Pacific Financial Corporation
Annual Report 2023

Plain-text annual report

Your Story is Our Story Lynden Bellingham (3 Locations) Anacortes Burlington (ATM/ITM) Taholah Ocean Shores Hoquiam Montesano Aberdeen Olympia Ocean Park Long Beach Warrenton Seaside Raymond Naselle (ATM/ITM) Cathlamet Vancouver Lake Oswego Salem Pacific Financial Corporation | 1216 Skyview Drive | Aberdeen, WA 98520 360-533-8873 | BankofthePacific.com NMLS #417480 Annual Report 2023 Dear Fellow Shareholders: For over 50 years our Company has prospered from our humble beginnings on the Washington coast to operating in two states with record earnings in 2023. Our long-term success stems from strong board oversight and exceptional employees who are committed to our values, with unwavering dedication to our customers and communities. We are very pleased with our financial performance in the recent year, especially against the backdrop of deposit volatility in the industry and the fastest increase in interest rates in several decades. Pacific Financial reported record net income of $14.6 million, or $1.40 per diluted share, compared to $10.9 million, or $1.04 per diluted share, for the full year of 2022. Earnings for 2023 were fueled by strong loan growth of over 7%, an excellent core deposit franchise and an increase in our net interest margin. Coming into 2023, the board and management positioned the Bank well for a rising rate environment, benefitting from a large cash position which repriced immediately with the Federal Reserve’s 500 basis point interest rate increases throughout the last two years, and a deposit base comprised of over 40% non-interest bearing balances. Leadership of the Bank resisted the temptation to invest long-term in a low rate environment through the pandemic and remained disciplined in pricing and duration of our loans and investments. As a result, our operating performance and healthy net interest margin positively set us apart from our peers. In consideration of the Company’s outstanding earnings and strong capital position, the board of directors of Pacific Financial increased dividends paid to our shareholders to $5.5 million during the four quarter period. This represented a dividend yield of 5.16% for our shareholders. Additionally, during 2023, the Company’s tangible book value per share increased 13% to $9.75 per share, up from $8.62 in 2022. Given our strong financial results, our strategic initiatives for 2023 included investing in our Company for the long-term by enhancing our presence and visibility in Western Washington and Oregon. In November 2023, we celebrated the relocation of our offices in Olympia and Vancouver, WA. These branch and commercial banking centers feature a blend of new technology including Interactive Teller Machines and a team of relationship bankers ready to serve the community. Also, in December 2023, we announced the addition of a new commercial banking team in the Portland suburb of Lake Oswego, OR. These growth markets are an important component of our long-term strategic plan. We see great opportunity here and look forward to contributing to the positive momentum in those markets. As we look to 2024, we do expect some headwinds on earnings related to persistent elevated interest rates and the impact on deposit costs and mortgage volume. Our focus for 2024 includes executing on our growth initiatives set forth in 2023, managing expenses amidst ongoing wage pressures and the continued high cost of technology and regulatory compliance, while helping our customers achieve success in order to drive long-term shareholder value. Lastly, on behalf of management and the board, I’d like to express our deepest appreciation for retiring board member, Randy Rust. Thank you Randy for your 21 years of remarkable leadership, fiscal responsibility, thoughtful guardianship of the Company’s capital, and steadfast support of our mission, vision and values. Please join us for our annual Shareholders’ meeting to be held via webcast on Wednesday, April 24, 2024 at 10:00 a.m. Pacific Time. You may access the meeting virtually via the internet at www.virtualshareholdermeeting.com/PFLC2024. Thank you for your investment and continued confidence in Pacific Financial Corporation. Sincerely, Denise Portmann President & CEO $ $ $ $ $ $ $ $ $ Operations Data Interest and dividend income Interest expense Net interest income Provision (benefit) for credit 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 credit losses to total loans Allowance for credit losses to nonperforming loans Nonperforming loans to total loans Nonperforming assets to total assets 2023 55,480 $ 6,280 49,200 520 6,172 36,856 17,996 3,391 14,605 $ 1.40 $ 1.40 $ 0.53 $ 5,524 $ 38% 2022 For the Year Ended December 31, 2021 (dollars in thousands, except per share data) (unaudited) 2020 42,152 $ 1,206 40,946 - 7,227 34,974 13,199 2,311 10,888 $ 37,159 $ 1,254 35,905 (3,650) 16,729 40,702 15,582 2,885 12,697 $ 39,574 $ 2,380 37,194 3,500 20,146 39,594 14,246 2,862 11,384 $ 1.05 $ 1.04 $ 1.22 $ 1.22 $ 1.08 $ 1.07 $ 0.52 $ 5,407 $ 50% 0.52 $ 5,418 $ 43% 0.38 $ 4,023 $ 35% 13.48% 1.22% 4.39% 66.56% 10.24% 0.82% 3.29% 72.60% 10.85% 1.00% 3.00% 77.33% 10.33% 1.07% 3.73% 69.05% 2019 41,570 2,928 38,642 - 13,895 35,556 16,981 3,223 13,758 1.30 1.29 0.31 3,288 24% 13.70% 1.50% 4.58% 67.68% 1,148,899 $ 676,023 1,009,292 13,403 114,691 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 9.98% 11.04 $ 9.75 $ 7.90% 9.91 $ 8.62 $ 8.91% 11.32 $ 10.03 $ 9.78% 10.94 $ 9.65 $ 11.33% 9.90 8.64 1.25% 1.29% 1.32% 1.65% 1.31% 1284.64% 0.10% 0.06% 947.76% 0.14% 0.07% 679.52% 0.19% 0.11% 504.52% 0.33% 0.20% 873.96% 0.15% 0.11% (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 and Subsidiary 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 Subsidiary (the Company), which comprise the consolidated statements of financial condition, as of December 31, 2023 and 2022, 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 Subsidiary as of December 31, 2023 and 2022, 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 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) and the Board of Governors of the Federal Reserve System Instructions for Preparation of Parent Company Only Financial Statements for Small Holding Companies (FR Y-9SP instructions) as of December 31, 2023, 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 14, 2024, 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 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. CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal.com/disclaimer. Board of Directors Pacific Financial Corporation and Subsidiary Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, effective January 1, 2023, Pacific Financial Corporation and Subsidiary, Bank of the Pacific adopted new accounting guidance for the measurement of credit losses on financial instruments through a cumulative-effect adjustment to retained earnings. Our opinion is not modified with respect to this matter. 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. 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 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 Subsidiary’s ability to continue as a going concern for a reasonable period of time. Board of Directors Pacific Financial Corporation and Subsidiary 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. 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 14, 2024 Pacific Financial Corporation Consolidated Statements of Financial Condition (Dollars in thousands, except per share data) ASSETS Ca s h on ha nd a nd i n ba nks Interes t bea ri ng depos i ts Ca s h a nd ca s h equi va l ents Other i nteres t earni ng depos i ts Inves tment s ecuri ti es avai l abl e for s a l e, a t fa i r va l ue Inves tment s ecuri ti es hel d to ma turi ty (fai r va l ue of $53,235 a nd $56,513, res pecti vel y) Loa ns hel d for s a l e Loa ns , net of deferred fees Al l owance for credi t l os s es Tota l l oa ns , net Nonma rketa bl e equi ty s ecuri ti es Premi s es a nd equi pment, net Opera ti ng l ea s e ri ght-of-us e a s s ets Ca s h s urrender va l ue of l i fe i ns ura nce Goodwi l l Other i nta ngi bl e a s s ets , net Accrued i nteres t recei va bl e Prepa i d expens es a nd other as s ets Tota l as s ets LIABILITIES AND SHAREHOLDERS' EQUITY Depos i ts Juni or s ubordi na ted debentures Opera ti ng l ea s e l i a bi l i ti es Accrued expens es a nd other l i abi l i ti es Tota l l i abi 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 ta ndi ng at December 31, 2023 a nd December 31, 2022 Common Stock, $1 par val ue; 25,000,000 s ha res a uthori zed, 10,388,724 a nd 10,414,276, s ha res i s s ued a nd outs ta ndi ng at December 31, 2023 a nd 2022, res pecti vel y Addi ti onal pa i d-i n-capi ta l Reta i ned ea rni ngs Accumul a ted other comprehens i ve l os s , net Tota l s harehol ders ' equi ty Tota l l i a bi l i ti es a nd s harehol ders ' equi ty $ $ $ 2023 2022 $ 16,716 $ 90,105 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 1,203,041 106,821 1,250 238,125 55,454 1,103 684,553 (8,530) 676,023 1,783 13,136 2,443 27,497 12,168 1,268 4,434 7,394 1,148,899 $ 1,009,292 $ 13,403 2,567 8,946 1,034,208 - - 10,389 41,793 78,473 (15,964) 114,691 1,148,899 $ 10,414 42,065 69,844 (19,161) 103,162 1,306,203 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 nteres t on i nves tment s ecuri ti es Nontaxabl 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 s ets Tota l i nteres t a nd di vi dend i ncome INTEREST EXPENSE Depos i 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 nteres t i ncome Provi s i on for credi t l os s es Net i nteres t i ncome after provi s i on for credi t l os s es NONINTEREST INCOME Servi ce cha rges on depos i ts Ga i n on s a l e of l oans , net Los s on s al e of i nves tment s ecuri ti es , net Ea rni ngs on bank owned l i fe i ns ura nce Other i ncome Tota l noni nteres t i ncome NONINTEREST EXPENSE Compens ati on and empl oyee benefi ts Occupa ncy Equi pment Da ta proces s i ng Profes s i onal s ervi ces Ma rketi ng Sta te a nd l oca l ta xes Federa l depos i t i ns urance premi um Other expens e Tota l noni nteres t expens e Income before i ncome ta xes Income ta x expens e Net i ncome Bas i c ea rni ngs per common s ha re Di l uted ea rni ngs per common s ha re Twelve Months Ended December 31, 2023 2022 $ $ $ $ 37,038 $ 8,665 585 9,192 55,480 5,351 929 - 6,280 49,200 520 48,680 1,975 635 (154) 685 3,031 6,172 22,793 2,215 1,109 3,770 875 549 1,018 550 3,977 36,856 17,996 3,391 14,605 $ 1.40 $ 1.40 $ 30,079 4,418 1,048 6,607 42,152 742 460 4 1,206 40,946 - 40,946 1,621 1,812 - 682 3,112 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 See accompanying Notes to Consolidated Financial Statements. 2 Pacific Financial Corporation Consolidated Statements of Comprehensive Income (Dollars in thousands) Net Income Other comprehens i ve i ncome (l os s ), net of ta x: Cha nge i n unreal i zed ga i n (l os s )— s ecuri ti es a va i l a bl e for s a l e, net of tax Recl a s s i fi ca ti on for net l os s on s ecuriti es — Twelve Months Ended December 31, 2023 2022 $ 14,605 $ 10,888 3,146 (20,707) a va i l abl e-for-s a l e rea l i zed i n earni ngs , net of ta x Defi ned benefi t pl a ns , net of tax Tota l other comprehens i ve i ncome (l os s ), net of ta x 122 (71) 3,197 Comprehens i ve i ncome (l os s ) $ 17,802 $ - 539 (20,168) (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, 2021 Net income Other comprehensive loss, net of tax Stock option exercises/stock unit vested Stock based compensation expense Cash dividends declared ($0.52 per share) Balance at December 31, 2022 Adoption of new accounting standard Net income Other comprehensive income, net of tax Stock option exercises/stock unit vested Stock based compensation expense Stock repurchase and cancellation of shares Cash dividends declared ($0.53 per share) Balance at December 31, 2023 Number of Common Shares 10,388,267 $ - - 26,009 - - 10,414,276 $ - - - 12,948 - (38,500) - 10,388,724 $ Common Stock Additional Paid-in Capital Retained Earnings 10,388 $ 41,884 $ - - 26 - - - - 31 150 - 10,414 $ 42,065 $ - - - 13 - (38) - - - - (56) 145 (361) - 10,389 $ 41,793 $ 64,363 $ 10,888 - - - (5,407) 69,844 $ (452) 14,605 - - - - (5,524) 78,473 $ Accumulated Other Comprehensive Income (Loss) , net Total Shareholders' Equity 1,007 $ - (20,168) - - - (19,161) $ - - 3,197 - - - - (15,964) $ 117,642 10,888 (20,168) 57 150 (5,407) 103,162 (452) 14,605 3,197 (43) 145 (399) (5,524) 114,691 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 tme nts to re conci l e ne t i ncome to ne t ca s h on ha nd a nd i n ba nks from ope ra ti ng a cti vi ti e s Provi s i on for cre di t l os s es De preci a ti on a nd a morti za ti on De fe rred i ncome ta xe s Ori gi na ti ons of l oa ns he l d for s a l e Procee ds from s a l e s of l oa ns Ga i n on s a l e of l oa ns , ne t Los s on s a l e of premi s e s a nd e qui pme nt Los s on s a l e of s ecuri ti e s , ne t Ea rni ngs on ba nk owned l i fe i ns ura nce Ne t cha nge i n a ccrue d i nte res t recei va bl e Ne t cha nge i n a ccrue d i nte res t pa ya bl e Ne t cha nge i n pre pa i d expe ns e s Othe r opera ti ng a cti vi ti e s Ne t ca s h provi de d by opera ti ng a cti vi ti e s Cash flows from investing activities: Net cha nge i n l oa ns Ma turi ti e s a nd pa ydowns of i nves tme nt s e curi ti e s he l d to ma turi ty Ma turi ti e s a nd pa ydowns of i nves tme nt s e curi ti e s a va i l a bl e for s a l e Purcha s e of i nves tme nt s e curi ti e s a va i l a bl e for s a l e Purcha s e of i nves tme nt s e curi ti e s he l d to ma turi ty Purcha s e s of nonma rke ta bl e equi ty s e curi ti es Decrea s e (Increa s e) i n othe r i nte res t ea rni ng de pos i ts Purcha s e of ba nk owned l i fe i ns ura nce Purcha s e s of pre mi s es a nd e qui pment Proce eds from s a l e s of i nves tme nt s e curi ti e s a va i l a bl e for s a l e Proce eds from s a l e s of nonma rke ta bl e e qui ty s ecuri ti e s Proce eds from ba nk owne d l i fe i ns ura nce de a th be ne fi t Proce eds from s a l e s of pre mi s e s a nd e qui pme nt Ne t ca s h us e d i n i nve s ti ng a cti vi ti e s Cash flows from financing activities: Net (decrea s e) i ncre a s e i n de pos i ts Re pa yme nts of FHLB Adva nces Net ca s h from s tock opti on e xe rci s e s Re purcha s e of common s tock Stock a wa rds i s s ue d Ta xe s re l a te d to net s ha re s e ttl e ment for e qui ty a wa rds Ca s h di vi de nds pa i d Ne t ca s h us e d i n fi na nci ng a cti vi ti e s Ne t de cre a s e i n ca s h a nd ca s h e qui 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 ntere s 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 tme nt Twelve Months Ended December 31, 2023 2022 $ 14,605 $ 10,888 520 1,335 (270) (22,734) 22,266 (635) 11 154 (685) (390) 385 173 1,082 15,817 (44,972) 4,504 14,663 (43,533) - - 3,000 (36) (1,347) 20,709 800 - 5 (46,207) (171,070) - 6 (399) - (38) (5,524) (177,025) (207,415) 314,236 106,821 5,895 4,252 $ $ $ - 3,357 59 (65,030) 71,690 (1,812) 13 - (682) (687) 73 (184) 7,689 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 - $ 850 $ $ $ $ See accompanying Notes to Consolidated Financial Statements. 5 Pacific Financial Corporation and Subsidiary Notes to Consolidated Financial Statements For the Years Ended December 31, 2023 and December 31, 2022 NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization: Pacific Financial Corporation (the “Company”) is a bank holding company headquartered in Aberdeen, Washington. The Company owns one banking subsidiary, Bank of the Pacific (the “Bank”), which is also headquartered in Aberdeen, Washington. The Company was incorporated in the State of Washington in February, 1997, pursuant to a holding company reorganization of the Bank. The Company has two wholly owned subsidiaries, PFC Statutory Trust I and II (the “Trusts”), which do not meet the criteria for consolidation, and therefore, are not consolidated in the Company’s financial statements. The Company conducts its banking business through the Bank, which operates fifteen branches located in communities in Grays Harbor, Pacific, Thurston, Whatcom, Clark, Skagit and Wahkiakum counties in the state of Washington and two branches in Clatsop County, Oregon. In addition, the Bank operates loan production offices in Burlington, Washington; Salem, Oregon; and Lake Oswego, 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 subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements are not audited, but include all adjustments that Management considers necessary for a fair presentation of consolidated financial condition and results of operations for the interim periods presented. Certain prior year amounts have been reclassified to conform with the 2023 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 provision and allowance for credit losses, the valuation and identification of deferred tax assets, the valuation of goodwill, and the estimate of the fair value of financial instruments. 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 14, 2024, 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 and collateralized mortgage obligations, 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 and collateralized mortgage obligations, 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 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 total assets and FHLB advances. At December 31, 2023 and 2022 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 that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $3.2 million at December 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments. The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. Loans with payments scheduled monthly are reported as past due when the borrower is in arrears two or more monthly payments. Loans with payment obligations other than monthly, are reported as past due when one scheduled payment is due and unpaid for 30 days or more. All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured. Purchased credit deteriorated (PCD) loans: The Company may purchase loans, some of which have experienced more than insignificant credit deterioration since origination. In those cases, the Company will consider internal loan grades, delinquency status and other relevant factors in assessing whether purchased loans are PCD. PCD loans are recorded at the amount paid. An initial allowance for credit losses is determined using the same methodology as other loans held for investment, but with no impact to earnings. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan's purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent to initial recognition, PCD loans are subject to the same interest income recognition and impairment model as non-PCD loans, with changes to the allowance for credit losses recorded through provision expense. Allowance for credit losses–Held-to-Maturity securities: Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. The Company’s held-to maturity portfolio contains securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The Company’s held-to-maturity portfolio also contains municipal bonds that are rated at an equivalent of Moody’s Aaa or Aa2. The Company has never incurred a loss on a municipal bond, therefore the expectation of credit losses on these securities is insignificant. The Company uses industry historical default information adjusted for current conditions to establish the allowance for credit losses on the municipal bond portfolio. Accrued interest receivable on held-to-maturity debt securities was excluded from the estimate of credit losses. As a result, no allowance for credit losses was recorded on held-to-maturity securities at December 31, 2023. Allowance for credit losses–Available-for-Sale securities: For available-for-sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. 7 If the Company has the intent to sell the security, or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value, and the entire loss is recorded in earnings. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected is compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit losses, limited to the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit losses when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities was excluded from the estimate of credit losses. At December 31, 2023, there was no allowance for credit losses related to the available-for-sale portfolio. Allowance for credit losses (ACL)–Loans: The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses. The ACL represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Management assesses the adequacy of the ACL on loans on a quarterly basis. The ACL on loans are calculated either on a pooled basis, when similar risk characteristics exist, or individually evaluated if they do not share similar risk characteristics, including nonaccrual loans. Loans evaluated individually are not included in the pool evaluations and typically represent collateral dependent loans. The Company has elected to use the practical expedient to measure individually evaluated loans as collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated costs to sell as appropriate. The allowance for pooled basis loans is comprised of the quantitative and qualitative allowance. The quantitative allowance is calculated using either a discounted cash flow methodology (DCF) or a weighted-average remaining maturity (WARM) methodology. Under the DCF quantitative approach the probability of default is an assumption derived from regression models which determines the relationship between historical defaults and national unemployment. The Company determines a reasonable and supportable forecast and applies that forecast to the regression model to determine defaults over the forecast period. The Company leverages economic projections from independent third-parties on quarterly basis. Following the forecast period, the economic variables used to calculate the probability of default reverts to its historical mean on a straight-line basis. Management selected a reasonable and supportable forecast period of 4 quarters with a reversion period of 4 quarters. Both the reasonable and supportable forecast period and the reversion period are periodically reviewed by management. Other assumptions relevant to the DCF model to derive the quantitative allowance include the loss given default, which is the estimate of loss for a defaulted loan, the discount rate, and prepayment speed applied to future cash flows. The DCF model calculates the net present value of each loan using both the contractual and expected cash flows, respectively. The Company has identified the following portfolio segments and calculates the allowance for credit losses using the DCF methodology: Commercial: Commercial loans generally are loans to sole proprietorships, partnerships, corporations, and other business enterprises to finance working capital, capital investment, or for other business related purposes. Collateral generally consists of pledges of business assets or interests, including but not limited to accounts receivable, inventory, plant and equipment, and real estate interests, 8 if applicable. The primary repayment sources for commercial loans are the cash flow of the operating businesses which can be adversely affected by company, industry and economic business cycles. Commercial loans may be secured or unsecured. Commercial Real Estate Owner Occupied: Owner occupied commercial real estate loans are properties that are owned and operated by the borrower and the primary source for repayment is the cash flow from the ongoing operations and activities conducted by the borrower’s business. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and positive cash flow. Also, certain types of businesses also may require specialized facilities that can increase costs and may not be economically feasible to an alternative user, which could adversely impact the market value of the collateral. Factors that may influence a borrower's ability to repay their loan include demand for the business’ products or services, the quality and depth of management, the degree of competition, regulatory changes, and general economic conditions. Commercial Real Estate Non-Owner Occupied: Non-owner occupied commercial real estate loans are investment properties and the primary source for repayment of the loan is derived from rental income associated with the property or proceeds of the sale of the property. Non-owner occupied commercial real estate loans consist of mortgage loans to finance investments in real property that may include, but are not limited to, commercial/retail office space, multifamily properties, industrial/warehouse space, hotels, assisted living facilities and other specific use properties. The primary risk characteristics include impacts of overall leasing rates, absorption timelines, levels of vacancy rates and operating expenses, and general economic conditions. HELOC & Consumer: Home equity line of credit (HELOC) and consumer loans generally include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto loans, debt consolidation loans, home improvements, and personal expense. The primary risk characteristics associated with HELOC and consumer loans typically include major changes to the borrower’s financial or personal circumstances, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death. In addition, fluctuations in collateral values can significantly impact the credit quality of these loans. Land & Land Development: Land and development loans are generally loans to acquire raw land or finance land development of industrial, commercial, or multifamily buildings secured by real estate. The primary risk characteristics are specific to the uncertainty on whether the development will be completed according to the specifications and schedules and the reliance on the sale of the completed project as the primary repayment source for the loan. Factors that may influence the development may be customer specific, such as the quality and depth of property management, or related to changes in general economic conditions. Trends in the commercial and residential construction industries can significantly impact the credit quality of these loans due to supply and demand imbalances. In addition, fluctuations in real estate values can significantly impact the credit quality of these loans, as property values may determine the economic viability of construction projects and adversely impact the value of the collateral securing the loan. Residential Real Estate: Residential real estate loans are 1-4 family mortgage loans generally to finance loans on owner occupied and non-owner occupied properties. Residential real estate loans are secured by first or second liens on the property. The degree of risk in residential mortgage lending involving owner occupied properties depends primarily on the borrower’s ability to repay and the loan amount in relation to collateral value. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrower’s capacity to repay their obligations may be deteriorating. Residential real estate loans include credits to finance non-owner occupied properties used as rentals. These loans can involve additional risks as the borrower’s ability to repay is based on the net operating income from the property which can be impacted by occupancy levels, rental rates, and operating expenses. Declines in net operating income can negatively impact the value of the property which increases the credit risk in the event of default. Speculative Residential Construction: Speculative residential construction loans are generally loans to finance the construction of new structures, additions or alterations to existing structures, or the demolition of existing structures to make way for new residential structures. Speculative residential construction loans are generally secured by real estate. The primary risk characteristics are specific to the uncertainty on whether the construction will be completed according to the specifications and schedules. Factors that may influence the completion of residential construction may be customer specific or related to changes in general economic conditions. Under the WARM quantitative approach relevant historical loss experience from peer bank data over a specific lookback period, and an estimated life for each segment, are applied to current segment loan balances to calculate the allowance for credit losses. 9 The Company has identified the following portfolio segments and calculates the allowance for credit losses using the WARM methodology: Credit Card Receivables: Credit card receivables include personal and business lines of credit for various personal and business purposes. The primary risk characteristics associated typically include the borrower’s financial circumstances including loss of income, and/or unexpected significant expense(s). Farmland: Farmland loans are loans secured by farmland and improvements thereon. Farmland includes all land known to be used or usable for agriculture purposes, such as crops and livestock production. The primary repayment sources for farmland loans are the cash flow of the agriculture business, therefore primary risk characteristics can be adversely affected by weather conditions, disease, and commodity prices. Ready Reserve, Overdrafts, & Fresh Start Loans: Ready Reserve, Overdrafts, & Fresh Start loans generally include unsecured smaller balance loans, at the individual and aggregate level, resulting from overdrawing deposit accounts. The primary risk characteristics associated with these loans typically include the borrower’s financial or personal circumstances. In addition to the quantitative portion of the allowance for credit losses, qualitative factors are used to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio. Each qualitative loss factor, for each loan segment within the portfolio, incorporates consideration for a minimum to maximum range for loss factors. These qualitative factor adjustments may increase or decrease the Company’s estimate of expected credit losses and are applied to each loan segment. The qualitative factors applied to each loan segment include: Economic conditions Changes in nature and volume of the portfolio Credit and lending staff/administration Problem loan trends Concentrations Loan review results Collateral values Regulatory and business environment         Allowance for credit losses–Unfunded Commitments: 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 on the balance sheet when they are funded. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets. 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 of minimum lease payments. For the discount rate the Company utilizes its incremental borrowing rate 10 at lease inception over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. Other real estate owned: Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are initially recorded at the fair value of the properties less estimated costs of disposal. Any write-down to fair value at the time of transfer to other real estate owned (“OREO”) is charged to the allowance for credit 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. Goodwill and other intangible assets: At December 31, 2023 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, 2023 and 2022, 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. In 2006, the Bank completed a deposit transfer and assumption transaction with an Oregon-based bank for a $1.3 million premium. In connection with completion of the transaction, the Oregon Department of Consumer and Business Services issued a Certificate of Authority to the Bank authorizing it to conduct a banking business in the State of Oregon. The premium, and the resultant right to conduct business in Oregon, is recorded as an indefinite-lived intangible asset. Impairment of long-lived assets: Management periodically reviews the carrying value of its long-lived assets to determine if impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life, of which there have been none. In making such determination, management evaluates the performance, on an undiscounted basis, of the underlying operations or assets which give rise to such amount. Transfers of financial assets: Transfers of financial assets, including cash, investment securities, loans and loans held for sale, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through either an agreement to repurchase them before their maturity, or the ability to cause the buyer to return specific assets. 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. 11 As of December 31, 2023, 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, 2023 and December 31, 2022 and recognized during the years ended December 31, 2023, and 2022 were immaterial. The tax years that remain subject to examination by federal and state taxing authorities are the years ended December 31, 2022, 2021 and 2020. 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 withdrawal 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 182,000 and 122,000 in 2023 and 2022, 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. 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, 2023 and 2022. 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. 12 Interchange and Other Fees – The Company earns interchange fees from debit or credit cardholder transactions, from cards issued by the Company to its customers or processed for non-customers, conducted through various card payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for interchange and other service charges are largely satisfied, and related revenue recognized, when completion of the services are rendered at a point in time. The following table presents the Company’s noninterest income by revenue stream and reportable segment for the years ended December 31, 2023 and 2022. Items outside the scope of ASC 606 are noted as such. Twelve Months Ended December 31, 2023 2022 (i n thous a nds ) 1,975 $ 1,621 635 (154) 685 2,963 68 6,172 $ 1,812 - 682 3,113 (1) 7,227 $ Servi ce charges on depos i ts Gai n on s a l e of l oa ns , net (1) Los s on s a le of i nves tment s ecuri ti es , net (1) Ea rni ngs on bank owned l i fe i ns ura nce (1) Intercha nge a nd other fees Other (1) Tota l noninteres t i ncome $ (1) Not wi thi n the s cope of ASC 606 Accounting Standards Adopted in 2023: On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not they will be required to sell. The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023, using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included a decrease in the allowance for credit losses on loans of $157,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $609,000, which is recorded within Other Liabilities. The adoption of CECL had an insignificant impact on the Company's held-to-maturity and available-for-sale securities portfolios. The Company recorded a net decrease to retained earnings of $452,000 as of January 1, 2023, for the cumulative effect of adopting CECL. Results for reporting periods beginning after January 1, 2023, are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). 13 The following table presents the impact of adopting CECL: As s ets : Loans Commerci al a nd a gri cul tural Rea l es tate: Cons tructi on a nd devel opment Res i denti a l 1-4 fami l y Mul ti -fami l y Commerci a l real es ta te -- owner occupi ed Commerci a l real es ta te -- non owner occupi ed Fa rml a nd Total real es ta te Cons umer Una l l oca ted Total Li a bi l i ti es : Al l owa nce for Credi t Los s es on Off-ba la nce Sheet Credi t Expos ures January 1, 2023 Pre- CECL Adoption Impact of CECL Adoption (i n thous ands ) As Reported Under CECL $ 980 $ 348 $ 1,328 497 706 362 1,047 1,468 409 4,489 1,874 893 8,236 $ (98) 911 (7) 509 (230) (163) 922 (534) (893) (157) $ 399 1,617 355 1,556 1,238 246 5,411 1,340 - 8,079 203 $ 609 $ 812 $ $ The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest. In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU updates guidance in Topic 326 to eliminate the accounting guidance for troubled debt restructurings, or TDRs, by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current period gross write offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financial receivables by credit quality indicator and class of financing receivables by year of origination. The Company adopted this standard during the first quarter of 2023 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements. 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. government agencies, state and local governments, other corporations, collateralized mortgage obligations and mortgaged backed securities (“MBS”). Investment securities have been classified according to management’s intent. There was no allowance for credit losses on investment securities as of December 31, 2023. 14 The amortized cost of securities and their approximate fair value were as follows: Available for Sale Col l a teral i zed mortga ge obl i ga ti ons Mortgage ba cked s ecuri ti es Muni ci pa l s ecuri ti es U.S. government and agency obl i ga ti ons Total a va i l a bl e for s a l e Held to maturity Col l a teral i zed mortga ge obl i ga ti ons Mortgage ba cked s ecuri ti es Muni ci pa l s ecuri ti es U.S. government Total hel d to ma turi ty Available for Sale Col l a teral i zed mortga ge obl i ga ti ons Mortgage ba cked s ecuri ti es Muni ci pa l s ecuri ti es Corporate debt s ecuri ti es U.S. government and agency obl i ga ti ons Total a va i l a bl e for s a l e Held to maturity Col l a teral i zed mortga ge obl i ga ti ons Mortgage ba cked s ecuri ti es Muni ci pa l s ecuri ti es U.S. government Total hel d to ma turi ty Amortized Cost December 31, 2023 Gross Unrealized Gains Gross Unrealized Losses (i n thous a nds ) 135,658 $ 19,635 48,474 55,165 258,932 $ 15,656 $ 8,049 2,354 29,395 55,454 $ 194 $ 67 9 - 270 $ - $ - 10 - 10 $ 8,368 $ 722 6,058 5,929 21,077 $ 1,110 $ 429 22 668 2,229 $ 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 $ $ $ $ $ $ $ $ $ Fair Value 127,484 18,980 42,425 49,236 238,125 14,546 7,620 2,342 28,727 53,235 Fair Value 101,958 13,110 61,771 1,999 47,946 226,784 16,853 9,299 2,500 27,861 56,513 15 Unrealized losses and fair value for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, as of December 31, 2023 and 2022 were as follows: Available for sale (in thous ands ) Less Than 12 Months December 31, 2023 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Col la teral ized mortgage obli ga tions Mortga ge ba cked s ecuri ti es Muni cipa l s ecurities U.S. government and a gency obli ga ti ons Tota l Held to maturity Col la teral ized mortgage obli ga tions Mortga ge ba cked s ecuri ti es Muni cipa l s ecurities U.S. government and a gency obli ga ti ons Tota l Available for sale Col la teral ized mortgage obli ga tions Mortga ge ba cked s ecuri ti es Muni cipa l s ecurities Corpora te debt s ecurities U.S. government and a gency obli ga ti ons Tota l Held to maturity Col la teral ized mortgage obli ga tions Mortga ge ba cked s ecuri ti es Muni cipa l s ecurities U.S. government and a gency obli ga ti ons Tota l $ $ $ $ $ $ $ $ 36,248 $ 3,277 2,191 - 41,716 $ 609 $ 17 58 - 684 $ 71,580 $ 10,406 37,828 49,236 169,050 $ 7,759 $ 705 6,000 5,929 20,393 $ 107,828 $ 13,683 40,019 49,236 210,766 $ 8,368 722 6,058 5,929 21,077 Less Than 12 Months December 31, 2023 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (in thous ands ) $ $ 628 1 628 $ 1 $ 14,546 $ 7,620 712 28,727 51,605 $ 1,110 $ 429 21 668 2,228 $ 14,546 $ 7,620 1,340 28,727 52,233 $ 1,110 429 22 668 2,229 Less Than 12 Months December 31, 2022 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (in thous ands ) 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 (in thous ands ) 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 At December 31, 2023, there were 220 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 and widening pricing spreads, leading to a decline in the 16 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 For collateralized mortgage obligations (“CMOs”) the Company estimates expected future cash flows of the underlying collateral, together with any credit enhancements. The expected future cash flows of the underlying collateral are determined using the remaining contractual cash flows adjusted for future expected credit losses (which considers current delinquencies, future expected default rates and collateral value by vintage) and prepayments. The expected cash flows of the security are then discounted to arrive at a present value amount. The Company has not recorded impairments related to credit losses through earnings for the years ended December 31, 2023. At December 31, 2022, there were 241 available for sale and held to maturity investment securities in an unrealized loss position. For periods prior to adoption of ASC 326, management conducted a review and evaluation of its securities for other than temporary impairment. The Company evaluated the securities 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, these investments were not considered to be other-than-temporarily impaired at December 31, 2022. The following table provides gross realized gains and losses on the sales of securities for the periods indicated: Twelve Months Ended December 31, 2023 2022 (i n thous a nds ) Gros s rea l i zed ga i n on s a l e of s ecuri ti es Gros s rea l i zed l os s on s a l e of s ecuri ti es $ Net rea l i zed l os s on s a l e of s ecuri ti es $ 92 $ (246) (154) $ - - - 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, 2023 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, 2023 Held to Maturity Available for Sale Amortized Cost Fair Value Amortized Cost Fair Value Due i n one yea r or l es s Due a fter one yea r 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 $ $ 9,984 $ 21,388 7,037 17,045 55,454 $ (i n thous a nds ) 9,899 $ 20,778 6,715 15,843 53,235 $ 5,764 $ 37,500 63,054 152,614 258,932 $ 5,629 34,134 56,781 141,581 238,125 At December 31, 2023, the Company had no securities held-to-maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held-to-maturity classified as nonaccrual for the year ended December 31, 2023. At December 31, 2023 and 2022, investment securities with an estimated fair value of $197.3 million and $135.3 million were pledged to secure public deposits, certain nonpublic deposits and borrowings, respectively. 17 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 of 0.06% of total assets plus 4.50% of outstanding advances. Participating banks record the value of FHLB stock equal to its par value at $100 per share. At December 31, 2023 and 2022 the Company held $783,000 and $1.6 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, 2023 and maintains capital ratios that exceed “well capitalized” standards for regulatory purposes. NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY Loans held in the portfolio at December 31, 2023 and 2022 were as follows: Commerci a l a nd a gri cul tura l PPP Rea l es ta te: December 31, 2023 2022 (i n thous ands ) 75,322 $ 122 75,705 515 $ Cons tructi on a nd devel opment Res i denti a l 1-4 fa mi l y Mul ti -fa mi l y Commerci a l rea l es tate -- owner occupi ed Commerci a l rea l es tate -- non owner occupi ed Fa rml a nd Total rea l es tate Cons umer Gros s l oans 48,720 96,301 51,025 164,443 155,280 27,273 543,042 66,863 685,349 Deferred fees , net Loa ns , net of deferred fees (796) 684,553 $ $ 37,287 82,653 41,122 154,380 153,707 26,935 496,084 68,412 640,716 (758) 639,958 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 $4,000 and $17,000 at December 31, 2023 and 2022, 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 18 successful operation and management of the properties and repayment of these loans is affected by adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks by scrutinizing the financial condition of the borrower, the quality and value of the collateral, and the management of the property securing the loan. In addition, commercial real estate loan portfolios are reviewed annually to evaluate the performance of individual loans 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. 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 procedures. Repayment of construction loans is dependent upon the sale of individual homes to consumers or in some cases to other developers. Construction loans are generally short-term in nature and most loans mature in one to two years. Interest rates are usually floating and fully indexed to a short-term rate index. The Company's credit policies address maximum loan to value, cash equity requirements, inspection requirements, and overall credit strength. The majority of one-to-four family residential loans are secured by single-family residences located in the Company’s primary market areas. Single-family portfolio loans are generally owner-occupied with terms typically ranging from 15 to 30 years. Repayment of these loans comes from the borrower’s personal cash flows and liquidity, and collateral values are a function of residential real estate values in the markets we serve. These loans include primary residences, second homes, rental homes and home equity loans and home equity lines of credit. 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 $104,000 and $108,000 at December 31, 2023 and 2022, respectively. At December 31, 2023 and 2022, $395.6 million and $289.1 million, respectively, of loans were pledged as collateral on FHLB advances. The Company has also pledged $89.4 million and $80.8 million of loans to the FRB for additional borrowing capacity at December 31, 2023 and 2022, respectively. Allowance for credit losses and credit quality The following table summarizes the activity related to the allowance for credit losses for the year ended December 31, 2023 under the CECL methodology. Balance(s) as of December 31, 2022, reflect CECL methodology adoption loan segment reclassifications from under the incurred loss methodology. Commercial and agricultural Construction and development Residential 1-4 family Multi-family CRE -- non owner occupied CRE -- owner occupied (in thous a nds ) Farmland Consumer Unallocated Total Bal ance, December 31, 2022 Impact of CECL adopti on Charge-offs Recoveri es Provis ion for credit los s es Bal ance, December 31, 2023 $ $ 980 $ 348 (83) 77 (22) 1,300 $ 497 $ (98) - - 102 501 $ 706 $ 911 - - 338 1,955 $ 362 $ (7) - - 72 427 $ 1,047 $ 509 - - 45 1,601 $ 1,468 $ (230) - - (18) 1,220 $ 409 $ (163) - - 3 249 $ 1,874 $ (534) (196) 20 113 1,277 $ 893 $ (893) - - - - $ 8,236 (157) (279) 97 633 8,530 19 Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for credit losses under the incurred loss methodology. The following table is disclosures related to the allowance for credit losses in prior periods. Balance at Beginning of Year $ $ 668 $ - 1,071 1,299 2,479 478 5,327 1,464 838 8,297 $ Twelve Months Ended December 31, 2022 Charge-offs Recoveries (i n thous a nds ) Provision (benefit) for Loan Losses Balance at End of Year - $ - - - - - - (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 Commerci a l and agri cul tural PPP Rea l es ta te: Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev Commerci a l rea l es ta te -- owner occupi ed Commerci a l rea l es ta te -- non owner occupi ed Fa rml and Tota l rea l es ta te Cons umer Unal l oca ted Tota l Credit Quality Indicators As part of the on-going monitoring of the credit quality of the 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.  “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 credit 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. 20 The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of December 31, 2023: Term Loans by Year of Origination 2023 2022 2021 2020 2019 Prior Revolving Total (i n thous a nds ) Pa s s $ Tota l cons tructi on and devel opment l oans $ 32,467 $ 13,754 $ 32,467 $ 13,754 $ 1,300 $ 1,300 $ 289 $ 289 $ 241 $ 241 $ 560 $ 560 $ 109 $ 48,720 109 $ 48,720 Commerci a l a nd a gri cul tura l Pa s s Other l oa ns es peci a l l y menti oned Subs ta nda rd Tota l commerci a l and agri cul ture l oa ns Current peri od gros s wri te-offs PPP Pa s s Tota l PPP l oa ns Cons tructi on a nd devel opment Res i denti a l 1-4 fami l y Pa s s Other l oa ns es peci a l l y menti oned Subs ta nda rd Tota l res i denti a l 1-4 fa mi l y l oa ns Mul ti -fa mi l y Pa s s Tota l Mul ti -fa mi l y l oa ns CRE -- owner occupi ed Pa s s Subs ta nda rd Tota l CRE --owner occupi ed l oa ns CRE -- non owner occupi ed Pa s s Other l oa ns es peci a l l y menti oned Tota l CRE -- non owner occupi ed l oans Fa rml and Pa s s Other l oa ns es peci a l l y menti oned Subs ta nda rd Tota l Fa rml and l oans Cons umer Pa s s Subs ta nda rd Tota l cons umer l oa ns Current peri od gros s wri te-offs Tota l l oa ns Tota l peri od gros s wri te-offs $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 20,825 $ 13,414 $ 5,296 $ 6,221 $ 5,418 $ 5,508 $ 447 395 - 534 - 121 - 505 - - - - 21,667 $ 13,948 $ 3 $ - $ 5,417 $ 6,726 $ 5,418 $ 5,508 $ - $ 80 $ - $ - $ 14,866 $ 71,548 447 - 3,327 1,772 16,638 $ 75,322 - $ 83 - $ - $ - $ - $ 122 $ 122 $ - $ - $ - $ - $ - $ - $ - $ - $ 122 122 $ 20,794 $ 23,178 $ 9,530 $ 6,023 $ 3,506 $ 15,947 $ - - - - - - - - - - - - 17,046 $ 96,024 53 224 53 224 20,794 $ 23,178 $ 9,530 $ 6,023 $ 3,506 $ 15,947 $ 17,323 $ 96,301 11,251 $ 11,251 $ 6,231 $ 6,231 $ 9,799 $ 9,096 $ 7,450 $ 7,198 $ 9,799 $ 9,096 $ 7,450 $ 7,198 $ - $ 51,025 - $ 51,025 25,438 $ 38,114 $ 34,039 $ 29,394 $ 8,625 $ 28,568 $ 55 - - - - - 25,493 $ 38,114 $ 34,039 $ 29,394 $ 8,625 $ 28,568 $ 19,510 $ 34,193 $ 35,242 $ 32,032 $ 9,810 $ 22,861 $ - - - 1,385 - - 19,510 $ 34,193 $ 35,242 $ 33,417 $ 9,810 $ 22,861 $ 210 $ 164,388 55 210 $ 164,443 - 247 $ 153,895 1,385 247 $ 155,280 - 5,414 $ - - 5,414 $ 5,493 $ 2,784 110 8,387 $ 3,396 $ 1,712 $ 3,047 $ 3,676 $ - - - - - - - 1,591 3,396 $ 1,712 $ 3,047 $ 5,267 $ 16,847 $ 22,048 $ 9,889 $ 5,116 $ 2,015 $ 7,738 $ 277 - 16 14 - 73 17,124 $ 22,048 $ - $ 92 $ 9,905 $ 5,130 $ 2,015 $ 7,811 $ - $ 21 $ 2 $ - $ $ 153,720 $ 159,853 $ 108,750 $ 91,787 $ 40,112 $ 93,720 $ - $ 21 $ $ 80 $ 92 $ 2 $ 3 $ 21 50 $ 22,788 2,784 1,701 50 $ 27,273 - - 2,830 $ 66,483 380 2,830 $ 66,863 - 81 $ 196 37,407 $ 685,349 279 81 $ Credit Quality indicators as of December 31, 2022 were as follows: December 31, 2022 Other Loans Especially Mentioned Substandard (i n thous ands ) Doubtful Total 5,453 $ - - 53 - - 1,411 - 1,464 - 6,917 $ 1,180 $ - - 394 - 220 - 1,908 2,522 51 3,753 $ - $ - - - - - - - - - - $ 75,705 515 37,287 82,653 41,122 154,380 153,707 26,935 496,084 68,412 640,716 Pass 69,072 $ 515 37,287 82,206 41,122 154,160 152,296 25,027 492,098 68,361 630,046 $ $ $ Commerci a l a nd a gri cul tura l PPP Rea l es ta te: Cons tructi on a nd devel opment Res i denti a l 1-4 fa mi l y Mul ti -fa mi l y Commerci a l rea l es tate -- owner occupi ed Commerci a l rea l es tate -- non owner occupi ed Fa rml a nd Tota l rea l es tate Cons umer Gros s Loa ns 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 2023 and 2022. Total related party loans outstanding at December 31, 2023 and 2022 to executive officers and directors were $2.6 million and $2.6 million, respectively. During 2023 and 2022, new loans or advances on existing loans of $12,000 and $350,000, respectively, were made, and repayments totaled $72,000 and $490,000, 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, 2023. Aging Analysis and Nonaccrual Loans The following tables summarize the Company’s loans past due, both accruing and non-accruing, by type as of December 31, 2023 and 2022. The Company did not recognize any interest income on non-accrual loans during the years ended December 31, 2023 and 2022. No allowance was established on non-accrual loans as of December 31, 2023 and 2022. 2023 30-59 Days Past Due 60-89 Days Past Due Total Past Due Nonaccrual with ACL Nonaccrual without ACL Loans Not Past Due Total (i n thous a nds ) Commercia l a nd a gri cultura l PPP Rea l es ta te: Cons tructi on a nd development Res i dentia l 1-4 fa mi ly Multi-fa mily Commercia l rea l es ta te -- owner occupied Commercia l rea l es ta te -- non owner occupied Fa rmla nd Tota l rea l es ta te Cons umer Gros s Loa ns $ $ 227 $ - - 289 - - - - 289 12 528 $ 241 $ - - 289 - 38 - - 327 22 590 $ - $ - - - - - - - - - - $ 264 $ - - 50 - - - - 50 350 664 $ 74,817 $ 122 75,322 122 48,720 95,962 51,025 164,405 155,280 27,273 542,665 66,491 684,095 $ 48,720 96,301 51,025 164,443 155,280 27,273 543,042 66,863 685,349 14 $ - - - - 38 - - 38 10 62 $ 22 2022 30-59 Days Past Due 60-89 Days Past Due Total Past Due Nonaccrual with ACL Nonaccrual without ACL Loans Not Past Due Total (i n thous a nds ) Commercia l a nd a gri cultura l PPP Rea l es ta te: Cons tructi on a nd development Res i dentia l 1-4 fa mi l y Multi-fa mily Commercia l rea l es ta te -- owner occupied Commercia l rea l es ta te -- non owner occupied Fa rmla nd Tota l rea l es ta te Cons umer Gros s Loa ns $ $ 199 $ - - 49 - - - - 49 101 349 $ 191 $ - - - - - - - - 4 195 $ 390 $ - - 49 - - - - 49 105 544 $ - $ - - - - - - - - - - $ 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 The following table represents the accrued interest receivable written off by reversing interest income during the year ended December 31, 2023: Commerci a l a nd a gri cul tura l Res i denti a l 1-4 fa mi l y Cons umer Gros s Loa ns Collateral Dependent Loans For the Year Ended December 31, 2023 (in thousands) 13 1 11 25 $ $ The Company designates individually evaluated loans on nonaccrual status as collateral-dependent loans, as well as other loans that management of the Company designates as having higher risk. Collateral-dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral-dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. The following table presents an analysis of collateral-dependent loans of the Company as of December 31, 2023: Commerci a l a nd a gri cul tura l Res i denti a l 1-4 fami l y Cons umer Tota l Real Estate $ $ 215 $ 50 - 265 $ Primary Type of Collateral Business Assets Automobile (i n thous a nds ) 49 $ - - 49 $ - $ - 350 350 $ Total 264 50 350 664 23 Impaired Loans Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The Company individually assessed for impairment all nonaccrual loans and all troubled debt restructurings. The tables below include all loans deemed impaired, whether or not individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis. The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of December 31, 2022: December 31, 2022 Recorded Investment With No Specific Valuation Allowance Recorded Investment With Specific Valuation Allowance Total Recorded Investment Unpaid Contractual Principal Balance (in thous a 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 Commercia l a nd a gricul tura l PPP Rea l Es tate: Res i denti al 1-4, Mul ti fa mi ly, Cons t & Dev Commerci al real es ta te -- owner occupied Commerci al real es ta te -- non owner occupied Fa rmla nd Total real es ta te Cons umer Tota l $ $ Purchased Credit Deteriorated Loans purchased or acquired in business combinations are recorded at their fair value at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated (PCD) or purchase non-credit-deteriorated. There were no PCD loans at December 31, 2023. Modifications Made to Borrowers Experiencing Financial Difficulty The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as 24 principal forgiveness, may be granted. For the real estate loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, and interest rate reduction. Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. For the twelve months ended December 31, 2023, the Company modifications to borrowers experiencing financial difficulty were immaterial to the financial statements. Troubled Debt Restructured Loans Prior to the adoption of ASU 2016-13 and ASU 2022-02, a modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. There are various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted by the Company. Commercial and industrial loans modified in a TDR may involve term extensions, below market interest rates and/or interest-only payments wherein the delay in the repayment of principal is determined to be significant when all elements of the loan and circumstances are considered. Additional collateral, a co-borrower, or a guarantor is often required. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs. Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity. Land loans modified in a TDR typically involve extending the balloon payment by one to three years, and providing an interest rate concession. Home equity modifications are made infrequently and are uniquely designed to meet the specific needs of each borrower. Loans modified in a TDR are considered impaired loans and typically already on non-accrual status. Partial charge-offs have in some cases already been taken against the outstanding loan balance. Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a 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. Effective January 1, 2023 the Company adopted the provision of ASU 2022-02, which eliminated the accounting for TDRs, while expanding loan modification and vintage disclosure requirements. Prior to the adoption of ASU 2022-02, during the twelve months ended December 31, 2022, there was a $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. 25 The following table presents TDRs by type as of December 31, 2022 all of which were modified due to financial stress of the borrower: 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 Cons umer Tota l TDRs (1) 2 1 1 1 5 December 31, 2022 Pre-TDR Outstanding Recorded Investment Post-TDR Outstanding Recorded Investment (dol l ars i n thous ands ) $ 554 $ 1,080 303 137 2,074 $ $ 340 1,070 295 101 1,806 (1) The peri od end ba l a nces are i ncl us i ve of a l l pa rti a l pa y-downs and cha rge-offs s i nce the modi fi ca ti on date. The following table presents TDRs modified or recorded during the year ended December 31, 2022. December 31, 2022 Commerci al a nd a gri cul ture Total Recorded Number of Loans Investment (doll a rs i n thous a nds ) 222 222 1 1 $ $ The following tables present troubled debt restructurings by accrual or nonaccrual status as of December 31, 2022: Accrual Status December 31, 2022 Non-Accrual Status (i n thous a nds ) Total TDRs Commerci al a nd a gri cul ture Commerci al real es ta te -- owner occupi ed Fa rml a nd Cons umer Total TDRs $ $ 118 $ 1,070 295 101 1,584 $ 222 $ - - - 222 $ 340 1,070 295 101 1,806 Unfunded Commitments The Company maintains a separate reserve for credit losses on off-balance-sheet credit exposures, including unfunded loan commitments, which is included in other liabilities on the consolidated balance sheet. The reserve for credit losses on off-balance- sheet credit exposures is adjusted as a provision for credit losses in the income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life, utilizing the same models and approaches for the Company's other loan portfolio segments described above, as these unfunded commitments share similar risk characteristics as its loan portfolio segments. The Company has identified the unfunded portion of certain lines of credit as unconditionally cancellable credit exposures, meaning the Company can cancel the unfunded commitment at any time. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement. On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $609,000 for the adoption of ASC Topic 326. For the year ended December 31, 2023, the Company recorded a reversal for credit losses for unfunded commitments of $113,000. At December 31, 2023, the liability for credit losses on off-balance-sheet credit exposures included in other liabilities was $698,000. 26 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, 2023 and 2022. Bal a nce, December 31, 2022 Cha nge i n fa i r val ue of i nves tment s ecuri ti es a va i l a bl e for s a l e, net of ta x Recl as s i fi cati on a djus tment of net l os s from s a l e of i nves tment s ecuri ti es avai l a bl e for s a l e i ncl uded i n i ncome, net of ta x Unrecogni zed net a ctua ri al l os s duri ng the peri od, net of tax Amorti za ti on of net actua ri a l l os s i ncl uded i n i ncome, net of tax Net current peri od other comprehens i ve i ncome (l os s ) Bal a nce, December 31, 2023 Bal a nce, December 31, 2021 Cha nge i n fa i r val ue of i nves tment s ecuri ti es a va i l a bl e for s a l e, net of ta x Unrecogni zed net a ctua ri al gai n duri ng the peri od, net of ta x Amorti za ti on of net actua ri a l ga i n i ncl uded i n i ncome, net of ta x Net current peri od other comprehens i ve i ncome (l os s ) Bal a nce, December 31, 2022 $ $ $ $ Investment Securities Defined Benefit Plans (i n thous a nds ) 203 $ - (19,364) $ 3,146 122 - - 3,268 (16,096) $ - (31) (40) (71) 132 $ Investment Securities Defined Benefit Plans (i n thous a nds ) (336) $ - 483 56 539 203 $ 1,343 $ (20,707) - - (20,707) (19,364) $ Total (19,161) 3,146 122 (31) (40) 3,197 (15,964) Total 1,007 (20,707) 483 56 (20,168) (19,161) The following table presents the components of other comprehensive income for the twelve months ended December 31, 2023 and 2022. Reclassification adjustments related to losses on securities available-for-sale are included in loss 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. Before Tax Twelve Months Ended December 31, 2023 Tax Effect Net of Tax (i n thous a nds ) 897 $ 32 929 4,043 $ 154 4,197 3,146 122 3,268 (39) (51) (90) 4,107 $ (8) (11) (19) 910 $ (31) (40) (71) 3,197 Net unrea l i zed l os s es on i nves tment s ecuri ti es : Net unrea l i zed l os s es a ri s i ng duri ng the peri od Recl a s s i fi ca ti on a djus tments for net l os s real i zed i n net i ncome Net unrea l i zed l os s es on i nves tment s ecuri ti es Defi ned benefi t pl ans : Net unrecogni zed a ctuari a l l os s 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 ) $ $ 27 Net unrea l i zed l os s es on i nves tment s ecuri ti es : Net unrea l i zed l os s es a ri s i ng duri ng the peri od Recl a s s i fi ca ti on a djus tments for net ga i ns rea l i zed i n net i ncome Net unrea l i zed l os s es on i nves tment s ecuri ti es Defi ned benefi t pl ans : Net unrecogni zed a ctuari 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 Tax Effect Net of Tax (i n thous a nds ) $ (26,595) $ - (26,595) 611 71 682 (25,913) $ $ (5,888) $ - (5,888) 128 15 143 (5,745) $ (20,707) - (20,707) 483 56 539 (20,168) NOTE 6 – PREMISES AND EQUIPMENT The components of premises and equipment at December 31, 2023 and 2022 were as follows: La nd a nd premi s es Equi pment, furni ture a nd fi xtures Cons tructi on i n progres s Les s accumul a ted depreca ti on a nd a morti za ti on Tota l premi s es a nd equi pment December 31, 2023 2022 (i n thous a nds ) $ $ 21,118 $ 10,427 104 31,649 (18,513) 13,136 $ 20,535 10,030 78 30,643 (17,772) 12,871 Depreciation expense was $1.1 million for years ending December 31, 2023 and 2022. 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, 2023 are as follows: 2024 2025 2026 2027 Therea fter $ Tota l future mi ni mum l ea s e pa yments $ Amounts repres enti ng i nteres t Tota l opera ti ng l ea s e l i a bi l i ti es $ December 31, 2023 (i n thous ands ) 683 544 386 374 972 2,959 (392) 2,567 At December 31, 2023 the weighted-average remaining lease term was 5.5 years and the weighted-average discount rate was 4.07%. Amortization of ROU assets, short term lease cost, interest on lease liabilities and non-lease component expenses was $755,000 and $647,000 for the years ending December 31, 2023 and 2022, respectively. NOTE 8 – OTHER REAL ESTATE OWNED The Company had no activity related to OREO for the years ended December 31, 2023 and 2022 and had no properties classified as OREO at December 31, 2023 and 2022. 28 NOTE 9 – DEPOSITS Time deposits that meet or exceed the FDIC Insurance limit of $250,000 at December 31, 2023 and 2022 were $36.5 million and $9.8 million, respectively. The composition of deposits at December 31, 2023 and 2022 was as follows: December 31, 2023 2022 (i n thous a nds ) Interes t-bea ri ng dema nd ("NOW") $ Money ma rket depos i ts Sa vi ngs depos i ts Ti me depos i ts ("CDs ") Tota l i nteres t-bea ri ng depos i ts Non-i nteres t bea ri ng dema nd Tota l depos i ts $ 183,436 $ 179,344 136,408 100,832 600,020 409,272 1,009,292 $ 253,272 195,814 174,887 48,754 672,727 507,635 1,180,362 Scheduled maturities of CDs were as follows for future years ending December 31 (in thousands): $ 2024 2025 2026 2027 2028 Tota l $ Maturities 71,011 24,517 3,143 1,157 1,004 100,832 NOTE 10 – BORROWINGS Advances from the Federal Home Loan Bank Utilizing a pledge agreement, qualifying securities and loans receivable at December 31, 2023 and 2022, were pledged as security for Federal Home Loan Bank (FHLB) borrowings. At December 31, 2023, the Bank had no outstanding borrowings against its $260.1 million borrowing capacity with the FHLB, as compared to no outstanding against a borrowing capacity of $195.8 million at December 31, 2022. The Bank’s borrowing facility with the FHLB is subject to collateral and stock ownership requirements. A summary of FHLB advances as of December 31, 2023 and 2022 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 nteres t ra te duri ng the yea r(1) $ $ (1) Fi xed ra te December 31, 2022 2023 (dol l ars i n thous a nds ) - $ - $ - 190 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, 2023, the Bank had an available discount window primary credit line with the Federal Reserve Bank of San Francisco of approximately $66.3 million with no balance outstanding. The Company did not utilize any Federal Reserve borrowing facility, other than for operational testing, during the twelve months ended December 31, 2023. 29 At December 31, 2023, 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, 2023. Availability of lines is subject to continued borrower eligibility. NOTE 11 – JUNIOR SUBORDINATED DEBENTURES At December 31, 2023, 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, 2023 and 2022 for the common capital securities issued by the issuer trusts. As of December 31, 2023 and 2022, regular accrued interest on junior subordinated debentures totaled $155,000 and $126,000, respectively, and is included in accrued expenses and other liabilities on the consolidated balance sheet. The terms of the junior subordinated debentures as of December 31, 2023 and 2022 are: Maturity Date Ma rch 2036 Jul y 2036 Trust Name Issue Date Issued Amount (dol l a rs i n thous a nds ) Rate Pa ci fi c Fi na nci a l Corpora ti on December Sta tutory Trus t I Pa ci fi c Fi na nci a l Corpora ti on Sta tutory Trus t II 2005 June 2006 $ 5,000 7.10% (1) 8,000 13,000 $ 7.26% (2) (1) Va ri a bl e ra te of 3-month CME Term SOFR pl us 1.71%, a djus ted quaterl y 3-month SOFR 5.38% a t December 13, 2023 (1) Va ri a bl e ra te of 3-month l i bor pl us 1.45%, adjus ted quaterl y 3-month LIBOR 4.77% a t December 13, 2022 (2) Va ri a bl e ra te of 3-month CME Term SOFR pl us 1.86%, a djus ted quaterl y 3-month LIBOR 5.39% a t October 13, 2023 (2) Va ri a bl e ra te of 3-month l i bor pl us 1.60%, adjus ted quaterl y 3-month LIBOR 4.08% a t October 13, 2022 NOTE 12 – INCOME TAXES The Company recorded an income tax provision for the twelve months ended December 31, 2023 and 2022. 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, 2023, 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. 30 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, 2023. Income taxes for the years ended December 31, 2023 and 2022 was as follows: Current Deferred Tota l i ncome tax expens e December 31, 2023 2022 (i n thous a nds ) 3,661 $ (270) 3,391 $ 2,252 59 2,311 $ $ 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, 2023 and 2022 are: Deferred Tax Assets Al l owa nce for credi t l os s es Deferred compens a ti on Suppl emental executive reti rement pl an Compens ati on expens e Unrea l i zed l os s on s ecuri ti es a va i l abl e for s a l e Other Total deferred ta x a s s ets Deferred Tax Liabilities Depreci a tion Loan fees /cos ts Prepa i d expens es Other Total deferred ta x l i abi l i ti es Net deferred tax assets December 31, 2023 2022 (i n thous a nds ) 2,043 $ 4 663 45 4,577 223 7,555 $ 1,868 7 689 64 5,506 335 8,469 199 $ 2,306 272 210 2,987 4,568 $ 189 2,534 245 273 3,241 5,228 $ $ $ $ 31 The following is a reconciliation between the statutory and effective federal income tax rate for the years ended December 31, 2023 and 2022: December 31, 2023 2022 Amount 3,779 43 (182) (144) (105) 3,391 $ $ Percent of Pre-tax Income Amount (dol l a rs i n thous a nds ) 21.0% $ 2,772 0.2% -1.0% -0.8% -0.6% 18.8% $ 95 (291) (143) (122) 2,311 Percent of Pre-tax Income 21.0% 0.7% -2.2% -1.1% -0.9% 17.5% Income tax a t s ta tutory rate Adjus tments res ul ti ng from: Sta te i ncome ta xes , net of federa l benefi t Ta x-exempt i ncome Net ea rni ngs on l i fe i ns ura nce pol i ci es Other Tota l i ncome ta x expens e NOTE 13 – EMPLOYEE BENEFITS Incentive Compensation Plan – The Bank has a plan that provides incentive compensation to key employees if the Bank meets certain performance criteria established by the Board of Directors. The cost of this plan was $1.7 million and $1.0 million in 2023 and 2022, 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 $703,000 and $743,000 for 2023 and 2022, 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 2023 and 2022. 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 $3.2 million and $3.1 million at December 31, 2023 and 2022, respectively. In 2023 and 2022, the net benefit recorded from these plans, including the cost of the related life insurance, was $121,000 and $183,000, 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 $19,000 and $34,000 at December 31, 2023 and 2022, respectively. Long-Term Compensation Agreements – The Company has long-term compensation agreements with selected employees that provide incentive for those covered employees to remain employed with the Company for a defined period of time. A cost of $61,000 and a benefit of $42,000 was recorded for these agreements for the years ended December 31, 2023 and 2022, 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 $7.5 million and $7.3 million at December 31, 2023 and 2022, respectively. 32 The following table sets forth the net periodic pension cost and obligation assumptions used in the measurement of the benefit obligation for the years ended December 31, 2023 and 2022: Net periodic pension cost: Service cost Interest cost Amortization of net (gain) loss Net periodic pension cost December 31, 2023 2022 (dollars in thousands) $ $ 45 $ 117 (40) 122 $ 58 69 56 183 The following table sets forth the change in benefit obligation at December 31, 2023 and 2022: Cha nge i n benefi t obl i ga ti on: Benefi t obl i ga ti on a t the begi nni ng of yea r $ Servi ce cos t Interes t cos t Benefi ts pa i d Actuari al l os s (ga i n) Benefi t obl i ga ti on a t end of year $ December 31, 2023 2022 (i n thous a nds ) 2,428 $ 45 117 (234) 31 2,387 $ 3,018 58 69 (234) (483) 2,428 Amounts recognized in accumulated other comprehensive income at December 31, 2023 and 2022 was as follows: Gain Prior service cost Total recognized in AOCI December 31, 2023 2022 (in thousands) (132) $ - (132) $ (203) - (203) $ $ The following table summarizes the projected and accumulated benefit obligations at December 31, 2023 and 2022: Projected benefi t obl i ga ti on Accumul a ted benefi t obl i gati on $ $ December 31, 2023 2022 (i n thous a nds ) 2,387 $ 2,387 $ 2,429 2,429 Estimated future benefit payments as of December 31, 2023 were as follows (in thousands): $ 2024 2025 2026 2027 2028 2029-2033 Total $ 234 234 234 234 328 1,140 2,404 33 NOTE 14 – COMMITMENTS AND CONTINGENCIES The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, and involve, to varying degrees, elements of credit risk in excess of the amount recognized on the consolidated balance sheets. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. A summary of the Bank’s off-balance sheet commitments at December 31, 2023 and 2022 is as follows: December 31, 2023 2022 Commi tments to extend credi t $ $ Sta ndby l etters of credi t (i n thous a nds ) $ $ 183,593 4,451 202,331 4,420 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Many of the commitments expire without being drawn upon; therefore total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income- producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Certain executive officers have entered into employment contracts with the Bank which provide for contingent payments subject to future events. In connection with certain loans held for sale, the Bank typically makes representations and warranties that the underlying loans conform to specified guidelines. If the underlying loans do not conform to the specifications, the Bank may have an obligation to repurchase the loans or indemnify the purchaser against loss. The Bank believes that the potential for loss under these arrangements is remote. Accordingly, no contingent liability is recorded in the consolidated financial statements. 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 surplus, excluding accumulated other comprehensive income (loss). Standby letters of credit were granted primarily to commercial borrowers. The Bank, as a matter of practice, generally does not extend credit to any single borrower or group of borrowers in excess of $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. 34 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, 2023 December 31, 2022 Expected Life 6.5 yea rs 6.5 yea rs Risk Free Interest Rate 3.58% 4.18% Expected Stock Price Volatility 27.24% 27.42% Dividend Yield 4.82% 4.98% Weighted Average Fair Value of Options Granted $ 1.92 $ 1.93 The following tables summarize the stock option activity for the years ended December 31, 2023 and 2022: Outs ta ndi ng at December 31, 2021 Gra nted Exerci s ed Forfei ted or ca ncel ed Expi red Outs ta ndi ng at December 31, 2022 Gra nted Exerci s ed Forfei ted or ca ncel ed Expi red Outs ta ndi ng at December 31, 2023 Weighted Average Exercise Price 10.42 10.45 5.11 12.47 12.69 11.25 10.81 5.14 11.82 12.05 11.18 Shares 174,150 $ 5,000 (25,500) (3,900) (2,400) 147,350 $ 86,000 (7,500) (12,400) (17,200) 196,250 $ Ves ted a nd exerci s a bl e a t December 31, 2023 86,450 $ 11.52 Weighted Average Remaining Contractual Term (in Years) 7.21 5.46 35 The following table summarizes nonvested stock option activity for the years ended December 31, 2023 and 2022: Nonves ted Outs ta ndi ng a t December 31, 2021 Gra nted Ves ted Forfei ted Nonves ted Outs ta ndi ng a t December 31, 2022 Gra nted Ves ted Forfei ted Nonves ted Outs ta ndi ng a t December 31, 2022 Weighted Average Grant Date Fair Value 1.18 1.93 1.15 1.03 1.28 1.92 1.09 1.21 1.82 Shares 78,800 $ 5,000 (25,400) (3,900) 54,500 $ 86,000 (18,300) (12,400) 109,800 $ Information related to the stock option plan during each year follows: Intri ns i c va l ue of opti ons exerci s ed Ca s h recei ved from opti on exerci s es $ $ 46 $ 39 $ 142 130 2023 2022 (i n thous a nds ) The Company accounts for stock based compensation in accordance with GAAP, which requires measurement of compensation cost for all stock-based awards based on grant date fair value and recognition of compensation cost over the service period of each award. The following information summarizes information about stock option compensation expense for the years ended December 31, 2023 and 2022: Compens a ti on Expens e Ta x Effect Compens a ti on Expens e, net Twelve Months Ended December 31, 2023 2022 (i n thous a nds ) $ $ 48 $ 10 38 $ 31 7 24 As of December 31, 2023, there was $165,000 of total unrecognized compensation cost related to stock options. The cost is expected to be recognized over a weighted-average period of 2.42 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. 36 The following table summarizes RSU activity during the twelve months ended December 31, 2023 and 2022: Weighted Average Grant Date Fair Value 11.85 Shares 25,850 11,000 $ (7,100) - 29,750 2,000 $ 11.00 (11,750) - 20,000 Outs ta ndi ng a t December 31, 2021 Granted Ves ted Forfei ted Outs ta ndi ng a t December 31, 2022 Granted Ves ted Forfei ted Outs ta ndi ng a t December 31, 2023 The following table summarizes RSU compensation expense during the twelve months ended December 31, 2023 and 2022: Compens a ti on Expens e Ta x Effect Compens a ti on Expens e, net $ $ Twelve Months Ended 2023 2022 (i n thous a nds ) 97 $ 20 77 $ 119 25 94 As of December 31, 2023, there was $67,000 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 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, 2023 and 2022, 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 37 set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category. Actual capital amounts and ratios for December 31, 2023 and 2022 are presented in the table below. Actual Minimum Requirements Well-Capitalized Requirements Amount Ratio Amount Ratio Amount Ratio (dol l ars i n thous ands ) As of December 31, 2023 Compa ny Common equi ty Ti er 1 capi ta l to ri s k-wei ghted as s ets Ti er 1 l everage capi ta l to avera ge a s s ets Ti er 1 ca pi tal to ri s k-wei ghted as s ets Tota l ca pi ta l to ri s k-wei ghted a s s ets $ Ba nk Common equi ty Ti er 1 capi ta l to ri s k-wei ghted as s ets Ti er 1 l everage capi ta l to avera ge a s s ets Ti er 1 ca pi tal to ri s k-wei ghted as s ets Tota l ca pi ta l to ri s k-wei ghted a s s ets As of December 31, 2022 Compa ny Common equi ty Ti er 1 capi ta l to ri s k-wei ghted as s ets Ti er 1 l everage capi ta l to avera ge a s s ets Ti er 1 ca pi tal to ri s k-wei ghted as s ets Tota l ca pi ta l to ri s k-wei ghted a s s ets $ Ba nk Common equi ty Ti er 1 capi ta l to ri s k-wei ghted as s ets Ti er 1 l everage capi ta l to avera ge a s s ets Ti er 1 ca pi tal to ri s k-wei ghted as s ets Tota l ca pi ta l to ri s k-wei ghted a s s ets 117,220 130,220 130,220 139,448 129,220 129,220 129,220 138,448 108,888 121,888 121,888 130,327 121,112 121,112 121,112 129,551 14.9% $ 11.3% 16.5% 17.7% 16.4% 11.2% 16.4% 17.6% 14.3% $ 9.4% 16.0% 17.1% 15.9% 9.1% 15.9% 17.0% 35,402 46,096 47,353 63,027 35,457 46,150 47,276 62,931 34,265 51,867 45,708 60,972 34,277 53,236 45,703 60,965 4.5% 4.0% 6.0% 8.0% N/A N/A N/A N/A 4.5% $ 4.0% 6.0% 8.0% 51,215 57,688 63,034 78,664 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 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. 38 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 yield curves models that incorporate loss severities, volatility, credit spread and optionality. Additionally, the pricing service may obtain a broker quote when sufficient information is not available to produce a valuation. Valuations and broker quotes are non-binding and do not represent quotes on which one may execute the disposition of the assets. The Company generally obtains one value from its primary external third-party pricing service. The Company’s third-party pricing service has established processes for us to submit inquiries regarding quoted prices. The Company’s third-party pricing service will review the inputs to the evaluation in light of any new market data presented by us. The Company’s third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis. 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, 2023 or 2022. The following table presents the balances of assets measured at fair value on a recurring basis at December 31, 2023 and 2022. At December 31, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Description Fair Value Ava i la bl e-for-s a l e s ecuri ti es : (i n thous ands ) Col l a tera l i zed mortga ge obl i ga ti ons $ 127,484 $ - $ 127,484 $ Mortga ge-ba cked s ecuri ti es Muni ci pal s ecuri ti es 18,980 42,425 - - U.S. government a nd a gency obl i ga ti ons Tota l a s s ets mea s ured at fa i r va l ue 49,236 238,125 $ $ 49,236 49,236 $ 18,980 41,815 - 188,279 $ - - 610 - 610 39 At December 31, 2022 Description Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Avai l a bl e-for-s a l e s ecuri ti es : (i n thous a nds ) Col l a tera l i zed mortga ge obl i ga tions $ 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 13,110 61,771 1,999 - - - U.S. government a nd a gency obl i gati ons Tota l a s s ets mea s ured a t fa i r val ue 47,946 226,784 $ $ 47,946 47,946 $ 13,110 61,131 1,999 - 178,198 $ - - 640 - - 640 As of December 31, 2023, the Company had one available-for-sale security classified as a Level 3 investment which consists 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, 2023 and 2022. 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, 2023 and 2022, respectively. Twelve Months Ended December 31, 2023 2022 (i n thous ands ) Bal a nce begi nni ng of peri od Tra ns fers i n to l evel 3 Cha nge i n FV (i ncl uded i n other comprehens i ve i ncome) Bal a nce end of peri od $ $ 640 $ - (30) 610 $ 680 - (40) 640 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 individually evaluated, 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: Loans individually evaluated (Impaired Loans prior to January 1, 2023) – The Company individually evaluates loans when a loan over $5,000 is in nonaccrual status or, prior to 2023, when a loan had its terms restructured in a trouble-debt-restructuring (TDR). On January 1, 2023, the Company adopted ASU 2022-02 prospectively. As a result, loans that were restructured prior to adoption are no longer considered TDRs and are not individually evaluated. In accordance with the provisions of the individually evaluated loan guidance, credit loss is measured on loans when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The Company has elected to use the practical expedient to measure individually evaluated loans as collateral dependent when repayment is expected 40 to be provided substantially through the operation or sale of the collateral. The credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale of the collateral. Those individually evaluated loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Individually evaluated loans for which an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 3 inputs based on customized discounting criteria. Credit loss amounts on individually evaluated loans represent specific valuation allowance and write-downs during the period presented that were individually evaluated for impairment based on the estimated fair value of the collateral less estimated selling costs, excluding impaired loans fully charged-off. 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 credit 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. There were no assets held at the end of December 31, 2023 that were measured at fair value on a nonrecurring basis. The following table present the Company’s assets that were held at the end of December 31, 2022 that were measured at fair value on a nonrecurring basis: Description Fair Value Loans meas ured for i mpa i rment, net of s peci fi c res erves Tota l a s s ets mea s ured on a nonrecurri ng ba s i s $ $ 1,316 $ 1,316 $ 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 thous a nds ) - $ - $ - $ - $ 1,316 1,316 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 (dollars in thousands): Description Fair Value Valuation Technique Significant Unobservable Inputs Range (Weighted Average) At December 31, 2022 Loa ns mea s ured for impa irment, net of s peci fi c res erves $ 1,316 Income a pproa ch Proba bil ity of defa ult, dis count ra te 3.95%, 5.12% 41 The estimated fair value of the Company’s financial instruments at December 31, 2023 and 2022 was as follows: Fi na nci al a s s ets : As of December 31, 2023 Fair Value Hierarchy Level Carrying Value (i n thous a nds ) Estimated Fair Value $ Ca s h a nd ca s h equi val ents Other i nteres t ea rni ng depos i ts Inves tment s ecuri ti es a va i l abl e-for-s a l e Inves tment s ecuri ti es hel d-to-ma turi ty Inves tment s ecuri ti es hel d-to-ma turi ty Inves tment s ecuri ti es hel d-to-ma turi ty Loa ns hel d-for-s a l e Loa ns recei vabl e, net Accrued i nteres t recei vabl e Level 1 Level 1 See previ ous ta bl e Level 1 Level 2 Level 3 Level 2 Level 3 Level 1 106,821 $ 1,250 238,125 24,727 30,212 515 1,103 676,023 4,434 106,821 1,250 238,125 24,211 28,509 515 1,103 654,594 4,434 Fi na nci al l i a bi l i ti es : Depos i ts Juni or s ubordi na ted debentures Accrued i nteres t pa ya bl e Fi na nci al a s s ets : Level 2 Level 3 Level 1 $ 1,009,292 $ 13,403 540 1,008,028 14,023 540 As of December 31, 2022 Fair Value Hierarchy Level Carrying Value (i n thous a nds ) Estimated Fair Value Ca s h a nd ca s h equi val ents Other i nteres t ea rni ng depos i ts Inves tment s ecuri ti es a va i l abl e-for-s a l e Inves tment s ecuri ti es hel d-to-ma turi ty Inves tment s ecuri ti es hel d-to-ma turi ty Inves tment s ecuri ti es hel d-to-ma turi ty Loa ns recei vabl e, net Accrued i nteres t recei vabl 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 al l i a bi l i ti es : Depos i ts Juni or s ubordi na ted debentures Accrued i nteres t pa ya bl e Level 2 Level 3 Level 1 $ 1,180,362 $ 13,403 155 1,178,435 13,785 155 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. 42 The following table illustrates the computation of basic and diluted earnings per share: For the Year Ended December 31, 2023 2022 Bas i c: Net i ncome (numera tor) Wei ghted a vera ge s ha res outs ta ndi ng (denomi nator) Bas i c earni ngs per s ha re Di l uted: Net i ncome (numera tor) Wei ghted a vera ge s ha res outs ta ndi ng Effect of di l uti ve s tock opti ons Wei ghted a vera ge s ha res outs ta ndi ng a s s umi ng di l uti on (denomi nator) Di l uted earni ngs per s ha re $ $ $ $ Sha res s ubject to outs ta ndi ng opti ons (dol l ars i n thous a nds , except per s ha re amounts ) 10,888 10,396,268 1.05 10,420,431 14,605 $ 1.40 $ 14,605 $ 10,420,431 8,756 10,429,187 1.40 $ 10,888 10,396,268 27,033 10,423,301 1.04 For the Year Ended December 31, 2023 155,500 2022 82,600 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 September 21, 2023 the Board of Directors for the Company authorized the repurchase of up to $2.5 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 38,500 shares, at a weighted average share price of $10.37, during the year ended December 31, 2023. No shares were repurchased during the year ended December 31, 2022 43 NOTE 20 – CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY Pacific Financial Corporation – Parent Company Only Consolidated Statements of Financial Condition (in thousands) ASSETS Ca s h a nd ca s h equi val 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 abi l i ti es Tota l l i a bi l i ti es $ $ $ Tota l s ha rehol ders ' equi ty Total l i a bi l i ti es a nd s ha rehol ders ' equi ty $ December 31, 2023 December 31, 2022 582 126,692 975 128,249 13,403 155 13,558 114,691 128,249 $ $ $ $ 593 115,386 711 116,690 13,403 125 13,528 103,162 116,690 Pacific Financial Corporation – Parent Company Only Consolidated Statements of Income (in thousands) INTEREST EXPENSE Juni or s ubordi na ted debentures Total i nteres t expens e NONINTEREST INCOME Di vi dends from s ubs i di ary 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 nteres t i ncome NONINTEREST EXPENSE Other expens e Total noni nteres t 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, 2023 2022 $ $ $ 929 $ 929 7,124 8,560 32 15,716 451 451 14,336 269 14,605 $ 17,802 $ 460 460 6,207 5,370 11 11,588 454 454 10,674 214 10,888 (9,280) 44 Pacific Financial Corporation – Parent Company Only Consolidated Statements of Cash Flows (Dollars in thousands) Twelve Months Ended December 31, 2023 2022 $ 14,605 $ 10,888 (8,560) (264) 30 145 5,956 6 (50) (399) (5,524) (5,967) (11) 593 582 $ (5,370) (77) 88 149 5,678 83 (24) - (5,407) (5,348) 330 263 593 Cash flows from operating activities: Net Income Adjus tments to reconci l e net i ncome to ca s h a nd ca s h equi va l ents from operati ng a cti vi ti es Equi ty i n undi s tri buted i ncome of s ubs i di a ry Net change i n other a s s ets Net change i n other l i a bi l i ti es Stock compens ati on expens e Net cas 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 ha re s ettl ement for equi ty a wa rds Repurchas e of common s tock Cas h di vi dends pai d Net cas h us ed i n fi nanci ng a cti vi ti es Net increa s e (decrea s e) i n ca s h and cas h equi val ents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ 45 NOTE 21 – SELECTED DATA Results of operations on a quarterly basis were as follows (unaudited): Year Ended December 31, 2023 First Quarter Second Quarter Third Quarter Fourth Quarter Interes t a nd di vi dend i ncome Interes t expens e Net interest income Provis i on for l oa n l os s es Noninteres t i ncome Noninteres t expens e Income before income taxes Income tax expens e Net income Earnings per common share Bas i c Di l uted Interes t a nd di vi dend i ncome Interes t expens e Net interest income Benefi t for l oan l os s es Noninteres t i ncome Noninteres t expens e Income before income taxes Income tax expens e Net income Earnings per common share Bas i c Di l uted $ $ $ $ $ $ $ $ (dol l ars i n thous ands , except per s ha re a mounts ) 13,690 $ 593 13,097 156 1,287 9,188 5,040 930 4,110 $ 14,242 $ 1,962 12,280 245 1,610 9,142 4,503 859 3,644 $ 13,735 $ 1,564 12,171 8 1,747 9,007 4,903 994 3,909 $ 13,813 2,161 11,652 111 1,528 9,519 3,550 608 2,942 0.39 $ 0.39 $ 0.38 $ 0.38 $ 0.35 $ 0.35 $ 0.28 0.28 Year Ended December 31, 2022 First Quarter Third Quarter Second Quarter Fourth Quarter (dol l ars i n thous ands , except per s ha 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 46 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 Lost stock certificates Consolidation of accounts Transfer of stock to another person Duplicate mailings Additional administrative services As a Pacific Financial Corporation shareholder, you are invited to take advantage of our convenient shareholder services or request more information about Pacific Financial Corporation. Access your account directly through Client Support at www.broadridge.com. Annual Meeting The annual meeting of shareholders will be held via webcast on April 24th, 2024, at 10:00 AM, Pacific 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 Darla Johnson, 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 Terri McKinnis 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 Darla Johnson Corporate Secretary 47 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 Benjamin Ertischek Chief Financial Officer EOS Worldwide 48 Your Story is Our Story Lynden Bellingham (3 Locations) Anacortes Burlington (ATM/ITM) Taholah Ocean Shores Hoquiam Montesano Aberdeen Olympia Ocean Park Long Beach Warrenton Seaside Raymond Naselle (ATM/ITM) Cathlamet Vancouver Lake Oswego Salem Pacific Financial Corporation | 1216 Skyview Drive | Aberdeen, WA 98520 360-533-8873 | BankofthePacific.com NMLS #417480 Annual Report 2023 

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