2024
Annual Report
Dear Fellow Shareholders:
Thank you for your investment in Pacific Financial Corporation (PFLC). We are a vibrant community bank
located in one of the top regional economies in the country. As I reflect on the past year, I want to express my
gratitude for your continued trust and support. In 2024, we generated another year of solid operating performance,
in a less than optimal interest rate and inverted yield curve environment. And while 2024 was marked by these
economic and interest rate challenges, we demonstrated resilience and strategic growth for Pacific Financial
Corporation, which included a second half rebound in the market valuation for PFLC stock and improved bank
fundamentals. This positive momentum underscores our optimism as we head into 2025.
Financial Performance and Industry Position
Net income for 2024 was $9.5 million, or $0.92 per diluted share, resulting in a return on average assets (ROAA)
of 0.84% and return on average equity (ROAE) of 8.20%. Excluding costs associated with the wind-down of
residential real estate lending, adjusted net income was $10.1 million, or ROAA of 0.89%, as measured on a non-
GAAP basis. Earnings in 2024 were down compared to the record earnings in 2023 as a result of rising deposit
costs, increases in expenses related to new office locations, and persistent inflation impacting technology and vendor
contract renewals. However, we are proud to report that we outperformed many of our peers, demonstrating the
strength and stability of our business model. Our commitment to prudent risk and balance sheet management has
helped us navigate these headwinds effectively. Our overall credit quality metrics remained strong with
nonperforming assets at just 0.09% of total assets, and net charge-offs of only $5,000 for the entire year which
limited provision expense for credit losses to $168,000 solely in support of loan growth.
Our performance aided by a strong net interest margin of 4.18% allowed us to return $5.8 million in capital to our
shareholders in 2024 through a quarterly cash dividend. This represented a dividend yield of 4.59% for our
shareholders. Further the Company renewed a share buy-back program of up to 2% of the stock outstanding in
fourth quarter 2024, which was completed in first quarter 2025.
Deposit Franchise
Pacific Financial continues to benefit from an exceptional core deposit base that positively impacts our net interest
margin. Non-interest bearing deposits remain a critical component representing the largest concentration of
deposits at 38% as of December 31, 2024. Another highlight for the year was the stabilization of our deposit
balances with a 1% growth at year-end. This achievement is particularly significant in an environment where
liquidity and safety remain as top priorities for customers. Our continued focus on providing value-driven
products and exceptional service has allowed us to maintain strong customer loyalty and trust.
Lending Landscape and Strategic Decisions
Lending demand was challenged throughout the year due to economic uncertainties and elevated market interest
rates. Despite this, we closed the year with 6% average loan growth year-over-year, reflecting our disciplined
approach to lending and our commitment to supporting the financial needs of our communities. Additionally,
while total loan origination volume was down, business development efforts toward generating new loans to new
clients, as a percentage of total new loans, far exceeded internal strategic goals. We do anticipate loan volume
and loan demand to improve in 2025 with continued interest rate cuts from the Federal Reserve and a more pro-
growth business friendly climate from the current federal administration and regulatory agencies.
As noted earlier, we made the difficult decision to exit residential lending and that exit was completed by year
end. This choice was not made lightly but was necessary to align our resources and capital with the most
promising growth opportunities. By reallocating these resources, we are better positioned to enhance our core
commercial and consumer lending segments as well as improve our efficiency ratio and reduce operating
expenses.
Employee Culture and Board of Directors
Executing our strategy and meeting our objectives would not be possible without a strong culture and talented team
of employees. Across the Bank we have strong leadership that reflects our values and these individuals, along with
our amazing employees, are driving the Company forward. The board of directors and I are confident in their skills
and invested in their success. Additionally, we have an outstanding board of directors who provide steadfast
guidance and thoughtful oversight of PFLC on behalf of our shareholders.
Thank you to Sue Freese who is retiring in April 2025, after over 20 years of dedicated service including
participation on the Board IT, ALCO and Compliance committees. Sue’s leadership combined a strong business
sense with an empathetic voice. We are proud of her service and grateful for Sue’s ongoing support as a shareholder,
customer and friend to the Bank.
I would also like to honor former director, Gary Forcum who passed away in February 2025. Gary was a remarkable
banker, astute businessman, and wonderful friend and mentor to many. During his nineteen years of energetic
engagement on the board, he served as the Chair of the Board for ten years from 2006 to 2016, including during the
Great Financial Crisis leading the bank admirably and with conviction. Gary played a pivotal role in the Bank’s
growth and success and he will be dearly missed.
Annual Shareholders’ Meeting
Please join us for our annual Shareholders’ meeting on Wednesday, April 23, 2025, at 9:00 am. You may access
the meeting virtually via the internet at www.virtualshareholdermeeting.com/PFLC2025. As a shareholder, you
will be required to enter your control number found on your proxy card.
Shareholder Value
As we look forward to 2025 and beyond, we will be operating from a strong balance sheet position with clean
asset quality, diversified loan portfolio, strong core deposits, abundant liquidity, an above peer average net interest
margin, and strong capital ratios along with a proven track record of delivering solid returns. We are confident in
our strategic direction and our ability to adapt to changing market conditions. Our focus for 2025 remains on
building our franchise through sustainable growth, operational efficiency and delivering long-term value to our
shareholders. We look forward to navigating these opportunities and any future challenges together.
Sincerely,
Denise Portmann
President and Chief Executive Officer
Pacific Financial Corporation
2024
2023
2022
2021
2020
Operations Data
Interest and dividend income
$
55,003
$
55,480
$
42,152
$
37,159
$
39,574
Interest expense
10,780
6,280
1,206
1,254
2,380
Net interest income
44,223
49,200
40,946
35,905
37,194
Provision (benefit) for credit losses
168
520
-
(3,650)
3,500
Noninterest income
6,869
6,172
7,227
16,729
20,146
Noninterest expense
39,184
36,856
34,974
40,702
39,594
Income before income taxes
11,740
17,996
13,199
15,582
14,246
Income tax expense
2,208
3,391
2,311
2,885
2,862
Net income
$
9,532
$
14,605
$
10,888
$
12,697
$
11,384
Net income per share:
Basic
$
0.93
$
1.40
$
1.05
$
1.22
$
1.08
Diluted
$
0.92
$
1.40
$
1.04
$
1.22
$
1.07
Dividends declared per share
$
0.56
$
0.53
$
0.52
$
0.52
$
0.38
Dividends declared
$
5,776
$
5,524
$
5,407
$
5,418
$
4,023
Dividend payout ratio
61%
38%
50%
43%
35%
Performance Ratios
Return on average equity
8.20%
13.48%
10.24%
10.85%
10.33%
Return on average assets
0.84%
1.22%
0.82%
1.00%
1.07%
Net interest margin
4.18%
4.39%
3.29%
3.00%
3.73%
Efficiency ratio
76.69%
66.56%
72.60%
77.33%
69.05%
Balance Sheet Data
Total assets
$
1,153,563 $
1,148,899 $
1,306,203 $
1,319,966 $
1,167,293
Loans, net
695,397
676,023
631,722
620,036
717,330
Total deposits
1,014,731
1,009,292
1,180,362
1,178,940
1,028,424
Total borrowings
13,403
13,403
13,403
13,806
13,956
Shareholders' equity
113,856
114,691
103,162
117,642
114,186
Equity to assets ratio
9.87%
9.98%
7.90%
8.91%
9.78%
Book value per share
$
11.26
$
11.04 $
9.91
$
11.32
$
10.94
Tangible book value per share
$
9.93
$
9.75 $
8.62
$
10.03
$
9.65
Asset Quality Ratios
Allowance for credit losses to total loans
1.26%
1.25%
1.29%
1.32%
1.65%
Allowance for credit losses to
nonperforming loans
809.05%
1284.64%
947.76%
679.52%
504.52%
Nonperforming loans to total loans
0.16%
0.10%
0.14%
0.19%
0.33%
Nonperforming assets to total assets
0.09%
0.06%
0.07%
0.11%
0.20%
For the Year Ended December 31,
(dollars in thousands, except per share data)
(unaudited)
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, which comprise the consolidated statements of financial condition as of December 31,
2024 and 2023, and the related consolidated statements of income, comprehensive income,
stockholders’ 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,
2024 and 2023, 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, 2024, 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 13, 2025, 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.
Responsibilities of Management for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with accounting principles generally accepted in the United States of
America, and for the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal.com/disclaimer.
CliftonLarsonAllen LLP
CLAconnect.com
Board of Directors
Pacific Financial Corporation and Subsidiary
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.
We are required to communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit, significant audit findings, and certain internal control related
matters that we identified during the audit.
Other Information Included in the Annual Report
Management is responsible for the other information included in the annual report. The other
information comprises the letter to the shareholders, financial information, and nonfinancial information
but does not include the consolidated financial statements and our auditors’ report thereon. Our opinion
on the consolidated financial statements does not cover the other information, and we do not express
an opinion or any form of assurance thereon.
Board of Directors
Pacific Financial Corporation and Subsidiary
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 13, 2025
1
Pacific Financial Corporation
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
See accompanying Notes to Consolidated Financial Statements.
December 31,
December 31,
ASSETS
2024
2023
Cash on hand and in banks
$
18,136 $
16,716
Interest bearing deposits
61,015
90,105
Cash and cash equivalents
79,151
106,821
Other interest earning deposits
1,000
1,250
Investment securities available for sale (amortized cost $285,496 and $258,932, respectively)
263,060
238,125
Investment securities held to maturity (fair value of $39,670 and $53,235, respectively)
41,442
55,454
Loans held for sale
-
1,103
Loans, net of deferred fees
704,248
684,553
Allowance for credit losses
(8,851)
(8,530)
Total loans, net
695,397
676,023
Nonmarketable equity securities
1,689
1,783
Premises and equipment, net
13,439
13,136
Operating lease right-of-use assets
3,513
2,443
Cash surrender value of life insurance
28,333
27,497
Goodwill
12,168
12,168
Other intangible assets, net
1,268
1,268
Accrued interest receivable
4,156
4,434
Prepaid expenses and other assets
8,947
7,394
Total assets
$
1,153,563 $
1,148,899
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
$
1,014,731 $
1,009,292
Junior subordinated debentures
13,403
13,403
Operating lease liabilities
4,040
2,567
Accrued expenses and other liabilities
7,533
8,946
Total liabilities
1,039,707
1,034,208
Shareholders' Equity:
Preferred Stock, no par value; 5,000,000 shares authorized; no shares issued
or outstanding at December 31, 2024 and December 31, 2023
-
-
Common Stock, $1 par value; 25,000,000 shares authorized, 10,109,757 and 10,388,724,
shares issued and outstanding at December 31, 2024 and 2023, respectively
10,110
10,389
Additional paid-in-capital
38,821
41,793
Retained earnings
82,229
78,473
Accumulated other comprehensive loss, net
(17,304)
(15,964)
Total shareholders' equity
113,856
114,691
Total liabilities and shareholders' equity
$
1,153,563 $
1,148,899
2
Pacific Financial Corporation
Consolidated Statements of Income
(Dollars in thousands, except per share data)
See accompanying Notes to Consolidated Financial Statements.
2024
2023
INTEREST AND DIVIDEND INCOME
Interest and fees on loans
$
41,192 $
37,038
Taxable interest on investment securities
9,414
8,665
Nontaxable interest on investment securities
485
585
Interest and dividends on other interest earning assets
3,912
9,192
Total interest and dividend income
55,003
55,480
INTEREST EXPENSE
Deposits
9,829
5,351
Junior subordinated debentures
951
929
Total interest expense
10,780
6,280
Net interest income
44,223
49,200
Provision for credit losses
168
520
Net interest income after provision for credit losses
44,055
48,680
NONINTEREST INCOME
Service charges on deposits
1,980
1,975
Gain on sale of loans, net
1,132
635
Gain (loss) on sale of investment securities, net
121
(154)
Earnings on bank owned life insurance
800
685
Other income
2,836
3,031
Total noninterest income
6,869
6,172
NONINTEREST EXPENSE
Compensation and employee benefits
24,944
22,793
Occupancy
2,574
2,215
Equipment
1,127
1,109
Data processing
4,921
4,713
Professional services
1,163
1,283
Marketing
680
549
State and local taxes
756
1,018
Federal deposit insurance premium
502
550
Other expense
2,517
2,626
Total noninterest expense
39,184
36,856
Income before income taxes
11,740
17,996
Income tax expense
2,208
3,391
Net income
$
9,532 $
14,605
Basic earnings per common share
$
0.93 $
1.40
Diluted earnings per common share
$
0.92 $
1.40
Twelve Months Ended
December 31,
3
Pacific Financial Corporation
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
See accompanying Notes to Consolidated Financial Statements.
2024
2023
Net Income
$
9,532
$
14,605
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss)—
securities available for sale, net of tax
(1,278)
3,146
Reclassification for net (gain) loss on securities—
available-for-sale realized in earnings, net of tax
(96)
122
Defined benefit plans, net of tax
34
(71)
Total other comprehensive income (loss), net of tax
(1,340)
3,197
Comprehensive income
$
8,192
$
17,802
Twelve Months Ended
December 31,
4
Pacific Financial Corporation
Consolidated Statements of Shareholders’ Equity
(Dollars in thousands, except share amounts)
See accompanying Notes to Consolidated Financial Statements.
Number of
Common
Shares
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss) ,
net
Total
Shareholders'
Equity
Balance at December 31, 2022
10,414,276 $
10,414 $
42,065 $
69,844 $
(19,161) $
103,162
Adoption of new accounting standard
-
-
-
(452)
-
(452)
Net income
-
-
-
14,605
-
14,605
Other comprehensive income, net of tax
-
-
-
-
3,197
3,197
Stock option exercises/stock unit vested
12,948
13
(56)
-
-
(43)
Stock based compensation expense
-
-
145
-
-
145
Stock repurchase and cancellation of shares
(38,500)
(38)
(361)
-
-
(399)
Cash dividends declared ($0.53 per share)
-
-
-
(5,524)
-
(5,524)
Balance at December 31, 2023
10,388,724 $
10,389 $
41,793 $
78,473 $
(15,964) $
114,691
Net income
-
-
-
9,532
-
9,532
Other comprehensive loss, net of tax
-
-
-
-
(1,340)
(1,340)
Stock option exercises/stock unit vested
13,350
13
(24)
-
-
(11)
Stock based compensation expense
-
-
192
-
-
192
Stock repurchase and cancellation of shares
(292,317)
(292)
(3,140)
-
-
(3,432)
Cash dividends declared ($0.56 per share)
-
-
-
(5,776)
-
(5,776)
Balance at December 31, 2024
10,109,757 $
10,110 $
38,821 $
82,229 $
(17,304) $
113,856
5
Pacific Financial Corporation
Consolidated Statements of Cash Flows
(Dollars in thousands)
See accompanying Notes to Consolidated Financial Statements.
2024
2023
Cash flows from operating activities:
Net Income
$
9,532
$
14,605
Provision for credit losses
168
520
Depreciation and amortization
1,080
1,335
Deferred income taxes
(229)
(270)
Originations of loans held for sale
(40,718)
(22,734)
Proceeds from sales of loans
42,953
22,266
Gain on sale of loans, net
(1,132)
(635)
Loss on sale of premises and equipment
-
11
(Gain) Loss on sale of securities, net
(121)
154
Earnings on bank owned life insurance
(800)
(685)
Net change in accrued interest receivable
278
(390)
Net change in accrued interest payable
229
385
Net change in prepaid expenses
(503)
173
Other operating activities
(1,771)
1,082
Net cash provided by operating activities
8,966
15,817
Cash flows from investing activities:
Net change in loans
(19,521)
(44,972)
Maturities and paydowns of investment securities held to maturity
14,368
4,504
Maturities and paydowns of investment securities available for sale
19,284
14,663
Purchase of investment securities available for sale
(45,999)
(43,533)
Decrease in other interest earning deposits
250
3,000
Purchase of bank owned life insurance
(36)
(36)
Purchases of premises and equipment
(1,474)
(1,347)
Proceeds from sales of investment securities available for sale
-
20,709
Proceeds from sales of equity securities
271
800
Proceeds from sales of premises and equipment
-
5
Net cash used in investing activities
(32,857)
(46,207)
Cash flows from financing activities:
Net increase (decrease) in deposits
5,439
(171,070)
Net cash from stock option exercises
3
6
Repurchase of common stock
(3,432)
(399)
Taxes related to net share settlement for equity awards
(13)
(38)
Cash dividends paid
(5,776)
(5,524)
Net cash used in financing activities
(3,779)
(177,025)
Net decrease in cash and cash equivalents
(27,670)
(207,415)
Cash and cash equivalents at beginning of year
106,821
314,236
Cash and cash equivalents at end of year
$
79,151
$
106,821
Supplemental disclosures of cash flow information:
Cash paid for interest
$
10,551
$
5,895
Cash paid for taxes
$
1,530
$
4,252
Twelve Months Ended
December 31,
Adjustments to reconcile net income to net cash on hand and in banks
from operating activities
6
Pacific Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2024 and December 31, 2023
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 three branches in Clatsop
and Clackamas counties in Oregon. In addition, the Bank operates loan production offices in Burlington, Washington and Salem,
Oregon.
Basis of presentation: The consolidated financial statements include the accounts of Pacific Financial Corporation and its wholly-
owned Bank 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 to the 2024 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 13, 2025, 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 (loss).” Realized gains and losses on securities available for sale, determined using the specific identification
method, are included in earnings. Amortization of premiums and accretion of discounts are recognized in interest income over the
period to maturity. For mortgage backed securities 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 debt 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 debt securities amortization of premiums are recognized over
the period to first call date.
7
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, 2024 and 2023 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. In 2024, the Company stopped originating mortgage loans to be sold in the secondary
market and did not carry any held-for-sale loans as of December 31, 2024.
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. 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.
Modifications made to borrowers experiencing financial difficulty: Loans are reported as modifications to borrowers experiencing
financial difficulty when the Bank grants a concession to a borrower experiencing financial difficulties that it would not otherwise
consider. Examples of such concessions include providing principal forgiveness, interest rate reductions, other-than-insignificant
payment delays, term extensions or any combination of these.
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, 2024 and 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.
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
8
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 (loss).
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, 2024, and 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 on loans 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 the national unemployment rate, changes to home prices, and growth of gross
domestic product (GDP). 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,
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
9
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.
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.
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.
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).
10
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 provision for credit losses 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 shorter. Gains or
losses on dispositions are reflected in earnings. Routine maintenance and repairs are expensed as incurred. Expenditures which
significantly increases values or extend useful lives are capitalized. The Company reviews buildings, leasehold improvements and
equipment for events or circumstances that occur that result in a material and sustained decrease in the cash flow generated,
potentially resulting in impairment. If impairment is identified, an impairment loss is recognized through a charge to earnings based
on the estimated fair value of the property.
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) as operating leases.
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
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. The Company’s operating lease agreements contain both lease and non-lease components, which are
generally accounted for separately.
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 on loans. 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
11
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, 2024 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, 2024 and 2023, 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.
As of December 31, 2024, 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, 2024 and December 31, 2023 and recognized during the years ended December 31, 2024, and 2023 were
immaterial. The tax years that remain subject to examination by federal and state taxing authorities are the years ended December
31, 2023, 2022 and 2021.
12
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 172,000 and 182,000 in 2024 and 2023, 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,
2024 and 2023. See Note 21 Segment Reporting for additional information.
Revenue Recognition: The Company recognizes revenue as it is earned based on contractual terms, as transactions occur, or as
services are provided and collectability is reasonably assured. The principal source of revenue is interest income from loans and
investments, which is out of scope of ASC 606 Revenue Recognition. The Company also earns non-interest income from various
banking services offered to its customers. Gain on sales of loans, investment securities, earnings on bank-owned life insurance, and
other income are not within the scope of ASC 606. The Company’s revenue from contracts with customers within the scope of ASC
606 is recognized in non-interest income. Certain specific policies related to those in scope with revenue streams income include the
following:
Service Charges on Deposit Accounts – The Company earns fees from its deposit customers by providing contractual transaction-
based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop
payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in time the
Company fulfills the customer’s request for product or service. Fees, which relate primarily to deposit account maintenance, are
earned over the course of a month, representing the period over which the Company satisfies its performance obligation. Fees for
performing that service are then assessed at the close of the statement period. Overdraft fees are recognized at the point in time that
the overdraft is created by the payment of a check against a deposit account in which there are not sufficient funds to pay that item.
Service charges on deposits are collected directly from the customer’s account balance per the terms of the contract with the
depositor.
Interchange and Other Fees – The Company earns interchange fees from debit or credit cardholder transactions, from cards issued
by the Company to its customers or processed for non-customers, conducted through various card payment networks. Interchange
fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently
with the transaction processing services provided to the cardholder. Other service charges include revenue from processing wire
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, 2024 and 2023. Items outside the scope of ASC 606 are noted as such.
13
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.
Accounting Standards Adopted in 2024:
FASB ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, was issued in November 2023.
This ASU improves reportable segment disclosure requirements and requires enhanced disclosures about significant segment
expenses. The Company adopted this guidance as of December 31, 2024, on a retrospective basis. See Note 21 Segment Reporting
for additional information.
Recently Issued Accounting Standards, Not Yet Adopted
FASB ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures, was issued in December 2023. The amendments
in the Update are intended to provide more transparency about income tax information through improvements to income tax
disclosures primarily related to the rate reconciliation and income taxes paid information. The ASU requires disclosure in the rate
reconciliation of specific categories as well as provide additional information for reconciling items that meet a quantitative threshold.
Those amendments require disclosure of the following information about income taxes paid on an annual basis:
Income taxes paid (net of refunds received), disaggregated by federal and state taxes and by individual jurisdictions in which
income taxes paid (net of refunds received) is equal to or greater than five percent of total income taxes paid (net of refunds
received).
Income tax expense (or benefit) from continuing operations disaggregated by federal and state jurisdictions.
2024
2023
Service charges on deposits
$
1,980 $
1,975
Gain on sale of loans, net
(1)
1,132
635
Gain (loss) on sale of investment securities, net
(1)
121
(154)
Earnings on bank owned life insurance
(1)
800
685
Interchange and other fees
2,811
2,963
Other
(1)
25
68
Total noninterest income $
6,869 $
6,172
(1) Not within the scope of ASC 606
Twelve Months Ended
December 31,
(in thousands)
14
The ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements
that have not yet been issued or made available for issuance. The amendments should be applied on a prospective basis. The Company
is evaluating the adoption of this ASU, as it will require additional disclosures in the notes to our 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, 2024 and December 31, 2023.
The amortized cost of securities and their approximate fair value were as follows:
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Available for sale
Collateralized mortgage obligations
$
160,275 $
1 $
9,662 $
150,614
Mortgage backed securities
27,488
4
1,173
26,319
Municipal securities
47,808
1
6,221
41,588
U.S. government and agency obligations
49,925
-
5,386
44,539
Total available for sale
$
285,496 $
6 $
22,442 $
263,060
Held to maturity
Collateralized mortgage obligations
$
13,523 $
- $
1,078 $
12,445
Mortgage backed securities
6,443
-
348
6,095
Municipal securities
1,823
-
27
1,796
U.S. government
19,653
-
319
19,334
Total held to maturity
$
41,442 $
- $
1,772 $
39,670
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Available for sale
Collateralized mortgage obligations
$
135,658 $
194 $
8,368 $
127,484
Mortgage backed securities
19,635
67
722
18,980
Municipal securities
48,474
9
6,058
42,425
U.S. government and agency obligations
55,165
-
5,929
49,236
Total available for sale
$
258,932 $
270 $
21,077 $
238,125
Held to maturity
Collateralized mortgage obligations
$
15,656 $
- $
1,110 $
14,546
Mortgage backed securities
8,049
-
429
7,620
Municipal securities
2,354
10
22
2,342
U.S. government
29,395
-
668
28,727
Total held to maturity
$
55,454 $
10 $
2,229 $
53,235
December 31, 2024
(in thousands)
December 31, 2023
(in thousands)
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, 2024 and 2023 were
as follows:
Interest accrued on investment securities totaled $1.2 million and $1.3 million as of December 31, 2024 and 2023, respectively, and
was reported in accrued interest receivable on the consolidated balance sheets.
At December 31, 2024, there were 227 available for sale and held to maturity investment securities in an unrealized loss position,
compared to 220 at December 31, 2023. The unrealized losses on these securities were caused by changes in interest rates and
widening pricing spreads, leading to a decline in the fair value subsequent to their purchase. The Company has evaluated the securities
Unrealized
Unrealized
Unrealized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Available for sale
Collateralized mortgage obligations
$
84,426 $
2,320 $
65,971 $
7,342 $
150,397 $
9,662
Mortgage backed securities
17,826
518
8,277
655
26,103
1,173
Municipal securities
659
5
39,613
6,216
40,272
6,221
U.S. government and agency obligations
-
-
44,538
5,386
44,538
5,386
Total
$
102,911 $
2,843 $
158,399 $
19,599 $
261,310 $
22,442
Unrealized
Unrealized
Unrealized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Held to maturity
Collateralized mortgage obligations
$
- $
- $
12,445 $
1,078 $
12,445 $
1,078
Mortgage backed securities
-
-
6,095
348
6,095
348
Municipal securities
1,088
8
708
19
1,796
27
U.S. government and agency obligations
-
-
19,334
319
19,334
319
Total
$
1,088 $
8 $
38,582 $
1,764 $
39,670 $
1,772
Unrealized
Unrealized
Unrealized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Available for sale
Collateralized mortgage obligations
$
36,248 $
609 $
71,580 $
7,759 $
107,828 $
8,368
Mortgage backed securities
3,277
17
10,406
705
13,683
722
Municipal securities
2,191
58
37,828
6,000
40,019
6,058
U.S. government and agency obligations
-
-
49,236
5,929
49,236
5,929
Total
$
41,716 $
684 $
169,050 $
20,393 $
210,766 $
21,077
Unrealized
Unrealized
Unrealized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Held to maturity
Collateralized mortgage obligations
$
- $
- $
14,546 $
1,110 $
14,546 $
1,110
Mortgage backed securities
-
-
7,620
429
7,620
429
Municipal securities
628
1
712
21
1,340
22
U.S. government and agency obligations
-
-
28,727
668
28,727
668
Total
$
628 $
1 $
51,605 $
2,228 $
52,233 $
2,229
Less Than 12 Months
12 Months or More
Total
(in thousands)
Less Than 12 Months
12 Months or More
Total
(in thousands)
December 31, 2023
December 31, 2024
Less Than 12 Months
12 Months or More
Total
(in thousands)
December 31, 2023
December 31, 2024
Less Than 12 Months
12 Months or More
Total
(in thousands)
16
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, 2024 and December 31, 2023.
The following table provides gross realized gains and losses on the sales of securities for the periods indicated:
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, 2024 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.
At December 31, 2024, 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, 2024.
At December 31, 2024 and 2023, investment securities with an estimated fair value of $172.8 million and $197.3 million were pledged
to secure public deposits, certain nonpublic deposits and borrowings, respectively.
Nonmarketable investment securities
As required of all members of the FHLB system, the Company maintains an investment in the capital stock of the FHLB in an amount
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, 2024 and 2023 the Company held $689,000 and $783,000 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, 2024 and maintains capital ratios that exceed “well capitalized” standards for regulatory purposes.
2024
2023
Gross realized gain on sale of securities
$
121 $
92
Gross realized loss on sale of securities
-
(246)
Net realized gain (loss) on sale of securities $
121 $
(154)
Twelve Months Ended
December 31,
(in thousands)
Held to maturity
Available for sale
Amortized
Amortized
Cost
Fair Value
Cost
Fair Value
Due in one year or less
$
9,965 $
9,895 $
1,043 $
1,033
Due after one year through five years
10,801
10,535
57,315
52,027
Due after five years through ten years
5,931
5,723
44,039
39,167
Due after ten years
14,745
13,517
183,099
170,833
Total investment securities
$
41,442 $
39,670 $
285,496 $
263,060
December 31, 2024
(in thousands)
17
NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY
Loans held in the portfolio at December 31, 2024 and 2023 were as follows:
Commercial and Agricultural. The Company's commercial and agricultural loans consist primarily of secured revolving operating lines
of credit, equipment financing, accounts receivable and inventory financing and business term loans, some of which may be partially
guaranteed by the Small Business Administration or the U.S. Department of Agriculture. The Company’s credit policies determine
advance rates against the different forms of collateral that can be pledged against commercial loans. Typically, the majority of loans
will be limited to a percentage of the underlying collateral values such as equipment, eligible accounts receivable and finished
inventory. Individual advance rates may be higher or lower depending upon the financial strength of the borrower, quality of the
collateral and/or term of the loan.
Real Estate. The Company originates owner occupied and non-owner occupied commercial real estate and multifamily loans within
its primary market areas. Commercial real estate and multifamily loans typically involve a greater degree of risk than single-family
residential mortgage loans. Payments on loans secured by multifamily and commercial real estate properties are dependent on
successful operation and management of the properties and repayment of these loans is affected by adverse conditions in the real
estate market or the economy. The Company seeks to minimize these risks by scrutinizing the financial condition of the borrower, the
quality and value of the collateral, and the management of the property securing the loan. In addition, commercial real estate loan
portfolios are reviewed annually to evaluate the performance of individual loans 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.
2024
2023
Commercial and agricultural
$
75,240 $
75,444
Real estate:
Construction and development
42,725
48,720
Residential 1-4 family
103,489
96,301
Multi-family
68,978
51,025
Commercial real estate -- owner occupied
164,829
164,443
Commercial real estate -- non owner occupied
159,873
155,280
Farmland
26,864
27,273
Total real estate
566,758
543,042
Consumer
62,867
66,863
Gross loans
704,865
685,349
Deferred fees, net
(617)
(796)
Loans, net of deferred fees
$
704,248 $
684,553
(in thousands)
December 31,
18
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 $132,000 and $104,000 at December 31, 2024 and 2023, respectively.
At December 31, 2024 and 2023, $377.7 million and $395.6 million, respectively, of loans were pledged as collateral on FHLB advances.
The Company has also pledged $91.2 million and $89.4 million of loans to the FRB for additional borrowing capacity at December 31,
2024 and 2023, respectively.
Accrued interest receivable related to loans totaled $2.9 million as of December 31, 2024, and $3.2 million as of December 31, 2023
and was reported in accrued interest receivable on the consolidated balance sheets.
Allowance for credit losses and credit quality
The following table summarizes the activity related to the allowance for credit losses under the CECL methodology for the year ended
December 31, 2024 and 2023:
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:
Commercial and
agricultural
Construction and
development
Residential 1-4
family
Multi-family
CRE -- owner
occupied
CRE -- non
owner
occupied
Farmland
Consumer
Unallocated
Total
Balance, December 31, 2023
$
1,300 $
501 $
1,955 $
427 $
1,601 $
1,220 $
249 $
1,277 $
- $
8,530
Charge-offs
(25)
-
(2)
-
-
-
-
(102)
-
(129)
Recoveries
24
-
96
-
-
-
-
4
-
124
Provision for credit losses
(356)
130
768
153
(547)
92
3
83
-
326
Balance, December 31, 2024
$
943 $
631 $
2,817 $
580 $
1,054 $
1,312 $
252 $
1,262 $
- $
8,851
(in thousands)
Commercial and
agricultural
Construction and
development
Residential 1-4
family
Multi-family
CRE -- owner
occupied
CRE -- non
owner
occupied
Farmland
Consumer
Unallocated
Total
Balance, December 31, 2022
$
980 $
497 $
706 $
362 $
1,047 $
1,468 $
409 $
1,874 $
893 $
8,236
Impact of CECL adoption
348
(98)
911
(7)
509
(230)
(163)
(534)
(893)
(157)
Charge-offs
(25)
-
-
-
-
-
-
(100)
-
(125)
Recoveries
24
-
-
-
-
-
-
5
-
29
Provision for credit losses
(27)
102
338
72
45
(18)
3
32
-
547
Balance, December 31, 2023
$
1,300 $
501 $
1,955 $
427 $
1,601 $
1,220 $
249 $
1,277 $
- $
8,530
(in thousands)
19
“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, 2024:
2024
2023
2022
2021
2020
Prior
Revolving
Total
Commercial and agricultural
Pass
$
21,572 $
11,961 $
9,462 $
3,551 $
3,285 $
5,493 $
17,015 $
72,339
Other loans especially mentioned
986
-
338
-
-
4
908
2,236
Substandard
31
-
109
31
293
-
201
665
Total commercial and agriculture loans
$
22,589 $
11,961 $
9,909 $
3,582 $
3,578 $
5,497 $
18,124 $
75,240
Current period gross write-offs
$
- $
- $
- $
8 $
17 $
- $
- $
25
Construction and development
Pass
$
36,863 $
3,728 $
343 $
1,019 $
144 $
487 $
- $
42,584
Other loans especially mentioned
-
-
-
-
-
-
141
141
Total construction and development loans $
36,863 $
3,728 $
343 $
1,019 $
144 $
487 $
141 $
42,725
Residential 1-4 family
Pass
$
15,668 $
18,846 $
22,163 $
9,181 $
5,537 $ 15,309 $
16,437 $ 103,141
Other loans especially mentioned
-
-
-
-
-
79
-
79
Substandard
-
-
-
-
44
-
225
269
Total residential 1-4 family loans
$
15,668 $
18,846 $
22,163 $
9,181 $
5,581 $ 15,388 $
16,662 $ 103,489
Current period gross write-offs
-
-
-
-
2
-
-
2
Multi-family
Pass
$
19,197 $
11,133 $
5,524 $
9,084 $
8,828 $ 15,212 $
- $
68,978
Total Multi-family loans
$
19,197 $
11,133 $
5,524 $
9,084 $
8,828 $ 15,212 $
- $
68,978
CRE -- owner occupied
Pass
$
26,921 $
25,117 $
33,723 $ 29,257 $ 23,035 $ 25,285 $
254 $ 163,592
Other loans especially mentioned
-
-
1,192
-
-
-
-
1,192
Substandard
45
-
-
-
-
-
-
45
Total CRE --owner occupied loans
$
26,966 $
25,117 $
34,915 $ 29,257 $ 23,035 $ 25,285 $
254 $ 164,829
CRE -- non owner occupied
Pass
$
23,946 $
18,998 $
33,215 $ 29,247 $ 26,841 $ 25,632 $
635 $ 158,514
Other loans especially mentioned
-
-
-
-
1,359
-
-
1,359
Total CRE -- non owner occupied loans
$
23,946 $
18,998 $
33,215 $ 29,247 $ 28,200 $ 25,632 $
635 $ 159,873
Farmland
Pass
$
3,367 $
4,115 $
3,147 $
1,835 $
1,395 $
5,710 $
150 $
19,719
Other loans especially mentioned
-
959
4,846
-
-
-
-
5,805
Substandard
-
-
107
-
-
1,233
-
1,340
Total Farmland loans
$
3,367 $
5,074 $
8,100 $
1,835 $
1,395 $
6,943 $
150 $
26,864
Consumer
Pass
$
14,222 $
11,610 $
15,452 $
7,720 $
3,375 $
6,135 $
3,966 $
62,480
Substandard
-
261
15
61
9
41
-
387
Total consumer loans
$
14,222 $
11,871 $
15,467 $
7,781 $
3,384 $
6,176 $
3,966 $
62,867
Current period gross write-offs
$
- $
16 $
8 $
- $
- $
10 $
68 $
102
Total loans
$ 162,818 $ 106,728 $ 129,636 $ 90,986 $ 74,145 $ 100,620 $
39,932 $ 704,865
Total period gross write-offs
$
- $
16 $
8 $
8 $
19 $
10 $
68 $
129
Term Loans by Year of Origination
(in thousands)
21
The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of
December 31, 2023:
2023
2022
2021
2020
2019
Prior
Revolving
Total
Commercial and agricultural
Pass
$
20,825 $
13,414 $
5,418 $
6,221 $
5,418 $
5,508 $
14,866 $
71,670
Other loans especially mentioned
447
-
-
-
-
-
-
447
Substandard
395
534
121
505
-
-
1,772
3,327
Total commercial and agriculture loans
$
21,667 $
13,948 $
5,539 $
6,726 $
5,418 $
5,508 $
16,638 $
75,444
Current period gross write-offs
$
- $
3 $
- $
80 $
- $
- $
- $
83
Construction and development
Pass
$
32,467 $
13,754 $
1,300 $
289 $
241 $
560 $
109 $
48,720
Total construction and development loans $
32,467 $
13,754 $
1,300 $
289 $
241 $
560 $
109 $
48,720
Residential 1-4 family
Pass
$
20,794 $
23,178 $
9,530 $
6,023 $
3,506 $ 15,947 $
17,046 $
96,024
Other loans especially mentioned
-
-
-
-
-
-
53
53
Substandard
-
-
-
-
-
-
224
224
Total residential 1-4 family loans
$
20,794 $
23,178 $
9,530 $
6,023 $
3,506 $ 15,947 $
17,323 $
96,301
Multi-family
Pass
$
11,251 $
6,231 $
9,799 $
9,096 $
7,450 $
7,198 $
- $
51,025
Total Multi-family loans
$
11,251 $
6,231 $
9,799 $
9,096 $
7,450 $
7,198 $
- $
51,025
CRE -- owner occupied
Pass
$
25,438 $
38,114 $
34,039 $ 29,394 $
8,625 $ 28,568 $
210 $ 164,388
Substandard
55
-
-
-
-
-
-
55
Total CRE --owner occupied loans
$
25,493 $
38,114 $
34,039 $ 29,394 $
8,625 $ 28,568 $
210 $ 164,443
CRE -- non owner occupied
Pass
$
19,510 $
34,193 $
35,242 $ 32,032 $
9,810 $ 22,861 $
247 $ 153,895
Other loans especially mentioned
-
-
-
1,385
-
-
-
1,385
Total CRE -- non owner occupied loans
$
19,510 $
34,193 $
35,242 $ 33,417 $
9,810 $ 22,861 $
247 $ 155,280
Farmland
Pass
$
5,414 $
5,493 $
3,396 $
1,712 $
3,047 $
3,676 $
50 $
22,788
Other loans especially mentioned
-
2,784
-
-
-
-
-
2,784
Substandard
-
110
-
-
-
1,591
-
1,701
Total Farmland loans
$
5,414 $
8,387 $
3,396 $
1,712 $
3,047 $
5,267 $
50 $
27,273
Consumer
Pass
$
16,847 $
22,048 $
9,889 $
5,116 $
2,015 $
7,738 $
2,830 $
66,483
Substandard
277
-
16
14
-
73
-
380
Total consumer loans
$
17,124 $
22,048 $
9,905 $
5,130 $
2,015 $
7,811 $
2,830 $
66,863
Current period gross write-offs
$
92 $
- $
21 $
- $
2 $
- $
81 $
196
Total loans
$ 153,720 $ 159,853 $ 108,750 $ 91,787 $ 40,112 $ 93,720 $
37,407 $ 685,349
Total period gross write-offs
$
92 $
3 $
21 $
80 $
2 $
- $
81 $
279
Term Loans by Year of Origination
(in thousands)
22
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 2024 and 2023. Total related party loans outstanding at December 31, 2024 and 2023 to executive officers and
directors were $2.4 million and $2.6 million, respectively. During 2024 and 2023, new loans or advances on existing loans of $0 and
$12,000, respectively, were made, and repayments totaled $113,000 and $72,000, 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, 2024.
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, 2024 and
2023. The Company did not recognize any interest income on non-accrual loans during the years ended December 31, 2024 and 2023.
No allowance was established on non-accrual loans as of December 31, 2024 and 2023.
30-59 Days
60-89 Days
Total Past
Nonaccrual
Nonaccrual
Past Due
Past Due
Due
with ACL
without ACL
Total
Commercial and agricultural
$
- $
- $
- $
- $
6 $
75,234 $
75,240
Real estate:
Construction and development
-
-
-
-
-
42,725
42,725
Residential 1-4 family
517
121
638
-
44
102,807
103,489
Multi-family
-
-
-
-
-
68,978
68,978
Commercial real estate -- owner occupied
-
-
-
-
-
164,829
164,829
Commercial real estate -- non owner occupied
-
-
-
-
-
159,873
159,873
Farmland
116
-
116
-
728
26,020
26,864
Total real estate
633
121
754
-
772
565,232
566,758
Consumer
79
222
301
-
316
62,250
62,867
Gross Loans
$
712 $
343 $
1,055 $
- $
1,094 $
702,716 $
704,865
30-59 Days
60-89 Days
Total Past
Nonaccrual
Nonaccrual
Past Due
Past Due
Due
with ACL
without ACL
Total
Commercial and agricultural
$
227 $
14 $
241 $
- $
264 $
74,939 $
75,444
Real estate:
Construction and development
-
-
-
-
-
48,720
48,720
Residential 1-4 family
289
-
289
-
50
95,962
96,301
Multi-family
-
-
-
-
-
51,025
51,025
Commercial real estate -- owner occupied
-
38
38
-
-
164,405
164,443
Commercial real estate -- non owner occupied
-
-
-
-
-
155,280
155,280
Farmland
-
-
-
-
-
27,273
27,273
Total real estate
289
38
327
-
50
542,665
543,042
Consumer
12
10
22
-
350
66,491
66,863
Gross Loans
$
528 $
62 $
590 $
- $
664 $
684,095 $
685,349
(in thousands)
2024
2023
(in thousands)
Loans Not
Past Due
Loans Not
Past Due
23
The following table represents the accrued interest receivable written off by reversing interest income during the year ended
December 31, 2024:
Collateral Dependent Loans
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 tables present an analysis of collateral-dependent loans of the Company as of December 31, 2024 and 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
For the Year Ended
December 31, 2024
(in thousands)
Farmland
3
Consumer
1
Gross Loans
$
4
Real Estate
Business
Assets
Automobile
Total
Commercial and agricultural
$
- $
6 $
- $
6
Residential 1-4 family
44
-
-
44
Farmland
728
-
-
728
Consumer
-
-
316
316
Total
$
772 $
6 $
316 $
1,094
Real Estate
Business
Assets
Automobile
Total
Commercial and agricultural
$
215 $
49 $
- $
264
Residential 1-4 family
50
-
-
50
Consumer
-
-
350
350
Total
$
265 $
49 $
350 $
664
Primary Type of Collateral
(in thousands)
December 31, 2024
Primary Type of Collateral
(in thousands)
December 31, 2023
24
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
principal forgiveness, may be granted.
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, 2024 and December 31 2023, the Company modifications to borrowers experiencing
financial difficulty were immaterial to the financial statements.
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.
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, 2024 and 2023.
Investment
Securities
Defined
Benefit
Plans
Total
Balance, December 31, 2023
$
(16,096) $
132 $
(15,964)
Change in fair value of investment securities available for sale, net of tax
(1,278)
-
(1,278)
Reclassification adjustment of net gain from sale of investment securities
available for sale included in income, net of tax
(96)
-
(96)
Unrecognized net actuarial gain during the period, net of tax
-
67
67
Amortization of net actuarial loss included in income, net of tax
-
(33)
(33)
Net current period other comprehensive income (loss)
(1,374)
34
(1,340)
Balance, December 31, 2024
$
(17,470) $
166 $
(17,304)
(in thousands)
25
The following table presents the components of other comprehensive income for the twelve months ended December 31, 2024 and
2023. 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.
Investment
Securities
Defined
Benefit
Plans
Total
Balance, December 31, 2022
$
(19,364) $
203 $
(19,161)
Change in fair value of investment securities available for sale, net of tax
3,146
-
3,146
Reclassification adjustment of net loss from sale of investment securities
available for sale included in income, net of tax
122
-
122
Unrecognized net actuarial loss during the period, net of tax
-
(31)
(31)
Amortization of net actuarial loss included in income, net of tax
-
(40)
(40)
Net current period other comprehensive income (loss)
3,268
(71)
3,197
Balance, December 31, 2023
$
(16,096) $
132 $
(15,964)
(in thousands)
Before Tax
Tax Effect
Net of Tax
Net unrealized losses on investment securities:
Net unrealized losses arising during the period
$
(1,643) $
(365) $
(1,278)
Reclassification adjustments for net gain realized in net income
(121)
(25)
(96)
Net unrealized losses on investment securities
(1,764)
(390)
(1,374)
Defined benefit plans:
Net unrecognized actuarial gain
85
18
67
Reclassification adjustment of amortization of net actuarial loss
(42)
(9)
(33)
Net pension plan liability adjustment
43
9
34
Other comprehensive income (loss)
$
(1,721) $
(381) $
(1,340)
(in thousands)
Twelve Months Ended December 31, 2024
Before Tax
Tax Effect
Net of Tax
Net unrealized losses on investment securities:
Net unrealized losses arising during the period
$
4,043 $
897 $
3,146
Reclassification adjustments for net loss realized in net income
154
32
122
Net unrealized losses on investment securities
4,197
929
3,268
Defined benefit plans:
Net unrecognized actuarial loss
(39)
(8)
(31)
Reclassification adjustment of amortization of net actuarial loss
(51)
(11)
(40)
Net pension plan liability adjustment
(90)
(19)
(71)
Other comprehensive income (loss)
$
4,107 $
910 $
3,197
Twelve Months Ended December 31, 2023
(in thousands)
26
NOTE 6 – PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 2024 and 2023 were as follows:
Depreciation expense was $1.1 million for years ending December 31, 2024 and 2023.
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, 2024 are as
follows:
At December 31, 2024 the weighted-average remaining lease term was 5.7 years and the weighted-average discount rate was 4.35%.
Amortization of ROU assets, short term lease cost, interest on lease liabilities and non-lease component expenses was $1.0 million
and $755,000 for the years ending December 31, 2024 and 2023, respectively.
NOTE 8 – OTHER REAL ESTATE OWNED
The Company had no activity related to OREO for the years ended December 31, 2024 and 2023 and had no properties classified as
OREO at December 31, 2024 and 2023.
NOTE 9 – DEPOSITS
Time deposits that meet or exceed the FDIC Insurance limit of $250,000 at December 31, 2024 and 2023 were $52.4 million and $36.5
million, respectively.
2024
2023
Land and premises
$
21,671 $
21,118
Equipment, furniture and fixtures
11,047
10,427
Construction in progress
215
104
32,933
31,649
Less accumulated deprecation and amortization
(19,494)
(18,513)
Total premises and equipment
$
13,439 $
13,136
December 31,
(in thousands)
December 31,
2024
(in thousands)
2025
$
901
2026
794
2027
737
2028
717
2029
693
Thereafter
837
Total future minimum lease payments
$
4,679
Amounts representing interest
(639)
Total operating lease liabilities
$
4,040
27
The composition of deposits at December 31, 2024 and 2023 was as follows:
Scheduled maturities of CDs were as follows for future years ending December 31 (in thousands):
Deposits at December 31, 2024 and 2023 included deposits from the Company’s directors, executive officers and related entities
totaling $36.6 million and $30.0 million, respectively.
NOTE 10 – BORROWINGS
Advances from the Federal Home Loan Bank
Utilizing a pledge agreement, qualifying securities and loans receivable at December 31, 2024 and 2023, were pledged as security for
Federal Home Loan Bank (FHLB) borrowings. At December 31, 2024, the Bank had no outstanding borrowings against its $254.7 million
borrowing capacity with the FHLB, as compared to no outstanding against a borrowing capacity of $260.1 million at December 31,
2023. The Bank’s borrowing facility with the FHLB is subject to collateral and stock ownership requirements.
The Company did not utilize any FHLB advances, other than for operational testing, during the twelve months ended December 31,
2024 and December 31, 2023.
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, 2024, the Bank had an available discount window primary credit
line with the Federal Reserve Bank of San Francisco of approximately $69.5 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,
2024.
At December 31, 2024, 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, 2024. Availability of lines is subject to continued
borrower eligibility.
NOTE 11 – JUNIOR SUBORDINATED DEBENTURES
At December 31, 2024, 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
2024
2023
Interest-bearing demand ("NOW") $
194,526 $
183,436
Money market deposits
193,324
179,344
Savings deposits
115,520
136,408
Time deposits ("CDs")
135,485
100,832
Total interest-bearing deposits
638,855
600,020
Non-interest bearing demand
375,876
409,272
Total deposits
$
1,014,731 $
1,009,292
December 31,
(in thousands)
Maturities
2025
$
129,028
2026
4,085
2027
754
2028
1,184
2029
434
Total
$
135,485
28
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, 2024 and 2023 for the common capital securities issued by the issuer trusts.
As of December 31, 2024 and 2023, regular accrued interest on junior subordinated debentures totaled $142,000 and $155,000,
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, 2024 and 2023 are:
NOTE 12 – INCOME TAXES
The Company recorded an income tax provision for the twelve months ended December 31, 2024 and 2023. 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, 2024, the Company believes that it is more likely than not that it will be able to fully realize its deferred tax asset
and therefore has not recorded a valuation allowance.
The Company's provision for income taxes includes both federal and state income taxes and reflects the application of federal and
state statutory rates to the Company's income before taxes. The principal difference between statutory tax rates and the Company's
effective tax rate is the benefit derived from investing in tax-exempt securities, tax-exempt loans and bank owned life insurance.
Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined
based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax
basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established
to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the
potential deferred tax asset will not be realized.
The Company applies the provisions of ASC 740, “Income Taxes”, relating to the accounting for uncertainty in income taxes. The
Company periodically reviews its income tax positions based on tax laws and regulations, and financial reporting considerations, and
records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the
Issued
Maturity
Trust Name
Issue Date
Amount
Rate
Date
Pacific Financial Corporation
December
March
Statutory Trust I
(1)
2005
5,000
$
6.07%
(2)
2036
Pacific Financial Corporation
June
July
Statutory Trust II
(1)
2006
8,000
6.52%
(3)
2036
13,000
$
(1) Eligible for optional redemption prior to contractual maturity date
(2) Variable rate of 3-month CME Term SOFR plus 1.71%, adjusted quaterly
3-month SOFR 4.36% at December 13, 2024
(2) Variable rate of 3-month CME Term SOFR plus 1.71%, adjusted quaterly
3-month SOFR 5.38% at December 13, 2023
(3) Variable rate of 3-month CME Term SOFR plus 1.86%, adjusted quaterly
3-month LIBOR 4.66% at October 13, 2024
(3) Variable rate of 3-month CME Term SOFR plus 1.86%, adjusted quaterly
3-month LIBOR 5.39% at October 13, 2023
(dollars in thousands)
29
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, 2024 and 2023 was as follows:
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, 2024
and 2023 are:
2024
2023
Current
$
2,437 $
3,661
Deferred
(229)
(270)
Total income tax expense
$
2,208 $
3,391
December 31,
(in thousands)
2024
2023
Deferred Tax Assets
Allowance for credit losses
$
2,079 $
2,043
Deferred compensation
1
4
Supplemental executive retirement plan
612
663
Compensation expense
59
45
Unrealized loss on securities available for sale
4,967
4,577
Lease Liability
449
123
Other
103
100
Total deferred tax assets
$
8,270 $
7,555
Deferred Tax Liabilities
Depreciation
$
189 $
199
Loan fees/costs
2,092
2,306
Prepaid expenses
337
272
Right-of-Use Asset
332
95
Other
132
115
Total deferred tax liabilities
3,082
2,987
Net deferred tax assets
$
5,188 $
4,568
(in thousands)
December 31,
30
The following is a reconciliation between the statutory and effective federal income tax rate for the years ended December 31, 2024
and 2023:
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 $1.1 million and $1.7 million in 2024 and 2023,
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 $787,000 and $703,000
for 2024 and 2023, 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 2024 and 2023. 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
at December 31, 2024 and 2023. In 2024 and 2023, the net benefit recorded from these plans, including the cost of the related life
insurance, was $125,000 and $121,000, 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 $1,000 and $19,000 at December 31, 2024 and 2023, 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 $33,000
and a benefit of $61,000 was recorded for these agreements for the years ended December 31, 2024 and 2023, 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 $7.7 million and $7.5 million at December 31,
2024 and 2023, respectively.
Percent
Percent
of Pre-tax
of Pre-tax
Amount
Income
Amount
Income
Income tax at statutory rate
$
2,465
21.0% $
3,779
21.0%
Adjustments resulting from:
State income taxes, net of federal benefit
60
0.5%
43
0.2%
Tax-exempt income
(124)
-1.1%
(182)
-1.0%
Net earnings on life insurance policies
(168)
-1.4%
(144)
-0.8%
Other
(25)
-0.2%
(105)
-0.6%
Total income tax expense
$
2,208
18.8% $
3,391
18.8%
(dollars in thousands)
December 31,
2024
2023
31
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, 2024 and 2023:
The following table sets forth the change in benefit obligation at December 31, 2024 and 2023:
Amounts recognized in accumulated other comprehensive income at December 31, 2024 and 2023 was as follows:
The following table summarizes the projected and accumulated benefit obligations at December 31, 2024 and 2023:
Estimated future benefit payments as of December 31, 2024 were as follows (in thousands):
2024
2023
Net periodic pension cost:
Service cost
$
48 $
45
Interest cost
110
117
Amortization of net (gain) loss
(33)
(40)
Net periodic pension cost
$
125 $
122
Weighted average assumptions:
Discount rate
4.83%
5.04%
Salary scale
n/a
n/a
Expected return on plan assets
n/a
n/a
(dollars in thousands)
December 31,
2024
2023
Change in benefit obligation:
Benefit obligation at the beginning of year $
2,387 $
2,428
Service cost
48
45
Interest cost
110
117
Benefits paid
(234)
(234)
Actuarial loss (gain)
(67)
31
Benefit obligation at end of year
$
2,244 $
2,387
December 31,
(in thousands)
2024
2023
Gain
$
(166) $
(132)
Prior service cost
-
-
Total recognized in AOCI
$
(166) $
(132)
December 31,
(in thousands)
2024
2023
Projected benefit obligation
$
2,244 $
2,387
Accumulated benefit obligation
$
2,244 $
2,387
December 31,
(in thousands)
2025
$
234
2026
234
2027
234
2028
328
2029
328
2030-2034
951
Total $
2,309
32
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, 2024 and 2023 is as follows:
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 $14.0 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.
2024
2023
Commitments to extend credit
$
164,505
$
183,593
Standby letters of credit
$
4,339
$
4,451
December 31,
(in thousands)
33
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.
The following tables summarize the stock option activity for the years ended December 31, 2024 and 2023:
Grant period ended
Expected
Life
Risk Free
Interest
Rate
Expected
Stock
Price
Volatility
Dividend
Yield
Weighted
Average
Fair Value
of Options
Granted
December 31, 2024
6.5 years
4.52%
28.44%
5.30%
1.88
$
December 31, 2023
6.5 years
3.58%
27.24%
4.82%
1.92
$
Shares
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term
(in Years)
Outstanding at December 31, 2022
147,350 $
11.25
Granted
86,000
10.81
Exercised
(7,500)
5.14
Forfeited or canceled
(12,400)
11.82
Expired
(17,200)
12.05
Outstanding at December 31, 2023
196,250 $
11.18
Granted
15,000
10.00
Exercised
(3,950)
7.29
Forfeited or canceled
(8,300)
10.90
Expired
(2,700)
12.20
Outstanding at December 31, 2024
196,300 $
11.17
6.48
Vested and exercisable at December 31, 2024
111,900 $
11.61
5.13
34
The following table summarizes nonvested stock option activity for the years ended December 31, 2024 and 2023:
Information related to the stock option plan during each year follows:
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, 2024
and 2023:
As of December 31, 2024, there was $127,000 of total unrecognized compensation cost related to stock options. The cost is expected
to be recognized over a weighted-average period of 2.2 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.
Shares
Weighted
Average Grant
Date Fair
Value
Nonvested Outstanding at December 31, 2022
54,500 $
1.28
Granted
86,000
1.92
Vested
(18,300)
1.09
Forfeited
(12,400)
1.21
Nonvested Outstanding at December 31, 2023
109,800 $
1.82
Granted
15,000
1.88
Vested
(32,100)
1.45
Forfeited
(8,300)
1.83
Nonvested Outstanding at December 31, 2024
84,400 $
1.97
2024
2023
Intrinsic value of options exercised
$
14 $
46
Cash received from option exercises
$
29 $
39
(in thousands)
2024
2023
Compensation Expense
$
50 $
48
Tax Effect
11
10
Compensation Expense, net
$
39 $
38
Twelve Months Ended
December 31,
(in thousands)
35
The following table summarizes RSU activity during the twelve months ended December 31, 2024 and 2023:
The following table summarizes RSU compensation expense during the twelve months ended December 31, 2024 and 2023:
As of December 31, 2024, there was $153,000 of total unrecognized compensation cost related to nonvested RSUs. The cost is
expected to be recognized over a weighted-average period of 1.6 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, 2024 and 2023, 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
Shares
Weighted
Average
Grant
Date Fair
Value
Outstanding at December 31, 2022
29,750
Granted
2,000 $
11.00
Vested
(11,750)
Forfeited
-
Outstanding at December 31, 2023
20,000
Granted
21,600 $
10.54
Vested
(13,000)
Forfeited
-
Outstanding at December 31, 2024
28,600
2024
2023
Compensation Expense
$
142 $
97
Tax Effect
30
20
Compensation Expense, net
$
112 $
77
Twelve Months Ended
(in thousands)
36
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, 2024 and 2023 are presented in the table below.
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.
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2024
Company
Common equity Tier 1 capital to
risk-weighted assets
$
117,725
14.7% $
36,038
4.5%
N/A
N/A
Tier 1 leverage capital to average assets
130,725
11.3%
46,274
4.0%
N/A
N/A
Tier 1 capital to risk-weighted assets
130,725
16.3%
48,120
6.0%
N/A
N/A
Total capital to risk-weighted assets
140,116
17.5%
64,053
8.0%
N/A
N/A
Bank
Common equity Tier 1 capital to
risk-weighted assets
130,067
16.2%
36,130
4.5% $
52,187
6.5%
Tier 1 leverage capital to average assets
130,067
11.2%
46,453
4.0%
58,066
5.0%
Tier 1 capital to risk-weighted assets
130,067
16.2%
48,173
6.0%
64,231
8.0%
Total capital to risk-weighted assets
139,458
17.4%
64,119
8.0%
80,148
10.0%
As of December 31, 2023
Company
Common equity Tier 1 capital to
risk-weighted assets
$
117,220
14.9% $
35,402
4.5%
N/A
N/A
Tier 1 leverage capital to average assets
130,220
11.3%
46,096
4.0%
N/A
N/A
Tier 1 capital to risk-weighted assets
130,220
16.5%
47,353
6.0%
N/A
N/A
Total capital to risk-weighted assets
139,448
17.7%
63,027
8.0%
N/A
N/A
Bank
Common equity Tier 1 capital to
risk-weighted assets
129,220
16.4%
35,457
4.5% $
51,215
6.5%
Tier 1 leverage capital to average assets
129,220
11.2%
46,150
4.0%
57,688
5.0%
Tier 1 capital to risk-weighted assets
129,220
16.4%
47,276
6.0%
63,034
8.0%
Total capital to risk-weighted assets
138,448
17.6%
62,931
8.0%
78,664
10.0%
Actual
Minimum
Requirements
Well-Capitalized
Requirements
(dollars in thousands)
37
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, 2024 or 2023.
The following table presents the balances of assets measured at fair value on a recurring basis at December 31, 2024 and 2023.
Description
Fair Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Available-for-sale securities:
Collateralized mortgage obligations
$
150,614 $
- $
150,614 $
-
Mortgage-backed securities
26,319
-
26,319
-
Municipal securities
41,588
-
41,008
580
U.S. government and agency obligations
44,539
44,539
-
-
Total assets measured at fair value
$
263,060 $
44,539 $
217,941 $
580
(in thousands)
At December 31, 2024
38
As of December 31, 2024, 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, 2024 and 2023.
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, 2024 and 2023, respectively.
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– The Company individually evaluates loans when a loan over $100,000 is in nonaccrual status. 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
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
Description
Fair Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Available-for-sale securities:
Collateralized mortgage obligations
$
127,484 $
- $
127,484 $
-
Mortgage-backed securities
18,980
-
18,980
-
Municipal securities
42,425
-
41,815
610
U.S. government and agency obligations
49,236
49,236
-
-
Total assets measured at fair value
$
238,125 $
49,236 $
188,279 $
610
(in thousands)
At December 31, 2023
2024
2023
Balance beginning of period
$
610 $
640
Transfers in to level 3
-
-
Change in FV (included in other comprehensive income)
(30)
(30)
Balance end of period
$
580 $
610
(in thousands)
Twelve Months Ended
December 31,
39
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 loss based on the estimated fair value of the collateral less estimated selling costs,
excluding 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, 2024 and 2023 that were measured at fair value on a nonrecurring basis.
40
The estimated fair value of the Company’s financial instruments at December 31, 2024 and 2023 was as follows:
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.
Fair Value Hierarchy
Level
Carrying
Value
Estimated
Fair Value
Financial assets:
Cash and cash equivalents
Level 1
$
79,151 $
79,151
Other interest earning deposits
Level 1
1,000
1,000
Investment securities available-for-sale
See previous table
263,060
263,060
Investment securities held-to-maturity
Level 1
14,878
14,693
Investment securities held-to-maturity
Level 2
26,564
24,977
Loans receivable, net
Level 3
695,397
686,434
Accrued interest receivable
Level 1
4,156
4,156
Financial liabilities:
Deposits
Level 2
$
1,014,731 $
1,013,652
Junior subordinated debentures
Level 3
13,403
14,170
Accrued interest payable
Level 1
769
769
Fair Value Hierarchy
Level
Carrying
Value
Estimated
Fair Value
Financial assets:
Cash and cash equivalents
Level 1
$
106,821 $
106,821
Other interest earning deposits
Level 1
1,250
1,250
Investment securities available-for-sale
See previous table
238,125
238,125
Investment securities held-to-maturity
Level 1
24,727
24,211
Investment securities held-to-maturity
Level 2
30,212
28,509
Investment securities held-to-maturity
Level 3
515
515
Loans held-for-sale
Level 2
1,103
1,103
Loans receivable, net
Level 3
676,023
654,594
Accrued interest receivable
Level 1
4,434
4,434
Financial liabilities:
Deposits
Level 2
$
1,009,292 $
1,008,028
Junior subordinated debentures
Level 3
13,403
14,023
Accrued interest payable
Level 1
540
540
As of December 31, 2024
(in thousands)
As of December 31, 2023
(in thousands)
41
The following table illustrates the computation of basic and diluted earnings per share:
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 26, 2024 the Board of Directors for the Company authorized the repurchase of up to $2.6 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 292,317 shares, at a weighted average share price of $11.74, during the year ended December 31, 2024.
The Company repurchased 38,500 shares, at a weighted average share price of $10.37, during the year ended December 31, 2023.
2024
2023
Basic:
Net income (numerator)
$
9,532 $
14,605
Weighted average shares outstanding (denominator)
10,303,574
10,420,431
Basic earnings per share
$
0.93
$
1.40
Diluted:
Net income (numerator)
$
9,532 $
14,605
Weighted average shares outstanding
10,303,574
10,420,431
Effect of dilutive stock options
13,839
8,756
Weighted average shares outstanding assuming dilution (denominator)
10,317,413
10,429,187
Diluted earnings per share
$
0.92
$
1.40
2024
2023
Shares subject to outstanding options
151,800
155,500
For the Year Ended
December 31,
For the Year Ended
December 31,
(dollars in thousands,
except per share amounts)
42
NOTE 20 – CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY
Pacific Financial Corporation – Parent Company Only
Statements of Financial Condition
(in thousands)
Pacific Financial Corporation – Parent Company Only
Statements of Income and Comprehensive Income
(in thousands)
December 31,
December 31,
2024
2023
ASSETS
Cash and cash equivalents:
$
412
$
582
Investment in bank
126,199
126,692
Other assets
790
975
Total assets
$
127,401
$
128,249
LIABILITIES AND SHAREHOLDERS' EQUITY
Junior subordinated debentures
$
13,403
$
13,403
Other liabilities
142
155
Total liabilities
13,545
13,558
Total shareholders' equity
113,856
114,691
Total liabilities and shareholders' equity
$
127,401
$
128,249
2024
2023
INTEREST EXPENSE
Junior subordinated debentures
$
951 $
929
Total interest expense
951
929
NONINTEREST INCOME
Dividends from subsidiary bank
9,867
7,124
Equity in undistributed income from subsidiary bank
847
8,560
Other income
29
32
Total noninterest income
10,743
15,716
NONINTEREST EXPENSE
Other expense
563
451
Total noninterest income
563
451
Income before income taxes
9,229
14,336
Income tax benefit
303
269
Net income
$
9,532 $
14,605
Comprehensive income
$
8,192 $
17,802
Twelve Months Ended
December 31,
43
Pacific Financial Corporation – Parent Company Only
Statements of Cash Flows
(Dollars in thousands)
NOTE 21 – SEGMENT REPORTING
Our primary banking operations are conducted through a single business segment, “Community Banking”. Loans, investments, and
deposits primarily provide the revenues in the community banking operation. Interest expense, provision for credit losses, data
processing, and compensation provide the significant expense in the community banking operation. Community banking operations
are managed through interdependent line of businesses that provide a range of services including commercial and consumer lending,
personal and business banking, treasury management and merchant services.
While revenue and expense generating activities are associated with our lines of business, they are managed for the Company as a
whole. In that general regard, all regions have the same lines of business, which have the same product and service offerings, have
similar types and classes of customers and utilize similar service delivery methods. Pricing guidelines for products and services are the
same across all regions. A regional reporting structure provides the means to scale community banking operations throughout the
Company’s geographic footprint. All operations are domestic.
The chief operating decision maker, our President and Chief Executive Officer, is provided with the Company’s consolidated statements
of financial condition and operations and evaluates the Company’s operating results based on consolidated net interest income, non-
interest income, non-interest expense, and net income, as presented on the consolidated statement of income. An additional
significant non-cash item assessed by the chief operating decision maker is depreciation and amortization, consistent with the
reporting on the consolidated statements of cash flows. Consolidated operating results are compared against budgeted amounts, prior
year results, and competitor’s results. This information is used to manage resources to drive business and net income growth, including
investment in key strategic priorities, as well as determine the Company's ability to generate shareholder value.
Accounting policies for segments are the same as those described in Note 1. Our segment assets represents our total assets as
presented on the Consolidated Statements of Financial Condition.
2024
2023
Cash flows from operating activities:
Net Income
$
9,532
$
14,605
Equity in undistributed income of subsidiary
(847)
(8,560)
Net change in other assets
185
(264)
Net change in other liabilities
(13)
30
Stock compensation expense
192
145
Net cash provided by operating activities
9,049
5,956
Cash flows from financing activities:
Net cash from stock option exercises
3
6
Taxes paid related to net share settlement for equity awards
(14)
(50)
Repurchase of common stock
(3,432)
(399)
Cash dividends paid
(5,776)
(5,524)
Net cash used in financing activities
(9,219)
(5,967)
Net increase (decrease) in cash and cash equivalents
(170)
(11)
Cash and cash equivalents at beginning of year
582
593
Cash and cash equivalents at end of year
$
412
$
582
Twelve Months Ended
December 31,
Adjustments to reconcile net income to cash and cash
equivalents from operating activities
44
NOTE 22 – SELECTED DATA
Results of operations on a quarterly basis were as follows (unaudited):
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Interest and dividend income
$
13,634 $
13,366 $
14,131 $
13,872
Interest expense
2,233
2,599
2,927
3,021
Net interest income
11,401
10,767
11,204
10,851
Provision (benefit) for loan losses
33
304
(66)
(103)
Noninterest income
1,444
1,963
1,687
1,775
Noninterest expense
9,533
9,846
9,730
10,075
Income before income taxes
3,279
2,580
3,227
2,654
Income tax expense
629
454
633
492
Net income
$
2,650 $
2,126 $
2,594 $
2,162
Earnings per common share
Basic
$
0.26 $
0.21 $
0.25 $
0.21
Diluted
$
0.26 $
0.21 $
0.25 $
0.20
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Interest and dividend income
$
13,690 $
13,735 $
14,242 $
13,813
Interest expense
593
1,564
1,962
2,161
Net interest income
13,097
12,171
12,280
11,652
Benefit for loan losses
156
8
245
111
Noninterest income
1,287
1,747
1,610
1,528
Noninterest expense
9,188
9,007
9,142
9,519
Income before income taxes
5,040
4,903
4,503
3,550
Income tax expense
930
994
859
608
Net income
$
4,110 $
3,909 $
3,644 $
2,942
Earnings per common share
Basic
$
0.39
$
0.38
$
0.35
$
0.28
Diluted
$
0.39
$
0.38
$
0.35
$
0.28
Year Ended December 31, 2024
(dollars in thousands, except per share amounts)
Year Ended December 31, 2023
(dollars in thousands, except per share amounts)
45
GENERAL CORPORATE AND SHAREHOLDER INFORMATION (unaudited)
Administrative Headquarters
1216 Skyview Drive
Aberdeen, WA 98520
(360) 533-8870
Transfer Agent and Registrar
Broadridge Financial Solutions, Inc.
51 Mercedes Way
Edgewood, NY 11717
www.broadridge.com
Independent Auditors
CliftonLarsonAllen LLP
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 23rd, 2025, at 9:00 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
46
Board of Directors
Randy W. Rognlin, Chairman
Co-Owner
Rognlins, Inc
Douglas M. Schermer, Vice Chairman
Owner and President
Schermer Construction Inc. & Wishkah Rock Products
Denise Portmann
President & CEO
Pacific Financial Corporation and Bank of the Pacific
Peter Dworkin
Attorney & Partner
Belcher Swanson Law Firm, PLLC
Daniel Tupper
Vice President & General Manager
Crown Distributing Co. of Aberdeen, Inc.
Benjamin Ertischek
Chief Financial Officer
EOS Worldwide
Doug Biddle
Retired CFO
Pacific Financial Corporation and Bank of the Pacific
Dwayne Carter
Retired President & General Manager
Brooks Manufacturing Co.
Kristi Gundersen
Partner & Chief Financial Officer
Knutzen Farms, LP
Susan C. Freese
Pharmacist
Pacific Financial Corporation | 1216 Skyview Drive | Aberdeen, WA 98520
360-533-8873 | BankofthePacific.com
NMLS #417480
Taholah
Ocean Shores
Olympia
Hoquiam
Aberdeen
Montesano
Raymond
Ocean Park
Long Beach
Naselle (ATM/ITM)
Warrenton
Seaside
Cathlamet
Vancouver
Salem
Lake Oswego
Anacortes
Burlington (ATM/ITM)
Lynden
Bellingham
(2 Locations)
Cover photo by Amanda Duesing, Ocean Shores and Taholah Branch, Customer Service Manager