Pacific Financial Corporation
Annual Report 2024

Plain-text annual report

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

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