1、Dear Fellow Shareholders:Five decades ago a small group of local businessmen in Long Beach,Washington came together to create a bank with an emphasis on serving the community through local decision making and exceptional customer service.This year marks the 50th anniversary of our Company.Our custom
2、ers and shareholders know that our mission and values are paramount to our success and have been drivers of our performance.Over the years we have consistently delivered to our customers,our employees,the communities we serve and our shareholders have been rewarded.We have done so through a rich emp
3、loyee culture that is focused on teamwork,collaboration,open communication,recognizing effort and providing a positive environment and enjoyable place to work.As the Bank continues to grow we know we must maintain a balance between expanding technologies and continuing to nurture the deep-rooted per
4、sonal connections for which we are known.This balanced approach will allow the Bank to expand its market share and increase profitability without sacrificing its heritage or mission to be the best bank for its employees,customers and communities.From a financial perspective,we had a good year and we
5、 are pleased with our performance especially during a pandemic in a historic low interest rate environment.Annual net income for 2021 was the second highest in the companys history at$12.7 million,or$1.22 per diluted share,resulting in a return on average assets of 1.00%and return on average equity
6、of 10.85%.These strong returns enabled us to return$5.4 million in capital to our shareholders in 2021 through a quarterly cash dividend.This represented a dividend yield of 4.37%for 2021 for our shareholders.Our participation in the Paycheck Protection Program(PPP)continued to enhance our financial
7、 performance for 2021,with$5 million recognized into income during the year.During 2021,we helped 665 clients access$67.4 million in the second round of funding from the PPP.Further,during 2021 our team worked with our clients to significantly reduce the amount of loans risk-rated watch or special m
8、ention,which were a result of loan deferrals during the pandemic,by$76.5 million,which allowed us to recapture$3.7 million from the allowance for loan losses.Financial highlights during the year also include near-record deposit growth of$150.5 million;our low cost of funds of 9 basis points;stock bu
9、y-backs totaling 58,000 shares or$717,000;and an increase in digital channels including a 23%increase in debit card interchange revenue and a 53%in Zelle person-to-person transactions.These were partially offset by decreases in loan balances as a result of PPP forgiveness and heightened payoffs,and
10、a decline in mortgage banking net revenue.We also took steps to position the company for the future.Throughout the year we continued to make good progress around our digital and business transformation efforts which included an upgrade to our commercial banking platform and the introduction of robot
11、ic process automation(RPA).In 2021,the Bank also began the process to introduce online deposit account opening which was fully launched in Q1 2022.The economic and public health challenges of 2021 made for some turbulent times particularly with low interest rates,inflationary pressures,declining loa
12、n balances,and staff turnover,however there were also many bright spots.PFLC prudently navigated these issues and ended the year with strong reserves,solid capital levels,abundant liquidity,an exceptional core deposit franchise,and renewed optimism for the future.The Bank is positioned well for a ri
13、sing rate environment,which the Federal Reserve is expected to begin increasing rates in 2022.We expect to continue to leverage our excess liquidity over the coming periods.The Banks loan officers,especially in our newer high growth markets,are seeing pipelines build as loan demand strengthens from
14、the lows of 2020 and 2021.We would not have achieved these results without the commitment and dedication of our amazing employees who live and work in the communities we serve.Additionally,we have an outstanding board of directors who serve as your guardians focused on both the welfare of shareholde
15、rs and nurturing our culture to which we hold dear.This includes former director John VanDijk who passed away unexpectedly in 2021 while he was still serving on the board.He was a remarkable banker,director and friend and was pivotal to the Banks growth and success.John was also a big champion of ou
16、r values and his legacy lives on.Please join us for our annual meeting on Wednesday,April 27,2022,at 4:00 p.m.You may access the meeting virtually via the internet at www.meetnow.global/MZM7VDH.As a shareholder,you will be required to enter your control number in the upper right-hand corner of your
17、proxy card.The Board and management team look forward to continue building a successful,entrepreneurial banking franchise.And we aim to make your journey with us a prosperous one.Sincerely,Denise Portmann President and Chief Executive Officer Pacific Financial Corporation 20212020201920182017Operati
18、ons DataInterest and dividend income$37,159$39,574$41,570$40,060$36,444Interest expense1,2542,3802,9282,5902,395Net interest income35,90537,19438,64237,47034,049Provision(benefit)for loan losses(3,650)3,500-272Noninterest income16,72920,14613,89510,03110,523Noninterest expense40,70239,59435,55633,79
19、332,976Income before income taxes15,58214,24616,98113,70811,324Income tax expense2,8852,8623,2232,3784,361Net income$12,697$11,384$13,758$11,330$6,963Net income per share:Basic$1.22$1.08$1.30$1.07$0.67 Diluted$1.22$1.07$1.29$1.06$0.65 Dividends declared per share$0.52$0.38$0.31$0.30$0.25 Dividends d
20、eclared$5,418$4,023$3,288$3,170$2,622Dividend payout ratio43%35%24%28%38%Performance RatiosReturn on average equity10.85%10.33%13.70%12.63%8.19%Return on average assets1.00%1.07%1.50%1.26%0.79%Net interest margin3.00%3.73%4.58%4.52%4.28%Efficiency ratio77.33%69.05%67.68%71.14%74.00%Balance Sheet Dat
21、aTotal assets$1,319,966$1,167,293$929,415$907,929$894,953Loans,net620,036717,330675,445694,054678,227Total deposits1,178,9401,028,424798,638783,549777,225Total borrowings13,80613,95616,60621,75621,906Shareholders equity117,642114,186105,29392,48385,031Equity to assets ratio8.91%9.78%11.33%10.19%9.50
22、%Book value per share$11.32$10.94$9.90$8.75$8.10 Tangible book value per share$10.03$9.65$8.64$7.47$6.82 Asset Quality RatiosAllowance for loan losses to total loans1.32%1.65%1.31%1.29%1.32%Allowance for loan losses tononperforming loans679.52%504.52%873.96%838.65%420.00%Nonperforming loans to total
23、 loans0.19%0.33%0.15%0.15%0.31%Nonperforming assets to total assets0.11%0.20%0.11%0.12%0.25%For the Year Ended December 31,(dollars in thousands,except per share data)(1)2017 results were impacted by the Tax Cuts and Jobs Act enacted December 22,2017,which required a(2)In 2019,the Company transition
24、ed to a quarterly cash dividend.The fourth quarter dividend of$0.11 per common share paid on February 26,2020.This fourth quarter dividend is not included in the 2019 dividend declared number,as it was(unaudited)not declared until January 2020.the net deferred tax asset.revaluation of our deferred t
25、ax assets and liabilities to account for the future impact of the decrease in the corporate income tax rate to 21%from 35%.Income tax expense increased$1.0 million as a result of our estimated revaluation of Board of Directors Pacific Financial Corporation Auditors Responsibilities for the Audit of
26、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
27、 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 fr
28、om 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 ba
29、sed 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
30、 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 a
31、udit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of Pacific Financial Corporation and its subsidiarys internal control.Accordingly,no such opinion is expressed.Evaluate the appropriateness of accounting policies used and
32、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 Finan
33、cial Corporation and its subsidiarys 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 contro
34、l 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 bu
35、t 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 In con
36、nection 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
37、 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 15,2022 1 Pacific Financial Corporation Consolidated Statements of Financial C
38、ondition(Dollars in thousands,except per share data)See accompanying Notes to Consolidated Financial Statements.December 31,December 31,ASSETS20212020Cash on hand and in banks$18,528$12,960Interest bearing deposits316,957179,639Federal Funds Sold50,88133,024Cash and cash equivalents386,366225,623Oth
39、er interest earning deposits3,2503,250Investment securities available for sale,at fair value232,947124,187Investment securities held to maturity(fair value of$788 and$923,respectively)788923Loans held for sale6,10434,906Loans,net of deferred fees628,333729,398Allowance for loan losses(8,297)(12,068)
40、Total loans,net620,036717,330Nonmarketable equity securities2,4162,137Premises and equipment,net13,00413,773Operating lease right-of-use assets1,4621,937Cash surrender value of life insurance26,07221,341Goodwill12,16812,168Other intangible assets,net1,2761,286Accrued interest receivable 3,3574,681Pr
41、epaid expenses and other assets10,7203,751Total assets$1,319,966$1,167,293LIABILITIES AND SHAREHOLDERS EQUITYDeposits$1,178,940$1,028,424Federal Home Loan Bank advances403553Junior subordinated debentures13,40313,403Operating lease liabilities1,4821,947Accrued expenses and other liabilities8,0968,78
42、0Total liabilities1,202,3241,053,107Shareholders Equity:Preferred Stock,no par value;5,000,000 shares authorized;no shares issuedor outstanding at December 31,2021 and December 31,2020-Common Stock,$1 par value;25,000,000 shares authorized,10,388,267 and 10,434,533shares issued and outstanding at De
43、cember 31,2021 and 2020,respectively10,38810,435Additional paid-in-capital41,88442,425Retained earnings64,36357,084Accumulated other comprehensive income,net1,0074,242Total shareholders equity117,642114,186Total liabilities and shareholders equity$1,319,966$1,167,2932 Pacific Financial Corporation C
44、onsolidated Statements of Income(Dollars in thousands,except per share data)See accompanying Notes to Consolidated Financial Statements.20212020INTEREST AND DIVIDEND INCOMEInterest and fees on loans$33,563$36,387Taxable interest on investment securities2,0611,802Nontaxable interest on investment sec
45、urities1,002935Interest and dividends on other interest earning assets533450Total interest and dividend income37,15939,574INTEREST EXPENSEDeposits1,0112,017Junior subordinated debentures232325Federal Home Loan Bank advances1138Total interest expense1,2542,380Net interest income35,90537,194Provision(
46、benefit)for loan losses(3,650)3,500Net interest income after loan loss provision(benefit)39,55533,694NONINTEREST INCOMEService charges on deposits1,4461,544Gain on sale of loans,net9,44813,728Earnings on bank owned life insurance1,384498Other income4,4514,376Total noninterest income16,72920,146NONIN
47、TEREST EXPENSECompensation and employee benefits27,11427,043Occupancy1,9782,043Equipment1,2441,186Data processing3,2883,088Professional services943897Marketing300391State and local taxes858652Federal deposit insurance premium42294Other expense4,5554,200Total noninterest expense40,70239,594Income bef
48、ore income taxes15,58214,246Income tax expense2,8852,862Net income$12,697$11,384Basic earnings per common share$1.22$1.08 Diluted earnings per common share$1.22$1.07 Twelve Months Ended December 31,3 Pacific Financial Corporation Consolidated Statements of Comprehensive Income(Dollars in thousands)S
49、ee accompanying Notes to Consolidated Financial Statements.20212020Net Income$12,697$11,384Other comprehensive income(loss),net of tax:Securities available for sale,net of tax(3,430)3,235Defined benefit plans,net of tax195(196)Total other comprehensive income(loss),net of tax(3,235)3,039Comprehensiv
50、e income$9,462$14,423Twelve 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 Re
51、tained Earnings Accumulated Other Comprehensive Income(Loss),net Total Shareholders Equity Balance at December 31,201910,632,058$10,632$43,735$49,723$1,203$105,293Net income-11,384-11,384Other comprehensive income,net of tax-3,0393,039Restricted stock awards issued,net of forfeitures3,770 4(5)-(1)St
52、ock awards issued10,000 10116-126Restricted stock compensation expense-88-88Stock option compensation expense-39-39Exercise of stock options2,713 3(5)-(2)Stock repurchase and cancelation of shares(214,008)(214)(1,543)-(1,757)Cash dividends declared($0.38 per share)-(4,023)-(4,023)Balance at December
53、 31,202010,434,533$10,435$42,425$57,084$4,242$114,186Net income-12,697-12,697Other comprehensive loss,net of tax-(3,235)(3,235)Restricted stock awards issued,net of forfeitures6,433 6(12)-(6)Restricted stock compensation expense-97-97Stock option compensation expense-29-29Exercise of stock options4,
54、893 54-9Stock repurchase and cancelation of shares(57,592)(58)(659)-(717)Cash dividends declared($0.52 per share)-(5,418)-(5,418)Balance at December 31,202110,388,267$10,388$41,884$64,363$1,007$117,6425 Pacific Financial Corporation Consolidated Statements of Cash Flows(Dollars in thousands)See acco
55、mpanying Notes to Consolidated Financial Statements.20212020Cash flows from operating activities:Net Income$12,697$11,384Provision(benefit)for loan losses(3,650)3,500Depreciation and amortization3,0552,185Deferred income taxes1,443(246)Originations of loans held for sale(425,575)(544,903)Proceeds fr
56、om sales of loans470,461533,833Gain on sale of loans,net(9,448)(13,728)Gain on sale of premises and equipment(12)-Earnings on bank owned life insurance(1,384)(498)Net change in accrued interest receivable1,324(1,607)Net change in accrued interest payable(30)(59)Net change in prepaid expenses(332)(14
57、4)Other operating activities(9,897)2,906Net cash provided by(used in)operating activities38,652(7,377)Cash flows from investing activities:Loans originated,net of principal payments96,451(47,180)Maturities of investment securities held to maturity135133Maturities and paydowns of investment securitie
58、s available for sale19,00021,885Purchase of investment securities available for sale(133,538)(40,490)Purchases of nonmarketable equity securities(286)(30)Purchase of bank owned life insurance(6,036)(36)Purchases of premises and equipment(597)(697)Proceeds from sales of nonmarketable equity securitie
59、s7110Proceeds from bank owned life insurance death benefit2,689-Proceeds from sales of premises and equipment24-Net cash used in investing activities(22,151)(66,305)Cash flows from financing activities:Net increase in deposits150,516229,786Repayments of FHLB Advances(150)(2,650)Net cash from stock o
60、ption exercises6453Repurchase of common stock(717)(1,757)Stock awards issued-10Taxes related to net share settlement for equity awards(53)(46)Cash dividends paid(5,418)(4,023)Net cash provided by financing activities144,242221,373Net increase in cash and cash equivalents160,743147,691Cash and cash e
61、quivalents at beginning of year225,62377,932Cash and cash equivalents at end of year$386,366$225,623Supplemental disclosures of cash flow information:Cash paid for interest$1,284$2,439Cash paid for taxes$2,275$3,188Supplemental non-cash disclosures of cash flow information:Transfer of loans held for
62、 sale to loans held for investment$6,636$-Twelve Months Ended December 31,Adjustments to reconcile net income to net cash on hand and in banks from operating activities6 Pacific Financial Corporation and Subsidiary Notes to Consolidated Financial Statements For the Years Ended December 31,2021 and D
63、ecember 31,2020 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
64、 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 there
65、fore,are not consolidated in the Companys financial statements.The Company conducts its banking business through the Bank,which operates fourteen branches located in communities in Grays Harbor,Pacific,Whatcom,Clark,Skagit and Wahkiakum counties in the state of Washington and two branches in Clatsop
66、 County,Oregon.In addition,the Bank operates three loan production offices in Burlington,Washington;Salem and Eugene,Oregon;and a residential real estate mortgage department.Basis of presentation The consolidated financial statements include the accounts of Pacific Financial Corporation and its whol
67、ly-owned subsidiaries.All intercompany accounts and transactions have been eliminated in consolidation.The interim consolidated financial statements are not audited,but include all adjustments that Management considers necessary for a fair presentation of consolidated financial condition and results
68、 of operations for the interim periods presented.Certain prior year amounts have been reclassified to conform with the 2021 presentation.These reclassifications did not change previously reported net income or shareholders equity.Method of accounting and use of estimates The Company prepares its con
69、solidated 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 di
70、sclosure 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 all
71、owance for loan losses,the identification of impaired loans,the fair value of available for sale investment securities and the identification of deferred tax assets.The Company utilizes the accrual method of accounting,which recognizes income when earned and expenses when incurred.Subsequent events
72、The Company performed an evaluation of subsequent events through March 15,2022,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 nece
73、ssarily to maturity.Securities available for sale are reported at fair value.Unrealized gains and losses,net of the related deferred tax effect,are reported net as a separate component of shareholders equity entitled“accumulated other comprehensive income.”Realized gains and losses on securities ava
74、ilable for sale,determined using the specific identification method,are included in earnings.Amortization of premiums and accretion of discounts are recognized in interest income over the period to maturity.For mortgage backed securities,actual maturity may differ from contractual maturity due to pr
75、incipal payments and amortization of premiums and accretion of discounts may vary due to prepayment speed assumptions.For callable securities amortization of premiums are recognized over the period to first call date.Securities held to maturity Debt securities for which the Company has the positive
76、intent and ability to hold to maturity are reported at cost,adjusted for amortization of premiums and accretion of discounts.Amortization of premiums and accretion of discounts are recognized in interest income over the period to maturity.For mortgage backed securities,actual maturity may differ fro
77、m contractual maturity due to principal payments and amortization of premiums and accretion of discounts may vary due to prepayment speed assumptions.For callable securities amortization of premiums are recognized over the period to first call date.7 Declines in the fair value of individual securiti
78、es held to maturity and available for sale that are deemed to be other than temporary are reflected in earnings when identified.Management evaluates individual securities for other than temporary impairment(“OTTI”)on a quarterly basis.OTTI is separated into a credit and noncredit component.Noncredit
79、 component losses are recorded in other comprehensive income(loss)when the fair value of the debt security is below the carrying value primarily due to changes in interest rates,there has not been significant deterioration in the financial condition of the issuer,and it is not more likely than not t
80、hat the Company will be required to,nor does it have the intent to sell the security before the anticipated recovery of its remaining carrying value.Credit component losses are reported in noninterest income.Nonmarketable equity securities The Companys investment in Federal Home Loan Bank(“FHLB”)sto
81、ck is carried at cost and cash and stock dividends are recorded as income.The Companys 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 securitie
82、s are periodically evaluated for impairment based on ultimate recovery of par value.The Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages,total assets,or FHLB advances.At December 31,2021 and 2020 the stock was that
83、 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
84、 between the sales proceeds and the carrying value of the loans.Net unrealized losses are recognized through a valuation allowance established by charges to income.Loans held for sale that are unable to be sold in the secondary market are transferred to loans receivable when identified.Loans receiva
85、ble Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for any charge-offs,the allowance for loan losses,any deferred fees or costs on originated loans,and unamortize
86、d premiums or discounts on purchased loans.Loan fees and certain direct loan origination costs are deferred,and the net fee or cost is recognized as an adjustment of yield over the contractual life of the related loans using the effective interest method.Interest income on loans is accrued over the
87、term of the loans based upon the principal outstanding.The accrual of interest on loans is discontinued when,in managements opinion,the borrower may be unable to meet payments as they come due.When interest accrual is discontinued,all unpaid accrued interest is reversed against interest income.Inter
88、est income is subsequently recognized only to the extent that cash payments are received until,in managements judgment,the borrower has the ability to make contractual interest and principal payments,in which case the loan is returned to accrual status.The Coronavirus Aid,Relief,and Economic Securit
89、y Act(the“CARES Act”)In response to the Coronavirus Disease 2019(“COVID-19”)pandemic,the CARES Act was signed into law on March 27,2020 to provide national emergency economic relief measures.Many of the CARES Acts programs are dependent upon the direct involvement of U.S.financial institutions and h
90、ave been implemented through rules and guidance adopted by federal departments and agencies,including the U.S.Department of Treasury,the Federal Reserve and other federal banking agencies,including those with direct supervisory jurisdiction over the Company and the Bank.Small Business Administration
91、(“SBA”)Paycheck Protection Program(“PPP”)The CARES Act amended the SBAs loan program,in which the Bank participated,to create a guaranteed,unsecured loan program,the PPP,to fund operational costs of eligible businesses,organizations and self-employed persons during COVID-19.The Consolidated Appropri
92、ations Act of 2021(“CA Act”)was signed into law on December 27,2020 and provided COVID-19 emergency response and relief,including renewing and extending the SBA PPP.During 2021 and 2020,the Company participated in the CARES Act by offering PPP loans to clients affected by the COVID-19 pandemic.Troub
93、led Debt Restructuring(“TDR”)and Loan Modifications for Affected Borrowers The CARES Act permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if loans met
94、certain criteria and was not more than 30 days past due at December 31,2019.The CA Act also extended relief offered under the CARES Act related to TDRs as a result of COVID-19 through January 1,2022 or 60 days after the end of the national emergency declared by the President,whichever is earlier.The
95、 Company has modified loans due to the effects of the COVID-19 pandemic that were not classified as TDRs.8 Allowance for loan losses The allowance for loan losses is established through a provision that is charged to earnings as probable losses are incurred.Losses are charged against the allowance w
96、hen management believes the collectability of a loan balance is unlikely.Subsequent recoveries,if any,are credited to the allowance.The allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectability of the loans in light of
97、 historical experience,the nature and volume of the loan portfolio,adverse situations that may affect the borrowers ability to repay,estimated value of underlying collateral and prevailing economic conditions.The evaluation is inherently subjective,as it requires estimates that are susceptible to si
98、gnificant revision as more information becomes available.The Companys methodology for assessing the appropriateness of the allowance consists of several key elements,which includes a general formulaic allowance and a specific allowance on impaired loans.The formulaic portion of the general credit lo
99、ss allowance is established by applying a loss percentage factor to the different loan types based on historical loss experience adjusted for qualitative factors.A loan is considered impaired when,based on current information and events,it is probable the Company will be unable to collect principal
100、and interest when due according to the contractual terms of the original loan agreement.Factors considered by management in determining impairment include payment status,collateral value,and the probability of collecting scheduled principal and interest payments when due.Loans that experience insign
101、ificant payment delays and payment shortfalls are generally not classified as impaired.Management determines the significance of payment delays and payment shortfalls on a case-by-case basis,taking into consideration all of the circumstances surrounding the loan and the borrowers,including the lengt
102、h of the delay,the reasons for the delay,the borrowers prior payment record,and the amount of the shortfall in relation to the principal and interest owed.Impairment is measured on a loan by loan basis for commercial,construction and real estate loans by either the present value of the expected futu
103、re cash flows discounted at the loans effective interest rate,or the fair value of the collateral less estimated selling costs if the loan is collateral dependent.When the net realizable value of an impaired loan is less than the book value of the loan,impairment is recognized by adjusting the allow
104、ance for loan losses.Uncollected accrued interest is reversed against interest income.If ultimate collection of principal is in doubt,all subsequent cash receipts including interest payments on impaired loans are applied to reduce the principal balance.A restructuring of a debt constitutes a trouble
105、d debt restructuring(“TDR”)if the Company grants a concession to the borrower for economic or legal reasons related to the borrowers financial difficulties that it would not otherwise consider.TDRs typically present an elevated level of credit risk as the borrowers are not able to perform according
106、to the original contractual terms.Loans or leases that are reported as TDRs are considered impaired and measured for impairment as described above.Premises and equipment Premises and equipment are stated at cost less accumulated depreciation,which is computed on the straight-line method over the est
107、imated useful lives of the assets.Asset lives range from 3 to 39 years.Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements,whichever is less.Gains or losses on dispositions are reflected in earnings.Right of Use Lease Asset&L
108、ease 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 n
109、ot to include short-term leases(i.e.,leases with initial terms of twelve months or less),or equipment leases(deemed immaterial)on the consolidated financial statements.The calculated amount of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rates us
110、ed to calculate the present value the minimum lease payments.For the discount rate the Company utilizes its incremental borrowing rate at lease inception over a similar term.For operating leases existing prior to January 1,2019,the rate for the remaining lease term as of January 1,2019 was used.Othe
111、r 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 th
112、e allowance for loan losses.Properties are evaluated regularly to ensure that the recorded amounts are supported by their current fair values,and that write-downs to reduce the carrying amounts to fair value less estimated costs to dispose are recorded as necessary.Any subsequent reductions in carry
113、ing 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 base
114、d on the terms of the underlying insurance contract.9 Off-balance-sheet credit related financial instruments In the ordinary course of business,the Company has entered into commitments to extend credit,including commitments under credit arrangements,commercial letters of credit,and standby letters o
115、f credit.Such financial instruments are recorded when they are funded.The Company maintains a separate allowance for off-balance-sheet commitments.Management estimates anticipated losses using historical data and utilization assumptions.The allowance for off-balance-sheet commitments is included in
116、accrued expenses and other liabilities.Goodwill and other intangible assets At December 31,2021 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 t
117、angible 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 assessme
118、nt 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 g
119、oodwill impairment test is used to identify the existence of impairment and the amount of impairment loss and compares the reporting units 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 carr
120、ying 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 31,2021 and 2020,the Companys
121、goodwill impairment evaluation,based on its qualitative assessment,indicated there was no impairment.No assurance can be given that the Company will not record an impairment loss on goodwill in the future.Core deposit intangibles are amortized to noninterest expenses using an accelerated method over
122、 ten years.Net unamortized core deposit intangible totaled$8,000 and$19,000 at December 31,2021 and 2020,respectively.Amortization expense related to core deposit intangible totaled$11,000 and$15,000 during the years ended December 31,2021 and 2020,respectively.In 2006,the Bank completed a deposit t
123、ransfer 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 O
124、regon.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 circum
125、stances 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 asset
126、s 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 tra
127、nsferee 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 th
128、e ability to cause the buyer to return specific assets.Income taxes Deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of assets and liabilities,and are reflected at currently enacted income tax rates applicable to the perio
129、d 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
130、 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 a
131、greement between the Company and the Bank.As of December 31,2021,the Company had no unrecognized tax benefits.The Companys policy is to recognize interest and penalties on unrecognized tax benefits in“Income Taxes”in the consolidated statements of income.There were no amounts related to interest and
132、 penalties recognized for the year ended December 31,2021.The tax years that remain subject to examination by federal and state taxing authorities are the years ended December 31,2020,2019 and 2018.10 Stock-based compensation Accounting guidance requires measurement of compensation cost for all stoc
133、k 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 Companys stock compensation plans are described more fully in Note 16.Cash eq
134、uivalents 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
135、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 Cer
136、tificates of deposit held for investments include amounts invested with financial institutions for a stated interest rate and maturity date.Early withdraw penalties apply,however the Company plans to hold these investments to maturity.Earnings per share Basic earnings per share excludes dilution and
137、 is computed by dividing net income by the weighted average number of common shares outstanding.Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options under the Companys stock option plans.Stock options excluded fro
138、m the calculation of diluted earnings per share because they are antidilutive,were 121,000 and 164,000 in 2021 and 2020,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
139、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
140、loss.Gains and losses on securities available for sale are reclassified to net income as the gains or losses are realized upon sale of the securities.Other-than-temporary impairment charges are reclassified to net income at the time of the charge.Business segment The Company operates a single busine
141、ss 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 31,2021 and 2020.Revenue Recognition The Company recognizes revenue as it is earned based on contractua
142、l 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 servic
143、es 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 Companys revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income.Certain specific pol
144、icies 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
145、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 customers request for product or service.Fees,which relate primarily to deposit account maintenance,are earned over the cour
146、se 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
147、 a deposit account in which there are not sufficient funds to pay that item.Service charges on deposits are collected directly from the customers account balance per the terms of the contract with the depositor.Interchange and Other Fees The Company earns interchange fees from debit or credit cardho
148、lder 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 t
149、ransaction processing services provided to the cardholder.Other service charges include revenue from processing wire transfers,bill pay service,cashiers checks,and other services.The Companys performance obligation for interchange and other service charges are largely satisfied,and related revenue r
150、ecognized,when completion of the services are rendered at a point in time.11 The following table presents the Companys noninterest income by revenue stream and reportable segment for the years ended December 31,2021 and 2020.Items outside the scope of ASC 606 are noted as such.Recent accounting pron
151、ouncements adopted FASB ASU 2019-12,Income Taxes(Topic 740):Simplifying the Accounting for Income Taxes,simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.The amendments also improve consistent application of and simplify GAAP by clarifyi
152、ng and amending existing guidance.The adoption of ASU No.2019-12 as of January 1,2021 did not have a material impact on the Companys consolidated financial statements.Recent accounting pronouncements not yet effective FASB ASU 2016-13,Financial Instruments:Credit Losses(Topic 326):Measurement of Cre
153、dit Losses on Financial Instruments,was issued in June 2016.Commonly referred to as the current expected credit loss model(CECL),this Update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected.The allowance for credit losses is a valu
154、ation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset.The measurement of expected credit losses is based on relevant information about past events including historical experi
155、ence,current conditions,and reasonable and supportable forecasts that affect the collectability of the reported amount.The amendment affects loans,debt securities,trade receivables,net investments in leases,off balance-sheet credit exposures,reinsurance receivables,and any other financial asset not
156、excluded from the scope that have the contractual right to receive cash.The Update replaces the incurred loss impairment methodology,which generally only considered past events and current conditions,with a methodology that reflects the expected credit losses and required consideration of a broader
157、range of reasonable and supportable information to estimate all expected credit losses.In October 2019,the FASB voted to approve amendments to the effective date of ASU No.2016-13 for smaller reporting companies,as defined by the SEC,and other non-SEC reporting entities.The amendment delays the effe
158、ctive date for the Company until interim and annual periods beginning after December 15,2022.An entity will apply the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.A prospective transition app
159、roach is required for debt securities.The Company is currently evaluating the impact that this Update will have on its Consolidated Financial Statements.FASB ASU 2020-04,Reference Rate Reform(Topic 848),as amended by ASU 2021-01,was issued in March 2020 and provides optional expedients and exception
160、s for applying GAAP to loan and lease agreements,derivative contracts,and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks.For transactions that are modified because of reference rate reform and that meet certain scope guidance(i)modificat
161、ions of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered minor so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and(ii)modifications of lease agreements shoul
162、d be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts.ASU 2020-04 also provides numerous opt
163、ional expedients for derivative accounting and is effective March 12,2020 through December 31,2022.An entity may elect to apply the ASU for contract modifications as of January 1,2020,or prospectively from a date within an interim period that includes or is subsequent to March 12,2020,up to the date
164、 that the financial statements are available to be issued.Once elected for a Topic or an Industry Subtopic within the Codification,the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic.The Companys LIBOR exposure is with
165、trust preferred securities,LIBOR indexed CMOs,and LIBOR indexed loans.The Company anticipates this ASU will simplify any modifications executed 20212020Service charges on deposits$1,446$1,544Gain on sale of loans,net(1)9,44813,728Earnings on bank owned life insurance(1)1,384498Interchange and other
166、fees4,3834,160Other(1)68216Total noninterest income$16,729$20,146(1)Not within the scope of ASC 606Twelve Months Ended December 31,(in thousands)12 between the selected start date(yet to be determined)and December 31,2022 that are directly related to LIBOR transition by allowing prospective recognit
167、ion of the continuation of the contract,rather than extinguishment of the old contract resulting in writing off unamortized net deferred fees.The Company does not expect this ASU to have a material impact on its business operations and the Consolidated Financial Statements.NOTE 2 RESTRICTED ASSETS F
168、ederal Reserve Board regulations require that the Bank maintain certain minimum reserve balances in cash on hand and on deposit with the Federal Reserve Bank,based on a percentage of deposits.The required reserve balance at December 31,2021 and 2020 was met by holding cash.NOTE 3 INVESTMENT SECURITI
169、ES AND NONMARKETABLE INVESTMENT SECURITIES Investment securities Investment securities consist principally of short and intermediate term debt instruments issued by the U.S.Treasury,other U.S.government agencies,state and local governments,other corporations,and mortgaged backed securities(“MBS”).In
170、vestment securities have been classified according to managements intent.The amortized cost of securities and their approximate fair value were as follows:GrossGrossAmortizedUnrealizedUnrealizedFair Cost GainsLossesValueAvailable for SaleCollateralized mortgage obligations$92,320$712$982$92,050Mortg
171、age backed securities17,34527018017,435Municipal securities68,9963,09954671,549Corporate debt securities2,0019-2,010U.S.government50,6291273849,903Total available for sale$231,291$4,102$2,446$232,947Held to maturityMortgage backed securities$2$-$-$2Municipal securities786-786Total held to maturity$7
172、88$-$-$788 GrossGrossAmortizedUnrealizedUnrealizedFair Cost GainsLossesValueAvailable for SaleCollateralized mortgage obligations$46,292$1,688$106$47,874Mortgage backed securities16,4765484016,984Municipal securities53,3064,0474057,313Corporate debt securities2,00214-2,016Total available for sale$11
173、8,076$6,297$186$124,187Held to maturityMortgage backed securities$7$-$-$7Municipal securities916-916Total held to maturity$923$-$-$923December 31,2021December 31,2020(in thousands)(in thousands)13 Unrealized losses and fair value,aggregated by investment category and length of time that individual s
174、ecurities have been in continuous unrealized loss position,as of December 31,2021 and 2020 were as follows:At December 31,2021,there were 96 investment securities in an unrealized loss position.The unrealized losses on these securities were caused by changes in interest rates,widening pricing spread
175、s and market illiquidity,leading to a decline in the fair value subsequent to their purchase.The Company has evaluated the securities shown above and anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market environment
176、.Based on managements evaluation,and because the Company does not have the intent to sell these securities and it is not more likely than not that it will have to sell the securities before recovery of cost basis,the Company does not consider these investments to be other-than-temporarily impaired a
177、t December 31,2021.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
178、adjusted for future expected credit losses(which considers current delinquencies,future expected default rates and collateral value by vintage)and prepayments.The expected cash flows of the security are then discounted to arrive at a present value amount.For the years ended December 31,2021 and 2020
179、,no CMO was determined to be other-than-temporarily-impaired.The Company has not recorded impairments related to credit losses through earnings for the years ended December 31,2021 and 2020.There were no sales of securities for the years ended December 31,2021 and 2020.The Company did not engage in
180、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 fair value of CMOs and MBS are presented by expected average life,rather than contractual maturity.Expected maturities ma
181、y differ from contractual maturities because borrowers may have the right to prepay underlying loans without prepayment penalties.UnrealizedUnrealizedUnrealizedFair ValueLossesFair ValueLossesFair ValueLossesAvailable for saleCollateralized mortgage obligations$57,016$702$5,299$280$62,315$982Mortgag
182、e backed securities9,2691541,6342610,903180Municipal securities17,8974412,25610520,153546U.S.government48,00273848,002738Total$132,184$2,035$9,189$411$141,373$2,446UnrealizedUnrealizedUnrealizedFair ValueLossesFair ValueLossesFair ValueLossesAvailable for saleCollateralized mortgage obligations$7,80
183、5$104$121$2$7,926$106Mortgage backed securities7,7693734438,11340Municipal securities4,38240-4,38240Total$19,956$181$465$5$20,421$186(in thousands)December 31,2021Less Than 12 Months12 Months or More TotalLess Than 12 Months12 Months or More Total(in thousands)December 31,202014 The amortized cost a
184、nd estimated fair value of investment securities at December 31,2021,by maturity were as follows:At December 31,2021 and 2020,investment securities with an estimated fair value of$126.3 million and$99.3 million were pledged to secure public deposits,certain nonpublic deposits and borrowings,respecti
185、vely.Nonmarketable investment securities As required of all members of the FHLB system,the Company maintains an investment in the capital stock of the FHLB in an amount equal to the greater of$500,000 or 0.5%of home mortgage loans and pass-through securities plus 5.0%of the outstanding balance of mo
186、rtgage home loans sold to FHLB under the Mortgage Purchase Program.Participating banks record the value of FHLB stock equal to its par value at$100 per share.At December 31,2021 and 2020 the Company held$1.4 million and$1.1 million in FHLB stock,respectively.The Company owns$1.0 million in common st
187、ock 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 s
188、ale 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 31,2021 and maintains capital ratios that exceed“well capitalized”standards for regulatory purposes.Held to MaturityAvailable
189、 for SaleAmortizedAmortizedCostFair ValueCostFair ValueDue in one year or less$2$2$-$-Due after one year through five years21721715,71916,046Due after five years through ten years56956991,99092,974Due after ten years-84,25184,994Declining balance securities-39,33138,933Total investment securities$78
190、8$788$231,291$232,947December 31,2021(in thousands)15 NOTE 4 LOANS AND ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY Loans held in the portfolio at December 31,2021 and 2020 were as follows:Commercial and Agricultural.The Companys commercial and agricultural loans consist primarily of secured revolvi
191、ng 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 Companys credit policies determine advance rates against the di
192、fferent 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
193、 upon the financial strength of the borrower,quality of the collateral and/or term of the loan.Paycheck Protection Program(“PPP”).This program was established by the Coronavirus Aid,Relief and Economic Security Act(“CARES Act”),enacted on March 27,2020,in response to the Coronavirus Disease 2019(“CO
194、VID-19”)pandemic.The PPP is administered by the Small Business Administration(SBA).PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA.These loans have either a two-year or five-year maturity date and earn interest at 1%.The Bank also earns a fee based on the size of the l
195、oan,which is recognized over the life of the loan.The balance of unamortized net deferred fees on SBA PPP loans was$944,000 and$2.2 million at December 31,2021 and 2020,respectively.Real Estate.The Company originates owner occupied and non-owner occupied commercial real estate and multifamily loans
196、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
197、 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 securin
198、g the loan.In addition,commercial real estate loan portfolios are reviewed annually to evaluate the performance of individual loans greater than$500,000 and for potential changes in interest rates,occupancy,and collateral values.Non-owner occupied commercial real estate loans are loans in which less
199、 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 r
200、ange 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,LIBOR,or Federal Home Loan Bank advance rates plus a defined margin.Fixed rates are generally set for periods of three to ten
201、 years with either a rate reset provision or a payment due at maturity.Prepayment penalties are often sought on term commercial real estate loans.20212020Commercial and agricultural$85,309$100,801PPP25,08196,070Real estate:Construction and development28,31820,722Residential 1-4 family67,39377,045Mul
202、ti-family39,85431,311Commercial real estate-owner occupied154,901156,833Commercial real estate-non owner occupied148,730165,365Farmland23,90528,516Total real estate463,101479,792Consumer56,26955,361Gross loans629,760732,024 Deferred fees,net(1,427)(2,626)Loans,net of deferred fees$628,333$729,398(in
203、 thousands)December 31,16 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 proper
204、ty.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-te
205、rm 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 Companys credit policies address maximum loan to value,cash equity requirements,inspection requirements,and overall credit strength.The majority of one-to-four
206、family residential loans are secured by single-family residences located in the Companys primary market areas.Single-family portfolio loans are generally owner-occupied with terms typically range from 15 to 30 years.Repayment of these loans comes from the borrowers personal cash flows and liquidity,
207、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 secur
208、ed 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 ne
209、eded.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.At December 31,2021 and 2020,$262.5 million and$230.4 million,respectively,of loans wer
210、e pledged as collateral on FHLB advances.The Company has also pledged$81.2 million and$60.4 million of loans to the FRB for additional borrowing capacity at December 31,2021 and 2020,respectively.Allowance for loan losses and credit quality The allowance for loan losses represents the Companys estim
211、ate as to the probable credit losses inherent in its loan portfolio.The allowance for loan losses is increased through periodic charges to earnings through provision for loan losses and represents the aggregate amount,net of loans charged-off and recoveries on previously charged-off loans,that is ne
212、eded to establish an appropriate reserve for credit losses.The allowance is estimated based on a variety of factors and using a methodology as described below:The Company classifies loans into relatively homogeneous pools by loan type in accordance with regulatory guidelines for regulatory reporting
213、 purposes.The Company regularly reviews all loans within each loan category to establish risk ratings for them that include Pass,Watch,Special Mention,Substandard,Doubtful and Loss.Pursuant to ASC 310“Accounting by Creditors for Impairment of a Loan”,the impaired portion of collateral dependent loan
214、s is charged-off.Other risk-related loans not considered impaired have loss factors applied to the various loan pool balances to establish loss potential for provisioning purposes.Analyses are performed to establish the loss factors based on historical experience,as well as expected losses based on
215、qualitative evaluations of such factors,as such economic trends and conditions,industry conditions,levels and trends in delinquencies and impaired loans,levels and trends in charge-offs and recoveries,among others.The loss factors are applied to loan category pools segregated by risk classification
216、to estimate the loss inherent in the Companys loan portfolio pursuant to ASC 450“Accounting for Contingencies.”Additionally,impaired loans are evaluated for loss potential on an individual basis in accordance with ASC 310“Accounting by Creditors for Impairment of a Loan”and specific reserves are est
217、ablished based on thorough analysis of collateral values where loss potential exists.When an impaired loan is collateral dependent and a deficiency exists in the fair value of collateral securing the loan in comparison to the associated loan balance,the deficiency is charged-off at that time or a sp
218、ecific reserve is established.Impaired loans are reviewed no less frequently than quarterly.In the event that a current appraisal to support the fair value of the real estate collateral underlying an impaired loan has not yet been received,but the Company believes that the collateral value is insuff
219、icient to support the loan amount,an impairment reserve is recorded.In these instances,the receipt of a current appraisal triggers an updated review of the collateral support for the loan and any deficiency is charged-off or reserved at that time.In those instances where a current appraisal is not a
220、vailable in a timely manner in relation to a financial reporting cut-off date,the Company discounts the most recent third-party appraisal depending on a number of factors including,but not limited to,property 17 location,local price volatility,local economic conditions,and recent comparable sales.In
221、 all cases,the costs to sell the subject property are deducted in arriving at the fair value of the collateral.Changes in the allowance for loan losses for the twelve months ended December 31,2021 and 2020 were as follows:Balance at Beginning of YearCharge-offsRecoveriesProvision(benefit)for Loan Lo
222、ssesBalance at End of YearCommercial and agricultural$1,524$(34)$42$(864)$668PPP-Real estate:Residential 1-4,Multi family,Const&Dev1,055-49(33)1,071Commercial real estate-owner occupied2,187-(888)1,299Commercial real estate-non owner occupied4,037-(1,558)2,479Farmland839-(361)478Total real estate8,1
223、18-49(2,840)5,327Consumer1,386(196)182561,464Unallocated1,040-(202)838Total$12,068$(230)$109$(3,650)$8,297Balance at Beginning of YearCharge-offsRecoveriesProvision(benefit)for Loan LossesBalance at End of YearCommercial and agricultural$1,482$(433)$19$456$1,524PPP-Real estate:Residential 1-4,Multi
224、family,Const&Dev1,059-135(139)1,055Commercial real estate-owner occupied916-1,2712,187Commercial real estate-non owner occupied1,256-2,7814,037Farmland1,042-(203)839Total real estate4,273-1353,7108,118Consumer1,721(160)14(189)1,386Unallocated1,517-(477)1,040Total$8,993$(593)$168$3,500$12,068Twelve M
225、onths Ended December 31,2021(in thousands)Twelve Months Ended December 31,2020(in thousands)18 The allowance for loan losses disaggregated on the basis of the Companys impairment method as of December 31,2021 and 2020 were as follows:Loans Individually Evaluated for ImpairmentLoans Collectively Eval
226、uated for ImpairmentTotal Allowance for Loan LossesCommercial and agricultural$4$664$668PPP-Real estate:Residential 1-4,Multi family,Const&Dev-1,0711,071Commercial real estate-owner occupied861,2131,299Commercial real estate-non owner occupied-2,4792,479Farmland22456478Total real estate1085,2195,327
227、Consumer-1,4641,464Unallocated-838838Total$112$8,185$8,297Loans Individually Evaluated for ImpairmentLoans Collectively Evaluated for ImpairmentTotal Allowance for Loan LossesCommercial and agricultural$4$1,520$1,524PPP-Real estate:Residential 1-4,Multi family,Const&Dev-1,0551,055Commercial real est
228、ate-owner occupied-2,1872,187Commercial real estate-non owner occupied-4,0374,037Farmland-839839Total real estate-8,1188,118Consumer-1,3861,386Unallocated-1,0401,040Total$4$12,064$12,068(in thousands)December 31,2021December 31,2020(in thousands)19 The recorded investment of loans disaggregated on t
229、he basis of the Companys impairment method as of December 31,2021 and 2020,were as follows:Credit Quality Indicators Federal regulations require that the Bank periodically evaluate the risks inherent in its loan portfolios.In addition,the Washington Division of Banks and the Federal Deposit Insuranc
230、e Corporation(“FDIC”)have authority to identify problem loans and,if appropriate,require them to be reclassified.There are three classifications for problem loans:Substandard,Doubtful,and Loss.These terms are used as follows:“Substandard”loans have one or more defined weaknesses and are characterize
231、d 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 quest
232、ionable 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 t
233、hereof is classified as Loss,it must be charged-off;meaning the amount of the loss is charged against the allowance for loan losses,thereby reducing that reserve.Loans Individually Evaluated for ImpairmentLoans Collectively Evaluated for ImpairmentGross LoansCommercial and agricultural$780$84,529$85
234、,309PPP-25,08125,081Real estate:Residential 1-4,Multi family,Const&Dev343135,222135,565Commercial real estate-owner occupied1,321153,580154,901Commercial real estate-non owner occupied-148,730148,730Farmland29923,60623,905Total real estate1,963461,138463,101Consumer11056,15956,269Total$2,853$626,907
235、$629,760Loans Individually Evaluated for ImpairmentLoans Collectively Evaluated for ImpairmentGross LoansCommercial and agricultural$1,808$98,993$100,801PPP-96,07096,070Real estate:Residential 1-4,Multi family,Const&Dev144128,934129,078Commercial real estate-owner occupied263156,570156,833Commercial
236、 real estate-non owner occupied98165,267165,365Farmland24828,26828,516Total real estate753479,039479,792Consumer-55,36155,361Total$2,561$729,463$732,024(in thousands)December 31,2021December 31,2020(in thousands)20 The Bank also classifies some loans as“Pass”or Other Loans Especially Mentioned(“OLEM
237、”).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 a
238、cceptable 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 los
239、s exposure.Loans classified as OLEM continue to perform but have shown deterioration in credit quality and require close monitoring.Credit quality indicators as of December 31,2021 and 2020 were as follows:Other Loans Especially PassMentionedSubstandardDoubtfulTotalCommercial and agricultural$82,390
240、$1,551$1,368$-$85,309PPP25,081-25,081Real estate:Construction and development27,984334-28,318Residential 1-4 family66,0021161,275-67,393Multi-family39,854-39,854Commercial real estate-owner occupied151,9572,449495-154,901Commercial real estate-non owner occupied137,8786,7644,088-148,730Farmland20,15
241、48562,895-23,905Total real estate443,82910,5198,753-463,101Consumer56,189-80-56,269Gross Loans$607,489$12,070$10,201$-$629,760Other Loans Especially PassMentionedSubstandardDoubtfulTotalCommercial and agricultural$91,317$5,059$4,425$-$100,801PPP96,070-96,070Real estate:Construction and development20
242、,722-20,722Residential 1-4 family74,7305331,782-77,045Multi-family31,311-31,311Commercial real estate-owner occupied149,4735,9601,400-156,833Commercial real estate-non owner occupied154,1026,9084,355-165,365Farmland19,3424,6384,536-28,516Total real estate449,68018,03912,073-479,792Consumer55,2412595
243、-55,361Gross Loans$692,308$23,123$16,593$-$732,024(in thousands)(in thousands)December 31,2021December 31,202021 Impaired Loans Impaired loans by type as of December 31,2021 and 2020,and interest income recognized for the twelve months ended December 31,2021 and 2020 were as follows:Insider Loans Ce
244、rtain related parties of the Company,principally directors and their affiliates,were loan customers of the Bank in the ordinary course of business during 2021 and 2020.Total related party loans outstanding at December 31,2021 and 2020 to executive officers and directors were$2.8 million and$2.7 mill
245、ion,respectively.During 2021 and 2020,new loans or advances on existing loans of$376,000 and$0,respectively,were made,and repayments totaled$310,000 and$429,000,respectively.In managements opinion,these loans and transactions were on the same terms as those for comparable loans and transactions with
246、 non-related parties.No loans to related parties were on non-accrual,past due or restructured at December 31,2021.Recorded Investment With No Specific Valuation AllowanceRecorded Investment With Specific Valuation AllowanceTotal Recorded InvestmentUnpaid Contractual Principal BalanceRelated Specific
247、 Valuation AllowanceAverage Recorded Investment Interest Income RecognizedCommercial and agricultural$636$144$780$820$4$881$43PPP-Real Estate:-Residential 1-4,Multi family,Const&Dev343-343360-37622Commercial real estate-owner occupied2411,0801,3211,335861,33969Commercial real estate-non owner occupi
248、ed-Farmland-2992992992230014Total real estate5841,3791,9631,9941082,015105Consumer110-110136-13710Total$1,330$1,523$2,853$2,950$112$3,033$158Recorded Investment With No Specific Valuation AllowanceRecorded Investment With Specific Valuation AllowanceTotal Recorded InvestmentUnpaid Contractual Princi
249、pal BalanceRelated Specific Valuation AllowanceAverage Recorded Investment Interest Income RecognizedCommercial and agricultural$1,640$168$1,808$2,068$4$2,094$10PPP-Real Estate:Residential 1-4,Multi family,Const&Dev144-144168-173-Commercial real estate-owner occupied263-263264-268-Commercial real es
250、tate-non owner occupied98-9898-98-Farmland248-248252-252-Total real estate753-753782-791-Consumer-Total$2,393$168$2,561$2,850$4$2,885$10December 31,2021(in thousands)December 31,2020(in thousands)22 Aging Analysis The following tables summarize the Companys loans past due,both accruing and nonaccrui
251、ng,by type as of December 31,2021 and 2020:Troubled Debt Restructured Loans A modification of a loan constitutes a troubled debt restructuring(“TDR”)when a borrower is experiencing financial difficulty and the modification constitutes a concession.There are various types of concessions when modifyin
252、g a loan,however,forgiveness of principal is rarely granted by the Company.Commercial and industrial loans modified in a TDR may involve term extensions,below market interest rates and/or interest-only payments wherein the delay in the repayment of principal is determined to be significant when all
253、elements of the loan and circumstances are considered.Additional collateral,a co-borrower,or a guarantor is often required.Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan,extending the maturity date at an intere
254、st rate lower than the current market rate for new debt with similar risk,or substituting or adding a new borrower or guarantor.Construction loans modified in a TDR may also involve extending the interest-only payment period.Residential mortgage loans modified in a TDR are primarily comprised of loa
255、ns where monthly payments are lowered to accommodate the borrowers financial needs.Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity.Land loans modified in a TDR typically involve extending the balloon payment by one to three years,and provi
256、ding an interest rate concession.Home equity modifications are made infrequently and are uniquely designed to meet the specific needs of each borrower.Loans modified in a TDR are considered impaired loans and typically already on non-accrual status.Partial charge-offs have in some cases already been
257、 taken against the outstanding loan balance.Loans modified in a TDR for the Company may have the financial effect Greater30-59 Days60-89 DaysThanTotal PastNon-accrualPast DuePast Due90 DaysDueLoansTotalCommercial and agricultural$-$-$-$-$636$84,673$85,309PPP-25,08125,081Real estate:Construction and
258、development-28,31828,318Residential 1-4 family-34367,05067,393Multi-family-39,85439,854Commercial real estate-owner occupied-242154,659154,901Commercial real estate-non owner occupied-148,730148,730Farmland-23,90523,905Total real estate-585462,516463,101Consumer55-55-56,21456,269Gross Loans$55$-$-$5
259、5$1,221$628,484$629,760 Greater30-59 Days60-89 DaysThanTotal PastNon-accrualPast DuePast Due90 DaysDueLoansTotalCommercial and agricultural$46$-$-$46$1,639$99,116$100,801PPP-96,07096,070Real estate:Construction and development-20,72220,722Residential 1-4 family266-26614476,63577,045Multi-family-31,3
260、1131,311Commercial real estate-owner occupied-263156,570156,833Commercial real estate-non owner occupied-98165,267165,365Farmland-24828,26828,516Total real estate266-266753478,773479,792Consumer118-118-55,24355,361Gross Loans$430$-$-$430$2,392$729,202$732,024(in thousands)20212020(in thousands)Loans
261、 Not Past DueLoans Not Past Due23 of increasing the specific allowance associated with the loan.An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loans effective interest rate,or the estimated fair
262、value of the collateral,less any selling costs,if the loan is collateral dependent.The Companys practice is to re-appraise collateral dependent loans every six to twelve months.During the twelve months ended December 31,2021,there was$108,000 increase on the allowance from TDRs during the period.The
263、 Company had no commitments to lend additional funds for loans classified as TDRs at December 31,2021.The Company closely monitors the performance of modified loans for delinquency,as delinquency is considered an early indicator of possible future default.The allowance may be increased,adjustments m
264、ay be made in the allocation of the allowance,or partial charge-offs may be taken to further write-down the carrying value of the loan.The following table presents TDRs as of December 31,2021 and 2020,all of which were modified due to financial stress of the borrower.There were not any subsequent de
265、faulted TDRs as of December 31,2021 and 2020.The following tables summarize the Companys TDRs by type as of December 31,2021 and 2020:Number of Loans Pre-TDR Outstanding Recorded Investment Post-TDR Outstanding Recorded Investment Commercial and agriculture2$554$376Commercial real estate-owner occup
266、ied11,0801,080Farmland1303299Consumer1137110Total TDRs(1)5$2,074$1,865Number of Loans Pre-TDR Outstanding Recorded Investment Post-TDR Outstanding Recorded Investment Commercial and agriculture3$789$617Farmland1252248Total TDRs(1)4$1,041$865(1)The period end balances are inclusive of all partial pay
267、-downs and charge-offs since the modification date.(dollars in thousands)(dollars in thousands)December 31,2021December 31,202024 The following table presents TDRs modified or recorded during the years ended December 31,2021 and 2020.The following tables present troubled debt restructurings by accru
268、al or nonaccrual status as of December 31,2021 and 2020:Section 4013 of the CARES Act,“Temporary Relief From Troubled Debt Restructurings,”allows financial institutions the option to temporarily suspend certain requirements under U.S.GAAP related to TDRs for a limited period of time during the COVID
269、-19 pandemic.In March 2020,various regulatory agencies,including the Board of Governors of the Federal Reserve System and the FDIC,(the agencies)issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19.The interagency
270、statement was effective immediately and impacted accounting for loan modifications.The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief,are not to be considered TDRs.This i
271、ncludes short-term(e.g.,six months)modifications,such as payment deferrals,fee waivers,extensions of repayment terms,or other delays in payment that are insignificant.Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification p
272、rogram is implemented.The Company had total outstanding principle balance of$74,000 and$1.9 million of COVID-19 related loan modifications under these provisions as of December 31,2021 and 2020,respectively.These loans did not have financial difficulty prior to the COVID-19 pandemic and were general
273、ly modified for principal and interest payment deferral or interest only payments for up to six months.Modified loans continue to accrue interest and are evaluated for past due status based on the revised payment terms.Number of Loans Recorded Investment Commercial real estate-owner occupied1$1,080F
274、armland1299Consumer1110Total3$1,489Number of Loans Recorded Investment Commercial and agriculture2$449Farmland1248Total3$697December 31,2020(dollars in thousands)December 31,2021(dollars in thousands)Accrual StatusNon-Accrual StatusTotal TDRsCommercial and agriculture$144$232$376Commercial real esta
275、te-owner occupied1,080-1,080Farmland299-299Consumer110-110Total TDRs$1,633$232$1,865Accrual StatusNon-Accrual StatusTotal TDRsCommercial and agriculture$168$449$617Farmland-248248Total TDRs$168$697$865December 31,2021(in thousands)December 31,2020(in thousands)25 NOTE 5 ACCUMULATED OTHER COMPREHENSI
276、VE 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 31,2021 and 2020.Investment SecuritiesDefined Benefit PlansTotalBalance,December 31,2020$4,773$(531)$4,242 Change in fair value of
277、 investment securities available for sale(3,430)-(3,430)Unrecognized net actuarial gain during the period,net of tax-120120 Amortization of net actuarial loss included in income-7575 Net current period other comprehensive income(loss)(3,430)195(3,235)Balance,December 31,2021$1,343$(336)$1,007Investm
278、ent SecuritiesDefined Benefit PlansTotalBalance,December 31,2019$1,538$(335)$1,203 Change in fair value of investment securities available for sale3,235-3,235 Unrecognized net actuarial loss during the period,net of tax-(238)(238)Amortization of net actuarial loss included in income-4242 Net current
279、 period other comprehensive income(loss)3,235(196)3,039Balance,December 31,2020$4,773$(531)$4,242(in thousands)(in thousands)26 The following table presents the components of other comprehensive income for the twelve months ended December 31,2021 and 2020.Reclassification adjustments related to gain
280、s on securities available-for-sale are included in gain on sale of investment securities,net,in the accompanying consolidated statements of income.Reclassification adjustments related to defined benefit plans are included in compensation and employee benefits in the accompanying consolidated stateme
281、nts of income.NOTE 6 PREMISES AND EQUIPMENT The components of premises and equipment at December 31,2021 and 2020 were as follows:Depreciation expense was$1.2 million for both years ending December 31,2021 and 2020.Before TaxTax EffectNet of TaxNet unrealized losses on investment securities:Net unre
282、alized losses arising during the period$(4,315)$(885)$(3,430)Reclassification adjustments for net gains realized in net income-Net unrealized losses on investment securities(4,315)(885)(3,430)Defined benefit plans:Net unrecognized actuarial gain15232120Reclassification adjustment of amortization of
283、net actuarial loss952075Net pension plan liability adjustment24752195Other comprehensive income$(4,068)$(833)$(3,235)Before TaxTax EffectNet of TaxNet unrealized gains on investment securities:Net unrealized gains arising during the period$4,135$900$3,235Reclassification adjustments for net gains re
284、alized in net income-Net unrealized gains on investment securities4,1359003,235Defined benefit plans:Net unrecognized actuarial loss(301)(63)(238)Reclassification adjustment of amortization of net actuarial loss531142Net pension plan liability adjustment(248)(52)(196)Other comprehensive income$3,887
285、$848$3,039(in thousands)Twelve Months Ended December 31,2021Twelve Months Ended December 31,2020(in thousands)20212020Land and premises$19,786$19,760Equipment,furniture and fixtures10,15910,179Construction in progress17720730,12230,146Less accumulated deprecation and amortization(17,118)(16,373)Tota
286、l premises and equipment$13,004$13,773December 31,(in thousands)27 NOTE 7 OPERATING LEASE RIGHT-OF-USE ASSET Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31,2021 are as follows:At December 31,2021 the weighted-average remaining lease
287、 term was 3.2 years and the weighted-average discount rate was 1.48%.Operating lease cost,interest on lease liabilities and amortization of ROU assets was$654,000 and$729,000 for the years ending December 31,2021 and 2020,respectively.NOTE 8 OTHER REAL ESTATE OWNED The Company had no activity relate
288、d to OREO for the years ended December 31,2021 and 2020 and had no properties classified as OREO at December 31,2021 and 2020.NOTE 9 DEPOSITS Time deposits that meet or exceed the FDIC Insurance limit of$250,000 at December 31,2021 and 2020 were$12.8 million and$15.2 million,respectively.The composi
289、tion of deposits at December 31,2021 and 2020 was as follows:December 31,2021(in thousands)2022$479202347420243642025191Thereafter23Total future minimum lease payments$1,531Amounts representing interest(49)Total operating lease liabilities$1,48220212020Interest-bearing demand(NOW)$242,789$292,032Mon
290、ey market deposits210,344190,174Savings deposits174,929137,615Time deposits(CDs)58,72465,895 Total interest-bearing deposits686,786685,716Non-interest bearing demand492,154342,708 Total deposits$1,178,940$1,028,424December 31,(in thousands)28 Scheduled maturities of CDs were as follows for future ye
291、ars ending December 31(in thousands):NOTE 10 BORROWINGS Federal funds purchased and short-term advances from the Federal Home Loan Bank(FHLB)generally mature within one to four days from the transaction date.The Company had no federal funds purchased or short-term FHLB borrowing for the years ended
292、December 31,2021 and 2020.Federal Home Loan Bank advances at December 31,2021 and 2020 represent longer term advances from the Federal Home Loan Bank of Des Moines.Advances at December 31,2021 bear a fixed weighted average rate of 2.23%.The advances mature in various years as follows(in thousands):N
293、OTE 11 JUNIOR SUBORDINATED DEBENTURES At December 31,2021,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
294、 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 Companys obligations under the Debentures and the related docum
295、ents,taken together,constitute a full and unconditional guarantee by the Company of the obligations of the trusts.The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures,or upon earlier redemption as provided in the indentures.The Company has the right to redeem
296、 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 sectio
297、n 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 31,2021 and 2020 for the common capital sec
298、urities issued by the issuer trusts.As of December 31,2021 and 2020,regular accrued interest on junior subordinated debentures totaled$38,000 and$40,000,respectively,and is included in accrued expenses and other liabilities on the consolidated balance sheet.Maturities2022$39,90320238,52420245,089202
299、52,96820262,240Total$58,724Maturities2022$15020231502024103Total$40329 The terms of the junior subordinated debentures as of December 31,2021 and 2020 are:NOTE 12 INCOME TAXES The Company recorded an income tax provision for the twelve months ended December 31,2021 and 2020.The amount of the provisi
300、on for each period was commensurate with the estimated tax liability associated with the net income earned during the period.As of December 31,2021,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 valua
301、tion allowance.The Companys provision for income taxes includes both federal and state income taxes and reflects the application of federal and state statutory rates to the Companys income before taxes.The principal difference between statutory tax rates and the Companys effective tax rate is the be
302、nefit 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 d
303、ifferences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Companys 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.Val
304、uation 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 acc
305、ounting 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
306、 of the Companys 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 31,2021.Income taxes for the years ended December 31,2021 and 2020 was as follows:Issued Ma
307、turity Trust NameIssue DateAmountRateDatePacific Financial CorporationDecemberMarchStatutory Trust I20055,000$LIBOR+1.45%(1)2036Pacific Financial CorporationJuneJulyStatutory Trust II20068,000 LIBOR+1.60%(2)203613,000$(1)Variable rate of 3-month libor,adjusted quaterly3-month LIBOR 0.20%at December
308、13,2021 and 0.23%at December 13,2020(2)Variable rate of 3-month libor,adjusted quaterly3-month LIBOR 0.12%at October 13,2021 and 0.24%at October 13,2020(dollars in thousands)20212020Current$1,442$3,108Deferred 1,443(246)Total income tax expense$2,885$2,862December 31,(in thousands)30 The tax effects
309、 of temporary differences that give rise to significant portions of deferred tax assets and liabilities and net deferred tax assets are recorded in prepaid expenses and other assets in the consolidated financial statements at December 31,2021 and 2020 are:The following is a reconciliation between th
310、e statutory and effective federal income tax rate for the years ended December 31,2021 and 2020: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 D
311、irectors.The cost of this plan was$1.1 million and$1.5 million in 2021 and 2020,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
312、 salary compensation as allowed by applicable IRS code.Matching contributions by the Bank are at the discretion of the Board of Directors.Contributions totaled$806,000 and$804,000 for 2021 and 2020,respectively.Director and Employee Deferred Compensation Plans The Company has director and employee d
313、eferred 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,
314、termination,death or permanent disability,sale of the Company,the ten-year anniversary of the participants participation date,or at the discretion of the Company.There are currently one participant receiving payments in the director and employee deferred compensation plan.There were no deferrals or
315、ongoing expense to the Company for these plans in 2021 and 2020.20212020Deferred Tax AssetsAllowance for loan losses$1,882$2,672Deferred compensation1114Supplemental executive retirement plan878911Compensation expense8755Other242161Total deferred tax assets$3,100$3,813Deferred Tax LiabilitiesDepreci
316、ation$292$417Loan fees/costs2,6061,895Unrealized gain on securities available for sale3821,267Prepaid expenses237163Other258189Total deferred tax liabilities3,7753,931Net deferred tax liabilities$(675)$(118)(in thousands)December 31,PercentPercentof Pre-taxof Pre-taxAmountIncomeAmountIncomeIncome ta
317、x at statutory rate$3,27221.0%$2,99221.0%Adjustments resulting from:State income taxes,net of federal benefit1580.9%1821.3%Tax-exempt income(287)-1.8%(275)-1.9%Net earnings on life insurance policies(285)-1.8%(110)-0.8%Other270.2%730.5%Total income tax expense$2,88518.5%$2,86220.1%(dollars in thousa
318、nds)December 31,2021202031 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 participat
319、e 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$3.0 million at December 31,2021 and 2020.In 2021 and 2020,th
320、e net benefit recorded from these plans,including the cost of the related life insurance,was$195,000 and$179,000,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
321、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$48,000 and$62,000 at December 31,2021 and 2020,respectively.Long-Term Compensation Agreem
322、ents The Company has long-term compensation agreements to selected employees that provide incentive for those covered employees to remain employed with the Company for a defined period of time.The cost of these agreements was$73,000 for both the years ended December 31,2021 and 2020,respectively.Sup
323、plemental 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
324、 SERP is designed to supplement a participating officers 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 incep
325、tion 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$7.1 million and$8.0 million at December 31,2021
326、 and 2020,respectively.The following table sets forth the net periodic pension cost and obligation assumptions used in the measurement of the benefit obligation for the years ended December 31,2021 and 2020:The following table sets forth the change in benefit obligation at December 31,2021 and 2020:
327、20212020Net periodic pension cost:Service cost$60$52Interest cost5985 Amortization of net loss7642Net periodic pension cost$195$179Weighted average assumptions:Discount rate1.87%2.84%Salary scalen/an/aExpected return on plan assetsn/an/a(dollars in thousands)December 31,20212020Change in benefit obl
328、igation:Benefit obligation at the beginning of year$3,253$3,112Service cost6052Interest cost5985Benefits paid(234)(234)Actuarial loss(gain)(120)238Benefit obligation at end of year$3,018$3,253December 31,(in thousands)32 Amounts recognized in accumulated other comprehensive income at December 31,202
329、1 and 2020 was as follows:The following table summarizes the projected and accumulated benefit obligations at December 31,2021 and 2020:Estimated future benefit payments as of December 31,2021 were as follows(in thousands):NOTE 14 COMMITMENTS AND CONTINGENCIES The Bank is party to financial instrume
330、nts 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 th
331、e consolidated balance sheets.The Banks 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 pol
332、icies in making commitments and conditional obligations as they do for on-balance-sheet instruments.A summary of the Banks off-balance sheet commitments at December 31,2021 and 2020 is as follows:Commitments to extend credit are agreements to lend to a customer as long as there is no violation of an
333、y 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 customers creditworthiness on a case-by-case basis.The amount of collateral obtained,if deemed necessary upon extension of credit,is based on managements credit evaluation of the customer.Col
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