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TheCompetition for deposits is also very competitive, with the Company attracts deposits through therelying on its branch office system.network. Competition for those deposits is principally from other savings institutions, commercial banks and credit unions located in the same community, as well as mutual funds, FinTech companies, and other alternative investments. The Bank competes for these deposits by offeringstriving to offer superior service and a variety of deposit accounts at competitive rates. Based on the most recent branch deposit data provided by the FDIC, at June 30, 2017,2023, 1st Security Bank of Washington’sBank’s share of aggregate deposits in theits market area consisting ofspanning the seven12 counties where thewith Company has branches, was less than one percent.
Employees
The Company’s market areas have a high concentration of financial institutions, including branches of large money centers and regional banks resulting from the banking industry's consolidation in Washington and other western states. National lenders like Wells Fargo, Bank of America, Chase, and others in the Company’s market area offer services beyond the Bank's scope, such as trust services. Institutions providing comprehensive services may attract customers seeking “one-stop shopping,” potentially diverting them from the Bank.
Information about our Executive Officers
At December 31, 2017, the Company had 326 full-time equivalent employees. Company employees are not represented by any collective bargaining group. The Company considers employee relations to be good.
Set forth below is certain information regarding the executive officers of the Company and the Bank. There are no family relationships among or between the executive officers.
Executive Officers. The following table sets forth information with respect to the executive officers of the Company and the Bank.
| |||||||||
Name | Age (1) |
|
| Position with 1st Security Bank | |||||
Joseph C. Adams | 64 | Director and |
| ||||||
Chief Executive Officer | Director and Chief Executive Officer | ||||||||
Matthew D. Mullet | 45 | Chief Financial Officer, Treasurer and Secretary | Executive Vice President, Chief Financial Officer | ||||||
| |||||||||
Benjamin G. Crowl | 39 | ||||||||
|
|
| |||||||
|
| Executive Vice President, Chief Lending Officer | |||||||
| 46 |
| Executive Vice President, Chief | ||||||
Vickie A. Jarman | 46 | Executive Vice President, Chief Human Resources Officer/WOW! Officer | |||||||
| Shana C. Allen | 54 | Executive Vice President, Chief Information Officer | |||||||
Donn C. Costa | 62 |
| Executive Vice President, Home Lending Production | ||||||
|
|
| |||||||
Kelli B. Nielsen | 52 | Executive Vice President, Retail Banking and Marketing |
|
| |||||
|
|
___________________________
(1) At December 31, 2023.
Joseph C. Adams, age 58,64, is a director and has been the Chief Executive Officer of 1st Security Bank of Washington since July 2004. He has also served in those capacities for FS Bancorp since its formation in September 2011. He joined 1st Security Bank of Washington in April 2003 as its Chief Financial Officer, when the Bank was Washington’s Credit Union.Officer. Mr. Adams also served as Supervisory Committee Chairperson from 1993 to 1999.1999 when the Bank was Washington’s Credit Union. Mr. Adams is a lawyer, having worked for Deloitte as a tax consultant, K&L Gates as a lawyer and then at Univar USA as a lawyer and Director of Regulatory Affairs. As the Director of Regulatory Affairs for Univar USA, the largest chemical distribution company in the United States, Mr. Adams receivedused his environmental law expertise to ensure Univar stayed in compliance with all relevant local, state and federal environmental laws, rules and regulations. He is a Master’s Degree equivalentmember of the Washington State Bar Association, and was a Board member of the Community Bankers of Washington. Mr. Adams graduated with distinction from the University of Hawaii with a Bachelor of Business Administration in Finance. He also graduated cum laude with a Juris Doctor from the University of Puget Sound School of Law. In addition, Mr. Adams graduated with honors from the Pacific Coast Banking School.School in 2007, a master’s level program held at the University of Washington. Mr. Adams’ legal and accounting backgrounds, as well as his duties as Chief Executive Officer of 1st Security Bank, of Washington, bring a special knowledge of the financial, economic and regulatory challenges faced by the Bank, which makes him well suitedwell-suited to educateeducating the Board on these matters.
Matthew D. Mullet, age 39,45,joined 1st Security Bank of Washington in July 2011 and was appointed Chief Financial Officer in September 2011. Mr. Mullet startedAs a cum laude graduate of University of Washington, he began his banking career in June 2000 as a financial examiner with the Washington State, Department of Financial Institutions, Division of Banks, where he worked until October 2004. From OctoberBanks. In 2004, until August 2010, Mr. Mullet was employedMatthew accepted a position at Golf Savings Bank Mountlake Terrace, WA, where hein Seattle. He served in several financiala variety of capacities including asat Golf and was appointed Chief Financial Officer from May 2007 until August 2010. In
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August 2010,in 2007. After the Golf Savings Bank was mergedmerger with Sterling Savings Bank, where Mr. Mullethe held the position asof Senior Vice President of the Home Loan Division at Sterling until resigning in 2011 to join 1st Security Bank. Matthew is inspired by the Bank’s commitment to its customers and commencing workto the communities it serves. Matthew serves on the Government Relations Committee with Washington Bankers Association and volunteers with The IF Project, teaching Financial Literacy at the Washington Corrections Center for Women. He is passionate about financial literacy and youth education.
Benjamin G. Crowl, age 39, joined the Bank in 2018 as Senior Vice President, Commercial Lending Relationship Manager. He was promoted to Executive Vice President and Chief Lending Officer on July 1, 2023. His responsibilities include oversight of the loan production for the commercial, consumer, and commercial real estate lending groups of the Bank. A five-year veteran at 1st Security Bank, he served as Senior Vice President, Director of Washington.Consumer Lending and held the position of Senior Vice President, Commercial Lending Team Lead. Benjamin holds a Bachelor of Science in Business Administration degree from Northern Arizona University with a specialty in Marketing. He is also an honor graduate of the Pacific Coast Banking School; a master's level program held at the University of Washington and has an Executive Leadership Certificate from the University of Washington's Michael G. Foster School of Business. With a deep dedication to local nonprofits and the community, Benjamin has served on several nonprofit boards throughout his career. He finds satisfaction in being able to use the skills he has developed in banking to help others.
Robert B. Fuller
Erin M. Burr, age 58,46, holds a Bachelor of Business Administration degree from Western Washington University. She began her career in 1999 as a financial examiner for the Washington State, Department of Financial Institutions, Division of Banks. In 2006, Erin joined Builders Capital Mortgage in Seattle as their senior underwriter. She joined 1st Security Bank of Washington as Chief Creditin January 2009 and became the Community Reinvestment Act (CRA) Officer in September of 2013. Prior to his employment withJanuary 2010. She took on the Bank, Mr. Fuller served as Chief Financial Officer/Chief Credit Officer for Blueprint Capital, REITEnterprise Risk Manager role in 2013, Chief Credit Officer for Core Business Bank duringMay 2012 and Plaza Bank during 2011, and in credit administration at Golf Savings Bank/Sterling Bank during 2009 and 2010. Mr. Fuller also served aswas promoted to Executive Vice President Chief Operating Officer, and Chief FinancialRisk Officer for Golf Savingsin April 2018. As the Bank’s CRA Officer, Erin enjoys building relationships with nonprofit groups that support the communities the Bank from March 2001 to September 2006 and wasserves. She coordinates the Bank’s community outreach volunteer programs. Erin is a member of the integration team forHousing Consortium of Everett and Snohomish County and is dedicated to addressing affordable housing issues. She volunteers with The IF Project, teaching Financial Literacy to women who are in the Golf saleWashington Corrections Center and she works with YWCA BankWork$ and the Teach Children to Sterling SavingsSave Program. She has volunteered in various roles with Domestic Violence Services of Snohomish County. As the Chief Risk Officer, Erin uses her regulatory background to help promote and build risk awareness throughout the Bank. Mr. Fuller started his banking career at US Bank
Vickie A. Jarman, age 46, holds a Bachelor of Washington’s mid-market production team and has over 30 years of banking experience.
Dennis V. O’Leary, age 50,Arts in Communications from Seattle Pacific University. She joined 1st Security Bank in 2002, after working with the Ballard Boys and Girls Club. Vickie was promoted to Executive Vice President and Chief Human Resources Officer/WOW! Officer in 2018. Prior to becoming the Director of WOW and Chief Human Resources Officer, Vickie worked with our Consumer Lending team. Vickie oversees the onboarding and orientation of new hires, sharing the Bank’s Vision, Mission, Core Values, and unique company culture. She also ensures that the Bank’s Core Values continue to reflect the personal principles that support all the employees as the organization evolves. She has always been passionate and dedicated to volunteering and giving back to our communities and nonprofits. She volunteers with The IF Project, teaching Financial Literacy at the Washington Corrections Center for Women, YWCA BankWork$, and for the Teach Children to Save Program.
Shana C. Allen, age 54, joined the Bank in 2010 as Vice President of Technology & Operations and was promoted to Senior Vice President - Consumer, Small Businessthe following year. In 2015 she was promoted to SVP, Chief Information Officer and Construction Lending in August 2011 and currently holds the position of Chief Lending Officer. Priorthen promoted to his employment with the Bank, Mr. O’Leary previously was employed by Sterling Savings Bank from July 2006 until August 2011 as SeniorExecutive Vice President and Puget Sound Regional DirectorChief Information Officer in January 2023. Her responsibilities include oversight of the residential construction lending division. Sterling Savings Bank acquired Golf Savings Bank in 2006 where Mr. O’Leary had served as Executive Vice President, Commercial Real Estate Lending, having previously served in various senior lending positions at Golf Savings Bank since June 1985.
Drew B. Ness, age 53, joined 1st Security Bank of Washington as Chief Operating Officer in 2008. Mr. Ness has over 26 years of diverse banking experience, including retail branch sales and service, branch networktechnology, security and project management and national customer service training. He served as Vice President and Managerteams at the Bank. Shana attended the University of the Corporate Deposit Operations Department for Washington Federal, Seattle, Washington from February 2008 until August 2008, following its acquisition of First Mutual Bank. Mr. Ness served as Vice President and Administrative/Operations Manager of the Retail Banking Group at First Mutual Bank, Bellevue, Washington from 2004 through February 2008, and, prior to that, in various management positions for Bank of America in Seattle, Washington and Newport Beach, California.holds certifications in IT Service Management under the Information Technology Infrastructure Library and is a Certified Information Systems Security Professional (CISSP). As a frequent contributor to industry publications in the areas of cybersecurity, information security and data encryption and a speaker on these topics in several industry forums, Shana has a proven track record of leadership in the Information Technology field. In addition, she currently sits on the Client Advisory Board for Computer Services, Inc. as well as on the IT & Cybersecurity Program Advisory Committee for Peninsula College, and the American Bankers Association Core Platforms Committee. An enthusiastic volunteer and passionate community supporter, Shana has served organizations such as Domestic Violence Services of Snohomish County and the White Center Food Bank.
Donn C. Costa, age 56, Executive Vice President,62, is a cum laude graduate from Washington State University with a Bachelor of Business Administration degree. He began his career in mortgage lending over three decades ago and joined the Bank as the EVP of Home Lending joined 1st Security Bank of Washington in October 2011 as Senior Vice President, Home Lending. He2012, overseeing home lending sales and operations. Donn previously held the position of Executive Vice President at Sterling Savings Bank Mountlake Terrace, Washington after theits merger with Golf Savings Bank in August 2009,2009. Prior to the merger, Donn was President of Golf Savings Bank and a member of the Board of Directors, serving on the Asset and Liability, Personnel and Lending Committees and held the position of Executive Vice President of Mortgage Lending. Donn’s achievements include serving as President of the Washington Mortgage Lenders and the Seattle Mortgage Bankers, as well as on the Advisory Boards of Fannie Mae and Freddie Mac. His goal for the team at Golf Savings1st Security Bank Mountlake Terrace, Washington since 2006. With more than 30 yearsis to provide “best in class” customer service and loan programs that help people achieve the dream of home lendinghomeownership.
Kelli B. Nielsen, age 52, has worked in the financial services industry for three decades and brought a wealth of retail banking and leadership experience Mr. Costa began as a loan officer at Lomas and Nettleton Mortgage Company in Mountlake Terrace in 1986.
Debbie L. Steck, age 58, Executive Vice President, Home Lending Operations,to her role when she joined 1st Security Bank of Washington in September 2011. Prior to her employment at the Bank,2016. Previously, she served as Chief Operating Officer and Vice President at Sterling Savings Bank after the merger with Golf Savings Bank in August 2009, and held that position with Golf Savings Bank for several years prior to that. Ms. Steck has over 30 years of experience in the mortgage industry. She currently serves on the Board of Directors for the Everett Gospel Mission.
Kelli B. Nielsen, age 46, Executive Vice President, Retail Banking and Marketing, joined 1st Security Bank of Washington in June 2016. Prior to her employment at the Bank, she served as Senior Vice President of Retail Banking and Marketing at Sound Community Bank and prior to that, Ms. Nielsen was Vice President, Sales and Service Manager of Retail Banking at Cascade Bank before she moved to Sound Community Bank as the Senior Vice President of Retail Banking and its acquirer Opus Bank. Ms. NielsenMarketing. In 2016, Kelli graduated from the American Bankers Association (ABA), Stonier Graduate School of Banking, and holds a Certificate of Leadership from the University of Pennsylvania, The Wharton School. She serves on the ABA Stonier Advisory Board and is a representative on the Diversity, Equity, and Inclusion (DEI) Committee. She is also a founder for Women of Stonier, an advisory group. Passionate about building relationships and helping others, Kelli serves on the Washington Bankers Association (WBA) Retail Banking Committee, the Government Relations Committee and is on the WBA Pros Board. Kelli is also a published children’s book author and certified life coach. She has 26 yearsa deep commitment to causes that improve the lives of experiencechildren. She volunteers with Long Way Home, a nonprofit in Guatemala focused on building schools from sustainable material, is a former board member of the Victim Support Services and the corporate advisory board for the Greater Seattle Business Association (GSBA) the largest LGBTQ+ Chamber in North America. She also volunteers with The IF Project, teaching Financial Literacy and serving as a mentor to female residents of the Washington Corrections Center for Women.
The Company has developed a Vision Statement that guides our current and future strategies. Our Vision Statement articulates our aspiration: To build a truly great place to work and bank. This statement is both aspirational and dynamic signifying our commitment to evolving responsibly to uphold these values for our employees. The deliberate order of priorities reflects our belief that constructing an exceptional workplace will inherently lead to the creation of an outstanding banking industryenvironment.
Employee Compensation and started her banking career at Seafirst BankBenefits
Management remains focused on ensuring employees are provided a livable wage in addition to a commitment to a balanced work/life schedule. Besides a competitive salary, the following benefits are available to all full-time employees:
● | Employee health benefits that have not increased in employee contribution cost since 2014; |
● | Life, AD&D, short-term disability and long-term disability; |
● | 401k match of up to the first 5% of contribution for up to 4% of total salary; |
● | An Employee Stock Purchase Plan (“ESPP”) that matched 6,799 shares in 2023 to employees that have met a minimum threshold of months worked; |
● | Vacation and sick leave benefits; |
● | Family leave benefits including paid time off for a new child/adopted child; |
● | Education reimbursement of up to $5,000 per year for any accredited program; |
● | Paid volunteer hours (16 hours each year); |
● | Opportunities to participate in development programs through the Washington Bankers Association; |
● | Regular Company provided lunches and treats; and |
● | A pet friendly workplace at the administrative offices. |
Management works with employees to provide these benefits whenever possible including a flexible schedule for employees to be able to enjoy full-time benefits with a reduced hour schedule when appropriate.
Diversity and BankInclusion
Diversity is a fundamental core value for our organization, reflecting our commitment to celebrating differences and promoting equality. Both the Board and management actively embrace diverse perspectives, backgrounds, and experiences, including considerations of America.gender, age, race, and ethnicity. Our inclusive community welcomes everyone. Among our independent directors, 50% are female (three out of six), and 50% of the executives that report to our Chief Executive Officer are female (four out of eight). As of December 31, 2023, our workforce composition was 69% female and 31% male. Women held 62% of the Company's management roles including executives. The average tenure for management positions was seven and a half years. Our diverse workforce includes individuals of various ethnicities: 1% Alaska Native or American Indian, 9% Asian, 2% Black, 7% Hispanic/Latino, 1% Native Hawaiian or Other Pacific Islander, 76% White. Additionally, 4% identified with Two or More Races.
HOW WE ARE REGULATED
The following table outlines gender diversity:
Level | Female % | Male % | ||||||
Individual Contributor | 73 | % | 27 | % | ||||
Manager | 60 | % | 40 | % | ||||
Independent Director | 50 | % | 50 | % | ||||
Executive | 50 | % | 50 | % | ||||
Talent Acquisition
Since 2011, the Company has experienced consistent growth and regularly seeks to fill positions within the markets we serve. Our interview process involves both manager and team members to ensure a comprehensive evaluation of potential candidates. The Human Resources team serves as a dedicated advocate for employees, with a primary focus on fostering a culture of “Wow.” The leader of our human resources team holds the role of EVP of WOW and is dedicated to recruiting individuals who can build lasting careers within our thriving culture. In 2023, we hired 145 new employees for additional positions and replacements, bringing our total employee count to 574 as of December 31, 2023.
Volunteerism
Our organization has a long history of giving back and actively participating in volunteer initiatives within the communities we serve. In 2023, our volunteer hours significantly increased, totaling approximately 6,000 hours, compared to 5,100 hours in 2022. This increase in community outreach can be attributed to the positive impact of the Branch Acquisition, as well as increased demand from additional nonprofit organizations seeking volunteer support.
Human Capital Metrics
As of December 31, 2023, the Company had 574 employees, 99.9% are full time employees and 0.1% are part time including our college internship program. None of our employees are represented by a collective bargaining agreement. Geographically, 89% of our employees reside in Washington State, 8% in Oregon, 1% in Arizona, and 2% in Idaho. The turnover rate for employees as measured by terminated/replaced individuals was 18% in 2023, showing a slight decrease from 19% in 2022.
The following is a brief description of certain laws and regulations applicable to FS Bancorp and 1st Security Bank of Washington.Bank. Descriptions of laws and regulations here and elsewhere in this Form 10‑10–K do not purport to be complete and are qualified in their entirety by reference to the actual laws and regulations. Legislation is introduced from time to time in the United States Congress or in the Washington State Legislature that may affect the operations of FS Bancorp and 1st Security Bank of Washington.Bank. In addition, the regulations governing the Company and the Bank may be amended from time to time by the FDIC, DFI, Federal Reserve and the Consumer Financial Protection Bureau (“CFPB”).
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Any such legislation or regulatory changes in the future could adversely affect our operations and financial condition. We cannot predict whether any such changes may occur.
The laws and regulations affecting banks and bank holding companies have changed significantly particularly in connection with the enactment
Many aspects of the Dodd-Frank Act are to be implemented under regulations promulgated by the federal banking agencies, some of which have not been completed and which in some instances will not take effect for some time, making it difficult to anticipate the overall financial impact of the Dodd-Frank Act on 1st Security Bank of Washington, FS Bancorp and the financial services industry more generally.
Regulation of 1st Security Bank of Washington
General. 1st Security Bank, of Washington, as a state-chartered savings bank, is subject to applicable provisions of Washington law and to regulations and examinations of the DFI. As an insured institution, it also is subject to examination and regulation by the FDIC, which insures the deposits of 1st Security Bank of Washington to the maximum amount permitted by law. During these state or federal regulatory examinations, the examiners may require 1st Security Bank of Washington to provide for higher general or specific loan loss reserves, which can impact capital and earnings. This regulation of 1st Security Bank of Washington is intended for the protection of depositors and the Deposit Insurance Fund (“DIF”) of the FDIC and not for the purpose of protecting shareholders of 1st Security Bank of Washington or FS Bancorp. 1st Security Bank of Washington is required to maintain minimum levels of regulatory capital and is subject to some limitations on the payment of dividends to FS Bancorp. See below “Regulatory Capital“Capital Requirements” and “Restrictions“Regulation and Supervision of FS Bancorp - Restrictions on Dividends and Stock Repurchases.”
Federal and State Enforcement Authority and Actions. As part of its supervisory authority over Washington-chartered savings banks, the DFI may initiate enforcement proceedings to obtain a consent order to cease-and-desist against an institution believed to have engaged in unsafe and unsound practices or to have violated a law, regulation, or other regulatory limit, including a written agreement. The FDIC also has the authority to initiate enforcement actions against insured institutions under its jurisdiction for similar reasons and may terminate the deposit insurance if it determines that an institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. Both these agencies may also utilize less formal supervisory tools to address their concerns about the condition, operations or compliance status of a savings bank.
Regulation by the Washington State Department of Financial Institutions. State law and regulations govern 1st Security Bank of Washington’sBank’s ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers, and to establish branch offices. As a state savings bank, 1st Security Bank of Washington must pay semi-annual assessments, examination costs and certain other charges to the DFI.
Washington law generally provides the same powers for Washington savings banks as federally and other-state chartered savings institutions and banks with branches in Washington, subject to the approval of the DFI. Washington law allows Washington savings banks to charge the maximum interest rates on loans and other extensions of credit to Washington residents which are allowable for a national bank in another state if higher than Washington limits. In addition, the DFI may approve applications by Washington savings banks to engage in an otherwise unauthorized activity, if the DFI determines that the activity is closely related to banking, and 1st Security Bank of Washington is otherwise qualified under the statute. This additional authority, however, is subject to review and approval by the FDIC if the activity is not permissible for national banks.
Insurance of Accounts and Regulation by the FDIC. Through the DIF, the FDIC insures deposit accounts in 1st Security Bank of Washington up to $250,000 per separately insured depositor.deposit ownership right or category. As insurer, the FDIC imposes deposit
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insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions.
The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution applied to its deposit base, which is its average consolidated total assets minus its Tier 1 capital. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. At December 31, 2023, total base assessment rates ranged from 2.5 to 32 basis points subject to certain adjustments.
Extraordinary growth in insured deposits during the first and second quarters of 2020 caused the DIF reserve ratio to decline below the statutory minimum of 1.35 percent as of June 30, 2020. In September 2020, the FDIC Board of Directors adopted a Restoration Plan to restore the reserve ratio to at least 1.35 percent within eight years, absent extraordinary circumstances, as required by the Federal Deposit Insurance Act. The Restoration Plan maintained the assessment rate schedules in place at the time and required the FDIC to update its analysis and projections for the deposit insurance fund balance and reserve ratio at least semiannually. In the semiannual update for the Restoration Plan in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the statutory minimum of 1.35 percent by September 30, 2028, the statutory deadline to restore the reserve ratio. Based on this update, the FDIC Board approved an Amended Restoration Plan, and concurrently proposed an increase in initial base deposit insurance assessment rate schedules uniformly by 2 basis points, applicable to all insured depository institutions. In October 2022, the FDIC Board finalized the increase with an effective date of January 1, 2023, applicable to the first quarterly assessment period of 2023. The revised assessment rate schedules which now range from 2.5 percent to 32 percent, subject to certain adjustments, are intended to increase the likelihood that the reserve ratio of the DIF reaches the statutory minimum level of 1.35 percent by September 30, 2028.
The FDIC has authority to increase insurance assessments, and any significant increases may have an adverse effect on the operating expenses and results of operations of the Company. Management cannot predict what assessment rates will be in the future. In a banking industry emergency, the FDIC may also impose a special assessment. The Bank’s deposit insurance premiums for the year ended December 31, 2017,2023, were $535,000. Those premiums have been reduced in recent years due to management’s focus on asset quality, risk management, and growing capital levels.$2.4 million.
The Dodd-Frank Act requires the FDIC’s deposit insurance assessments to be based on assets instead
The FDIC conducts examinations of and requires reporting by state non-member banks, such as 1st Security Bank of Washington.Bank. The FDIC also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the DIF. No institution may pay a dividend if it is in default on its federal deposit insurance assessment.
In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation established in 1987 to recapitalize a predecessor deposit insurance fund. These assessments, which may be revised based upon the level of DIF deposits, will continue until the bonds mature from 2018 through 2020. This payment is assessed quarterly at an annualized rate applied to assessable assets. During 2017, the rate was 4.90%. 1st Security Bank of Washington and FS Bancorp have made no payments to the DIF.
The FDIC may terminate the deposit insurance of any insured depository institution, including 1st Security Bank of Washington, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily under certain circumstances. Management is not aware of noany existing circumstances which would result in termination of the Bank's deposit insurance.
Capital Requirements. 1st Security Bank is subject to capital regulations adopted by the FDIC, which establish a required ratio for common equity Tier 1 (“CET1”) capital, minimum leverage and Tier 1 capital ratios, risk-weightings of Washington’s deposit insurance.certain assets for purposes of the risk-based capital ratios, an additional capital conservation buffer over the minimum capital ratios and define what qualifies as capital for purposes of meeting the capital requirements. These regulations implement the regulatory capital reforms required by the Dodd Frank Act and the “Basel III” requirements.
A significant increase
Under the capital regulations, the minimum capital ratios are: (1) a CET1 capital ratio of 4.50% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.00% of risk-weighted assets; (3) a total risk-based capital ratio of 8.00% of risk-weighted assets; and (4) a leverage ratio (the ratio of Tier 1 capital to average total adjusted assets) of 4.00%. CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income (“AOCI”); and certain minority interests; all subject to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. In addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available for sale debt and equity securities, unless an institution elects to opt out of such inclusion, if eligible to do so. We have elected to permanently opt-out of the inclusion of AOCI in insurance premiums would likelyour capital calculations. Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the ACL on loans up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital.
In addition to the minimum capital requirements, a capital conservation buffer must be maintained by 1st Security Bank which consists of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.
To be considered well capitalized, a depository institution must have a Tier 1 risk-based capital ratio of at least 8.00%, a total risk-based capital ratio of at least 10.00%, a CET1 capital ratio of at least 6.50% and a leverage ratio of at least 5.00% and not be subject to an adverse effectindividualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level.
At December 31, 2023, 1st Security Bank was categorized as well capitalized under the prompt corrective action regulations of the FDIC. Management monitors the capital levels of the Bank to provide for current and future business opportunities and to meet regulatory guidelines for well capitalized institutions. The Bank’s actual capital ratios at December 31, 2023 are presented in the following table:
To be Well | ||||||||||||||||
Capitalized | ||||||||||||||||
For Capital | For Capital | Under Prompt | ||||||||||||||
Adequacy | Adequacy with | Corrective | ||||||||||||||
Actual | Purposes | Capital Buffer | Action Provisions | |||||||||||||
Ratio | Ratio | Ratio | Ratio | |||||||||||||
At December 31, 2023 | ||||||||||||||||
Total risk-based capital (to risk-weighted assets) | 13.37 | % | 8.00 | % | 10.50 | % | 10.00 | % | ||||||||
Tier 1 risk-based capital (to risk-weighted assets) | 12.12 | % | 6.00 | % | 8.50 | % | 8.00 | % | ||||||||
Tier 1 leverage capital (to average assets) | 10.39 | % | 4.00 | % | N/A | 5.00 | % | |||||||||
CET1 capital (to risk-weighted assets) | 12.12 | % | 4.50 | % | 7.00 | % | 6.50 | % | ||||||||
At December 31, 2023, the Bank was categorized as well capitalized under the prompt corrective action regulations of the FDIC. For a complete description of the Bank’s required and actual capital levels on December 31, 2023, see “Note 15 – Regulatory Capital” of the operating expensesNotes to Consolidated Financial Statements included in “Item 8. Financial Statements and resultsSupplementary Data,” of operationsthis Form 10–K.
The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of particular risks or circumstances. Management of 1st Security Bank of Washington. There can be no prediction asbelieves that, under the current regulations, 1st Security Bank will continue to what changes in insurance assessment rates may be mademeet its minimum capital requirements in the foreseeable future.
FS Bancorp is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Bank holding companies with less than $3.0 billion in assets are generally not subject to compliance with the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to the Bank. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to the holding company’s subsidiary bank and expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations. If FS Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at December 31, 2023, FS Bancorp would have exceeded all regulatory capital requirements.
Prompt Corrective Action. The FDIC Improvement Act established a system of prompt corrective action to resolve the problems of under-capitalized institutions. Federal statutes establish a supervisory framework for FDIC-insured institutions based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution’s category generally depends upon where its capital levels are in relation to relevant capital measures, which include risk-based capital measures, a leverage ratio capital measure, and certain other factors. The well capitalized category is described below in “Capital Requirements”. An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized. The previously referenced final rule establishing an elective “community bank leverage ratio” regulatory capital framework provides that a qualifying institution whose capital exceeds the community bank leverage ratio and opts to use that framework will be considered “well capitalized” for purposes of prompt corrective action.
Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by 1st Security Bank of Washington to comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements.
At December 31, 2017,2023, 1st Security Bank of Washington was categorized as well capitalized under the prompt corrective action regulations of the FDIC. For additional information, see “Capital Requirements” below and Note 14 of
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the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data,” of this Form 10‑K.
Capital Requirements. Effective January 1, 2015 (with some changes transitioned into full effectiveness over a number of years), 1st Security Bank of Washington became subject to new capital regulations adopted by the Federal Reserve and the FDIC, which created a new required ratio for common equity Tier 1 (“CET1”) capital, increased the minimum leverage and Tier 1 capital ratios, changed the risk-weightings of certain assets for purposes of the risk-based capital ratios, required an additional capital conservation buffer over the minimum capital ratios, and changed what qualifies as capital for purposes of meeting the capital requirements. These regulations implement the regulatory capital reforms required by the Dodd Frank Act and the “Basel III” requirements.
Under the new capital regulations, the minimum capital ratios applicable to FS Bancorp and 1st Security Bank of Washington are: (1) a CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total risk-based capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio (the ratio of Tier 1 capital to average total adjusted assets) of 4.0%. CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income (“AOCI”) unless an institution elects to exclude AOCI from regulatory capital; and certain minority interests; all subject to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital.
In addition to the minimum capital requirements, a capital conservation buffer must be maintained by 1st Security Bank of Washington which consists of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. The new capital conservation buffer requirement was phased in beginning on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required. The capital conservation buffer increases each year until the capital conservation buffer requirement is fully phased in on January 1, 2019.
To be considered well capitalized, a depository institution must have a Tier 1 risk-based capital ratio of at least 8.00%, a total risk-based capital ratio of at least 10%, a CET1 capital ratio of at least 6.50% and a leverage ratio of at least 5.00% and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level.
At December 31, 2017, 1st Security Bank of Washington met the requirements to be well capitalized and met the fully phased in capital conservation buffer requirement. Management monitors the capital levels of the Bank to provide for current and future business opportunities and to meet regulatory guidelines for well capitalized institutions. The Bank’s actual capital ratios at December 31, 2017 and 2016 are presented in the following tables:
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Total risk-based capital |
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| 16.25 | % | 8.00 | % | 9.25 | % | 10.00 | % |
Tier 1 risk-based capital |
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| 15.00 | % | 6.00 | % | 7.25 | % | 8.00 | % |
Tier 1 leverage capital |
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| 12.61 | % | 4.00 | % | N/A |
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| 15.00 | % | 4.50 | % | 5.75 | % | 6.50 | % |
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| 13.87 | % | 8.00 | % | 8.63 | % | 10.00 | % |
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| 12.62 | % | 6.00 | % | 6.63 | % | 8.00 | % |
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| 12.62 | % | 4.50 | % | 5.13 | % | 6.50 | % |
The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of particular risks or circumstances. Management of 1st Security Bank of Washington believes that, under the current regulations, 1st Security Bank of Washington will continue to meet its minimum capital requirements in the foreseeable future.
For a complete description of the Bank’s required and actual capital levels on December 31, 2017, see Note 14“Note 15 – Regulatory Capital” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data,” of this Form 10‑10–K.
Standards for Safety and Soundness. TheEach federal banking regulatory agencies have prescribed, by regulation,agency, including the FDIC, has adopted guidelines for all insured depository institutionsestablishing general standards relating to internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. TheIn general, the guidelines set forth the safetyrequire, among other things, appropriate systems and soundness standards that the federal banking agencies usepractices to identify and address problems at insured depository institutions before capital becomes impaired. Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical,manage the risks and physical safeguards appropriateexposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the institution’s size and complexity and the nature and scope of its activities. The information security program must be designed to ensure the security and confidentiality of customer information, protect against any unanticipated threatsservices performed by an executive officer, employee, director, or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer, and ensure the proper disposal of customer and consumer information. Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customer information in customer information systems.principal shareholder. If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance. Management of the Bank is not aware of any conditions relating to these safety and soundness standards which would require submission of a plan of compliance.
Federal Home Loan Bank System. The FHLB of Des Moines is one of 11 regional FHLBsFederal Home Loan Banks that administer the home financing credit function of savings institutions. The FHLBsFederal Home Loan Banks are subject to the oversight of the Federal Housing Finance Agency and each FHLBFederal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. The FHLBsFederal Home Loan Banks are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLBFederal Home Loan Bank System and makesmake loans or advances to members in accordance with policies and procedures established by the Board of Directors of the FHLB,Federal Home Loan Bank, which are subject to the oversight of the Federal Housing Finance Agency. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, members areFederal Home Loan Bank. As a member, the Bank is required to purchase and maintain stock equal to 4.0%in the FHLB of advances. That stock may be redeemed if advances are paid down.Des Moines based on the Bank’s asset size and level of borrowings from the FHLB of Des Moines. See “Business - Deposit Activities and Other Sources of Funds - Debt.” At December 31, 2017,2023, 1st Security Bank of Washington had $2.9$2.1 million in FHLB of Des Moines stock, which was in compliance with this requirement.
Other than as noted above, during the year ended December 31, 2017, the FHLB of Des Moines did not repurchase any of its membership stock from 1st Security Bank of Washington. The FHLB pays dividends quarterly, and 1st Security Bank of Washington received $112,000$245,000 in dividends during the year ended December 31, 2017.2023.
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The FHLBsFederal Home Loan Banks continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLBFederal Home Loan Bank dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLBFederal Home Loan Bank stock in the future. A reduction in value of 1st Security Bank of Washington’s FHLB stock may result in a decrease in net income.
Commercial Real Estate Lending Concentrations.The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance directs the FDIC and other federal bank regulatory agencies to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk. A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:
● | Total reported loans for construction, land development and other land represent 100% or more of the Bank’s total regulatory capital; or |
● | Total commercial real estate loans (as defined in the guidance) represent 300% or more of the Bank’s total regulatory capital and the outstanding balance of the Bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. |
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. At December 31, 2023, 1st Security Bank's aggregate recorded loan balances for construction, land development and land loans were 89.4% of regulatory capital. In addition, at December 31, 2023, 1st Security Bank loans on all commercial real estate, including construction, owner and non-owner occupied commercial real estate, and multi-family lending, as defined by the FDIC, were 273.1% of regulatory capital.
Activities and Investments of Insured State-Chartered Financial Institutions. Federal law generally limits the activities and equity investments of FDIC insured, state-chartered banks to those that are permissible for national banks. An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (4) acquiring or retaining the voting shares of a depository institution if certain requirements are met.
Dividends. Dividends from 1st Security Bank of Washington constitute a major source of funds for dividends in future periods that may be paid by FS Bancorp to shareholders. The amount of dividends payable by 1st Security Bank of Washington to FS Bancorp depends upon the Bank’s earnings and capital position, and is limited by federal and state laws, regulations and policies. According to Washington law, 1st Security Bank of Washington may not declare or pay a cash dividend on its capital stock if it would cause its net worth to be reduced below (1) the amount required for liquidation accounts or (2) the net worth requirements, if any, imposed by the Director of the DFI. Dividends on 1st Security Bank of Washington’sBank’s capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of 1st Security Bank, of Washington, without the approval of the Director of the DFI. The Bank paid $1.9$8.9 million in dividends to the holding company in 2017.2023.
The amount of dividends actually paid during any one period will be strongly affected by 1st Security Bank of Washington’sBank’s policy of maintaining a strong capital position. Federal law further limits and can prohibit dividends when an institution does not meet the capital conservation buffer requirement and provides that no insured depository institution may pay a cash dividend if it would cause the institution to be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments are deemed to constitute an unsafe and unsound practice.
Affiliate Transactions. FS Bancorp and 1st Security Bank of Washington are separate and distinct legal entities. FS Bancorp (and any non-bank subsidiary of FS Bancorp) is an affiliate of 1st Security Bank of Washington.Bank. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates. Transactions deemed to be “covered transactions” under Section 23A of the Federal Reserve Act and between a bank and an affiliate are limited to 10% of the bank subsidiary’s capital and surplus and, with respect to all affiliates, to an aggregate of 20% of the bank’s capital and surplus. Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.
Community Reinvestment Act. 1st Security Bank of Washington is also subject to the provisions of the Community Reinvestment Act of 1977 (“CRA”), which requires the appropriate federal bank regulatory agency to assess a bank’s performance under the CRA in meeting the credit needs of the community serviced by the Bank, including lowlow- and moderate incomemoderate-income neighborhoods. The regulatory agency’s assessment of a bank’s record is made available to the public. Further, a bank’s CRA performance rating must be considered in connection with a bank’s application to, among other things, establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution.institution, and in connection with certain applications by a bank holding company, such as bank acquisitions. An unsatisfactory rating may be the basis for denial of certain applications. 1st Security Bank of Washington received a “satisfactory” rating during its most recent CRA examination.
Privacy Standards. 1st Security Bank of Washington is subject
On October 24, 2023, the federal banking agencies issued a final rule designed to FDICstrengthen and modernize regulations implementing the privacy protection provisionsCRA. The changes are designed to encourage banks to expand access to credit, investment and banking service in low- and moderate-income communities, adapt to changes in the banking industry including mobile and internet banking, provide greater clarity and consistency in the application of the CRA regulations and tailor CRA evaluations and data collection to bank size and type. The Bank cannot predict the impact the changes to the CRA will have on its operations at this time.
In February 2024, several trade groups filed a complaint in the U.S. District Court for the Northern District of Texas challenging the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency’s final rule modernizing how they assess lenders’ compliance under the CRA. In their complaint, the trade groups asked the court to vacate the final rule and provide a preliminary injunction that would pause implementation of the final rule while the court decides the case. It is not known at this time what the final outcome of this litigation will be and how it will impact our CRA requirements
Privacy Standards and Cybersecurity. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999.1999 modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers. Federal banking agencies, including the FDIC, have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. These regulations require 1st Security Bank of Washington to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of itstheir rights to opt out of certain practices. In addition, other federal and state cybersecurity and data privacy laws and regulations may expose 1st Security Bank to risk and result in certain risk management costs.
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a final rule providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents. Specifically, the new rule requires a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after the banking organization determines that a “computer-security incident” rising to the level of a “notification incident” has occurred. Notification is required for incidents that have materially affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector. Service providers are required under the rule to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect the banking organization’s customers for four or more hours. Compliance with the new rule was required by May 1, 2022. Noncompliance with federal or similar state privacy and cybersecurity laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private causes of action and/or reputational harm.
In July 2023, the SEC adopted rules requiring registrants to disclose material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance. The new rules require registrants to disclose on Form 8–K any cybersecurity incident they determine to be material and to describe the material aspects of the incident's nature, scope, and timing, as well as its material impact or reasonably likely material impact on the registrant. For information regarding the Company's cybersecurity risk management, strategy, and governance, see “Item 1C. Cybersecurity” in Part I of this Form 10–K.
Environmental Issues Associated with Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) is a federal statute that generally imposes strict liability on, all prior and present “owners and operators” of sites containing hazardous waste. However, Congress asked to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including 1st Security Bank, of Washington, that have made loans secured by properties with potentialpotentially hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.
Federal Reserve System. The Federal Reserve Board requires that all depository institutions to maintain reserves onat specified levels against their transaction accounts, or non-personal time deposits. These reserves may beprimarily checking accounts. At December 31, 2023, the Bank was in the form of cash or noninterest-bearing depositscompliance with the regional Federal Reserve Bank. Negotiable order of withdrawal (“NOW”) accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to the reserve requirements as are any non-personal time depositsin place at a savings bank. As of December 31, 2017, 1st Security Bank of Washington’s deposit with the Federal Reserve Bank and vault cash exceeded its reserve requirements.time.
Other Consumer Protection Laws and Regulations. The Dodd-Frank Act established the CFPB and empowered it to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. 1st Security Bank of Washington is subject to consumer protection regulations issued by the CFPB, but as a financial institution with assets of less than $10 billion, 1st Security Bank of Washington is generally subject to supervision and enforcement by the FDIC and the DFI with respect to compliance with federal and state consumer financial protection laws and CFPB regulations.
1st Security Bank of Washington is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. While the list set forth below is not exhaustive, these include the Truth-in-LendingTruth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. In addition, The USA PATRIOT Act, requires banks to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations. Failure to comply with these laws and regulations can subject 1st Security Bank of Washington to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.
Regulation and Supervision of FS Bancorp
General. FS Bancorp is a bank holding company registered with the Federal Reserve and is the sole shareholder of 1st Security Bank of Washington.Bank. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”), and the regulations promulgated there under. This regulation and oversight is generally intended to ensure that FS Bancorp limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of 1st Security Bank of Washington.
Bank. As a bank holding company, FS Bancorp is required to file quarterly and annual reports with the Federal Reserve and any additional information required by the Federal Reserve and is subject to regular examinations by the Federal Reserve. The Federal Reserve also has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, to issue cease and desist or removal orders, and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.
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The Bank Holding Company Act. Under the BHCA, FS Bancorp is supervised by the Federal Reserve. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, the Dodd-Frank Act provides that a bank holding company should serve as a source of strength to its subsidiary banks by having the ability to provide financial assistance to its subsidiary banks during periods of financial stress to the bank. A bank holding company’s failure to meet its obligation to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both. No regulations have yet been proposed by the Federal Reserve to implement the source of strength doctrine required by the Dodd-Frank Act. FS Bancorp and any subsidiaries that it may control are considered “affiliates” of 1st Security Bank of Washington within the meaning of the Federal Reserve Act, and transactions between 1st Security Bank of Washington and its affiliates are subject to numerous restrictions. With some exceptions, FS Bancorp and its subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by FS Bancorp or its subsidiaries.
Acquisitions. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities include: operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks, and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.
Regulatory Capital Requirements. Bank holding companies like FS Bancorp are subject to capital adequacy requirements of the The Federal Reserve undermust approve the BHCA and the regulationsacquisition (or acquisition of the Federal Reserve. Forcontrol) of a bank or other FDIC-insured depository institution by a bank holding company, with less than $1.0 billionand the appropriate federal banking regulator must approve a bank’s acquisition (or acquisition of control) of another bank or other FDIC-insured institution.
Under the Change in assets, the capital guidelines apply onBank Control Act, no person may acquire control of a bank only basis, andholding company such as the FS Bancorp unless the Federal Reserve expectshas prior written notice and has not issued a notice disapproving the proposed acquisition. In evaluating such notices, the Federal Reserve takes into consideration such factors as the financial resources, competence, experience and integrity of the acquirer, the future prospects the bank holding company involved and its subsidiary bank and the competitive effects of the acquisition. In January 2020, the Federal Reserve substantially revised its control regulations. Under the revised rule, control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Where an investor holds less than 25%, the Federal Reserve provides the following four-tiered approach to determining control: (1) less than 5%; (2) 5% -9.99%; (3) 10% - 14.99%; and (4) 15% - 24.99%. In addition to the four tiers, the Federal Reserve takes into account substantive activities, including director service, business relationships, business terms, officer/employee interlocks, contractual powers, and proxy contests for directors. The Federal Reserve Board may require the company to enter into passivity and, if other companies are making similar investments, anti-association commitments. Acquisition of more than 10% of any class of a bank holding company’s subsidiary bank to be well capitalizedvoting stock constitutes a rebuttable presumption of control under the prompt corrective action regulations. Ifregulations under certain circumstances including where, as will be the case with the FS Bancorp, were subjectthe issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
Regulatory Capital Requirements. As discussed above, pursuant to regulatory guidelines forthe “Small Bank Holding Company” exception, effective August 30, 2018, bank holding companies with $1.0less than $3 billion or more in consolidated assets at December 31, 2017,were generally no longer subject to the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to 1st Security Bank. At the time of this change, FS Bancorp would have exceeded all regulatory requirements.
The Company’s regulatorywas considered “well capitalized” (as defined for a bank holding company), and was not subject to an individualized order, directive or agreement under which the Federal Reserve requires it to maintain a specific capital amounts and ratios at December 31, 2017 are presented in the following table.
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| 15.70 | % | $ | 65,965 |
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Tier 1 risk-based capital |
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| $ | 119,111 |
| 14.45 | % | $ | 49,474 |
| 6.00 | % | $ | 59,781 |
| 7.25 | % | $ | 65,965 |
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Tier 1 leverage capital |
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| $ | 119,111 |
| 12.13 | % | $ | 39,279 |
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| $ | 49,099 |
| 5.00 | % |
CET1 capital |
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|
(to risk-weighted assets) |
| $ | 119,111 |
| 14.45 | % | $ | 37,105 |
| 4.50 | % | $ | 47,412 |
| 5.75 | % | $ | 53,597 |
| 6.50 | % |
level. For additional information, see Note 14“Note 15 – Regulatory Capital” of the Notes to the Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of this Form 10‑10–K.
Interstate Banking. The Federal Reserve may approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the holding company’s
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home state, without regard to whether the transaction is prohibited by the laws of any state. The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period, not exceeding five years, specified by the law of the host state. Nor may the Federal Reserve approve an application if the applicant controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch. Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the federal law.
The federal banking agencies are generally authorized to approve interstate merger transactions without regard to whether the transaction is prohibited by the law of any state. Interstate acquisitions of branches will be permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration amounts described above.
Restrictions on Dividends and Stock Repurchases. FS Bancorp’s ability to declare and pay dividends is subject to the Federal Reserve limits and Washington law and it may depend on its ability to receive dividends received from 1st Security Bank of Washington.
Bank. Federal Reserve policy limits the payment of a cash dividend by a bank holding company if the holding company’s net income for the past year is not sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with capital needs, asset quality and overall financial condition. A bank holding company that does not meet any applicable capital standard would not be able to pay any cash dividends under this policy. A bank holding company not subject to consolidated capital requirements is expected not to pay dividends unless its debt-to-equity ratio is less than 1:1, and it meets certain additional criteria. The Federal Reserve also has indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.
Except for a company that meets the applicable standard to be considered a well capitalizedwell-capitalized and well-managed bank holding company and is not subject to any unresolved supervisory issues, a bank holding company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation or regulatory order, condition, or written agreement.
Under Washington corporate law, FS Bancorp generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total assets would be less than the sum of its total liabilities.
Federal Securities Law. The stock of FS Bancorp is registered with the SEC under the Securities Exchange Act of 1934, as amended. As a result, FS Bancorp is subject to the information, proxy solicitation, insider trading restrictions, and other requirements under the Securities Exchange Act of 1934.
FS Bancorp stock held by persons who are affiliates of FS Bancorp may not be resold without registration unless sold in accordance with certain resale restrictions. Affiliates are generally considered to be officers, directors, and principal shareholders. If FS Bancorp meets specified current public information requirements, each affiliate of FS Bancorp will be able to sell in the public market, without registration, a limited number of shares in any three-month period.
Sarbanes-Oxley Act of 2002. As a public company that files periodic reports with the SEC, under the Securities Exchange Act of 1934, FS Bancorp is subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. Our policies and procedures have been updated to comply with the requirements of the Sarbanes-Oxley Act.
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The Dodd-Frank Act. The Dodd-Frank Act of 2010 imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions, and implements new capital regulations that Taxation
Federal Taxation
General. FS Bancorp and 1st Security Bank of Washington have and will become subject to and that are discussed above under the section entitled “Regulation of 1st Security Bank of Washington - Capital Requirements.”
In addition, among other changes, the Dodd-Frank Act requires public companies like FS Bancorp, to (i) provide their shareholders with a non-binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years on whether they should have a “say on pay” vote every one, two, or three years; (ii) have a separate, non-binding shareholder vote regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions, or other transactions that would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive compensation paid and the financial performance of the issuer; and (iv) amend Item 402 of Regulation S-K to require companies to disclose the ratio of the Chief Executive Officer’s annual total compensation to the median annual total compensation of all other employees. For certain of these changes, the implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot be determined at this time.
Federal Taxation
General. FS Bancorp and 1st Security Bank of Washington are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to FS Bancorp. 1st Security Bank of Washington is no longer subject to U.S. federal income tax examinations by tax authorities for years ended before 2014,2020, and income tax returns have not been audited for the past six years, 2012period of 2015 to 2017. See Note 11 of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10‑K.2023.
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal income tax rate from a maximum of 35% to a flat 21% rate. The corporate income tax rate reduction was effective January 1, 2018. The Tax Act required a revaluation the Company’s deferred tax assets and liabilities to account for the future impact of lower corporate income tax rates and other provisions of the legislation. As a result of the Company’s revaluation, the Company recognized $396,000 in tax benefit due to a net deferred tax liability position.
FS Bancorp files a consolidated federal income tax return with 1st Security Bank of Washington.Bank. Accordingly, any cash distributions made by FS Bancorp to its shareholders would be considered to be taxable dividends and not as a non‑taxable return of capital to shareholders for federal and state tax purposes. For additional information, see “Note 12 – Income Taxes” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.
Method of Accounting. For federal income tax purposes, FS Bancorp currently reports its income and expenses on the accrual method of accounting and uses a fiscal year ending on December 31 for filing its federal income tax return.
Minimum Tax.
Net Operating Loss Carryovers. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent such alternative minimum taxable income is in excess of an exemption amount. NetCompany may carryforward net operating losses can offsetindefinitely. At December 31, 2023, the Company had no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.net operating losses.
Corporate Dividends‑Received Deduction. FS Bancorp may eliminate from its income dividends received from 1st Security Bank of Washington as a wholly ownedwholly-owned subsidiary of FS Bancorp if it elects to file a consolidated return with 1st Security Bank of Washington.Bank. The corporate dividends-received deduction is 100%, or 80%, in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payor of the dividend. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.
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Washington Taxation
The Company and the Bank are subject to a business and occupation tax which is imposed under Washington law at the rate of 1.50%1.75% of gross receipts. Interest received on loans secured by mortgages or deeds of trust on residential properties, residential mortgage-backed securities, and certain U.S. Government and agency securities are not subject to this tax.
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report and our other filingsdocuments filed with and furnished to the SEC. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, capital levels, cash flows, liquidity, results of operations, and prospects. The market price of our common stock could decline significantly due to any of these identified or other risks, and you could lose some or all of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. This report is qualified in its entirety by these risk factors.
Risks Related to Our BusinessMacroeconomic Conditions
Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.
Our primary market area is concentratedareas are in the Puget Sound region of Washington. OurWashington and Kitsap, Clallam, Jefferson, Grays Harbor, Thurston, and Benton counties. Additionally, following the acquisition of seven branches on February 24, 2023, our footprint has expanded to include Klickitat County (2) in Washington, and the counties of Lincoln (2) Malheur (1) and Tillamook (2) in Oregon. A return of recessionary conditions or adverse economic conditions in our market areas could reduce our rate of growth, affect our customers’ ability to repay loans and adversely impact our business, is directly affected by market conditions, trends in industryfinancial condition, and finance, legislative and regulatory changes, and changes in governmental monetary and fiscal policies, and inflation, allresults of which are beyond our control.operations. General economic conditions, including inflation, unemployment and money supply fluctuations, also may adversely affect our profitability adversely. A declineprofitability. In addition, weakness in the economiesglobal economy and prevalent global supply chain issues have adversely affected numerous businesses within our market areas, particularly those reliant on international trade. Changes in agreements or relationships between the United States and other countries may further impact these businesses and, by extension, our operations.
While real estate values and unemployment rates have recently improved, a deteriorationA downturn in economic conditions, in the market areas we serve could result in loan losses beyond that which is provided for in our allowance for loan losses and could result in the following consequences, any of whichbe it due to inflation, a recession, war, geopolitical conflicts, adverse weather, or other factors, could have a material adverse effect on the business, financial condition, and results of operations:operations, including but not limited to:
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A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate
Our loan portfolios are geographically diverse. Many of the loans in our portfolio arepredominantly comprises assets secured by real estate or fixtures attachedaffixed to real estate. Deteriorationproperty. Any deterioration in the real estate markets whereassociated with the collateral for asecuring mortgage loan is locatedloans could negatively affect the borrower’s ability to repay the loansignificantly impact borrowers' repayment capabilities and the value of the collateral securing the loan.collateral. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies, and natural disasters such as earthquakes. If we are required
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to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
Adverse
External economic factors, such as changes in the regionalmonetary policy and general economy could reduce our growth rate, impair our ability to collect loans,inflation and generallydeflation, may have a negativean adverse effect on our business, financial condition and results of operations.operations.
Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Board of Governors of the Federal Reserve System, or the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance. Inflation has risen sharply since the end of 2021 and throughout 2022 at levels not seen for over 40 years. Inflationary pressures, while easing recently, remained elevated throughout the first half of 2023. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business clients to repay their loans may deteriorate quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates tend to have a more significant impact on our performance than general levels of inflation or deflation. Interest rates do not necessarily move in the same direction or by the same magnitude as the prices of goods and services.
Risks Related to our Lending Activities
Our loan portfolio possesses increased risk due to a large percentage of consumer loans.
Our consumer loans accounted for $208.7$646.8 million, or 27.0%26.6% of our total gross loan portfolio as of December 31, 2017,2023, of which $130.2$569.9 million (62.4%(88.1% of total consumer loans) consisted of indirect home improvement loans (some of which were not secured by a lien on the real property), $41.0$73.3 million (19.7% of total consumer loans) consisted of solar loans, $35.4 million (17.0%(11.3% of total consumer loans) consisted of marine loans secured by boats, $2.1and $3.5 million (1.0%(0.6% of total consumer loans) consisted of other consumer loans, which includes personal lines of credit, credit cards, automobile, direct home improvement, loans on deposit, and recreational loans. Generally, we consider these types of loans to involve a higher degree of risk compared to first mortgage loans on owner-occupied, one-to-four-family residential properties. As a result of our large portfolio of consumer loans, it may become necessary to increase the level of provision for our loancredit losses on loans, which would reduce profits. Consumer loans generally entail greater risk than do one-to-four-family residential mortgage loans, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles and boats. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance.
Most of our consumer loans are originated indirectly by or through third parties, which presents greater risk than our direct lending products which involves direct contact between us and the borrower. Unlike a direct loan where the borrower makes an application directly to us, in these loans the dealer, who has a direct financial interest in the loan transaction, assists the borrower in preparing the loan application. Although we disburse the loan proceeds directly to the dealer upon receipt of a “completion certificate” signed by the borrower, because we do not have direct contact with the borrower, these loans may be more susceptible to a material misstatement on the loan application or having the loan proceeds being misused by the borrower or the dealer. In addition, if the work is not properly performed, the borrower may cease payment on the loan until the problem is rectified. Most fixture and solar loans have
Although we file a UCC-2 financing statement to perfect the security interest filing; however,in the personal property collateral for most fixture loans, there are no guarantees on our ability to collect on that security interest or that the repossessed collateral for a defaulted fixture loan will provide an adequate source of repayment for the outstanding loan given the limited stand-alone value of used fixtures.
Indirect home improvement and solar loans totaled $171.2 million, or 22.1% of our total gross loan portfolio at December 31, 2017, and are originated through a network of 88 home improvement contractors and dealers located in Washington, Oregon, California, Idaho, and Colorado. At December 31, 2017, the Company had $40.8 million in solar loans to borrowers that reside in California. Adverse economic conditions in California, including an increase in the level of unemployment, or a decline in real estate values could adversely affect the ability of these borrowers to make loan payments to us.
In addition, we rely on six dealers for a majority, or 56.7% of our loan volume so the loss of one of these dealers can have a significant effect on our loan origination volume.collateral. See “Item 1. Business -– Lending Activities -– Consumer Lending” and “-“– Asset Quality”.Quality.”
Our business could suffer if we are unsuccessful in making, continuing, and growing relationships with home improvement contractors and dealers.
Our indirect home improvement lending, which is the largest component of our consumer loan portfolio, is reliant on our relationships with home improvement contractors and dealers. In particular, our indirect home improvement loan operations depend in large part upon our ability to establish and maintain relationships with reputable contractors and dealers who originate loans at the point of sale. Our indirect home improvement contractor/dealer network is currently comprised of 88114active contractors and dealers with businesses located throughout Washington, Oregon, California, Idaho, Colorado, Arizona, Minnesota, Nevada, Texas, Utah, Massachusetts, Montana, and Colorado, with approximately six contractors/dealers responsible for more than half of this loan volume.recently, New Hampshire. Indirect home improvement and solar loans totaled $171.2$569.9 million, or 22.1%23.4% of our total gross loan portfolio, at December 31, 2017,2023, reflecting approximately 14,00030,500 loans with an average balance of approximately $12,000.$19,000.
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We have relationships with home improvement contractors/dealers,dealers; however, the relationships generally are not exclusive, some of them are newly established and they may be terminated at any time. If there is anotherAn economic downturn or recession and contraction of credit to both contractors/dealers and their customers, there could beresult in an increase in business closures and our existing contractor/dealer base could experience decreased sales and loan volume, which may have an adverse effect on our business, results of operations and financial condition. In addition, if a competitor were to offer better service or more attractive loan products to our contractor/dealer partners, it is possible that our partners would terminate their relationships with us or recommend customers to our competitors. If we are unable to continue to grow our existing relationships and develop new relationships, our results of operations and financial condition could be adversely affected. In addition, we rely on five dealers for 65.9% of our loan volume so the loss of one of these dealers can have a significant effect on our loan origination volume.
In the fourth quarter of 2012, we expanded consumer loan originations in California which enabled us to increase annual originations of California consumer loans from $2.5 million in 2012 to $20.2 million in 2017. We have adopted limits on California lending to be no more than 100% of total risk-based capital. At December 31, 2017, the maximum level of California originated consumer loans was $134.0 million. At December 31, 2017, we held $44.7 million of consumer loans to borrowers located in California.
A significant portion of our business involves commercial real estate lending which is subject to various risks that could adversely impact our results of operations and financial condition.
At December 31, 2017,2023, our loan portfolio included $108.1$590.1 million of commercial real estate loans, including $190.6 million secured by non-owner occupied commercial real estate properties, and $223.8 million of multi-family real estate loans, or 14.0%9.2% of our total gross loan portfolio, comparedportfolio. Subject to $93.4 million, or 15.4%, at December 31, 2016. Wemarket demand, we have been increasing and intend to continue to increase, subject to market demand,since 2011, the origination of commercial and multi-family real estate loans. The credit risk related to these types of loans is considered to be greater than the risk related to one-to-four-family residential loans because the repayment of commercial and multi-family real estate loans typically is dependent on the successful operation and income stream of the property securing the loan and the value of the real estate securing the loan as collateral, which can be significantly affected by economic conditions.
Our renewed focus on these types of lendingloans will increase the risk profile relative to traditional one-to-four-family lenders as we continue to implement our business strategy. Although commercial and multi-family real estate loans are intended to enhance the average yield of the earning assets, they do involve a different, and possibly higher, level of risk of delinquency or collection than generally associated with one-to-four-family loans for a number of reasons. Among other factors, these loans involve larger balances to a single borrower or groups of related borrowers. Since commercial real estate and multi-family real estate loans generally have large balances, if we make any errors in judgment in the collectability of these loans, we may need to significantly increase the provision for loancredit losses since any resulting charge‑offs will be larger on a per loan basis. Consequently, this could materially adversely affect our future earnings.
Collateral evaluation for these types of loans also requires a more detailed analysis at the time of loan underwriting and on an ongoing basis. In addition, most of our commercial and multi-family loans are not fully amortizing and include balloon payments upon maturity. Balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. Finally, if foreclosure occurs on a commercial real estate loan, the holding period for the collateral, if any, typically is longer than for a one-to-four-family residence because the secondary market for most types of commercial and multi-family real estate is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these assets. See “Item 1. Business -– Lending Activities -– Commercial Real Estate Lending” of this Form 10‑10–K.
Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may beunpredictable, and the collateral securing these loans may fluctuate in value.
At December 31, 2017,2023, our commercial business loan portfolio included $83.3 million of commercial and industrial loans of $238.3 million, or 10.8%9.8%, and warehouse lending of $17.6 million, or 0.7%, of our total gross loan portfolio, compared to $65.8 million, or 10.9% at December 31, 2016, and warehouse lending of $41.4 million, or 5.3% compared to $32.9 million, or 5.4% at December 31, 2016.portfolio. Commercial business lending involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral-based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. Our commercial and industrial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers’ cash flow may be unpredictable
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and collateral securing these loans may fluctuate in value. This collateral may consist of equipment, inventory, accounts receivable, or other business assets. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing these loans may depreciate over time, may be difficult to appraise, may be illiquid, and may fluctuate in value based on the specific type of business and equipment. As a result, the availability of funds for the repayment of commercial and industrial business loans may be substantially dependent on the success of the business itself, which, in turn, is often dependent in part upon general economic conditions and secondarily on the underlying collateral provided by the borrower. For additional information related to the risks of warehouse lending, see “Our residential mortgage warehouse lending and construction warehouse lending programs are subject to various risks that could adversely impact our results of operations and financial condition.”
We continue to expand
Our residential construction lending which is subject to various risks that could adversely impact our results of operations and financial condition.
We make
Our lending activities include extending real estate construction loans to individuals and builders, primarily for the constructionresidential property development. As of residential properties. We originate these loans whether or not the collateral property underlying the loan is under contract for sale. At December 31, 2017,2023, our construction and development loansloan portfolio totaled $143.1$303.1 million, or 18.5%constituting 12.5% of our total gross loan portfolio, (excluding $78.9excluding $154.6 million of undisbursedin unfunded construction loan commitments), of which $113.1commitments. Of this portfolio, $210.7 million were forwas allocated to residential real estate projects. This comparesAdditionally, we hadfour commercial note-secured lines of credit totaling $57.5 million in commitments, directed towards residential construction re-lenders with an outstanding balance of $17.0 million at December 31, 2023. The risks associated with the collateral underlying our commercial construction warehouse lines are similar to those associated with our residential construction and development loans of $94.5 million, or 15.6% of our total loan portfolio at December 31, 2016, or an increase of 51.5% during the past year. loans.
Construction financing is generally considered to involveinherently involves a higher degree of credit risk thancompared to longer-term financing on improved, owner-occupied real estate.
In general, Factors contributing to elevated risk levels in construction lending involves additional risks becauseinclude advanced disbursement of funds are advanced upon estimates of costs in relation to values associated with the completed project. Construction lending involves additional risks when compared with permanent residential lending because funds are advances upon the collateral for the project based on an estimate ofestimated project costs that will produce ato achieve future value at completion. Because of thecompletion, uncertainties inherent in estimating construction costs as well asand the market value of the complete projectcompleted projects, and the effectsinfluence of governmental regulationregulations on real property it is relatively difficult to evaluate accurately the total funds required to complete awhich may impact project and the completed project loan-to-value ratio.valuations. Changes in demand for new housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated. For these reasons, thisThis type of lending also typically involves higher loan principal amounts and may be concentrated with a small number of builders. A downturn in housing, or the real estate market, could increase delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of the builders we deal with have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss. In addition, during the term of most of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. BecauseAlso, construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, making these loans are more difficult and costly to monitor.
Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchaser’scan substantially increase borrowing costs thereby possiblyfor end-purchasers, potentially reducing the homeowner's ability of homeowners to finance the home upon completioncompleted homes or the overall demand for the project.projects. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs.
Furthermore, in the casea portion of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished project. At December 31, 2017,our outstanding construction and development loans totaled $143.1comprises $131.3 million of which $80.0 million was comprised ofin speculative one-to-four-family construction loans and $11.5$38.5 million ofin land acquisition and development loans. Approximately $4.0 millionloans as of our residentialDecember 31, 2023. Speculative construction loans involve financing projects without a committed buyer in place, relying on market demand upon project completion for sale. Consequently, the success of these loans heavily depends on prevailing market conditions at December 31, 2017 were made to financethe project's completion. Fluctuations in market demand for such properties can significantly impact their salability and subsequent loan repayment. As these projects advance without a predetermined purchaser, completion and subsequent sale are imperative for loan repayment. The absence of a confirmed buyer during the construction of owner-occupied homesphase introduces uncertainty and potential challenges in ensuring a successful project. Land acquisition loans are structured to be converted to permanent loans atoften associated with properties lacking income-generating capabilities. Without income streams from the endproperty, repayment primarily depends on successful development, sale, or lease of the construction phase. Total committed, including unfunded construction and development loans at December 31, 2017 was $222.0 million.
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Loans onland. Unlike developed properties, undeveloped land under development or held for future construction pose additional risks because of thecan be illiquid, meaning it may not readily convert to cash. The lack of income being produced byand potential challenges in liquidating the propertycollateral could impact repayment capabilities in the event of default. Given the inherent uncertainties associated with speculative construction and theland loans, rigorous monitoring practices are essential. Active oversight, continuous evaluation of market conditions, and careful management of these loan types are crucial to mitigate associated risks and minimize potential illiquid nature of the collateral. These risks can be significantly impacted by supplyadverse impacts on our loan portfolio and demand. As a result, this type of lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor themselves to repay principal and interest. No financial standing.
At December 31, 2023, $4.7 million inreal estate construction and development loans were non-performing at December 31, 2017.nonperforming. A materialsubstantial increase in our non-performing construction and developmentnonperforming loans in this segment could have a material adverse effect onsignificantly affect our financial condition and results of operation.operations.
Our residential mortgage warehouse lending and construction warehouse lending programs areprogram is subject to various risks that could adversely impact our results of operations and financial condition.
Our
The Company has a residential mortgage warehouse lending program that focuses on sixthree Pacific Northwest mortgage banking companies. Short termShort-term funding is provided to the mortgage banking companies for the purpose of originating residential mortgage loans for sale into the secondary market. Our warehouse lending lines are secured by the underlying notes associated with mortgage loans made to borrowers by the mortgage banking company and we generally require guarantees from the principleprincipal shareholder(s) of the mortgage banking company. Because these loans are repaid when the note is sold by the mortgage bank into the secondary market, with the proceeds from the sale used to pay down our outstanding loan before being dispersed to the mortgage bank, interest rate fluctuation is also a key risk factor affecting repayment. At December 31, 2017,2023, we had approved residential warehouse lending lines to three companies in varying amounts from $3.0 million to $9.0$10.0 million, with each of the six companies, for an aggregate amount of $35.0$22.0 million. During the year ended December 31, 2017, we processed approximately 1,000 loans and funded approximately $327.6 million under this program. Our residential mortgage warehouse related gross revenues totaled $500,000 for the year ended December 31, 2017. At December 31, 2017,2023, there was $7.4 million in$573,000 outstanding under these residential warehouse lines, outstanding, compared to $7.8 millionno amounts outstanding at December 31, 2016.2022.
The Company also has commercial construction warehouse lines secured by notes on construction loans and typically guaranteed by principles with experience in construction lending. At December 31, 2017, the Company had $84.7 million in approved commercial construction warehouse lending lines for nine companies. The commitments range from $5.0 million to $21.0 million. At December 31, 2017, there was $34.0 million outstanding, compared to $49.0 million approved in commercial warehouse lending lines for eight companies with $25.1 million outstanding at December 31, 2016.
There are numerous risks associated with this type ofresidential mortgage warehouse lending, which include, without limitation, (i) credit risks relating to the mortgage bankers that borrow from us, (ii) the risk of intentional misrepresentation or fraud by any of these mortgage bankers, (iii) changes in the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings under the warehouse line of credit, due to changes in interest rates during the time in warehouse, (iv) unsalable or impaired mortgage loans originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker, and (v) the volatility of mortgage loan originations.
The underlying collateral risks associated with our residential mortgage warehouse lines are similar to the risks related to our one-to-four-family residential mortgage loans. Additionally, the impact of interest rates on our residential mortgage warehouse lending business can be significant. Changes in interest rates can impact the number of residential mortgages originated and initially funded under our residential mortgage warehouse lines of credit and thus our residential mortgage warehouse related revenues and may also impact repayment of our commercial construction warehouse lines. A decline in mortgage rates generally increases the demand for mortgage loans. Conversely, in a constant or increasing rate environment, we would expect fewer loans to be originated.
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land
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represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm non-residential properties, loans for construction, land development and other land, and loans otherwise sensitivesimilar to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The particular focus of the guidance isimpact on exposure to commercial real estate loans that are dependent on the cash flow from the real estate heldour mortgage banking operations as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing.
Based on factor (i) mentioned above, we have concluded that we have a concentration in commercial real estate lending because our total reported loans for construction, land development, and other land at December 31, 2017 represent 100% or more of total capital. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.
Our lending limit may limit growth.
The Board of Directors has implemented a policy lending limit that it believes matches the Washington State legal lending limit. Our policy limits loans to one borrower and the borrower’s related entities to 20% of our unimpaired capital and surplus, or $27.5 million at December 31, 2017. Management has adopted an internal lending limit of a maximum of 80% of the Bank’s legal lending limit for risk mitigation purposes and all loans over this limit require approval from the AQC. These amounts are significantly less than that of many of our competitors and may discourage potential commercial borrowers who have credit needs in excess of our lending limit from doing business with us. The lending limit also impacts the efficiency of our commercial lending operation because it tends to lower the average loan size, which means a higher number of transactions have to be generated to achieve the same portfolio volume. We can accommodate larger loans by selling participations in those loans to other financial institutions, but this strategy is not efficient or always available. We may not be able to attract or maintain clients seeking larger loans or may not be able to sell participations in these loans on terms that are considered favorable.
Revenuediscussed below under “Revenue from mortgage banking operations areis sensitive to changes in economic conditions, decreased economic activity, a slowdown in the housing market, higher interest rates or new legislation and may adversely impact our financial condition and results of operations.”
Our mortgage banking program, which we restarted in the fourth quarter of 2011 in an effort to diversify our revenue streams and to generate additional income is dependent upon our ability to originate and sell loans to investors. Mortgage revenues are primarily generated from gains on the sale of one-to-four-family residential loans underwritten to programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA, USDA Rural Housing, the FHLB, and other non-GSE investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. We sell loans on both a servicing retained and servicing released basis utilizing market execution analysis and customer relationships as the criteria. Any future changes in these programs, our eligibility to participate in these programs, the criteria for loans to be accepted, or laws that significantly affect the activity of these entities could, in turn, materially adversely affect the success of our mortgage banking program and, consequently, our results of operations.
Mortgage loan production levels are sensitive to changes in economic conditions and can suffer from decreased economic activity, a slowdown in the housing market or higher interest rates. Generally, any sustained period of decreased economic activity or higher interest rates could adversely affect mortgage originations and, consequently, adversely affect income from mortgage lending activities.
In the past several years, as a result of government actions and other economic factors related to the economic downturn, interest rates have been at historically low levels. In December 2017, the Federal Reserve slightly increased the targeted Fed Funds rate by 25 basis points for the third time within a year and intends further increases during 2018 subject to economic conditions. As the Federal Reserve increases the Fed Funds rate, refinancing activity typically declines and
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new home purchases may be negatively impacted. To the extent that market interest rates increase in the future, our ability to originate mortgage loans held for sale may decrease, resulting in fewer loans that are available to be sold to investors. This would adversely affect our ability to generate mortgage revenues, and consequently noninterest income. Because interest rates depend on factors outside of our control, we cannot eliminate the interest rate risk associated with our mortgage operations.
Our results of operations will also be affected by the amount of noninterest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense, and other operating costs. If we cannot generate a sufficient volume of loans for sale, our results of operations may be adversely affected. In addition, during periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations.
When we sell or securitize mortgage loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Under these agreements, we may be required to repurchase mortgage loans if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations, and financial condition could be adversely affected.
If our allowance for loan lossesACL on loans is not sufficient to cover actual loan losses, our earnings could be reduced.
While conditions
We maintain our allowance for loan losses at the time a loan is originated or acquired, incorporating a broader range of information and future economic scenarios. The determination of the appropriate level that management considers adequateof the ACL on loans inherently involves a high degree of subjectivity and requires us to absorb probable loan losses based on an analysis of our portfolio and market environment. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses,ACL on loans, we review loans and our historical loss and delinquency experience and evaluate economic conditions. Management also recognizes that significant new growth in loan portfolios, new loan products, and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner.manner and will increase the risk that our ACL may be insufficient to absorb credit losses without significant additional provisions. If our assumptions are incorrect, our allowance for loan lossesACL on loans may not be sufficient to cover actual losses, resulting in additional provisions for loancredit losses on loans to replenish the allowance for loan losses. ACL on loans.
Deterioration in economic conditions, new information regarding existing loans, identification of additional problem loans or relationships, and other factors, both within and outside of our control, may increase our loan charge-offs and/or may also otherwise also require an increase in our provision for loan losses. In addition, the Financial Accounting Standards Board has adopted new accounting standard 2016-13 that will be effective for our first fiscal year after December 15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for credit losses that are probable, which would likely require us to increase our allowance for loan losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations. Management also anticipates any change to our required allowance for loan losses to impact our capital levels in 2020 when the new standards will be adopted. For more on this new accounting standard, see Note 1 of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
Our allowance for loan losses was 1.4% of total gross loans, and 1,035.2% of non-performing loans at December 31, 2017, compared to 1.7% of total gross loans, and 1,416.2% of non-performing loans at December 31, 2016.loans. In addition, bank regulatory agencies periodically review our allowance for loan losses andACL on loans. Based on their assessment, they may require anadditional provisions for credit losses or loan charge-offs. Any increase in the provision for possible loancredit losses or the recognition of further loan charge-offs based on their judgment about information
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available to them at the time of their examination. Any increases in the provision for loan losses will result in a decrease inloans affects net income and may have a material adverse effect oncould materially impact our financial condition, results of operations, and capital.
The unseasoned nature of our commercial business, commercial construction, and commercial real estate portfolios may result in difficulties in judging collectability, which may lead to additional provisions or charge-offs, which would reduce our profits.
As a result of our rapid growth, a significant portion of our loan portfolio at any given time is of relatively recent origin. Typically, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time (which varies by loan duration and loan type), a process referred to as “seasoning.” During the period from January 1, 2012 through December 31, 2017, we originated $1.1 billion of commercial loans, including loans in process, with an outstanding balance of $396.1 million, at December 31, 2017. As a result, a significant portion of the portfolio is relatively unseasoned and some borrowers may not have had sufficient time to perform to properly indicate the magnitude of potential losses. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could have a material adverse effect on our business, financial condition, results of operations, and growth prospects.
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2017, $163.72023, $567.7 million, excluding loans held for sale of $25.7 million, or 21.2%23.3% of our total loan portfolio was secured by first liens on one-to-four-family residential loans and ourloans. Additionally, home equity lines of credit and second lien mortgages totaled $25.3$69.5 million, or 3.3%2.9% of our total loan portfolio.portfolio at that date. These types of loans are generally sensitive to regional and local economic conditions thatfluctuations, significantly impact theimpacting borrowers’ ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values resulting from a downturn in the Washington housing markets, particularly in whichWashington (and to a lesser extent in Oregon), where a concentration of our loans are concentrated mayexist could reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowersupon a default on their loans. Aby the borrower. Economic decline in economic conditions or in the volume ofreduced real estate sales and/or the salesvolume and prices, coupled with elevatedhigher unemployment rates, may result in higher than expectedincrease loan delinquencies or problem assets, and a decline inasset quality concerns, affecting demand for our products and services. In addition, residential loans with highhigher combined loan-to-value ratios will beare more sensitivevulnerable to the fluctuation of property values than thosevalue fluctuations, potentially leading to increased default rates and higher losses, compared to loans with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses.ratios. Further, the majority of our home equity lines of credit consist ofare second mortgage loans. For those home equity lines secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds inIn the event of default on these second mortgage-secured lines of credit, recovering loan proceeds is challenging unless we are prepared to repaycover the first mortgage loan repayment and such repayment and the costs associated with a foreclosure are justified by the value of the property. For these reasons, weThese factors may experiencelead to higher elevated rates of delinquencies, defaults, and related losses, which would adversely affect our net income.
In addition, the Tax Act could negatively impact our customers because it lowers the existing caps on mortgage interest deductions
Nonperforming assets take significant time to resolve and limits the state and local tax deductions. These changes could make it more difficult for borrowers to make their loan payments, could also negatively impact the housing market, which could adversely affect our businessresults of operations and loan growth.financial condition and could result in losses in the future.
Our non-owner occupied commercial real estate loans may expose us to increased credit risk.
At December 31, 2017, $32.52023, our nonperforming assets (which consisted of nonaccrual loans, other real estate owned (“OREO”), and other repossessed assets) were $11.0 million or 4.2%0.4% of total assets. Nonperforming assets adversely affect our total loan portfolio, consisted of loans secured by non-owner occupied commercial real estate properties. Loans secured by non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. Furthermore, some of our non-owner occupied commercial loan borrowers have more than one loan outstanding with us. At December 31, 2017, we had seven non-owner occupied commercial multi-loan relationships, the largest of which had a combined outstanding balance of $3.3 million, with an aggregate outstanding balance of $14.1 million. Consequently, an adverse development with respect to one credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to an owner occupied commercial real estate loan.
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earnings in various ways. We occasionally purchase loans in bulk or “pools.” We may experience lower yields or losses on loan pools because the assumptions we use when purchasing loans in bulk maydo not prove correct.
From time to time, we purchase real estate loans in bulk or “pools.” When we determine the purchase price we are willing to pay to purchase loans in bulk, management makes certain assumptions about, among other things, how fast borrowers will prepay their loans, the real estate market and our ability to collect loans successfully and, if necessary, to dispose of any real estate that may be acquired through foreclosure. When we purchase loans in bulk, we perform certain due diligence procedures and we purchase the loans subject to customary limited indemnities. To the extent that our underlying assumptions prove to be inaccurate or the basis for those assumptions change (such as an unanticipated decline in the real estate market), the purchase price paid for pools of loans may prove to have been excessive, resulting in a lower yield or a loss of some or all of the loan principal. For example, if we purchase pools of loans at a premium and some of the loans are prepaid before we expected we will earn lessrecord interest income on nonaccrual loans or foreclosed assets, thereby adversely affecting our income and increasing our loan administration costs. Upon foreclosure or similar proceedings, we record the purchase than expected. Our success in growing through purchases of loan pools depends on our ability to price loan pools properly and on general economic conditions in the geographic areas where the underlying properties of our loans are located.
Acquiring loans through bulk purchases may involve acquiring loans of a type or in geographic areas where management may not have substantial prior experience. We may be exposed to a greater risk of loss to the extent that bulk purchases contain such loans.
Our securities portfolio may be negatively impacted by fluctuations in market value, changes in the tax code, and interest rates.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. At December 31, 2017, the fair value of our securities portfolio was approximately $82.5 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. Changes in interest rates can have an adverse effect on our financial condition, as our available-for-sale securities are reportedrepossessed asset at their estimated fair value, and therefore are impacted by fluctuations in interest rates. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or individual mortgagors with respect to the underlying securities, and limited investor demand. Our securities portfolio is evaluated quarterly for other-than-temporary impairment (“OTTI”). The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. We increase or decrease our shareholders’ equity by the amount of change in the estimated fair value, of the available-for-sale securities, net of taxes. There can be no assurance that the declines in market value will notless costs to sell, which may result in other-than-temporary impairments of thesea write down or loss. If we experience increases in nonperforming loans and nonperforming assets, our losses and troubled assets could increase significantly, which would lead to accounting charges that could have a material adverse effect on our financial condition and results of operations.
The valuationoperations, as our loan administration costs could increase, each of our investment securities also is influenced by additional external market and other factors, including implementation of Securities and Exchange Commission and Financial Accounting Standards Board guidance on fair value accounting, default rates on residential mortgage securities, changes in the tax code and rating agency actions. Accordingly, there can be no assurance that future declines in the market value of our private label mortgage backed securities or other investment securities will not result in OTTI of these assets and lead to accounting charges thatwhich could have an adverse effect on our results of operations.
New lines of business or new productsnet income and services may subject us to additional risk.
From time to time, we may implement new lines of business or offer new products and services within existing lines of business. Currently, we are expanding existing commercial real estate, commercial business and residential lending programsrelated ratios, such as home improvement loans for consumer solar projects. There are substantial risksreturn on assets and uncertainties associated with these efforts, particularlyequity. A significant increase in instances where the markets are not fully developed. In developinglevel of nonperforming assets from current levels would also increase our risk profile and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be
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achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectivenesscapital levels our regulators believe are appropriate in light of the system of internal controls. Failure to successfully manage these risksincreased risk profile.
While we reduce problem assets through collection efforts, asset sales, workouts and restructurings, decreases in the developmentvalue of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and implementation of new lines of business and/or new products or servicesmarket conditions beyond our control, could have a material adverse effect onadversely affect our business, results of operations, and financial condition.
Our inability to manage our growth or deploy assets profitably could harm our business and decrease our overall profitability, which may cause our stock price to decline.
Our assets and deposit base have grown substantially in recent years, and we anticipate that we will continue to grow over time, perhaps significantly. To manage the expected growth of our operations and personnel, we will be required to manage multiple aspects of the business simultaneously, including among other things: (i) improve existing and implement new transaction processing, operational and financial systems, procedures and controls; (ii) maintain effective credit scoring and underwriting guidelines; (iii) maintain sufficient levels of regulatory capital; and (iv) expand our employee base and train and manage this growing employee base. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the extent we acquireperformance of their other banks and or bank branches, asset pools or deposits we may haveresponsibilities.
Risk Related to manage additional risks such as exposure to potential asset quality issues, disruption to our normal business activities, and diversion of management’s time and attention due to integration and conversion efforts. If we are unable to manage growth effectively or execute integration efforts properly, we may not be able to achieve the anticipated benefits of growth,Changes in which our business, financial condition, and results of operations could be adversely affected.Market Interest Rates
We may not be able to sustain past levels of profitability as we grow, and our past levels of profitability should not be considered a guarantee or indicator of future success. If we are not able to maintain our levels of profitability by deploying growth in our deposits in profitable assets or investments, our net interest margin and overall level of profitability will decrease and our stock price may decline.
Hedging against interest rate exposure may adversely affect our earnings.
We employ techniques that limit, or “hedge,” the adverse effects of rising interest rates on our loans held for sale, and originated interest rate locks to customers. Our hedging activity varies based on the level and volatility of interest rates and other changing market conditions. These techniques may include purchasing or selling forward contracts, purchasing put and call options on securities or securities underlying futures contracts, or entering into other mortgage-backed derivatives. There are, however, no perfect hedging strategies, and interest rate hedging may fail to protect us from loss. Moreover, hedging activities could result in losses if the event against which we hedge does not materialize. Additionally, interest rate hedging could fail to protect us or adversely affect us because, among other things:
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Changes in interest rates may reduce our net interest income and may result in higher defaults in a rising rate environment.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. In an attemptReserve. Since March 2022, in response to helpinflation, the overall economy,Federal Open Market Committee (“FOMC”) of the Federal Reserve has kept interest rates low through its targeted Fed Funds rate. Beginning in December 2016, the Federal Reserve Board increased the Fed Fundstarget range for the federal funds rate by 525 basis points, including 100 basis points during 2023, to a range of 1.25%5.25% to 1.50%. At5.50% as of December 31, 2017, this range was unchanged2023. The FOMC has paused increases to the target federal funds rate but has not ruled out future increases. If the Federal Reserve Board has indicated a likelihood for aFOMC further increase of 25 basis points or more during 2018 subject to economic conditions. As the Federal Reserve increases the Fed Funds rate,targeted federal funds rates, overall interest rates will likely rise, which will negatively impact our net interest income and may negatively impact both the housing marketsmarket by reducing refinancing activity and new home purchases and the U.S. economic recovery.economy.
Changes in monetary policy, including changes in
We principally manage interest rates, could influence not only the interest we receive on loansrate risk by managing our volume and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate and/or sell loans and obtain deposits, (ii) the fair valuemix of our financialearning assets and liabilities, which could negatively impact shareholders’ equity,funding liabilities. If we are unable to manage interest rate risk effectively, our business, financial condition, and our ability to realize gains from the saleresults of such assets, (iii) our ability to obtain and retain deposits in competition with other available investment alternatives, (iv) the ability of our borrowers to repay adjustable or variable rate loans, and (v) the average duration of our investment securities portfolio and other interest-earning assets. If the interest rates paid on deposits and borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings,operations could be adverselymaterially affected.
Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on our interest-earning assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates-up or down-could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our interest-earning assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our interest-bearing liabilities tend to be shorter in duration than our interest-earning assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our interest-earning assets, causing our net interest margin to contract until the yields on interest-earning assets catch up.
Changes in the slope of the “yield curve”, or the spread between short-term and long-term interest rates could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our interest-bearing liabilities tend to be shorter in duration than our interest-earning assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our interest-earning assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely hurt our income.
A sustained increase in market interest rates could adversely affect our earnings. As a result ofis the exceptionally low interest rate environment, an increasing percentage of ourcase with many financial institutions, we attempt to increase core deposits, have been comprised ofthose deposits bearing no or a relatively low rate of interest and having a shorter duration than our assets.with no stated maturity date, which has been challenging over the last couple of years. At December 31,, 2017, 2023, we had $108.1$863.4 million in certificates of deposit that mature within one year and $607.6 million$1.43 billion in non-interestnoninterest bearing, NOW checking, savings and money market accounts. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. In addition, a substantial amount of our residential mortgage loans and home equity lines of credit have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment.
Our net income can also be reduced by the impact that changes in interest rates can have on the fair value of our capitalized servicing rights.MSRs. At December 31, 2017,2023, we serviced $778.9 million$2.83 billion of loans sold to third parties, and the servicing rights associated with such loans had an amortized cost of $6.8$17.2 million and an estimated fair value, at that date, of $8.6$38.2 million. Because the estimated life and estimated income to be derived from servicing the underlying loans generally increase with rising interest rates and decrease with falling interest rates, the value of servicing rightsMSRs generally increases as interest rates rise
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and decreases as interest rates fall. IfFor example, a decrease in mortgage interest rates falltypically increases the prepayment speeds of MSRs and therefore decreases the fair value of the MSRs. Future decreases in mortgage interest rates could decrease the fair value of our capitalized servicing rightsMSRs below their recorded amount, which would decrease we may be requiredour earnings. For additional information, see "Note 1 - Basis of Presentation and Summary of Significant Account Policies - Subsequent Events", “Note 5 – Mortgage Servicing Rights” and “Note 16 – Fair Value Measurements” of the Notes to recognize an additional impairment charge against income for the amount by which amortized cost exceeds estimated fair market value.Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.
Changes in interest rates also affect the value of our interest-earning assets and in particular, our investment securities portfolio. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity.
Changes in interest rates also affect the current market value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At December 31, 2023, the fair value of our investment securities available for sale totaled $292.9 million. Unrealized net losses on these available for sale securities totaled approximately $35.8 million at December 31, 2023 and are reported as a separate component of stockholders’ equity. Decreases in the fair value of securities available for sale in future periods would have an adverse effect on stockholders’ equity.
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -– Asset and Liability Management and Market Risk” of this Form 10‑10–K.
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Revenue from mortgage banking operations is sensitive to changes in economic conditions, decreased economic activity, a slowdown in the housing market, higher interest rates or new legislation and may adversely impact our non-performing assets increase,financial condition and results of operations.
Our mortgage banking operations provide a significant portion of our earnings willnoninterest income. We generate mortgage banking revenues primarily from gains on the sale of one-to-four-family mortgage loans. The one-to-four-family mortgage loans are sold pursuant to programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA, USDA Rural Housing, the FHLB, and non-Government Sponsored Enterprise (“GSE”) investors. These entities account for a substantial portion of the secondary market in residential one-to-four-family mortgage loans. Any future changes in the one-to-four-family programs, our eligibility to participate in these programs, the criteria for loans to be adversely affected.
At December 31, 2017, our non-performing assets (which consistaccepted or laws that significantly affect the activity of non-accruing loans, accruing loans 90 days or more past due, non-accrual investment securities, and OREO and other repossessed assets) were $1.0 million, or 0.1% of total assets. Our non-performing assetssuch entities, could, in turn, materially adversely affect our netresults of operations. Mortgage banking is generally considered a volatile source of income because it depends largely on the level of loan volume which, in various ways:
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If additional borrowers become delinquentturn, depends largely on prevailing market interest rates. In a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in mortgage banking revenues and do not pay their loansa corresponding decrease in noninterest income. In addition, our results of operations are affected by the amount of noninterest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense, and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to successfully managereduce expenses commensurate with the decline in loan originations. In addition, although we sell loans into the secondary market without recourse, we are required to give customary representations and warranties about the loans to the buyers. If we breach those representations and warranties, the buyers may require us to repurchase the loans and we may incur a loss on the repurchase. The Company has recorded a holdback reserve of $2.1 million to cover loss exposure related to these guarantees for one-to-four-family loans sold into the secondary market at December 31, 2023.
Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, rating agency actions in respect to the securities, defaults by the issuer or with respect to the underlying securities, lower market prices for securities and limited investor demand. Our available-for-sale debt securities in an unrealized loss position are evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. If a credit loss exists, an allowance for credit losses is recorded for the credit loss, resulting in a charge against earnings. Changes in interest rates can also have an adverse effect on our non-performingfinancial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available-for-sale are reported as a separate component of AOCI, net of tax. Decreases in the fair value of securities available-for-sale resulting from increases in interest rates could have an adverse effect on shareholders’ equity. There can be no assurance that the declines in market value will not result in credit losses, which would lead to additional provision for credit losses that could have a material adverse effect on our net income and capital levels.
If our hedging against interest rate exposure is ineffective, it could result in volatility in our operating results, including potential losses, which could have a material adverse effect on our results of operations and cash flows.
We employ hedging techniques to mitigate the adverse impacts of rising interest rates on our loans held for sale and interest rate locks provided to customers. Our hedging strategies adapt to varying interest rate levels and market dynamics, utilizing tools such as forward contracts, put and call options on securities, and other mortgage-backed derivatives. However, hedging strategies are not perfect and may not fully shield us from potential losses. The effectiveness of interest rate hedging could be compromised due to several factors, including but not limited to the following:
● | Hedging strategies might not entirely align with the specific interest rate risks they aim to mitigate. |
● | The duration of the hedge may not match the underlying liability’s duration, impacting its effectiveness. |
● | Risks arise from potential defaults or credit downgrades of counterparties involved in hedging transactions, impacting our ability to execute or assign our side of the hedge. |
● | Changes in fair value adjustments mandated by accounting standards can affect the value of derivatives used for hedging, leading to mark-to-market losses. |
● | Mark-to-market losses could reduce our stockholders’ equity. |
We may enter into derivative financial instruments such as interest rate swaps in order to mitigate our interest rate risks. These instruments expose us to several risks:
● | Potential loss due to variations in the spread between the interest rate contract and the hedged item. |
● | Risks related to the counterparty’s inability to fulfill obligations. |
● | Exposure to fluctuations and uncertainties in underlying asset prices due to interest rates and market volatility. |
● | Liquidity risk associated with the ease of buying or selling these instruments. |
Losses on interest rate hedging derivatives could adversely affect our business, financial condition and prospects, leading to decreased net income.
We designate interest rate swaps as effective cash flow hedges under Accounting Standards Codification ("ASC") 815, "Derivatives and Hedging." Regular evaluations measure hedge effectiveness and any ineffectiveness may result from factors such as debt early retirement or counterparty creditworthiness. Ineffective hedges could materially impact our operations and cash flows, causing volatility in our financial results. Additionally, changes in accounting standards related to these derivatives, particularly ASC 815, could significantly increase earnings volatility.
Risks Related to Accounting Matters
We may experience future goodwill impairment, which could reduce our earnings.
In accordance with GAAP, we record assets acquired and liabilities assumed in a business combination at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. As a result, acquisitions typically result in recording goodwill. We perform a goodwill evaluation at least annually to test for goodwill impairment. Our test of goodwill for potential impairment is based on a qualitative assessment by management that takes into consideration macroeconomic conditions, industry and market conditions, cost or margin factors, financial performance and share price. Our evaluation of the fair value of goodwill involves a substantial amount of judgment. If our judgment was incorrect, or if events or circumstances change, and an impairment of goodwill was deemed to exist, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such charge could have a material adverse effect on our results of operations; however, it would have no impact on our liquidity, operations or regulatory capital.
Long-lived assets, such as purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by an asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company had $3.6 million of goodwill at December 31, 2023.
The Company’s reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates, which, if incorrect, could cause unexpected losses in the future.
The Company’s accounting policies and troubledmethods are fundamental to how the Company records and reports its financial condition and results of operations. The Company’s management must exercise judgment in selecting and applying many of these accounting policies and methods, so they comply with generally accepted accounting principles and reflect management’s judgment regarding the most appropriate manner to report the Company’s financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances, yet might result in the Company’s reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting the Company’s financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include, but are not limited to, the ACL on loans, MSRs, derivative and hedging activity, fair value, income taxes, securities and unfunded commitments and acquisition accounting, including valuing assets and liabilities of an acquired company, including intangible assets such goodwill. Because of the uncertainty of estimates involved in these matters, the Company may be required to do one or more of the following: significantly increase the ALC and/or sustain credit losses that are significantly higher than the reserve provided or recognize significant losses on the impairment of goodwill.
For more information, refer to “Critical Accounting Estimates” included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10–K.
Risk Related to Regulatory and Compliance Matters
We may become subject to supervisory actions and enhanced regulation that could increase significantly,have a material adverse effect on our business, reputation, operating flexibility and, financial condition.
Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, state banking regulators, the DFI, the Federal Reserve and separately the FDIC as the insurer of bank deposits, each has the authority to compel or restrict certain actions on our part if any of them determine that we have insufficient capital or are otherwise operating in a manner that may be deemed to be inconsistent with safe and sound banking practices. In addition to examinations for safety and soundness, we and our subsidiaries also are subject to examination by state and federal banking regulators, including the CFPB, for compliance with various laws and regulations, as well as consumer compliance initiatives. As a result of this regulatory oversight and examination process, our regulators may require us to enter into informal or formal supervisory agreements, including board resolutions, memoranda of understanding, written agreements, and consent or cease and desist orders, pursuant to which we could be required to take identified corrective actions to address cited concerns, or to refrain from taking certain actions.
If we become subject to and are unable to comply with the terms of any future regulatory actions or directives, supervisory agreements, or orders, then we could become subject to additional, heightened supervisory actions and orders, possibly including consent orders, prompt corrective action restrictions, and/or other regulatory actions, including prohibitions. If our regulators were to take such additional supervisory actions, then we could, among other things, become subject to significant restrictions on our ability to develop any new business, as well as restrictions on our existing business, The terms of any such supervisory action could have a material negative effect on our business, reputation and operating flexibility.
Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations.
The effects of climate change continue to create an alarming level of concern for the state of the environment. As a result, the global business community has increased its political and social awareness surrounding the issue, and the United States has entered into international agreements in an attempt to reduce global temperatures, such as reentering the Paris Agreement. Further, the U.S. Congress, state legislatures and federal and state regulatory agencies continue to propose initiatives to supplement the global effort to combat climate change. Similar and even more expansive initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. The lack of empirical data surrounding the credit and other financial risks posed by climate change render it difficult, or even impossible, to predict how specifically climate change may impact our financial condition and results of operations; however, the physical effects of climate change may also directly impact us. Specifically, unpredictable and more frequent weather disasters may adversely impact the real property, and/or the value of the real property, securing the loans in our portfolios. Additionally, if insurance obtained by our borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to our borrowers, the collateral securing our loans may be negatively impacted by climate change, natural disasters and related events, which could impact our financial condition and results of operations. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our customers and impact the communities in which we operate. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on our financial condition and results of operations.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts and related regulations require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. Failure to comply with these regulations could result in fines or sanctions. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations. If our policies and procedures are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the denial of regulatory approvals to proceed with certain aspects of our business plan. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations, and growth prospects.
Risks Related to Cybersecurity, Third Parties and Technology
We rely on other companies to provide key components of our business infrastructure.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of our vendors’ performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our business and customers, or cyber-attacks or security breaches of the networks, systems or devices that our customers use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service, attacks, misuse, computer viruses, malware, or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Increases in criminal activity levels and sophistication, advances in computer capabilities, vulnerabilities in third-party technologies (including browsers and operating systems), or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions, and to protect data about us, our customers, and underlying transactions. Any compromise of our security could deter customers from using our internet banking services that involve the transmission of confidential information. Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses to us or our customers, our loss of business and/or customers, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services, or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.
Our security measures may not protect us from system failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While we select third-party vendors carefully, we do not control their actions. If our third-party providers encounter difficulties including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our customers and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of third-party failures and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures, or other disruptions. If any of our third-party service providers experience financial, operational, or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
We are subject to certain risks in connection with our data management or aggregation.
We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management. Our ability to manage data and aggregate data may be limited by the effectiveness of our policies, programs, processes, and practices that govern how data is acquired, validated, stored, protected, and processed. While we continuously update our policies, programs, processes, and practices, many of our data management and aggregation processes are manual and subject to human error or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.
Risks Related to Our Business and Industry Generally
Ineffective liquidity management could adversely affect our financial results and condition.
Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities/withdrawals, payments on our debt obligations as they come due, and other cash commitments under both normal operating conditions and other unpredictable circumstances causing industry or general financial market stress. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources include a downturn in the geographic markets in which our loans and operations are concentrated or difficult credit markets. Our access to deposits may also be affected by the liquidity needs of our depositors. In particular, a majority of our liabilities are checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, a
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substantial majority of our assets are loans, which cannot be called or sold in the same time frame. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future, especially if a large number of our depositors seek to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could materially and adversely affect our business, results of operations, or financial condition. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -– Liquidity” of this Form 10-K.10–K.
Our ability to retain bankers and recruit additional successful bankers is critical to the success of our business strategy and any failure to do so could impair our customer relationships and adversely affect our business and results of operations.
Our ability to retain and grow our loans, deposits, and fee income depends upon the business generation capabilities, reputation, and relationship management skills of our lenders. If we were to lose the services of any of our bankers, including successful bankers employed by banks that wegrowth or future losses may acquire, to a new or existing competitor, or otherwise, we may not be able to retain valuable relationships and some of our customers could choose to use the services of a competitor instead of our services.
Our success and growth strategy also depends on our continued ability to attract and retain experienced loan officers and support staff, as well as other management personnel. We may face difficulties in recruiting and retaining lenders and other personnel of our desired caliber, including as a result of competition from other financial institutions. Competition for loan officers and other personnel is strong and we may not be successful in attracting or retaining the personnel we require. In particular, many of our competitors are significantly larger with greater financial resources, and may be able to offer more attractive compensation packages and broader career opportunities. Additionally, we may incur significant expenses and expend significant time and resources on training, integration and business development before we are able to determine whether a new loan officer will be profitable or effective. If we are unable to attract and retain successful loan officers and other personnel, or if our loan officers and other personnel fail to meet our expectations in terms of customer relationships and profitability, we may be unable to execute our business strategy and our business, financial condition, results of operations, and growth prospects may be negatively affected.
We operate in a highly competitive industry and market area.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources. These competitors primarily include national, regional, and internet banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, mortgage banking finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. A number of out-of-state financial intermediaries have opened production offices or otherwise solicit deposits in our market areas. Additionally, we face growing competition from so-called “online businesses” with few or no physical locations, including online banks, lenders and consumer and commercial lending platforms, as well as automated retirement and investment service providers. Technology has also lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints, may have lower cost structures, and due to their size, may be able to achieve economies of scale resulting in their ability to offer a broader range of products and services, as well as better pricing for those products and services than we can. Increased competition in our markets may result in reduced loans, deposits and commissions and brokers’ fees, as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against current and future competitors. If we are unable to attract and retain banking and mortgage customers, we may be unable to continue to grow our business, and our financial condition and results of operations may be adversely affected.
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Our ability to compete successfully depends on a number of factors including the following:
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Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations. See “Item 1. Business - Competition” of this Form 10‑K.
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that are expected to increase our costs of operations.
We are currently subject to extensive examination, supervision, and comprehensive regulation by the FDIC and the DFI, primarily for the protection of depositors and the DFI. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on an institution’s operations, reclassify assets, determine the adequacy of an institution’s allowance for loan losses, and determine the level of deposit insurance premiums assessed. These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. The current administration has indicated that it would like to see changes made to certain financial reform regulations, including the Dodd-Frank Act, which has resulted in increased regulatory uncertainty, and we are assessing the potential impact on financial and economic markets and on our business. Changes in federal policy and at regulatory agencies are expected to occur over time through policy and personnel changes, which could lead to changes involving the level of oversight and focus on the financial services industry. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. Any new regulations or legislation, change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator’s interpretation of a law or regulation, could have a material impact on our operations, increase our costs of regulatory compliance and of doing business, and/or otherwise adversely affectrequire us and our profitability. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of our operations as could our interpretation of those changes.
As discussed under “Business - How We Are Regulated” in Item 1 of this Form 10‑K, the Dodd-Frank Act significantly changed the bank regulatory structure and affects the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt and implement a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting and implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. It is difficult at this time to predict when or how any new standards will ultimately be applied to us or what specific impact the Dodd-Frank Act and the rules and regulations for implementation (some of which have yet to be written) will have on community banks. However, it is expected that at a minimum, they will increase our operating and compliance costs and will increase our non-interest expense.
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Any other additional changes in our regulation and oversight, whether in the form of new laws, rules, or regulations, could likewise make compliance more difficult or expensive or otherwise materially adversely affect our business, financial condition, or prospects.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate, and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances or that it will adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations, or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
We may need to raise additional capital in the future, and if we fail to maintain sufficientbut that capital whether due to losses, an inability to raise additionalmay not be available when it is needed or the cost of that capital or otherwise, our financial condition, liquidity, and results of operations, as well as our ability to maintain regulatory compliance, wouldmay be adversely affected.exceedingly high.
We face significant capital and other regulatory requirements as a financial institution. Although management believes that funds raised in our secondary offering this year will be sufficient to fund operations and growth initiatives for at least the next twenty-four months based on our estimated future operations, we may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions. We are also required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Importantly, regulatory capital requirements could increase from current levels, which could require us to raise additional capital or contract our operations.
At some point, in the future, we may need to raise additional capital or issue additional debt to support our growth and achieve our long-term business objectives.or replenish future losses. Our ability to raise additional capital or issue additional debt depends on conditions in the capital markets, economic conditions, and a number of other factors, including investor perceptions regarding the banking industry, market conditions, and governmental activities, and on our financial condition and performance. Such borrowings or additional capital, if sought, may not be available to us or, if available, may not be on favorable terms. If additional financing sources are unavailable or are not available on reasonable terms, the Company’s financial condition, results of operations and future prospects could
Accordingly, we cannot make assurances that we will be adversely affected and we may haveable to raise additional capital or issue additional debt if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital or issue additional debt when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected.
In addition, any additional capital we obtain may dilute the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be significantly dilutivesubject to our shareholders.adverse regulatory action.
The Company’s ability to pay dividends and make subordinated debt payments is subject to the ability of the Bank to make capital distributions to the Company.
The Company is a separate legal entity from its subsidiary and does not have significant operations of its own. The long-term ability of the Company to pay dividends to its stockholders and debt payments is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level. The availability of dividends from the Bank is limited by the Bank’s earnings and capital, as well as various statutes and regulations. In the event, the Bank is unable to pay dividends to the Company, the Company may not be able to pay dividends on its common stock or make payments on its outstanding debt. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, and future prospects. At December 31, 2023, FS Bancorp had $9.1 million in unrestricted cash to support dividend and debt payments.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. During the last few years, several banking institutions have received large fines for non-compliance with
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these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations. If our policies and procedures are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the denial of regulatory approvals to proceed with certain aspects of our business plan.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations, and growth prospects.
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Any compromise of our security could also deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures, which could result in significant legal liability and significant damage to our reputation and our business.
Our security measures may not protect us from systems failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any failures or interruptions may require us to identify alternative sources of such services and we cannot make assurances that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor, report, analyze, and control the types of risk to which we are subject to. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among
57
others. We also maintain a compliance program to identify measure, assess, and report on our adherence to applicable laws, policies, and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business, financial condition and results of operations could be materially adversely affected.
We are subject to certain risks in connection with our data management or aggregation.
We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management. Our ability to manage data and aggregate data may be limited by the effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected, and processed. While we continuously update our policies, programs, processes, and practices, many of our data management and aggregation processes are manual and subject to human error or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.
The markets in which the Company operates are subject to the risk of flooding, mudslides, and other natural disasters.
The Company’s offices are located in Washington.Washington and as of February 24, 2023, Oregon. Also, most of the real and personal properties securing the Company’s loans are located in Washington.either Washington isor Oregon which areas are prone to flooding, mudslides, brush fires, earthquakes, and other natural disasters. In addition to possibly sustaining damage to its own properties, if there is a major flood, mudslide, brush fire, earthquake or other natural disaster, the Company faces the risk that many of the Company’s borrowers may experience uninsured property losses, or sustained job interruption and/or loss which may materially impair their ability to meet the terms of their loan obligations. Therefore, a major flood, mudslide, brush fire, earthquake or other natural disaster in Washington could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.
Item 1B. Unresolved Staff Comments
None.
Risk Management Strategy
As a financial institution, cybersecurity presents significant risks. Accordingly, the protection of customer and business information is taken very seriously. Cybersecurity risk management is a component of the Company’s formal Information Security Program. The Information Security Program is incorporated into the Company’s Enterprise Risk Management Program, ensuring a holistic approach to risk prevention, detection, mitigation, and remediation of cybersecurity threats.
The Information Security Program is based on regulation and guidance established by agencies, including but not limited to, the Federal Financial Institutions Counsel (“FFIEC”) and the Federal Deposit Insurance Corporation (“FDIC”). The Information Security Program begins with risk assessment. At least annually, the Company’s Information Security team completes an information security risk assessment in accordance with regulatory guidance. While cyber threats are included in the overall information security risk assessment, a targeted cybersecurity risk assessment is also completed, utilizing the FFIEC Cybersecurity Assessment Tool (“FFIEC CAT”). The FFIEC CAT specifically assesses the maturity and effectiveness of the Bank’s cybersecurity programs. In addition to the FFIEC CAT, the Bank partners with internal and external auditors to conduct various assessments throughout the year to identify, manage, and mitigate cybersecurity risks. The assessments conducted include but are not limited to: vulnerability assessments, penetration testing, social engineering, and onsite security assessments. Risk assessments consider size and complexity, are formally documented, and adapt to changes in the technology and organizational environment. Management and the Board of Directors use risk assessment data to make informed risk management decisions based on a full understanding of the risks. Management and the Board also consider the results of these assessments when overseeing operations. A strong, high-level risk assessment process provides the foundation for more detailed assessments within the functional risk management areas, as well as improves policy and internal control decisions across the organization.
Information Security Risk Assessment
Information security controls result from an effective risk assessment process. The Company identifies, measures, controls, and monitors threats to avoid risks that threaten the safety and soundness of the organization. In accordance with the Gramm-Leach-Bliley Act (GLBA) and FDIC regulation 12 CFR Part 364 Appendix B III B, the objectives of the information security risk assessment include:
● | Identifying reasonably foreseeable internal and external threats that could result in unauthorized disclosure, misuse, alteration, or destruction of customer information or customer information systems. |
● | Assessing the likelihood and potential damage of these threats, taking into consideration the sensitivity of customer information. |
● | Assessing the sufficiency of policies, procedures, customer information systems, and other arrangements in place to control risks. |
Cybersecurity Risk Assessment
Cybersecurity is an integral subset of information security and refers to anything intended to protect enterprises and individuals from intentional attacks, breaches, incidents, and consequences. The foundation of this protection begins with identifying the risk of these threats and assessing the controls in place to mitigate such risks. The Company has included cyber threats in its information security risk assessment in accordance with regulatory guidance and conducts a targeted cyber risk assessment using the FFIEC CAT. Utilizing the FFIEC CAT, the Company’s inherent risk profile is documented along with its maturity level and effectiveness in managing cyber risk.
Both the Information Security Risk Assessment and the FFIEC CAT results are presented to, and approved by, the Audit Committee of the Board of Directors at least annually.
Risk Management Plan
Once risk assessments are complete, a risk management plan is prepared to ensure controls are developed or enhanced to mitigate risks to acceptable levels. The Risk Management Plan is presented to, and approved by, the Audit Committee of the Board of Directors annually and progress on remediation activities is shared quarterly.
Information Security Program
● | Vendor Management. The Company maintains a formally documented Vendor Management Program that includes an information security review of all new and existing third-party vendor relationships. The Vendor Management team ensures initial and ongoing due diligence is performed on all third- party relationships according to policy. Quarterly Vendor Management program updates are provided and the Policy is reviewed and approved annually by the Audit Committee of the Board of Directors. |
● | Implementation of a multi-faceted threat intelligence gathering process. The Information Security and Information Technology teams subscribe to several threat intelligence news feeds and regularly attend cybersecurity threat intelligence webinars, trainings, and peer groups. Information on threat gathering is included in a quarterly report to the Board of Directors. |
● | Implementation of a multi-layered defense strategy to fortify information protection. Technical, physical, and administrative control redundancies are deployed to ensure multiple layers of protection are in place against cyber threats. Control design and operating effectiveness is tested regularly by independent audit firms and reported to senior management and the Audit Committee of the Board of Directors. |
● | Comprehensive security awareness training and testing for all bank employees. Various communication strategies to communicate new and existing cybersecurity threats are used. Employees receive regular virtual and in-person security awareness training through simulated tests, online training courses, company communications, and in-person training and testing events. Training and testing efforts are included in the quarterly update to the Board of Directors. |
● | Incident Response. A comprehensive Incident Response Plan has been developed and tested. The Plan contains information for employees to ensure they can recognize, investigate, communicate, prevent, and document an incident that threatens the confidentiality, integrity, or availability of information or systems. All incidents are reported to, and the Plan is reviewed and approved by, the Audit Committee of the Board of Directors. |
● | Independent Audit and Testing. The Company’s Audit Department schedules and oversees a regular review of program design and effectiveness by independent third-party audit firms that specialize in technology and cybersecurity. Results are reported directly to senior management and the Audit Committee of the Board of Directors. |
● | Remediation Tracking. Remediation and tracking sheets are developed for all audit and assessment results. Progress is monitored by the Audit Department and reported to the Audit Committee of the Board of Directors regularly. |
Governance
The Company’s Board of Directors provides active oversight of cybersecurity threats in accordance with the Board-approved Information Security Policy and Program. Direct oversight of the Program is delegated to the Audit Committee of the Board of Directors. The Audit Committee has an established risk appetite statement that defines the Company’s risk acceptance tolerance. The Audit Committee reviews and approves the Risk Appetite statement annually. The Audit Committee also plays a critical role in overseeing the Bank’s efforts to develop, implement, and maintain an effective Information Security Program. With direction and oversight by the Audit Committee, the Bank’s Chief Risk Officer (“CRO”) oversees the enterprise-wide risk management program, and the Chief Information Officer (“CIO”) is the Board-appointed Information Security Officer, responsible for the Information Security Program, including cybersecurity. The CRO and CIO report cybersecurity related matters directly to the Audit Committee.
The Information Security team, engaged in enterprise-wide cybersecurity strategy, policy, standards, architecture, and processes, ensures a complete approach to safeguarding the confidentiality, integrity, and availability of sensitive information. The Information Security team consists of experienced information security professionals and is led by the CIO. The CIO has more than 25 years of information technology and banking leadership experience and holds a Certified Information Systems Security Professional (“CISSP”) designation. Reporting to the CIO is the Information Security Manager who has more than 10 years of cybersecurity experience in the Financial Institution industry and possesses a master’s degree in information systems management with an emphasis in cybersecurity. Complementing the independent Information Security team, is the Information Technology (IT) team. The IT System Administration & Engineering Manager has over seven years financial institution technology experience and a master’s degree in information systems management with a cybersecurity management specialization and the Systems Support Manager has over 20 years of financial institution technology experience, ensuring technology operations occur with a security-focused mindset. In addition to experienced information security and information technology teams, the Company engages with industry experts for managed security services. This collaborative effort includes threat intelligence gathering, firewall management, intrusion detection system monitoring, intrusion prevention services, and security information and event management monitoring, ensuring round-the-clock protection.
The Vendor Management team ensures compliance with the organization’s Vendor Management Policy, including initial and ongoing due diligence of all third-party providers.
Risk assessments and risk management plans are developed, communicated, and tracked. Annually, the CIO presents the Information Security Risk Assessment to the IT Steering Committee and to the Audit Committee of the Board of Directors for review and approval. Quarterly, the CIO provides an Information Security Risk Management Plan status report to the Audit Committee and an Information/Cybersecurity Status report to the full Board of Directors. Reports encompass internal information and cybersecurity assessments, business continuity plans, disaster recovery measures, incident response planning and testing, patch management and vendor management program statuses, as well as internal self-audit results. The information security risk assessment and updates on projects aimed at fortifying information security systems and emerging cybersecurity threat insights are communicated to the Audit Committee, maintaining transparency, and ensuring informed decision-making. Annual review and approval of information security-related policies by the Audit Committee underscore our commitment to governance and regulatory compliance.
Audits and testing of program effectiveness are coordinated by the Company’s Senior Vice President of Audit who oversees the Audit Department and reports to the Audit Committee of the Board of Directors, independent of the technology and cybersecurity functions. The Audit Department utilizes independent third-party audit firms with technology and cybersecurity expertise. Results of all audits and independent assessments are delivered directly to senior management and the Audit Committee of the Board of Directors by the SVP of Audit.
The Information Security team serves as the Bank’s dedicated cybersecurity incident response team. Cybersecurity incident response is a sub-section of the Bank’s Incident Response Plan. The Information Security team handles the technical aspects of the Bank’s response to a cybersecurity incident. Escalation instructions are included in the Plan for engaging resources outside the Information Security team. The Board is notified immediately of cybersecurity incidents, as per the incident response instructions.
Cybersecurity Incidents
As of the reporting period, the Company has not experienced any material cybersecurity events or incidents. Although third-party service providers have encountered cybersecurity events or incidents, these occurrences have not resulted in a material impact on our systems, computing environments, or data.
At December 31, 2017,2023, the Company had one mainmaintained a headquarters office in Mountlake Terrace, Washington, an administrative office one free-standing ATM, five stand-alonein Aberdeen, Washington, 27 full-service bank branches, and 13 loan production offices, and 11 full-service bank branches with an aggregate net book value of $15.5$30.6 million. The following table sets forth certainCompany owns its headquarters office, its administrative office and 20 of its 27 branch offices. The remaining branch offices and the seven stand-alone loan production offices are leased facilities. The lease terms for our branch and loan production offices are not individually material. The Company’s leases have remaining lease terms of three months to 6.5 years, some of which include options to extend the leases for up to five years. In the opinion of management, all properties are adequately covered by insurance, are in a good state of repair and are suitable for the Company’s needs. For additional information concerning the properties at December 31, 2017. See also Notesee “Note 6 – Premises and Equipment” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10‑10–K. In the opinion of management, the facilities are adequate and suitable for the Company’s needs.
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| Square |
| Owned or |
| Lease |
| Net Book Value at | |
Location |
| Footage |
| Leased |
| Expiration Date |
| December 31, 2017(1) | |
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Capitol Hill |
| 5,100 |
| Leased |
| December 2022 (2) |
| $ | 413 |
614 Broadway East |
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Seattle, WA 98102 |
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58
Edmonds |
| 2,474 |
| Owned |
| — |
| $ | 1,196 |
620 Edmonds Way |
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Edmonds, WA 98020 |
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Hadlock |
| 1,755 |
| Owned |
| — |
| $ | 412 |
10 Old Oak Bay Rd |
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Hadlock, WA 98339 |
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Kingston (ATM) |
| 50 |
| Leased |
| December 2021 (3) |
| $ | 105 |
8215 NE State Hwy 104 |
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Kingston, WA 98346 |
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Lynnwood |
| 3,000 |
| Leased |
| June 2020 |
| $ | 64 |
19002 33rd Ave W |
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Lynnwood, WA 98036 |
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Mill Creek (Banking and Home Lending) |
| 2,894 |
| Leased |
| April 2020 (2) |
| $ | 254 |
15224 Main St, Suite 105 |
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Mill Creek, WA 98012 |
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Mountlake Terrace (Administrative) |
| 39,535 |
| Owned |
| — |
| $ | 6,858 |
6920 220th St SW |
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Mountlake Terrace, WA 98043 |
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Mountlake Terrace (Lending)(7) |
| 9,980 |
| Leased |
| July 2027 (2) |
| $ | 396 |
6100 219th St SW, Suite 400 |
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Mountlake Terrace, WA 98043 |
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Overlake |
| 2,331 |
| Leased |
| May 2021 (5) |
| $ | 27 |
14808 NE 24th St, Suite D |
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Redmond, WA 98052 |
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Port Angeles |
| 2,267 |
| Owned (6) |
| — |
| $ | 402 |
134 W 8th St |
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Port Angeles, WA 98362 |
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Port Townsend |
| 10,157 |
| Leased |
| September 2019 (4) |
| $ | 140 |
734 Water St |
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Port Townsend, WA 98368 |
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Poulsbo (Banking and Home Lending) |
| 3,498 |
| Owned |
| — |
| $ | 2,709 |
21650 Market Place |
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Poulsbo, WA 98370 |
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Puyallup |
| 2,474 |
| Owned |
| — |
| $ | 1,217 |
307 W Stewart St |
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Puyallup, WA 98371 |
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Sequim |
| 8,866 |
| Owned |
| — |
| $ | 958 |
114 S Sequim Ave |
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Sequim, WA 98382 |
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Bellevue Home Lending |
| 4,068 |
| Leased |
| March 2023 (5) |
| $ | 2 |
1110 112th Ave NE, Suite 310 |
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Bellevue, WA 98004 |
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Everett Home Lending |
| 3,020 |
| Leased |
| December 2021 (5) |
| $ | 132 |
2825 Colby Ave, Suite 205 |
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Everett, WA 98201 |
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Port Orchard Home Lending |
| 1,000 |
| Leased |
| May 2020 |
| $ | 27 |
450 Port Orchard Blvd, Suite 300 |
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Port Orchard, WA 98366 |
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Puyallup Home Lending |
| 3,389 |
| Leased |
| June 2019 (5) |
| $ | 27 |
2910 S Meridian, Suite 180 |
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Puyallup, WA 98373 |
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Tri-Cities Home Lending |
| 5,477 |
| Leased |
| March 2020 (2) |
| $ | 119 |
8486 West Gage Blvd, Suite A |
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Kennewick, WA 99336 |
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The Company maintains depositor and borrower customer files on an on-line basis, utilizing a telecommunications network, portions of which are leased. The book value of all data processing and computer equipment utilized by the Company at December 31, 20172023 was $1.1$1.6 million. Management has a business continuity plan in place with respect to the data processing system, as well as the Company’s operations as a whole.
Because of the nature of our activities, the Company is subject to various pending and threatened legal actions, which arise in the ordinary course of business. From time to time, subordination liens may create litigation which requires us to defend our lien rights. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on our financial position.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on The NASDAQ Stock Market LLC’s Global Market, under the symbol “FSBW”.“FSBW.” At December 31, 2017,2023, there were 3,680,152 shares of common stock issued and outstanding and approximately 135198 shareholders of record based upon securities position listings furnished to us by our transfer agent. This total does not reflect the number of persons or entities who hold stock in nominee or “street name” accounts with brokers.
Common shares outstanding of 3,539,626 were calculated using shares outstanding of 3,680,152 at December 31, 2017, less 36,482 restricted stock shares, and 103,684 unallocated ESOP shares. Common shares of 2,861,135 were calculated using shares outstanding at period end of 3,059,503 at December 31, 2016, less 68,763 restricted stock shares, and 129,605 unallocated ESOP shares.
The tables below show the high and low closing prices and quarterly cash dividends for our common stock for the periods indicated.
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| Cash dividends | |
Year Ended December 31, 2017 |
| High |
| Low |
| declared and paid | |||
First quarter |
| $ | 38.90 |
| $ | 34.91 |
| $ | 0.10 |
Second quarter |
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| 45.85 |
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| 37.00 |
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| 0.11 |
Third quarter |
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| 53.10 |
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| 42.70 |
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| 0.11 |
Fourth quarter |
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| 57.87 |
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| 50.27 |
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| 0.11 |
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| Cash dividends | |
Year Ended December 31, 2016 |
| High |
| Low |
| declared and paid | |||
First quarter |
| $ | 26.28 |
| $ | 23.21 |
| $ | 0.07 |
Second quarter |
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| 26.00 |
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| 24.41 |
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| 0.10 |
Third quarter |
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| 29.50 |
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| 25.26 |
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| 0.10 |
Fourth quarter |
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| 37.94 |
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| 28.00 |
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| 0.10 |
1st Security Bank of Washington is a wholly-owned subsidiary of FS Bancorp. Under federal regulations, the dollar amount of dividends 1st Security Bank of Washington may pay to FS Bancorp depends upon its capital position and recent net income. Generally, if 1st Security Bank of Washington satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed by state law and FDIC regulations. See “Item 1. Business -– How We Are Regulated -– Regulation of 1st Security Bank of Washington -– Dividends” and “Regulation and Supervision of FS Bancorp -– Restrictions on Dividends and Stock Repurchases”.Repurchases.”
The
Our cash dividend policy is reviewed by management and the Board of Directors. Any dividends declared and paid in the future would depend upon a number of factors including capital requirements, the Company’s financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. Our future payment of dividends may depend, in part, upon receipt of dividends from the Bank, which are restricted by federal regulations. Management’s projections show an expectation that cash dividends will continue for the foreseeable future.
Stock Repurchases. There were no
Issuer Purchases of Equity Securities. The following table summarizes common stock repurchases byduring the quarter ended December 31, 2023:
Maximum | ||||||||||||||||
Total Number | Dollar Value of | |||||||||||||||
of Shares | Shares that | |||||||||||||||
Average | Repurchased as | May Yet Be | ||||||||||||||
Total Number | Price | Part of Publicly | Repurchased | |||||||||||||
of Shares | Paid per | Announced | Under the | |||||||||||||
Period | Purchased | Share | Plan or Program | Plan or Program | ||||||||||||
October 1, 2023 - October 31, 2023 | 3,172 | $ | 28.99 | 3,172 | $ | 4,569,836 | ||||||||||
November 1, 2023 - November 30, 2023 | 29,162 | 30.52 | 29,162 | 3,679,708 | ||||||||||||
December 1, 2023 - December 31, 2023 | — | — | — | — | ||||||||||||
Total for the quarter | 32,334 | $ | 30.37 | 32,334 | $ | 3,679,708 | ||||||||||
On August 15, 2023, the Company duringpublicly announced that its Board of Directors approved a stock repurchase program, authorizing the fourth quarter 2017. repurchase up to $5.0 million of Company common stock, representing approximately 2.5% of its outstanding shares as of that date. The repurchase may be executed, from time to time, in the open market, through privately negotiated transactions, or by withholding shares upon the exercise of equity awards, over a 12-month period until July 31, 2024. The actual timing, price, and number of shares repurchased under the program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, price, general business and market conditions, and alternative investment opportunities. The share repurchase program does not obligate the Company to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time.
Equity Compensation Plan Information.The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this report is incorporated herein by reference.
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Performance Graph. The following graph compares the cumulative total shareholder return on the Company’s common stock with the cumulative total return on the NASDAQ S&P 500 Index (U.S. Stock), SNL and S&P U.S. Bank NASDAQ Index, and the SNL ThriftSmallCap Banks Index. Total return assumes the reinvestment of all dividends and that the value of common stock and bank index was $100 on December 31, 2012.2018.
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Index |
| 12/31/12 |
| 12/31/13 |
| 12/31/14 |
| 12/31/15 |
| 12/31/16 |
| 12/31/2017 |
FS Bancorp, Inc. |
| 100.00 |
| 133.39 |
| 143.87 |
| 207.39 |
| 290.78 |
| 446.69 |
S&P 500 |
| 100.00 |
| 132.39 |
| 150.51 |
| 152.59 |
| 170.84 |
| 208.14 |
SNL Bank $500M-$1B |
| 100.00 |
| 129.67 |
| 142.26 |
| 160.57 |
| 216.81 |
| 264.51 |
SNL Thrift $500M-$1B |
| 100.00 |
| 122.91 |
| 143.41 |
| 170.78 |
| 212.70 |
| 267.23 |
Index | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 | ||||||||||||||||||
FS Bancorp, Inc. | $ | 100.00 | $ | 150.66 | $ | 131.95 | $ | 164.65 | $ | 168.64 | $ | 192.43 | ||||||||||||
S&P 500 Index | 100.00 | 131.49 | 155.68 | 200.37 | 164.08 | 207.21 | ||||||||||||||||||
S&P U.S. SmallCap Banks Index | 100.00 | 125.46 | 113.94 | 158.62 | 139.85 | 140.55 | ||||||||||||||||||
Item 6. Selected Financial Data
The following table sets forth certain information concerning the Company’s consolidated financial position and results of operations at and for the dates indicated and have been derived from the audited consolidated financial statements. The information below is qualified in its entirety by the detailed information included elsewhere herein and
should be read along with “ItemItem 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data”.Operations
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| At December 31, | |||||||||||||
(In thousands) |
| 2017 |
| 2016 |
| 2015 |
| 2014 |
| 2013 | |||||
Selected Financial Condition Data: |
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Total assets |
| $ | 981,783 |
| $ | 827,926 |
| $ | 677,561 |
| $ | 509,754 |
| $ | 419,187 |
Loans receivable, net(1) |
|
| 761,558 |
|
| 593,317 |
|
| 502,535 |
|
| 387,174 |
|
| 281,081 |
Loans held for sale, at fair value |
|
| 53,463 |
|
| 52,553 |
|
| 44,925 |
|
| 25,983 |
|
| 11,185 |
Securities available-for-sale, at fair value |
|
| 82,480 |
|
| 81,875 |
|
| 55,217 |
|
| 48,744 |
|
| 56,239 |
FHLB stock, at cost |
|
| 2,871 |
|
| 2,719 |
|
| 4,551 |
|
| 1,650 |
|
| 1,702 |
Deposits |
|
| 829,842 |
|
| 712,593 |
|
| 485,178 |
|
| 420,444 |
|
| 336,876 |
Borrowings |
|
| 7,529 |
|
| 12,670 |
|
| 98,769 |
|
| 17,034 |
|
| 16,664 |
Subordinated note, net |
|
| 9,845 |
|
| 9,825 |
|
| 9,805 |
|
| — |
|
| — |
Total stockholders’ equity |
|
| 122,002 |
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| 81,033 |
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| 75,340 |
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| 65,836 |
|
| 62,313 |
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| Year Ended December 31, | |||||||||||||
(In thousands) |
| 2017 |
| 2016 |
| 2015 |
| 2014 |
| 2013 | |||||
Selected Operations Data: |
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Total interest and dividend income |
| $ | 46,181 |
| $ | 38,020 |
| $ | 31,707 |
| $ | 24,842 |
| $ | 21,733 |
Total interest expense |
|
| 4,933 |
|
| 4,163 |
|
| 3,658 |
|
| 2,702 |
|
| 2,178 |
Net interest income |
|
| 41,248 |
|
| 33,857 |
|
| 28,049 |
|
| 22,140 |
|
| 19,555 |
Provision for loan losses |
|
| 750 |
|
| 2,400 |
|
| 2,250 |
|
| 1,800 |
|
| 2,170 |
Net interest income after provision for loan losses |
|
| 40,498 |
|
| 31,457 |
|
| 25,799 |
|
| 20,340 |
|
| 17,385 |
Service charges and fee income |
|
| 3,548 |
|
| 3,391 |
|
| 1,977 |
|
| 1,762 |
|
| 1,807 |
Gain on sale of loans |
|
| 17,985 |
|
| 19,058 |
|
| 14,672 |
|
| 7,577 |
|
| 6,371 |
Impairment of long-lived assets |
|
| — |
|
| — |
|
| — |
|
| (9) |
|
| — |
Gain (loss) on sale of investment securities |
|
| 380 |
|
| 146 |
|
| 76 |
|
| (41) |
|
| 264 |
Gain on sale of mortgage servicing rights |
|
| 1,062 |
|
| — |
|
| — |
|
| — |
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| — |
Earnings on cash surrender value of BOLI |
|
| 274 |
|
| 282 |
|
| 216 |
|
| 187 |
|
| 83 |
Other noninterest income |
|
| 825 |
|
| 692 |
|
| 652 |
|
| 557 |
|
| 390 |
Total noninterest income |
|
| 24,074 |
|
| 23,569 |
|
| 17,593 |
|
| 10,033 |
|
| 8,915 |
Total noninterest expense |
|
| 43,993 |
|
| 38,923 |
|
| 29,643 |
|
| 23,902 |
|
| 20,361 |
Income before provision for income taxes |
|
| 20,579 |
|
| 16,103 |
|
| 13,749 |
|
| 6,471 |
|
| 5,939 |
Provision for income taxes |
|
| 6,494 |
|
| 5,604 |
|
| 4,873 |
|
| 1,931 |
|
| 2,019 |
Net income |
| $ | 14,085 |
| $ | 10,499 |
| $ | 8,876 |
| $ | 4,540 |
| $ | 3,920 |
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63
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| At or For the |
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| Year Ended December 31, |
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Selected Financial Ratios and Other Data |
| 2017 |
| 2016 |
| 2015 |
| 2014 |
| 2013 |
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Performance ratios: |
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Return on assets (ratio of net income to average total assets) |
|
| 1.53 | % |
| 1.31 | % |
| 1.52 | % |
| 1.00 | % |
| 1.01 | % |
Return on equity (ratio of net income to average equity) |
|
| 14.80 |
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| 13.84 |
|
| 12.73 |
|
| 7.19 |
|
| 6.43 |
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Yield on average interest-earning assets |
|
| 5.21 |
|
| 4.97 |
|
| 5.67 |
|
| 5.74 |
|
| 5.93 |
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Rate paid on average interest-bearing liabilities |
|
| 0.76 |
|
| 0.74 |
|
| 0.83 |
|
| 0.80 |
|
| 0.77 |
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Interest rate spread information: |
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Average during period |
|
| 4.45 |
|
| 4.23 |
|
| 4.84 |
|
| 4.94 |
|
| 5.16 |
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Net interest margin(1) |
|
| 4.65 |
|
| 4.43 |
|
| 5.01 |
|
| 5.12 |
|
| 5.33 |
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Operating expense to average total assets |
|
| 4.76 |
|
| 4.87 |
|
| 5.07 |
|
| 5.27 |
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| 5.27 |
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Average interest-earning assets to average |
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interest-bearing liabilities |
|
| 136.88 |
|
| 135.96 |
|
| 127.09 |
|
| 128.30 |
|
| 129.73 |
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Efficiency ratio(2) |
|
| 67.35 |
|
| 67.78 |
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| 64.95 |
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| 74.29 |
|
| 71.52 |
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Margin on loans sold (3) |
|
| 2.50 |
|
| 2.64 |
|
| 2.58 |
|
| 2.31 |
|
| 2.37 |
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Asset quality ratios: |
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Non-performing assets to total assets at end of period(4) |
|
| 0.11 | % |
| 0.09 | % |
| 0.15 | % |
| 0.08 | % |
| 0.77 | % |
Non-performing loans to total gross loans(5) |
|
| 0.13 |
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| 0.12 |
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| 0.20 |
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| 0.11 |
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| 0.38 |
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Allowance for loan losses to non-performing loans(5) |
|
| 1,035.23 |
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| 1,416.23 |
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| 765.49 |
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| 1,406.47 |
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| 462.49 |
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Allowance for loan losses to gross loans receivable |
|
| 1.39 |
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| 1.69 |
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| 1.52 |
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| 1.54 |
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| 1.77 |
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Capital ratios: |
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Equity to total assets at end of period |
|
| 12.43 | % |
| 9.79 | % |
| 11.12 | % |
| 12.92 | % |
| 14.87 | % |
Average equity to average assets |
|
| 10.30 |
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| 9.49 |
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| 11.94 |
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| 13.92 |
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| 15.78 |
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Other data: |
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Number of full service offices |
|
| 11 |
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| 11 |
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| 7 |
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| 7 |
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| 7 |
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Full-time equivalent employees |
|
| 326 |
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| 306 |
|
| 239 |
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| 209 |
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| 158 |
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Net income per common share: |
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Basic |
| $ | 4.55 |
| $ | 3.63 |
| $ | 2.98 |
| $ | 1.52 |
| $ | 1.29 |
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Diluted |
| $ | 4.28 |
| $ | 3.51 |
| $ | 2.93 |
| $ | 1.52 |
| $ | 1.29 |
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Book values: |
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Book value per common share |
| $ | 34.47 | (10) | $ | 28.32 | (9) | $ | 25.18 | (8) | $ | 22.48 | (7) | $ | 20.55 | (6) |
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64
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto that appear in Item 88. of this Form 10‑10–K. The information contained in this section should be read in conjunction with these Consolidated Financial Statements and footnotes and the business and financial information provided in this Form 10‑10–K.
Overview
FS Bancorp Inc. and its subsidiary bank, 1st Security Bank, of Washington have been serving the Puget Sound area since 1936.1907. Originally chartered as a credit union, previously known as Washington’s Credit Union, the credit union served various select employment groups. On April 1, 2004, the credit union converted to a Washington state-chartered mutual savings bank. On July 9, 2012, the Bank converted from mutual to stock ownership and became the wholly owned subsidiary of FS Bancorp, Inc.Bancorp.
The Company is relationship-driven, delivering banking and financial services to local families, local and regional businesses and industry niches within distinctin suburban communities in the greater Puget Sound area, communities, and one loan production office located inthe Kennewick-Pasco-Richland metropolitan area of Washington, also known as the Tri-Cities, Washington. Goldendale, Vancouver, and White Salmon, Washington and Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon.
On January 22, 2016,February 24, 2023, the Company completed the previously announced Branch Purchaseits purchase of seven retail bank branches from Columbia State Bank of America, N.A(the “Branch Acquisition”) and acquired $186.4approximately $425.5 million in deposits and $419,000$66.1 million in loans based on financial information at that date.loans. The fourseven acquired branches are located in the communities of Port Angeles, Sequim, Port Townsend,Goldendale and Hadlock, Washington.White Salmon, Washington, and Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon. The Branch PurchaseAcquisition expanded our Puget Sound-focused retail footprint ontointo southeast Washington and the Olympic Peninsula and providedstate of Oregon as well as providing an opportunity to extend our unique brand of community banking into those communities.
The Company also maintains its long-standing indirect consumer lending platform which operates primarily throughout the West Coast.Western United States. The Company emphasizes long-term relationships with families and businesses within the communities served, working with them to meet their financial needs. The Company is also actively involved in community activities and events within these market areas, which further strengthens our relationships within those markets.
The Company focuses onCompany's strategic focus involves diversifying revenues, expanding lending channels, and growingenhancing the banking franchise. Management remains focused on building diversifiedis committed to establishing varied revenue streams based uponconsidering credit, interest rate, and concentration risks. OurThe business plan remains as follows:includes:
● |
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● | Maintaining strong asset quality; |
● |
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| ● | Capturing |
| ● | Expanding |
The Company is
As a diversified lender, with a focus on the origination of indirect home improvement loans, also referred to as fixture securedCompany specializes in originating one-to-four-family loans, commercial real estate mortgagemortgages, second mortgages, consumer loans, homemarine lending, and commercial business loans. At December 31, 2023, the Company's loan portfolio included real estate loans, consumer loans, and commercial business loans representing 63.0%, 26.6%, and second mortgage/home equity10.5% of the total loan products. Consumer loans, in particular indirect home improvementportfolio, respectively.
Fixture secured loans to finance window, replacement, gutter, replacement, siding replacement, solar panels, spas, and other improvement renovations isare a large portionsegment of the consumer loan portfolioportfolio. These fixture-secured consumer loans are dependent on the Company's contractor/dealer network of 114 active dealers located throughout Washington, Oregon, California, Idaho, Colorado, Nevada, Arizona, Minnesota, Texas, Utah, Massachusetts, Montana, and have traditionally beenrecently, New Hampshire. Five of these contractor/dealers were responsible for 65.9% of the mainstaydollar volume of our lending strategy. Atfunded loans for the year ended December 31, 2017, consumer loans represented 27.0%2023. To address concentration risks, management has consolidated any dealers owned by the same corporate entity under that entity as of the Company’s total gross loan portfolio, down from 28.9% at December 31, 2016,2023, rather than treating them as real estate loan originations have increased at a faster pace thanseparate dealers. The Company funded $205.3 million, or approximately 9,000 loans in the fixture-secured consumer loan originationscategory during the year ended December 31, 2017.2023.
Indirect home improvement lending is dependent on
The following table details fixture secured loan originations by state for the Bank’s relationships with home improvement contractors and dealers. periods indicated:
(Dollars in thousands) | For the Year Ended | For the Year Ended | ||||||||||||||
December 31, 2023 | December 31, 2022 | |||||||||||||||
State | Amount | Percent | Amount | Percent | ||||||||||||
Washington | $ | 72,166 | 35.1 | % | $ | 102,981 | 32.7 | % | ||||||||
Oregon | 48,831 | 23.8 | 73,110 | 23.2 | ||||||||||||
California | 34,219 | 16.7 | 59,175 | 18.8 | ||||||||||||
Idaho | 13,787 | 6.7 | 22,744 | 7.2 | ||||||||||||
Colorado | 7,442 | 3.6 | 14,584 | 4.6 | ||||||||||||
Arizona | 5,846 | 2.8 | 5,029 | 1.6 | ||||||||||||
Nevada | 4,697 | 2.3 | 4,869 | 1.5 | ||||||||||||
Minnesota | 8,312 | 4.0 | 28,503 | 9.1 | ||||||||||||
Texas | 1,685 | 0.8 | 572 | 0.2 | ||||||||||||
Utah | 5,062 | 2.5 | 2,674 | 0.9 | ||||||||||||
Massachusetts | 778 | 0.4 | 137 | — | ||||||||||||
Montana | 2,200 | 1.1 | 577 | 0.2 | ||||||||||||
New Hampshire | 322 | 0.2 | — | — | ||||||||||||
Total fixture secured loans | $ | 205,347 | 100.0 | % | $ | 314,955 | 100.0 | % | ||||||||
The Company funded $92.8originates one-to-four-family residential mortgage loans through referrals from real estate agents, financial planners, builders, and from existing customers. Retail banking customers are also an important source of the Company’s loan originations. The Company originated $527.7 million or approximately 6,000of one-to-four-family loans (which included loans held for sale, loans held for investment and second lien mortgages classified as home equity loans) in addition to $15.9 million of loans brokered to other institutions through the home lending segment during the year ended December 31, 2017,
65
using its indirect home improvement contractor/dealer network located throughout Washington, Oregon, California, Idaho, and Coloradowhich $408.0 million were sold to investors. Of the loans sold to investors, $241.5 million were sold to the FNMA, FHLMC, FHLB, and/or GNMA with six contractor/dealers responsibleservicing rights retained for 56.7%the purpose of further developing these customer relationships. At December 31, 2023, one-to-four-family residential mortgage loans held for investment totaled $567.7 million, or 23.3% of the fundedtotal gross loan portfolio, while loans dollar volume. See “Item 1A. Risk Factors - Our business could suffer if we are unsuccessful in making, continuingheld for sale totaled $25.7 million and growing relationships with home improvement contractorsequity loans totaled $69.5 million at that date.
For the year ended December 31, 2023, one-to-four-family loan originations and dealers”refinancing activity decreased as a result of this Form 10‑K.
Since 2012, the Company has had an emphasis on diversifying lending products by expanding commercial real estate, commercial business and residential lending, while maintaining the current size of the consumer loan portfolio. The Company’s lending strategies are intended to take advantage of: (1) historical strength in indirect consumer lending, (2) recentincreased market consolidation that has created new lending opportunities and the availability of experienced bankers, and (3) strength in relationship lending. Retail deposits will continue to serve as an important funding source. See “Item 1. Business: Lending Activities” and “Item 1A. Risk Factors - Risks Related to Our Business” of this Form 10‑K.
Recently, improvements in the economy, employment rates, stronger real estate prices, and a general lack of new housing inventory has resulted in our significantly increasing originations of construction loans for properties located in our market areas. We anticipate thatinterest rates. Residential construction and development lending, will continuewhile not as common as other loan origination options like one-to-four-family loans, continues to be a strongan important element ofin our total loan portfolio, in future periods. We willand we continue to take a disciplined approach in our construction and development lending by concentrating our efforts on loans to builders and developers in our market areas known to us. Originations of construction and development loans increased to $123.3 million in 2017 from $73.7 million in 2016. These short termshort-term loans typically mature inhave a maturity period of six to twelve months. In addition, the funding is usually18 months, with disbursements not fully disbursedrealized at origination, thereby reducing ourleading to a short-term reduction in net loans receivable in the short term. At December 31, 2017, outstanding construction and development loans totaled $143.1 million, or 18.5%, of the gross loan portfolio and consisted of loans for residential and commercial construction projects, primarily for vertical construction and $11.5 million of land acquisition and development loans. Total committed, including unfunded construction and development loans at December 31, 2017, was $222.0 million as compared to $154.3 million at December 31, 2016.receivable.
The Company is significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs. Deposit flows are influenced by a number of factors, including interest rates paid on time deposits, other investments, account maturities, and the overall level of personal income and savings. Lending activities are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles. Sources of funds for lending activities include primarily deposits, including brokered deposits, borrowings, payments on loans, and income provided from operations.
The Company’s earnings are primarily dependent upon net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on these loans and investments. Interest expense is a function of the amount of deposits and borrowings outstanding during the same period and the interest rates paid on these deposits and borrowings. Another significant influence on the Company’s earnings is fee income from mortgage banking activities.
The Company’s earnings are also affected by fee income from mortgage banking activities, the provision for loan(recovery of) credit losses, service charges and fees, gains from sales of assets, operating expenses and income taxes. Most notable of these factors, the Company recorded a provision for credit losses of $4.8 million for the year ended December 31, 2023, compared to $6.2 million for the same period one year ago. The decreased provision in the current year was primarily due to a decrease in net loan growth, particularly in consumer loans and an increase in recoveries of reserves for unfunded commitments.
Critical Accounting Policies and Estimates
Certain of the Company’s accounting policies are important to the portrayal of the Company’s
We prepare our consolidated financial condition, since they require managementstatements in accordance with GAAP. In doing so, we have to make difficult, complex or subjective judgments, someestimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes inuncertainty at the performance oftime the economyestimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of borrowers. Management believesoperations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that itswe believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting estimates with the audit committee of our Board of Directors. See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10–K for a summary of significant accounting policies include determiningand the allowanceeffect on our financial statements.
Allowance for loanCredit Losses on Held-to-MaturitySecurities. Management measures expected credit losses on held-to-maturity securities by individual security. Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers credit ratings and historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.
The held-to-maturity portfolio consists entirely of corporate securities. Securities are generally rated investment grade or higher. Securities are analyzed individually to establish a reserve.
Allowance for Credit Losses on Available-for-Sale Securities. For available-for-sale securities in an unrealized loss position, management first assesses whether it intends to sell, or is more likely than not to be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded, limited by the amount that the fair value is less than the amortized cost basis.
Changes in the ACL are recorded as a provision for (reversal of) credit losses. Losses are charged against the ACL when management believes the uncollectability of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities is not included in the estimate of credit losses.
Allowance for Credit Losses on Loans. The ACL on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL when management believes the uncollectability of a loan balance is confirmed and recoveries are credited to the ACL when received. In the case of recoveries, amounts may not exceed the aggregate of amounts previously charged off.
Management utilizes relevant available information, from internal and external sources, relating to past events, current conditions, historical loss experience, and reasonable and supportable forecasts. The lookback period in the analysis includes historical data from 2009 to present. Adjustments to historical loss information are made when management determines historical data is not likely reflective of the current portfolio such as limited data sets or lack of default or loss history. Management may selectively apply external market data to subjectively adjust the Company’s own loss history including index or peer data. Accrued interest receivable is excluded from the estimate of credit losses on loans.
The ACL on loans is measured on a collective cohort basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by call report code and then risk-grade grouping. Risk grade is grouped within each call report code by pass, watch, special mention, substandard, and doubtful. Other loan types are separated into their own cohorts due to specific risk characteristics for that pool of loans.
The Company has elected a non-discounted cash flow methodology with probability of default (“PD”) and loss given default (“LGD”) for all call report code cohorts (“cohorts”), except for the indirect and marine portfolios which are evaluated under a vintage methodology. The vintage methodology measures the expected loss calculation for future periods based on historical performance by the origination period of loans with similar life cycles and risk characteristics. Guaranteed portions of loans are measured with zero risk due to cash collateral and full guaranty.
The PD calculation looks at the historical loan portfolio at points in time (each month during the lookback period) to determine the probability that loans in a certain cohort will default over the next 12-month period. A default is defined as a loan that has moved to past due 90 days and greater, nonaccrual status, or experienced a charge-off during the period. In cohorts where the Company’s historical data is insufficient due to a minimal amount of default activity or zero defaults, management uses index PDs comprised of rates derived from the PD experience of other community banks in place of the Company’s historical PDs. Additionally, management reviews all other cohorts to determine if index PDs should be used outside of these criteria.
The LGD calculation looks at actual losses (net charge-offs) experienced over the entire lookback period for each cohort of loans. The aggregate loss amount is divided by the exposure at default to determine an LGD rate. All loan defaults (non-accrual, charge-off, or greater than 90 days past due) occurring during the lookback period are included in the denominator, whether a loss occurred or not and exposure at default is determined by the loan balance immediately preceding the default event (i.e., nonaccrual or charge-off). Due to limited charge-off history, management uses index LGDs comprised of rates derived from the LGD experience of other community banks in place of the Company’s historical LGDs.
The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans. The calculation includes a 12-month PD forecast based on the Company’s regression model comparing peer nonperforming loan ratios to the national unemployment rate. After the forecast period, PD rates revert on a straight-line basis back to long-term historical average rates over a 12-month period. Due to limited default history, management uses index PDs comprised of rates derived from the PD experience of other community banks in place of the Company’s historical PDs.
The Company recognizes that all significant factors that affect the collectability of the loan portfolio must be considered to determine the estimated credit losses as of the evaluation date. Furthermore, the methodology, in and of itself and even when selectively adjusted by comparison to market and peer data, does not provide a sufficient basis to determine the estimated credit losses. The Company adjusts the modeled historical losses by qualitative and environmental adjustments to incorporate all significant risks to form a sufficient basis to estimate the credit losses.
Loans classified as nonaccrual, are reviewed quarterly for potential individual assessment. Any loan classified as a nonaccrual that is not determined to need individual assessment is evaluated collectively within its respective cohort.
Where the primary and/or expected source of repayment of a specific loan is believed to be the future liquidation of available collateral, impairment will generally be measured based upon expected future collateral proceeds, net of disposition expenses including sales commissions as well as other costs potentially necessary to sell the asset(s) (i.e., past due taxes, liens, etc.). Estimates of future collateral proceeds will be based upon available appraisals, reference to recent valuations of comparable properties, use of consultants or other professionals with relevant market and/or property-specific knowledge, and any other sources of information believed appropriate by management under the specific circumstances. When appraisals are ordered to support the impairment analysis of an impaired loan, the appraisal is reviewed by the Company’s internal appraisal reviewer.
Where the primary and/or expected source of repayment of a specific loan is believed to be the receipt of principal and interest payments from the borrower and/or the refinancing of the loan by another creditor, impairment will generally be measured based upon the present value of expected proceeds discounted at the contractual interest rate. Expected refinancing proceeds may be estimated from review of term sheets received by the borrower from other creditors and/or from the Company’s knowledge of terms generally available from other banks.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications. Prepayment assumptions will be determined by analysis of historical behavior by loan cohort.
Allowance for Credit Losses on Unfunded Commitments. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The ACL on unfunded commitments is adjusted through a provision for (recovery of) credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate utilizes the same factors and assumptions as the ACL on loans and is applied at the same collective cohort level.
Business Combinations and Goodwill. Pursuant to applicable accounting guidance, the Company recognizes assets acquired, including identified intangible assets, and liabilities assumed in acquisitions at their fair values as of the acquisition date. Transaction costs related to the acquisition are expensed in the period incurred. The determination of fair values involves estimates based on internal or third-party valuations, including appraisals, discounted cash flow analysis, and other techniques incorporating factors such as attrition, inflation, asset growth rates, discount rates, credit risk, and multiples of earnings. The determination of fair value may require us to make point-in-time estimates about discount rates, future expected cash flows, market conditions, and other future events that can be volatile in nature and challenging to assess. While we use the best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.
In whole bank or bank branch acquisitions, the primary identifiable intangible asset recorded is the value of core deposit intangibles, representing the estimated value of long-term deposit relationships acquired. The determination involves assumptions and estimates, typically determined through discounted cash flow analysis, considering customer attrition/runoff, alternative funding costs, deposit servicing rights, derivativescosts, and hedging activity,discount rates. Amortization of core deposit intangibles occurs over estimated useful lives reviewed periodically for reasonableness. These estimated useful lives, typically ranging from seven to 10 years with an accelerated rate of amortization, are periodically reviewed for reasonableness. Identifiable intangible assets, including core deposit intangibles, are assessed for impairment when events or changes suggest the carrying value may not be recoverable. The Company's policy dictates recognition of an impairment loss equal to the difference between the asset’s carrying amount and fair value if the expected undiscounted future cash flows are less than the carrying amount. Estimating future cash flows involves multiple estimates and assumptions, as previously mentioned.
The ACL on purchase credit deteriorated (“PCD”) assets is recognized within business combination accounting with no initial impact to net income. Subsequent changes in estimates of expected credit losses on PCD loans are recognized through a provision for deferred(reversal of) credit losses in subsequent periods as they arise. The ACL on non-PCD assets is recognized as provision expense in the same reporting period as the business combination. Estimated loan losses for acquired loans are determined using methodologies and applying estimates and assumptions that were described previously in the section above entitled, “Allowance for Credit Losses on Loans.”
Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with differences from contractual unpaid principal balances referred to as “discounts.” These discounts are accreted to interest income taxes.over the loans' estimated remaining lives.
Similar adjustments are made for premiums or discounts on acquired debt impacting interest expense over their remaining lives. Actual accretion or amortization may differ materially from our estimates impacting our operating results.
Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Accounting for goodwill also involves a higher degree of judgment than most other significant accounting policies. ASC 350–10 establishes standards for an impairment assessment of goodwill.
The initial recognition of goodwill and other intangible assets, along with subsequent analyses, necessitates subjective judgments from management. These judgements involve estimating how acquired assets will perform in the future using valuation methods including discounted cash flow analysis. Additionally, the challenge arises as estimated cash flows may extend beyond 10 years, making them difficult to determine over an extended timeframe. Significant events and factors influencing these estimates include competitive forces, customer behaviors, attrition, changes in revenue growth trends, cost structures, technology, alterations in discount rates, and specific industry and market conditions. To validate assumptions in its estimates, the Company reviews the historical performance of underlying or similar assets, ensuring the reasonableness of cash flow estimates.
The Company’s annual assessment of potential goodwill impairment was completed during the fourth quarter of 2023. Based on the results of this assessment, no goodwill impairment was recognized. Because of current economic conditions the Company continues to monitor goodwill and other intangible assets for impairment indicators throughout the year.
On an on-going basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company’s policies related to these estimates can be found in “Note 1 – Basis of Presentation and Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K. The Company’s accounting policies are discussed in detail in Note“Note 1 – Basis of Presentation and Summary” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10‑10–K.
Allowance for Loan Loss. The allowance for loan losses is the amount estimated by management as necessary to cover probable losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. A high degree of judgment is necessary when determining the
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amount of the allowance for loan losses. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although the Company believes that use of the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. As the Company adds new products to the loan portfolio and expands the Company’s market area, management intends to enhance and adapt the methodology to keep pace with the increased size and complexity of the loan portfolio. Changes in any of the above factors could have a significant effect on the calculation of the allowance for loan losses in any given period. Management believes that its systematic methodology continues to be appropriate given the Company’s increased size and level of complexity.
Servicing Rights. Servicing assets are recognized as separate assets when rights are acquired through the purchase or through the sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage, commercial and consumer loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage, commercial, or consumer servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses. Servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranches. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as a recovery and an increase to income. Capitalized servicing rights are stated separately on the consolidated balance sheets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
Derivative and Hedging Activity. ASC 815, “Derivatives and Hedging,” requires that derivatives of the Company be recorded in the consolidated financial statements at fair value. Management considers its accounting policy for derivatives to be a critical accounting policy because these instruments have certain interest rate risk characteristics that change in value based upon changes in the capital markets. The Company’s derivatives are primarily the result of its mortgage banking activities in the form of commitments to extend credit, commitments to sell loans, To-Be-Announced (“TBA”) mortgage backed securities trades and option contracts to mitigate the risk of the commitments to extend credit. Estimates of the percentage of commitments to extend credit on loans to be held for sale that may not fund are based upon historical data and current market trends. The fair value adjustments of the derivatives are recorded in the Consolidated Statements of Income with offsets to other assets or other liabilities in the Consolidated Balance Sheets.
Income Taxes. Income taxes are reflected in the Company’s consolidated financial statements to show the tax effects of the operations and transactions reported in the consolidated financial statements and consist of taxes currently payable plus deferred taxes. Accounting Standards Codification, ASC 740, “Accounting for Income Taxes,” requires the asset and liability approach for financial accounting and reporting for deferred income taxes. Deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of assets and liabilities. They are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled and are determined using the assets and liability method of accounting. The deferred income provision represents the difference between net deferred tax asset/liability at the beginning and end of the reported period. In formulating the deferred tax asset, the Company is required to estimate income and taxes in the jurisdiction in which the Company operates. This process involves estimating the actual current tax exposure for the reported period together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses, for tax and financial reporting purposes.
Deferred tax liabilities occur when taxable income is smaller than reported income on the income statements due to accounting valuation methods that differ from tax, as well as tax rate estimates and payments made quarterly and
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adjusted to actual at the end of the year. Deferred tax liabilities are temporary differences payable in future periods. The Company had a net deferred tax liability of $607,000, and $1.2 million, at December 31, 2017 and 2016, respectively.
Our Business and Operating Strategy and Goals
The Company’s primary objective is to operate 1st Security Bank of Washington as a well capitalized,well-capitalized, profitable, independent, community-oriented financial institution, serving customers in its primary market area defined generally as the greater Puget Sound market area. The Company’s strategy is to provide innovative products and superior customer service to small businesses, industry and geographic niches, and individuals located in its primary market area. Services are currently provided to communities through the main office, and 1127 full-service bank branches and seven stand-alone loan production offices, which are supported with 24/7 access to on-line banking and participation in a worldwide ATM network.
The Company focuses on diversifying revenues, expanding lending channels, and growing the banking franchise. Management remains focused on building diversified revenue streams based upon credit, interest rate, and concentration risks. The Board of Directors seeks to accomplish the Company’s objectives through the adoption of a strategy designed to improve profitability and maintain a strong capital position and high asset quality. This strategy primarily involves:
Growing and diversifying the loan portfolio and revenue streams. The Company is transitioning lending activities from a predominantly consumer-driven modeldiversified lender that seeks to a more diversifiedgrow and maintain the current level of diversification in its portfolio. At December 31, 2023, the Company's loan portfolio included real estate loans, consumer loans, and business model by emphasizing three key lending initiatives: expansion of commercial business lending programs, increasing in-house originationsloans representing 63.0%, 26.5%, and 10.5% of residential mortgage loans primarily for sale into the secondary market through the mortgage banking program; and commercial real estate lending. Additionally, the Company seeks to diversify thetotal loan portfolio, by increasing lending to small businesses in the market area, as well as residential construction lending.respectively.
Maintaining strong asset quality. The Company believes that strong asset quality is a key to long-term financial success. The percentage of non-performingnonperforming loans to total gross loans were 0.45% and the0.39% at December 31, 2023 and 2022, respectively. The percentage of non-performingnonperforming assets to total assets were each unchanged0.37% and 0.35% at 0.1% for both December 31, 20172023 and 2016,2022, respectively. The Company hasManagement actively managed theaddresses delinquent loans and non-performingnonperforming assets by aggressively pursuing theaggressive collection ofefforts for consumer debts, and marketing saleable properties upon which were foreclosed or repossessed work-outs ofproperties, working on classified assetsassets' resolutions and implementing loan charge-offs. In the past severalrecent years, the Company also began emphasizingfocused on originating consumer loan originations toloans for borrowers with higher credit scores, generally, credit scores over 720 (although the policy allows us to go lower), which has led to lower charge-offs in recent periods. Althoughwhile maintaining flexibility with its policy. While the Company plans to place more emphasis on certainemphasize specific lending products, such asincluding commercial and multi-family real estate loans, construction and development loans including(including speculative residential construction loans,loans), and commercial business loans, while growingit remains committed to expanding the current size of theits one-to-four-family residential mortgage loans and the consumer loan portfolios,portfolios. Throughout these initiatives, the Company continues to manage its credit exposures through the use of experienced bankers and an overallmaintains a conservative approach to lending.lending and manages credit exposures by leveraging the expertise of experienced bankers.
Emphasizing lower cost core deposits to reduce the costs of funding loan growth. The Company offersprovides a range of financial products, including personal and business checking accounts, NOW accounts, and savings and money market accounts. These accounts which generally areserve as lower-cost funding sources of funds thancompared to certificates of deposit and are less sensitive to withdrawal when interest rates fluctuate. In orderrate fluctuations. The Company employs several strategies to build a core deposit base, the Company is pursuing a number of strategies.base. First, a diligent attempt to recruit allit actively encourages commercial loan customers to establish and maintain a deposit relationship with the Company, generally arelationships typically through business checking account relationship to the extent practicable, for the term of their loan.accounts. Second, periodic interest rate promotions are providedoffered on savings and checking accounts from time to time to encouragestimulate deposit growth. Third, the growth of these types of deposits. Third, by hiringCompany hires experienced personnel with established community relationships in the communities we serve.areas it serves to further enhance its deposit-building efforts.
Capturing customers’customers’ full relationship. The Company offers a wide range of products and services that provide diversification of revenue sources and solidify the relationship with the Bank’s customers. The Company focuses on core retail and business deposits, including savings and checking accounts, that lead to long-term customer retention. As part of the commercial lending process, cross-selling the entire business banking relationship, including deposit relationships and business banking products, such as online cash management, treasury management, wires, direct deposit, payment processing and remote deposit capture. The Company’s mortgage banking program also provides opportunities to cross-sell products to new customers.
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Expanding the Company’sCompany’s markets. In addition to deepening relationships with existing customers, the Company intends to expand business to new customersbroaden its customer base by leveraging the Company’s well-established involvement in the community and byinvolvement. This strategy involves selectively emphasizing products and services designedtailored to meet theirthe specific banking needs. Theneeds of new customers. Additionally, the Company also intendsplans to pursue expansion inextend its presence into other market areas through selective growthtargeted expansion of theits home lending network. As an example, through the Branch Purchase, the Company expanded its retail market area onto the Olympic Peninsula into the communities
Comparison of Financial Condition at December 31, 20172023 and December 31, 20162022
Assets. Total assets increased $153.9$339.8 million, or 18.6%, to $981.8 million$2.97 billion at December 31, 2017,2023, from $827.9 million$2.63 billion at December 31, 2016,2022. The increase was primarily the result of an increasedue to increases in loans receivable, net of $168.2$210.6 million, securities available-for-sale of $63.7 million, total cash and cash equivalents of $24.3 million, certificates of deposit at other financial institutions of $2.9 million, accrued interest of $1.0$19.5 million, and loanscore deposit intangible of $14.0 million. The Company also transferred $8.1 million of residential MSRs to held for sale during the fourth quarter of $910,000,2023. The increase in total assets was primarily funded by deposit growth during the year ended December 31, 2023.
Loans receivable, net, increased $210.6 million, to $2.40 billion at December 31, 2023, from $2.19 billion at December 31, 2022. Total real estate loans increased $109.1 million, with increases in one-to-four-family portfolio loans of $98.3 million, commercial real estate loans of $32.3 million, home equity loans of $14.1 million, and multi-family loans of $4.0 million, offset by a decrease in construction and development loans of $39.5 million. Undisbursed construction and development loan commitments decreased $47.1 million, or 23.3%, to $154.6 million at December 31, 2023, as compared to $201.7 million at December 31, 2022. Consumer loans increased $77.2 million, primarily due to increases of $74.0 million in indirect home improvement loans and $2.7 million in marine loans. Additionally, commercial business loans increased $27.9 million due to an increase in commercial and industrial loans of $41.5 million, partially offset by a decrease in total cashwarehouse lending of $13.6 million due to higher residential mortgage interest rates and cash equivalents of $17.5 million and servicing rights of $1.7 million. The increase in assets was primarily funded by growth in deposits and net proceeds from an underwritten public offering completed in the third quarter of 2017.reduced refinance activity.
Loans receivable, net, increased $168.2 million, or 28.4%, to $761.6 million at December 31, 2017, from $593.3 million at December 31, 2016. The increase in loans receivable, net was primarily a result of a $108.1 million increase in total real estate loans, including increases in one-to-four-family loans of $39.6 million, multi-family loans of $6.9 million, construction and development loans of $48.6 million, commercial real estate loans of $7.7 million, and home equity loans of $5.2 million, as well as increases in commercial business loans of $26.0 million, and consumer loans of $33.9 million.
Loans held for sale, consisting of one-to-four-family loans, increased by $910,000,$5.6 million, or 1.7%27.7%, to $53.5$25.7 million at December 31, 2017,2023, compared to $52.6$20.1 million for the prior year due to the increase in fair value and the timing difference between loan fundings and loan sale settlements.at December 31, 2022. The Company continues to expandinvest in its home lending operations by hiring additional lendingand strategically adds production staff and will continue selling one-to-four-family mortgage loans intoin the secondary market for asset/liability management purposes.markets we serve.
One-to-four-family loan originations including $698.5for the year ended December 31, 2023, included $377.1 million of loans heldoriginated for sale, $105.2$150.5 million of portfolio loans including first and second liens, and $8.4$15.9 million of loans brokered to other institutions, increased 4.1% to $812.1 million during the year ended December 31, 2017, compared to $779.8 million for the prior year. The growth in originations was a result of increased purchase activity associated with the strong home purchase demand in the Pacific Northwest. institutions.
Originations of one-to-four-family loans to purchase and to refinance a home (purchase production) increased by $109.1 million, or 21.2% with $624.3 million in loan purchase production closing duringfor the periods indicated were as follows:
(Dollars in thousands) | For the Year Ended December 31, | |||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
Amount | Percent | Amount | Percent | $ Change | % Change | |||||||||||||||||||
Purchase | $ | 497,669 | 91.6 | % | $ | 664,361 | 80.2 | % | $ | (166,692 | ) | (25.1 | )% | |||||||||||
Refinance | 45,925 | 8.4 | 164,380 | 19.8 | (118,455 | ) | (72.1 | ) | ||||||||||||||||
Total | $ | 543,594 | 100.0 | % | $ | 828,741 | 100.0 | % | $ | (285,147 | ) | (34.4 | )% | |||||||||||
During the year ended December 31, 2017, up from $515.22023, the Company sold $408.0 million of one-to-four-family loans, compared to $715.6 million one year ago. The decrease in loan purchase and refinance activity, as well as sales activity, compared to the prior year reflects the impact of higher interest rates. The cash margin on loans sold, net of deferred fees and capitalized expenses, increased to 1.59% for the year ended December 31, 2016. One-to-four-family loan originations for refinance (refinance production) decreased $77.5 million, or 29.3% with $186.9 million in refinance production closing during the year ended December 31, 2017, down from $264.4 million2023, compared to 1.39% for the year ended December 31, 2016.2022. Margin reported is based on actual loans sold into the secondary market and the related value of capitalized servicing, partially offset by recognized deferred loans fees and capitalized expenses. The gross cash margins on loans sold, were 3.07% and 2.78% for the years ended December 31, 2023 and 2022, respectively. Gross cash margins on loans sold is defined as the margin on loans sold without the impact of deferred loan costs.
The allowance for loan losses (“ALLL”) at December 31, 2017ACL on loans was $10.8$31.5 million, or 1.4% of gross loans receivable, excluding loans held for sale, compared to $10.2 million, or 1.7%1.30% of gross loans receivable, excluding loans held for sale at December 31, 2016. Substandard loans decreased $1.62023, compared to $28.0 million, or 19.3%,1.26% of gross loans receivable, excluding loans held for sale, at December 31, 2022. The increase was primarily due to $6.5organic loan growth, increases in nonperforming loans, and the addition of loans acquired in the Branch Acquisition. The ACL - unfunded loan commitments decreased $1.0 million to $1.5 million at December 31, 2017, compared to $8.02023, from $2.5 million at December 31, 2016. The $1.62022, primarily due to a decrease in unfunded construction loan commitments.
At December 31, 2023, loans classified as substandard or worse increased to $24.9 million, decreaseconsisting of $24.5 million classified as substandard and $399,000 as doubtful, compared to $20.2 million at December 31, 2022, all of which loans were classified as substandard. This increase in substandard loans was primarily due to the saleincreases of $4.7 million in construction and development loans and $787,000 in indirect home improvement loans, partially offset by a $1.9decrease of $1.5 million shared national credit with a slight discount to book value charged off against the ALLL in the third quartercommercial and industrial loans.
Nonperforming loans, consisting solely of non-accruingnonaccrual loans, increased $318,000, or 44.1%,$2.3 million to $1.0$11.0 million at December 31, 2017,2023, from $721,000$8.7 million at December 31, 2016. At December 31, 2017, non-performing2022. This increase was primarily due to a $4.7 million increase in nonaccrual construction and development loans, consisted of $551,000 ofa $1.1 million increase in nonaccrual commercial business loans, $293,000 of residential real estate loans, and $195,000a $787,000 increase in nonaccrual indirect home improvement loans, partially offset by a $3.7 million decrease in nonaccrual commercial business loans and an $842,000 decrease in nonaccrual one-to-four family loans. These increases and decreases were largely due to the payment performance on a few loans. At December 31, 2023, nonperforming loans consisted of $4.7 million in construction and development loans, $2.7 million in commercial business loans, $1.9 million in indirect home improvement loans, $1.1 million in commercial real estate loans, $342,000 in marine loans, $173,000 of home equity loans, $96,000 in one-to-four-family loans, and $8,000 in other consumer loans.
Non-performing The ratio of nonperforming loans to total gross loans were unchanged at 0.1% at both December 31, 2017 and 2016, respectively. There was no other real estate owned0.45% at December 31, 20172023, compared to 0.39% at December 31, 2022. There were no OREO properties at December 31, 2023, and 2016.one OREO property totaling $570,000 at December 31, 2022. See “Item 1. Business -– Lending Activities -– Asset Quality” of this Form 10‑10–K for additional information regarding the Company’s non-performingnonperforming loans.
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During the second quarter of 2017, the Company sold $564.8 million of the MSA with a MSR book value of $4.8 million and generated an associated gain of $1.1 million. Under regulatory capital guidelines, MSAs are limited to 10% of the Bank’s common equity Tier 1 capital. MSAs in excess of the 10% threshold must be deducted from common equity for regulatory capital purposes. The sale of this asset allows the Bank to remain below the maximum 10% regulatory capital limitation with the expectation that continued MSAs will be generated from future residential loan sales.
Liabilities. Total liabilities increased $112.9$307.0 million or 15.1%, to $859.8$2.71 billion at December 31, 2022, from $2.40 billion at December 31, 2022, primarily due to $394.6 million in deposits, partially offset by a $92.8 million decrease in borrowings.
Total deposits increased $394.6 million to $2.52 billion at December 31, 2023, from $2.13 billion at December 31, 2022, primarily as a result of the Branch Acquisition in which we acquired approximately $425.5 million in deposits. CDs increased $367.0 million to $1.10 billion at December 31, 2023, from $729.8 million at December 31, 2017, from $746.9 million at December 31, 2016. Deposits increased $117.2 million, or 16.5% to $829.8 million at December 31, 2017, from $712.6 million at December 31, 2016. Relationship-based transactional2022. Transactional accounts (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased $87.7$225.6 million or 40.1%, to $306.8$914.9 million at December 31, 2017,2023, from $219.0$689.3 million at December 31, 2016.2022, due to increases of $116.1 million in noninterest-bearing checking, $108.9 million in interest-bearing checking and $547,000 in escrow accounts (also noninterest bearing) related to mortgages serviced. Money market and savings accounts increased $3.0decreased $198.0 million, or 1.0%, to $300.8$510.7 million at December 31, 2017,2023, from $297.8$708.6 million at December 31, 2016. Time2022 as depositors shifted to higher yielding CDs and other investment alternatives.
Deposits are summarized as follows at the years indicated:
(Dollars in thousands) | December 31, | |||||||
2023 | 2022 | |||||||
Noninterest-bearing checking | $ | 654,048 | $ | 537,938 | ||||
Interest-bearing checking (1) | 244,028 | 135,127 | ||||||
Savings | 151,630 | 134,358 | ||||||
Money market (2) | 359,063 | 574,290 | ||||||
Certificates of deposit less than $100,000 (3) | 587,858 | 440,785 | ||||||
Certificates of deposit of $100,000 through $250,000 | 429,373 | 195,447 | ||||||
Certificates of deposit of $250,000 and over (4) | 79,540 | 93,560 | ||||||
Escrow accounts related to mortgages serviced | 16,783 | 16,236 | ||||||
Total | $ | 2,522,323 | $ | 2,127,741 | ||||
(1) | Includes $70.2 million and $2.3 million of brokered deposits at December 31, 2023 and December 31, 2022, respectively. |
(2) | Includes $1,000 and $59.7 million of brokered deposits at December 31, 2023 and December 31, 2022, respectively. |
(3) | Includes $361.3 million and $332.0 million of brokered CDs at December 31, 2023 and December 31, 2022, respectively. |
(4) | CDs that meet or exceed the FDIC insurance limit. |
The Bank had uninsured deposits increased $26.5of approximately $606.5 million or 13.6%,24.0% of total deposits, at December 31, 2023, compared to $222.3approximately $560.0 million or 26.3% of total deposits at December 31, 2022. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.
At December 31, 2023, borrowings totaled $93.7 million and were comprised of the FRB borrowings from the BTFP of $89.9 million and FHLB fixed-rate advances of $3.9 million. Borrowings decreased $92.8 million to $93.7 million at December 31, 2017,2023, from $195.7$186.5 million of FHLB advances at December 31, 2022. The decrease was partially attributable to a shift in funding mix from overnight borrowings to wholesale brokered CDs, as well as liquidity from the Branch Acquisition utilized to pay down borrowings and brokered deposits.
Stockholders’ Equity. Total stockholders’ equity increased $32.8 million to $264.5 million at December 31, 2016. Non-retail certificates of deposit which includes brokered certificates of deposit, online certificates of deposit, and public funds, increased $6.3 million, or 10.5%, to $66.52023, from $231.7 million at December 31, 2017, compared to $60.2 million at December 31, 2016. Management remains focused on growth in lower cost relationship-based deposits to fund long-term asset growth.
At December 31, 2017, borrowings decreased $5.1 million, or 40.6%, to $7.5 million from $12.7 million at December 31, 2016, primarily due to the repayment of FHLB fixed rate advances.
Stockholders’ Equity. Total stockholders’ equity increased $41.0 million, or 50.6%, to $122.0 million at December 31, 2017, from $81.0 million at December 31, 2016.2022. The increase in stockholders’ equity was primarily from net proceeds of $25.6 million from an underwritten public offering completed in the third quarter of 2017 anddue to net income of $14.1$36.1 million earned during 2023, partially offset by cash dividends paid during the year of $7.8 million. In addition, stockholders' equity was positively impacted by unrealized gains on fair value and cash flow hedges of $3.0 million, net of tax, and unrealized net gains in securities available-for-sale of $5.3 million, net of tax, reflecting changes in market interest rates during the period, resulting in a $2.3 million increase in accumulated other income.
Book value per common share was $34.47$34.36 at December 31, 2017,2023, compared to $28.32$30.42 at December 31, 2016.2022. The calculation of book value per share at December 31, 2023, was based on 7,698,401 common shares, derived by subtracting the 102,144 unvested restricted stock shares from the 7,800,545 reported common shares outstanding as of that date. Similarly, the book value per share at December 31, 2022, was calculated based on 7,617,655 common shares, obtained by subtracting the 118,530 unvested restricted stock shares from the 7,736,185 reported common shares outstanding as of that date.
70
Average Balances, Interest and Average Yields/Cost
The following table sets forth for the periods indicated, information regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at December 31, 2017.2023. Income and all average balances are monthly average balances. Non-accruingNonaccrual loans have been included in the table as loans carrying a zero yield. The yields on tax-exempt municipal bonds have not been computed on a tax equivalent basis.
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| At December 31, |
| Year Ended December 31, |
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| 2017 |
| 2017 |
| 2016 |
| 2015 |
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| Average |
| Interest |
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| Average |
| Interest |
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| Average |
| Interest |
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| Yield/ |
| Balance |
| Earned |
| Yield/ |
| Balance |
| Earned |
| Yield/ |
| Balance |
| Earned |
| Yield/ |
| ||||||
(Dollars in thousands) |
| Rate |
| Outstanding |
| Paid |
| Rate |
| Outstanding |
| Paid |
| Rate |
| Outstanding |
| Paid |
| Rate |
| ||||||
Interest-earning assets: |
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Loans receivable, net and loans held for sale (1) |
| 5.75 | % | $ | 749,179 |
| $ | 43,457 |
| 5.80 | % | $ | 618,557 |
| $ | 35,772 |
| 5.78 | % | $ | 490,774 |
| $ | 30,418 |
| 6.20 | % |
Mortgage-backed securities |
| 2.42 |
|
| 46,178 |
|
| 996 |
| 2.16 |
|
| 38,515 |
|
| 793 |
| 2.06 |
|
| 18,975 |
|
| 380 |
| 2.00 |
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Investment securities |
| 2.53 |
|
| 41,534 |
|
| 1,000 |
| 2.41 |
|
| 41,378 |
|
| 895 |
| 2.16 |
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| 30,068 |
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| 669 |
| 2.22 |
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FHLB stock |
| 3.59 |
|
| 3,617 |
|
| 112 |
| 3.10 |
|
| 2,047 |
|
| 50 |
| 2.44 |
|
| 2,201 |
|
| 42 |
| 1.91 |
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Interest-bearing deposits at other financial institutions |
| 1.52 |
|
| 45,913 |
|
| 616 |
| 1.34 |
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| 64,165 |
|
| 510 |
| 0.79 |
|
| 17,473 |
|
| 198 |
| 1.13 |
|
Total interest-earning assets (1) |
| 5.30 | % |
| 886,421 |
|
| 46,181 |
| 5.21 | % |
| 764,662 |
|
| 38,020 |
| 4.97 | % |
| 559,491 |
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| 31,707 |
| 5.67 | % |
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Interest-bearing liabilities: |
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Savings and money market |
| 0.43 | % |
| 315,635 |
|
| 1,260 |
| 0.40 | % |
| 280,660 |
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| 1,019 |
| 0.36 | % |
| 186,151 |
|
| 982 |
| 0.53 | % |
Interest-bearing checking |
| 0.20 |
|
| 88,060 |
|
| 128 |
| 0.15 |
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| 53,310 |
|
| 27 |
| 0.05 |
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| 30,740 |
|
| 25 |
| 0.08 |
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Certificates of deposit |
| 1.18 |
|
| 207,446 |
|
| 2,532 |
| 1.22 |
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| 192,347 |
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| 2,208 |
| 1.15 |
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| 182,263 |
|
| 2,222 |
| 1.22 |
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Borrowings |
| 1.36 |
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| 26,608 |
|
| 334 |
| 1.26 |
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| 26,278 |
|
| 226 |
| 0.86 |
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| 38,960 |
|
| 285 |
| 0.73 |
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Subordinated note |
| 6.80 |
|
| 9,834 |
|
| 679 |
| 6.90 |
|
| 9,814 |
|
| 683 |
| 6.96 |
|
| 2,120 |
|
| 144 |
| 6.79 |
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Total interest-bearing liabilities |
| 0.75 | % |
| 647,583 |
|
| 4,933 |
| 0.76 | % |
| 562,409 |
|
| 4,163 |
| 0.74 | % |
| 440,234 |
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| 3,658 |
| 0.83 | % |
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Net interest income |
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| $ | 41,248 |
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| $ | 33,857 |
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| $ | 28,049 |
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Net interest rate spread |
| 4.56 | % |
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| 4.45 | % |
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| 4.23 | % |
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| 4.84 | % |
Net earning assets |
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| $ | 238,838 |
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| $ | 202,253 |
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| $ | 119,257 |
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Net interest margin |
| N/A |
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| 4.65 | % |
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| 4.43 | % |
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| 5.01 | % |
Average interest-earning assets to average interest-bearing liabilities |
|
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| 136.88 | % |
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| 135.96 | % |
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| 127.09 | % |
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Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
2023 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
Average | Interest | Average | Interest | Average | Interest | ||||||||||||||||||||||||||||||||
Balance | Earned | Yield/ | Balance | Earned | Yield/ | Balance | Earned | Yield/ | |||||||||||||||||||||||||||||
(Dollars in thousands) | Outstanding | Paid | Rate | Outstanding | Paid | Rate | Outstanding | Paid | Rate | ||||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||||||||||||
Loans receivable, net and loans held for sale (1) (2) | $ | 2,384,577 | $ | 154,945 | 6.50 | % | $ | 2,014,017 | $ | 111,648 | 5.54 | % | $ | 1,762,832 | $ | 90,737 | 5.15 | % | |||||||||||||||||||
Taxable mortgage-backed securities | 93,661 | 1,596 | 1.70 | 86,626 | 1,842 | 2.13 | 75,493 | 1,690 | 2.24 | ||||||||||||||||||||||||||||
Taxable AFS investment securities | 65,704 | 4,578 | 6.97 | 60,729 | 1,431 | 2.36 | 56,063 | 1,152 | 2.05 | ||||||||||||||||||||||||||||
Tax-exempt AFS investment securities | 128,787 | 2,503 | 1.94 | 130,744 | 2,488 | 1.90 | 97,471 | 1,733 | 1.78 | ||||||||||||||||||||||||||||
Taxable HTM Investment securities | 8,500 | 430 | 5.06 | 8,084 | 409 | 5.06 | 7,500 | 380 | 5.07 | ||||||||||||||||||||||||||||
FHLB stock | 4,740 | 245 | 5.17 | 7,231 | 401 | 5.55 | 5,494 | 256 | 4.66 | ||||||||||||||||||||||||||||
Interest-bearing deposits at other financial institutions | 67,063 | 2,895 | 4.32 | 32,689 | 475 | 1.45 | 93,435 | 426 | 0.46 | ||||||||||||||||||||||||||||
Total interest-earning assets | 2,753,032 | 167,192 | 6.07 | 2,340,120 | 118,694 | 5.07 | 2,098,288 | 96,374 | 4.59 | ||||||||||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||||
Savings and money market | 612,430 | 5,511 | 0.90 | 781,763 | 3,775 | 0.48 | 661,199 | 1,604 | 0.24 | ||||||||||||||||||||||||||||
Interest-bearing checking | 189,107 | 2,586 | 1.37 | 176,204 | 495 | 0.28 | 203,230 | 282 | 0.14 | ||||||||||||||||||||||||||||
Certificates of deposit | 930,805 | 28,654 | 3.08 | 459,594 | 5,150 | 1.12 | 464,921 | 5,043 | 1.08 | ||||||||||||||||||||||||||||
Borrowings | 110,328 | 5,196 | 4.71 | 102,571 | 3,052 | 2.98 | 63,128 | 1,074 | 1.70 | ||||||||||||||||||||||||||||
Subordinated note | 49,492 | 1,942 | 3.92 | 49,425 | 1,942 | 3.93 | 44,160 | 1,722 | 3.90 | ||||||||||||||||||||||||||||
Total interest-bearing liabilities | 1,892,162 | 43,889 | 2.32 | % | 1,569,557 | 14,414 | 0.92 | % | 1,436,638 | 9,725 | 0.68 | % | |||||||||||||||||||||||||
Net interest income | $ | 123,303 | $ | 104,280 | $ | 86,649 | |||||||||||||||||||||||||||||||
Net interest rate spread | 3.75 | % | 4.15 | % | 3.91 | % | |||||||||||||||||||||||||||||||
Net earning assets | $ | 860,870 | $ | 770,563 | $ | 661,650 | |||||||||||||||||||||||||||||||
Net interest margin | 4.48 | % | 4.46 | % | 4.13 | % | |||||||||||||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 145.50 | % | 149.09 | % | 146.06 | % | |||||||||||||||||||||||||||||||
____________________________
(1) | The average loans receivable, net balances include |
(2) | Includes net deferred fee recognition of $6.0 million, $8.3 million and $9.4 million for the years ended December 31, 2023, 2022, 2021, respectively. |
71
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.liabilities for the periods indicated. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
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| Year Ended December 31, 2017 vs. 2016 |
| Year Ended December 31, 2016 vs. 2015 | ||||||||||||||
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| Increase (Decrease) Due to |
| Total Increase |
| Increase (Decrease) Due to |
| Total Increase | ||||||||||
(In thousands) |
| Volume |
| Rate |
| (Decrease) |
| Volume |
| Rate |
| (Decrease) | ||||||
Interest-earning assets: |
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Loans receivable, net and loans held for sale(1) |
| $ | 7,554 |
| $ | 131 |
| $ | 7,685 |
| $ | 7,920 |
| $ | (2,566) |
| $ | 5,354 |
Mortgage-backed securities |
|
| 158 |
|
| 45 |
|
| 203 |
|
| 391 |
|
| 22 |
|
| 413 |
Investment securities |
|
| 3 |
|
| 102 |
|
| 105 |
|
| 252 |
|
| (26) |
|
| 226 |
FHLB stock |
|
| 38 |
|
| 24 |
|
| 62 |
|
| (3) |
|
| 11 |
|
| 8 |
Interest-bearing deposits at other financial institutions |
|
| (145) |
|
| 251 |
|
| 106 |
|
| 529 |
|
| (217) |
|
| 312 |
Total interest-earning assets(1) |
| $ | 7,608 |
| $ | 553 |
| $ | 8,161 |
| $ | 9,089 |
| $ | (2,776) |
| $ | 6,313 |
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Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and money market |
| $ | 127 |
| $ | 114 |
| $ | 241 |
| $ | 499 |
| $ | (462) |
| $ | 37 |
Interest-bearing checking |
|
| 18 |
|
| 83 |
|
| 101 |
|
| 18 |
|
| (16) |
|
| 2 |
Certificates of deposit |
|
| 173 |
|
| 151 |
|
| 324 |
|
| 123 |
|
| (137) |
|
| (14) |
Borrowings |
|
| 3 |
|
| 105 |
|
| 108 |
|
| (93) |
|
| 34 |
|
| (59) |
Subordinated note |
|
| 1 |
|
| (5) |
|
| (4) |
|
| 523 |
|
| 16 |
|
| 539 |
Total interest-bearing liabilities |
| $ | 322 |
| $ | 448 |
| $ | 770 |
| $ | 1,070 |
| $ | (565) |
| $ | 505 |
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|
|
|
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|
|
|
|
|
|
Net change in interest income |
|
|
|
|
|
|
| $ | 7,391 |
|
|
|
|
|
|
| $ | 5,808 |
Year Ended December 31, 2023 vs. 2022 | Year Ended December 31, 2022 vs. 2021 | |||||||||||||||||||||||
Increase (Decrease) Due to | Total Increase | Increase (Decrease) Due to | Total Increase | |||||||||||||||||||||
(Dollars in thousands) | Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans receivable, net and loans held for sale(1) | $ | 20,542 | $ | 22,755 | $ | 43,297 | $ | 12,929 | $ | 7,982 | $ | 20,911 | ||||||||||||
Taxable mortgage-backed securities | 150 | (396 | ) | (246 | ) | 249 | (97 | ) | 152 | |||||||||||||||
Taxable AFS Investment securities | 117 | 3,030 | 3,147 | 96 | 183 | 279 | ||||||||||||||||||
Tax-exempt AFS investment securities | (38 | ) | 53 | 15 | 592 | 163 | 755 | |||||||||||||||||
Taxable HTM Investment securities | 21 | — | 21 | 30 | (1 | ) | 29 | |||||||||||||||||
FHLB stock | (138 | ) | (18 | ) | (156 | ) | 81 | 64 | 145 | |||||||||||||||
Interest-bearing deposits at other financial institutions | 500 | 1,920 | 2,420 | (277 | ) | 326 | 49 | |||||||||||||||||
Total interest-earning assets | $ | 21,154 | $ | 27,344 | $ | 48,498 | $ | 13,700 | $ | 8,620 | $ | 22,320 | ||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings and money market | $ | (818 | ) | $ | 2,554 | $ | 1,736 | $ | 292 | $ | 1,879 | $ | 2,171 | |||||||||||
Interest-bearing checking | 36 | 2,055 | 2,091 | (38 | ) | 251 | 213 | |||||||||||||||||
Certificates of deposit | 5,280 | 18,224 | 23,504 | (58 | ) | 165 | 107 | |||||||||||||||||
Borrowings | 231 | 1,913 | 2,144 | 671 | 1,307 | 1,978 | ||||||||||||||||||
Subordinated note | 2 | (2 | ) | — | 205 | 15 | 220 | |||||||||||||||||
Total interest-bearing liabilities | $ | 4,731 | $ | 24,744 | $ | 29,475 | $ | 1,072 | $ | 3,617 | $ | 4,689 | ||||||||||||
Net change in net interest income | $ | 19,023 | $ | 17,631 | ||||||||||||||||||||
__________________________
(1) | The average loans receivable, net balances include |
Comparison of Results of Operations for the Years Ended December 31, 20172023 and 20162022
General. Net income for the year ended December 31, 2017, increased $3.6 million, or 34.2%, to $14.1 million, from $10.5was $36.1 million for the year ended December 31, 2016. The increase in net income was primarily a result of an $8.2 million, or 21.5% increase in interest income, a $1.7 million reduction in the provision for loan losses,2023, and a $505,000, or 2.1% increase in noninterest income, partially offset by a $5.1 million, or 13.0% increase in noninterest expense, an $890,000, or 15.9% increase in the provision for income tax expense, and a $770,000, or 18.5% increase in interest expense.
Net Interest Income. Net interest income increased $7.4 million, or 21.8%, to $41.2$29.6 million for the year ended December 31, 2017, from $33.92022. The $6.4 million, or 21.6%, increase in net income was primarily due to a $19.0 million, or 18.2% increase in net interest income, a $2.4 million, or 13.2%, increase in noninterest income, and a $1.4 million, or 23.2%, decrease in the provision for credit losses, partially offset by a $14.6 million, or 18.4%, increase in noninterest expense and a $1.9 million, or 25.6%, increase in the provision for income taxes.
Net Interest Income. Net interest income increased $19.0 million to $123.3 million for the year ended December 31, 2016. The2023, from $104.3 million for the year ended December 31, 2022. This increase in net interest income was primarily attributableattributed to a $7.7 million, or 21.5% increase in loan receivable interest income resulting from a $130.6 million increase in average loans receivable, net and loans held for sale over the last year, and a $476,000, or 21.2%an increase in interest income earned on loans, resulting from both an increase in the average balance of loans and dividendsan improved yield on loans. Additionally, there were minor contributions to the increase in interest income from taxable available-for-sale (“AFS”) investment securities and cash and cash equivalents,interest-bearing deposits at other financial institutions. These increases were partially offset by a $770,000 or 18.5%$29.5 million increase in total interest expense.expense during the same period, primarily as a result of higher interest rates, higher utilization of borrowings and a shift in deposit mix from transactional accounts to higher cost CDs.
The net interest margin (“NIM”) increased 22two basis points to 4.65%4.48% for the year ended December 31, 2017,2023, from 4.43%4.46% for the same period lastprior year. The increasedincrease in NIM reflects continued growthnew loan originations at higher market interest rates, variable rate interest-earning assets repricing higher following increases in market interest rates. The benefit of the higher yielding loans,rates and reductionsincrease in securities AFSinterest-earning assets was partially offset by rising deposit and cashborrowing costs. Increases in average balances of higher costing CDs and cash equivalents. The average cost of funds for total interest-bearing liabilities increasedborrowings placed additional pressure on the NIM.
72
two basis points to 0.76% for the year ended December 31, 2017, from 0.74% for the year ended December 31, 2016. Management remains focused on matching deposit duration with the duration of earning assets where appropriate.
Interest Income. Interest income for the year ended December 31, 2017,2023, increased $8.2$48.5 million, or 21.5%, to $46.2$167.2 million, from $38.0$118.7 million for the year ended December 31, 2016.2022. The increase during the year was primarily attributable to a $412.9 million increase in the average balance of total interest-earning assets, primarily loans, and a 100-basis point increase in the average yield on total interest-earning assets. Interest income on loans receivable, including fees, increased $43.3 million, 38.8%, for the year ended December 31, 2023, compared to the prior year due to an increase in the average balance of loans receivable, netoutstanding during the period and to new loans held for sale to $749.2being originated at higher rates, and variable-rate loans repricing higher following increases in market interest rates. In addition, interest income on taxable AFS investment securities and interest-bearing deposits at other financial institutions increased $3.1 million for the year ended December 31, 2017, compared to $618.6and $2.4 million, for the year ended December 31, 2016, and a 24 basis point increase in the average yield on interest-earning assets to 5.21%respectively, during the year ended December 31, 2017, from 4.97% for the prior year. The increase in average yield on interest-earning assets2023, compared to the prior year, primarily reflects the growthdue to increases in the loan portfolio and the proportionally larger level of loans in the average interest-earning asset mix. The average yield on loans receivable, net and loans held for sale increased to 5.80% during the year ended December 31, 2017, from 5.78% for the prior year.market interest rates.
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the years ended December 31, 20172023 and 2016:2022:
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|
|
| Year Ended December 31, | |||||||||||
|
| 2017 |
| 2016 |
|
|
| ||||||
|
| Average |
|
|
| Average |
|
|
| Increase in | |||
|
| Balance |
|
|
| Balance |
|
|
| Interest | |||
(Dollars in thousands) |
| Outstanding |
| Yield/Rate |
| Outstanding |
| Yield/Rate |
| Income | |||
Loans receivable, net and loans held for sale (1) |
| $ | 749,179 |
| 5.80 | % | $ | 618,557 |
| 5.78 | % | $ | 7,685 |
Mortgage-backed securities |
|
| 46,178 |
| 2.16 |
|
| 38,515 |
| 2.06 |
|
| 203 |
Investment securities |
|
| 41,534 |
| 2.41 |
|
| 41,378 |
| 2.16 |
|
| 105 |
FHLB stock |
|
| 3,617 |
| 3.10 |
|
| 2,047 |
| 2.44 |
|
| 62 |
Interest-bearing deposits at other financial institutions |
|
| 45,913 |
| 1.34 |
|
| 64,165 |
| 0.79 |
|
| 106 |
Total interest-earning assets |
| $ | 886,421 |
| 5.21 | % | $ | 764,662 |
| 4.97 | % | $ | 8,161 |
(Dollars in thousands) | Year Ended December 31, | |||||||||||||||||||
2023 | 2022 | |||||||||||||||||||
Average | Average | $ Change | ||||||||||||||||||
Balance | Yield/ | Balance | Yield/ | in Interest | ||||||||||||||||
Outstanding | Rate | Outstanding | Rate | Income | ||||||||||||||||
Loans receivable, net and loans held for sale (1) | $ | 2,384,577 | 6.50 | % | $ | 2,014,017 | 5.54 | % | $ | 43,297 | ||||||||||
Taxable mortgage-backed securities | 93,661 | 1.70 | 86,626 | 2.13 | (246 | ) | ||||||||||||||
Taxable AFS investment securities | 65,704 | 6.97 | 60,729 | 2.36 | 3,147 | |||||||||||||||
Tax-exempt AFS investment securities | 128,787 | 1.94 | 130,744 | 1.90 | 15 | |||||||||||||||
Taxable HTM investment securities | 8,500 | 5.06 | 8,084 | 5.06 | 21 | |||||||||||||||
FHLB stock | 4,740 | 5.17 | 7,231 | 5.55 | (156 | ) | ||||||||||||||
Interest-bearing deposits at other financial institutions | 67,063 | 4.32 | 32,689 | 1.45 | 2,420 | |||||||||||||||
Total interest-earning assets | $ | 2,753,032 | 6.07 | % | $ | 2,340,120 | 5.07 | % | $ | 48,498 | ||||||||||
___________________________
(1) | The average loans receivable, net balances include |
Interest Expense. Interest expense increased $770,000, or 18.5%,$29.5 million, to $4.9$43.9 million for the year ended December 31, 2017,2023, from $4.2$14.4 million for the prior year. The increase wasyear, primarily attributabledue to an increase in interest expense on deposits of $666,000,$27.3 million, primarily higher costing CDs, and an increase in interest on borrowings of $108,000.$2.1 million. The average cost of funds for total interest-bearing liabilities increased two140 basis points to 0.76%2.32% for the year ended December 31, 2017, compared to 0.74%2023, from 0.92% for the year ended December 31, 2016.2022. The increase in interest expense was predominantly due to the increase in market rate for deposits and borrowings, and a shift in deposits to higher costing CDs. The average cost of total interest-bearing deposits (excluding noninterest-bearing deposits) slightly increased two146 basis points to 0.50%2.12% for the year ended December 31, 2017,2023, compared to 0.48%0.66% for the year ended December 31, 2016, reflecting rising interest rates over2022. The average cost of funds, including noninterest-bearing checking, increased 105 basis points to 1.72% for the last year ended December 31, 2023, from 0.67% for the year ended December 31, 2022. The average balance of noninterest-bearing deposits, which include noninterest-bearing checking and escrow accounts, totaled $672.2 million and $580.0 million for the increase in non-retail certificatesyears ended December 31, 2023 and 2022, respectively.
The following table details average balances for cost of funds on interest-bearing liabilities, associated rates and theresulting change in interest expense for the years ended December 31, 20172023 and 2016:2022:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, | |||||||||||
|
| 2017 |
| 2016 |
| Increase | |||||||
|
| Average |
|
|
| Average |
|
|
| (Decrease) in | |||
|
| Balance |
|
|
| Balance |
|
|
| Interest | |||
(Dollars in thousands) |
| Outstanding |
| Yield |
| Outstanding |
| Yield |
| Expense | |||
Savings and money market |
| $ | 315,635 |
| 0.40 | % | $ | 280,660 |
| 0.36 | % | $ | 241 |
Interest-bearing checking |
|
| 88,060 |
| 0.15 |
|
| 53,310 |
| 0.05 |
|
| 101 |
Certificates of deposit |
|
| 207,446 |
| 1.22 |
|
| 192,347 |
| 1.15 |
|
| 324 |
Borrowings |
|
| 26,608 |
| 1.26 |
|
| 26,278 |
| 0.86 |
|
| 108 |
Subordinated note |
|
| 9,834 |
| 6.90 |
|
| 9,814 |
| 6.96 |
|
| (4) |
Total interest-bearing liabilities |
| $ | 647,583 |
| 0.76 | % | $ | 562,409 |
| 0.74 | % | $ | 770 |
(Dollars in thousands) | Year Ended December 31, | |||||||||||||||||||
2023 | 2022 | |||||||||||||||||||
Average | Average | $ Change | ||||||||||||||||||
Balance | Yield/ | Balance | Yield/ | in Interest | ||||||||||||||||
Outstanding | Rate | Outstanding | Rate | Expense | ||||||||||||||||
Savings and money market | $ | 612,430 | 0.90 | % | $ | 781,763 | 0.48 | % | $ | 1,736 | ||||||||||
Interest-bearing checking | 189,107 | 1.37 | 176,204 | 0.28 | 2,091 | |||||||||||||||
Certificates of deposit | 930,805 | 3.08 | 459,594 | 1.12 | 23,504 | |||||||||||||||
Borrowings | 110,328 | 4.71 | 102,571 | 2.98 | 2,144 | |||||||||||||||
Subordinated note | 49,492 | 3.92 | 49,425 | 3.93 | — | |||||||||||||||
Total interest-bearing liabilities | $ | 1,892,162 | 2.32 | % | $ | 1,569,557 | 0.92 | % | $ | 29,475 | ||||||||||
Provision for LoanCredit Losses. TheFor the year ended December 31, 2023, the provision for loancredit losses was $750,000$4.8 million consisting of a $5.8 million provision for credit losses on loans partially offset by a $1.0 million reversal of the ACL on unfunded loan commitments, compared to a $6.2 million provision for credit losses, consisting of a $6.6 million provision for credit losses on loans partially offset by a $365,000 reversal of the ACL on unfunded loan commitments for the year ended December 31, 2017, compared to $2.4 million2022. The provision for credit losses on loans reflects the increase in total loans receivable, increased net charge-offs, and increased reserves on individually evaluated nonaccrual loans. The reversals of the allowance for credit losses on unfunded loan commitments for the year ended December 31, 2016. The decrease in the provision was primarilyyears indicated above were a result of the relatively low levels of charge-offs, delinquencies, nonperforming and classified loans, as well as the increasingdecreases in total unfunded commitments during those periods.
73
percentage of real estate loans compared to consumer loans and improving real estate values in our market areas reducing the increase in the provision for loan losses required for loan growth. Substandard loans decreased $1.6 million, or 19.3%, to $6.5 million at December 31, 2017, compared to $8.0 million at December 31, 2016. The decrease in substandard loans from one year ago was primarily due to the sale of a $1.9 million shared national credit as discussed above. Non-performing loans increased to $1.0 million, or 0.1% of total gross loans at December 31, 2017, compared to $721,000, or 0.1% of total gross loans at December 31, 2016. During the year ended December 31, 2017,2023, net charge-offs totaled $205,000$2.2 million, compared to net recoveries of $26,000$1.4 million during the year ended December 31, 2016.2022. The increase was primarily due to increases in net charge-offs of $1.3 million in indirect home improvement loans, partially offset by a decrease in net charge-offs of $395,000 in deposit accounts and overdrafts. A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowed economic growth, among other factors, could result in a material increase in the ACL on loans and may adversely affect the Company’s financial condition and result of operations.
The following table details activity and information related to the allowance for loan lossesACL on loans for the years ended December 31, 20172023 and 2016:2022:
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|
|
|
|
|
|
|
|
| At or For the Year Ended December 31, |
| ||||
(Dollars in thousands) |
| 2017 |
| 2016 |
| ||
Provision for loan losses |
| $ | 750 |
| $ | 2,400 |
|
Net charge-offs (recoveries) |
| $ | 205 |
| $ | (26) |
|
Allowance for loan losses |
| $ | 10,756 |
| $ | 10,211 |
|
Allowance for loan losses as a percentage of total gross loans receivable at the end of the year |
|
| 1.4 | % |
| 1.7 | % |
Non-accrual and 90 days or more past due loans |
| $ | 1,039 |
| $ | 721 |
|
Allowance for loan losses as a percentage of non-performing loans at end of year |
|
| 1,035.2 | % |
| 1,416.2 | % |
Non-accrual and 90 days or more past due loans as a percentage of gross loans receivable at the end of the year |
|
| 0.1 | % |
| 0.1 | % |
Total gross loans |
| $ | 773,445 |
| $ | 605,415 |
|
At or For the Year Ended December 31, | ||||||||
(Dollars in thousands) | 2023 | 2022 | ||||||
Provision for credit losses on loans | $ | 5,770 | $ | 6,623 | ||||
Net charge-offs | $ | 2,228 | $ | 1,407 | ||||
ACL on loans | $ | 31,534 | $ | 27,992 | ||||
ACL on loans as a percentage of total gross loans receivable at year end | 1.30 | % | 1.26 | % | ||||
Nonperforming loans | $ | 10,952 | $ | 8,652 | ||||
ACL on loans as a percentage of nonperforming loans at year end | 288.11 | % | 303.50 | % | ||||
Nonperforming loans as a percentage of gross loans receivable at year end | 0.45 | % | 0.39 | |||||
Total gross loans | $ | 2,433,015 | $ | 2,218,852 | ||||
Management considers the allowance for loan lossesACL on loans at December 31, 2017,2023, to be adequate to cover probableforecasted losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes that the estimates and assumptions used in its determination of the adequacy of the allowanceACL on loans are reasonable, there can beit is important to acknowledge the inherent uncertainties. There is no assurance that suchthese estimates and assumptions will not be proven incorrect in the future, orfuture. Additionally, there is the possibility that the actual amount of future provisions will notmay exceed the amount of past provisions, or thatand any potential increased provisions that may be required will notcould adversely impact the Company’sCompany's financial condition and results of operations. In addition,Furthermore, the determination of the amount of allowance for loan lossesthe Company's ACL on loans is subject to review by bank regulators as part of the routine examination process, whichprocess. The regulators may result inadjust the establishment of additional reservesACL based uponon their judgment ofand the information available to them at the time of their examination. This regulatory scrutiny adds an additional layer of evaluation and potential adjustment to the Company's credit loss provisions.
Noninterest Income. Noninterest income increased $505,000, or 2.1%,$2.4 million to $24.1$20.5 million for the year ended December 31, 2017,2023, from $23.6$18.1 million for the year ended December 31, 2016.2022. The following table provides a detailed analysis of the changes in the components of noninterest income:
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|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, |
| Increase/(Decrease) |
| |||||||
(Dollars in thousands) |
| 2017 |
| 2016 |
| Amount |
| Percent |
| |||
Service charges and fee income |
| $ | 3,548 |
| $ | 3,391 |
| $ | 157 |
| 4.6 | % |
Gain on sale of loans |
|
| 17,985 |
|
| 19,058 |
|
| (1,073) |
| (5.6) |
|
Gain on sale of investment securities |
|
| 380 |
|
| 146 |
|
| 234 |
| 160.3 |
|
Gain on sale of mortgage servicing rights |
|
| 1,062 |
|
| — |
|
| 1,062 |
| 100.0 |
|
Earnings on cash surrender value of BOLI |
|
| 274 |
|
| 282 |
|
| (8) |
| (2.8) |
|
Other noninterest income |
|
| 825 |
|
| 692 |
|
| 133 |
| 19.2 |
|
Total noninterest income |
| $ | 24,074 |
| $ | 23,569 |
| $ | 505 |
| 2.1 | % |
Year Ended December 31, | Increase/(Decrease) | |||||||||||||||
(Dollars in thousands) | 2023 | 2022 | Amount | Percent | ||||||||||||
Service charges and fee income | $ | 11,138 | $ | 8,525 | $ | 2,613 | 30.7 | % | ||||||||
Gain on sale of loans | 6,711 | 7,917 | (1,206 | ) | (15.2 | ) | ||||||||||
Earnings on cash surrender value of BOLI | 920 | 876 | 44 | 5.0 | ||||||||||||
Other noninterest income | 1,721 | 790 | 931 | 117.8 | ||||||||||||
Total noninterest income | $ | 20,490 | $ | 18,108 | $ | 2,382 | 13.2 | % | ||||||||
The year over year increase during the period was primarily due to increasesinclude a $2.6 million increase in gain on sale of mortgage servicing rights of $1.1 million, gain on sale of investment securities of $234,000 and increased service charges and fee income as a result of $157,000,less amortization of MSRs reflecting increased market interest rates and increased servicing fees from non-portfolio serviced loans and a $931,000 increase in other noninterest income, partially offset by a $1.2 million, or 15.2%, decrease in gain on sale of loans, of $1.1 million. The gain on sale of loans includedprimarily due to a reduction in the favorable fair-value adjustment on derivative financial instruments (commitments to extend credit, commitments to sellorigination and sales volume of loans mortgage backed securities tradesheld for sale and option contracts) and reflects a reduction in gross margins of gainsold loans. Gross margins on sale margins associated with the product mix in the Pacific Northwest. For the year ended December 31, 2017, we recorded a net gain of $2.3
74
million for changes in the valuation of derivatives carried at fair value, comparedhome loan sales increased to a net gain of $3.13.07% for the year ended December 31, 2016, which are included in gain on sale of loans. These adjustments in fair value primarily reflect changes in loan volume and interest rate lock commitments issued as a result of subsequent changes in the level of market interest rates. See Note 17 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this Form 10‑K. During the year ended December 31, 2017, the Company originated $812.1 million of one-to-four-family consumer mortgages during 2017 and sold $698.6 million to secondary mortgage market investors, and $19.4 million to another financial institution, compared to sales of $711.7 million during the year ended December 31, 2016. In addition, the margin on loans sold decreased to 2.50%2023, from 2.78% for the year ended December 31, 2017, from 2.64% a year ago.2022.
Noninterest Expense. Noninterest expense increased $5.1$14.6 million or 13.0%, to $44.0$93.7 million for the year ended December 31, 2017, compared to $38.92023, from $79.2 million for the year ended December 31, 2016.2022. The following table provides an analysis of the changes in the components of noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Increase |
| |||
|
| Year Ended December 31, |
| (Decrease) |
| |||||||
(Dollars in thousands) |
| 2017 |
| 2016 |
| Amount |
| Percent |
| |||
Salaries and benefits |
| $ | 26,595 |
| $ | 21,982 |
| $ | 4,613 |
| 21.0 | % |
Operations |
|
| 6,205 |
|
| 6,000 |
|
| 205 |
| 3.4 |
|
Occupancy |
|
| 2,672 |
|
| 2,404 |
|
| 268 |
| 11.1 |
|
Data processing |
|
| 2,521 |
|
| 2,134 |
|
| 387 |
| 18.1 |
|
Gain on sale of OREO |
|
| — |
|
| (150) |
|
| 150 |
| 100.0 |
|
Loan costs |
|
| 2,652 |
|
| 2,505 |
|
| 147 |
| 5.9 |
|
Professional and board fees |
|
| 1,697 |
|
| 1,943 |
|
| (246) |
| (12.7) |
|
FDIC insurance |
|
| 535 |
|
| 487 |
|
| 48 |
| 9.9 |
|
Marketing and advertising |
|
| 716 |
|
| 710 |
|
| 6 |
| 0.8 |
|
Acquisition costs |
|
| — |
|
| 389 |
|
| (389) |
| (100.0) |
|
Amortization of core deposit intangible |
|
| 400 |
|
| 522 |
|
| (122) |
| (23.4) |
|
Recovery on servicing rights |
|
| — |
|
| (3) |
|
| 3 |
| 100.0 |
|
Total noninterest expense |
| $ | 43,993 |
| $ | 38,923 |
| $ | 5,070 |
| 13.0 | % |
Year Ended December 31, | Increase/(Decrease) | |||||||||||||||
(Dollars in thousands) | 2023 | 2022 | Amount | Percent | ||||||||||||
Salaries and benefits | $ | 53,622 | $ | 47,632 | $ | 5,990 | 12.6 | |||||||||
Operations | 13,070 | 10,743 | 2,327 | 21.7 | ||||||||||||
Occupancy | 6,378 | 5,165 | 1,213 | 23.5 | ||||||||||||
Data processing | 6,852 | 6,062 | 790 | 13.0 | ||||||||||||
Gain on sale of OREO | (148 | ) | — | (148 | ) | NM | ||||||||||
Loan costs | 2,574 | 2,718 | (144 | ) | (5.3 | ) | ||||||||||
Professional and board fees | 2,584 | 3,154 | (570 | ) | (18.1 | ) | ||||||||||
FDIC insurance | 2,392 | 1,224 | 1,168 | 95.4 | ||||||||||||
Marketing and advertising | 1,349 | 897 | 452 | 50.4 | ||||||||||||
Acquisition costs | 1,562 | 898 | 664 | 73.9 | ||||||||||||
Amortization of core deposit intangible | 3,464 | 691 | 2,773 | 401.3 | ||||||||||||
Impairment (recovery) of MSRs | 48 | (1 | ) | 49 | (4,900.0 | ) | ||||||||||
Total noninterest expense | $ | 93,747 | $ | 79,183 | $ | 14,564 | 18.4 | |||||||||
At December 31, 2017, the Company employed 326 full-time equivalent employees compared to 306 at December 31, 2016. SalariesThe increase in noninterest expense was primarily a result of a $6.0 million increase in salaries and benefits increased $4.6 million, or 21.0%, which included $1.4 million of commissions and incentives for the loan production staff reflecting our increased loan production, as well as $593,000 of employee stock option plan expenselargely due to the significantan increase in our stock price over the last year.number of FTEs as a result of the Branch Acquisition. Other year over year changesincreases included a $2.8 million in expenses include a $387,000, or 18.1% increaseamortization of core deposit intangible, $2.3 million in operations, $1.2 million in occupancy, $1.2 million in FDIC insurance, $790,000 in data processing, a $268,000, or 11.1% increaseand $664,000 in occupancy, a $205,000, or 3.4% increase in operations costs, and a $147,000, or 5.9% increase in loanacquisition costs, partially offset by a $389,000, or 100.0% decrease in acquisition costs, and a $246,000, or 12.7% decreaseof $570,000 in professional and board fees.There was no gain on the sale of OREO in the current year to offset the increase in expenses as compared to $150,000 last year.
The efficiency ratio, which is noninterest expense as a percentage of net interest income and noninterest income, improved slightly improved to 67.4%62.47% for the year ended December 31, 2017,2023, compared to 67.8%64.70% for the year ended December 31, 2016. By definition, a lower efficiency ratio would be an indication that2022, primarily due to the Company is more efficiently utilizing resources to generate income.growth in revenues outpacing the increase in noninterest expenses.
Provision for Income TaxTaxes. DuringFor the year ended December 31, 2017,2023, the Company recorded a provision for income tax expensetaxes of $6.5$9.2 million on pre-tax income of $45.3 million, as compared to $5.6a provision of income taxes of $7.3 million on pre-tax income of $37.0 million for the year ended December 31, 2016 reflecting both higher pre-tax income and2022. There was a tax benefit recognized as a result of the Tax Act. The Tax Act required a revaluation the Company’snet deferred tax assetsasset of $6.7 million at both December 31, 2023 and liabilities to account for the future impact of lower2022. The effective corporate income tax rates and other provisions offor the legislation. As a result of the Company’s revaluation, the Company recognized $396,000 in tax benefit due to a net deferred tax liability position. Atyears ended December 31, 20172023 and 2016, there was a $607,0002022 were 20.4% and $1.2 million net deferred tax liability,19.8%, respectively. The increase in effective tax rate was partially attributable to an increase in disallowed interest expense on tax exempt assets due to an increase in the cost of funds. Disallowed interest expense was $1.9 million and $587,000 for the yearyears ended December 31, 2017 was 31.6%, compared to 35.1% for the year ended December 31, 2016.2023 and 2022, respectively. For future periods, the Company will be using an estimated tax rate of 21.5% to
75
account for its federal and stateadditional information regarding income tax expense. See Note 11taxes, see “Note 12 – Income Taxes” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10‑10–K.
Comparison of Results of Operations for the Years Ended December 31, 2022 and 2021
See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10–K for the year ended December 31, 2022 filed with the SEC.
Asset and Liability Management and Market Risk
Risk When Interest Rates Change. The rates of interest the Company earns on assets and pays on liabilities generally is established contractually for a period of time. Market rates change over time. Like other financial institutions, the Company’s results of operations are impacted by changes in interest rates and the interest rate sensitivity of the Company’s assets and liabilities. The risk associated with changes in interest rates and the Company’s ability to adapt to these changes is known as interest rate risk and is the most significant market risk.
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, the fair value of the Company’s consolidated financial instruments will change when interest rate levels change, and that change may either be favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed interest rate obligations are less likely to prepay in a rising interest rate environment and more likely to prepay in a falling interest rate environment. Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors interest rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans, and deposits, and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
How The Company Measures Risk of Interest Rate Changes. As part of an attempt to manage exposure to changes in interest rates and comply with applicable regulations, the Company monitors interest rate risk. In doing so, the Company analyzes and manages assets and liabilities based on their interest rates and payment streams, timing of maturities, repricing opportunities, and sensitivity to actual or potential changes in market interest rates.
The Company is subject to interest rate risk to the extent that its interest-bearing liabilities, primarily deposits, subordinated notes, and FHLB advances, reprice more rapidly or at different rates than the interest-earning assets. In order to minimize the potential for adverse effects of material prolonged increases or decreases in interest rates on the Company’s results of operations, the Company has adopted an Asset and Liability Management Policy. The Board of Directors sets the Asset and Liability Management Policy for the Bank, which is implemented by the asset/liability committeeAsset/Liability Committee (“ALCO”), an internal management committee. The board levelboard-level oversight forof the ALCO is performed by the audit committeeAudit Committee of the Board of Directors.
The purpose of the ALCO is to communicate, coordinate, and control asset/liability management consistent with the business plan and board-approved policies. The committee establishes and monitors the volume and mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk, and profitability goals.
The committeeALCO generally meets monthly to, among other things, protect capital through earnings stability over the interest rate cycle; maintain the Bank’s well capitalized status; and provide a reasonable return on investment. The committee recommends appropriate strategy changes based on this review. The committeeAdditionally, the ALCO is responsible for reviewing and reporting the effects of the policy implementations and strategies to the Board of Directors at least quarterly. The Chief Financial Officer oversees thethis process on a daily basis.
A key element of the Bank’s asset/liability management plan is to protect net earnings by managing the maturity or repricing mismatch between interest-earning assets and rate-sensitive liabilities. The Company seeks to accomplish this by extending funding maturities through wholesale funding sources, including the use of FHLB advances and brokered certificates of deposit, and through asset management, including the use of adjustable-rate loans and selling certain fixed-rate loans in the secondary market. Management is also focused on matching deposit duration with the duration of earning assets as appropriate.
As part of the efforts to monitor and manage interest rate risk, a number of indicators are used to monitor overall risk. Among the measurements are:
Market Risk. Market risk is the potential change in the value of investment securities if interest rates change. This change in value impacts the value of the Company and the liquidity of the securities. Market risk is controlled by setting a maximum average maturity/average life of the securities portfolio to 10 years.
Economic Risk. Economic risk is the risk that the underlying value of a bank will change when rates change. This can be caused by a change in value of the existing assets and liabilities (this is called Economic Value of Equity or EVE), or a change in the earnings stream (this is caused by interest rate risk). The Company takes economic risk primarily when fixed rate loans are made, or purchase fixed-rate investments, or issue long term certificates of deposit or take fixed-rate FHLB advances. It is the risk that interest rates will change and these fixed-rate assets and liabilities will change in value. This change in value usually is not recognized in the earnings, or equity (other than marking to market securities
76
available-for-sale or fair value adjustments on loans held for sale). The change is recognized only when the assets and liabilities are liquidated. Although the change in market value is usually not recognized in earnings or in capital, the impact is real to the long-term value of 1st Security Bank of Washington.the Company. Therefore, the Company will control the level of economic risk by limiting the amount of long-term, fixed-rate assets the Companyit will have and by setting a limit on concentrations and maturities of securities.
Interest Rate Risk. If the Federal Reserve Board changes the Fed Funds rate 100, 200 or 300 basis points, the Bank policy dictates that a change in net interest income should not change more that 7.5%, 15% and 30%, respectively.
The table presented below, as of December 31, 2017,2023, is an analysis prepared for 1st Security Bank of Washingtonthe Company by Olson Research Associates, Inc. utilizinga third-party consultant. The analysis employs various market and actual experience-based assumptions. The table representsassumptions and depicts a static shockshock. to the net interest income usingthrough instantaneous and sustained shifts in the yield curve, with adjustments in 100 basis point increments, both up and down 100by 300 basis points. No rates in the model are allowed to go below zero. Given the low interest rate environment, reduction in rates by 200 and 300 basis points are not reported. The results reflectpresent a projected income statement with minimal exposure to instantaneousimmediate changes in interest rates. These results are primarily based uponoutcomes rely on historical prepayment speeds within the consumer lending portfolio, in combinationcoupled with the above average yields associated with the consumer portfolio if those prepayments do not occur. The current targeted Fed Funds rate is a range of 1.25 to 1.50% making a 200 and 300 basis point decrease impossible.table illustrates the estimated change in net interest income over the next 12 months, starting from December 31, 2023.
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Change in |
| December 31, 2017 |
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Interest |
| Net Interest Income |
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Rates in Basis Points |
| Amount |
| Change |
| Change |
| ||
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| (Dollars in thousands) |
| ||||||
300bp |
| $ | 45,340 |
| $ | 1,475 |
| 3.36 | % |
200bp |
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| 45,269 |
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| 1,404 |
| 3.20 |
|
100bp |
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| 44,748 |
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| 883 |
| 2.01 |
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0bp |
|
| 43,865 |
|
| — |
| — |
|
(100)bp |
|
| 42,011 |
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| (1,854) |
| (4.23) |
|
Change in Interest | Net Interest Income | |||||||||||
Rates in Basis Points | Amount | Change | Change | |||||||||
(Dollars in thousands) | ||||||||||||
+300bp | $ | 116,799 | $ | (4,006 | ) | (3.32 | )% | |||||
+200bp | 118,376 | (2,429 | ) | (2.01 | ) | |||||||
+100bp | 119,629 | (1,176 | ) | (0.97 | ) | |||||||
0bp | 120,805 | — | — | |||||||||
-100bp | 120,489 | (316 | ) | (0.26 | ) | |||||||
-200bp | 119,999 | (806 | ) | (0.67 | ) | |||||||
-300bp | 118,928 | (1,877 | ) | (1.55 | ) | |||||||
In managing the assets/liability mix the Company typically places an equal emphasis on maximizing net interest margin and matching the interest rate sensitivity of the assets and liabilities. From time to time, however, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, the Company may place somewhat greater emphasis on maximizing net interest margin than on strict dollar for dollar categories matching the interest rate sensitivity of the assets and liabilities. Management also believes that the increased net income which may result from a prepayment assumption denied mismatch in the actual maturity or repricing of the asset and liability portfolios can, during periods of changing interest rates, provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. Management believes that 1st Security Bank of Washington’sBank’s level of interest rate risk is acceptable under this approach.
In evaluating 1st Security Bank of Washington’sthe Company’s exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable rateadjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. 1st Security Bank of WashingtonThe Company considers all of these factors in monitoring its exposure to interest rate risk.
Liquidity and Capital Resources
Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit runoff that may occur in the normal course of business. The Company relies on a number of different sources in order to meet potential liquidity demands. The primary sources are increases in deposit accounts, FHLB advances,
77
purchases of Fed Funds,federal funds, sale of securities available-for-sale, cash flows from loan payments, sales of one-to-four-family loans held for sale, and maturing securities. While the maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund its operations. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At December 31, 2017,2023, the Bank’s total borrowing capacity was $209.7$686.2 million with the FHLB of Des Moines, with unused borrowing capacity of $201.0 million at that date.$681.9 million. The FHLB borrowing limit is based on certain categories of loans, primarily real estate loans, that qualify as collateral for FHLB advances. At December 31, 2017,2023, the Bank held approximately $318.5 million$1.07 billion in loans that qualify as collateral for FHLB advances.
In addition to the availability of liquidity from the FHLB of Des Moines, the Bank maintained a short-term borrowing line of credit with the Federal Reserve Bank,FRB, with a current limit of $99.1$351.6 million, and a combined credit limit of $43.0$101.0 million in written Fed Fundsfederal funds lines of credit through correspondent banking relationships as ofat December 31, 2017.2023. The Federal Reserve BankFRB borrowing limit is based on certain categories of loans, primarily consumer loans, that qualify as collateral for Federal Reserve BankFRB line of credit. At December 31, 2017,2023, the Bank held approximately $203.3$631.1 million in loans that qualify as collateral for the Federal Reserve BankFRB line of credit.
At Additionally, securities with a carrying value of $77.0 million at December 31, 2017, $7.52023, were pledged primarily to provide contingent liquidity through the BTFP at the FRB, with a current limit of $90.5 million and unused borrowing capacity of $620,000. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in FHLB advancesthe future to fund loan originations and FHLB Fed Funds were outstanding,deposit withdrawals, to satisfy other financial commitments, repay maturing debt and no advances were outstanding againstto take advantage of investment opportunities to the Federal Reserve Bank line of credit, and Fed Funds lines of credit. extent feasible.
The Bank’s Asset and Liability Management Policy permits management to utilize brokered deposits up to 20% of total deposits or $167.0$506.3 million as ofat December 31, 2017.2023. Total brokered deposits as ofat December 31, 20172023 were $59.3$431.5 million. Management utilizes brokered deposits to mitigate interest rate risk exposure whereand to enhance liquidity when appropriate.
Liquidity management is both a daily and long-term function of Companythe Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and Fed Funds.federal funds. On a longer termlonger-term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S. Government obligations and U.S. agency securities. The Company uses sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At December 31, 2017,2023, the approved outstanding loan commitments including unused linestotaled $535.0 million, which included $154.6 million of credit, amountedundisbursed construction and development loan commitments. For information regarding our commitments and off-balance sheet arrangements, see “Note 13 – Commitments and Contingencies” of the Notes to $284.9 million. CertificatesConsolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K. Securities purchased during the years ended December 31, 2023 and 2022 totaled $76.0 million and $24.0 million, respectively, and securities repayments, maturities and sales in those periods were $17.3 million and $21.2 million, respectively.
The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the years ended December 31, 2023 and 2022, the Bank sold $405.0 million and $740.4 million in loans, respectively. During the years ended December 31, 2023 and 2022, the Bank received $652.7 million and $737.3 million in principal repayments on loans, respectively.
The Bank’s liquidity has been positively impacted by increases in deposit levels. During the years ended December 31, 2023 and 2022, deposits increased by $394.6 million and $212.0 million, respectively. Our liquid assets in the form of cash and cash equivalents, CDs at other financial institutions and investment securities increased to $391.2 million at December 31, 2023 from $283.9 million at December 31, 2022. CDs scheduled to mature in one year or less at December 31, 2017,2023, totaled $108.1$863.4 million. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, the CompanyBank believes that a majority of maturing relationship deposits will remain with the Bank.
We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises and equipment during the year ending December 31, 2024 that would materially impact liquidity. We also have purchase obligations, with remaining terms generally less than three years and contracts with various vendors to provide services, including information processing. These contracts typically extend for periods ranging from one to five years, and our financial obligations are contingent upon satisfactory performance by the vendor.
For the year ending December 31, 2024, we project that fixed commitments will include $1.9 million of operating lease payments and $93.7 million of scheduled payments and maturities of FHLB advances and FRB borrowing. For information regarding our operating leases and borrowings, see “Note 7 – Leases” and “Note 11 – Debt”, respectively, of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.
The Bank's management believes that the Company's liquid assets combined with its available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months.
As a separate legal entity from the Bank, FS Bancorp Inc. must provide for its own liquidity. Sources of capital and liquidity for the FS Bancorp Inc. include distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory notice. At December 31, 2017,2023, FS Bancorp, Inc. had $5.2$9.1 million in “unrestricted”unrestricted cash to meet liquidity needs.
The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.26 per share, which we believe is a partydividend rate per share which enables us to financial instruments with off-balance sheet riskbalance our multiple objectives of managing and investing in the normal courseBank and returning a substantial portion of business in orderour cash to meetour shareholders. Assuming continued cash dividend payment during 2024 at this rate of $0.26 per share, our average total dividend paid each quarter would be approximately $2.0 million based on the financing needsnumber of its customers. For information regarding our commitments and off-balance sheet arrangements, see Note 12current outstanding shares as of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10‑K.
A summary of off-balance sheet commitments to extend credit at December 31, 2017 was as follows:2023.
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|
| (In thousands) | |
Off-balance sheet loan commitments: |
|
|
|
Real estate secured (1) |
| $ | 111,202 |
Commercial business loans |
|
| 130,755 |
Home equity loans and lines of credit |
|
| 32,889 |
Consumer loans |
|
| 10,041 |
Total commitments to extend credit |
| $ | 284,887 |
|
|
78
The Bank is subject to minimum capital requirements imposed by the FDIC. Based on its capital levels at December 31, 2017,2023, the Bank exceeded these requirements as of that date. Consistent with our goals to operate a sound and profitable organization, our policy is for the Bank to maintain a well capitalized status under the capital categories of the FDIC. Based on capital levels at December 31, 2017,2023, the Bank was considered to be well capitalized. At December 31, 2017,2023, the Bank exceeded all regulatory capital requirements with Tier 1 leverage-based capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 (“CET1”) capital ratios of 12.6%10.4%, 15.0%12.1%, 16.3%13.4%, and 15.0%12.1%, respectively. For additional information regarding the Bank’s regulatory capital compliance, see the discussion included in Note 14 to the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10‑K.
During the third quarter of 2017, the Company raised gross proceeds of $27.6 million from an underwritten public offering for the sale of 587,234 shares of its common stock with net proceeds after underwriting fees and costs of $25.6 million. Capital proceeds receive from the offering were used to fund the majority of a $26.0 million contribution to the Bank at the end of the third quarter of 2017 to provide additional capital for growth planned over the next 24 months.
ForAs a bank holding company registered with the Federal Reserve, the Company is subject to the capital adequacy requirements of the Federal Reserve. Bank holding companies with less than $1$3.0 billion in consolidated assets suchare generally not subject to compliance with the Federal Reserve’s capital regulations, which are generally the same as FS Bancorp, Inc., the capital guidelines apply onregulations applicable to the Bank. The Federal Reserve has a policy that a bank only basisholding company is required to serve as a source of financial and managerial strength to the holding company’s subsidiary bank and the Federal Reserve requiresexpects the holding company’s subsidiary banksbank to be well capitalized under the prompt corrective action regulations. If FS Bancorp Inc. waswere subject to regulatory capital guidelines for bank holding companies with $1$3.0 billion or more in assets at December 31, 2017,2023, FS Bancorp Inc. would have exceeded all regulatory capital requirements.
The following table compares 1st Security Bank of Washington’s actual For informational purposes, the regulatory capital amountsratios calculated for FS Bancorp at December 31, 2017, to its minimum2023 were 9.0% for Tier 1 leverage-based capital, 10.5% for Tier 1 risk-based capital, 13.7% for total risk-based capital, and 10.5% for CET 1 capital ratio. For additional information regarding regulatory capital requirements at that date:
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| To be Well Capitalized |
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| Under Prompt |
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| For Capital |
| For Capital Adequacy |
| Corrective |
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| Actual |
| Adequacy Purposes |
| with Capital Buffer |
| Action Provisions |
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(Dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
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| Amount |
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As of December 31, 2017 |
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Total risk-based capital |
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(to risk-weighted assets) |
| $ | 133,967 |
| 16.25 | % | $ | 65,965 |
| 8.00 | % | $ | 76,272 |
| 9.25 | % | $ | 82,456 |
| 10.00 | % |
Tier 1 risk-based capital |
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(to risk-weighted assets) |
| $ | 123,651 |
| 15.00 | % | $ | 49,474 |
| 6.00 | % | $ | 59,781 |
| 7.25 | % | $ | 65,965 |
| 8.00 | % |
Tier 1 leverage capital |
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(to average assets) |
| $ | 123,651 |
| 12.61 | % | $ | 39,233 |
| 4.00 | % |
| N/A |
| N/A |
| $ | 49,041 |
| 5.00 | % |
CET1 capital |
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(to risk-weighted assets) |
| $ | 123,651 |
| 15.00 | % | $ | 37,105 |
| 4.50 | % | $ | 47,412 |
| 5.75 | % | $ | 53,597 |
| 6.50 | % |
Recent Accounting Pronouncements
For acompliance, see the discussion of recent accounting standards, please see Note 1included in “Note 15 – Regulatory Capital” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10‑10–K.
Recent Accounting Pronouncements
For a discussion of recent accounting standards, please see “Note 1– Basis of Presentation and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises principally from interest rate risk inherent in lending, investing, deposit and borrowings activities. Management actively monitors and manages its interest rate risk exposure. In addition to other risks that are managed in the normal course of business, such as credit quality and liquidity, management considers interest rate risk to be a significant market risk that could potentially have a material effect on the Company’s financial condition and result of operations. The information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -– Asset and Liability Management” of this Form 10‑10–K is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
FS BANCORP,INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
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● | Testing the design, implementation, and operating effectiveness of controls related to management’s calculation of the allowance for credit losses on loans, including controls over the accuracy of risk-grade groupings and application of qualitative and environmental adjustments. |
● | Testing the completeness and accuracy of the data used in the calculation, application of the loan risk-grade groupings, and application of qualitative and environmental adjustments, all of which are determined by management and used in the calculation. |
● | Testing a risk-based, targeted selection of loans to gain substantive evidence that the Company is appropriately risk-grading these loans in accordance with its policies, and that the risk grades for the loans are reasonable based on current information available. |
● | Obtaining management’s analysis and supporting documentation related to the qualitative and environmental adjustments, and testing whether the adjustments used in the calculation of the allowance for credit losses on loans are supported by the analysis provided by management. |
● | Analytically reviewed historical asset quality trends and the overall characteristics of the loan portfolio for directional consistency. |
Business Combination
As discussed in Notes 1 and 2 to the consolidated financial statements, on February 24, 2023, the Company’s wholly owned subsidiary, 1st Security Bank, completed the purchase of seven branches (“Branch Acquisition”) from Columbia State Bank. In accordance with the Purchase and Assumption Agreement, dated as of November 7, 2022, between Columbia State Bank and 1st Security Bank, the Bank acquired $425.5 million of deposits, a portfolio of performing loans, six owned bank branches, one lease associated with the bank branches, and certain other assets of the branches. In consideration of the purchased assets and assumed liabilities, 1st Security Bank paid the unpaid principal balance and accrued interest of $66.6 million for the loans acquired; the fair value, or approximately $6.3 million, for the bank facilities and certain other assets associated with the acquired branches; and a deposit premium of 4.15% for core deposits and 2.5% for public funds on substantially all of the deposits assumed, which equated to approximately $16.4 million. The transaction was settled with Columbia State Bank paying cash of $334.7 million to 1st Security Bank for the difference between the total assets purchased and the total liabilities assumed. The business combination was accounted for using the acquisition method of accounting in which assets, liabilities, and consideration exchanged were recorded at their respective fair values on February 24, 2023, the date of the acquisition.
We identified the valuation of acquired loans as a critical audit matter because of the judgments necessary by management to determine the fair value of the loan portfolio acquired and the related high degree of auditor judgment and extensive effort involved in testing management’s significant estimates and assumptions, including using individuals with specialized skill and knowledge.
The primary procedures we performed to address this critical audit matter included:
● | Testing the design, implementation, and operating effectiveness of internal controls related to the completeness and accuracy of acquired loan data and fair value estimates of acquired loans, including significant assumptions and methods utilized in the calculation. |
● | Testing the completeness and accuracy of loan data used in the determination of non-purchase credit deteriorated loans at the acquisition data and evaluating the reasonableness of the criteria used by management in their identification. |
● | Testing the completeness and accuracy of acquired loan data used in the fair value estimate calculation. |
● | Utilizing internal firm specialists with specialized skill and knowledge to evaluate the reasonableness of significant assumptions and methods used by management, by preparing an independent fair value calculation, as well as an assessment of the overall reasonableness of the fair value estimates of all acquired loans. |
We identified the valuation of the core deposit intangible as a critical audit matter because of the judgments necessary by management to determine the fair value of the core deposit intangible, and the related high degree of auditor judgment and extensive effort involved in testing management’s significant estimates and assumptions, including using individuals with specialized skill and knowledge.
The primary procedures we performed to address this critical audit matter included:
● | Testing the design, implementation, and operating effectiveness of internal controls related to the completeness and accuracy of acquired deposit data and the fair value estimate of the core deposit intangible, including significant assumptions and methods utilized in the calculation. |
● | Testing the completeness and accuracy of acquired deposit data used in the fair value estimate calculation. |
● | Utilizing internal firm specialists with specialized skill and knowledge to evaluate the reasonableness of significant assumptions and methods used by management, by preparing an independent fair value calculation, as well as an assessment of the overall reasonableness of the fair value estimates of core deposit intangible. |
/s/ Moss Adams LLP
Everett, Washington
We have served as the Company’s auditor since 2004.2006.
82
FS BANCORP, INC. AND SUBSIDIARY
DECEMBER 31, 20172023 AND 20162022
(InDollars in thousands, except share data)
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| 2017 |
| 2016 |
| December 31, | December 31, | ||||||||
ASSETS |
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| 2023 | 2022 | ||||||
Cash and due from banks |
| $ | 3,043 |
| $ | 3,590 |
| $ | 17,083 | $ | 10,525 | ||||
Interest-bearing deposits at other financial institutions |
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| 15,872 |
|
| 32,866 |
| 48,608 | 30,912 | ||||||
Total cash and cash equivalents |
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| 18,915 |
|
| 36,456 |
| 65,691 | 41,437 | ||||||
Certificates of deposit at other financial institutions |
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| 18,108 |
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| 15,248 |
| 24,167 | 4,712 | ||||||
Securities available-for-sale, at fair value |
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| 82,480 |
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| 81,875 |
| 292,933 | 229,252 | ||||||
Securities held-to-maturity, net of allowance for credit losses of $45 and $31, respectively (fair value of $7,666 and $7,929, respectively) | 8,455 | 8,469 | |||||||||||||
Loans held for sale, at fair value |
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| 53,463 |
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| 52,553 |
| 25,668 | 20,093 | ||||||
Loans receivable, net |
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| 761,558 |
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| 593,317 |
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Loans receivable, net (includes $15,088 and $14,035, at fair value, respectively) | 2,401,481 | 2,190,860 | |||||||||||||
Accrued interest receivable |
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| 3,566 |
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| 2,524 |
| 14,005 | 11,144 | ||||||
Premises and equipment, net |
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| 15,458 |
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| 16,012 |
| 30,578 | 25,119 | ||||||
Operating lease right-of-use (“ROU”) assets | 6,627 | 6,226 | |||||||||||||
Federal Home Loan Bank (“FHLB”) stock, at cost |
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| 2,871 |
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| 2,719 |
| 2,114 | 10,611 | ||||||
Other real estate owned (“OREO”) | — | 570 | |||||||||||||
Deferred tax asset, net | 6,725 | 6,670 | |||||||||||||
Bank owned life insurance (“BOLI”), net |
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| 10,328 |
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| 10,054 |
| 37,719 | 36,799 | ||||||
Servicing rights, held at the lower of cost or fair value |
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| 6,795 |
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| 8,459 |
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Mortgage servicing rights (“MSRs”), held at the lower of cost or fair value | 9,090 | 18,017 | |||||||||||||
MSRs held for sale, held at the lower of cost or fair value | 8,086 | — | |||||||||||||
Goodwill |
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| 2,312 |
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| 2,312 |
| 3,592 | 2,312 | ||||||
Core deposit intangible, net |
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| 1,317 |
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| 1,717 |
| 17,343 | 3,369 | ||||||
Other assets |
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| 4,612 |
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| 4,680 |
| 18,395 | 17,240 | ||||||
TOTAL ASSETS |
| $ | 981,783 |
| $ | 827,926 |
| $ | 2,972,669 | $ | 2,632,900 | ||||
LIABILITIES |
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Deposits: |
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| ||||||||
Noninterest-bearing accounts |
| $ | 186,890 |
| $ | 155,053 |
| $ | 670,831 | $ | 554,174 | ||||
Interest-bearing accounts |
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| 642,952 |
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| 557,540 |
| 1,851,492 | 1,573,567 | ||||||
Total deposits |
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| 829,842 |
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| 712,593 |
| 2,522,323 | 2,127,741 | ||||||
Borrowings |
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| 7,529 |
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| 12,670 |
| 93,746 | 186,528 | ||||||
Subordinated note: |
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Subordinated notes: | |||||||||||||||
Principal amount |
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| 10,000 |
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| 10,000 |
| 50,000 | 50,000 | ||||||
Unamortized debt issuance costs |
|
| (155) |
|
| (175) |
| (473 | ) | (539 | ) | ||||
Total subordinated note less unamortized debt issuance costs |
|
| 9,845 |
|
| 9,825 |
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Deferred tax liability, net |
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| 607 |
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| 1,161 |
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Total subordinated notes less unamortized debt issuance costs | 49,527 | 49,461 | |||||||||||||
Operating lease liabilities | 6,848 | 6,474 | |||||||||||||
Other liabilities |
|
| 11,958 |
|
| 10,644 |
| 35,737 | 30,999 | ||||||
Total liabilities |
|
| 859,781 |
|
| 746,893 |
| 2,708,181 | 2,401,203 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 12) |
|
|
|
|
|
|
| ||||||||
COMMITMENTS AND CONTINGENCIES (NOTE 13) | |||||||||||||||
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
| ||||||||
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued or outstanding |
|
| — |
|
| — |
| ||||||||
Common stock, $.01 par value; 45,000,000 shares authorized; 3,680,152 and 3,059,503 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively |
|
| 37 |
|
| 31 |
| ||||||||
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued or outstanding | — | — | |||||||||||||
Common stock, $.01 par value; 45,000,000 shares authorized; 7,800,545 and 7,736,185 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively | 78 | 77 | |||||||||||||
Additional paid-in capital |
|
| 55,135 |
|
| 27,334 |
| 57,362 | 55,187 | ||||||
Retained earnings |
|
| 68,422 |
|
| 55,584 |
| 230,354 | 202,065 | ||||||
Accumulated other comprehensive loss, net of tax |
|
| (475) |
|
| (536) |
| (23,306 | ) | (25,632 | ) | ||||
Unearned shares – Employee Stock Ownership Plan (“ESOP”) |
|
| (1,117) |
|
| (1,380) |
| ||||||||
Total stockholders’ equity |
|
| 122,002 |
|
| 81,033 |
| 264,488 | 231,697 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 981,783 |
| $ | 827,926 |
| $ | 2,972,669 | $ | 2,632,900 | ||||
See accompanying notes to these consolidated financial statements.
83
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBERDecember 31, 20172023, 2022, and 20162021
(InDollars in thousands, except earnings per share data)
Year Ended | |||||||||||||||||||
|
|
|
|
|
|
|
| December 31, | |||||||||||
|
| 2017 |
| 2016 |
| 2023 | 2022 | 2021 | |||||||||||
INTEREST INCOME |
|
|
|
|
| ||||||||||||||
Loans receivable, including fees |
| $ | 43,457 |
| $ | 35,772 |
| $ | 154,945 | $ | 111,648 | $ | 90,737 | ||||||
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions |
|
| 2,724 |
|
| 2,248 |
| 12,247 | 7,046 | 5,637 | |||||||||
Total interest and dividend income |
|
| 46,181 |
|
| 38,020 |
| 167,192 | 118,694 | 96,374 | |||||||||
INTEREST EXPENSE |
|
|
|
|
|
|
| ||||||||||||
Deposits |
|
| 3,920 |
|
| 3,254 |
| 36,751 | 9,420 | 6,929 | |||||||||
Borrowings |
|
| 334 |
|
| 226 |
| 5,196 | 3,052 | 1,074 | |||||||||
Subordinated note |
|
| 679 |
|
| 683 |
| ||||||||||||
Subordinated notes | 1,942 | 1,942 | 1,722 | ||||||||||||||||
Total interest expense |
|
| 4,933 |
|
| 4,163 |
| 43,889 | 14,414 | 9,725 | |||||||||
NET INTEREST INCOME |
|
| 41,248 |
|
| 33,857 |
| 123,303 | 104,280 | 86,649 | |||||||||
PROVISION FOR LOAN LOSSES |
|
| 750 |
|
| 2,400 |
| ||||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
|
| 40,498 |
|
| 31,457 |
| ||||||||||||
PROVISION FOR CREDIT LOSSES | 4,774 | 6,217 | 500 | ||||||||||||||||
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 118,529 | 98,063 | 86,149 | ||||||||||||||||
NONINTEREST INCOME |
|
|
|
|
|
|
| ||||||||||||
Service charges and fee income |
|
| 3,548 |
|
| 3,391 |
| 11,138 | 8,525 | 4,349 | |||||||||
Gain on sale of loans |
|
| 17,985 |
|
| 19,058 |
| 6,711 | 7,917 | 31,083 | |||||||||
Gain on sale of investment securities |
|
| 380 |
|
| 146 |
| ||||||||||||
Gain on sale of mortgage servicing rights (“MSR”) |
|
| 1,062 |
|
| — |
| ||||||||||||
Earnings on cash surrender value of BOLI |
|
| 274 |
|
| 282 |
| 920 | 876 | 866 | |||||||||
Other noninterest income |
|
| 825 |
|
| 692 |
| 1,721 | 790 | 1,215 | |||||||||
Total noninterest income |
|
| 24,074 |
|
| 23,569 |
| 20,490 | 18,108 | 37,513 | |||||||||
NONINTEREST EXPENSE |
|
|
|
|
|
|
| ||||||||||||
Salaries and benefits |
|
| 26,595 |
|
| 21,982 |
| 53,622 | 47,632 | 49,721 | |||||||||
Operations |
|
| 6,205 |
|
| 6,000 |
| 13,070 | 10,743 | 10,791 | |||||||||
Occupancy |
|
| 2,672 |
|
| 2,404 |
| 6,378 | 5,165 | 4,892 | |||||||||
Data processing |
|
| 2,521 |
|
| 2,134 |
| 6,852 | 6,062 | 4,951 | |||||||||
Gain on sale of other real estate owned (“OREO”) |
|
| — |
|
| (150) |
| ||||||||||||
(Gain) loss on sale of OREO | (148 | ) | — | 9 | |||||||||||||||
Loan costs |
|
| 2,652 |
|
| 2,505 |
| 2,574 | 2,718 | 2,795 | |||||||||
Professional and board fees |
|
| 1,697 |
|
| 1,943 |
| 2,584 | 3,154 | 3,181 | |||||||||
Federal Deposit Insurance Corporation (“FDIC”) insurance |
|
| 535 |
|
| 487 |
| 2,392 | 1,224 | 636 | |||||||||
Marketing and advertising |
|
| 716 |
|
| 710 |
| 1,349 | 897 | 634 | |||||||||
Acquisition costs |
|
| — |
|
| 389 |
| 1,562 | 898 | — | |||||||||
Amortization of core deposit intangible |
|
| 400 |
|
| 522 |
| 3,464 | 691 | 691 | |||||||||
Recovery on servicing rights |
|
| — |
|
| (3) |
| ||||||||||||
Impairment (recovery) of MSRs | 48 | (1 | ) | (2,059 | ) | ||||||||||||||
Total noninterest expense |
|
| 43,993 |
|
| 38,923 |
| 93,747 | 79,183 | 76,242 | |||||||||
INCOME BEFORE PROVISION FOR INCOME TAXES |
|
| 20,579 |
|
| 16,103 |
| 45,272 | 36,988 | 47,420 | |||||||||
PROVISION FOR INCOME TAXES |
|
| 6,494 |
|
| 5,604 |
| 9,219 | 7,339 | 10,008 | |||||||||
NET INCOME |
| $ | 14,085 |
| $ | 10,499 |
| $ | 36,053 | $ | 29,649 | $ | 37,412 | ||||||
Basic earnings per share |
| $ | 4.55 |
| $ | 3.63 |
| $ | 4.63 | $ | 3.75 | $ | 4.48 | ||||||
Diluted earnings per share |
| $ | 4.28 |
| $ | 3.51 |
| $ | 4.56 | $ | 3.70 | $ | 4.37 | ||||||
Share and per share data has been adjusted for all periods to reflect a two-for-one stock split effective July 14, 2021.
See accompanying notes to these consolidated financial statements.
84
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBERDecember 31, 20172023, 2022, and 20162021
(Dollars in thousands)
(In thousands)
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| ||
Net Income |
| $ | 14,085 |
| $ | 10,499 |
|
Other comprehensive income (loss), before tax: |
|
|
|
|
|
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
Unrealized holding gain (loss) during year |
|
| 605 |
|
| (804) |
|
Income tax (provision) benefit related to unrealized holding gain |
|
| (213) |
|
| 286 |
|
Reclassification adjustment for realized gain included in net income |
|
| (380) |
|
| (146) |
|
Income tax provision related to reclassification for realized gain |
|
| 133 |
|
| 50 |
|
Other comprehensive income (loss), net of tax |
|
| 145 |
|
| (614) |
|
COMPREHENSIVE INCOME |
| $ | 14,230 |
| $ | 9,885 |
|
Year Ended | ||||||||||||
December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Net income | $ | 36,053 | $ | 29,649 | $ | 37,412 | ||||||
Other comprehensive income (loss): | ||||||||||||
Securities available-for-sale: | ||||||||||||
Unrealized gain (loss) during period | 6,779 | (41,849 | ) | (5,150 | ) | |||||||
Income tax (provision) benefit related to unrealized holding gain (loss) | (1,458 | ) | 8,998 | 1,108 | ||||||||
Derivative financial instruments: | ||||||||||||
Unrealized derivative gain during period | 1,651 | 9,844 | 1,706 | |||||||||
Income tax provision related to unrealized derivative gain | (355 | ) | (2,116 | ) | (367 | ) | ||||||
Reclassification adjustment for realized (gain) loss, net included in net income | (5,465 | ) | (970 | ) | 538 | |||||||
Income tax provision (benefit) related to reclassification, net | 1,174 | 209 | (116 | ) | ||||||||
Other comprehensive income (loss), net of tax | 2,326 | (25,884 | ) | (2,281 | ) | |||||||
COMPREHENSIVE INCOME | $ | 38,379 | $ | 3,765 | $ | 35,131 | ||||||
See accompanying notes to these consolidated financial statements.
85
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED December 31, 2023, 2022, and 2021
(Dollars in thousands, except share amounts)
Accumulated | ||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||
Additional | Comprehensive | Unearned | Total | |||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Income (Loss), | ESOP | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Net of Tax | Shares | Equity | ||||||||||||||||||||||
BALANCE, January 1, 2021 | 8,475,912 | $ | 85 | $ | 81,275 | $ | 146,405 | $ | 2,533 | $ | (291 | ) | $ | 230,007 | ||||||||||||||
Net income | — | $ | — | — | 37,412 | — | — | $ | 37,412 | |||||||||||||||||||
Dividends paid ($0.56 per share) | — | $ | — | — | (4,602 | ) | — | — | $ | (4,602 | ) | |||||||||||||||||
Share-based compensation | — | $ | — | 1,446 | — | — | — | $ | 1,446 | |||||||||||||||||||
Restricted stock awards | 41,350 | $ | — | — | — | — | — | $ | — | |||||||||||||||||||
Common stock repurchased - repurchase plan | (518,383 | ) | $ | (4 | ) | (13,957 | ) | — | — | — | $ | (13,961 | ) | |||||||||||||||
Common stock repurchased for employee/director taxes paid on restricted stock awards | (5,970 | ) | $ | — | (211 | ) | — | — | — | $ | (211 | ) | ||||||||||||||||
Stock options exercised, net | 176,978 | $ | 1 | (2,077 | ) | — | — | — | $ | (2,076 | ) | |||||||||||||||||
Other comprehensive loss, net of tax | — | $ | — | — | — | (2,281 | ) | — | $ | (2,281 | ) | |||||||||||||||||
ESOP shares allocated | — | $ | — | 1,482 | — | — | 291 | $ | 1,773 | |||||||||||||||||||
BALANCE, December 31, 2021 | 8,169,887 | $ | 82 | $ | 67,958 | $ | 179,215 | $ | 252 | $ | — | $ | 247,507 | |||||||||||||||
BALANCE, January 1, 2022 | 8,169,887 | $ | 82 | $ | 67,958 | $ | 179,215 | $ | 252 | $ | — | $ | 247,507 | |||||||||||||||
Net income | — | $ | — | — | 29,649 | — | — | $ | 29,649 | |||||||||||||||||||
Dividends paid ($0.90 per share) | — | $ | — | — | (7,096 | ) | — | — | $ | (7,096 | ) | |||||||||||||||||
Share-based compensation | — | $ | — | 1,971 | — | — | — | $ | 1,971 | |||||||||||||||||||
Issuance of common stock- employee stock purchase plan | 16,934 | $ | — | 503 | — | — | — | $ | 503 | |||||||||||||||||||
Restricted stock awards | 35,050 | $ | — | — | — | — | — | $ | — | |||||||||||||||||||
Cumulative effect of new accounting standard (Topic 326) - impact in year of adoption | — | $ | — | — | 297 | — | — | $ | 297 | |||||||||||||||||||
Common stock repurchased - repurchase plan | (544,530 | ) | $ | (5 | ) | (15,623 | ) | — | — | — | $ | (15,628 | ) | |||||||||||||||
Common stock repurchased for employee/director taxes paid on restricted stock awards | (6,150 | ) | $ | — | (190 | ) | — | — | — | $ | (190 | ) | ||||||||||||||||
Stock options exercised, net | 64,994 | $ | — | 568 | — | — | — | $ | 568 | |||||||||||||||||||
Other comprehensive loss, net of tax | — | $ | — | — | — | (25,884 | ) | — | $ | (25,884 | ) | |||||||||||||||||
BALANCE, December 31, 2022 | 7,736,185 | $ | 77 | $ | 55,187 | $ | 202,065 | $ | (25,632 | ) | $ | — | $ | 231,697 | ||||||||||||||
Share and per share data has been adjusted for all periods to reflect a two-for-one stock split effective July 14, 2021.
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBERDecember 31, 20172023, 2022, and 20162021 (Continued)
(InDollars in thousands, except share data)amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
| |
|
|
|
|
|
|
| Additional |
|
|
|
| Other |
| Unearned |
| Total | ||||
|
| Common Stock |
| Paid-in |
| Retained |
| Comprehensive |
| ESOP |
| Stockholders’ | ||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Income, Net of Tax |
| Shares |
| Equity | ||||||
BALANCE, January 1, 2016 |
| 3,242,120 |
| $ | 32 |
| $ | 30,692 |
| $ | 46,175 |
| $ | 78 |
| $ | (1,637) |
| $ | 75,340 |
Net income |
| — |
| $ | — |
|
| — |
|
| 10,499 |
|
| — |
|
| — |
| $ | 10,499 |
Dividends paid ($0.36 per share) |
| — |
| $ | — |
|
| — |
|
| (1,090) |
|
| — |
|
| — |
| $ | (1,090) |
Share-based compensation |
| — |
| $ | — |
|
| 783 |
|
| — |
|
| — |
|
| — |
| $ | 783 |
Restricted stock awards |
| 4,500 |
| $ | — |
|
| — |
|
| — |
|
| — |
|
| — |
| $ | — |
Common stock repurchased |
| (198,167) |
| $ | (1) |
|
| (4,902) |
|
| — |
|
| — |
|
| — |
| $ | (4,903) |
Stock options exercised |
| 11,050 |
| $ | — |
|
| 186 |
|
| — |
|
| — |
|
| — |
| $ | 186 |
Other comprehensive loss, net of tax |
| — |
| $ | — |
|
| — |
|
| — |
|
| (614) |
|
| — |
| $ | (614) |
ESOP shares allocated |
| — |
| $ | — |
|
| 575 |
|
| — |
|
| — |
|
| 257 |
| $ | 832 |
BALANCE, December 31, 2016 |
| 3,059,503 |
| $ | 31 |
| $ | 27,334 |
| $ | 55,584 |
| $ | (536) |
| $ | (1,380) |
| $ | 81,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, January 1, 2017 |
| 3,059,503 |
| $ | 31 |
| $ | 27,334 |
| $ | 55,584 |
| $ | (536) |
| $ | (1,380) |
| $ | 81,033 |
Net income |
| — |
| $ | — |
|
| — |
|
| 14,085 |
|
| — |
|
| — |
| $ | 14,085 |
Dividends paid ($0.41 per share) |
| — |
| $ | — |
|
| — |
|
| (1,331) |
|
| — |
|
| — |
| $ | (1,331) |
Proceeds from public offering, net of offering expenses of $326,000 |
| 587,234 |
| $ | 6 |
|
| 25,612 |
|
| — |
|
| — |
|
| — |
| $ | 25,618 |
Share-based compensation |
| — |
| $ | — |
|
| 634 |
|
| — |
|
| — |
|
| — |
| $ | 634 |
Common stock repurchased |
| (6,198) |
| $ | — |
|
| (275) |
|
| — |
|
| — |
|
| — |
| $ | (275) |
Stock options exercised |
| 39,613 |
| $ | — |
|
| 669 |
|
| — |
|
| — |
|
| — |
| $ | 669 |
Other comprehensive income, net of tax |
| — |
| $ | — |
|
| — |
|
| — |
|
| 145 |
|
| — |
| $ | 145 |
ESOP shares allocated |
| — |
| $ | — |
|
| 1,161 |
|
| — |
|
| — |
|
| 263 |
| $ | 1,424 |
Income tax rate differential |
| — |
| $ | — |
|
| — |
|
| 84 |
|
| (84) |
|
| — |
| $ | — |
BALANCE, December 31, 2017 |
| 3,680,152 |
| $ | 37 |
| $ | 55,135 |
| $ | 68,422 |
| $ | (475) |
| $ | (1,117) |
| $ | 122,002 |
Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Additional | Comprehensive | Total | ||||||||||||||||||||||
Common Stock | Paid-in | Retained | Loss, | Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Earnings | Net of Tax | Equity | |||||||||||||||||||
BALANCE, January 1, 2023 | 7,736,185 | $ | 77 | $ | 55,187 | $ | 202,065 | $ | (25,632 | ) | $ | 231,697 | ||||||||||||
Net income | — | $ | — | — | 36,053 | — | $ | 36,053 | ||||||||||||||||
Dividends paid ($1.00 per share) | — | $ | — | — | (7,764 | ) | — | $ | (7,764 | ) | ||||||||||||||
Share-based compensation | — | $ | — | 2,010 | — | — | $ | 2,010 | ||||||||||||||||
Issuance of common stock- employee stock purchase plan | 32,330 | $ | 1 | 1,016 | — | — | $ | 1,017 | ||||||||||||||||
Restricted stock awards | 37,600 | $ | — | — | — | — | $ | — | ||||||||||||||||
Restricted stock awards forfeited | (9,524 | ) | $ | — | — | — | — | $ | — | |||||||||||||||
Common stock repurchased - repurchase plan | (32,334 | ) | $ | — | (223 | ) | — | — | $ | (223 | ) | |||||||||||||
Common stock repurchased for employee/director taxes paid on restricted stock awards | (11,446 | ) | $ | — | (355 | ) | — | — | $ | (355 | ) | |||||||||||||
Stock options exercised, net | 47,734 | $ | — | (273 | ) | — | — | $ | (273 | ) | ||||||||||||||
Other comprehensive income, net of tax | — | $ | — | — | — | 2,326 | $ | 2,326 | ||||||||||||||||
BALANCE, December 31, 2023 | 7,800,545 | $ | 78 | $ | 57,362 | $ | 230,354 | $ | (23,306 | ) | $ | 264,488 | ||||||||||||
Share and per share data has been adjusted for all periods to reflect a two-for-one stock split effective July 14, 2021.
See accompanying notes to these consolidated financial statements.
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBERDecember 31, 20172023, 2022, and 20162021
(Dollars in thousands)
(In thousands)
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
Net income |
| $ | 14,085 |
| $ | 10,499 |
Adjustments to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
Provision for loan losses |
|
| 750 |
|
| 2,400 |
Depreciation, amortization and accretion |
|
| 3,938 |
|
| 5,210 |
Compensation expense related to stock options and restricted stock awards |
|
| 634 |
|
| 783 |
ESOP compensation expense for allocated shares |
|
| 1,424 |
|
| 832 |
(Benefit) provision for deferred income taxes |
|
| (718) |
|
| 206 |
Increase in cash surrender value of BOLI |
|
| (274) |
|
| (282) |
Gain on sale of loans held for sale |
|
| (17,487) |
|
| (19,058) |
Gain on sale of portfolio loans |
|
| (498) |
|
| — |
Gain on sale of investment securities |
|
| (380) |
|
| (146) |
Gain on sale of OREO |
|
| — |
|
| (150) |
Gain on sale of MSR |
|
| (1,062) |
|
| — |
Origination of loans held for sale |
|
| (698,504) |
|
| (718,864) |
Proceeds from sale of loans held for sale |
|
| 711,766 |
|
| 726,831 |
Recovery on servicing rights |
|
| — |
|
| (3) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
Accrued interest receivable |
|
| (1,042) |
|
| (417) |
Other assets |
|
| 1,256 |
|
| (7,326) |
Other liabilities |
|
| 1,196 |
|
| 3,073 |
Net cash from operating activities |
|
| 15,084 |
|
| 3,588 |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
Activity in securities available-for-sale: |
|
|
|
|
|
|
Proceeds from sale of investment securities |
|
| 39,103 |
|
| 13,577 |
Maturities, prepayments, sales, and calls |
|
| 7,580 |
|
| 14,093 |
Purchases |
|
| (47,271) |
|
| (55,811) |
Maturities of certificates of deposit at other financial institutions |
|
| 1,240 |
|
| 292 |
Purchase of certificates of deposit at other financial institutions |
|
| (4,102) |
|
| (3,122) |
Loan originations and principal collections, net |
|
| (155,793) |
|
| (95,043) |
Purchase of portfolio loans |
|
| (38,950) |
|
| — |
Proceeds from sale of portfolio loans |
|
| 25,120 |
|
| — |
Proceeds from sale of other real estate owned, net |
|
| — |
|
| 682 |
Purchase of premises and equipment, net |
|
| (1,016) |
|
| (3,595) |
Proceeds from sale of MSR |
|
| 4,827 |
|
| — |
FHLB stock, net |
|
| (152) |
|
| 1,832 |
Net cash received from acquisition |
|
| — |
|
| 180,356 |
Net cash (used by) from investing activities |
|
| (169,414) |
|
| 53,261 |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
Net increase in deposits |
|
| 117,249 |
|
| 47,059 |
Proceeds from borrowings |
|
| 495,274 |
|
| 349,125 |
Repayments of borrowings |
|
| (500,415) |
|
| (435,225) |
Dividends paid |
|
| (1,331) |
|
| (1,090) |
Proceeds from stock options exercised |
|
| 669 |
|
| 186 |
Common stock repurchased |
|
| (275) |
|
| (4,903) |
Proceeds from issuance of common stock, net |
|
| 25,618 |
|
| — |
Net cash from (used by) financing activities |
|
| 136,789 |
|
| (44,848) |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
| (17,541) |
|
| 12,001 |
CASH AND CASH EQUIVALENTS, beginning of year |
|
| 36,456 |
|
| 24,455 |
CASH AND CASH EQUIVALENTS, end of year |
| $ | 18,915 |
| $ | 36,456 |
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
87
Interest |
| $ | 4,904 |
| $ | 4,164 |
Income taxes |
| $ | 8,100 |
| $ | 6,110 |
Assets acquired in acquisition of branches (Note 2) |
| $ | — |
| $ | 181,575 |
Liabilities assumed in acquisition of branches (Note 2) |
| $ | — |
| $ | 186,393 |
SUPPLEMENTARY DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
Change in unrealized gain on investment securities |
| $ | 225 |
| $ | (950) |
Transfer portfolio loans to loans held for sale |
| $ | 1,886 |
| $ | — |
Property received in settlement of loans |
| $ | — |
| $ | 525 |
Retention of gross mortgage servicing rights from loan sales |
| $ | 5,075 |
| $ | 4,194 |
Year Ended December 31, | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | 2023 | 2022 | 2021 | |||||||||
Net income | $ | 36,053 | $ | 29,649 | $ | 37,412 | ||||||
Adjustments to reconcile net income to net cash from operating activities | ||||||||||||
Provision for credit losses | 4,774 | 6,217 | 500 | |||||||||
Depreciation, amortization and accretion | 12,649 | 14,004 | 15,183 | |||||||||
Compensation expense related to stock options and restricted stock awards | 2,010 | 1,971 | 1,446 | |||||||||
ESOP compensation expense for allocated shares | — | — | 1,773 | |||||||||
(Benefit) provision for deferred income taxes | (693 | ) | (844 | ) | 1,750 | |||||||
Earnings on cash surrender value of BOLI | (920 | ) | (876 | ) | (866 | ) | ||||||
Gain on sale of loans held for sale | (6,711 | ) | (7,321 | ) | (30,977 | ) | ||||||
Gain on sale of portfolio loans | — | (596 | ) | (106 | ) | |||||||
Origination of loans held for sale | (377,144 | ) | (566,898 | ) | (1,353,636 | ) | ||||||
Proceeds from sale of loans held for sale | 411,484 | 708,400 | 1,444,305 | |||||||||
Impairment (recovery) of MSRs | 48 | (1 | ) | (2,059 | ) | |||||||
(Gain) loss on sale of OREO | (148 | ) | — | 9 | ||||||||
Changes in operating assets and liabilities | ||||||||||||
Accrued interest receivable | (2,331 | ) | (3,550 | ) | (564 | ) | ||||||
Other assets | (4,495 | ) | 2,127 | (3,670 | ) | |||||||
Other liabilities | 3,093 | 2,616 | (1,491 | ) | ||||||||
Net cash from operating activities | 77,669 | 184,898 | 109,009 | |||||||||
CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES | ||||||||||||
Activity in securities available-for-sale: | ||||||||||||
Maturities, prepayments, and calls | 17,295 | 21,201 | 29,863 | |||||||||
Purchases | (76,030 | ) | (22,968 | ) | (130,138 | ) | ||||||
Activity in securities held-to-maturity: | ||||||||||||
Purchases | — | (1,000 | ) | — | ||||||||
Maturities of certificates of deposit at other financial institutions | 4,186 | 5,830 | 1,736 | |||||||||
Purchase of certificates of deposit at other financial institutions | (23,641 | ) | — | — | ||||||||
Portfolio loan originations and principal collections, net | (185,024 | ) | (534,335 | ) | (214,133 | ) | ||||||
Net cash from acquisitions | 336,157 | — | — | |||||||||
Proceeds from sale of portfolio loans | — | 39,034 | 2,699 | |||||||||
Purchase of portfolio loans | (2,818 | ) | (5,736 | ) | (1,618 | ) | ||||||
Proceeds from sale of OREO, net | 718 | 145 | 81 | |||||||||
Purchase of premises and equipment | (1,671 | ) | (1,551 | ) | (1,984 | ) | ||||||
Proceeds from bank owned life insurance death benefits | — | 1,169 | — | |||||||||
Change in FHLB stock, net | 8,497 | (5,833 | ) | 2,661 | ||||||||
Net cash from (used by) investing activities | 77,669 | (504,044 | ) | (310,833 | ) | |||||||
CASH FLOWS (USED BY) FROM FINANCING ACTIVITIES | ||||||||||||
Net (decrease) increase in deposits | (30,704 | ) | 211,935 | 241,537 | ||||||||
Proceeds from borrowings | 2,164,338 | 3,003,617 | 148,907 | |||||||||
Repayments of borrowings | (2,257,120 | ) | (2,859,617 | ) | (272,188 | ) | ||||||
Dividends paid on common stock | (7,764 | ) | (7,096 | ) | (4,602 | ) | ||||||
Net proceeds from issuance of subordinated notes | — | — | 49,333 | |||||||||
Repayment of subordinated notes | — | — | (10,000 | ) | ||||||||
Stock options exercised, net | (273 | ) | 568 | (2,076 | ) | |||||||
Common stock repurchased for employee/director taxes paid on restricted stock awards | (355 | ) | (190 | ) | (211 | ) | ||||||
Issuance of common stock - employee stock purchase plan | 1,017 | 503 | — | |||||||||
Common stock repurchased | (223 | ) | (15,628 | ) | (13,961 | ) | ||||||
Net cash (used by) from financing activities | (131,084 | ) | 334,092 | 136,739 | ||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 24,254 | 14,946 | (65,085 | ) | ||||||||
CASH AND CASH EQUIVALENTS, beginning of year | 41,437 | 26,491 | 91,576 | |||||||||
CASH AND CASH EQUIVALENTS, end of year | $ | 65,691 | $ | 41,437 | $ | 26,491 | ||||||
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest on deposits and borrowings | $ | 38,744 | $ | 10,968 | $ | 8,174 | ||||||
Income taxes | 10,396 | 4,693 | 11,083 | |||||||||
SUPPLEMENTARY DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES | ||||||||||||
Change in unrealized gain (loss) on available-for-sale investment securities | $ | 6,779 | $ | (41,849 | ) | $ | (5,150 | ) | ||||
Change in unrealized (loss) gain on fair value and cash flow hedges | (3,814 | ) | 8,857 | 2,244 | ||||||||
Retention in gross MSRs from loan sales | 2,772 | 5,400 | 9,760 | |||||||||
OREO received in settlement of loans | — | 145 | — | |||||||||
Transfer of closed retail branch to OREO | — | 570 | — | |||||||||
ROU assets in exchange for lease liabilities | 2,034 | 3,049 | 979 | |||||||||
Acquisitions: | ||||||||||||
Assets acquired | 87,512 | — | — | |||||||||
Liabilities assumed | 424,949 | — | — | |||||||||
See accompanying notes to these consolidated financial statements.
NOTE 1 - – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations- –FS Bancorp, Inc. (the “Company”) was incorporated in September 2011 as the proposed holding company for 1st Security Bank of Washington (the “Bank” or “1st“1st Security Bank”) in connection with the Bank’s conversion from the mutual to stock form of ownership which was completed on July 9,2012. The Bank is a community-based savings bank with 1127 full-service bank branches, a headquarters that also originates loans and seven homeaccepts deposits, and loan production offices in suburban communities in the greater Puget Sound area, which includes Snohomish, King, Pierce, Jefferson, Kitsap,the Kennewick-Pasco-Richland metropolitan area of Washington, also known as the Tri-Cities, Goldendale, Vancouver, and Clallam counties,White Salmon, Washington and one home loan production officeManzanita, Newport, Ontario, Tillamook, and Waldport, Oregon. The Bank’s branches located in the market areacommunities of the Tri-Cities, Washington. Goldendale and White Salmon, Washington and Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon were acquired from Columbia State Bank on February 24, 2023, and opened as 1st Security Bank branches on February 27, 2023. The Bank provides loan and deposit services to customers who are predominantly small- and middle-market businesses and individuals. The Bank acquired four retail bank branches from Bank of America, National Association (“Bank of America”) (two in Clallam and two in Jefferson counties) on January 22, 2016, and these branches opened as 1st Security Bank branches on January 25, 2016. The Company and its subsidiary are subject to regulation by certain federal and state agencies and undergo periodic examination by these regulatory agencies.
Pursuant to the Plan of Conversion (the “Plan”), the Company’s Board of Directors adopted an employee stock ownership plan ( “ESOP”) which purchased 8% of the common stock in the open market or 259,210 shares. As provided for in the Plan, the Bank also established a liquidation account in the amount of retained earnings at December 31, 2011. The liquidation account is maintained for the benefit of eligible savings account holders at June 30, 2007 and supplemental eligible account holders as of March 31, 2012, who maintain deposit accounts at the Bank after the conversion. The conversion was accounted for as a change in corporate form with the historic basis of the Company’s assets, liabilities, and equity unchanged as a result.
Financial Statement Presentation- –The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and with prevailing practices within the banking and securities industries. In preparing such financial statements, management is required to make certain estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loancredit losses, fair value adjustments from assets and lease losses,liabilities acquired in a business combination, fair value of financial instruments, the valuation of servicing rights, and theMSRs, deferred income taxes.taxes, and if needed, a deferred tax asset valuation allowance.
Amounts presented in the consolidated financial statements and footnote tables are rounded and presented into the nearest thousands of dollars except per share amounts. In the narrative footnote discussion, amounts are rounded and presented in millions of dollars to one decimal point ifIf the amounts are above $1.0 million. Amounts below $1.0$1.0 million, they are rounded one decimal point, and presented in dollars to the nearest thousands. Certain prior��year amounts have been reclassified to conform to the 2017 presentation with no change to consolidated net income or stockholders’ equity previously reported.if they are above $1.0 billion, they are rounded two decimal points.
Principles of Consolidation- –The consolidated financial statements include the accounts of FS Bancorp Inc. and its wholly owned subsidiary, 1st Security Bank of Washington.Bank. All material intercompany accounts have been eliminated in consolidation.
Segment Reporting- – The Company operates in two business segments through the Bank: commercial and consumer banking and home lending. The Company’s business segments are determined based on the products and services provided, as well as the nature of the related business activities, and they reflect the manner in whichway financial information is regularly reviewed for the purpose of allocating resources and evaluating performance of the Company’s businesses. The results for these business segments are based on management’s accounting process, which assigns income statement items and assets to each responsible operating segment. This process is dynamic and is based on management’s view of the Company’s operations. See “Note 1921 – Business Segments”.Segments.”
Subsequent Events- –The Company has entered intoevaluated events and transactions subsequent to December 31, 2023, for potential recognition or disclosure. On January 31, 2024, the Company completed the sale of MSRs relating to certain single family mortgage loans serviced for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac,” and together with Fannie Mae, the “Agencies”) with an aggregate unpaid principal balance of approximately $1.29 billion to an approved Agency seller and servicer. The total purchase price for the MSRs was approximately $16.6 million and an amortized cost of $8.1 million, which is subject to certain customary holdbacks and adjustments. The sale represented approximately 45.6% of the Company’s total MSR portfolio as of January 31, 2024. The Agencies consented to the transfer of the MSRs.
Error Corrections - The Company has evaluated error corrections in earnings per share as follows:
Earnings Per Share
Prior presentations of earnings per share were revised due to the improper inclusion of certain unvested shares of the Company’s commons stock in the denominator of basic and diluted earnings per share. As a fiveresult of the inclusion, earnings per share was understated for the year lease with two five year option renewalsended December 31, 2021. Basic earnings per share for a new retail branch location in Silverdale, Washington, expectedDecember 31, 2021 was updated to open in April 2018.$4.48, from $4.42 as previously reported, and diluted earnings per share was updated to $4.37, from $4.32 as previously reported.
Cash and Cash Equivalents - – Cash and cash equivalents include cash and due from banks, and interest-bearing balances due from other banks and the Federal Reserve Bank of San Francisco (“FRB”)FRB and have aan original maturity of 90 days or less at the time of purchase. At times, cash balances may exceed Federal Deposit Insurance Corporation (“FDIC”)FDIC insured limits. At December 31, 2017 2023 and 2016,2022, the Company had $15,000$27,000 and $7.8 million,$281,000, respectively, of cash and due from banks
89
and interest-bearing deposits at other financial institutions in excess of FDIC insured limits. Because
Securities – Securities are classified as held-to-maturity when the Company places these deposits with major financial institutionshas the ability and monitorspositive intent to hold them to maturity. Securities classified as held-to-maturity are carried at cost, adjusted for amortization of premiums to the financial conditionearliest callable date and accretion of these institutions, management believesdiscounts to the risk of loss tomaturity date and, if appropriate, any deposits in excess of FDIC limits to be minimal.
Securities Available-for-Sale -credit impairment losses. Securities available-for-sale consist of debt securities that the Company has the intent and ability to hold for an indefinite period, but not necessarily to maturity. Such securities may be sold to implement the Company’s asset/liability management strategies and in response to changes in interest rates and similar factors. Securities available-for-sale are reported at fair value. Realized gains and losses on securities available-for-sale, determined using the specific identification method, are included in results of operations. Amortization of premiumpremiums and accretion of discounts are recognized in interest incomeas adjustments to yield over the period to maturity.
Unrealized holding gains and losses, netcontractual lives of the related deferred tax effect,securities with the exception of premiums for non-contingently callable debt securities which are reported as a net amount in a separate component of equity entitled accumulated other comprehensive income. Unrealized losses that are deemed to be other than temporary are reflected in results of operations. Any declines in the values of these securities that are considered to be other-than-temporary-impairment (“OTTI”) and credit-related are recognized in earnings. Noncredit-related OTTI on securities not expected to be sold is recognized in other comprehensive income. The review for OTTI is conducted on an ongoing basis and takes into account the severity and duration of the impairment, recent events specificamortized to the issuer or industry, fair value in relationship to cost, extent and nature of change in fair value, creditworthiness ofearliest call date, rather than the issuer including external credit ratings and recent downgrades, trends and volatility of earnings, current analysts’ evaluations, and other key measures. In addition, the Company does not intend to sell the securities and it is more likely than not that we will not be required to sell the securities before recovery of their amortized cost basis. In doing this, we take into account our balance sheet management strategy and consideration of current and future market conditions.contractual maturity date. Dividends and interest income are recognized when earned.
Management no longer evaluates securities for other-than-temporary impairment, as ASC Subtopic 326-30, Financial Instruments - Credit Losses - Available for Sale Debt Securities, changes the accounting for recognizing impairment on available for sale and held to maturity debt securities. Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. Management considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component recognized through the Provision for Credit Losses on the Consolidated Statements of Income. (See Note 3 – Investments).
Federal Home Loan Bank Stock - – The Bank’s investment in FHLB stock is carried at cost, which approximates fair value. As a member of the FHLB system, the Bank is required to maintain an investment in capital stock of the FHLB in an amount of $994,000 and 4.0% of advances from the FHLB. The Bank’s required minimum level of investment in FHLB stock is based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At December 31, 2017 2023 and 2016,2022, the Bank’s minimum level of investment requirement in FHLB stock was $2.9$2.1 million and $2.7$10.6 million, respectively. The Bank was in compliance with the FHLB minimum investment requirement at December 31, 2017 2023 and 2016.2022.
Management evaluates FHLB stock for impairment as needed.annually. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1)(1) the significance of any decline in net assets of the FHLB as compared with the capital stock amount for the FHLB and the length of time this situation has persisted; (2)(2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (3)(3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB; and (4)(4) the liquidity position of the FHLB. Based on its evaluation, management determined that there was no impairment of FHLB stock at for the years ended December 31, 20172023, 2022, and 2016, respectively.2021.
Loans Held for Sale - – The Bank records all mortgage loans held-for-saleheld for sale at fair value. Fair value is determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis. Gains and losses on fair value changes of loans held for sale are recorded in the gain on sale of loans component of noninterest income. Origination fees and costs are recognized in earnings at the time of origination. Mortgage loans held-for-saleheld for sale are sold with the mortgage service rights either released or retained by the Bank. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. All sales are made with limited recourse against the Company.
Other Real Estate Owned – OREO is recorded initially at the lower of cost or fair value less selling costs, with any initial charge made to the allowance for credit losses ("ACL") on loans. Costs relating to development and improvement of the properties or assets are capitalized while costs relating to holding the properties or assets are expensed. Valuations are periodically performed by management, and a charge to earnings is recorded if the recorded value of a property exceeds its estimated net realizable value.
Derivatives - – Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free-standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitments to fund the loans, theloans. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered. Fair values of these mortgage derivatives are estimated
90
based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are reported in “Gain on sale of loans” on the Consolidated Statements of Income.
The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. The Company’s hedging policies permit the use of various derivative financial instruments to manage interest rate risk or to hedge specified assets and liabilities. To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. If derivative instruments are designated as fair value hedges, and such hedges are highly effective, both the change in the fair value of the hedge and the hedged item are included in current earnings. If derivative instruments are designated as cash flow hedges, fair value adjustments related to the effective portion are recorded in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of cash flow hedges are reflected in earnings as they occur. Actual cash receipts and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the interest income or interest expense associated with the hedged item. During the life of the hedge, the Company formally assesses whether derivatives designated as hedging instruments continue to be highly effective in offsetting changes in the fair value or cash flows of hedged items. If it is determined that a hedge has ceased to be highly effective, the Company will discontinue hedge accounting prospectively. At such time, previous adjustments to the carrying value of the hedged item are reversed into current earnings and the derivative instrument is reclassified to a trading position recorded at fair value. For derivatives not designated as hedges, changes in fair value are recognized in earnings, in noninterest income.
Loans Receivable - – Loans receivable, are stated at the amount of unpaid principal reduced by an allowance for loan lossesthe ACL on loans and net deferred fees or costs.costs and premiums or discounts. Interest on loans is calculated using the simple interest method based on the daily balance of the principal amount outstanding and is credited to income as earned. Loan fees, net of direct origination costs, are deferred and amortized over the life of the loan using the effective yield method. If the loan is repaid prior to maturity, the remaining unamortized net deferred loan origination fee is recognized in income at the time of repayment.
Income Recognition on Nonaccrual Loans and Securities – Interest on loans is accrued daily based on the principal amount outstanding. Generally, the accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due or when they are past due 90 days as to either principal or interest (based on contractual terms), unless they are well secured and in the process of collection. All interest accrued but not collected for loans that are placed on non-accrualnonaccrual status or charged off are reversed against interest income. Subsequent collections on a cash basis are applied proportionately to past due principal and interest, unless collectability of principal is in doubt, in which case all payments are applied to principal. Loans are returned to accrual status when the loan is deemed current,performing according to its contractual terms for at least six months and the collectability of principal and interest is no longer doubtful,doubtful. While less common, similar interest reversal and nonaccrual treatment is applied to investment securities if their ultimate collectability becomes questionable.
Allowance for Credit Losses on Held-to-Maturity Securities – Management measures expected credit losses on held-to-maturity securities by individual security. Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers credit ratings and historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.
The held-to-maturity portfolio consists entirely of corporate securities. Securities are generally rated investment grade. Securities are analyzed individually to establish a reserve.
Allowance for Credit Losses on Available-for-Sale Securities –For available-for-sale securities in an unrealized loss position, management first assesses whether it intends to sell, or generally, whenis more likely than not to be required to sell, the loansecurity before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than 90 days delinquent,amortized cost, any changes to the rating of the security by a rating agency, and performing accordingadverse conditions specifically related to its contractual terms afterthe security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.
Changes in the ACL are recorded as a provision for (recovery of) credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities is not included in the estimate of credit losses.
Allowance for Credit Losses on Loans –The ACL on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed and recoveries are credited to the allowance when received. In the case of recoveries, amounts may not exceed the aggregate of amounts previously charged off.
Management utilizes relevant available information, from internal and external sources, relating to past events, current conditions, historical loss experience, and reasonable and supportable forecasts. The lookback period in the analysis includes historical data from 2009 to present. Adjustments to historical loss information are made when management determines historical data is not likely reflective of six months performance.the current portfolio such as limited data sets or lack of default or loss history. Management may selectively apply external market data to subjectively adjust the Company’s own loss history including index or peer data. Accrued interest receivable is excluded from the estimate of credit losses on loans.
Collective Assessment –The ACL on loans is measured on a collective cohort basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by call report code and then risk-grade grouping. Risk grade is grouped within each call report code by pass, watch, special mention, substandard, and doubtful. Other loan types are separated into their own cohorts due to specific risk characteristics for that pool of loan.
The Company charges feeshas elected a non-discounted cash flow methodology with probability of default (“PD”) and loss given default (“LGD”) for originatingall call report code cohorts (“cohorts”), with the exception of the indirect and marine portfolios which are evaluated under a vintage methodology. The vintage methodology measures the expected loss calculation for future periods based on historical performance by the origination period of loans with similar life cycles and risk characteristics. Guaranteed portions of loans are measured with zero risk due to cash collateral and full guaranty.
The PD calculation looks at the historical loan portfolio at particular points in time (each month during the lookback period) to determine the probability that loans in a certain cohort will default over the next 12-month period. A default is defined as a loan that has moved to past due 90 days and greater, nonaccrual status, or experienced a charge-off during the period. In cohorts where the Company’s historical data is insufficient due to a minimal amount of default activity or zero defaults, management uses index PDs comprised of rates derived from the PD experience of other community banks in place of the Company’s historical PDs. Additionally, management reviews all other cohorts to determine if index PDs should be used outside of these criteria.
The LGD calculation looks at actual losses (net charge-offs) experienced over the entire lookback period for each cohort of loans. These fees,The aggregate loss amount is divided by the exposure at default to determine an LGD rate. All defaults (non-accrual, charge-off, or greater than 90 days past due) occurring during the lookback period are included in the denominator, whether a loss occurred or not and exposure at default is determined by the loan balance immediately preceding the default event (i.e., nonaccrual or charge-off). Due to very limited charge-off history, management uses index LGDs comprised of rates derived from the LGD experience of other community banks in place of the Company’s historical LGDs.
The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans. The calculation includes a 12-month PD forecast based on the Company’s regression model comparing peer nonperforming loan ratios to the national unemployment rate. After the forecast period, PD rates revert on a straight-line basis back to long-term historical average rates over a 12-month period. Due to very limited default history, management uses index PDs comprised of rates derived from the PD experience of other community banks in place of the Company’s historical PDs.
The Company recognizes that all significant factors that affect the collectability of the loan portfolio must be considered to determine the estimated credit losses as of the evaluation date. Furthermore, the methodology, in and of itself and even when selectively adjusted by comparison to market and peer data, does not provide a sufficient basis to determine the estimated credit losses. The Company adjusts the modeled historical losses by qualitative and environmental adjustments to incorporate all significant risks to form a sufficient basis to estimate the credit losses.
Individual Assessment –Loans classified as nonaccrual are reviewed quarterly for potential individual assessment. Any loan classified as a nonaccrual that is not determined to need individual assessment is evaluated collectively within its respective cohort.
Where the primary and/or expected source of repayment of a specific loan is believed to be the future liquidation of available collateral, impairment will generally be measured based upon expected future collateral proceeds, net of certaindisposition expenses including sales commissions as well as other costs potentially necessary to sell the asset(s) (i.e., past due taxes, liens, etc.). Estimates of future collateral proceeds will be based upon available appraisals, reference to recent valuations of comparable properties, use of consultants or other professionals with relevant market and/or property-specific knowledge, and any other sources of information believed appropriate by management under the specific circumstances. When appraisals are ordered to support the impairment analysis of an impaired loan, origination costs, are deferred and amortized to income, on the level-yield basis, overappraisal is reviewed by the loan term. IfCompany’s internal appraisal reviewer.
Where the primary and/or expected source of repayment of a specific loan is repaid priorbelieved to maturity,be the remaining unamortized net deferred loan origination fee is recognized in income at the timereceipt of repayment.
Impaired Loans- A loan is considered impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance withfrom the original borrower and/or modified termsthe refinancing of the loan agreement. Impaired loans are measured on a loan by loan basis based on the estimated fair value of the collateral less estimated cost to sell if the loan is considered collateral dependent. Impaired loans not considered toanother creditor, impairment will generally be collateral dependent are measured based onupon the present value of expected future cash flows. Impairmentproceeds discounted at the contractual interest rate. Expected refinancing proceeds may be estimated from review of term sheets actually received by the borrower from other creditors and/or from the Company’s knowledge of terms generally available from other banks.
Determining the Contractual Term –Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications. Prepayment assumptions will be determined by analysis of historical behavior by loan cohort.
Allowance for Credit Losses on Unfunded Commitments –The Company estimates expected credit losses over the contractual period in which the Company is measuredexposed to credit risk via a contractual obligation to extend credit. The ACL on unfunded commitments is adjusted through a provision for each loan in(recovery of) credit losses. The estimate includes consideration of the portfolio except forlikelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate utilizes the smaller groups of homogeneous consumer loans.
The categories of non-accrualsame factors and assumptions as the ACL on loans and impaired loans overlap, although they are not coextensive. The Company considers all circumstances regarding the loan and borrower on an individual basis when determining whether an impaired loan should be placed on non-accrual status, such as the financial strength of the borrower, the collateral value, reasons for delay, payment record, the amount of past due and the number of days past due. Loans that experience insignificant payment delays and payment shortfalls are generally not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
Allowance for Loan Losses - The allowance for loan losses is maintained at a level considered adequate to provide for probable losses on existing loans based on evaluating known and inherent risks in the loan portfolio. The allowance is reduced by loans charged off and increased by provisions charged to earnings and recoveries on loans previously charged-off. The allowance is based on management’s periodic, systematic evaluation of factors underlying the quality of the loan portfolio including changes in the size and composition of the loan portfolio, the estimated value of any underlying collateral, actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectability may not be assured. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses the best information available to make its estimates, future adjustments to the allowance may be necessary if there is a significant change in economic and other conditions. The appropriateness of the allowance for loan losses is estimated based on these factors and trends identified by managementapplied at the time the financial statements are prepared.same collective cohort level.
When available information confirms that specific loans or portions thereof are uncollectible, these amounts are charged-off against the allowance for loan losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not evidenced the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to
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pay the debt; the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement.
A provision of loan losses is charged against income and added to the allowance for loan losses based on regular assessment of the loan portfolio. The allowance for loan losses is allocated to certain loan categories based on the relative risk characteristics, asset classifications, and actual loss experience within the loan portfolio. Although management has allocated the allowance for loan losses to various loan portfolio segments, the allowance is general in nature and is available for the loan portfolio in its entirety.
The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control. These factors may result in losses or recoveries differing significantly from those provided for in the financial statements. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
Reserve for Unfunded Loan Commitments - The reserve for unfunded loan commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to these unfunded credit facilities. The determination of the adequacy of the reserve is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. The reserve for unfunded loan commitments is included in other liabilities on the consolidated balance sheet, with changes to the balance charged against noninterest expense.
Premises and Equipment, Net - – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used to compute depreciation include building and building improvements fromup to 25 to 40 years and furniture, fixtures, and equipment from 3three to 10 years. Leasehold and tenant improvements are amortized using the straight-line method over the lesser of useful life or the life of the related lease. Gains or losses on dispositions are reflected in resultson the Consolidated Statements of operations.Income.
Management reviews buildings, improvements and equipment for impairment on an annual basis or whenever events or changes in the circumstances indicate that the undiscounted cash flows for the property are less than its carrying value. If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.
Right of Use (“ROU”) Lease Asset & Lease Liability –The Company leases retail space, office space, storage space, and equipment under operating leases. Most leases require the Company to pay real estate taxes, maintenance, insurance and other similar costs in addition to the base rent. Certain leases also contain lease incentives, such as tenant improvement allowances and rent abatement. Variable lease payments are recognized as lease expense as they are incurred. The Company records an operating lease ROU asset and an operating lease liability for operating leases with a lease term greater than 12 months. The ROU asset and lease liability are recorded in “Other assets” and “Other liabilities”, respectively, on the Consolidated Balance Sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. Many of the Company’s leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule, which are factored into our determination of lease payments when appropriate. Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. The ROU asset and lease liability terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Transfers of Financial Assets- – Transfers of an entire financial asset, a group of entire financial assets, or participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1)(1) the assets have been isolated from the Company, (2)(2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3)(3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Mortgage Servicing Rights - – Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rightsMSRs are capitalized at the cost to acquire the rights. For sales of mortgage commercial and consumer loans, a portion of the cost of originating the loan is allocated to the servicing rightMSRs based on relative fair value. Fair value is based on market prices for comparable mortgage, commercial, or consumer servicingMSR contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses.
Servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranches.tranche. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as a recovery and an increase to income. Capitalized servicing rightsMSRs are stated separately on the consolidated balance sheetsConsolidated Balance Sheets and are amortized
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into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
Income Taxes - – The Company files a consolidated federal income tax return. Income taxes are reflected in the Company’s consolidated financial statements to show the tax effects of the operations and transactions reported in the consolidated financial statements and consist of taxes currently payable plus deferred taxes. ASC 740, “Accounting for Income Taxes,” requires the asset and liability approach for financial accounting and reporting for deferred income taxes. Deferred federal income taxestax assets and liabilities result from temporary differences between the financial statement carrying amounts and the tax basisbases of assets and liabilities, and their reported amountsliabilities. They are reflected at currently enacted income tax rates applicable to the period in which the financial statements. These will result in differences between income for tax purposes and income for financial reporting purposes in future years. As changes in tax laws or rates are enacted, deferred tax assets andor liabilities are adjusted throughexpected to be realized or settled and are determined using the assets and liability method of accounting. The deferred income tax provision represents the difference between net deferred tax asset/liability at the beginning and end of the reported period. In formulating the deferred tax asset, the Company is required to estimate income and taxes in the jurisdiction in which the Company operates. This process involves estimating the actual current tax exposure for the reported period together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for income taxes. Valuation allowances are established to reduce the net recorded amount of deferredcredit losses, for 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.and financial reporting purposes.
The Financial Accounting Standards Board (“FASB”)Company follows the authoritative guidance issued guidance related to accounting for uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It is the Company’s policy to record any penalties or interest arising from federal or state taxes as a component of income tax expense.
Employee Stock Ownership Plan (“ESOP”) - – Compensation expense recognized for the Company’sCompany's ESOP equals the fair value of shares that have been allocated or committed to be released for allocation to participants. Any difference between the fair value of the shares at the time and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (additional paid-in capital)paid-in-capital). The cost of ESOP shares that have not yet been allocated or committed to be released is deducted from stockholders’ equity.
Earnings Per Share -(“EPS”) – Basic and diluted EPS are computed using the two-class method, which is an earnings allocation method for computing earnings per share that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. Basic earnings per share (“EPS”) are computed by dividing income available to common stockholdersshareholders by the weighted average number of common shares outstanding for the period. Unvested share-based awards containing non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For purposes of computing basic and dilutive EPS, ESOP shares that have been committed to be released are outstanding and ESOP shares that have not been committed to be released shall not be considered outstanding.
Comprehensive Income (Loss) - – Comprehensive income (loss) is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes items recorded directly to equity, such as unrealized holding gains and losses on securities available-for-sale.available-for-sale, net of tax and unrealized holding gains (losses) on derivatives designated as hedges, net of tax recorded directly to equity.
Financial Instruments - – In the ordinary course of business, the Company has entered into agreements for off-balance-sheet financial instruments consisting of commitments to extend credit and stand-by letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
Restricted Assets - – Regulations of the Board of Governors of the Federal Reserve regulationsSystem (“Federal Reserve”) require that the Bank maintain reserves in the form of cash on hand and deposit balances with the FRB, based on a percentage of deposits. The amounts of such balances for the years ended At December 31, 20172023 and 2016 were $18.2 million and $10.7 million, respectively, included in interest-bearing deposits at other financial institutions onDecember 31, 2022, the balance sheet.Bank had no reserve requirement.
Marketing and Advertising Costs - – The Company records marketing and advertising costs as expenses as they are incurred. Total marketing and advertising expense was $716,000$1.3 million, $897,000 and $710,000$634,000 for the years ended December 31, 20172023, 2022, and 2016,2021, respectively.
Stock-Based Compensation- – Compensation cost is recognized for stock options and restricted stock awards, based on the fair value of these awards at the grant date. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the grant date is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Goodwill- – Goodwill is recorded upon completion of a business combination as the difference between the purchase price and the fair value of net identifiable assets acquired. Goodwill was not recorded until the first quarterThe Company completes its annual review of 2016 in recognition of the four retail branches purchased from Bank of America. Subsequent to initial recognition, the Company tests goodwill for impairment during the fourth quarter of each fiscal year, oryear. An assessment of qualitative factors is completed to determine if it is more often if events or circumstances, such as adverse
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changes in the business climate indicate there may be impairment. There was no goodwill impairment at December 31, 2017 or December 31, 2016.
Application of New Accounting Guidance
On October 1, 2017, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2017‑04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued to simplify the subsequent measurement of goodwill and the amendment eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparinglikely than not that the fair value of a reporting unit withis less than its carrying amount. AnIf the qualitative analysis concludes that further analysis is required, then a quantitative impairment charge shouldtest would be recognized forcompleted. The quantitative goodwill impairment test is used to identify the existence of impairment and the amount by whichof impairment loss and compares the reporting unit’s estimated fair value, including goodwill, to its carrying amount. If the fair value exceeds the carrying amount, then goodwill is not considered impaired. If the carrying amount exceeds the reporting unit’sits fair value; however,value, an impairment loss would be recognized equal to the loss recognized should not exceed the total amount of excess, limited to the amount of total goodwill allocated to that reporting unit. There was no goodwill impairment for the years ended December 31, 2023, 2022, and 2021.
Bank Owned Life Insurance – The Bank has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
As a result of current tax law and the nature of these policies, the Bank records any increase in cash value of these policies as nontaxable noninterest income. If the Bank decided to surrender any of the policies prior to the death of the insured, such surrender may result in tax expense related to the life-to-date cumulative increase in cash value of the policy. If the Bank retains such policies until the death of the insured, the Bank would receive nontaxable proceeds from the insurance company equal to the death benefit of the policies.
Business Combinations – The Company accounts for business combinations using the acquisition method of accounting. The accounts of an acquired entity are included as of the date of acquisition, and any excess of purchase price over the fair value of the net assets acquired is capitalized as goodwill. In addition, income tax effectsthe event that the fair value of net assets acquired exceeds the purchase price, including fair value of liabilities assumed, a bargain purchase gain is recorded on that acquisition. Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value.
The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represents the estimated value of the long-term deposit relationships acquired in the transaction. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. The core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from any tax deductible goodwill onthis intangible. The estimated useful lives are periodically reviewed for reasonableness and have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the difference between the asset's carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the reporting unit shouldasset. Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above.
Acquired Loans – Loans acquired in business combinations are recorded at their fair value at the acquisition date. Establishing the fair value of acquired loans involves a significant amount of judgement, including determining the credit discount based upon historical data adjusted for current economic conditions and other factors. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated or purchased non-credit-deteriorated. Purchased credit-deteriorated (“PCD”) loans have experienced more than insignificant credit deterioration since origination. For PCD loans, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The loan’s fair value is grossed up for the allowance for credit losses and becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through a provision for credit losses.
For purchased non-credit-deteriorated loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loan. While credit discounts are included in the determination of the fair value for non-credit-deteriorated loans, since these discounts are expected to be consideredaccreted over the life of the loans, they cannot be used to offset the allowance for credit losses that must be recorded at the acquisition date. As a result, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment and is recognized as a provision for credit losses in the Consolidated Statement of Income. Any subsequent deterioration (improvement) in credit quality is recognized by recording a provision for (reversal of) credit losses.
Application of New Accounting Guidance in 2023
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) No.2022–02,Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminated the accounting guidance for troubled debt restructurings (“TDRs”) for creditors, required new disclosures for creditors for certain loan refinancings and restructurings when measuringa borrower is experiencing financial difficulty, and required public business entities to include current-period gross write-offs in the goodwill impairment loss, if applicable.vintage disclosure tables. The Company still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The application ofamendments in this ASU were effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of ASU 2022–02did not have a material impact on the Company’s consolidated financial statements.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”). SAB 118 provides guidance to registrants under three scenarios: (1) Measurement of certain income tax effects is complete, (2) Measurement of certain income tax effects can be reasonably estimated and (3) Measurement of certain income tax effects cannot be reasonably estimated. SAB 118 provides a one year measurement period for the registrant to complete its accounting for certain income tax effects that are considered provisional or for which reasonable estimates cannot be made. The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with SAB 118.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, March 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU No. 2014‑09, Revenue from Contracts with Customers (Topic 606)2020–04, “Reference Rate Reform” (“Topic 848”). This ASU provides optional guidance for a limited period to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU apply to modifications to agreements (e.g., which creates Topic 606loans, debt securities, derivatives, borrowings) that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and supersedes Topic 605, Revenue Recognition. In August 2015, FASB issued ASU No. 2015‑14, Revenue from Contracts with Customers (Topic 606), which postponedcontemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) Modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective dateinterest rate; 2) Modifications of 2014‑09. The core principlecontracts within the scope of Topic 606 isTopics 840, Leases, and 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (for example, the incremental borrowing rate) or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted for as separate contracts; and 3) Modifications of contracts do not require an entity recognizes revenue to depictreassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the transfereconomic characteristics and risks of promised goods or services to customersthe host contract under Subtopic 815-15, Derivatives and Hedging - Embedded Derivatives. In January 2021, ASU 2021–01 updated amendments in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companiesASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that use more judgmentan interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this ASU and make more estimates than under current guidance, including identifying performance obligationsthe expedients and exceptions in Topic 848 capture the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The ASU is effective for public entities for interim and annual periods beginning after December 15, 2017; early adoption is not permitted. For financial reporting purposes, the ASU allows for either full retrospective adoption, meaning the ASU is applied to all of the periods presented, or modified retrospective adoption, meaning the ASU is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. As a bank holding company, key revenue sources, such as interest income have been identified as outincremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the effective dates. The amendments in this new guidance. ASU have differing effective dates, beginning with an interim period including and subsequent to March 12, 2020 through December 31, 2022, deferred now until December 31, 2024. The Company’s analysis suggests thatCompany does not expect the adoption of this accounting standard is not expectedASU 2020–04 to have a material impact on the Company’sits consolidated financial statements as substantially all of the Company’s revenues are excluded from the scope of the new guidance. The Company plans to adopt the new guidance on January 1, 2018, utilizing the modified retrospective approach.and related disclosures.
In January 2016, June 2022, the FASB issued ASU No. 2016‑01, Financial Instruments 2022- Overall (Subtopic 825‑10), Recognition and03, Fair Value Measurement (Topic 820): Fair Value Measurement of Financial AssetsEquity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value, nor should the contractual restriction be recognized and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. Thismeasured separately. Further, this ASU requires equity investments (except those accounted for under the equity methoddisclosure of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendments in this ASU require the exit price notion be used when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e.,equity securities or loans and receivables) onsubject to contractual sale restrictions reflected in the balance sheet, or the accompanying notes to the financial statements. This ASU also eliminates the requirement to disclose the method(s)nature and significant assumptions used to estimate the fair value that is required to be disclosed for
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financial instruments measured at amortized cost on the balance sheet. The ASU also requires a reporting organization to present separately in other comprehensive income the portionremaining duration of the total changerestrictions(s), and the circumstances that could cause a lapse in the fair value of a liability resulting from a change in the instrument specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.restriction(s). ASU No. 2016‑012022-03 is effective for financial statements issuedthe Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for certain provisions. The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company’s consolidated financial statements and the Company is implementing processes and procedures to ensure it is fully compliant with the disclosures requirements of this ASU related to fair value of its financial instruments beginning with the quarterly reporting period as of March 31, 2018.
In February 2016, FASB issued ASU No. 2016‑02, Leases (Topic 842). ASU No. 2016‑02 requires lessees to recognize on the balance sheet the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income. For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis. The amendments in ASU 2016‑02 are effective for fiscal years beginning after December 15, 2018, 2023, including interim periods within those fiscal years. Early application of the amendments in the ASU is permitted. Once adopted, we expect to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, however, if adopted at December 31, 2017 based on current leases, management estimates that ASU 2016-02 would have increased the Consolidated Balance Sheets by an estimated $4.7 million from the present value of future lease obligations and would not have a material impact on our regulatory capital ratios.
In June 2016, the FASB issued ASU No. 2016‑13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements. Once adopted, we expect our allowance for loan losses to increase through a one-time adjustment to retained earnings, however, until our evaluation is complete, the magnitude of the increase will be unknown.
In August 2016, the FASB issued ASU No. 2016‑15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments. This ASU is intended to address the appropriate classification of eight specific cash flow issues on the cash flow statement. Debt prepayment costs should be classified as an outflow for financing activities. Settlement of zero-coupon debt instruments divides the interest portion as an outflow for operating activities and the principal portion as an outflow for financing activities. Contingent consideration payments made after a business combination should be classified as outflows for financing and operating activities. Proceeds from the settlement of bank-owned life insurance policies should be classified as inflows from investing activities. Other specific areas are identified in the ASU as to the appropriate classification of the cash inflows or outflows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted and must be applied using retrospective transition method to each period presented. Adoption of ASU 2016-15 is not expected to have a material impact on the Company’s consolidated financial statements.
95
In March 2017, the FASB issued ASU No. 2017‑08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310‑20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017‑08 is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017‑09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to this ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award is the same after the modification as compared to the original award prior to the modification. The standard is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of ASU No. 2017‑09 is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting recognition and presentation requirements in ASC 815 to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU No. 2017-12 is not expected to have a material impact on the Company's consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI"). ASU 2018-02 eliminates the stranded tax effects within AOCI resulting from the application of current U.S. GAAP in response to the change in the U.S. corporate income tax rate from 35 percent to 21 percent as part of the Tax Act. Stranded tax effects unrelated to the Tax Act are released from AOCI using the security-by-security approach. The effective date of ASU 2018-02 is for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permittedpermitted. The Company does not believe this ASU will have a material impact on its consolidated financial statements and related disclosures.
In March 2023, the FASB issued ASU 2023-02,Investments - Equity Method and Joint Ventures (Topic 323): Accounting for public entitiesInvestments in Tax Credit Structures Using the Proportional Amortization Method, a consensus of the Emerging Issues Task Force. ASU 2023-02 allows an entity the option to apply the proportional amortization method of accounting to other equity investments that are made for the primary purpose of receiving tax credits or other income tax benefits if certain conditions are met. Prior to this ASU, the application of the proportional amortization method of accounting was limited to investments in low-income housing tax credit structures. The proportional amortization method of accounting results in the amortization of applicable investments, as well as the related income tax credits or other income tax benefits received, being presented on a single line in the statements of income, income tax expense. Under this ASU, an entity has the option to apply the proportional amortization method of accounting to applicable investments on a tax-credit-program-by-tax-credit program basis. In addition, the amendments in this ASU require that all tax equity investments accounted for using the proportional amortization method use the delayed equity contribution guidance in paragraph 323-740-25-3, requiring a liability to be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event when that contingent event becomes probable. Under this ASU, low-income housing tax credit investments for which the proportional amortization method is not applied can no longer be accounted for using the delayed equity contribution guidance. Further, this ASU specifies that impairment of low-income housing tax credit investments not accounted for using the equity method must apply the impairment guidance in Subtopic 323-10:Investments - Equity Method and Joint Ventures - Overall. This ASU also clarifies that for low-income housing tax credit investments not accounted for under the proportional amortization method or the equity method, an entity shall account for them under Topic 321: Investments - Equity Securities. The amendments in the ASU also require additional disclosures in interim and annual periods concerning investments for which the proportional amortization method is applied, including (i) the nature of tax equity investments, and (ii) the effect of tax equity investments and related income tax credits and other income tax benefits on the financial statements had not yet been issued. The Company elected to early adoptposition and results of operations. ASU 2018-022023-02 is effective for the year ended Company for fiscal years beginning after December 31, 2017,15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2023-02 will have on its consolidated financial statements and related disclosures.
In November 2023, the FASB issued guidance within ASU 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU requires that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this ASU and all existing disclosures in Topic 280.
The amendments in this ASU are intended to improve segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The key amendments included in this ASU:
● | Require disclosure on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and are included within each reported measure of segment profit and loss. |
● | Require disclosure on an annual and interim basis, an amount for other segment items (defined in the ASU) and a description of its composition. |
● | Clarify that if the CODM uses more than one measure of the segment's profit or loss in assessing performance, one or more of those additional measures may be reported. |
● | Require disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing performance. |
This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The amendments should be applied retrospectively to all prior periods presented in the provisions retrospectivelyfinancial statements. The Company is currently evaluating the effect that ASU 2023-07 will have on the Company’s consolidated financial statements and related disclosures.
In December 2023, the FASB issued guidance within our Consolidated Balance SheetsASU 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in the ASU are intended to provide more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and Statementsincome taxes paid information. The ASU requires disclosure in the rate reconciliation of Shareholders' Equity. This adoption resulted inspecific categories as well as provide additional information for reconciling items that meet a one-time reclassificationquantitative threshold.
Those amendments require disclosure of the following information about income taxes paid on an annual basis:
● | Income taxes paid (net of refunds received), disaggregated by federal and state taxes and by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than five percent of total income taxes paid (net refunds received). |
● | Income tax expense (or benefit) from continuing operations disaggregated by federal and state jurisdictions. |
The ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments should be applied on a prospective basis. The Company is evaluating the effect of remeasuring deferred tax liabilitiesthat ASU 2023-09 will have on its consolidated financial statements and related to items, primarily unrealized gains and losses on investments, within AOCI to retained earnings resulting from the change in the U.S. corporate income tax rate. This reclassification resulted in a decrease to AOCI and an increase to retained earnings in the amount of $84,000 for the year ended December 31, 2017, with no net impact to total stockholders' equity.disclosures.
NOTE 2 - – BUSINESS COMBINATION
On January 22, 2016, February 24, 2023, the Company’s wholly-owned subsidiary, 1st Security Bank, completed the purchase of fourseven branches (“Branch Purchase”Acquisition”) from Columbia State Bank of America.to expand its franchise in Washington and Oregon. The Branch PurchaseAcquisition included fourseven retail bank branches located in the communities of Port Angeles, Sequim, Port Townsend,Goldendale and Hadlock, Washington.White Salmon, Washington and Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon. In accordance with the Purchase and Assumption Agreement, dated as of September 1, 2015, November 7, 2022, between Columbia State Bank of America and 1st Security Bank, the Bank acquired $186.4$425.5 million of deposits, a small portfolio of performing loans, twosix owned bank branches, three leasesone lease associated with the bank branches and parking facilities and certain other assets of the branches. In consideration of the purchased assets and transferred liabilities, 1st Security Bank paid (a) the unpaid principal balance and accrued interest of $419,000$66.6 million for the loans acquired, (b) the net bookfair value, or approximately $778,000,$6.3 million, for the bank facilities and certain other assets associated with the acquired branches, and (c) a deposit premium of 2.50%4.15% for core deposits and 2.5% for public funds on substantially all of the deposits assumed, which equated to approximately $4.8$16.4 million. The transaction was settled with Columbia State Bank of America paying cash of $180.4$334.7 million to 1st Security Bank for the difference between these amountsthe total assets purchased and the total depositsliabilities assumed.
96
The Branch PurchaseAcquisition was accounted for under the acquisition method of accounting and accordingly, the assets and liabilities were recorded at their fair values on January 22, 2016, February 24, 2023, the date of acquisition. Determining the fair value of assets and liabilities is a complicated process involving significant judgmentjudgement regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values become available. DuringDue to the second quarter of 2016, the Company completed a re-evaluationtiming of the core deposit intangible because a portiondata conversion and the integration of core deposits were excluded from the original valuation. The updated valuationoperations of the core deposit intangible increasedbranches onto the fair value adjustment by $100,000 to $2.2 million from $2.1 million resulting in a decreaseCompany’s existing operations, historical reporting of $100,000the acquired branches is impracticable, and therefore, disclosure of the amounts of revenue and expenses attributable to the fair value adjustment of goodwill. The impact to consolidated net income was an increase inacquired branches since the amortization of the core deposit intangible for the six months ended June 30, 2016 of $6,000 and was acquisition date are not considered material to the consolidated financial statements. available.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
| Acquired Book |
| Fair Value |
| Amount | |||
January 22, 2016 |
| Value |
| Adjustments |
| Recorded | |||
Assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 180,356 |
| $ | — |
| $ | 180,356 |
Loans receivable |
|
| 417 |
|
| — |
|
| 417 |
Premises and equipment, net |
|
| 697 |
|
| 267 | (1) |
| 964 |
Accrued interest receivable |
|
| 2 |
|
| — |
|
| 2 |
Core deposit intangible |
|
| — |
|
| 2,239 | (2) |
| 2,239 |
Goodwill |
|
| — |
|
| 2,312 | (3) |
| 2,312 |
Other assets |
|
| 103 |
|
| — |
|
| 103 |
Total assets acquired |
| $ | 181,575 |
| $ | 4,818 |
| $ | 186,393 |
Liabilities |
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
Noninterest-bearing accounts |
| $ | 79,966 |
| $ | — |
| $ | 79,966 |
Interest-bearing accounts |
|
| 106,398 |
|
| — |
|
| 106,398 |
Total deposits |
|
| 186,364 |
|
| — |
|
| 186,364 |
Accrued interest payable |
|
| 7 |
|
| — |
|
| 7 |
Other liabilities |
|
| 22 |
|
| — |
|
| 22 |
Total liabilities assumed |
| $ | 186,393 |
| $ | — |
| $ | 186,393 |
Acquired Book | Fair Value | Amount | |||||||||||
February 24, 2023 | Value | Adjustments | Recorded | ||||||||||
Assets | |||||||||||||
Cash and cash equivalents | $ | 336,157 | $ | — | $ | 336,157 | |||||||
Loans receivable | 66,093 | (2,902 | ) | (1) | 63,191 | ||||||||
Premises and equipment | 6,342 | — | 6,342 | ||||||||||
Accrued interest receivable | 530 | — | 530 | ||||||||||
Core deposit intangible ("CDI") | — | 17,438 | (2) | 17,438 | |||||||||
Goodwill | — | 1,280 | (3) | 1,280 | |||||||||
Other assets | 11 | — | 11 | ||||||||||
Total assets acquired | $ | 409,133 | $ | 15,816 | $ | 424,949 | |||||||
Liabilities | |||||||||||||
Deposits: | |||||||||||||
Noninterest-bearing accounts | $ | 225,567 | $ | — | $ | 225,567 | |||||||
Interest-bearing accounts | 199,898 | (548 | ) | (4) | 199,350 | ||||||||
Total deposits | 425,465 | (548 | ) | 424,917 | |||||||||
Accrued interest payable | 4 | — | 4 | ||||||||||
Other liabilities | 28 | — | 28 | ||||||||||
Total liabilities assumed | $ | 425,497 | $ | (548 | ) | $ | 424,949 | ||||||
______________________
(1) | The fair value discount for acquired loans was determined by separate adjustments to reflect a credit risk and marketability component and a yield component reflecting the differential between portfolio and market yields. The discount on acquired loans will be accreted back into interest income using the effective yield method. None of the loans acquired are purchased financial assets with credit deterioration. The fair value of the loans is $63.2 million and the gross amount due is $66.1 million, none of which is expected to be uncollectable. |
Explanation of Fair Value Adjustments
(1) The fair value adjustment represents the difference between the fair value of the acquired branches and the book value of the assets acquired. The Company utilized third-party valuations but did not receive appraisals to assist in the determination of fair value.
(2) The fair value adjustment represents the value of the core deposit base assumed in the Branch Purchase based on a study performed by an independent consulting firm. This amount was recorded by the Company as an identifiable intangible asset and will be amortized as an expense on an accelerated basis over the average life of the core deposit base, which is estimated to be nine years.
(3) The fair value adjustment represents the value of the goodwill calculated from the purchase based on the purchase price, less the fair value of assets acquired net of liabilities assumed.
Goodwill - The acquired goodwill represents the excess purchase price over the estimated fair value of the net assets acquired and was recorded at $2.3 million on January 22, 2016.
97
The following table summarizes the aggregate amount recognized for each major class of assets acquired and liabilities assumed by 1st Security Bank in the Branch Purchase:
|
|
|
|
|
| At January 22, | |
|
| 2016 | |
Purchase price (1) |
| $ | 6,015 |
Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value: |
|
|
|
Cash and cash equivalents |
|
| 186,371 |
Acquired loans |
|
| 417 |
Premises and equipment, net |
|
| 964 |
Accrued interest receivable |
|
| 2 |
Core deposit intangible |
|
| 2,239 |
Other assets |
|
| 103 |
Deposits |
|
| (186,364) |
Accrued interest payable |
|
| (7) |
Other liabilities |
|
| (22) |
Total fair value of identifiable net assets |
|
| 3,703 |
Goodwill |
| $ | 2,312 |
(2) |
|
(3) | The fair value adjustment represents the value of the goodwill calculated from the purchase based on the purchase price, less the fair value of assets acquired net of liabilities assumed. The goodwill of $1.3 million is attributable to the workforce and customer relationships associated with the branches. All the goodwill is deductible for tax purposes and will be amortized over a 15-year period. The goodwill was assigned to the Commercial and Consumer Banking segment. |
(4) |
|
Core deposit intangible
The core deposit intangible representsdisclosures regarding pro-forma data and the fair valueresults of operations after the acquired core deposit base.acquisition date are omitted as this information is not practical to obtain. The core deposit intangible will be amortizedbranches’ financial information is not reported on an accelerated basis over approximately nine years. Total amortization expense was $400,000 for the year ended December 31, 2017, and $522,000 for the same period in 2016. Amortization expense for core deposit intangible is expected to be as follows:
|
|
|
|
2018 |
|
| 307 |
2019 |
|
| 235 |
2020 |
|
| 181 |
2021 |
|
| 166 |
2022 |
|
| 166 |
Thereafter |
|
| 262 |
Total |
| $ | 1,317 |
a stand-alone basis.
NOTE 3 - SECURITIES AVAILABLE-FOR-SALE – INVESTMENTS
The following tables present the amortized costs, unrealized gains, unrealized losses, and estimated fair values of securities available-for-sale and held-to-maturity, and ACL on securities held-to-maturity, at December 31, 2017 and 2016:the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | ||||||||||
|
|
|
|
|
|
|
|
|
|
| Estimated | |
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair | ||||
|
| Cost |
| Gains |
| Losses |
| Values | ||||
SECURITIES AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
| $ | 9,077 |
| $ | 49 |
| $ | (11) |
| $ | 9,115 |
Corporate securities |
|
| 7,113 |
|
| 9 |
|
| (96) |
|
| 7,026 |
Municipal bonds |
|
| 12,720 |
|
| 148 |
|
| (82) |
|
| 12,786 |
Mortgage-backed securities |
|
| 40,161 |
|
| 63 |
|
| (490) |
|
| 39,734 |
U.S. Small Business Administration securities |
|
| 14,014 |
|
| — |
|
| (195) |
|
| 13,819 |
Total securities available-for-sale |
| $ | 83,085 |
| $ | 269 |
| $ | (874) |
| $ | 82,480 |
December 31, 2023 | ||||||||||||||||||||
Estimated | ||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||
SECURITIES AVAILABLE-FOR-SALE | Cost | Gains | Losses | Values | ACL | |||||||||||||||
U.S. agency securities | $ | 21,151 | $ | 46 | $ | (3,179 | ) | $ | 18,018 | $ | — | |||||||||
Corporate securities | 13,000 | 613 | (741 | ) | 12,872 | — | ||||||||||||||
Municipal bonds | 138,803 | 42 | (19,398 | ) | 119,447 | — | ||||||||||||||
Mortgage-backed securities | 112,855 | 238 | (11,845 | ) | 101,248 | — | ||||||||||||||
U.S. Small Business Administration securities | 42,886 | — | (1,538 | ) | 41,348 | — | ||||||||||||||
Total securities available-for-sale | 328,695 | 939 | (36,701 | ) | 292,933 | — | ||||||||||||||
SECURITIES HELD-TO-MATURITY | ||||||||||||||||||||
Corporate securities | 8,500 | — | (834 | ) | 7,666 | 45 | ||||||||||||||
Total securities held-to-maturity | 8,500 | — | (834 | ) | 7,666 | 45 | ||||||||||||||
Total securities | $ | 337,195 | $ | 939 | $ | (37,535 | ) | $ | 300,599 | $ | 45 | |||||||||
December 31, 2022 | ||||||||||||||||||||
Estimated | ||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||
SECURITIES AVAILABLE-FOR-SALE | Cost | Gains | Losses | Values | ACL | |||||||||||||||
U.S. agency securities | $ | 21,153 | $ | — | $ | (3,865 | ) | $ | 17,288 | $ | — | |||||||||
Corporate securities | 9,497 | 27 | (979 | ) | 8,545 | — | ||||||||||||||
Municipal bonds | 144,200 | 21 | (23,619 | ) | 120,602 | — | ||||||||||||||
Mortgage-backed securities | 82,424 | — | (12,458 | ) | 69,966 | — | ||||||||||||||
U.S. Small Business Administration securities | 14,519 | — | (1,668 | ) | 12,851 | — | ||||||||||||||
Total securities available-for-sale | 271,793 | 48 | (42,589 | ) | 229,252 | — | ||||||||||||||
SECURITIES HELD-TO-MATURITY | ||||||||||||||||||||
Corporate securities | 8,500 | — | (571 | ) | 7,929 | 31 | ||||||||||||||
Total securities held-to-maturity | 8,500 | — | (571 | ) | 7,929 | 31 | ||||||||||||||
Total securities | $ | 280,293 | $ | 48 | $ | (43,160 | ) | $ | 237,181 | $ | 31 | |||||||||
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | ||||||||||
|
|
|
|
|
|
|
|
|
|
| Estimated | |
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair | ||||
|
| Cost |
| Gains |
| Losses |
| Values | ||||
SECURITIES AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
| $ | 8,150 |
| $ | 12 |
| $ | (94) |
| $ | 8,068 |
Corporate securities |
|
| 7,654 |
|
| 14 |
|
| (168) |
|
| 7,500 |
Municipal bonds |
|
| 15,183 |
|
| 164 |
|
| (83) |
|
| 15,264 |
Mortgage-backed securities |
|
| 45,856 |
|
| 52 |
|
| (713) |
|
| 45,195 |
U.S. Small Business Administration securities |
|
| 5,862 |
|
| 27 |
|
| (41) |
|
| 5,848 |
Total securities available-for-sale |
| $ | 82,705 |
| $ | 269 |
| $ | (1,099) |
| $ | 81,875 |
The following table presents the activity in the ACL on securities held-to-maturity by major security type for the years indicated:
SECURITIES HELD-TO-MATURITY | For the Year Ended | |||||||
Corporate Securities | December 31, 2023 | December 31, 2022 | ||||||
Beginning ACL balance | $ | 31 | $ | — | ||||
Impact of adopting ASU 2016-13 | — | 72 | ||||||
Provision for (recapture of) credit losses | 14 | (41 | ) | |||||
Securities charged-off | — | — | ||||||
Recoveries | — | — | ||||||
Total ending ACL balance | $ | 45 | $ | 31 | ||||
At DecemberManagement measures expected credit losses on held-to-maturity debt securities on an individual basis. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Accrued interest receivable on held-to-maturity debt securities totaled $116,000 as of December 31, 2017, the2023 and 2022, and was $1.5 million and $1.2 million on available-for-sale debt securities as of December 31, 2023 and 2022, respectively. Accrued interest receivable on securities is reported in “Accrued interest receivable” on the Consolidated Balance Sheets and is excluded from the calculation of the ACL.
The Bank pledged ninemonitors the credit quality of debt securities heldheld-to-maturity quarterly using credit rating, material event notices, and changes in market value. The following table summarizes the amortized cost of debt securities held-to-maturity at the FHLB with a carrying valuedates indicated, aggregated by credit quality indicator:
December 31, | ||||||||
Corporate securities | 2023 | 2022 | ||||||
BBB/BBB- | $ | 7,000 | $ | 8,500 | ||||
BB+ | 1,500 | — | ||||||
Total | $ | 8,500 | $ | 8,500 | ||||
At December 31, 2023, there were no debt securities held-to-maturity that were classified as either nonaccrual or 90 days or more past due and still accruing interest.
The following table presents, as of $10.7 millionDecember 31, 2023, investment securities which were pledged to secure Washington Stateborrowings, public deposits or other obligations as permitted or required by law:
December 31, 2023 | ||||||||||||
Purpose or beneficiary | Carrying Value | Amortized Cost | Fair Value | |||||||||
State and local government public deposits | $ | 39,704 | $ | 45,689 | $ | 39,704 | ||||||
FRB - Bank Term Funding Program facility ("BTFP") | 77,043 | 90,195 | 77,043 | |||||||||
Total pledged securities | $ | 116,747 | $ | 135,884 | $ | 116,747 | ||||||
Investment securities that were in an unrealized loss position at December 31, 2017 and 2016the dates indicated are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. Management believes that these securities are only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | ||||||||||||||||
|
| Less than 12 Months |
| 12 Months or Longer |
| Total | ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
SECURITIES AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
| $ | 2,987 |
| $ | (11) |
| $ | — |
| $ | — |
| $ | 2,987 |
| $ | (11) |
Corporate securities |
|
| 4,102 |
|
| (15) |
|
| 1,915 |
|
| (81) |
|
| 6,017 |
|
| (96) |
Municipal bonds |
|
| 5,982 |
|
| (82) |
|
| — |
|
| — |
|
| 5,982 |
|
| (82) |
Mortgage-backed securities |
|
| 7,262 |
|
| (61) |
|
| 20,635 |
|
| (429) |
|
| 27,897 |
|
| (490) |
U.S. Small Business Administration securities |
|
| 11,876 |
|
| (162) |
|
| 1,943 |
|
| (33) |
|
| 13,819 |
|
| (195) |
Total |
| $ | 32,209 |
| $ | (331) |
| $ | 24,493 |
| $ | (543) |
| $ | 56,702 |
| $ | (874) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
| December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
|
| Less than 12 Months |
| 12 Months or Longer |
| Total | December 31, 2023 | |||||||||||||||||||||||||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||||
SECURITIES AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
U.S. agency securities |
| $ | 6,998 |
| $ | (94) |
| $ | — |
| $ | — |
| $ | 6,998 |
| $ | (94) | $ | — | $ | — | $ | 15,972 | $ | (3,179 | ) | $ | 15,972 | $ | (3,179 | ) | ||||||||||
Corporate securities |
|
| 5,048 |
|
| (106) |
|
| 1,438 |
|
| (62) |
|
| 6,486 |
|
| (168) | 959 | (41 | ) | 4,300 | (700 | ) | 5,259 | (741 | ) | |||||||||||||||
Municipal bonds |
|
| 6,741 |
|
| (83) |
|
| — |
|
| — |
|
| 6,741 |
|
| (83) | 3,922 | (23 | ) | 113,577 | (19,375 | ) | 117,499 | (19,398 | ) | |||||||||||||||
Mortgage-backed securities |
|
| 39,373 |
|
| (713) |
|
| — |
|
| — |
|
| 39,373 |
|
| (713) | 20,662 | (113 | ) | 67,376 | (11,732 | ) | 88,038 | (11,845 | ) | |||||||||||||||
U.S. Small Business Administration securities |
|
| 2,963 |
|
| (41) |
|
| — |
|
| — |
|
| 2,963 |
|
| (41) | 33,211 | (460 | ) | 8,137 | (1,078 | ) | 41,348 | (1,538 | ) | |||||||||||||||
Total securities available-for-sale | $ | 58,754 | $ | (637 | ) | $ | 209,362 | $ | (36,064 | ) | $ | 268,116 | $ | (36,701 | ) | |||||||||||||||||||||||||||
SECURITIES HELD-TO-MATURITY | ||||||||||||||||||||||||||||||||||||||||||
Corporate securities | — | — | 7,666 | (834 | ) | 7,666 | (834 | ) | ||||||||||||||||||||||||||||||||||
Total securities held-to-maturity | — | — | 7,666 | (834 | ) | 7,666 | (834 | ) | ||||||||||||||||||||||||||||||||||
Total |
| $ | 61,123 |
| $ | (1,037) |
| $ | 1,438 |
| $ | (62) |
| $ | 62,561 |
| $ | (1,099) | $ | 58,754 | $ | (637 | ) | $ | 217,028 | $ | (36,898 | ) | $ | 275,782 | $ | (37,535 | ) | |||||||||
December 31, 2022 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
SECURITIES AVAILABLE-FOR-SALE | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
U.S. agency securities | $ | 3,823 | $ | (118 | ) | $ | 13,465 | $ | (3,747 | ) | $ | 17,288 | $ | (3,865 | ) | |||||||||
Corporate securities | 2,494 | (4 | ) | 4,026 | (975 | ) | 6,520 | (979 | ) | |||||||||||||||
Municipal bonds | 44,261 | (5,794 | ) | 73,990 | (17,825 | ) | 118,251 | (23,619 | ) | |||||||||||||||
Mortgage-backed securities | 29,791 | (3,188 | ) | 40,175 | (9,270 | ) | 69,966 | (12,458 | ) | |||||||||||||||
U.S. Small Business Administration securities | 10,807 | (1,162 | ) | 2,044 | (506 | ) | 12,851 | (1,668 | ) | |||||||||||||||
Total securities available-for-sale | $ | 91,176 | $ | (10,266 | ) | $ | 133,700 | $ | (32,323 | ) | $ | 224,876 | $ | (42,589 | ) | |||||||||
SECURITIES HELD-TO-MATURITY | ||||||||||||||||||||||||
Corporate securities | 7,929 | (571 | ) | — | — | 7,929 | (571 | ) | ||||||||||||||||
Total securities held-to-maturity | 7,929 | (571 | ) | — | — | 7,929 | (571 | ) | ||||||||||||||||
Total | $ | 99,105 | $ | (10,837 | ) | $ | 133,700 | $ | (32,323 | ) | $ | 232,805 | $ | (43,160 | ) | |||||||||
There were 21 investments withno held-to-maturity debt securities in an unrealized lossesloss position of less than one year and 17 investments withseven in an unrealized lossesloss position of more than one year at December 31, 2017. 2023.
There were 48 investments with30 available-for-sale securities in an unrealized lossesloss position of less than one year and two investments with180 available-for-sale securities in an unrealized lossesloss position of more than one year at December 31, 2016.2023. The unrealized losses associated with these investmentssecurities are believed to be caused by changing market conditions that are considered to be temporary and the
99
Company does not intend to sell thesethe securities, and it is not likely to be required to sell these securities prior to maturity. No other-than-temporaryManagement monitors the published credit ratings of the issuers of the debt securities for material ratings or outlook changes. Substantially all of the Company’s municipal bond portfolio is comprised of obligations of states and political subdivisions located within the Company’s geographic footprint that are monitored through quarterly or annual financial review utilizing published credit ratings. All the municipal bond securities are investment grade.
All of the available-for-sale mortgage-backed securities and U.S. Small Business Administration securities in an unrealized loss position are issued or guaranteed by government-sponsored enterprises, and the available-for-sale corporate securities are all investment grade and monitored for rating or outlook changes. Based on the Company’s evaluation of these securities, no credit impairment was recorded for the years ended December 31, 20172023, 2022, and 2016.2021.
The contractual maturities of securities available-for-sale and held-to-maturity at December 31, 2017 and 2016the dates indicated are listed below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations; therefore, these securities are classified separately with no specific maturity date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 |
| December 31, 2016 | ||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair | ||||
|
| Cost |
| Value |
| Cost |
| Value | ||||
U.S. agency securities |
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years |
| $ | — |
| $ | — |
| $ | 4,000 |
| $ | 3,956 |
Due after five years through ten years |
|
| 4,079 |
|
| 4,124 |
|
| 4,150 |
|
| 4,112 |
Due after ten years |
|
| 4,998 |
|
| 4,991 |
|
| — |
|
| — |
Subtotal |
|
| 9,077 |
|
| 9,115 |
|
| 8,150 |
|
| 8,068 |
Corporate securities |
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years |
|
| 5,117 |
|
| 5,111 |
|
| 5,659 |
|
| 5,625 |
Due after five years through ten years |
|
| 1,996 |
|
| 1,915 |
|
| 1,995 |
|
| 1,875 |
Subtotal |
|
| 7,113 |
|
| 7,026 |
|
| 7,654 |
|
| 7,500 |
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
| — |
|
| — |
|
| 509 |
|
| 513 |
Due after one year through five years |
|
| 2,001 |
|
| 2,026 |
|
| 5,326 |
|
| 5,386 |
Due after five years through ten years |
|
| 4,111 |
|
| 4,206 |
|
| 7,476 |
|
| 7,492 |
Due after ten years |
|
| 6,608 |
|
| 6,554 |
|
| 1,872 |
|
| 1,873 |
Subtotal |
|
| 12,720 |
|
| 12,786 |
|
| 15,183 |
|
| 15,264 |
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association (“FNMA”) |
|
| 23,310 |
|
| 23,091 |
|
| 23,522 |
|
| 23,197 |
Federal Home Loan Mortgage Corporation (“FHLMC”) |
|
| 10,818 |
|
| 10,629 |
|
| 14,950 |
|
| 14,662 |
Government National Mortgage Association (“GNMA”) |
|
| 6,033 |
|
| 6,014 |
|
| 7,384 |
|
| 7,336 |
Subtotal |
|
| 40,161 |
|
| 39,734 |
|
| 45,856 |
|
| 45,195 |
U.S. Small Business Administration securities |
|
|
|
|
|
|
|
|
|
|
|
|
Due after five years through ten years |
|
| 12,065 |
|
| 11,896 |
|
| 5,862 |
|
| 5,848 |
Due after ten years |
|
| 1,949 |
|
| 1,923 |
|
| — |
|
| — |
Subtotal |
|
| 14,014 |
|
| 13,819 |
|
| 5,862 |
|
| 5,848 |
Total |
| $ | 83,085 |
| $ | 82,480 |
| $ | 82,705 |
| $ | 81,875 |
December 31, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
SECURITIES AVAILABLE-FOR-SALE | Amortized | Fair | Amortized | Fair | ||||||||||||
U.S. agency securities | Cost | Value | Cost | Value | ||||||||||||
Due within one year | $ | 922 | $ | 914 | $ | — | $ | — | ||||||||
Due after one year through five years | 3,947 | 3,544 | 4,874 | 4,321 | ||||||||||||
Due after five years through ten years | 11,972 | 10,139 | 6,989 | 5,963 | ||||||||||||
Due after ten years | 4,310 | 3,421 | 9,290 | 7,004 | ||||||||||||
Subtotal | 21,151 | 18,018 | 21,153 | 17,288 | ||||||||||||
Corporate securities | ||||||||||||||||
Due within one year | 1,000 | 1,004 | 1,000 | 997 | ||||||||||||
Due after one year through five years | 6,000 | 6,609 | 2,497 | 2,519 | ||||||||||||
Due after five years through ten years | 4,000 | 3,839 | 4,000 | 3,763 | ||||||||||||
Due after ten years | 2,000 | 1,420 | 2,000 | 1,266 | ||||||||||||
Subtotal | 13,000 | 12,872 | 9,497 | 8,545 | ||||||||||||
Municipal bonds | ||||||||||||||||
Due within one year | 1,013 | 1,003 | 2,660 | 2,644 | ||||||||||||
Due after one year through five years | 757 | 751 | 1,038 | 1,012 | ||||||||||||
Due after five years through ten years | 7,603 | 7,101 | 6,341 | 5,771 | ||||||||||||
Due after ten years | 129,430 | 110,592 | 134,161 | 111,175 | ||||||||||||
Subtotal | 138,803 | 119,447 | 144,200 | 120,602 | ||||||||||||
Mortgage-backed securities | ||||||||||||||||
Federal National Mortgage Association (“FNMA”) | 76,369 | 66,275 | 68,421 | 57,358 | ||||||||||||
Federal Home Loan Mortgage Corporation (“FHLMC”) | 32,311 | 31,376 | 9,290 | 8,424 | ||||||||||||
Government National Mortgage Association (“GNMA”) | 4,175 | 3,597 | 4,713 | 4,184 | ||||||||||||
Subtotal | 112,855 | 101,248 | 82,424 | 69,966 | ||||||||||||
U.S. Small Business Administration securities | ||||||||||||||||
Due within one year | 198 | 196 | — | — | ||||||||||||
Due after one year through five years | 1,860 | 1,824 | 2,553 | 2,407 | ||||||||||||
Due after five years through ten years | 21,420 | 20,929 | 4,461 | 3,996 | ||||||||||||
Due after ten years | 19,408 | 18,399 | 7,505 | 6,448 | ||||||||||||
Subtotal | 42,886 | 41,348 | 14,519 | 12,851 | ||||||||||||
Total securities available-for-sale | 328,695 | 292,933 | 271,793 | 229,252 | ||||||||||||
SECURITIES HELD-TO-MATURITY | ||||||||||||||||
Corporate securities | ||||||||||||||||
Due after five years through ten years | 8,500 | 7,666 | 8,500 | 7,929 | ||||||||||||
Total securities held-to-maturity | 8,500 | 7,666 | 8,500 | 7,929 | ||||||||||||
Total securities | $ | 337,195 | $ | 300,599 | $ | 280,293 | $ | 237,181 | ||||||||
TheThere were no sales proceeds, and resultingor gains andor losses computed using specific identification from salesthe sale of securities available-for-sale for the years ended December 31, 20172023, 2022, and 2016 were as follows:2021.
|
|
|
|
|
|
|
|
|
|
| ||
|
| December 31, 2017 | ||||||||||
|
| Proceeds |
| Gross Gains |
|
| Gross Losses | |||||
Securities available-for-sale |
| $ | 39,103 |
| $ | 413 |
| $ |
| (33) | ||
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | |||||||
|
| Proceeds |
| Gross Gains |
| Gross Losses | |||
Securities available-for-sale |
| $ | 13,577 |
| $ | 149 |
| $ | (3) |
100
NOTE 4 - – LOANS RECEIVABLE AND ALLOWANCE FOR LOANCREDIT LOSSES ON LOANS
The composition of the loan portfolio was as follows at December 31:the dates indicated:
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
REAL ESTATE LOANS |
|
|
|
|
|
|
Commercial |
| $ | 63,611 |
| $ | 55,871 |
Construction and development |
|
| 143,068 |
|
| 94,462 |
Home equity |
|
| 25,289 |
|
| 20,081 |
One-to-four-family (excludes loans held for sale) |
|
| 163,655 |
|
| 124,009 |
Multi-family |
|
| 44,451 |
|
| 37,527 |
Total real estate loans |
|
| 440,074 |
|
| 331,950 |
CONSUMER LOANS |
|
|
|
|
|
|
Indirect home improvement |
|
| 130,176 |
|
| 107,759 |
Solar |
|
| 41,049 |
|
| 36,503 |
Marine |
|
| 35,397 |
|
| 28,549 |
Other consumer |
|
| 2,046 |
|
| 1,915 |
Total consumer loans |
|
| 208,668 |
|
| 174,726 |
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
Commercial and industrial |
|
| 83,306 |
|
| 65,841 |
Warehouse lending |
|
| 41,397 |
|
| 32,898 |
Total commercial business loans |
|
| 124,703 |
|
| 98,739 |
Total loans receivable, gross |
|
| 773,445 |
|
| 605,415 |
Allowance for loan losses |
|
| (10,756) |
|
| (10,211) |
Deferred costs, fees, premiums, and discounts, net |
|
| (1,131) |
|
| (1,887) |
Total loans receivable, net |
| $ | 761,558 |
| $ | 593,317 |
December 31, | ||||||||
REAL ESTATE LOANS | 2023 | 2022 | ||||||
Commercial | $ | 366,328 | $ | 334,059 | ||||
Construction and development | 303,054 | 342,591 | ||||||
Home equity | 69,488 | 55,387 | ||||||
One-to-four-family (excludes loans held for sale) | 567,742 | 469,485 | ||||||
Multi-family | 223,769 | 219,738 | ||||||
Total real estate loans | 1,530,381 | 1,421,260 | ||||||
CONSUMER LOANS | ||||||||
Indirect home improvement | 569,903 | 495,941 | ||||||
Marine | 73,310 | 70,567 | ||||||
Other consumer | 3,540 | 3,064 | ||||||
Total consumer loans | 646,753 | 569,572 | ||||||
COMMERCIAL BUSINESS LOANS | ||||||||
Commercial and industrial | 238,301 | 196,791 | ||||||
Warehouse lending | 17,580 | 31,229 | ||||||
Total commercial business loans | 255,881 | 228,020 | ||||||
Total loans receivable, gross | 2,433,015 | 2,218,852 | ||||||
ACL on loans | (31,534 | ) | (27,992 | ) | ||||
Total loans receivable, net | $ | 2,401,481 | $ | 2,190,860 | ||||
Loan amounts are net of unearned loan fees in excess of unamortized costs and premiums of $8.4 million as of December 31, 2023 and $7.8 million as of December 31, 2022. Net loans include unamortized net discounts on acquired loans of $2.6 million and $437,000 as of December 31, 2023 and 2022, respectively. Net loans do not include accrued interest receivable. Accrued interest receivable on loans was $11.5 million as of December 31, 2023 and $9.6 million as of December 31, 2022 and was reported in “Accrued interest receivable” on the Consolidated Balance Sheets.
Most of the Company’s commercial and multi-family real estate, construction, residential, and commercial business lending activities are with customers located in Western Washington, the Oregon Coast, and near our loan production offices in Vancouver, Washington and the Tri-Cities, Washington. The Company originates real estate, consumer and commercial business loans and has concentrations in these areas, however, indirect home improvement loans, including solar-related home improvement loans, are originated through a network of home improvement contractors and dealers located throughout Washington, Oregon, California, Idaho, Colorado, Arizona, Minnesota, Nevada, Texas, Utah, Massachusetts, Montana, and recently New Hampshire. Management reviewed dealer concentrations and determined as of December 31, 2023, any dealer owned by the same corporate entity will be included under that corporate entity and not as a separate dealer. Loans are generally secured by collateral and rights to collateral vary and are legally documented to the extent practicable. Local economic conditions may affect borrowers’ ability to meet the stated repayment terms.
At December 31, 2023, the Bank held approximately $1.07 billion in loans that are pledged as collateral for FHLB advances, compared to approximately $840.2 million at December 31, 2022. The Bank held approximately $631.1 million in loans that are pledged as collateral for the FRB line of credit at December 31, 2023, compared to approximately $579.8 million at December 31, 2022.
The Company has defined its loan portfolio into three segments that reflect the structure of the lending function, the Company’s strategic plan and the manner in whichway management monitors performance and credit quality. The three loan portfolio segments are: (a) Real Estate Loans, (b) Consumer Loans and (c) Commercial Business Loans. Each of these segments is disaggregated into classes based on the risk characteristics of the borrower and/or the collateral type securing the loan. The following is a summary of each of the Company’s loan portfolio segments and classes:
Real Estate Loans
Commercial Lending. Loans originated by the Company primarily secured by income producing properties, including retail centers, warehouses, and office buildings located in our market areas.
Construction and Development Lending. Loans originated by the Company for the construction of, and secured by, commercial real estate, one-to-four-family,one-to-four-family, and multi-family residences and tracts of land for development that are not pre-sold. A portion of the one-to-four-familyone-to-four-family construction portfolio is custom construction loans to the intended occupant of the residence.
Home Equity Lending. Loans originated by the Company secured by second mortgages on one-to-four-familyone-to-four-family residences, including home equity lines of credit in our market areas.
One-to-Four-Family Real Estate Lending. One-to-four-familyOne-to-four-family residential loans include owner occupiedowner-occupied properties (including second homes), and non-owner occupied properties.non-owner-occupied properties with four or less units. These loans originated by the Company or periodically purchased from banks are secured by first mortgages on one-to-four-familyone-to-four-family residences in our market areas that the Company intends to hold (excludes loans held for sale).
Multi-family Lending. Apartment term lending (5(five or more units) to current banking customers and community reinvestment loans for low to moderate income individuals in the Company’s footprint.
101
Consumer Loans
Indirect Home Improvement. Fixture secured loans for home improvement are originated by the Company through its network of home improvement contractors and dealers and are secured by the personal property installed in, on, or at the borrower’s real property, and may be perfected with a UCC‑2 financing statement filed in the county of the borrower’s residence. These indirect home improvement loans include replacement windows, siding, roofing, spas, and other home fixture installations.
Solar. Fixture secured loans forinstallations, including solar related home improvement projects are originated by the Company through its network of contractors and dealers and are secured by the personal property installed in, on, or at the borrower’s real property, and which may be perfected with a UCC‑2 financing statement filed in the county of the borrower’s residence.projects.
Marine. Loans originated by the Company, secured by boats, to borrowers primarily located in its market areas.the states where the Company originates consumer loans.
Other Consumer. Loans originated by the Company to consumers in our retail branch footprint, including automobiles, recreational vehicles, direct home improvement loans, loans on deposits, and other consumer loans, primarily consisting of personal lines of credit.credit and credit cards.
Commercial Business Loans
Commercial and Industrial (“C&I”) Lending. LoansC&I loans originated by the Company to local small- and mid-sized businesses in our Puget Sound market area are secured primarily by accounts receivable, inventory, or personal property, plant and equipment. Commercial and industrialSome of the C&I loans purchased by the Company are outside of the greater Puget Sound market area. C&I loans are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.
Warehouse Lending. Loans originated to non-depository financial institutions and secured by notes originated by the non-depository financial institution. The Company has two distinct warehouse lending divisions: commercial warehouse re-lending secured by notes on construction loans and mortgage warehouse re-lending secured by notes on one-to-four-family loans. The Company’s mortgage andcommercial construction warehouse lines are secured by notes on construction loans and typically guaranteed by principals with experience in construction lending. Mortgage warehouse lending programloans are funded through whichthird-party residential mortgage bankers. Under this program, the Company funds third-party lendersprovides short-term funding to the mortgage banking companies for the purpose of originating residential mortgage and construction loans for sale into the secondary marketmarket.
Allowance for Credit Losses
The main drivers of the provision for credit losses on loans recorded in 2023 were increases in outstanding loans, net charge-offs, and speculative construction loans for residential properties built for sale to single family households. These loans are secured by the notes and assigned deeds of trust associated with the residential mortgage and construction loansspecific reserves on properties primarily located in the Company’s market areas.individually evaluated loans.
The following tables detail activitiesactivity in the ACL on loans and the allowance for loan losses by loan categories, at or for the years shown:indicated:
|
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|
|
|
|
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|
|
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|
|
|
|
|
|
| At or For the Year Ended December 31, 2017 | |||||||||||||
|
|
|
|
|
|
|
| Commercial |
|
|
|
|
|
| |
|
| Real Estate |
| Consumer |
| Business |
| Unallocated |
| Total | |||||
ALLOWANCE FOR LOAN LOSSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | 3,547 |
| $ | 2,082 |
| $ | 2,675 |
| $ | 1,907 |
| $ | 10,211 |
Provision for loan losses |
|
| 1,253 |
|
| 884 |
|
| (638) |
|
| (749) |
|
| 750 |
Charge-offs |
|
| (65) |
|
| (832) |
|
| (33) |
|
| — |
|
| (930) |
Recoveries |
|
| 35 |
|
| 680 |
|
| 10 |
|
| — |
|
| 725 |
Net charge-offs |
|
| (30) |
|
| (152) |
|
| (23) |
|
| — |
|
| (205) |
Ending balance |
| $ | 4,770 |
| $ | 2,814 |
| $ | 2,014 |
| $ | 1,158 |
| $ | 10,756 |
Period end amount allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
| $ | 21 |
| $ | 68 |
| $ | — |
| $ | — |
| $ | 89 |
Loans collectively evaluated for impairment |
|
| 4,749 |
|
| 2,746 |
|
| 2,014 |
|
| 1,158 |
|
| 10,667 |
Ending balance |
| $ | 4,770 |
| $ | 2,814 |
| $ | 2,014 |
| $ | 1,158 |
| $ | 10,756 |
LOANS RECEIVABLE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
| $ | 348 |
| $ | 195 |
| $ | 551 |
| $ | — |
| $ | 1,094 |
Loans collectively evaluated for impairment |
|
| 439,726 |
|
| 208,473 |
|
| 124,152 |
|
| — |
|
| 772,351 |
Ending balance |
| $ | 440,074 |
| $ | 208,668 |
| $ | 124,703 |
| $ | — |
| $ | 773,445 |
102
At or For the Year Ended December 31, 2023 | ||||||||||||||||||||
Real | Commercial | |||||||||||||||||||
ACL ON LOANS | Estate | Consumer | Business | Unallocated | Total | |||||||||||||||
Beginning balance | $ | 12,123 | $ | 12,109 | $ | 3,760 | $ | — | $ | 27,992 | ||||||||||
Provision for credit losses on loans | 1,994 | 3,465 | 311 | — | 5,770 | |||||||||||||||
Charge-offs | (10 | ) | (3,465 | ) | (1 | ) | — | (3,476 | ) | |||||||||||
Recoveries | — | 1,248 | — | — | 1,248 | |||||||||||||||
Net charge-offs | (10 | ) | (2,217 | ) | (1 | ) | — | (2,228 | ) | |||||||||||
Total ending ACL balance | $ | 14,107 | $ | 13,357 | $ | 4,070 | $ | — | $ | 31,534 | ||||||||||
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|
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|
|
| At or For the Year Ended December 31, 2016 | |||||||||||||
|
|
|
|
|
|
|
| Commercial |
|
|
|
|
|
| |
|
| Real Estate |
| Consumer |
| Business |
| Unallocated |
| Total | |||||
ALLOWANCE FOR LOAN LOSSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | 2,874 |
| $ | 1,681 |
| $ | 1,396 |
| $ | 1,834 |
| $ | 7,785 |
Provision for loan losses |
|
| 622 |
|
| 513 |
|
| 1,192 |
|
| 73 |
|
| 2,400 |
Charge-offs |
|
| (65) |
|
| (1,002) |
|
| — |
|
| — |
|
| (1,067) |
Recoveries |
|
| 116 |
|
| 890 |
|
| 87 |
|
| — |
|
| 1,093 |
Net recoveries (charge-offs) |
|
| 51 |
|
| (112) |
|
| 87 |
|
| — |
|
| 26 |
Ending balance |
| $ | 3,547 |
| $ | 2,082 |
| $ | 2,675 |
| $ | 1,907 |
| $ | 10,211 |
Period end amount allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
Loans collectively evaluated for impairment |
|
| 3,547 |
|
| 2,082 |
|
| 2,675 |
|
| 1,907 |
|
| 10,211 |
Ending balance |
| $ | 3,547 |
| $ | 2,082 |
| $ | 2,675 |
| $ | 1,907 |
| $ | 10,211 |
LOANS RECEIVABLE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
| $ | 194 |
| $ | — |
| $ | — |
| $ | — |
| $ | 194 |
Loans collectively evaluated for impairment |
|
| 331,756 |
|
| 174,726 |
|
| 98,739 |
|
| — |
|
| 605,221 |
Ending balance |
| $ | 331,950 |
| $ | 174,726 |
| $ | 98,739 |
| $ | — |
| $ | 605,415 |
At or For the Year Ended December 31, 2022 | ||||||||||||||||||||
| Real | Commercial | |||||||||||||||||||
ACL ON LOANS | Estate | Consumer | Business | Unallocated | Total | |||||||||||||||
Beginning balance, prior to adoption of ASC 326 | $ | 14,798 | $ | 4,280 | $ | 6,536 | $ | 21 | $ | 25,635 | ||||||||||
Impact of adopting ASC 326 | (5,234 | ) | 6,078 | (3,682 | ) | (21 | ) | (2,859 | ) | |||||||||||
Provision for credit losses on loans | 2,559 | 3,158 | 906 | — | 6,623 | |||||||||||||||
Charge-offs | — | (2,465 | ) | — | — | (2,465 | ) | |||||||||||||
Recoveries | — | 1,058 | — | — | 1,058 | |||||||||||||||
Net charge-offs | — | (1,407 | ) | — | — | (1,407 | ) | |||||||||||||
Total ending ACL balance | $ | 12,123 | $ | 12,109 | $ | 3,760 | $ | — | $ | 27,992 | ||||||||||
Non-AccrualThe allowance for loan losses is reported using the incurred loss method at or for the year ended December 31, 2021:
At or For the Year Ended December 31, 2021 | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
ALLOWANCE FOR LOAN LOSSES | Real Estate | Consumer | Business | Unallocated | Total | |||||||||||||||
Beginning balance | $ | 13,846 | $ | 6,696 | $ | 4,939 | $ | 691 | $ | 26,172 | ||||||||||
Provision for (recapture of) loan losses | 952 | (1,417 | ) | 1,635 | (670 | ) | 500 | |||||||||||||
Charge-offs | — | (1,755 | ) | (38 | ) | — | (1,793 | ) | ||||||||||||
Recoveries | — | 756 | — | — | 756 | |||||||||||||||
Net charge-offs | — | (999 | ) | (38 | ) | — | (1,037 | ) | ||||||||||||
Total ending allowance for loan losses balance | $ | 14,798 | $ | 4,280 | $ | 6,536 | $ | 21 | $ | 25,635 | ||||||||||
Period end amount allocated to: | ||||||||||||||||||||
Loans individually evaluated for impairment | $ | 23 | $ | 219 | $ | 921 | $ | — | $ | 1,163 | ||||||||||
Loans collectively evaluated for impairment | 14,775 | 4,061 | 5,615 | 21 | 24,472 | |||||||||||||||
Ending balance | $ | 14,798 | $ | 4,280 | $ | 6,536 | $ | 21 | $ | 25,635 | ||||||||||
LOANS RECEIVABLE | ||||||||||||||||||||
Loans individually evaluated for impairment | $ | 781 | $ | 629 | $ | 4,419 | $ | — | $ | 5,829 | ||||||||||
Loans collectively evaluated for impairment | 1,089,522 | 421,414 | 237,410 | — | 1,748,346 | |||||||||||||||
Ending balance | $ | 1,090,303 | $ | 422,043 | $ | 241,829 | $ | — | $ | 1,754,175 | ||||||||||
Nonaccrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are automatically placed on non-accrualnonaccrual once the loan is 90 days past due or sooner if, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, or as required by regulatory authorities.
Loan Modifications to Borrowers Experiencing Financial Difficulty
The Company may modify the contractual terms of a loan to a borrower experiencing financial difficulty as a part of ongoing loss mitigation strategies. These modifications may result in an interest rate reduction, term extension, payment deferral, or a combination thereof. The Company typically does not offer principal forgiveness.
The following tables present the amortized basis of loans that were modified to borrowers experiencing financial difficulty during the period by loan class and modification type.
Payment Deferral | ||||||||||
Amortized Cost | % of Total Loan | |||||||||
December 31, 2023 | Basis | Type | Financial Effect | |||||||
Commercial real estate | $ | 1,088 | 0.3 | % | Deferred payments and capitalized interest for a weighted-average period of 1.5 years. | |||||
Combination - Term Extension and Interest Rate Reduction | ||||||||||
Amortized Cost | % of Total Loan | |||||||||
December 31, 2023 | Basis | Type | Financial Effect | |||||||
C&I | $ | 2,940 | 1.2 | % | Reduced weighted-average contractual interest rate from 7.5% to 4.1%, and added a weighted-average 5 years to the life of the loans. | |||||
There were no loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022–02, through December 31, 2023 that subsequently defaulted during the period presented.
Troubled Debt Restructurings (“TDRs”)
At December 31, 2022, the Company had two TDRs, both of which were commercial business loans, on nonaccrual totaling $3.7 million. The Company had no commitments to lend additional funds on these TDRs. The Company has not forgiven any principal on these loans. There were no TDRs which incurred a payment default within twelve months of the restructure date during the year ended December 31, 2022.
Nonaccrual and Past Due Loans
The following tables provide information pertaining to the aging analysis of contractually past due loans and non-accrualnonaccrual loans forat the years ended December 31, 2017 and 2016:dates indicated:
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|
|
| December 31, 2017 | |||||||||||||||||||
|
| 30-59 |
| 60-89 |
|
|
|
|
|
|
|
|
|
| |||||||
|
| Days |
| Days |
| 90 Days |
| Total |
|
|
| Total |
|
| |||||||
|
| Past |
| Past |
| or More |
| Past |
|
|
| Loans |
| Non- | |||||||
|
| Due |
| Due |
| Past Due |
| Due |
| Current |
| Receivable |
| Accrual | |||||||
REAL ESTATE LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 63,611 |
| $ | 63,611 |
| $ | — |
Construction and development |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 143,068 |
|
| 143,068 |
|
| — |
Home equity |
|
| 122 |
|
| — |
|
| 136 |
|
| 258 |
|
| 25,031 |
|
| 25,289 |
|
| 151 |
One-to-four-family |
|
| 142 |
|
| — |
|
| — |
|
| 142 |
|
| 163,513 |
|
| 163,655 |
|
| 142 |
Multi-family |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 44,451 |
|
| 44,451 |
|
| — |
Total real estate loans |
|
| 264 |
|
| — |
|
| 136 |
|
| 400 |
|
| 439,674 |
|
| 440,074 |
|
| 293 |
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect home improvement |
|
| 255 |
|
| 215 |
|
| 99 |
|
| 569 |
|
| 129,607 |
|
| 130,176 |
|
| 195 |
Solar |
|
| 49 |
|
| 19 |
|
| — |
|
| 68 |
|
| 40,981 |
|
| 41,049 |
|
| — |
Marine |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 35,397 |
|
| 35,397 |
|
| — |
Other consumer |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,046 |
|
| 2,046 |
|
| — |
Total consumer loans |
|
| 304 | �� |
| 234 |
|
| 99 |
|
| 637 |
|
| 208,031 |
|
| 208,668 |
|
| 195 |
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| — |
|
| 551 |
|
| — |
|
| 551 |
|
| 82,755 |
|
| 83,306 |
|
| 551 |
Warehouse lending |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 41,397 |
|
| 41,397 |
|
| — |
Total commercial business loans |
|
| — |
|
| 551 |
|
| — |
|
| 551 |
|
| 124,152 |
|
| 124,703 |
|
| 551 |
Total loans |
| $ | 568 |
| $ | 785 |
| $ | 235 |
| $ | 1,588 |
| $ | 771,857 |
| $ | 773,445 |
| $ | 1,039 |
December 31, 2023 | ||||||||||||||||||||||||||||
30-59 | 60-89 | |||||||||||||||||||||||||||
Days | Days | 90 Days | Total | Total | ||||||||||||||||||||||||
Past | Past | or More | Past | Loans | Non- | |||||||||||||||||||||||
REAL ESTATE LOANS | Due | Due | Past Due | Due | Current | Receivable | Accrual (1) | |||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | 366,328 | $ | 366,328 | $ | 1,088 | ||||||||||||||
Construction and development | — | — | — | — | 303,054 | 303,054 | 4,699 | |||||||||||||||||||||
Home equity | 79 | 25 | 136 | 240 | 69,248 | 69,488 | 173 | |||||||||||||||||||||
One-to-four-family | — | 96 | — | 96 | 567,646 | 567,742 | 96 | |||||||||||||||||||||
Multi-family | — | — | — | — | 223,769 | 223,769 | — | |||||||||||||||||||||
Total real estate loans | 79 | 121 | 136 | 336 | 1,530,045 | 1,530,381 | 6,056 | |||||||||||||||||||||
CONSUMER LOANS | ||||||||||||||||||||||||||||
Indirect home improvement | 1,759 | 1,248 | 777 | 3,784 | 566,119 | 569,903 | 1,863 | |||||||||||||||||||||
Marine | 373 | 243 | 137 | 753 | 72,557 | 73,310 | 342 | |||||||||||||||||||||
Other consumer | 57 | 18 | 6 | 81 | 3,459 | 3,540 | 8 | |||||||||||||||||||||
Total consumer loans | 2,189 | 1,509 | 920 | 4,618 | 642,135 | 646,753 | 2,213 | |||||||||||||||||||||
COMMERCIAL BUSINESS LOANS | ||||||||||||||||||||||||||||
C&I | — | — | 2,514 | 2,514 | 235,787 | 238,301 | 2,683 | |||||||||||||||||||||
Warehouse lending | — | — | — | — | 17,580 | 17,580 | — | |||||||||||||||||||||
Total commercial business loans | — | — | 2,514 | 2,514 | 253,367 | 255,881 | 2,683 | |||||||||||||||||||||
Total loans | $ | 2,268 | $ | 1,630 | $ | 3,570 | $ | 7,468 | $ | 2,425,547 | $ | 2,433,015 | $ | 10,952 | ||||||||||||||
103
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | |||||||||||||||||||
|
| 30-59 |
| 60-89 |
|
|
|
|
|
|
|
|
|
| |||||||
|
| Days |
| Days |
| 90 Days |
| Total |
|
|
| Total |
|
| |||||||
|
| Past |
| Past |
| or More |
| Past |
|
|
| Loans |
| Non- | |||||||
|
| Due |
| Due |
| Past Due |
| Due |
| Current |
| Receivable |
| Accrual | |||||||
REAL ESTATE LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 55,871 |
| $ | 55,871 |
| $ | — |
Construction and development |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 94,462 |
|
| 94,462 |
|
| — |
Home equity |
|
| 34 |
|
| — |
|
| 210 |
|
| 244 |
|
| 19,837 |
|
| 20,081 |
|
| 210 |
One-to-four-family |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 124,009 |
|
| 124,009 |
|
| — |
Multi-family |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 37,527 |
|
| 37,527 |
|
| — |
Total real estate loans |
|
| 34 |
|
| — |
|
| 210 |
|
| 244 |
|
| 331,706 |
|
| 331,950 |
|
| 210 |
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect home improvement |
|
| 268 |
|
| 278 |
|
| 167 |
|
| 713 |
|
| 107,046 |
|
| 107,759 |
|
| 435 |
Solar |
|
| 92 |
|
| — |
|
| 69 |
|
| 161 |
|
| 36,342 |
|
| 36,503 |
|
| 69 |
Marine |
|
| 8 |
|
| — |
|
| — |
|
| 8 |
|
| 28,541 |
|
| 28,549 |
|
| — |
Other consumer |
|
| 3 |
|
| 2 |
|
| 4 |
|
| 9 |
|
| 1,906 |
|
| 1,915 |
|
| 7 |
Total consumer loans |
|
| 371 |
|
| 280 |
|
| 240 |
|
| 891 |
|
| 173,835 |
|
| 174,726 |
|
| 511 |
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 65,841 |
|
| 65,841 |
|
| — |
Warehouse lending |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 32,898 |
|
| 32,898 |
|
| — |
Total commercial business loans |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 98,739 |
|
| 98,739 |
|
| — |
Total loans |
| $ | 405 |
| $ | 280 |
| $ | 450 |
| $ | 1,135 |
| $ | 604,280 |
| $ | 605,415 |
| $ | 721 |
December 31, 2022 | ||||||||||||||||||||||||||||
30-59 | 60-89 | |||||||||||||||||||||||||||
Days | Days | 90 Days | Total | Total | ||||||||||||||||||||||||
Past | Past | or More | Past | Loans | Non- | |||||||||||||||||||||||
REAL ESTATE LOANS | Due | Due | Past Due | Due | Current | Receivable | Accrual (1) | |||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | 334,059 | $ | 334,059 | $ | — | ||||||||||||||
Construction and development | — | — | — | — | 342,591 | 342,591 | — | |||||||||||||||||||||
Home equity | 29 | 104 | 16 | 149 | 55,238 | 55,387 | 46 | |||||||||||||||||||||
One-to-four-family | — | — | 463 | 463 | 469,022 | 469,485 | 920 | |||||||||||||||||||||
Multi-family | — | — | — | — | 219,738 | 219,738 | — | |||||||||||||||||||||
Total real estate loans | 29 | 104 | 479 | 612 | 1,420,648 | 1,421,260 | 966 | |||||||||||||||||||||
CONSUMER LOANS | ||||||||||||||||||||||||||||
Indirect home improvement | 2,298 | 685 | 532 | 3,515 | 492,426 | 495,941 | 1,076 | |||||||||||||||||||||
Marine | 650 | 385 | 86 | 1,121 | 69,446 | 70,567 | 267 | |||||||||||||||||||||
Other consumer | 32 | 37 | 5 | 74 | 2,990 | 3,064 | 9 | |||||||||||||||||||||
Total consumer loans | 2,980 | 1,107 | 623 | 4,710 | 564,862 | 569,572 | 1,352 | |||||||||||||||||||||
COMMERCIAL BUSINESS LOANS | ||||||||||||||||||||||||||||
C&I | 1 | — | 2,617 | 2,618 | 194,173 | 196,791 | 6,334 | |||||||||||||||||||||
Warehouse lending | — | — | — | — | 31,229 | 31,229 | — | |||||||||||||||||||||
Total commercial business loans | 1 | — | 2,617 | 2,618 | 225,402 | 228,020 | 6,334 | |||||||||||||||||||||
Total loans | $ | 3,010 | $ | 1,211 | $ | 3,719 | $ | 7,940 | $ | 2,210,912 | $ | 2,218,852 | $ | 8,652 | ||||||||||||||
(1) | Includes past due loans as applicable. |
There were no loans 90 days or more past due and still accruing interest at both December 31, 2017 2023 and 2016.2022.
The following tables provide additional information about our impaired loans that have been segregated to reflect loans for which an allowance for credit losses has been provided and loans for which no allowance was provided for the years ended December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | ||||||||||
|
| Unpaid |
|
|
|
|
|
|
|
|
| |
|
| Principal |
|
|
| Recorded |
| Related | ||||
|
| Balance |
| Impairment |
| Investment |
| Allowance | ||||
WITH NO RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| $ | 151 |
| $ | — |
| $ | 151 |
| $ | — |
One-to-four-family |
|
| 67 |
|
| (12) |
|
| 55 |
|
| — |
Total real estate loans |
|
| 218 |
|
| (12) |
|
| 206 |
|
| — |
Commercial business loans |
|
| 551 |
|
| — |
|
| 551 |
|
| — |
|
|
| 769 |
|
| (12) |
|
| 757 |
|
| — |
WITH RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four-family |
|
| 142 |
|
| — |
|
| 142 |
|
| 21 |
Consumer loans |
|
| 195 |
|
| — |
|
| 195 |
|
| 68 |
|
|
| 337 |
|
| — |
|
| 337 |
|
| 89 |
Total |
| $ | 1,106 |
| $ | (12) |
| $ | 1,094 |
| $ | 89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | ||||||||||
|
| Unpaid |
|
|
|
|
|
|
|
|
| |
|
| Principal |
|
|
| Recorded |
| Related | ||||
|
| Balance |
| Impairment |
| Investment |
| Allowance | ||||
WITH NO RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| $ | 137 |
| $ | — |
| $ | 137 |
| $ | — |
One-to-four-family |
|
| 69 |
|
| (12) |
|
| 57 |
|
| — |
Total |
| $ | 206 |
| $ | (12) |
| $ | 194 |
| $ | — |
104
The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized and received for the years ended December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At or For the Year Ended | ||||||||||
|
| December 31, 2017 |
| December 31, 2016 | ||||||||
|
| Average Recorded |
| Interest Income |
| Average Recorded |
| Interest Income | ||||
|
| Investment |
| Recognized |
| Investment |
| Recognized | ||||
WITH NO RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| $ | 219 |
| $ | — |
| $ | 139 |
| $ | 1 |
One-to-four-family |
|
| 56 |
|
| 3 |
|
| 57 |
|
| 3 |
Total real estate loans |
|
| 275 |
|
| 3 |
|
| 196 |
|
| 4 |
Commercial business loans |
|
| 551 |
|
| 24 |
|
| — |
|
| — |
|
|
| 826 |
|
| 27 |
|
| 196 |
|
| 4 |
WITH RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four-family |
|
| 142 |
|
| 4 |
|
| — |
|
| — |
Consumer loans |
|
| 281 |
|
| 16 |
|
| — |
|
| — |
|
|
| 423 |
|
| 20 |
|
| — |
|
| — |
Total |
| $ | 1,249 |
| $ | 47 |
| $ | 196 |
| $ | 4 |
Credit Quality Indicators
As part of the Company’s on-going monitoring of credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grading of loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) non-performingnonperforming loans and (v) the general economic conditions in the Company’s markets.
The Company utilizes a risk grading matrix to assign a risk grade to its real estate and commercial business loans. Loans are graded on a scale of 1 to 10, with loans in risk grades 1 to 6 considered reported as “Pass” and loans in risk grades 7 to 10 are reported as classified loans in the Company’s allowance for loan lossACL analysis.
A description of the 10 risk grades is as follows:
● |
| Grades 1 and 2- These grades include loans to very |
● |
| Grade 3- This grade includes loans to borrowers of good business credit with moderate risk. |
● |
| Grades 4 and 5- These grades include “Pass” grade loans to borrowers of average credit quality and risk. |
● |
| Grade 6- This grade includes loans on management’s “Watch” list and is intended to be utilized on a temporary basis for “Pass” grade borrowers where frequent and thorough monitoring is required due to credit weaknesses and where significant risk-modifying action is anticipated in the near term. |
● |
| Grade 7- This grade is for “Other Assets Especially Mentioned (OAEM)” in accordance with regulatory guidelines and includes borrowers where performance is poor or significantly less than expected. |
● |
| Grade 8- This grade includes “Substandard” loans in accordance with regulatory guidelines which represent an unacceptable business credit where a loss is possible if loan weakness is not corrected. |
● |
| Grade 9- This grade includes “Doubtful” loans in accordance with regulatory guidelines where a loss is highly probable. |
● |
| Grade 10- This grade includes “Loss” loans in accordance with regulatory guidelines for which total loss is expected and when identified are charged off. |
105
Consumer, Home Equity and One-to-Four-Family Real Estate Loans
Homogeneous loans are risk rated based upon the FDIC’sFederal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy. Loans classified under this policy at the Company are consumer loans which include indirect home improvement, solar, marine, other consumer, and one-to-four-family one-to-four-family first and second liens. Under the Uniform Retail Credit Classification Policy, loans that are current or less than 90 days past due are graded “Pass” and risk graded “4”“4” or “5”“5”internally. Loans that are past due more than 90 days are classified “Substandard” risk graded “8”“8” internally until the loan has demonstrated consistent performance, typically six months of contractual payments. Closed-end loans that are 120 days past due and open-end loans that are 180 days past due are charged off based on the value of the collateral less cost to sell. Management may choose to conservatively risk rate credits even if paying in accordance with the loan’s repayment terms.
Commercial real estate, construction and development, multi-family and commercial business loans are evaluated individually for their risk classification and may be classified as “Substandard” even if current on their loan payment obligations. We regularly review our credits for accuracy of risk grades whenever we receive new information. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk, and complexity. In addition, nonowner-occupied commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.
The following tables summarize risk rated loan balances by category as of December 31, 2023 and 2022. Term loans that are renewed or extended for periods longer than 90 days are presented as new originations in the year of the most recent renewal or extension.
December 31, 2023 | ||||||||||||||||||||||||||||||||||||
Revolving Loans | ||||||||||||||||||||||||||||||||||||
REAL ESTATE LOANS | Term Loans by Year of Origination | Converted | ||||||||||||||||||||||||||||||||||
Commercial | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | to Term | Total Loans | |||||||||||||||||||||||||||
Pass | $ | 48,551 | $ | 91,144 | $ | 61,689 | $ | 46,117 | $ | 27,957 | $ | 61,764 | $ | 499 | $ | — | $ | 337,721 | ||||||||||||||||||
Watch | 3,201 | 5,446 | 12,894 | — | 453 | 2,226 | 45 | — | 24,265 | |||||||||||||||||||||||||||
Special mention | — | — | — | — | 409 | — | — | — | 409 | |||||||||||||||||||||||||||
Substandard | — | — | — | 1,650 | — | 1,957 | — | 326 | 3,933 | |||||||||||||||||||||||||||
Total commercial | 51,752 | 96,590 | 74,583 | 47,767 | 28,819 | 65,947 | 544 | 326 | 366,328 | |||||||||||||||||||||||||||
Construction and development | ||||||||||||||||||||||||||||||||||||
Pass | 120,155 | 106,168 | 46,989 | 15,219 | — | 540 | 9,284 | — | 298,355 | |||||||||||||||||||||||||||
Substandard | — | 4,699 | — | — | — | — | — | — | 4,699 | |||||||||||||||||||||||||||
Total construction and development | 120,155 | 110,867 | 46,989 | 15,219 | — | 540 | 9,284 | — | 303,054 | |||||||||||||||||||||||||||
Home equity | ||||||||||||||||||||||||||||||||||||
Pass | 4,583 | 398 | 1,584 | 6,525 | 11 | 2,137 | 54,077 | — | 69,315 | |||||||||||||||||||||||||||
Substandard | — | — | — | — | — | 36 | 137 | — | 173 | |||||||||||||||||||||||||||
Total home equity | 4,583 | 398 | 1,584 | 6,525 | 11 | 2,173 | 54,214 | — | 69,488 | |||||||||||||||||||||||||||
Home equity gross charge-offs | — | — | — | — | — | — | 10 | — | 10 | |||||||||||||||||||||||||||
One-to-four-family | ||||||||||||||||||||||||||||||||||||
Pass | 103,165 | 175,412 | 122,406 | 80,815 | 30,595 | 52,008 | — | 472 | 564,873 | |||||||||||||||||||||||||||
Substandard | — | 866 | — | — | — | 2,003 | — | — | 2,869 | |||||||||||||||||||||||||||
Total one-to-four-family | 103,165 | 176,278 | 122,406 | 80,815 | 30,595 | 54,011 | — | 472 | 567,742 | |||||||||||||||||||||||||||
Multi-family | ||||||||||||||||||||||||||||||||||||
Pass | 7,106 | 20,404 | 91,047 | 42,511 | 37,990 | 24,711 | — | — | 223,769 | |||||||||||||||||||||||||||
Total multi-family | 7,106 | 20,404 | 91,047 | 42,511 | 37,990 | 24,711 | — | — | 223,769 | |||||||||||||||||||||||||||
Total real estate loans | $ | 286,761 | $ | 404,537 | $ | 336,609 | $ | 192,837 | $ | 97,415 | $ | 147,382 | $ | 64,042 | $ | 798 | $ | 1,530,381 | ||||||||||||||||||
December 31, 2023 | ||||||||||||||||||||||||||||||||||||
Revolving Loans | ||||||||||||||||||||||||||||||||||||
CONSUMER LOANS | Term Loans by Year of Origination | Converted | ||||||||||||||||||||||||||||||||||
Indirect home improvement | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | to Term | Total Loans | |||||||||||||||||||||||||||
Pass | $ | 171,208 | $ | 212,661 | $ | 93,664 | $ | 36,032 | $ | 23,977 | $ | 30,492 | $ | 6 | $ | — | $ | 568,040 | ||||||||||||||||||
Substandard | 212 | 663 | 448 | 141 | 258 | 141 | — | — | 1,863 | |||||||||||||||||||||||||||
Total indirect home improvement | 171,420 | 213,324 | 94,112 | 36,173 | 24,235 | 30,633 | 6 | — | 569,903 | |||||||||||||||||||||||||||
Indirect home improvement gross charge-offs | 204 | 1,386 | 567 | 290 | 145 | 336 | — | — | 2,928 | |||||||||||||||||||||||||||
Marine | ||||||||||||||||||||||||||||||||||||
Pass | 13,619 | 23,963 | 9,987 | 13,082 | 5,267 | 7,050 | — | — | 72,968 | |||||||||||||||||||||||||||
Substandard | — | — | 52 | 85 | — | 205 | — | — | 342 | |||||||||||||||||||||||||||
Total marine | 13,619 | 23,963 | 10,039 | 13,167 | 5,267 | 7,255 | — | — | 73,310 | |||||||||||||||||||||||||||
Marine gross charge-offs | — | 47 | 93 | — | 7 | 256 | — | — | 403 | |||||||||||||||||||||||||||
Other consumer | ||||||||||||||||||||||||||||||||||||
Pass | 309 | 559 | 175 | 69 | 3 | 159 | 2,258 | — | 3,532 | |||||||||||||||||||||||||||
Substandard | — | — | — | — | — | — | 8 | — | 8 | |||||||||||||||||||||||||||
Total other consumer | 309 | 559 | 175 | 69 | 3 | 159 | 2,266 | — | 3,540 | |||||||||||||||||||||||||||
Other consumer gross charge-offs | — | 2 | 12 | — | — | — | 120 | — | 134 | |||||||||||||||||||||||||||
Total consumer loans | $ | 185,348 | $ | 237,846 | $ | 104,326 | $ | 49,409 | $ | 29,505 | $ | 38,047 | $ | 2,272 | $ | — | $ | 646,753 | ||||||||||||||||||
December 31, 2023 | ||||||||||||||||||||||||||||||||||||
COMMERCIAL | Revolving Loans | |||||||||||||||||||||||||||||||||||
BUSINESS LOANS | Term Loans by Year of Origination | Converted | ||||||||||||||||||||||||||||||||||
C&I | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | to Term | Total Loans | |||||||||||||||||||||||||||
Pass | $ | 13,971 | $ | 32,334 | $ | 19,634 | $ | 11,537 | $ | 5,122 | $ | 9,707 | $ | 119,844 | $ | 145 | $ | 212,294 | ||||||||||||||||||
Watch | 2,322 | — | 1,382 | 2,366 | — | 953 | 5,754 | — | 12,777 | |||||||||||||||||||||||||||
Special mention | 143 | — | — | — | 498 | 253 | 1,345 | — | 2,239 | |||||||||||||||||||||||||||
Substandard | 2,940 | — | 2,321 | 1,391 | 1,766 | 169 | 2,005 | — | 10,592 | |||||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | 399 | — | 399 | |||||||||||||||||||||||||||
Total C&I | 19,376 | 32,334 | 23,337 | 15,294 | 7,386 | 11,082 | 129,347 | 145 | 238,301 | |||||||||||||||||||||||||||
C&I gross charge-offs | — | — | 1 | — | — | — | — | — | 1 | |||||||||||||||||||||||||||
Warehouse lending | ||||||||||||||||||||||||||||||||||||
Pass | — | — | — | — | — | — | 17,003 | — | 17,003 | |||||||||||||||||||||||||||
Watch | — | — | — | — | — | — | 577 | — | 577 | |||||||||||||||||||||||||||
Total warehouse lending | — | — | — | — | — | — | 17,580 | — | 17,580 | |||||||||||||||||||||||||||
Total commercial business loans | $ | 19,376 | $ | 32,334 | $ | 23,337 | $ | 15,294 | $ | 7,386 | $ | 11,082 | $ | 146,927 | $ | 145 | $ | 255,881 | ||||||||||||||||||
TOTAL LOANS RECEIVABLE, GROSS | ||||||||||||||||||||||||||||||||||||
Pass | $ | 482,667 | $ | 663,043 | $ | 447,175 | $ | 251,907 | $ | 130,922 | $ | 188,568 | $ | 202,971 | $ | 617 | $ | 2,367,870 | ||||||||||||||||||
Watch | 5,523 | 5,446 | 14,276 | 2,366 | 453 | 3,179 | 6,376 | — | 37,619 | |||||||||||||||||||||||||||
Special mention | 143 | — | — | — | 907 | 253 | 1,345 | — | 2,648 | |||||||||||||||||||||||||||
Substandard | 3,152 | 6,228 | 2,821 | 3,267 | 2,024 | 4,511 | 2,150 | 326 | 24,479 | |||||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | 399 | — | 399 | |||||||||||||||||||||||||||
Total loans receivable, gross | $ | 491,485 | $ | 674,717 | $ | 464,272 | $ | 257,540 | $ | 134,306 | $ | 196,511 | $ | 213,241 | $ | 943 | $ | 2,433,015 | ||||||||||||||||||
Total gross charge-offs | $ | 204 | $ | 1,435 | $ | 673 | $ | 290 | $ | 152 | $ | 592 | $ | 130 | $ | — | $ | 3,476 | ||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||||||
Revolving Loans | ||||||||||||||||||||||||||||||||||||
REAL ESTATE LOANS | Term Loans by Year of Origination | Converted | ||||||||||||||||||||||||||||||||||
Commercial | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans | to Term | Total Loans | |||||||||||||||||||||||||||
Pass | $ | 86,189 | $ | 76,030 | $ | 46,125 | $ | 38,930 | $ | 14,101 | $ | 55,271 | $ | — | $ | — | $ | 316,646 | ||||||||||||||||||
Watch | 9,504 | — | 373 | — | — | — | — | — | 9,877 | |||||||||||||||||||||||||||
Special mention | — | — | — | 2,113 | — | — | — | — | 2,113 | |||||||||||||||||||||||||||
Substandard | — | — | — | — | 581 | 4,842 | — | — | 5,423 | |||||||||||||||||||||||||||
Total commercial | 95,693 | 76,030 | 46,498 | 41,043 | 14,682 | 60,113 | — | — | 334,059 | |||||||||||||||||||||||||||
Construction and development | ||||||||||||||||||||||||||||||||||||
Pass | 193,084 | 118,724 | 21,966 | 8,379 | — | 438 | — | — | 342,591 | |||||||||||||||||||||||||||
Total construction and development | 193,084 | 118,724 | 21,966 | 8,379 | — | 438 | — | — | 342,591 | |||||||||||||||||||||||||||
Home equity | ||||||||||||||||||||||||||||||||||||
Pass | 4,978 | 1,696 | 6,818 | 11 | 1,203 | 1,572 | 39,063 | — | 55,341 | |||||||||||||||||||||||||||
Watch | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Special mention | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Substandard | — | — | — | — | 13 | 33 | — | — | 46 | |||||||||||||||||||||||||||
Total home equity | 4,978 | 1,696 | 6,818 | 11 | 1,216 | 1,605 | 39,063 | — | 55,387 | |||||||||||||||||||||||||||
One-to-four-family | ||||||||||||||||||||||||||||||||||||
Pass | 166,388 | 129,282 | 82,461 | 31,878 | 15,837 | 40,526 | — | 199 | 466,571 | |||||||||||||||||||||||||||
Watch | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Special mention | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Substandard | — | — | — | — | 1,941 | 973 | — | — | 2,914 | |||||||||||||||||||||||||||
Total one-to-four-family | 166,388 | 129,282 | 82,461 | 31,878 | 17,778 | 41,499 | — | 199 | 469,485 | |||||||||||||||||||||||||||
Multi-family | ||||||||||||||||||||||||||||||||||||
Pass | 41,041 | 63,353 | 48,376 | 38,805 | 4,176 | 23,987 | — | — | 219,738 | |||||||||||||||||||||||||||
Total multi-family | 41,041 | 63,353 | 48,376 | 38,805 | 4,176 | 23,987 | — | — | 219,738 | |||||||||||||||||||||||||||
Total real estate loans | $ | 501,184 | $ | 389,085 | $ | 206,119 | $ | 120,116 | $ | 37,852 | $ | 127,642 | $ | 39,063 | $ | 199 | $ | 1,421,260 | ||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||||||
Revolving Loans | ||||||||||||||||||||||||||||||||||||
CONSUMER LOANS | Term Loans by Year of Origination | Converted | ||||||||||||||||||||||||||||||||||
Indirect home improvement | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans | to Term | Total Loans | |||||||||||||||||||||||||||
Pass | $ | 253,495 | $ | 123,264 | $ | 46,476 | $ | 31,251 | $ | 18,165 | $ | 22,205 | $ | 9 | $ | — | $ | 494,865 | ||||||||||||||||||
Watch | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Substandard | 347 | 213 | 137 | 62 | 169 | 148 | — | — | 1,076 | |||||||||||||||||||||||||||
Total indirect home improvement | 253,842 | 123,477 | 46,613 | 31,313 | 18,334 | 22,353 | 9 | — | 495,941 | |||||||||||||||||||||||||||
Marine | ||||||||||||||||||||||||||||||||||||
Pass | 27,904 | 11,762 | 15,139 | 6,224 | 5,415 | 3,856 | — | — | 70,300 | |||||||||||||||||||||||||||
Watch | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Substandard | — | — | — | 151 | 61 | 55 | — | — | 267 | |||||||||||||||||||||||||||
Total marine | 27,904 | 11,762 | 15,139 | 6,375 | 5,476 | 3,911 | — | — | 70,567 | |||||||||||||||||||||||||||
Other consumer | ||||||||||||||||||||||||||||||||||||
Pass | 792 | 754 | 116 | 48 | 14 | 80 | 1,251 | — | 3,055 | |||||||||||||||||||||||||||
Substandard | 1 | 5 | — | — | — | — | 3 | — | 9 | |||||||||||||||||||||||||||
Total other consumer | 793 | 759 | 116 | 48 | 14 | 80 | 1,254 | — | 3,064 | |||||||||||||||||||||||||||
Total consumer loans | $ | 282,539 | $ | 135,998 | $ | 61,868 | $ | 37,736 | $ | 23,824 | $ | 26,344 | $ | 1,263 | $ | — | $ | 569,572 | ||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||||||
COMMERCIAL | Revolving Loans | |||||||||||||||||||||||||||||||||||
BUSINESS LOANS | Term Loans by Year of Origination | Converted | ||||||||||||||||||||||||||||||||||
C&I | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans | to Term | Total Loans | |||||||||||||||||||||||||||
Pass | $ | 24,337 | $ | 22,561 | $ | 12,461 | $ | 3,940 | $ | 3,074 | $ | 7,701 | $ | 104,524 | $ | — | $ | 178,598 | ||||||||||||||||||
Watch | — | 1,127 | 2,932 | — | — | 746 | 1,327 | — | 6,132 | |||||||||||||||||||||||||||
Special mention | — | — | — | 634 | — | — | 963 | — | 1,597 | |||||||||||||||||||||||||||
Substandard | — | 1,586 | 1,265 | 2,291 | 190 | 3,739 | 1,093 | 300 | 10,464 | |||||||||||||||||||||||||||
Total C&I | 24,337 | 25,274 | 16,658 | 6,865 | 3,264 | 12,186 | 107,907 | 300 | 196,791 | |||||||||||||||||||||||||||
Warehouse lending | ||||||||||||||||||||||||||||||||||||
Pass | — | — | — | — | — | — | 31,227 | — | 31,227 | |||||||||||||||||||||||||||
Watch | — | — | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||||||||
Total warehouse lending | — | — | — | — | — | — | 31,229 | — | 31,229 | |||||||||||||||||||||||||||
Total commercial business loans | $ | 24,337 | $ | 25,274 | $ | 16,658 | $ | 6,865 | $ | 3,264 | $ | 12,186 | $ | 139,136 | $ | 300 | $ | 228,020 | ||||||||||||||||||
TOTAL LOANS RECEIVABLE, GROSS | ||||||||||||||||||||||||||||||||||||
Pass | $ | 798,208 | $ | 547,426 | $ | 279,938 | $ | 159,466 | $ | 61,985 | $ | 155,636 | $ | 176,074 | $ | 199 | $ | 2,178,932 | ||||||||||||||||||
Watch | 9,504 | 1,127 | 3,305 | — | — | 746 | 1,329 | — | 16,011 | |||||||||||||||||||||||||||
Special mention | — | — | — | 2,747 | — | — | 963 | — | 3,710 | |||||||||||||||||||||||||||
Substandard | 348 | 1,804 | 1,402 | 2,504 | 2,955 | 9,790 | 1,096 | 300 | 20,199 | |||||||||||||||||||||||||||
Total loans receivable, gross | $ | 808,060 | $ | 550,357 | $ | 284,645 | $ | 164,717 | $ | 64,940 | $ | 166,172 | $ | 179,462 | $ | 499 | $ | 2,218,852 | ||||||||||||||||||
The following table presents the amortized cost basis of loans on nonaccrual status at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | |||||||||||||||||||
|
|
|
|
|
| Special |
|
|
|
|
|
|
|
| |||||||
|
| Pass |
| Watch |
| Mention |
| Substandard |
| Doubtful |
| Loss |
|
| |||||||
|
| (1 - 5) |
| (6) |
| (7) |
| (8) |
| (9) |
| (10) |
| Total | |||||||
REAL ESTATE LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| $ | 62,057 |
| $ | — |
| $ | 1,554 |
| $ | — |
| $ | — |
| $ | — |
| $ | 63,611 |
Construction and development |
|
| 143,068 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 143,068 |
Home equity |
|
| 25,138 |
|
| — |
|
| — |
|
| 151 |
|
| — |
|
| — |
|
| 25,289 |
One-to-four-family |
|
| 163,513 |
|
| — |
|
| — |
|
| 142 |
|
| — |
|
| — |
|
| 163,655 |
Multi-family |
|
| 44,451 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 44,451 |
Total real estate loans |
|
| 438,227 |
|
| — |
|
| 1,554 |
|
| 293 |
|
| — |
|
| — |
|
| 440,074 |
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect home improvement |
|
| 129,981 |
|
| — |
|
| — |
|
| 195 |
|
| — |
|
| — |
|
| 130,176 |
Solar |
|
| 41,049 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 41,049 |
Marine |
|
| 35,397 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 35,397 |
Other consumer |
|
| 1,998 |
|
| — |
|
| — |
|
| 48 |
|
| — |
|
| — |
|
| 2,046 |
Total consumer loans |
|
| 208,425 |
|
| — |
|
| — |
|
| 243 |
|
| — |
|
| — |
|
| 208,668 |
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| 76,942 |
|
| — |
|
| 425 |
|
| 5,939 |
|
| — |
|
| — |
|
| 83,306 |
Warehouse lending |
|
| 40,724 |
|
| 673 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 41,397 |
Total commercial business loans |
|
| 117,666 |
|
| 673 |
|
| 425 |
|
| 5,939 |
|
| — |
|
| — |
|
| 124,703 |
Total loans |
| $ | 764,318 |
| $ | 673 |
| $ | 1,979 |
| $ | 6,475 |
| $ | — |
| $ | — |
| $ | 773,445 |
December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
Nonaccrual with | Nonaccrual with | Total | Nonaccrual with | Nonaccrual with | Total | |||||||||||||||||||
REAL ESTATE LOANS | No ACL | ACL | Nonaccrual | No ACL | ACL | Nonaccrual | ||||||||||||||||||
Commercial | $ | 1,088 | $ | — | $ | 1,088 | $ | — | $ | — | $ | — | ||||||||||||
Construction and development | — | 4,699 | 4,699 | — | — | — | ||||||||||||||||||
Home equity | 173 | — | 173 | 46 | — | 46 | ||||||||||||||||||
One-to-four-family | 96 | — | 96 | 920 | — | 920 | ||||||||||||||||||
| 1,357 | 4,699 | 6,056 | 966 | — | 966 | |||||||||||||||||||
CONSUMER LOANS | ||||||||||||||||||||||||
Indirect home improvement | — | 1,863 | 1,863 | — | 1,076 | 1,076 | ||||||||||||||||||
Marine | — | 342 | 342 | — | 267 | 267 | ||||||||||||||||||
Other consumer | — | 8 | 8 | — | 9 | 9 | ||||||||||||||||||
| — | 2,213 | 2,213 | — | 1,352 | 1,352 | |||||||||||||||||||
COMMERCIAL BUSINESS LOANS | ||||||||||||||||||||||||
C&I | — | 2,683 | 2,683 | — | 6,334 | 6,334 | ||||||||||||||||||
Total | $ | 1,357 | $ | 9,595 | $ | 10,952 | $ | 966 | $ | 7,686 | $ | 8,652 | ||||||||||||
The Company recognized interest income on a cash basis for nonaccrual loans of $579,000, $506,000, and $351,000 during the years ended December 31, 2023, 2022, and 2021, respectively.
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | |||||||||||||||||||
|
|
|
|
|
| Special |
|
|
|
|
|
|
|
| |||||||
|
| Pass |
| Watch |
| Mention |
| Substandard |
| Doubtful |
| Loss |
|
| |||||||
|
| (1 - 5) |
| (6) |
| (7) |
| (8) |
| (9) |
| (10) |
| Total | |||||||
REAL ESTATE LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| $ | 53,234 |
| $ | 2,637 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 55,871 |
Construction and development |
|
| 94,462 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 94,462 |
Home equity |
|
| 19,871 |
|
| — |
|
| — |
|
| 210 |
|
| — |
|
| — |
|
| 20,081 |
One-to-four-family |
|
| 124,009 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 124,009 |
Multi-family |
|
| 37,527 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 37,527 |
Total real estate loans |
|
| 329,103 |
|
| 2,637 |
|
| — |
|
| 210 |
|
| — |
|
| — |
|
| 331,950 |
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect home improvement |
|
| 107,324 |
|
| — |
|
| — |
|
| 435 |
|
| — |
|
| — |
|
| 107,759 |
Solar |
|
| 36,434 |
|
| — |
|
| — |
|
| 69 |
|
| — |
|
| — |
|
| 36,503 |
Marine |
|
| 28,549 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 28,549 |
Other consumer |
|
| 1,813 |
|
| — |
|
| — |
|
| 102 |
|
| — |
|
| — |
|
| 1,915 |
Total consumer loans |
|
| 174,120 |
|
| — |
|
| — |
|
| 606 |
|
| — |
|
| — |
|
| 174,726 |
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| 58,105 |
|
| 525 |
|
| — |
|
| 7,211 |
|
| — |
|
| — |
|
| 65,841 |
Warehouse lending |
|
| 32,898 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 32,898 |
Total commercial business loans |
|
| 91,003 |
|
| 525 |
|
| — |
|
| 7,211 |
|
| — |
|
| — |
|
| 98,739 |
Total loans |
| $ | 594,226 |
| $ | 3,162 |
| $ | — |
| $ | 8,027 |
| $ | — |
| $ | — |
| $ | 605,415 |
The following table presents the amortized cost basis of collateral dependent loans by class of loans as of dates indicated:
December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||
Other | Other | |||||||||||||||||||||||||||
Commercial | Residential | Non-Real | Residential | Non-Real | ||||||||||||||||||||||||
REAL ESTATE LOANS | Real Estate | Real Estate | Estate | Total | Real Estate | Estate | Total | |||||||||||||||||||||
Commercial | $ | 1,088 | $ | — | $ | — | $ | 1,088 | $ | — | $ | — | $ | — | ||||||||||||||
Construction and development | 4,699 | — | — | 4,699 | — | — | — | |||||||||||||||||||||
Home equity | — | 173 | — | 173 | 46 | $ | — | $ | 46 | |||||||||||||||||||
One-to-four-family | — | 96 | — | 96 | 920 | — | 920 | |||||||||||||||||||||
| 5,787 | 269 | — | 6,056 | 966 | — | 966 | ||||||||||||||||||||||
CONSUMER LOANS | ||||||||||||||||||||||||||||
Indirect home improvement | — | — | 1,863 | 1,863 | — | 1,076 | 1,076 | |||||||||||||||||||||
Marine | — | — | 342 | 342 | — | 267 | 267 | |||||||||||||||||||||
| — | — | 2,205 | 2,205 | — | 1,343 | 1,343 | ||||||||||||||||||||||
COMMERCIAL BUSINESS LOANS | ||||||||||||||||||||||||||||
C&I | — | — | 2,683 | 2,683 | — | 6,334 | 6,334 | |||||||||||||||||||||
Total | $ | 5,787 | $ | 269 | $ | 4,888 | $ | 10,944 | $ | 966 | $ | 7,677 | $ | 8,643 | ||||||||||||||
There were no loans and a $43,000 mortgage loan collateralized by residential real estate property in the process of foreclosure at December 31, 2017 and 2016, respectively.
Related Party Loans
Certain directors and executive officers or their related affiliates are customers of and have had banking transactions with the Company. Total loans to directors, executive officers, and their affiliates are subject to regulatory limitations.
Outstanding loan balances of related party loans were as follows and were within regulatory limitations:
|
|
|
|
|
|
|
|
| At December 31, | ||||
|
| 2017 |
| 2016 | ||
Beginning balance |
| $ | 313 |
| $ | — |
Additions |
|
| 351 |
|
| 313 |
Repayments |
|
| (9) |
|
| — |
Ending balance |
| $ | 655 |
| $ | 313 |
At December 31, | ||||||||
2023 | 2022 | |||||||
Beginning balance | $ | 3,445 | $ | 4,207 | ||||
Additions | — | — | ||||||
Repayments | (102 | ) | (762 | ) | ||||
Ending balance | $ | 3,343 | $ | 3,445 | ||||
The aggregate maximum loan balancesbalance of extended credit were $819,000to related parties was $3.7 million and $469,000$3.4 million at December 31, 2017 2023 and 2016,2022, respectively, and includes the ending balances from the tables above.
These loans and lines of credit were made in compliance with applicable laws on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other personsunrelated third parties and do not involve more than the normal risk of collectability.
NOTE 5 - – MORTGAGE SERVICING RIGHTS
Loans serviced for others are not included on the Consolidated Balance Sheets. The unpaid principal balances of permanent loans serviced for others were $778.9 million$2.83 billion and $977.1 million$2.78 billion at December 31, 2017 2023 and 2016, respectively and are carried at the lower of cost or market.2022, respectively.
107
During the year ended December 31, 2017, the Company sold a portion of its MSR with a book value of $4.8 million, generating an associated gain of $1.1 million.
The following table summarizes servicing rightsthe activity for MSRs at or for the years ended December 31, 2017 and 2016:indicated:
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
Beginning balance |
| $ | 8,459 |
| $ | 5,811 |
Additions |
|
| 5,075 |
|
| 4,194 |
Sales |
|
| (4,751) |
|
| — |
Servicing rights amortized |
|
| (1,988) |
|
| (1,549) |
Recovery on servicing rights |
|
| — |
|
| 3 |
Ending balance |
| $ | 6,795 |
| $ | 8,459 |
At or For the Year Ended | ||||||||||||
December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Beginning balance, at the lower of cost or fair value | $ | 18,017 | $ | 16,970 | $ | 12,595 | ||||||
Additions | 2,772 | 5,400 | 9,760 | |||||||||
MSRs amortized | (3,565 | ) | (4,354 | ) | (7,444 | ) | ||||||
Recovery (impairment) of MSRs | (48 | ) | 1 | 2,059 | ||||||||
Ending balance, at the lower of cost or fair value | $ | 17,176 | $ | 18,017 | $ | 16,970 | ||||||
MSRs held for sale, held at the lower of cost or fair value included in the ending balance above | $ | 8,086 | $ | — | $ | — | ||||||
The fair market value of the permanentmortgage servicing rights’ assets was $8.6$38.2 million and $11.7$35.5 million at December 31, 20172023 and December 31, 2016,2022, respectively. Fair value adjustments to servicing rightsMSRs are mainly due to market basedmarket-based assumptions associated with discounted cash flows, loan prepayment speeds, and changes in interest rates. A significant change in prepayments of the loans in the servicingMSR portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of servicing rights.MSRs.
The following provides valuation assumptions used in determining the fair value of MSRMSRs at the dates indicated:
|
|
|
|
|
|
|
| At December 31, |
| ||
|
| 2017 |
| 2016 |
|
Key assumptions: |
|
|
|
|
|
Weighted average discount rate |
| 9.5 | % | 9.5 | % |
Conditional prepayment rate (“CPR”) |
| 10.9 | % | 8.8 | % |
Weighted average life in years |
| 6.7 |
| 7.9 |
|
At December 31, | ||||||||
Key assumptions: | 2023 | 2022 | ||||||
Weighted average discount rate | 9.4 | % | 9.6 | % | ||||
Conditional prepayment rate (“CPR”) | 7.2 | % | 8.2 | % | ||||
Weighted average life in years | 8.4 | 7.8 | ||||||
Key economic assumptions and the sensitivity of the current fair value for single family MSR to immediate adverse changesMSRs are presented in those assumptions at December 31, 2017 and December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 |
| December 31, 2016 |
| ||
Aggregate portfolio principal balance |
|
|
|
| $ | 775,093 |
| $ | 973,139 |
|
Weighted average rate of note |
|
|
|
|
| 4.1 | % |
| 3.9 | % |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017 |
| Base |
| 0.5%Adverse Rate Change |
| 1.0%Adverse Rate Change |
| |||
Conditional prepayment rate |
|
| 10.9 | % |
| 17.7 | % |
| 24.5 | % |
Fair value MSR |
| $ | 8,602 |
| $ | 6,811 |
| $ | 5,614 |
|
Percentage of MSR |
|
| 1.1 | % |
| 0.9 | % |
| 0.7 | % |
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 9.6 | % |
| 10.1 | % |
| 10.6 | % |
Fair value MSR |
| $ | 8,602 |
| $ | 8,433 |
| $ | 8,271 |
|
Percentage of MSR |
|
| 1.1 | % |
| 1.1 | % |
| 1.1 | % |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016 |
| Base |
| 0.5%Adverse Rate Change |
| 1.0%Adverse Rate Change |
| |||
Conditional prepayment rate |
|
| 8.8 | % |
| 12.8 | % |
| 20.2 | % |
Fair value MSR |
| $ | 11,735 |
| $ | 9,991 |
| $ | 7,808 |
|
Percentage of MSR |
|
| 1.2 | % |
| 1.0 | % |
| 0.8 | % |
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 9.5 | % |
| 10.0 | % |
| 10.5 | % |
Fair value MSR |
| $ | 11,735 |
| $ | 11,480 |
| $ | 11,235 |
|
Percentage of MSR |
|
| 1.2 | % |
| 1.2 | % |
| 1.2 | % |
108
The above tables showthe table below. Also presented is the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four-familyone-to-four-family FNMA, FHLMC, GNMA, or FHLB serviced home loan. The above tables referencetable below references a 50 basis point and 100 basis point decrease in note rates.adverse rate change and the impact on prepayment speeds and discount rates at the dates indicated:
December 31, | ||||||||||||
2023 | 2022 | |||||||||||
Aggregate portfolio principal balance | $ | 2,832,016 | $ | 2,783,458 | ||||||||
Weighted average rate of loans in servicing portfolio | 3.6 | % | 3.4 | % | ||||||||
At December 31, 2023 | Base | 0.5% Adverse Rate Change | 1.0% Adverse Rate Change | |||||||||
Conditional prepayment rate | 7.2 | % | 8.0 | % | 9.3 | % | ||||||
Fair value MSRs | $ | 38,163 | $ | 37,268 | $ | 35,819 | ||||||
Percentage of MSRs | 1.3 | % | 1.3 | % | 1.3 | % | ||||||
Discount rate | 9.4 | % | 9.9 | % | 10.4 | % | ||||||
Fair value MSRs | $ | 38,163 | $ | 37,301 | $ | 36,476 | ||||||
Percentage of MSRs | 1.3 | % | 1.3 | % | 1.3 | % | ||||||
At December 31, 2022 | Base | 0.5% Adverse Rate Change | 1.0% Adverse Rate Change | |||||||||
Conditional prepayment rate | 8.2 | % | 8.6 | % | 9.3 | % | ||||||
Fair value MSRs | $ | 35,478 | $ | 34,997 | $ | 34,188 | ||||||
Percentage of MSRs | 1.3 | % | 1.3 | % | 1.2 | % | ||||||
Discount rate | 9.6 | % | 10.1 | % | 10.6 | % | ||||||
Fair value MSRs | $ | 35,478 | $ | 34,715 | $ | 33,984 | ||||||
Percentage of MSRs | 1.3 | % | 1.2 | % | 1.2 | % | ||||||
These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSRMSRs which is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSRthe fair value.value of MSRs. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of the MSRMSRs is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSRthe fair value of MSRs is limited by the conditions existing and assumptions made asat a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.
The Company recorded $2.2$7.2 million, $7.1 million, and $2.0$6.3 million of gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of mortgage and commercial loans for the years ended December 31, 20172023, 2022, and 2016,2021, respectively. The income, net of MSRs amortization, is reported in noninterest income“Service charges and fee income” on the Consolidated Statements of Income.
NOTE 6 - – PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2017 and 2016the dates indicated were as follows:
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
Land |
| $ | 2,028 |
| $ | 2,028 |
Buildings |
|
| 8,611 |
|
| 8,611 |
Furniture, fixtures, and equipment |
|
| 10,105 |
|
| 8,826 |
Leasehold improvements |
|
| 2,108 |
|
| 2,102 |
Building improvements |
|
| 4,545 |
|
| 4,537 |
Projects in process |
|
| 189 |
|
| 467 |
Subtotal |
|
| 27,586 |
|
| 26,571 |
Less accumulated depreciation and amortization |
|
| (12,128) |
|
| (10,559) |
Total |
| $ | 15,458 |
| $ | 16,012 |
December 31, | ||||||||
2023 | 2022 | |||||||
Land | $ | 7,925 | $ | 5,715 | ||||
Buildings | 20,814 | 16,934 | ||||||
Furniture, fixtures, and equipment | 17,962 | 16,226 | ||||||
Leasehold improvements | 2,680 | 2,461 | ||||||
Building improvements | 8,043 | 7,688 | ||||||
Projects in process | 150 | 537 | ||||||
Subtotal | 57,574 | 49,561 | ||||||
Less accumulated depreciation and amortization | (26,996 | ) | (24,442 | ) | ||||
Total | $ | 30,578 | $ | 25,119 | ||||
Depreciation and amortization expense for these assets totaled $1.6$2.6 million, $2.5 million, and $1.4$2.7 million for the years ended December 31, 20172023, 2022, and 2016,2021, respectively.
NOTE 7 – LEASES
The Company has operating leases premisesfor retail bank and equipment under operating leases. Minimum net rental commitments under non-cancelablehome lending branches, loan production offices, and certain equipment. The Company’s leases having an original orhave remaining termlease terms of more than one yearthree months to six years and six months, some of which include options to extend the leases for future years, were as follows:up to five years.
|
|
|
|
Years Ending December 31, |
|
|
|
2018 |
| $ | 1,083 |
2019 |
|
| 1,019 |
2020 |
|
| 783 |
2021 |
|
| 650 |
2022 |
|
| 541 |
Thereafter |
|
| 1,085 |
Total |
| $ | 5,161 |
Certain leases contain renewal options from five to ten years and escalation clauses basedThe components of lease cost (included in occupancy expense on increases in property taxes and other costs. Rental expensethe Consolidated Statements of leased premises and equipment was $1.1 million and $977,000Income) for the years ended December 31, 2017 and 2016, respectively, which is includedindicated are as follows:
For Year Ended December 31, | ||||||||||||
Lease cost: | 2023 | 2022 | 2021 | |||||||||
Operating lease cost | $ | 1,837 | $ | 1,422 | $ | 1,433 | ||||||
Short-term lease cost | 19 | 21 | 5 | |||||||||
Total lease cost | $ | 1,856 | $ | 1,443 | $ | 1,438 | ||||||
The following table provides supplemental information related to operating leases at or for the years indicated:
Cash paid for amounts included in the | At or For the Year Ended December 31, | |||||||
measurement of lease liabilities: | 2023 | 2022 | ||||||
Operating cash flows from operating leases | $ | 1,882 | $ | 1,431 | ||||
Weighted average remaining lease term - operating leases (in years) | 4.0 | 4.6 | ||||||
Weighted average discount rate - operating leases | 2.95 | % | 2.42 | % | ||||
The Company’s leases typically do not contain a discount rate implicit in occupancy expense.the lease contract. As an alternative, the discount rate used in determining the lease liability for each individual lease was the FHLB of Des Moines’ fixed advance rate.
109
Maturities of operating lease liabilities at December 31, 2023 for future periods are as follows:
2024 | $ | 1,933 | ||
2025 | 1,628 | |||
2026 | 1,475 | |||
2027 | 1,173 | |||
2028 | 428 | |||
Thereafter | 955 | |||
Total lease payments | 7,592 | |||
Less imputed interest | (744 | ) | ||
Total | $ | 6,848 |
NOTE 7 -8 – OTHER REAL ESTATE OWNED (“OREO”)
The following table presents the activity related to OREO at and for the years ended December 31:indicated:
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
Beginning balance |
| $ | — |
| $ | — |
Net loans transferred to OREO |
|
| — |
|
| 525 |
Capitalized costs |
|
| — |
|
| 7 |
Gross proceeds from sale of OREO |
|
| — |
|
| (682) |
Gain on sale of OREO |
|
| — |
|
| 150 |
Ending balance |
| $ | — |
| $ | — |
At or For the Year Ended | ||||||||||||
December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Beginning balance | $ | 570 | $ | — | $ | 90 | ||||||
Loans transferred to OREO | — | 145 | — | |||||||||
Closed retail branch transferred to OREO | — | 570 | — | |||||||||
Gross proceeds from sale of OREO | (718 | ) | (145 | ) | (81 | ) | ||||||
Gain (loss) on sale of OREO | 148 | — | (9 | ) | ||||||||
Ending balance | $ | — | $ | 570 | $ | — | ||||||
At There were no OREO properties at December 31, 20172023, one OREO property (a closed branch in Centralia, Washington) at December 31, 2022 and 2016, there were nonone at December 31, 2021. OREO properties. There were no holding costs associated with OREOwere none, $10,000, and none for the years ended December 31, 20172023, 2022, and 2016,2021, respectively.
There were $96,000 and $511,000 in mortgage loans collateralized by residential real estate property in the process of foreclosure at December 31, 2023 and 2022, respectively.
NOTE 8 -9 – DEPOSITS
Deposits are summarized as follows at December 31:the dates indicated:
|
|
|
|
|
|
|
|
| December 31, |
| December 31, | ||
|
| 2017(1) |
| 2016(1) | ||
Noninterest-bearing checking |
| $ | 177,739 |
| $ | 145,377 |
Interest-bearing checking |
|
| 119,872 |
|
| 63,978 |
Savings |
|
| 72,082 |
|
| 54,996 |
Money market(2) |
|
| 228,742 |
|
| 242,849 |
Certificates of deposit less than $100,000(3) |
|
| 111,489 |
|
| 93,791 |
Certificates of deposit of $100,000 through $250,000 |
|
| 77,934 |
|
| 74,832 |
Certificates of deposit of $250,000 and over(4) |
|
| 32,833 |
|
| 27,094 |
Escrow accounts related to mortgages serviced |
|
| 9,151 |
|
| 9,676 |
Total |
| $ | 829,842 |
| $ | 712,593 |
December 31, | ||||||||
2023 | 2022 | |||||||
Noninterest-bearing checking | $ | 654,048 | $ | 537,938 | ||||
Interest-bearing checking (1) | 244,028 | 135,127 | ||||||
Savings | 151,630 | 134,358 | ||||||
Money market (2) | 359,063 | 574,290 | ||||||
Certificates of deposit less than $100,000 (3) | 587,858 | 440,785 | ||||||
Certificates of deposit of $100,000 through $250,000 | 429,373 | 195,447 | ||||||
Certificates of deposit of $250,000 and over | 79,540 | 93,560 | ||||||
Escrow accounts related to mortgages serviced (4) | 16,783 | 16,236 | ||||||
Total | $ | 2,522,323 | $ | 2,127,741 | ||||
_____________________________
| (1) | Includes |
|
|
| (2) | Includes |
(3) |
|
(4) | Noninterest-bearing accounts. |
|
Scheduled maturities of time deposits at December 31, 20172023 for future years ending are as follows:
|
|
|
|
|
|
|
|
|
| At December 31, 2017 | |
Maturing in 2018 |
| $ | 108,142 |
Maturing in 2019 |
|
| 56,047 |
Maturing in 2020 |
|
| 23,781 |
Maturing in 2021 |
|
| 16,295 |
Maturing in 2022 |
|
| 17,969 |
Thereafter |
|
| 22 |
Total |
| $ | 222,256 |
110
December 31, 2023 | ||||
Maturing in 2024 | $ | 863,350 | ||
Maturing in 2025 | 166,827 | |||
Maturing in 2026 | 44,288 | |||
Maturing in 2027 | 21,727 | |||
Maturing in 2028 and thereafter | 579 | |||
Total | $ | 1,096,771 | ||
Interest expense by deposit category for the years ended December 31, 2017 and 2016indicated is as follows:
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
Interest-bearing checking |
| $ | 128 |
| $ | 27 |
Savings and money market |
|
| 1,260 |
|
| 1,019 |
Certificates of deposit |
|
| 2,532 |
|
| 2,208 |
Total |
| $ | 3,920 |
| $ | 3,254 |
Year Ended | ||||||||||||
December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Interest-bearing checking | $ | 2,586 | $ | 495 | $ | 282 | ||||||
Savings and money market | 5,511 | 3,775 | 1,604 | |||||||||
Certificates of deposit | 28,654 | 5,150 | 5,043 | |||||||||
Total | $ | 36,751 | $ | 9,420 | $ | 6,929 | ||||||
The Company had related party deposits of approximately $2.1$2.8 million and $976,000$5.7 million at December 31, 2017 2023 and 2016,2022, respectively, which includesincluded deposits held for directors and executive officers.
NOTE 9 -10 – EMPLOYEE BENEFITS
401(k) Plan
The Company has a salary deferral 401(k) Plan covering substantially all of its employees. Employees are eligible to participate in the 401(k) plan at the date of hire if they are 18 years of age. Eligible employees may contribute through payroll deductions and are 100% vested at all times in their deferral contributions account. The Company matches 100% for contributions of 1% to 3%, and 50% for contributions of 4% to 5%. There was a $1.7 million, $1.9 million, and $1.7 million matching contribution for the years ended December 31, 2023, 2022, and 2021, respectively.
NOTE 11 – DEBT
Borrowings
The Bank is a member of the FHLB of Des Moines, which entitles it to certain benefits including a variety of borrowing options consisting of a secured credit line that allows both fixed and variable rate advances. The FHLB borrowings at December 31, 2017 2023 and 2016,2022, consisted of a warehouse securities credit line (“securities line”), which allows advances with interest rates fixed at the time of borrowing and a warehouse Federal Fundsfederal funds (“Fed Funds”) advance, which allows daily advances at variable interest rates. Credit capacity is primarily determined by the value of assets collateralized at the FHLB, funds on deposit at the FHLB, and stock owned by the Bank.
Credit is limited to 35%45% of the Company’s total assets and available pledged assets. The Bank entered into an Advanced,Advances, Pledges and Security Agreement with the FHLB for which specific loans are pledged to secure these credit lines. At December 31, 2017,2023, loans of approximately $318.5 million$1.07 billion were pledged to the FHLB with aFHLB. At December 31, 2023, the Bank’s total borrowing capacity netwas $686.2 million with the FHLB of advancesDes Moines, with unused borrowing capacity of $201.0$681.9 million. In addition, all FHLB stock owned by the Company is collateral for credit lines.
The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral. The Bank can borrow under the Term Auction orFacility and Term Deposit Facility at rates published by the San Francisco FRB. At As of December 31, 2017 2023 and 2016,2022, the Bank had approximately $203.3$631.1 million and $579.8 million, respectively, in pledged consumer loans with a Term Auction or Term Facility borrowing capacity of $99.1$351.6 million and $85.9$205.8 million respectively, of which none wasfor the Term Auction Facility and Term Deposit Facility, respectively. No borrowings were outstanding under either facility at either date. Additionally, securities with a carrying value of $77.0 million were pledged primarily to provide contingent liquidity through the BTFP at the FRB at December 31, 2023, with a current credit limit of $90.5 million and an outstanding balance of $89.9 million at December 31, 2023. The Bank also had $43.0$101.0 million unsecured Fed Funds lines of credit with other large financial institutions of which none was outstanding at December 31, 2017.2023.
Advances
Borrowings on these lines at December 31, 2017 and 2016the dates indicated were as follows:
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
Federal Home Loan Bank - (interest rates ranging from 0.96% to 1.73% and 0.86% to 1.73% at December 31, 2017 and 2016, respectively) |
| $ | 7,529 |
| $ | 12,670 |
Total |
| $ | 7,529 |
| $ | 12,670 |
December 31, | ||||||||
2023 | 2022 | |||||||
Federal Home Loan Bank - (interest rates ranging from 2.00% to 2.37% and 1.72% to 4.60% at December 31, 2023 and 2022, respectively) | $ | 3,896 | $ | 186,528 | ||||
FRB BTFP advance - (interest rate of 4.70% at December 31, 2023) | 89,850 | — | ||||||
Total | $ | 93,746 | $ | 186,528 | ||||
Scheduled maturities of borrowings were as follows:
Interest | ||||||||
Years Ending December 31, | Balances | Rates | ||||||
2024 | $ | 93,746 | 4.60 | % | ||||
Subordinated NoteNotes
On October 15, 2015 (the “Closing Date”), February 10, 2021, FS Bancorp Inc. issuedcompleted the private placement of $50.0 million of its 3.75% fixed-to-floating rate subordinated notes due 2031 (the “Notes”) at an unsecured subordinated term note inoffering price equal to 100% of the aggregate principal amount of $10.0 million due October 1, 2025 (the “Subordinated Note”) pursuantthe Notes, resulting in net proceeds, after placement agent fees and offering expenses, of approximately $49.3 million. The interest rate on the Notes remains fixed equal to 3.75% for the firstfive years. After five years the interest rate changes to a Subordinated Loan Agreement with Community Funding CLO, Ltd. The Subordinated Note bears interest at an annualfloating interest rate tied to a Three-Month Term Secured Overnight Financing Rate (“SOFR”), plus a spread of 6.50%, payable by the Company quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, commencing on the first such date following the Closing Date and on the maturity date.
337 basis points. The Subordinated NoteNotes will mature on October 1, 2025 but may be prepaid at the Company’s option and with regulatory approval at any time onFebruary 15, 2031. On or after five years after February 15, 2026, the Closing DateCompany may redeem the Notes, in whole or at any time upon certain events, such as a change in the regulatory capital treatmentpart.
The Notes are unsecured obligations and are subordinated in right of payment to all existing and future indebtedness, deposits and other liabilities of the Subordinated Note orCompany's current and future subsidiaries, including the interest onBank’s deposits as well as the Subordinated Note no longer being deductible byCompany's subsidiaries' liabilities to general creditors and liabilities arising during the ordinary course of business. The Notes may be included in Tier 2 capital for the Company for United States federal income tax purposes. The Company contributed $9.0 million of the proceeds from the Subordinated Note as additional capital to the Bank in the fourth quarter of 2015under current regulatory guidelines and used the balance to fund general working capital and operating expenses.interpretations.
111
The maximum balance at any month end and the average outstandingbalances and weighted average interest rates on debt during the years ended December 31, 2017 and 2016indicated were as follows:
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| ||
Maximum balance: |
|
|
|
|
|
|
|
Federal Home Loan Bank advances and Fed Funds |
| $ | 70,419 |
| $ | 98,769 |
|
Federal Reserve Bank |
| $ | 1,000 |
| $ | 1,000 |
|
Fed Funds lines of credit |
| $ | 17,501 |
| $ | 6,000 |
|
Subordinated note |
| $ | 10,000 |
| $ | 10,000 |
|
Average balance: |
|
|
|
|
|
|
|
Federal Home Loan Bank advances and Fed Funds |
| $ | 25,635 |
| $ | 26,259 |
|
Federal Reserve Bank |
| $ | 3 |
| $ | 3 |
|
Fed Funds lines of credit |
| $ | 876 |
| $ | 16 |
|
Subordinated note |
| $ | 10,000 |
| $ | 10,000 |
|
Weighted average interest rate: |
|
|
|
|
|
|
|
Federal Home Loan Bank advances and Fed Funds |
|
| 1.26 | % |
| 0.98 | % |
Federal Reserve Bank |
|
| 1.75 | % |
| 1.00 | % |
Fed Funds lines of credit |
|
| 1.30 | % |
| 0.77 | % |
Subordinated note |
|
| 6.50 | % |
| 6.50 | % |
Scheduled maturities of Federal Home Loan Bank advances were as follows:
|
|
|
|
|
|
|
|
|
|
|
| Interest |
|
Year Ending December 31, |
| Balances |
| Rates |
| |
2018 |
| $ | 3,986 |
| 1.01 | % |
2019 |
|
| 1,207 |
| 1.73 | % |
2020 |
|
| 2,336 |
| 1.71 | % |
2021 |
|
| — |
| — | % |
Total |
| $ | 7,529 |
|
|
|
For the Year Ending December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Maximum balance: | ||||||||||||
FHLB advances and Fed Funds | $ | 74,895 | $ | 260,828 | $ | 102,528 | ||||||
FRB Fed Funds | — | — | — | |||||||||
Fed Funds lines of credit with other financial institutions | — | — | — | |||||||||
Subordinated notes | 50,000 | 50,000 | 50,000 | |||||||||
FRB Paycheck Protection Program Liquidity Facility ("PPPLF") | — | — | 59,349 | |||||||||
FRB BTFP advance | 90,000 | — | — | |||||||||
Average balance: | ||||||||||||
FHLB advances and Fed Funds | 33,945 | 102,008 | 55,602 | |||||||||
FRB Fed Funds | 14,704 | 548 | 205 | |||||||||
Fed Funds lines of credit with other financial institutions | 11 | 15 | 11 | |||||||||
Subordinated notes | 50,000 | 50,000 | 44,699 | |||||||||
FRB PPPLF | — | — | 7,310 | |||||||||
FRB BTFP advance | 61,669 | — | — | |||||||||
Weighted average interest rates | ||||||||||||
FHLB advances and Fed Funds | 4.40 | % | 2.98 | % | 1.88 | % | ||||||
FRB Fed Funds | 5.42 | % | 1.69 | % | 0.25 | % | ||||||
Fed Funds lines of credit with other financial institutions | 5.62 | % | 3.28 | % | 0.49 | % | ||||||
Subordinated notes | 3.88 | % | 3.75 | % | 3.75 | % | ||||||
FRB PPPLF | — | % | — | % | 0.35 | % | ||||||
FRB BTFP advance | 4.71 | % | — | % | — | % | ||||||
NOTE 10 - EMPLOYEE BENEFITS
Employee Stock Ownership Plan
On January 1, 2012, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank are eligible to participate in the ESOP if they have been credited with at least 1,000 hours of service during the employees’ first 12‑month period and based on the employee’s anniversary date will be vested in the ESOP. The employee will be 100% vested in the ESOP after two years of working at least 1,000 hours in each of those two years.
The ESOP borrowed $2.6 million from FS Bancorp, Inc. and used those funds to acquire 259,210 shares of FS Bancorp, Inc. common stock in the open market at an average price of $10.17 per share during the second half of 2012. It is anticipated that the Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to FS Bancorp, Inc. over a period of 10 years, bearing interest at 2.30%. Intercompany expenses associated with the ESOP are eliminated in consolidation. Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to FS Bancorp, Inc. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank’s discretionary contributions to the ESOP and earnings on the ESOP assets. Payments of principal and interest are due annually on December 31, the Company’s fiscal year end. On December 31, 2017, the ESOP paid the sixth annual installment of principal in the amount of $263,000, plus accrued interest of $32,000 pursuant to the ESOP loan agreement.
As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares at December 31, 2017 for the prior 90 days. These shares become outstanding for earnings
112
per share computations. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.
Compensation expense related to the ESOP for the years ended December 31, 2017 and 2016, was $1.4 million, and $832,000, respectively.
Shares held by the ESOP at December 31, 2017 and December 31, 2016, were as follows (shown as actual):
|
|
|
|
|
|
|
|
| December 31, | ||||
|
| 2017 |
| 2016 | ||
Allocated shares |
|
| 153,049 |
|
| 126,589 |
Committed to be released shares |
|
| — |
|
| — |
Unallocated shares |
|
| 103,684 |
|
| 129,605 |
Total ESOP shares |
|
| 256,733 |
|
| 256,194 |
|
|
|
|
|
|
|
Fair value of unallocated shares (in thousands) |
| $ | 5,696 |
| $ | 4,158 |
401(k) Plan
The Company has a salary deferral 401(k) Plan covering substantially all of its employees. Employees are eligible to participate in the 401(k) plan at the date of hire if they are 18 years of age. Eligible employees may contribute through payroll deductions and are 100% vested at all times in their deferral contributions account. The Company matches 100% for contributions of 1% to 3%, and 50% for contributions of 4% to 5%. There was a $904,000 and $759,000 matching contribution for the years ended December 31, 2017 and 2016, respectively.
NOTE 11 -12 – INCOME TAXES
The components of income tax expense for the years ended December 31, 2017 and 2016,indicated were as follows:
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
Provision for income taxes |
|
|
|
|
|
|
Current |
| $ | 7,212 |
| $ | 5,398 |
Deferred |
|
| (718) |
|
| 206 |
Total provision for income taxes |
| $ | 6,494 |
| $ | 5,604 |
On December 22, 2017, the U.S. Government enacted the Tax Act. The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal income tax rate from a maximum of 35% to a flat 21% rate. The corporate income tax rate reduction was effective January 1, 2018. The Tax Act required a revaluation the Company’s deferred tax assets and liabilities to account for the future impact of lower corporate tax rates and other provisions of the legislation. As a result of the Company’s revaluation, the Company recognized $396,000 in tax benefit due to a net deferred tax liability position.
113
For the Year Ending December 31, | ||||||||||||
Provision for income taxes | 2023 | 2022 | 2021 | |||||||||
Current | $ | 9,912 | $ | 8,183 | $ | 8,258 | ||||||
Deferred | (693 | ) | (844 | ) | 1,750 | |||||||
Total provision for income taxes | $ | 9,219 | $ | 7,339 | $ | 10,008 | ||||||
A reconciliation of the effective income tax rate with the federal statutory tax rates at December 31, 2017 and 2016the dates indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| ||||||
|
| Amount |
| Rate |
| Amount |
| Rate |
| ||
Income tax provision at statutory rate |
| $ | 7,203 |
| 35.0 | % | $ | 5,636 |
| 35.0 | % |
Tax exempt income |
|
| (218) |
| (1.0) |
|
| (255) |
| (1.6) |
|
Decrease in tax resulting from other items |
|
| (487) |
| (2.4) |
|
| 42 |
| 0.3 |
|
Income tax rate differential |
|
| (396) |
| (1.9) |
|
| — |
| — |
|
ESOP |
|
| 392 |
| 1.9 |
|
| 181 |
| 1.1 |
|
Total |
| $ | 6,494 |
| 31.6 | % | $ | 5,604 |
| 34.8 | % |
December 31, | ||||||||||||||||||||||||
2023 | 2022 | 2021 | ||||||||||||||||||||||
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
Income tax provision at statutory rate | $ | 9,507 | 21.0 | % | $ | 7,767 | 21.0 | % | $ | 9,958 | 21.0 | % | ||||||||||||
Tax exempt income | (333 | ) | (0.7 | ) | (852 | ) | (2.3 | ) | (492 | ) | (1.0 | ) | ||||||||||||
Nondeductible items resulting in increase in tax | 165 | 0.4 | 31 | 0.1 | 28 | — | ||||||||||||||||||
Increase in tax resulting from other items | 36 | 0.1 | 274 | 0.7 | 100 | 0.2 | ||||||||||||||||||
Equity compensation | (208 | ) | (0.5 | ) | (146 | ) | (0.4 | ) | (883 | ) | (1.9 | ) | ||||||||||||
Executive compensation | 52 | 0.1 | 265 | 0.7 | 979 | 2.1 | ||||||||||||||||||
ESOP | — | — | — | — | 318 | 0.7 | ||||||||||||||||||
Total | $ | 9,219 | 20.4 | % | $ | 7,339 | 19.8 | % | $ | 10,008 | 21.1 | % | ||||||||||||
Total deferred tax assets and liabilities at December 31, 2017 and 2016the dates indicated were as follows:
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| 2017 |
| 2016 | ||
Deferred Tax Assets |
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|
|
|
Allowance for loan losses |
| $ | 1,912 |
| $ | 2,467 |
Non-accrued loan interest |
|
| 9 |
|
| 3 |
Non-qualified stock options |
|
| — |
|
| 159 |
Securities available-for-sale |
|
| 130 |
|
| 294 |
Other |
|
| 210 |
|
| 437 |
Total deferred tax assets |
|
| 2,261 |
|
| 3,360 |
Deferred Tax Liabilities |
|
|
|
|
|
|
Loan origination costs |
|
| (870) |
|
| (1,242) |
Servicing rights |
|
| (1,461) |
|
| (3,003) |
Prepaids |
|
| (52) |
|
| (72) |
Stock dividend - FHLB stock |
|
| (1) |
|
| (1) |
Property, plant, and equipment |
|
| (484) |
|
| (203) |
Total deferred tax liabilities |
|
| (2,868) |
|
| (4,521) |
Net deferred tax liabilities |
| $ | (607) |
| $ | (1,161) |
Deferred Tax Assets | December 31, | |||||||
2023 | 2022 | |||||||
ACL on loans | $ | 6,746 | $ | 6,119 | ||||
Non-accrued loan interest | 3 | 11 | ||||||
Restricted stock awards | 113 | 101 | ||||||
Non-qualified stock options | 615 | 438 | ||||||
Lease liability | 1,463 | 1,392 | ||||||
Securities available-for-sale | 7,689 | 9,146 | ||||||
ACL on unfunded commitments | 327 | 547 | ||||||
Other | 49 | 234 | ||||||
Purchase accounting adjustments | 48 | — | ||||||
Total deferred tax assets | 17,053 | 17,988 | ||||||
Deferred Tax Liabilities | ||||||||
Loan origination costs | (2,512 | ) | (2,123 | ) | ||||
MSRs | (3,679 | ) | (3,874 | ) | ||||
Stock dividend - FHLB stock | (7 | ) | (35 | ) | ||||
Property, plant, and equipment | (1,408 | ) | (1,095 | ) | ||||
Purchase accounting adjustments | — | (727 | ) | |||||
Lease right-of-use assets | (1,415 | ) | (1,338 | ) | ||||
Interest rate swaps designated as cash flow hedge | (1,307 | ) | (2,126 | ) | ||||
Total deferred tax liabilities | (10,328 | ) | (11,318 | ) | ||||
Net deferred tax assets | $ | 6,725 | $ | 6,670 | ||||
The Company files a U.S. Federal income tax return and Oregon State return,and Idaho state returns, which are subject to examination by tax authorities for years 20142021 and later. At December 31, 2017 2023 and 2016,2022, the Company had no uncertain tax positions. The Company recognizesrecognized no interest and penalties in tax expense and at for the years ended December 31, 20172023, 2022, and 2016, the Company recognized no interest and penalties.2021.
NOTE 12 -13 – COMMITMENTS AND CONTINGENCIES
Commitments - – The Company is party to financial instruments with off-balance-sheetoff-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. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the Consolidated Balance Sheets.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
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The following table provides a summary of the Company’s commitments at December 31, 2017 and 2016:the dates indicated:
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|
| 2017 |
| 2016 | ||
COMMITMENTS TO EXTEND CREDIT |
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|
REAL ESTATE LOANS |
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|
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Commercial |
| $ | 107 |
| $ | 108 |
Construction and development |
|
| 73,321 |
|
| 57,016 |
One-to-four-family (includes locks for salable loans) |
|
| 37,336 |
|
| 36,623 |
Home equity |
|
| 32,889 |
|
| 26,129 |
Multi-family |
|
| 438 |
|
| 426 |
Total real estate loans |
|
| 144,091 |
|
| 120,302 |
CONSUMER LOANS |
|
| 10,041 |
|
| 8,527 |
COMMERCIAL BUSINESS LOANS |
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|
|
|
|
|
Commercial and industrial |
|
| 52,452 |
|
| 31,774 |
Warehouse lending |
|
| 78,303 |
|
| 51,102 |
Total commercial business loans |
|
| 130,755 |
|
| 82,876 |
Total commitments to extend credit |
| $ | 284,887 |
| $ | 211,705 |
COMMITMENTS TO EXTEND CREDIT | December 31, | |||||||
REAL ESTATE LOANS | 2023 | 2022 | ||||||
Commercial | $ | 3,472 | $ | 1,260 | ||||
Construction and development | 154,611 | 201,708 | ||||||
One-to-four-family (includes locks for saleable loans) | 23,751 | 10,713 | ||||||
Home equity | 94,026 | 77,566 | ||||||
Multi-family | 2,945 | 2,999 | ||||||
Total real estate loans | 278,805 | 294,246 | ||||||
CONSUMER LOANS | 29,517 | 39,406 | ||||||
COMMERCIAL BUSINESS LOANS | ||||||||
C&I | 164,873 | 150,109 | ||||||
Warehouse lending | 61,837 | 64,781 | ||||||
Total commercial business loans | 226,710 | 214,890 | ||||||
Total commitments to extend credit | $ | 535,032 | $ | 548,542 | ||||
Commitments to extend credit are agreements to lend to a customer as long asprovided there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the amount of the total commitments do does not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and ultimately may not be drawn upon to the total extent to which the Company is committed. The Company’s ACL – unfunded loan commitments at December 31, 2023 and December 31, 2022 was $1.5 million and $2.5 million, respectively. The decline in the ACL was due to the Company has established reserves for estimated lossesrecording a recovery from the ACL – unfunded loan commitments of $253,000 and $179,000 at $1.0 million for the year ended December 31, 2017 and 2016, respectively. One-to-four-family2023, as compared to a recovery of $365,000 for the year ended December 31, 2022. A portion of the one-to-four-family commitments included in the table above are accounted for as fair value derivatives and do not carry an associated loss reserve. The Company’s derivative positions are presented with discussion in “Note 18 – Derivatives.”
The Company also sells one-to-four-familyone-to-four-family loans to the FHLB of Des Moines that require a limited level of recourse if the loans default and exceed a certain loss exposure. Specific to that recourse, the FHLB of Des Moines established a first loss account (“FLA”) related to the loans and required a credit enhancement (“CE”) obligation by the Bank to be utilized after the FLA is used. Based on loans sold through December 31, 2017,2023, the total loans sold to the FHLB were $39.3$9.0 million with the FLA being $433,000$581,000 and the CE obligation at $1.1 million$389,000 or 2.7%4.3% of the loans outstanding. Management has established a holdback of 10% of the outstanding CE obligation, or $121,000,$39,000, which is a part of the off-balance sheet holdback for loans sold. ThereAt December 31, 2023 and 2022, there were no outstanding delinquencies on the loans sold to the FHLB of Des Moines at December 31, 2017 and December 31, 2016.greater than 30 days past their contractual payment due date.
Contingent liabilities for loans held for sale - – In the ordinary course of business, loans are sold with limited recourse against the Company and may have to subsequently be repurchased due to defects that occurred during the origination of the loan. The defects are categorized as documentation errors, underwriting errors, early payoff, early payment defaults, breach of representation or warranty, servicing errors, and/or fraud. When a loan sold to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred. If a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no such defects, the Company has no commitment to repurchase the loan. The Company has recorded reservesa holdback reserve of $1.0$2.1 million and $955,000$2.3 million to cover loss exposure related to these guarantees for one-to-four-familyone-to-four-family loans sold into the secondary market at December 31, 2017 2023 and 2016,2022, respectively, which is included in other liabilities in“Other liabilities” on the Consolidated Balance Sheets.
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The Company has entered into a severance agreement with its Chief Executive Officer.Officer (“CEO”). The severance agreement, subject to certain requirements, generally includes a lump sum payment to the Chief Executive OfficerCEO equal to 24 months of base compensation in the event their employment is involuntarily terminated, other than for cause or the executive terminates his employment with good reason, as defined in the severance agreement.
The Company has entered into change of control agreements with its Chief Financial Officer, Chief OperatingLending Officer, Chief LendingRisk Officer, and twoChief Human Resources Officer, Senior Vice President Compliance Officer, Executive Vice PresidentsPresident of Retail Banking and Marketing, and the Executive Vice President of Home Lending. The change of control agreements, subject to certain requirements, generally remain in effect until canceled by either party upon at least 24 months prior written notice. Under the change of control agreements, the executive generally will be entitled to a change of control payment from the Company if the executive is involuntarily terminated within six months preceding or 12 months after a change in control (as defined in the change of control agreements). In such an event, the executives would each be entitled to receive a cash payment in an amount equal to 12��12months of their then current salary, subject to certain requirements in the change of control agreements.
The Bank received 7,158 shares of Class B common stock in Visa, Inc. as a result of the Visa initial public offering (“IPO”) in March 2008. These Class B shares of stock held by the Bank could be converted to Class A shares at a conversion rate of 1.6483 when all litigation pending as of the date of the IPO is concluded. However, at December 31, 2017, the date that litigation will be concluded cannot be determined. Until such time, the stock cannot be redeemed or sold by the Bank; therefore, it is not readily marketable and has a current carrying value of $0. Visa, Inc. Class A stock’s market value at December 31, 2017 and December 31, 2016 was $114.02 per share and $77.73 per share, respectively.
As a result of the nature of our activities, the Company is subject to various pending and threatened legal actions, which arise in the ordinary course of business. From time to time, subordination liens may create litigation which requires us to defend our lien rights. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on our financial position. The Company had no material pending legal actions at December 31, 2017.2023.
NOTE 13 -14 – SIGNIFICANT CONCENTRATION OF CREDIT RISK
Most of the Company’s commercial and multi-family real estate, construction, residential, and commercial business and lending activities are primarily with customers located in Western Washington, and various location in Oregon state, near the greater Puget Sound area and one loan production office located in the Tri-Cities, Washington, and our newest loan production office in Vancouver, Washington. The Company originates real estate, consumer, and consumercommercial business loans and has concentrations in these areas, however, indirect home improvement loans, including solar-related home improvement loans are originated through a network of home improvement contractors and dealers located throughout Washington, Oregon, California, Idaho, Colorado, Arizona, Minnesota, Nevada, Texas, Utah, Massachusetts, Montana, and Colorado. The Company also originates solar loans through contractors and dealers in the state of California. Generally, loansrecently New Hampshire. Loans are generally secured by deposit accounts, personal property, or real estate. Rightscollateral and rights to collateral vary and are legally documented to the extent practicable. Local economic conditions may affect borrowers’ ability to meet the stated repayment terms. The concentration on commercial real estate remains below the 300% of Risk Based Capital regulatory threshold and the subset of construction concentration, excluding owner-occupied loans is within Board approved limits. The construction, land development, and other land concentration represents less than 100% of the Bank’s total regulatory capital at 89.4% and is focused on in city, in fill vertical construction financing in King and Snohomish counties. Local economic conditions may affect borrowers’ ability to meet the stated repayment terms.
NOTE 14 -15 – REGULATORY CAPITAL
The Company and the Bank areis subject to various regulatory capital requirements administered by the federal banking agencies.Federal Reserve and the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines of the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative
Under capital adequacy guidelines of the regulatory framework for prompt corrective action, quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier 1 total capital (as defined) and common equity Tier 1 (“CET 1”) capital to risk-weighted assets (as defined).
The Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and Tier CET 1 leverage capital ratios as set forth in the table below to be categorized as well capitalized. At December 31, 2017 and December 31, 2016,2023, the Bank was categorized as well capitalized under applicable regulatory requirements. There are no conditions or events since that notification that
116
management believes have changed the Bank’s category. Management believes, at December 31, 2017,2023, that the Company and the Bank met all capital adequacy requirements.
The following table compares the Bank’s actual capital amounts and ratios at December 31, 2017 and 20162023 to their minimum regulatory capital requirements and well capitalized regulatory capital at those dates (dollars in thousands):that date:
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| To be Well Capitalized |
| |||
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| Under Prompt |
| |||
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|
| For Capital |
| For Capital Adequacy |
| Corrective |
| |||||||||
|
| Actual |
| Adequacy Purposes |
| with Capital Buffer |
| Action Provisions |
| ||||||||||||
Bank Only |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| ||||
At December 31, 2017 |
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|
|
|
|
|
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|
|
|
|
|
|
|
|
Total risk-based capital |
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|
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|
|
(to risk-weighted assets) |
| $ | 133,967 |
| 16.25 | % | $ | 65,965 |
| 8.00 | % | $ | 76,272 |
| 9.25 | % | $ | 82,456 |
| 10.00 | % |
Tier 1 risk-based capital |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets) |
| $ | 123,651 |
| 15.00 | % | $ | 49,474 |
| 6.00 | % | $ | 59,781 |
| 7.25 | % | $ | 65,965 |
| 8.00 | % |
Tier 1 leverage capital |
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|
|
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|
|
|
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|
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|
|
(to average assets) |
| $ | 123,651 |
| 12.61 | % | $ | 39,233 |
| 4.00 | % |
| N/A |
| N/A |
| $ | 49,041 |
| 5.00 | % |
CET 1 capital |
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|
|
|
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|
|
|
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|
|
(to risk-weighted assets) |
| $ | 123,651 |
| 15.00 | % | $ | 37,105 |
| 4.50 | % | $ | 47,412 |
| 5.75 | % | $ | 53,597 |
| 6.50 | % |
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At December 31, 2016 |
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Total risk-based capital |
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(to risk-weighted assets) |
| $ | 93,309 |
| 13.87 | % | $ | 53,813 |
| 8.00 | % | $ | 58,051 |
| 8.63 | % | $ | 67,266 |
| 10.00 | % |
Tier 1 risk-based capital |
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|
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|
|
(to risk-weighted assets) |
| $ | 84,876 |
| 12.62 | % | $ | 40,360 |
| 6.00 | % | $ | 44,597 |
| 6.63 | % | $ | 53,813 |
| 8.00 | % |
Tier 1 leverage capital |
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(to average assets) |
| $ | 84,876 |
| 10.33 | % | $ | 32,862 |
| 4.00 | % |
| N/A |
| N/A |
| $ | 41,078 |
| 5.00 | % |
CET 1 capital |
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(to risk-weighted assets) |
| $ | 84,876 |
| 12.62 | % | $ | 30,270 |
| 4.50 | % | $ | 34,508 |
| 5.13 | % | $ | 43,723 |
| 6.50 | % |
To be Well Capitalized | ||||||||||||||||||||||||||||||||
Under Prompt | ||||||||||||||||||||||||||||||||
For Capital | For Capital Adequacy | Corrective | ||||||||||||||||||||||||||||||
Actual | Adequacy Purposes | with Capital Buffer | Action Provisions | |||||||||||||||||||||||||||||
Bank Only | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
At December 31, 2023 | ||||||||||||||||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | $ | 339,436 | 13.37 | % | $ | 203,094 | 8.00 | % | $ | 266,561 | 10.50 | % | $ | 253,868 | 10.00 | % | ||||||||||||||||
Tier 1 risk-based capital (to risk-weighted assets) | $ | 307,686 | 12.12 | % | $ | 152,321 | 6.00 | % | $ | 215,787 | 8.50 | % | $ | 203,094 | 8.00 | % | ||||||||||||||||
Tier 1 leverage capital (to average assets) | $ | 307,686 | 10.39 | % | $ | 118,488 | 4.00 | % | $ | N/A | N/A | $ | 148,109 | 5.00 | % | |||||||||||||||||
CET 1 capital (to risk-weighted assets) | $ | 307,686 | 12.12 | % | $ | 114,240 | 4.50 | % | $ | 177,707 | 7.00 | % | $ | 165,014 | 6.50 | % | ||||||||||||||||
In addition to the minimum CET 1, Tier 1, total capital, and leverage ratios, the Bank now hasis required to maintain a capital conservation buffer consisting of additional CET 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. The capital conservation buffer requirement began to be phased-in on January 1, 2016 when more than 0.625% of risk-weighted assets was required, and increases by 0.625% on each subsequent January 1, until fully implemented to an amount equal to 2.5% of risk-weighted assets in January 2019. At December 31, 2017,2023, the Bank’s CET1 capital exceeded the required capital conservation buffer of 1.25%.buffer.
FS Bancorp, Inc.
The Company is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to the capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. ForBank holding companies with less than $3.0 billion in assets are generally not subject to compliance with the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to the Bank. The Federal Reserve has a policy that a bank holding company with less than $1.0 billion in assets,is required to serve as a source of financial and managerial strength to the capital guidelines apply on aholding company’s subsidiary bank only basis and the Federal Reserve expects the holding company’s subsidiary banksbank to be well capitalized under the prompt corrective action regulations. If FS Bancorp Inc. wasthe Company were subject to regulatory guidelines for bank holding companies with $1.0$3.0 billion or more in assets at December 31, 2017, the Company2023, it would have exceeded all regulatory capital requirements. TheFor informational purposes, the regulatory capital ratios calculated for FS Bancorp Inc.the Company at December 31, 20172023, were 12.1%9.0% for Tier 1 leverage-based capital, 14.5%10.5% for Tier 1 risk-based capital, 15.7%13.7% for total risk-based capital, and 14.5%10.5% for CET 1 capital ratio. The capital ratios calculated for the Company at December 31, 2022 were 9.7% for Tier 1 leverage-based capital, 10.7% for Tier 1 risk-based capital, 14.0% for total risk-based capital, and 10.7% for CET 1 capital ratio.
117
NOTE 15 -16 – FAIR VALUE OF FINANCIAL INSTRUMENTSMEASUREMENTS
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, thedetermines fair value ofbased on the Company’s consolidated financial instruments will change when interest rate levels change and that change may either be favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed interest rate obligations are less likely to prepayrequirements established in a rising interest rate environment and more likely to prepay in a falling interest rate environment. Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors interest rates and maturities of assets and liabilities, and attempts to minimize interest rate risk by adjusting terms of new loans, and deposits, and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
Accounting guidance regarding fair value measurements defines fair value and establishesASC Topic 820, Fair Value Measurements, which provides a framework for measuring fair value in accordance with U.S. GAAP. FairGAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Topic 820 defines fair value isas the exchangeexit price, or the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. date under current market conditions. ASU 2016 – 01,Financial Instruments –Overall (Subtopic 825 – 10), Recognition and Measurement of Financial Assets and Financial Liabilities, requires us to use the exit price notion when measuring the fair value of instruments for disclosure purposes.
The following definitions describe the levels of inputs that may be used to measure fair value:
Level 1 - – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 - – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Determination
The following methods were used to estimate the fair value of Fair Market Values:certain assets and liabilities on a recurring and nonrecurring basis.
Securities Available-for-Sale - – The fair value of securities available-for-sale are recorded on a recurring basis. The fair value of investments and mortgage-backed securities are provided by a third-partythird-party pricing service. These valuations are based on market data using pricing models that vary by asset class and incorporate available current trade, bid and other market information, and for structured securities, cash flow, and loan performance data. The pricing processes utilize benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. Option adjusted spread models are also used to assess the impact of changes in interest rates and to develop prepayment scenarios.scenarios (Level 2). Transfers between the fair value hierarchy are determined through the third-partythird-party service provider which, from time to time will transfer between levels based on market conditions per the related security. All models and processes used take into accountconsider market convention (Level 2).convention.
Mortgage Loans Held for Sale - –The fair value of loans held for sale reflects the value of commitments with investors and/or the relative price as delivered into a To Be AnnouncedTo-Be-Announced (“TBA”) mortgage-backed security (Level 2)2).
Loans Receivable – Certain residential mortgage loans were initially originated for sale and measured at fair value; after origination, the loans were transferred to loans held for investment. As of December 31, 2023 and 2022, there were $15.1 million and $14.0 million, respectively, in residential mortgage loans recorded at fair value as they were previously transferred from held for sale to loans held for investment. The aggregate unpaid principal balance of these loans was $16.3 million and $15.6 million as of December 31, 2023 and 2022, respectively. Gains and losses from changes in fair value for these loans are reported in earnings as a component of “Other noninterest income” on the Consolidated Statements of Income. For the years ended December 31, 2023, 2022, and 2021, the Company recorded a net increase of $447,000, a net decrease of $1.7 million, and a net decrease of $29,000 in fair value, respectively. For loans originated as held for sale and transferred into loans held for investment, the fair value is determined based on quoted secondary market prices for similar loans (Level 2).
Derivative Instruments - – Fair values for derivative assets and liabilities are measured on a recurring basis. The primary use of a derivative instrument is related to the mortgage banking activities of the Company. The fair value of the interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. TBA mortgage-backed securities are fair valued usingon similar contracts in active markets (Level 2)2) while locks and forwards with customers and investors are fair valued using similar contracts in the market and changes in the market interest rates (Level 2 and 3)3). Derivative instruments not related to mortgage banking activities include interest rate swap agreements. The fair values of interest rate swap agreements are based on valuation models using observable market data as of the measurement date (Level 2). The Company’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including market transactions and third-party pricing services. The fair values of all interest rate swaps are determined from third-party pricing services without adjustment.
Impaired Loans -
Other Real Estate Owned – Fair value adjustments to impairedOREO are recorded at the lower of carrying amount of the loan or fair value of the collateral less selling costs. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ACL on loans. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell (Level 3).
Collateral Dependent Loans – Expected credit losses on collateral dependent loans are recorded to reflect partial write-downsmeasured based on the current appraisedfair value of the collateral or internally developed models, which contain management’s assumptions. Management will utilize discounted cashflow impairment for TDRs whenas of the change in terms result in a discount to the overall cashflows to be received (Level 3).
118
The following tables present securities available-for-sale measured at fair value on a recurring basis at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Securities Available-for-Sale | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
At December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
| $ | — |
| $ | 9,115 |
| $ | — |
| $ | 9,115 |
Corporate securities |
|
| — |
|
| 7,026 |
|
| — |
|
| 7,026 |
Municipal bonds |
|
| — |
|
| 12,786 |
|
| — |
|
| 12,786 |
Mortgage-backed securities |
|
| — |
|
| 39,734 |
|
| — |
|
| 39,734 |
U.S. Small Business Administration securities |
|
| — |
|
| 13,819 |
|
| — |
|
| 13,819 |
Total |
| $ | — |
| $ | 82,480 |
| $ | — |
| $ | 82,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Securities Available-for-Sale | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
At December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
| $ | — |
| $ | 8,068 |
| $ | — |
| $ | 8,068 |
Corporate securities |
|
| — |
|
| 7,500 |
|
| — |
|
| 7,500 |
Municipal bonds |
|
| — |
|
| 15,264 |
|
| — |
|
| 15,264 |
Mortgage-backed securities |
|
| — |
|
| 45,195 |
|
| — |
|
| 45,195 |
U.S. Small Business Administration securities |
|
| — |
|
| 5,848 |
|
| — |
|
| 5,848 |
Total |
| $ | — |
| $ | 81,875 |
| $ | — |
| $ | 81,875 |
The following table presents mortgage loans held for sale measured at fair value on a recurring basis at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mortgage Loans Held for Sale | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
December 31, 2017 |
| $ | — |
| $ | 53,463 |
| $ | — |
| $ | 53,463 |
December 31, 2016 |
| $ | — |
| $ | 52,553 |
| $ | — |
| $ | 52,553 |
The following tables presentreporting date, less estimated selling costs, as applicable. If the fair value of interest rate lock commitments with customers, individual forward sale commitments with investors, and paired off commitments with investors measured at their fair value on a recurringthe collateral is less than the amortized cost basis atof the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest Rate Lock Commitments with Customers | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
December 31, 2017 |
| $ | — |
| $ | — |
| $ | 726 |
| $ | 726 |
December 31, 2016 |
| $ | — |
| $ | — |
| $ | 818 |
| $ | 818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Individual Forward Sale Commitments with Investors | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
December 31, 2017 |
| $ | — |
| $ | (65) |
| $ | 51 |
| $ | (14) |
December 31, 2016 |
| $ | — |
| $ | 495 |
| $ | 177 |
| $ | 672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Paired Off Commitments with Investors | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
December 31, 2017 |
| $ | — |
| $ | 53 |
| $ | — |
| $ | 53 |
December 31, 2016 |
| $ | — |
| $ | 747 |
| $ | — |
| $ | 747 |
119
The following table presents impaired loans measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded duringloan, the reporting period. The amounts disclosed below representCompany will recognize an allowance as the fair values at the time the nonrecurring fair value measurements were evaluated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Impaired Loans | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
December 31, 2017 |
| $ | — |
| $ | — |
| $ | 1,094 |
| $ | 1,094 |
December 31, 2016 |
| $ | — |
| $ | — |
| $ | 194 |
| $ | 194 |
Quantitative Information about Level 3 Fair Value Measurements - Shown in the table below isdifference between the fair value of financial instruments measured under a Level 3 unobservable input on a recurringthe collateral, less costs to sell (if applicable) at the reporting date and nonrecurringthe amortized cost basis at December 31, 2017:
|
|
| |||||||
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|
|
| |||||
| |||||||||
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|
|
| ||||
|
|
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|
| ||||
| |||||||||
|
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|
|
An increase in the pull-through rate utilized inloan. If the fair value measurement of the interest rate lock commitments with customers and forward sale commitments with investorscollateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will result in positive fair value adjustments (and an increasebe limited to the amount previously charged-off by the subsequent changes in the fair value measurement). Conversely, a decreaseexpected credit losses on collateral dependent loans are included within the provision for credit losses in the pull-through rate will resultsame manner in which the expected credit loss initially was recognized or as a negative fair value adjustment (and a decreasereduction in the fair value measurement)provision that would otherwise be reported (Level 3).
The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2017 and 2016.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change in fair | |
|
|
|
|
|
|
|
|
|
|
|
|
| value for gains/ | ||
|
|
|
|
| Purchases |
|
|
|
|
|
|
| (losses) relating to | ||
|
| Beginning |
| and |
| Sales and |
| Ending |
| items held at end of | |||||
|
| Balance |
| Issuances |
| Settlements |
| Balance |
| year | |||||
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments with customers |
| $ | 818 |
| $ | 14,319 |
| $ | (14,411) |
| $ | 726 |
| $ | (92) |
Individual forward sale commitments with investors |
|
| 177 |
|
| 141 |
|
| (267) |
|
| 51 |
|
| (126) |
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments with customers |
| $ | 698 |
| $ | 16,793 |
| $ | (16,673) |
| $ | 818 |
| $ | 120 |
Individual forward sale commitments with investors |
|
| 74 |
|
| 175 |
|
| (72) |
|
| 177 |
|
| 103 |
Gains (losses) on interest rate lock commitments carried at fair value are recorded in other noninterest income. Gains (losses) on forward sale commitments with investors carried at fair value are recorded within other noninterest income.
120
Fair Values of Financial Instruments -The following methods and assumptions were used by the Company in estimating the fair values of financial instruments disclosed in these financial statements:
Cash, and Cash Equivalents and Certificates of Deposit at Other Financial Institutions - The carrying amounts of cash and short-term instruments approximate their fair value (Level 1).
Federal Home Loan Bank Stock - The par value of FHLB stock approximates its fair value (Level 2).
Bank-owned Life Insurance - The estimated fair value is equal to the cash surrender value of policies, net of surrender charges (Level 1).
Accrued Interest - The carrying amounts of accrued interest approximate its fair value (Level 2).
Loans Receivable, Net - For variable rate loans that re-price frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers or similar credit quality (Level 3).
Mortgage Servicing Rights - – The fair value of mortgage, commercial, and consumer servicing rights areMSRs is estimated using net present value of expected cash flows using a third party-party model that incorporates assumptions used in the industry to value such rights, adjusted for factors such as weighted average prepayments speeds based on historical information where appropriate (Level 3)3).
Deposits -
The following tables present securities available-for-sale, mortgage loans held for sale, loans receivable, at fair value, and derivative assets and liabilities measured at fair value on a recurring basis at the dates indicated:
Financial Assets | At December 31, 2023 | |||||||||||||||
Securities available-for-sale: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
U.S. agency securities | $ | — | $ | 18,018 | $ | — | $ | 18,018 | ||||||||
Corporate securities | — | 12,872 | — | 12,872 | ||||||||||||
Municipal bonds | — | 119,447 | — | 119,447 | ||||||||||||
Mortgage-backed securities | — | 101,248 | — | 101,248 | ||||||||||||
U.S. Small Business Administration securities | — | 41,348 | — | 41,348 | ||||||||||||
Mortgage loans held for sale, at fair value | — | 25,668 | — | 25,668 | ||||||||||||
Loans receivable, at fair value | — | 15,088 | — | 15,088 | ||||||||||||
Derivatives: | ||||||||||||||||
Interest rate lock commitments with customers | — | — | 329 | 329 | ||||||||||||
Interest rate swaps - cash flow and fair value hedges | — | 6,431 | — | 6,431 | ||||||||||||
Interest rate swaps - dealer offsets to customer swap positions | — | 64 | — | 64 | ||||||||||||
Total assets measured at fair value | $ | — | $ | 340,184 | $ | 329 | $ | 340,513 | ||||||||
Financial Liabilities | ||||||||||||||||
Derivatives: | ||||||||||||||||
Mandatory and best effort forward commitments with investors | $ | — | $ | — | $ | (188 | ) | $ | (188 | ) | ||||||
Forward TBA mortgage-backed securities | — | (284 | ) | — | (284 | ) | ||||||||||
Interest rate swaps - cash flow and fair value hedges | — | (375 | ) | — | (375 | ) | ||||||||||
Interest rate swaps - customer swap positions | — | (63 | ) | — | (63 | ) | ||||||||||
Total liabilities measured at fair value | $ | — | $ | (722 | ) | $ | (188 | ) | $ | (910 | ) | |||||
Financial Assets | At December 31, 2022 | |||||||||||||||
Securities available-for-sale: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
U.S. agency securities | $ | — | $ | 17,288 | $ | — | $ | 17,288 | ||||||||
Corporate securities | — | 8,545 | — | 8,545 | ||||||||||||
Municipal bonds | — | 120,602 | — | 120,602 | ||||||||||||
Mortgage-backed securities | — | 69,966 | — | 69,966 | ||||||||||||
U.S. Small Business Administration securities | — | 12,851 | — | 12,851 | ||||||||||||
Mortgage loans held for sale, at fair value | — | 20,093 | — | 20,093 | ||||||||||||
Loans receivable, at fair value | — | 14,035 | — | 14,035 | ||||||||||||
Derivatives: | ||||||||||||||||
Forward TBA mortgage-backed securities | — | 164 | — | 164 | ||||||||||||
Interest rate lock commitments with customers | — | — | 107 | 107 | ||||||||||||
Interest rate swaps - cash flow and fair value hedges | — | 9,870 | — | 9,870 | ||||||||||||
Total assets measured at fair value | $ | — | $ | 273,414 | $ | 107 | $ | 273,521 | ||||||||
Financial Liabilities | ||||||||||||||||
Derivatives: | ||||||||||||||||
Mandatory and best effort forward commitments with investors | $ | — | $ | — | $ | (38 | ) | $ | (38 | ) | ||||||
Total liabilities measured at fair value | $ | — | $ | — | $ | (38 | ) | $ | (38 | ) | ||||||
The following table presents financial assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy at the dated indicated. There were no financial assets measured at fair value on a nonrecurring basis as of December 31, 2022.
December 31, 2023 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
MSRs | $ | — | $ | — | $ | 38,163 | $ | 38,163 | ||||||||
Quantitative Information about Level 3 Fair Value Measurements – Shown in the table below is the fair value of deposits with no stated maturity date is includedfinancial instruments measured under a Level 3 unobservable input on a recurring and nonrecurring basis at the amount payabledates indicated:
Level 3 | Significant | Weighted Average | ||||||||||||
Fair Value | Valuation | Unobservable | December 31, | December 31, | ||||||||||
Instruments | Techniques | Inputs | Range | 2023 | 2022 | |||||||||
RECURRING | ||||||||||||||
Interest rate lock commitments with customers | Quoted market prices | Pull-through expectations | 80% - 99% | 90.5 | % | 92.5 | % | |||||||
Individual forward sale commitments with investors | Quoted market prices | Pull-through expectations | 80% - 99% | 90.5 | % | 92.5 | % | |||||||
NONRECURRING | ||||||||||||||
MSRs | Industry sources | Pre-payment speeds | 0% - 50% | 7.2 | % | 8.2 | % | |||||||
The pull-through rate is based on demand. historical loan closing rates for similar interest rate lock commitments. An increase or decrease in the pull-through rate would have a corresponding positive or negative fair value adjustment.
The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years indicated:
Purchases | Net change in | Net change in | ||||||||||||||||||||||
Beginning | and | Sales and | Ending | fair value for | fair value for | |||||||||||||||||||
2023 | Balance | Issuances | Settlements | Balance | gains/(losses) (1) | gains/(losses) (2) | ||||||||||||||||||
Interest rate lock commitments with customers | $ | 107 | $ | 4,291 | $ | (4,069 | ) | $ | 329 | $ | 222 | $ | — | |||||||||||
Individual forward sale commitments with investors | (38 | ) | 66 | (216 | ) | (188 | ) | (150 | ) | — | ||||||||||||||
2022 | ||||||||||||||||||||||||
Interest rate lock commitments with customers | $ | 757 | $ | 3,215 | $ | (3,865 | ) | $ | 107 | $ | (650 | ) | $ | — | ||||||||||
Individual forward sale commitments with investors | 808 | 6,383 | (7,229 | ) | (38 | ) | (846 | ) | — | |||||||||||||||
2021 | ||||||||||||||||||||||||
Interest rate lock commitments with customers | $ | 4,024 | $ | 23,164 | $ | (26,431 | ) | $ | 757 | $ | (3,267 | ) | $ | — | ||||||||||
Individual forward sale commitments with investors | (67 | ) | 2,526 | (1,651 | ) | 808 | 875 | — | ||||||||||||||||
Securities available-for-sale, at fair value | 1,111 | 40 | (13 | ) | 1,138 | — | 27 | |||||||||||||||||
_____________________________
(1) Relating to items held at end of period included in income.
(2) Relating to items held at end of period included in other comprehensive income.
(Losses) gains on interest rate lock commitments and on forward sale commitments with investors carried at fair value are recorded in “Gain on sale of loans” on the Consolidated Statements of Income.
Fair values for fixed rate certificatesfinancial instruments are management's estimates of deposit are estimated usingthe values at which the instruments could be exchanged in a discounted cash flow calculation on interest rates currently offered on similar certificates (Level 2).
Borrowings -transaction between willing parties. The carrying amounts of advances maturing within 90 days approximate their fair values. The fair values of long-term advances are estimated using discounted cash flow analyses based onCompany uses the Bank’s current incremental borrowing rates for similar types of borrowing arrangements (Level 2).
Subordinated Note - Theexit price notion when measuring the fair value of the Subordinated Note is based upon the average yield of debt issuances for similarly sized issuances (Level 2).financial instruments.
Off-Balance Sheet Instruments - The fair value of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the customers. The majority of the Company’s off-balance-sheet instruments consist of non-fee producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value. The fair value of loan lock commitments with customers and investors reflect an estimate of value based upon the interest rate lock date, the expected pull through percentage for the commitment, and the interest rate at year end (Level 2 and 3).
121
The following table provides estimated fair values of the Company’s financial instruments at December 31, 2017 and 2016,the dates indicated, whether or not recognized at fair value inor not on the Consolidated Balance Sheets:
December 31, | December 31, | |||||||||||||||
2023 | 2022 | |||||||||||||||
Financial Assets | Carrying | Fair | Carrying | Fair | ||||||||||||
Level 1 inputs: | Amount | Value | Amount | Value | ||||||||||||
Cash and cash equivalents | $ | 65,691 | $ | 65,691 | $ | 41,437 | $ | 41,437 | ||||||||
Certificates of deposit at other financial institutions | 24,167 | 24,167 | 4,712 | 4,712 | ||||||||||||
Level 2 inputs: | ||||||||||||||||
Securities available-for-sale, at fair value | 292,933 | 292,933 | 229,252 | 229,252 | ||||||||||||
Securities held-to-maturity | 8,500 | 7,666 | 8,500 | 7,929 | ||||||||||||
Loans held for sale, at fair value | 25,668 | 25,668 | 20,093 | 20,093 | ||||||||||||
FHLB stock, at cost | 2,114 | 2,114 | 10,611 | 10,611 | ||||||||||||
Forward TBA mortgage-backed securities | — | — | 164 | 164 | ||||||||||||
Loans receivable, at fair value | 15,088 | 15,088 | 14,035 | 14,035 | ||||||||||||
Interest rate swaps - cash flow and fair value hedges | 6,431 | 6,431 | 9,870 | 9,870 | ||||||||||||
Accrued interest receivable | 14,005 | 14,005 | 11,144 | 11,144 | ||||||||||||
Interest rate swaps - dealer offsets to customer swap positions | 64 | 64 | — | — | ||||||||||||
Level 3 inputs: | ||||||||||||||||
Loans receivable, gross | 2,417,927 | 2,276,397 | 2,204,817 | 2,153,769 | ||||||||||||
MSRs, held at lower of cost or fair value | 9,090 | 20,552 | 18,017 | 35,478 | ||||||||||||
MSRs held for sale, held at lower of cost or fair value | 8,086 | 17,611 | — | — | ||||||||||||
Fair value interest rate locks with customers | — | — | 107 | 107 | ||||||||||||
Financial Liabilities | ||||||||||||||||
Level 2 inputs: | ||||||||||||||||
Deposits | 2,522,323 | 2,515,026 | 2,127,741 | 2,105,926 | ||||||||||||
Borrowings | 93,746 | 93,416 | 186,528 | 186,188 | ||||||||||||
Subordinated notes, excluding unamortized debt issuance costs | 50,000 | 43,480 | 50,000 | 44,500 | ||||||||||||
Accrued interest payable | 5,473 | 5,473 | 2,270 | 2,270 | ||||||||||||
Interest rate swaps - cash flow and fair value hedges | 375 | 375 | — | — | ||||||||||||
Forward TBA mortgage-backed securities | 284 | 284 | — | — | ||||||||||||
Interest rate swaps - customer swap positions | 63 | 63 | ||||||||||||||
Level 3 inputs: | ||||||||||||||||
Mandatory and best effort forward commitments with investors | 188 | 188 | 38 | 38 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair | ||||
|
| Amount |
| Value |
| Amount |
| Value | ||||
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 18,915 |
| $ | 18,915 |
| $ | 36,456 |
| $ | 36,456 |
Certificates of deposit at other financial institutions |
|
| 18,108 |
|
| 18,108 |
|
| 15,248 |
|
| 15,248 |
Level 2 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale, at fair value |
|
| 82,480 |
|
| 82,480 |
|
| 81,875 |
|
| 81,875 |
Loans held for sale, at fair value |
|
| 53,463 |
|
| 53,463 |
|
| 52,553 |
|
| 52,553 |
FHLB stock, at cost |
|
| 2,871 |
|
| 2,871 |
|
| 2,719 |
|
| 2,719 |
Accrued interest receivable |
|
| 3,566 |
|
| 3,566 |
|
| 2,524 |
|
| 2,524 |
Individual forward sale commitments with investors |
|
| — |
|
| — |
|
| 495 |
|
| 495 |
Paired off commitments with investors |
|
| 53 |
|
| 53 |
|
| 747 |
|
| 747 |
Level 3 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, gross |
|
| 773,445 |
|
| 780,551 |
|
| 605,415 |
|
| 617,630 |
Servicing rights, held at lower of cost or fair value |
|
| 6,795 |
|
| 8,608 |
|
| 8,459 |
|
| 11,741 |
Fair value interest rate locks with customers |
|
| 726 |
|
| 726 |
|
| 818 |
|
| 818 |
Individual forward sale commitments with investors |
|
| 51 |
|
| 51 |
|
| 177 |
|
| 177 |
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 829,842 |
|
| 838,087 |
|
| 712,593 |
|
| 718,970 |
Borrowings |
|
| 7,529 |
|
| 7,498 |
|
| 12,670 |
|
| 12,660 |
Subordinated note |
|
| 9,845 |
|
| 10,741 |
|
| 9,825 |
|
| 9,805 |
Accrued interest payable |
|
| 214 |
|
| 214 |
|
| 192 |
|
| 192 |
Paired off commitments with investors |
|
| 65 |
|
| 65 |
|
| — |
|
| — |
NOTE 17 – EARNINGS PER SHARE
NOTE 16 - EARNINGS PER SHARE
The Company computes earnings per share using the two-class method, which is an earnings allocation method for computing earnings per share that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the year.period. Unvested share-based awards containing non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For earnings per share calculations for 2021,the ESOP shares committed to be released arewere included as outstanding shares for both basic and diluted earnings per share. All ESOP shares were allocated as of December 31, 2021.
The following table presents a reconciliation of the components used to compute basic and diluted earnings per share at or for the years ended December 31, 2017 and 2016.indicated:
At or For the Year Ended December 31, | ||||||||||||
Numerator (Dollars in thousands, except per share amounts): | 2023 | 2022 | 2021 | |||||||||
Net income | $ | 36,053 | $ | 29,649 | $ | 37,412 | ||||||
Dividends and undistributed earnings allocated to participating securities | (578 | ) | (554 | ) | (611 | ) | ||||||
Net income available to common shareholders | $ | 35,475 | $ | 29,095 | $ | 36,801 | ||||||
Denominator (shown as actual): | ||||||||||||
Basic weighted average common shares outstanding | 7,656,526 | 7,754,507 | 8,217,916 | |||||||||
Dilutive shares | 118,907 | 119,133 | 200,580 | |||||||||
Diluted weighted average common shares outstanding | 7,775,433 | 7,873,640 | 8,418,496 | |||||||||
Basic earnings per share | $ | 4.63 | $ | 3.75 | $ | 4.48 | ||||||
Diluted earnings per share | $ | 4.56 | $ | 3.70 | $ | 4.37 | ||||||
Potentially dilutive weighted average share options that were not included in the computation of diluted earnings per share because to do so would be anti-dilutive. | 56,520 | 61,912 | 16,466 | |||||||||
|
|
|
|
|
|
|
|
| At or For the Year Ended December 31, | ||||
Numerator: |
| 2017 |
| 2016 | ||
Net income (in thousands) |
| $ | 14,085 |
| $ | 10,499 |
Denominator: |
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
| 3,094,586 |
|
| 2,896,209 |
Dilutive shares |
|
| 197,114 |
|
| 93,950 |
Diluted weighted average common shares outstanding |
|
| 3,291,700 |
|
| 2,990,159 |
Basic earnings per share |
| $ | 4.55 |
| $ | 3.63 |
Diluted earnings per share |
| $ | 4.28 |
| $ | 3.51 |
NOTE 18 – DERIVATIVES
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
122
The Company’s predominant derivative and hedging activities involve interest rate swaps related to certain borrowings, brokered deposits, investment securities, forward sales contracts, and commitments to extend credit associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors.
NOTE 17 - DERIVATIVES
Mortgage Banking Derivatives Not Designated as Hedges
The Company regularly enters into commitments to originate and sell loans held for sale. The Company has established a hedging strategyexposure to protect itself againstmovements in interest rates associated with written interest rate lock commitments with potential borrowers to originate one-to four-family loans that are intended to be sold and for closed one-to-four-family mortgage loans held for sale for which fair value accounting has been elected, that are awaiting sale and delivery into the secondary market. The Company economically hedges the risk of losschanging interest rates associated with interest rate movements onthese mortgage loan commitments. The Company enterscommitments by entering into forward sales contracts to sell one-to-four-family mortgage loans or into contracts to sell forward TBATo-Be-Announced (“TBA”) mortgage-backed securities. These commitments and contracts are considered derivatives but have not been designated as hedging instruments for reporting purposes under U.S. GAAP. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in noninterest income.income or noninterest expense. The CompanyBank recognizes all derivative instruments as either other assets“Other assets” or other liabilities“Other liabilities” on the Consolidated Balance Sheets and measures those instruments at fair value.
Customer Swaps Not Designated as Hedges
The Company also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of clients desiring to manage interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. To economically hedge the interest rate risk associated with offering this product, the Company simultaneously enters into derivative contracts with third parties to offset the customer contracts such that the Company minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts reduce over time to generally match the expected amortization of the underlying loans. These derivatives are not speculative and arise from a service provided to clients.
Cash Flow Hedges
The Company has entered into interest rate swaps to reduce the exposure to variability in interest-related cash outflows attributable to changes in forecasted SOFR based brokered deposits. These derivative instruments are designated as cash flow hedges. The hedged item is the SOFR portion of the series of future adjustable-rate borrowings and deposits over the term of the interest rate swap. Accordingly, changes to the amount of interest payment cash flows for the hedged transactions attributable to a change in credit risk are excluded from management’s assessment of hedge effectiveness. The Bank tests for hedging effectiveness on a quarterly basis. The accumulated other comprehensive income is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Bank has not recorded any hedge ineffectiveness since inception.
The Bank expects that approximately $3.6 million will be reclassified from accumulated other comprehensive loss as a decrease to interest expense over the next twelve months related to these cash flow hedges.
Fair Value Hedges
The Company is exposed to changes in the fair value of certain of its pools of prepayable fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, the SOFR. Interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
The following amounts were recorded on the balance sheet related to cumulative-basis adjustment for fair value hedges for the dates indicated:
Cumulative Amount of Fair Value | ||||||||
Line item on the Consolidated Balance Sheets | Hedging Adjustment Included in | |||||||
in which the hedged item is included: | Carrying Amount of the | the Carrying Amount of the | ||||||
December 31, 2023 | Hedged Assets | Hedged Assets | ||||||
Investment securities (1) | $ | 56,785 | $ | 3,215 | ||||
Total | $ | 56,785 | $ | 3,215 | ||||
December 31, 2022 | ||||||||
Investment securities (1) | $ | 55,893 | $ | 4,107 | ||||
Total | $ | 55,893 | $ | 4,107 | ||||
1) | These amounts include the amortized cost basis of closed portfolios used in designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At December 31, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $236.7 million; the cumulative basis adjustments associated with these hedging relationships was $3.2 million; and the amounts of the designated hedged items was $60.0 million. |
The following tables summarize the Company’s derivative instruments at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | |||||||
|
|
|
|
| Fair Value | ||||
|
| Notional |
| Asset |
| Liability | |||
Fallout adjusted interest rate lock commitments with customers |
| $ | 31,951 |
| $ | 726 |
| $ | — |
Mandatory and best effort forward commitments with investors |
|
| 12,505 |
|
| 51 |
|
| — |
Forward TBA mortgage-backed securities |
|
| 66,500 |
|
| — |
|
| 65 |
TBA mortgage-backed securities forward sales paired off with investors |
|
| 36,500 |
|
| 53 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | |||||||
|
|
|
|
| Fair Value | ||||
|
| Notional |
| Asset |
| Liability | |||
Fallout adjusted interest rate lock commitments with customers |
| $ | 33,289 |
| $ | 818 |
| $ | — |
Mandatory and best effort forward commitments with investors |
|
| 23,536 |
|
| 177 |
|
| — |
Forward TBA mortgage-backed securities |
|
| 53,000 |
|
| 495 |
|
| — |
TBA mortgage-backed securities forward sales paired off with investors |
|
| 44,000 |
|
| 747 |
|
| — |
At December 31, 2017indicated. The Company has master netting agreements with derivative dealers with which it does business, but reflects gross assets and 2016, the Company had $66.5 millionliabilities as “Other assets” and $53.0 million of TBA trades with counterparties that required margin collateral of $75,000 and none, respectively. This collateral is included in interest-bearing deposits at other financial institutions“Other liabilities”, respectively, on the Consolidated Balance Sheets.Sheets, as follows:
December 31, 2023 | ||||||||||||
Fair Value | ||||||||||||
Cash flow hedges: | Notional | Asset | Liability | |||||||||
Interest rate swaps - brokered deposits | $ | 250,000 | $ | 3,233 | $ | 375 | ||||||
Fair value hedges: | ||||||||||||
Interest rate swaps - securities | $ | 60,000 | $ | 3,198 | $ | — | ||||||
Non-hedging derivatives: | ||||||||||||
Fallout adjusted interest rate lock commitments with customers | 22,334 | 329 | — | |||||||||
Mandatory and best effort forward commitments with investors | 10,070 | — | 188 | |||||||||
Forward TBA mortgage-backed securities | 33,000 | — | 284 | |||||||||
Interest rate swaps - customer swap positions | 801 | 63 | ||||||||||
Interest rate swaps - dealer offsets to customer swap positions | 801 | 64 | — | |||||||||
December 31, 2022 | ||||||||||||
Fair Value | ||||||||||||
Cash flow hedges: | Notional | Asset | Liability | |||||||||
Interest rate swaps - brokered deposits | $ | 90,000 | $ | 5,780 | $ | — | ||||||
Fair value hedges: | ||||||||||||
Interest rate swaps - securities | $ | 60,000 | $ | 4,090 | $ | — | ||||||
Non-hedging derivatives: | ||||||||||||
Fallout adjusted interest rate lock commitments with customers | 8,837 | 107 | — | |||||||||
Mandatory and best effort forward commitments with investors | 4,558 | — | 38 | |||||||||
Forward TBA mortgage-backed securities | 27,000 | 164 | — | |||||||||
The following table summarizes the effect of fair value and cash flow hedge accounting on the Consolidated Statements of Income for the years indicated:
Year Ended December 31, | ||||||||||||||||||||||||
2023 | 2022 | 2021 | ||||||||||||||||||||||
Interest | Interest | Interest | Interest | Interest | Interest | |||||||||||||||||||
Expense | Income | Expense | Income | Expense | Income | |||||||||||||||||||
Deposits | Securities | Deposits | Securities | Deposits | Securities | |||||||||||||||||||
Total amounts presented on the Consolidated Statements of Income | $ | 36,751 | $ | 12,247 | $ | 9,420 | $ | 7,046 | $ | 6,929 | $ | 5,637 | ||||||||||||
Net gains (losses) on fair value hedging relationships: | ||||||||||||||||||||||||
Interest rate swaps - securities | ||||||||||||||||||||||||
Recognized on hedged items | — | 892 | — | (4,107 | ) | — | — | |||||||||||||||||
Recognized on derivatives designated as hedging instruments | — | (892 | ) | — | 4,103 | — | — | |||||||||||||||||
Net interest income (expense) recognized on cash flows of derivatives designated as hedging instruments | — | 1,509 | — | — | — | — | ||||||||||||||||||
Net income (expense) recognized on fair value hedges | $ | — | $ | 1,509 | $ | — | $ | (4 | ) | $ | — | $ | — | |||||||||||
Net gain (loss) on cash flow hedging relationships: | ||||||||||||||||||||||||
Interest rate swaps - brokered deposits and borrowings | ||||||||||||||||||||||||
Realized gains (losses) (pre-tax) reclassified from AOCI into net income | $ | 5,465 | $ | — | $ | 970 | $ | — | $ | (538 | ) | $ | — | |||||||||||
Net income (expense) recognized on cash flow hedges | $ | 5,465 | $ | — | $ | 970 | $ | — | $ | (538 | ) | $ | — | |||||||||||
Changes in the fair value of the non-hedging derivatives recognized in other noninterest income“Noninterest income” on the Consolidated Statements of Income and included in gain on sale of loans resulted in a net gaingains of $2.3$75,000, net losses of $2.6 million, and $3.1net gains of $5.1 million for the years ended December 31, 20172023, 2022, and 2016,2021, respectively.
The following table presents a summary of amounts outstanding in derivative financial instruments, including those entered into in connection with the same counterparty under master netting agreements, as of the years indicated. While these agreements are typically over-collateralized, GAAP requires disclosures in this table to limit the amount of such collateral to the amount of the related asset or liability for each counterparty.
Gross Amounts | Net Amounts of | Gross Amounts Not Offset | ||||||||||||||||||||||
Gross Amounts | Offset on the | Assets on the | on the Consolidated Balance Sheets | |||||||||||||||||||||
Offsetting of derivative assets | of Recognized | Consolidated | Consolidated | Financial | Cash Collateral | |||||||||||||||||||
At December 31, 2023 | Assets | Balance Sheets | Balance Sheets | Instruments | Received | Net Amount | ||||||||||||||||||
Interest rate swaps | $ | 6,648 | $ | 153 | $ | 6,495 | $ | — | $ | — | $ | 6,495 | ||||||||||||
At December 31, 2022 | ||||||||||||||||||||||||
Interest rate swaps | $ | 9,870 | $ | — | $ | 9,870 | $ | — | $ | — | $ | 9,870 | ||||||||||||
Gross Amounts | Net Amounts of | Gross Amounts Not Offset | ||||||||||||||||||||||
Gross Amounts | Offset on the | Liabilities on the | on the Consolidated Balance Sheets | |||||||||||||||||||||
Offsetting of derivative liabilities | of Recognized | Consolidated | Consolidated | Financial | Cash Collateral | |||||||||||||||||||
At December 31, 2023 | Liabilities | Balance Sheets | Balance Sheets | Instruments | Posted | Net Amount | ||||||||||||||||||
Interest rate swaps | $ | (722 | ) | $ | (347 | ) | $ | (375 | ) | $ | — | $ | 270 | $ | (105 | ) | ||||||||
At December 31, 2022 | ||||||||||||||||||||||||
Interest rate swaps | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Credit Risk-related Contingent Features
The Company has derivative contracts with its derivative counterparties that contain provisions to post collateral to the counterparties when these contracts are in a net liability position. At December 31, 2023, the Company had collateral posted of $569,000 due to these provisions. Receivables related to cash collateral that has been paid to counterparties is included in "Cash and cash equivalents" on the Consolidated Balance Sheets. In certain cases, the Company will have posted excess collateral, compared to total exposure due to initial margin requirements or day-to-day rate volatility.
NOTE 18 -19 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following were changes in accumulated other comprehensive income (loss) by component, net of tax, for the years indicated:
Unrealized (Losses) | ||||||||||||
Gains and | and Gains | |||||||||||
(Losses) on | on Available | |||||||||||
Derivative | for Sale | |||||||||||
Year Ended December 31, 2023 | Instruments | Securities | Total | |||||||||
Beginning balance | $ | 7,761 | $ | (33,393 | ) | $ | (25,632 | ) | ||||
Other comprehensive income before reclassification, net of tax | 1,296 | 5,321 | 6,617 | |||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | (4,291 | ) | — | (4,291 | ) | |||||||
Net current period other comprehensive (loss) income | (2,995 | ) | 5,321 | 2,326 | ||||||||
Ending balance | $ | 4,766 | $ | (28,072 | ) | $ | (23,306 | ) | ||||
Unrealized | ||||||||||||
Gains and | Losses | |||||||||||
(Losses) on | on Available | |||||||||||
Derivative | for Sale | |||||||||||
Year Ended December 31, 2022 | Instruments | Securities | Total | |||||||||
Beginning balance | $ | 794 | $ | (542 | ) | $ | 252 | |||||
Other comprehensive income (loss) before reclassification, net of tax | 7,728 | (32,851 | ) | (25,123 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | (761 | ) | — | (761 | ) | |||||||
Net current period other comprehensive income (loss) | 6,967 | (32,851 | ) | (25,884 | ) | |||||||
Ending balance | $ | 7,761 | $ | (33,393 | ) | $ | (25,632 | ) | ||||
Unrealized Gains | ||||||||||||
(Losses) and | and (Losses) | |||||||||||
Gains on | on Available | |||||||||||
Derivative | for Sale | |||||||||||
Year Ended December 31, 2021 | Instruments | Securities | Total | |||||||||
Beginning balance | $ | (967 | ) | $ | 3,500 | $ | 2,533 | |||||
Other comprehensive (loss) income before reclassification, net of tax | 1,339 | (4,042 | ) | (2,703 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income, net of tax | 422 | — | 422 | |||||||||
Net current period other comprehensive income (loss) | 1,761 | (4,042 | ) | (2,281 | ) | |||||||
Ending balance | $ | 794 | $ | (542 | ) | $ | 252 | |||||
NOTE 20 – STOCK-BASED COMPENSATION
Stock Options and Restricted Stock
In September 2013,
On May 17, 2018, the shareholders of FS Bancorp, Inc.the Company approved the FS Bancorp, Inc. 20132018 Equity Incentive Plan (“(the “2018Plan”). that authorized 1.3 million shares of the Company’s common stock to be awarded. The2018 Plan provides for the grant of incentive stock options, non-qualified stock options, and up to 326,000 shares as restricted stock awards.awards (“RSAs”) to directors, emeritus directors, officers, employees or advisory directors of the Company. At December 31, 2023, there were 253,532 stock option awards and 76,622 RSAs available for future grants under the 2018 Plan.
Total
For the years ended December 31, 2023, 2022, and 2021, total share-based compensation expense for the Plan was $634,000 for the year ended December 31, 2017,$2.0 million, $2.0 million, and $783,000 for the year ended December 31, 2016.$1.4 million, respectively. The related income tax benefit was $222,000$422,000, $414,000, and $304,000 for the yearyears ended December 31, 2017,2023, 2022, and $274,000 for 2016.2021, respectively.
Stock Options
The 2018Plan authorizes the grantconsists of stock options totaling 324,013 shares to Company directors and employees in which 322,000 option share awards under the Plan were granted with an exercise price equal to the market price of FS Bancorp’s common stock at the grant date of May 8, 2014, of $16.89 per share. These option awards werethat may be granted as non-qualifiedincentive stock options havingor nonqualified stock options. Stock option awards generally vest over a vestingone-year period of for independent directors or over a five years,-year period for employees and officers with 20% vesting on the anniversary date of each grant date and a contractual lifeas long as the award recipient remains in service to the Company. The options are exercisable after vesting for up to the remaining term of the original grant. The maximum term of the options granted is 10 years. Any unexercised stock options will expire 10 years after the grant date or sooner in the event
123
of the award recipient’s termination of service with the Company or the Bank. At December 31, 2017, 6,013 option share awards are available to be granted.
The fair value of each stock option award is estimated on the grant date using a Black-Scholes Option pricing model that uses the following assumptions. The dividend yield is based on the current quarterly dividend in effect at the time of the grant. Historical employment data is used to estimate the forfeiture rate. The Company became a publicly held company in July 2012, therefore historical data was not available to calculate the volatility for FS Bancorp stock. Instead, management utilized the NASDAQ Bank Index, or NASDAQ Bank (NASDAQ symbol: BANK) to determine the expected volatility of FS Bancorp’s stock at grant date for the majority of stock options granted in 2014. This index provides the volatility of the banking sectorCompany's stock price over a specified period of time is used for NASDAQ traded banks.the expected volatility. The majority of smaller banks are tradedCompany bases the risk-free interest rate on the NASDAQ given the costs and daily interaction required with trading on the New York Stock Exchange. The Company utilized the comparable U.S. Treasury rate for the discount rate associated with the stock options granted.in effect on the date of the grant. The Company elected to use Staff Accounting Bulletin 107, simplified expected term calculation for the “Share-Based Payments” method permitted by the SEC to calculate the expected term. This method uses the vesting term of an option along with the contractual term, setting the expected life at 5.5 years for one-year vesting and 6.5 years.years for five-year vesting.
The fair value of options granted was determined using the following weighted-average assumptions as of the grant date for the years indicated:
For the Year Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Dividend yield | 3.25 | % | 2.59 | % | 1.58 | % | ||||||
Expected volatility | 28.24 | % | 26.86 | % | 37.10 | % | ||||||
Risk-free interest rate | 4.35 | % | 2.88 | % | 1.01 | % | ||||||
Expected term in years | 6.5 | 6.5 | 6.5 | |||||||||
Weighted-average grant date fair value per option granted | $ | 7.61 | $ | 7.13 | $ | 10.67 | ||||||
The following table presents a summary of the Company’s stock option plan awards during the year ended December 31, 2017years indicated (shown as actual):
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|
|
|
|
|
|
|
| Weighted-Average |
|
|
|
|
|
|
| Weighted- |
| Remaining |
|
|
| |
|
|
|
| Average |
| Contractual Term In |
| Aggregate | ||
|
| Shares |
| Exercise Price |
| Years |
| Intrinsic Value | ||
Outstanding at January 1, 2017 |
| 295,850 |
| $ | 16.89 |
| 7.36 |
| $ | 5,638,901 |
Granted |
| — |
|
| — |
| — |
|
| — |
Less exercised |
| 39,613 |
| $ | 16.89 |
| — |
| $ | 1,113,997 |
Forfeited or expired |
| — |
|
| — |
| — |
|
| — |
Outstanding at December 31, 2017 |
| 256,237 |
| $ | 16.89 |
| 6.36 |
| $ | 9,655,010 |
|
|
|
|
|
|
|
|
|
|
|
Expected to vest, assuming a 0.31% annual forfeiture rate (1) |
| 255,902 |
| $ | 16.89 |
| 6.36 |
| $ | 9,642,373 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017 |
| 129,437 |
| $ | 16.89 |
| 6.36 |
| $ | 4,877,186 |
(1) Forfeiture rate. Share and per share data has been calculated and estimatedadjusted for all periods to assumereflect a forfeiture of 1/32 over the 10-year contractual life, or 3.1% of the options forfeited over 10 years. two-for-one stock split effective July 14, 2021.
Weighted-Average | ||||||||||||||||
Weighted- | Remaining | |||||||||||||||
Average | Contractual Term In | Aggregate | ||||||||||||||
Shares | Exercise Price | Years | Intrinsic Value | |||||||||||||
Outstanding at January 1, 2021 | 671,754 | $ | 19.45 | 6.58 | $ | 5,721,159 | ||||||||||
Granted | 118,850 | $ | 35.46 | — | — | |||||||||||
Less exercised | 176,978 | $ | 12.73 | — | $ | 4,265,369 | ||||||||||
Forfeited or expired | — | — | — | — | ||||||||||||
Outstanding at December 31, 2021 | 613,626 | $ | 25.24 | 7.17 | $ | 5,362,902 | ||||||||||
Outstanding at January 1, 2022 | 613,626 | $ | 25.24 | 7.17 | $ | 5,362,902 | ||||||||||
Granted | 99,200 | $ | 30.94 | — | — | |||||||||||
Less exercised | 64,994 | $ | 19.75 | — | $ | 790,558 | ||||||||||
Forfeited or expired | — | — | — | — | ||||||||||||
Outstanding at December 31, 2022 | 647,832 | $ | 26.67 | 6.84 | $ | 4,627,255 | ||||||||||
Outstanding at January 1, 2023 | 647,832 | $ | 26.67 | 6.84 | $ | 4,627,255 | ||||||||||
Granted | 103,000 | $ | 30.73 | — | — | |||||||||||
Less exercised | 47,734 | $ | 10.17 | — | $ | 970,064 | ||||||||||
Forfeited or expired | 40,819 | $ | 32.96 | — | — | |||||||||||
Outstanding at December 31, 2023 | 662,279 | $ | 28.12 | 6.69 | $ | 5,852,975 | ||||||||||
Expected to vest, assuming a 0.31% annual forfeiture rate at December 31, 2023 (1) | 650,507 | $ | 28.10 | 6.60 | $ | 5,761,706 | ||||||||||
Exercisable at December 31, 2023 | 383,462 | $ | 26.94 | 5.52 | $ | 3,842,104 | ||||||||||
___________________________
(1) | Forfeiture rate has been calculated and estimated to assume a forfeiture of 3.1% of the options over 10 years. |
At December 31, 2017,2023, there was $311,000$1.7 million of total unrecognized forfeiture adjusted compensation cost related to nonvested stock options granted under the2018 Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 1.43.4 years.
Restricted Stock Awards
The total intrinsicRSAs fair value is equal to the value of options exercised for the years ended December 31, 2017 and 2016 was $1.1 million and $106,000, respectively.
Restricted Stock Awards
The Plan authorizesmarket price of the Company’s common stock on the grant of restricted stock awards totaling 129,605 shares to Company directorsdate and employees, and 125,105 shares were granted on May 8, 2014 at a grant date fair value of $16.89 per share. The remaining 4,500 restricted stock awards were granted on January 1, 2016 at a grant date fair value of $26.00 per share. Compensationcompensation expense is recognized over the vesting period of the awards based on the fair value of the restricted stock. The restricted stock awards’ fair value is equal toShares granted under the value2018 Plan generally vest over a one-year period for independent directors, a five-year period for employees and officers, beginning on the grant date. Shares awarded as restricted stock vest ratably over a three-year periodAny nonvested RSAs will be forfeited and be made available for directors and a five-year period for employees, beginning atfuture grants under the grant date. Any unvested restricted stock awards will expire after vesting or sooner2018 Plan in the event of the award recipient’s termination of service with the Company or the Bank.
124
The following table presents a summary of the Company’s nonvested awards during the year ended December 31, 2017years indicated (shown as actual):. Share and per share data has been adjusted for all periods to reflect a two-for-one stock split effective July 14, 2021.
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|
| Weighted-Average | |
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|
| Grant-Date Fair Value | |
Nonvested Shares |
| Shares |
| Per Share | |
Nonvested at January 1, 2017 |
| 68,763 |
| $ | 17.49 |
Granted |
| — |
|
| — |
Less vested |
| 31,921 |
| $ | 17.32 |
Forfeited or expired |
| — |
|
| — |
Nonvested at December 31, 2017 |
| 36,842 |
| $ | 17.63 |
Weighted-Average | ||||||||
Grant-Date Fair Value | ||||||||
Nonvested Shares | Shares | Per Share | ||||||
Nonvested at January 1, 2021 | 110,184 | $ | 24.35 | |||||
Granted | 41,350 | 35.46 | ||||||
Less vested | 29,862 | 24.78 | ||||||
Forfeited or expired | — | — | ||||||
Nonvested at December 31, 2021 | 121,672 | $ | 28.02 | |||||
Nonvested at January 1, 2022 | 121,672 | $ | 28.02 | |||||
Granted | 35,050 | 30.94 | ||||||
Less vested | 38,192 | 28.12 | ||||||
Forfeited or expired | — | — | ||||||
Nonvested at December 31, 2022 | 118,530 | $ | 28.85 | |||||
Nonvested at January 1, 2023 | 118,530 | $ | 28.85 | |||||
Granted | 37,600 | 30.73 | ||||||
Less vested | 44,462 | 28.24 | ||||||
Forfeited or expired | 9,524 | 30.96 | ||||||
Nonvested at December 31, 2023 | 102,144 | $ | 29.61 | |||||
AtDecember 31, 2017,2023, there was $427,000$2.5 million of total unrecognized forfeiture adjusted compensation costs related to nonvested shares granted under the 2018 Plan as restricted stock awards.RSAs. The cost is expected to be recognized over the remaining weighted-average vesting period of 1.33.3 years. The total fair value of shares vested for the years ended December 31, 2017 and 2016 was $1.4 million and $761,000, respectively.
NOTE 19 -21 – BUSINESS SEGMENTS
The Company’s business segments are determined based on the products and services provided, as well as the nature of the related business activities, and they reflect the manner in whichway financial information is currently evaluated by management. This process is dynamic and is based on management’s current view of the Company’s operations and is not necessarily comparable with similar information for other financial institutions. We define ourThe Company defines its business segments by product type and customer segment which we haveit has organized into two lines of business: commercial and consumer banking and home lending.
We use
The Company uses various management accounting methodologies to assign certain income statement items to the responsible operating segment, including:
● |
|
a funds transfer pricing (“FTP”) system, which allocates interest income credits and funding charges between the segments, assigning to each segment a funding credit for its liabilities, such as deposits, and a charge to fund its assets;
| ● | a cost per loan serviced allocation based on the number of loans being serviced on the balance sheet and the number of loans serviced for third parties; |
● |
|
an allocation based upon the approximate square footage utilized by the home lending segment in Company owned locations;
| ● | an allocation of charges for services rendered to the segments by centralized functions, such as corporate overhead, which are generally based on the number of |
● |
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|
The FTP methodology is based on management’s estimated cost
A description of the Company’s business segments and the products and services that they provide is as follows:
Commercial and Consumer Banking Segment
The commercial and consumer banking segment provides diversified financial products and services to our commercial and consumer customers through Bank branches, ATMs, online banking platforms, mobile banking apps, and telephone banking. These products and services include deposit products; residential, consumer, business and commercial real estate lending portfolios and cash management services. We originateThe Company originates consumer loans, commercial and multi-family real estate
125
loans, construction loans onfor residential and multi-family construction, and commercial business loans. At December 31, 2017, our2023, the Company’s retail deposit branch network consisted of 1127 branches in the Pacific Northwest. At December 31, 2017 and December 31, 2016, our deposits totaled $829.8 million and $712.6 million, respectively. This segment is also responsible for the management of ourthe investment portfolio and other assets of the Bank.
Home Lending Segment
The home lending segment originates one-to-four-familyone-to-four-family residential mortgage loans primarily for sale in the secondary markets as well as originating adjustable rate mortgage (“ARM”) loans held for investment. TheA majority of ourthese mortgage loans are sold to or securitized by FNMA, FHLMC, GNMA or the FHLB of Des Moines, while we retainthe Company generally retains the right to service these loans. Loans originated under the guidelines of the Federal Housing Administration or FHA,(“FHA”), US Department of Veterans Affairs or VA, and United States Department of Agriculture or USDA are generally sold servicing released or servicing retained to a correspondent bank or mortgage company. We haveThe Company has the option to sell loans on a servicing-released or servicing-retained basis to securitizers and correspondent lenders. A small percentage of ourits loans are brokered to other lenders. On occasion, we the Company may sell a portion of ourits MSR portfolio and may sell small pools of loans initially originated to be held in the loan portfolio. We manageThe Company manages the loan funding and the interest rate risk associated with the secondary market loan sales and the retained one-to-four-family mortgage servicing rightsone-to-four-family MSRs within this business segment. One-to-four-familyOne-to-four-family loans originated for investment and held in this segment are allocated to the home lending segment with a corresponding provision expense and FTP for cost of funds.
Segment Financial Results
The tables below summarize the financial results for each segment based primarily on the number of FTEs and assetsfactors mentioned above within each segment at or for the years ended December 31, 2017 and 2016:indicated:
|
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| At or For the Year Ended December 31, 2017 | |||||||
|
| Home Lending |
| Commercial and Consumer Banking |
| Total | |||
Condensed income statement: |
|
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|
|
|
|
|
|
Net interest income (1) |
| $ | 2,587 |
| $ | 38,661 |
| $ | 41,248 |
Provision for loan losses |
|
| (287) |
|
| (463) |
|
| (750) |
Noninterest income |
|
| 18,973 |
|
| 5,101 |
|
| 24,074 |
Noninterest expense |
|
| (17,052) |
|
| (26,941) |
|
| (43,993) |
Income before provision for income taxes |
|
| 4,221 |
|
| 16,358 |
|
| 20,579 |
Provision for income taxes |
|
| (1,332) |
|
| (5,162) |
|
| (6,494) |
Net income |
| $ | 2,889 |
| $ | 11,196 |
| $ | 14,085 |
Total assets |
| $ | 220,353 |
| $ | 761,430 |
| $ | 981,783 |
Total average assets at year end |
| $ | 203,379 |
| $ | 720,202 |
| $ | 923,581 |
FTEs |
|
| 119 |
|
| 207 |
|
| 326 |
At or For the Year Ended December 31, 2023 | ||||||||||||
Commercial | ||||||||||||
and Consumer | ||||||||||||
Condensed income statement: | Banking | Home Lending | Total | |||||||||
Net interest income (1) | $ | 111,737 | $ | 11,566 | $ | 123,303 | ||||||
Provision for credit losses | (3,494 | ) | (1,280 | ) | (4,774 | ) | ||||||
Noninterest income (2) | 10,368 | 10,122 | 20,490 | |||||||||
Noninterest expense (3) | (73,767 | ) | (19,980 | ) | (93,747 | ) | ||||||
Income before provision for income taxes | 44,844 | 428 | 45,272 | |||||||||
Provision for income taxes | (9,132 | ) | (87 | ) | (9,219 | ) | ||||||
Net income | $ | 35,712 | $ | 341 | $ | 36,053 | ||||||
Total average assets for period ended | $ | 2,315,806 | $ | 527,442 | $ | 2,843,248 | ||||||
FTEs | 447 | 123 | 570 | |||||||||
|
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|
|
| At or For the Year Ended December 31, 2016 | |||||||
|
| Home Lending |
| Commercial and Consumer Banking |
| Total | |||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
Net interest income (1) |
| $ | 2,221 |
| $ | 31,636 |
| $ | 33,857 |
Provision for loan losses |
|
| (208) |
|
| (2,192) |
|
| (2,400) |
Noninterest income |
|
| 19,195 |
|
| 4,374 |
|
| 23,569 |
Noninterest expense |
|
| (14,944) |
|
| (23,979) |
|
| (38,923) |
Income before provision for income taxes |
|
| 6,264 |
|
| 9,839 |
|
| 16,103 |
Provision for income taxes |
|
| (2,180) |
|
| (3,424) |
|
| (5,604) |
Net income |
| $ | 4,084 |
| $ | 6,415 |
| $ | 10,499 |
126
Total assets |
| $ | 184,003 |
| $ | 643,923 |
| $ | 827,926 |
Total average assets at year end |
| $ | 153,812 |
| $ | 645,208 |
| $ | 799,020 |
FTEs |
|
| 112 |
|
| 194 |
|
| 306 |
At or For the For the Year Ended December 31, 2022 | ||||||||||||
Commercial | ||||||||||||
and Consumer | ||||||||||||
Condensed income statement: | Banking | Home Lending | Total | |||||||||
Net interest income (1) | $ | 93,358 | $ | 10,922 | $ | 104,280 | ||||||
Provision for credit losses | (5,064 | ) | (1,153 | ) | (6,217 | ) | ||||||
Noninterest income (2) | 10,158 | 7,950 | 18,108 | |||||||||
Noninterest expense (3) | (59,723 | ) | (19,460 | ) | (79,183 | ) | ||||||
Income (loss) before (provision) benefit for income taxes | 38,729 | (1,741 | ) | 36,988 | ||||||||
(Provision) benefit for income taxes | (7,684 | ) | 345 | (7,339 | ) | |||||||
Net income (loss) | $ | 31,045 | $ | (1,396 | ) | $ | 29,649 | |||||
Total average assets for period ended | $ | 2,018,263 | $ | 417,431 | $ | 2,435,694 | ||||||
FTEs | 405 | 132 | 537 | |||||||||
At or For the Year Ended December 31, 2021 | ||||||||||||
Commercial | ||||||||||||
and Consumer | ||||||||||||
Condensed income statement: | Banking | Home Lending | Total | |||||||||
Net interest income (1) | $ | 78,306 | $ | 8,343 | $ | 86,649 | ||||||
(Provision for) recovery of loan losses | (2,613 | ) | 2,113 | (500 | ) | |||||||
Noninterest income (2) | 8,545 | 28,968 | 37,513 | |||||||||
Noninterest expense(3) | (56,557 | ) | (19,685 | ) | (76,242 | ) | ||||||
Income before provision for income taxes | 27,681 | 19,739 | 47,420 | |||||||||
Provision for income taxes | (5,842 | ) | (4,166 | ) | (10,008 | ) | ||||||
Net income | $ | 21,839 | $ | 15,573 | $ | 37,412 | ||||||
Total average assets for period ended | $ | 1,779,850 | $ | 409,363 | $ | 2,189,213 | ||||||
FTEs | 384 | 152 | 536 | |||||||||
__________________________
| (1) | Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to the other segment. The cost of liabilities includes interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of assigned liabilities to fund segment assets. All material revenues in each segment are from external customers. |
(2) | Noninterest income includes activity from certain residential mortgage loans that were initially originated for sale and measured at fair value, and subsequently transferred to loans held for investment. Gains and losses from changes in fair value for these loans are reported in earnings as a component of noninterest income. For the years ended December 31, 2023, 2022, and 2021, the Company recorded net increases in fair value of $447,000, net decreases of $1.7 million, and net decreases of $29,000, respectively. As of December 31, 2023, 2022, and 2021, there were $15.1 million, $14.0 million, and $17.8 million, respectively, in residential mortgage loans recorded at fair value as they were previously transferred from loans held for sale to loans held for investment. All material revenues in each segment are from external customers. |
(3) | Noninterest expense includes allocated overhead expense from general corporate activities. Allocation is determined based on a combination of segment assets and FTEs. For the years ended December 31, 2023, 2022, and 2021, the Home Lending segment included allocated overhead expenses of $6.1 million, $6.2 million, and $7.3 million, respectively. |
NOTE 22 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
All the Company’s revenue from contracts with customers in-scope of ASC 606 is recognized in noninterest income and included in our commercial and consumer banking segment. The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope and/or immaterial to Topic 606, for the years indicated:
For the Year Ended December 31, | ||||||||||||
Noninterest income | 2023 | 2022 | 2021 | |||||||||
In-scope of Topic 606: | ||||||||||||
Debit card interchange fees | $ | 3,200 | $ | 2,266 | $ | 2,252 | ||||||
Deposit service and account maintenance fees | 1,412 | 919 | 757 | |||||||||
Noninterest income (in-scope of Topic 606) | 4,612 | 3,185 | 3,009 | |||||||||
Noninterest income (out-of-scope of Topic 606) | 15,878 | 14,923 | 34,504 | |||||||||
Total noninterest income | $ | 20,490 | $ | 18,108 | $ | 37,513 | ||||||
Deposit Service and Account Maintenance Fees
The Bank earns fees from its deposit customers for account maintenance, transaction-based services and overdraft charges. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts monthly. The performance obligation is satisfied and the fees are recognized monthly as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such as wire fees, as well as charges against the account, such as fees for non-sufficient funds and overdrafts. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.
Debit Card Interchange Income
Debit and ATM interchange income represent fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ debit card.
NOTE 23 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and certain other intangibles generally arise from business combinations accounted for under the acquisition method of accounting. Goodwill totaled $3.6 million at December 31, 2023, and $2.3 million at December 31, 2022, and represents the excess of the total acquisition price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in the Branch Acquisition on February 24, 2023, and the purchase of four retail bank branches from Bank of America on January 22, 2016. Goodwill is not amortized but is evaluated for impairment on an annual basis at December 31 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company performed an impairment analysis at December 31, 2023 and determined that no impairment of goodwill existed.
Core deposit intangible (“CDI”) is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life. As of December 31, 2023, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI.
The following table summarizes the changes in the Company’s other intangible assets comprised solely of CDI for the years indicated:
Other Intangible Assets | ||||||||||||
Accumulated | ||||||||||||
Gross CDI | Amortization | Net CDI | ||||||||||
Balance, December 31, 2020 | $ | 7,490 | $ | (2,739 | ) | $ | 4,751 | |||||
Amortization | — | (691 | ) | (706 | ) | |||||||
Balance, December 31, 2021 | 7,490 | (3,430 | ) | 4,060 | ||||||||
Amortization | — | (691 | ) | (691 | ) | |||||||
Balance, December 31, 2022 | 7,490 | (4,121 | ) | 3,369 | ||||||||
Additions as a result of the Branch Purchase | 17,438 | — | 17,438 | |||||||||
Amortization | — | (3,464 | ) | (3,464 | ) | |||||||
Balance, December 31, 2023 | $ | 24,928 | $ | (7,585 | ) | $ | 17,343 | |||||
The CDI represents the fair value of the intangible core deposit base acquired in business combinations. The CDI will be amortized on a straight-line basis over 10 years for the CDI related to the Anchor Acquisition in November 2018 and on an accelerated basis over approximately nine years for the CDI related to the Branch Acquisition. Total amortization expense was $3.5 million, $691,000 and $691,000 for the years ended December 31, 2023, 2022, and 2021, respectively.
Amortization expense for CDI is expected to be as follows for the years ended December 31:
2024 | $ | 3,633 | ||
2025 | 3,191 | |||
2026 | 2,846 | |||
2027 | 2,500 | |||
2028 | 2,110 | |||
Thereafter | 3,063 | |||
Total | $ | 17,343 |
NOTE 24 – PARENT COMPANY ONLY FINANCIAL INFORMATION
The Condensed Balance Sheets, Statements of Income, and Statements of Cash Flows for the Company (Parent Only) are presented below:
Condensed Balance Sheets | December 31, | |||||||
Assets | 2023 | 2022 | ||||||
Cash and due from banks | $ | 9,094 | $ | 7,195 | ||||
Investment in subsidiary | 305,315 | 274,092 | ||||||
Other assets | 458 | 704 | ||||||
Total assets | $ | 314,867 | $ | 281,991 | ||||
Liabilities and Stockholders' Equity | ||||||||
Subordinated notes, net | 49,527 | 49,461 | ||||||
Other liabilities | 852 | 833 | ||||||
Total liabilities | 50,379 | 50,294 | ||||||
Stockholders' equity | 264,488 | 231,697 | ||||||
Total liabilities and stockholders' equity | $ | 314,867 | $ | 281,991 | ||||
Condensed Statements of Income | Year Ended December 31, | |||||||||||
2023 | 2022 | 2021 | ||||||||||
Interest expense on subordinated note | $ | (1,942 | ) | $ | (1,942 | ) | $ | (1,722 | ) | |||
Dividends received from subsidiary | 8,919 | 9,110 | 9,800 | |||||||||
Other expenses | (278 | ) | (274 | ) | (272 | ) | ||||||
Income before income tax benefit and equity in undistributed net income of subsidiary | 6,699 | 6,894 | 7,806 | |||||||||
Income tax benefit | 458 | 465 | 419 | |||||||||
Equity in undistributed earnings of subsidiary | 28,896 | 22,290 | 29,187 | |||||||||
Net income | $ | 36,053 | $ | 29,649 | $ | 37,412 | ||||||
Condensed Statements of Cash Flows | Year Ended December 31, | |||||||||||
2023 | 2022 | 2021 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 36,053 | $ | 29,649 | $ | 37,412 | ||||||
Equity in undistributed net income of subsidiary | (28,896 | ) | (22,290 | ) | (29,187 | ) | ||||||
Amortization | 66 | 67 | 61 | |||||||||
ESOP compensation expense for allocated shares | — | — | 1,482 | |||||||||
Share-based compensation expense related to stock options and restricted stock | 2,010 | 1,971 | 1,446 | |||||||||
Changes in operating assets and liabilities | ||||||||||||
Other assets | 246 | (297 | ) | (205 | ) | |||||||
Other liabilities | 18 | 55 | 569 | |||||||||
Net cash from operating activities | 9,497 | 9,155 | 11,578 | |||||||||
Cash flows used by investing activities: | ||||||||||||
Net proceeds from ESOP | — | — | 291 | |||||||||
Investment in subsidiary | — | — | (25,000 | ) | ||||||||
Net cash used by investing activities | — | — | (24,709 | ) | ||||||||
Cash flows (used by) from financing activities: | ||||||||||||
Net proceeds from issuance of subordinated notes | — | — | 49,333 | |||||||||
Repayment of subordinated notes | — | — | (10,000 | ) | ||||||||
Stock options exercised, net | (273 | ) | 568 | (2,076 | ) | |||||||
Common stock repurchased for employee/director taxes paid on restricted stock awards | (355 | ) | (190 | ) | (211 | ) | ||||||
Issuance of common stock - employee stock purchase plan | 1,017 | 503 | — | |||||||||
Common stock repurchased | (223 | ) | (15,628 | ) | (13,961 | ) | ||||||
Dividends paid on common stock | (7,764 | ) | (7,096 | ) | (4,602 | ) | ||||||
Net cash (used by) from financing activities | (7,598 | ) | (21,843 | ) | 18,483 | |||||||
Net increase (decrease) in cash and cash equivalents | 1,899 | (12,688 | ) | 5,352 | ||||||||
Cash and cash equivalents, beginning of year | 7,195 | 19,883 | 14,531 | |||||||||
Cash and cash equivalents, end of year | $ | 9,094 | $ | 7,195 | $ | 19,883 | ||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(i) Evaluation of Disclosure Controls and Procedures.
An evaluation of ourthe disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) was carried out as of December 31, 20172023 under the supervision and with the participation of ourthe Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and several other members of ourthe Company’s senior management. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
The Company’s CEO (Principal Executive Officer)(principal executive officer) and CFO (Principal Financial Officer)(principal financial officer) concluded that as ofbased on their evaluation at December 31, 2017, FS Bancorp’s2023, the Company’s disclosure controls and procedures were effective in ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to FS Bancorp management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC’s rules and forms.
a) Management’s Report on internal control over financial reporting. |
|
|
FS Bancorp’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a‑15(f) of the Securities Exchange Act of 1934.Act. FS Bancorp’s internal control system is designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles.
This process includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of FS Bancorp; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of FS Bancorp are being made only in accordance with authorizations of management and directors of FS Bancorp; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of FS Bancorp’s assets that could have a material effect on the financial statements. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Additionally, in designing disclosure controls and procedures, FS Bancorp’s management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Furthermore, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
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FS Bancorp’s management assessed the effectiveness of FS Bancorp’s internal control over financial reporting as of December 31, 2017.2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Based on thatmanagement’s assessment, FS Bancorp’s management believesit was concluded that, as of December 31, 2017,2023, FS Bancorp’s internal control over financial reporting iswas effective based on those criteria.
b) Attestation report of the registered public accounting firm.
Moss Adams LLP, an independent registered public accounting firm, has audited the Company’sFS Bancorp’s consolidated financial statements and the effectiveness of ourits internal control over financial reporting as of December 31, 2017,2023, which is included in Item 8. Financial Statements and Supplementary Data.
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The “Report of Independent Registered Public Accounting Firm” included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10‑K is incorporated herein by reference.10–K.
c) Changes in internal control over financial reporting. |
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There were no significant changes in FS Bancorp’s internal control over financial reporting during FS Bancorp’s most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, FS Bancorp’s internal control over financial reporting.
None.
PART IIIa) Nothing to report.
b) During the quarter ended December 31, 2023, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Corporation adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” as each term is defined in Item 408(a) of Regulation S–K.
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Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The information required by this item regarding the Company’s Board of Directors is incorporated herein by reference from the section captioned “Proposal I - Election of Directors” in the Company’s Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the Company’s fiscal year end.
The executive officers of the Company and the Bank are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors. For information regarding the Company’s executive officers, see “Item 1. Business -– Information About Our Executive Officers” included in this Form 10‑10–K.
Compliance
Delinquent Section 16(a) Reports
Any information concerning compliance with the reporting requirements of Section 16(a) of the Securities Exchange Act
The information of 1934 by our directors, officers and ten percent stockholders required by this item is incorporated herein by reference from the section captioned “Compliance with Section 16(a) of the Exchange Act” in the Company’sCompany's Proxy Statement, a copy of which will be filed with the SEC noSecurities and Exchange Commission not later than 120 days after the Company’sCompany's fiscal year end.
Code of Ethics for Senior Financial Officers
The Board of Directors has adopted a Code of Ethics for the Company’s officers (including its senior financial officers), directors and employees. The Code of Ethics is applicable to the Company’s principal executive officer and senior financial officers. The Company’s Code of Ethics is posted on its website at www.fsbwa.com under the Investor Relations tab.
Nominating Procedures
There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since last disclosed to stockholders.
Audit Committee and Audit Committee Financial Expert
The Company has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee of the Company is composed of Directors Leech (Chairperson), Mansfield and Cofer-Wildsmith. Each member of the Audit Committee is “independent”independent as independence is defined for audit committee members in the listing standards of The Nasdaq Stock Market, listing standards.LLC. The Board of Directors has determined that Mr. Leech and Mr. Mansfield meet the definition of “audit committee financial expert,” as defined by the SEC.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference from the sections captioned “Executive Compensation” and “Directors’ Compensation” in the Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the Company’s fiscal year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Security Ownership of Certain Beneficial Owners.
The information required by this item is incorporated herein by reference from the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the Company’s Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the Company’s fiscal year end.
(b) Security Ownership of Management.
The information required by this item is incorporated herein by reference from the sections captioned “Security Ownership of Certain Beneficial Owners and Management” and “Proposal I -– Election of Directors” in the Company’s Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the Company’s fiscal year end.
(c) Changes in Control.
The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
(d)
d) Equity Compensation PlanPlans Information.
The following table summarizes share and exercise price information about FS Bancorp’s equity compensation plans as of December 31, 2017:2023:
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| remaining available for |
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| outstanding options, |
| securities reflected in | |
Plan category |
| warrants, and rights |
| warrants, and rights |
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Equity compensation plans (stock options) approved by security holders: |
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2013 Equity Incentive Plan(1) |
| 324,013 |
| $ | 16.89 |
| 6,013 |
Equity compensation plans not approved by security holders |
| N/A |
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| N/A |
Total |
| 324,013 |
| $ | 16.89 |
| 6,013 |
Number of securities | ||||||||||||
remaining available for | ||||||||||||
future issuance under | ||||||||||||
Number of securities to | Weighted-average | equity compensation | ||||||||||
be issued upon exercise | exercise price of | plans (excluding | ||||||||||
of outstanding options, | outstanding options, | securities reflected in | ||||||||||
Plan category | warrants, and rights | warrants, and rights | column (a)) | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plans (stock options) approved by security holders: | ||||||||||||
2013 Equity Incentive Plan | 30,638 | $ | 13.85 | N/A | ||||||||
2018 Equity Incentive Plan | 631,641 | $ | 28.98 | 330,154 | ||||||||
Equity compensation plans not approved by security holders | N/A | N/A | N/A | |||||||||
Total | 662,279 | $ | 28.12 | 330,154 | (1) | |||||||
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(1)The restricted Includes 76,622 shares granted under the 2013 Equity Incentive Plan were purchased by FS Bancorp in open market transactions and subsequently issued to the Company’s directors and certain employees. At December 31, 2017, there were 129,605 restricted shares granted pursuant to the 2013 Equity Incentive Plan and no shares were available for future grants of restricted stock.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference from the section captioned “Transactions with Management” in the Company’s Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the Company’s fiscal year end.
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Item 14. Principal AccountingAccountant Fees and Services
The information required by this item is incorporated herein by reference from the section captioned “Proposal 3 -– Ratification of Appointment of Independent Auditor” in the Company’s Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the Company’s fiscal year end.
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Item 15. Exhibits and Financial Statement Schedules
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(1) | Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (333-177125) filed on October 3, 2011, and incorporated by reference. |
(2) | Filed as an exhibit to the Registrant’s Current Report on Form 8‑K filed on July 10, 2013 (File No. 001‑355589). |
(3) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 11, 2021 (File No. 001-35589). |
| (4) | Filed as an exhibit to the Registrant's Current Report on 424B5 (Prospectus) (333-215810) filed on September 11, 2017. |
(5) | Filed as an exhibit to the Registrant’s Registration Statement on Form S‑8 (333‑192990) filed on December 20, 2013 and incorporated by reference. |
(6) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 1, 2016 (File No. 001-35589) |
(7) | Registrant elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at www.fsbwa.com in the section titled Investor Relations: Corporate Governance. |
(8) | Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (333-22513) filed on May 23,2018. |
(9) | Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (333-265729) filed on June 21,2022. |
| (10) | Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on February 2, 2024 (File No. 001-35589). |
None.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Date: March | FS Bancorp, Inc. | |
/s/Joseph C. Adams | ||
Joseph C. Adams | ||
Chief Executive Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES | TITLE | DATE | |||
/s/Joseph C. Adams | Director and Chief Executive Officer | March 15, 2024 | |||
Joseph C. Adams | (Principal Executive Officer) |
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/s/Matthew D. Mullet | Chief Financial Officer, Treasurer and Secretary | March 15, 2024 | |||
Matthew D. Mullet | (Principal Financial and Accounting Officer) |
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/s/Ted A. Leech | Chairman of the Board | March 15, 2024 | |||
Ted A. Leech |
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/s/Margaret R. Piesik | Director | March 15, 2024 | |||
Margaret R. Piesik |
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/s/Joseph P. Zavaglia | Director | March 15, 2024 | |||
Joseph P. Zavaglia |
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/s/Michael J. Mansfield | Director | March 15, 2024 | |||
Michael J. Mansfield |
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/s/Marina Cofer-Wildsmith | Director | March 15, 2024 | |||
Marina Cofer-Wildsmith |
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/s/ | Director | March 15, 2024 | |||
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