Equibles

10-Q

FS Bancorp, Inc. (FSBW)

10-Q 2024-11-08 For: 2024-09-30
View Original
Added on April 10, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

or

☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from   to

Commission File Number: 001-35589

FS BANCORP,

INC.

(Exact name of registrant as specified in its charter)

Washington 45-4585178
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

6920 220th Street SW, Mountlake Terrace, Washington

98043

(Address of principal executive offices; Zip Code)

(425)

771

‑

5299

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $.01 per share FSBW The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒          No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒          No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).    Yes ☐          No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 4, 2024, there were 7,817,172 outstanding shares of the registrant’s common stock.

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FS Bancorp, Inc.

Form 10‑Q

Table of Contents

Page Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2024 (Unaudited) and December 31, 2023 3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited) 4
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited) 5
Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited) 6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023 (Unaudited) 8 - 9
Notes to Consolidated Financial Statements 10 - 10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 48 - 64
Item 3. Quantitative and Qualitative Disclosures About Market Risk 64
Item 4. Controls and Procedures 65
PART II OTHER INFORMATION 65
Item 1. Legal Proceedings 65
Item 1A. Risk Factors 65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 66
Item 3. Defaults Upon Senior Securities 66
Item 4. Mine Safety Disclosures 66
Item 5. Other Information 66
Item 6. Exhibits 67
SIGNATURES 68

When we refer to “FS Bancorp” in this report, we are referring to FS Bancorp, Inc. When we refer to “Bank” or “1st Security Bank” in this report, we are referring to 1st Security Bank of Washington, the wholly owned subsidiary of FS Bancorp. As used in this report, the terms “we,” “our,” “us,” and “Company” refer to FS Bancorp, Inc. and its consolidated subsidiary, 1st Security Bank of Washington, unless the context indicates otherwise.

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Item 1. Financial Statements

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands, except shares and per share amounts) (Unaudited)

December 31,
ASSETS 2023
Cash and due from banks 17,950 $ 17,083
Interest-bearing deposits at other financial institutions 22,390 48,608
Total cash and cash equivalents 40,340 65,691
Certificates of deposit at other financial institutions 12,001 24,167
Securities available-for-sale, at fair value (amortized cost of 252,272 and 328,695, net of allowance for credit losses of 0 and 0, respectively) 228,199 292,933
Securities held-to-maturity, net of allowance for credit losses of 45 (fair value of 7,983 and 7,666, respectively) 8,455 8,455
Loans held for sale, at fair value 49,373 25,668
Loans receivable, net of allowance for credit losses of 31,232 and 31,534 (includes loans of 13,861 and 15,088, at fair value, respectively) 2,463,697 2,401,481
Accrued interest receivable 14,014 14,005
Premises and equipment, net 30,026 30,578
Operating lease right-of-use (“ROU”) assets 5,365 6,627
Federal Home Loan Bank (“FHLB”) stock, at cost 9,504 2,114
Deferred tax asset, net 4,222 6,725
Bank owned life insurance (“BOLI”), net 38,453 37,719
Mortgage servicing rights (“MSRs”), held at the lower of cost or fair value 8,739 9,090
MSRs held for sale, held at the lower of cost or fair value — 8,086
Goodwill 3,592 3,592
Core deposit intangible, net 14,586 17,343
Other assets 39,642 18,395
TOTAL ASSETS 2,970,208 $ 2,972,669
LIABILITIES **** ****
Deposits:
Noninterest-bearing accounts 657,753 $ 670,831
Interest-bearing accounts 1,769,578 1,851,492
Total deposits 2,427,331 2,522,323
Borrowings 163,806 93,746
Subordinated notes:
Principal amount 50,000 50,000
Unamortized debt issuance costs (423 ) (473 )
Total subordinated notes less unamortized debt issuance costs 49,577 49,527
Operating lease liabilities 5,548 6,848
Other liabilities 35,044 35,737
Total liabilities 2,681,306 2,708,181
COMMITMENTS AND CONTINGENCIES (NOTE 9) **** ****
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; 7,817,172 and 7,800,545 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively 78 78
Additional paid-in capital 55,264 57,362
Retained earnings 251,843 230,354
Accumulated other comprehensive loss, net of tax (18,283 ) (23,306 )
Total stockholders’ equity 288,902 264,488
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY 2,970,208 $ 2,972,669

All values are in US Dollars.

See accompanying notes to these consolidated financial statements.

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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except shares and per share amounts) (Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
2024 2023 2024 2023
INTEREST INCOME **** **** ****
Loans receivable, including fees $ 43,800 $ 39,874 $ 127,203 $ 114,082
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions 3,243 3,396 10,660 8,667
Total interest and dividend income 47,043 43,270 137,863 122,749
INTEREST EXPENSE **** **** ****
Deposits 13,486 10,462 39,620 24,696
Borrowings 1,828 1,689 4,796 3,749
Subordinated notes 485 485 1,456 1,456
Total interest expense 15,799 12,636 45,872 29,901
NET INTEREST INCOME 31,244 30,634 91,991 92,848
PROVISION FOR CREDIT LOSSES 1,513 548 3,989 3,372
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 29,731 30,086 88,002 89,476
NONINTEREST INCOME **** **** ****
Service charges and fee income 2,482 2,882 7,513 8,352
Gain on sale of loans 2,523 1,875 6,824 5,298
Gain on sale of MSRs 141 — 8,356 —
Gain (loss) on sale of investment securities, net 11 — (7,836 ) —
Earnings on cash surrender value of BOLI 252 233 734 681
Other noninterest income 558 (8 ) 1,355 703
Total noninterest income 5,967 4,982 16,946 15,034
NONINTEREST EXPENSE **** **** ****
Salaries and benefits 13,985 13,503 40,920 40,880
Operations 3,827 3,409 10,354 9,744
Occupancy 1,662 1,588 5,036 4,670
Data processing 2,156 1,841 6,172 5,092
Loan costs 666 564 1,904 2,077
Professional and board fees 1,223 666 3,034 2,001
Federal Deposit Insurance Corporation (“FDIC”) insurance 533 561 1,515 1,732
Marketing and advertising 377 452 981 1,072
Acquisition cost — — — 1,562
Amortization of core deposit intangible 897 1,002 2,757 2,484
Impairment of MSRs 506 — 545 —
Total noninterest expense 25,832 23,586 73,218 71,314
INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES 9,866 11,482 31,730 33,196
(BENEFIT) PROVISION FOR INCOME TAXES (420 ) 2,529 4,088 6,915
NET INCOME $ 10,286 $ 8,953 $ 27,642 $ 26,281
Basic earnings per share $ 1.32 $ 1.15 $ 3.54 $ 3.38
Diluted earnings per share $ 1.29 $ 1.13 $ 3.45 $ 3.33

See accompanying notes to these consolidated financial statements.

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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
2024 2023 2024 2023
Net income $ 10,286 $ 8,953 $ 27,642 $ 26,281
Other comprehensive income (loss): **** **** **** ****
Securities available-for-sale:
Unrealized gain (loss) during period 5,404 (11,762 ) 3,853 (9,341 )
Income tax (provision) benefit related to unrealized holding gain (loss) (1,161 ) 2,528 (828 ) 2,007
Reclassification adjustment for realized (gain) loss, net included in net income (11 ) — 7,836 —
Income tax provision (benefit) related to reclassification for realized (gain) loss, net 2 — (1,685 ) —
Derivative financial instruments:
Unrealized derivative (loss) gain during period (7,742 ) 4,337 (1,270 ) 8,155
Income tax benefit (provision) related to unrealized derivative (loss) gain 1,664 (933 ) 273 (1,753 )
Reclassification adjustment for realized gain, net included in net income (1,151 ) (1,446 ) (4,021 ) (3,624 )
Income tax provision related to reclassification, net 248 311 865 779
Other comprehensive (loss) income, net of tax (2,747 ) (6,965 ) 5,023 (3,777 )
COMPREHENSIVE INCOME $ 7,539 $ 1,988 $ 32,665 $ 22,504

See accompanying notes to these consolidated financial statements.

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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share amounts) (Unaudited)

Three Months Ended September 30, 2024 and 2023

Accumulated
Other
Additional Comprehensive Total
Paid-in Retained Loss, Stockholders'
Amount Capital Earnings Net of Tax Equity
BALANCE, July 1, 2023 7,753,607 $ 77 $ 56,781 $ 215,519 $ (22,444 ) $ 249,933
Net income — $ — — 8,953 — $ 8,953
Dividends paid (0.25 per share) — $ — — (1,940 ) — $ (1,940 )
Share-based compensation — $ — 590 — — $ 590
Issuance of common stock - employee stock purchase plan 7,710 $ 1 241 — — $ 242
Restricted stock awards 37,600 $ — — — — $ —
Restricted stock awards forfeited (4,712 ) $ — — — — $ —
Common stock repurchased for employee/director taxes paid on restricted stock awards (11,006 ) $ — (339 ) — — $ (339 )
Stock options exercised, net 12,896 $ — 191 — — $ 191
Other comprehensive loss, net of tax — $ — — — (6,965 ) $ (6,965 )
BALANCE, September 30, 2023 7,796,095 $ 78 $ 57,464 $ 222,532 $ (29,409 ) $ 250,665
BALANCE, July 1, 2024 7,742,607 $ 77 $ 55,834 $ 243,651 $ (15,536 ) $ 284,026
Net income — $ — — 10,286 — $ 10,286
Dividends paid (0.27 per share) — $ — — (2,094 ) — $ (2,094 )
Share-based compensation — $ — 464 — — $ 464
Issuance of common stock - employee stock purchase plan 6,173 $ 1 251 — — $ 252
Restricted stock awards 42,250 $ — — — — $ —
Common stock repurchased for employee/director taxes paid on restricted stock awards (9,193 ) $ — (386 ) — — $ (386 )
Common stock repurchased - repurchase plan (87,931 ) $ — (147 ) — — $ (147 )
Stock options exercised, net 123,266 $ — (752 ) — — $ (752 )
Other comprehensive loss, net of tax — $ — — — (2,747 ) $ (2,747 )
BALANCE, September 30, 2024 7,817,172 $ 78 $ 55,264 $ 251,843 $ (18,283 ) $ 288,902

All values are in US Dollars.

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Nine Months Ended September 30, 2024 and 2023

Accumulated
Other
Additional Comprehensive Total
Paid-in Retained Income (Loss), Stockholders'
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 — $ — — 26,281 — $ 26,281
Dividends paid (0.75 per share) — $ — — (5,814 ) — $ (5,814 )
Share-based compensation — $ — 1,608 — — $ 1,608
Issuance of common stock - employee stock purchase plan 24,159 $ 1 780 — $ 781
Restricted stock awards 37,600 $ — — — — $ —
Restricted stock awards forfeited (9,524 ) $ — — — — $ —
Common stock repurchased for employee/director taxes paid on restricted stock awards (11,446 ) $ — (355 ) — — $ (355 )
Stock options exercised, net 19,121 $ — 244 — — $ 244
Other comprehensive loss, net of tax — $ — — — (3,777 ) $ (3,777 )
BALANCE, September 30, 2023 7,796,095 $ 78 $ 57,464 $ 222,532 $ (29,409 ) $ 250,665
BALANCE, January 1, 2024 7,800,545 $ 78 $ 57,362 $ 230,354 $ (23,306 ) $ 264,488
Net income — $ — — 27,642 — $ 27,642
Dividends paid (0.79 per share) — $ — — (6,153 ) — $ (6,153 )
Share-based compensation — $ — 1,248 — — $ 1,248
Issuance of common stock - employee stock purchase plan 24,113 $ 1 831 — — $ 832
Restricted stock awards 42,250 $ — — — — —
Restricted stock awards forfeited (4,000 ) $ — — — — $ —
Common stock repurchased for employee/director taxes paid on restricted stock awards (9,193 ) $ — (386 ) — — $ (386 )
Common stock repurchased - repurchase plan (178,421 ) $ (1 ) (2,507 ) — — $ (2,508 )
Stock options exercised, net 141,878 $ — (1,284 ) — — $ (1,284 )
Other comprehensive income, net of tax — $ — — — 5,023 $ 5,023
BALANCE, September 30, 2024 7,817,172 $ 78 $ 55,264 $ 251,843 $ (18,283 ) $ 288,902

All values are in US Dollars.

See accompanying notes to these consolidated financial statements.

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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

Nine Months Ended September 30,
CASH FLOWS FROM OPERATING ACTIVITIES 2024 2023
Net income $ 27,642 $ 26,281
Adjustments to reconcile net income to net cash from operating activities
Provision for credit losses 3,989 3,372
Depreciation, amortization and accretion 7,948 9,505
Compensation expense related to stock options and restricted stock awards 1,248 1,608
Change in cash surrender value of BOLI (734 ) (681 )
Gain on sale of loans held for sale (6,824 ) (5,298 )
Gain on sale of MSRs (8,356 ) —
Loss on sale of investment securities, net 7,836 —
Origination of loans held for sale (426,672 ) (292,309 )
Proceeds from sale of loans held for sale 430,421 324,083
Gain on purchase of tax credits (2,262 ) —
Purchase of tax credits (26,007 ) —
Impairment of MSRs 545 —
Changes in operating assets and liabilities
Accrued interest receivable (9 ) (2,251 )
Other assets 3,758 (4,074 )
Other liabilities (2,781 ) 4,798
Net cash from operating activities 9,742 65,034
CASH FLOWS (USED BY) FROM INVESTING ACTIVITIES **** ****
Activity in securities available-for-sale:
Proceeds from sale of investment securities 101,907 —
Maturities, prepayments, and calls 13,403 13,492
Purchases (47,729 ) (46,906 )
Maturities of certificates of deposit at other financial institutions 14,874 —
Purchase of certificates of deposit at other financial institutions (2,708 ) (12,924 )
Portfolio loan originations and principal collections, net (37,873 ) (150,385 )
Net cash from acquisitions — 336,157
Proceeds from sale of MSRs 16,311 —
Purchase of portfolio loans (50,099 ) (2,475 )
Purchase of premises and equipment (1,253 ) (1,395 )
Change in FHLB stock, net (7,390 ) 6,915
Net cash (used by) from investing activities (557 ) 142,479
CASH FLOWS USED BY FINANCING ACTIVITIES **** ****
Net decrease in deposits (95,097 ) (98,500 )
Proceeds from borrowings 707,768 1,725,337
Repayments of borrowings (637,708 ) (1,789,970 )
Dividends paid on common stock (6,153 ) (5,814 )
(Disbursements) proceeds from stock options exercised, net (1,284 ) 244
Common stock repurchased for employee/director taxes paid on restricted stock awards (386 ) (355 )
Issuance of common stock - employee stock purchase plan 832 781
Common stock repurchased (2,508 ) —
Net cash used by financing activities (34,536 ) (168,277 )
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (25,351 ) 39,236
CASH AND CASH EQUIVALENTS, beginning of period 65,691 41,437
CASH AND CASH EQUIVALENTS, end of period $ 40,340 $ 80,673

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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands) (Unaudited)

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION **** ****
Cash paid during the period for:
Interest on deposits and borrowings $ 47,071 $ 26,280
Income taxes 2,435 8,355
SUPPLEMENTARY DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES **** ****
Change in fair value on available-for-sale investment securities $ 11,689 $ (9,341 )
Change in fair value on fair value and cash flow hedges (5,288 ) 4,523
Change in fair value on portfolio loans measured under the fair value option 448 (285 )
Retention in gross MSRs from loan sales 1,891 2,279
ROU assets in exchange for lease liabilities — 2,034
Acquisitions:
Assets acquired — 87,512
Liabilities assumed — 424,949

See accompanying notes to these consolidated financial statements.

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FS BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Amounts)

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 holding company for 1st Security Bank of Washington (the “Bank” or “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 27 full-service bank branches, a headquarters that also originates loans and accepts deposits, and loan production offices in suburban communities in the greater Puget Sound area, the Kennewick-Pasco-Richland metropolitan area of Washington, also known as the Tri-Cities, Goldendale, Vancouver, and White Salmon, Washington and Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon. The Bank’s branches located in the communities of 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 Company and its subsidiary are subject to regulation by certain federal and state agencies and undergo periodic examination by these regulatory agencies.

Financial Statement Presentation – The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10‑Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10‑K which includes all the audited financial statements and footnotes required by U.S. GAAP for complete financial statements for the year ended December 31, 2023, as filed with the SEC on March 15, 2024. In the opinion of management, all normal adjustments and recurring accruals considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.

The results for the three and nine months ended September 30, 2024, are not necessarily indicative of the results that may be expected for the year ending December 31, 2024, or any other future period. The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses (“ACL”).

Amounts presented in the consolidated financial statements and footnote tables are rounded and presented to the nearest thousands of dollars except per share amounts. If the amounts are above $1.0 million, they are rounded one decimal point, and 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 and its wholly owned subsidiary, 1st Security 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 way 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 14 – Business Segments.”

Subsequent Events – The Company has evaluated events and transactions after  September 30, 2024, for potential recognition or disclosure.

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RECENT ACCOUNTING PRONOUNCEMENTS

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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., loans, debt securities, derivatives, borrowings) that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous 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 interest rate; 2) Modifications of contracts within the scope of Topics 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 to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging – Embedded Derivatives. In January 2021, ASU 2021-01 updated amendments in the new ASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this ASU and the expedients and exceptions in Topic 848 capture the incremental 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 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 does not expect the adoption of ASU 2020-04 to have a material impact 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.
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● 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.
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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 financial 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 ASU 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 income taxes paid information. The ASU requires disclosure in the rate reconciliation of specific categories as well as provide additional information for reconciling items that meet a quantitative threshold.

Those amendments require disclosure of the following information about income taxes paid on an annual basis:

● Income taxes paid (net of refunds received), disaggregated by federal and state taxes and by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than five percent of total income taxes paid (net refunds received).
● Income tax expense (or benefit) from continuing operations disaggregated by federal and state jurisdictions.
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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 that ASU 2023-09 will have on its consolidated financial statements and related disclosures.

Application of New Accounting Guidance Adopted in 2024

On January 1, 2024, the Company adopted ASU No.2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity 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 measured separately.  Further, this ASU requires disclosure of the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet, the nature and remaining duration of the restrictions(s), and the circumstances that could cause a lapse in the restriction(s).  ASU 2022-03 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The adoption of ASU 2022-03 did not have a material impact on the Company’s consolidated financial statements and related disclosures.

On January 1, 2024, the Company adopted ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments 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 position and results of operations.  ASU 2023-02 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.  The adoption of ASU 2023-02 did not have a material impact on the Company's consolidated financial statements and related disclosures.

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NOTE 2 – INVESTMENTS

The following tables present the amortized costs, unrealized gains, unrealized losses, estimated fair values of securities available-for-sale and held-to-maturity, and the ACL on securities available-for-sale and held-to-maturity at  September 30, 2024 and December 31, 2023:

September 30, 2024
Estimated
Amortized Unrealized Unrealized Fair
SECURITIES AVAILABLE-FOR-SALE Cost Gains Losses Values ACL
U.S. agency securities $ 20,242 $ 30 $ (2,590 ) $ 17,682 $ —
Corporate securities 16,000 140 (736 ) 15,404 —
Municipal bonds 83,060 4 (10,738 ) 72,326 —
Mortgage-backed securities 120,136 261 (9,478 ) 110,919 —
U.S. Small Business Administration securities 12,834 4 (970 ) 11,868 —
Total securities available-for-sale 252,272 439 (24,512 ) 228,199 —
SECURITIES HELD-TO-MATURITY ****
Corporate securities 8,500 — (517 ) 7,983 45
Total securities held-to-maturity 8,500 — (517 ) 7,983 45
Total securities $ 260,772 $ 439 $ (25,029 ) $ 236,182 $ 45
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

The following tables present the activity in the ACL on securities held-to-maturity by major security type for the three and nine months ended September 30, 2024 and 2023:

SECURITIES HELD-TO-MATURITY For the Three Months Ended September 30,
Corporate Securities 2024 2023
Beginning ACL balance $ 45 $ 31
Provision for credit losses — 14
Total ending ACL balance $ 45 $ 45

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SECURITIES HELD-TO-MATURITY For the Nine Months Ended September 30,
Corporate Securities 2024 2023
Beginning ACL balance $ 45 $ 31
Provision for credit losses — 14
Total ending ACL balance $ 45 $ 45

Management 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 $117,000 and $116,000 at  September 30, 2024 and December 31, 2023, and was $1.4 million and $1.5 million on available-for-sale debt securities as of September 30, 2024 and December 31, 2023, 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 Company monitors the credit quality of debt securities held-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 dates indicated, aggregated by credit quality indicator:

September 30, December 31,
Corporate securities 2024 2023
BBB/BBB- $ 8,500 $ 7,000
BB+ — 1,500
Total $ 8,500 $ 8,500

At September 30, 2024 and  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 September 30, 2024, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law:

September 30, 2024
Purpose or beneficiary Carrying Value Amortized Cost Fair Value
State and local government public deposits $ 35,505 $ 40,492 $ 35,505

Investment securities that were in an unrealized loss position at the dates indicated are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position.

September 30, 2024
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 $ — $ — $ 15,653 $ (2,590 ) $ 15,653 $ (2,590 )
Corporate securities 3,864 (136 ) 5,400 (600 ) 9,264 (736 )
Municipal bonds 44 — 70,584 (10,738 ) 70,628 (10,738 )
Mortgage-backed securities 9,492 (37 ) 67,032 (9,441 ) 76,524 (9,478 )
U.S. Small Business Administration securities 3,806 (45 ) 7,451 (925 ) 11,257 (970 )
Total securities available-for-sale 17,206 (218 ) 166,120 (24,294 ) 183,326 (24,512 )
SECURITIES HELD-TO-MATURITY **** **** ****
Corporate securities — — 7,983 (517 ) 7,983 (517 )
Total securities held-to-maturity — — 7,983 (517 ) 7,983 (517 )
Total securities $ 17,206 $ (218 ) $ 174,103 $ (24,811 ) $ 191,309 $ (25,029 )

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December 31, 2023
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 $ — $ — $ 15,972 $ (3,179 ) $ 15,972 $ (3,179 )
Corporate securities 959 (41 ) 4,300 (700 ) 5,259 (741 )
Municipal bonds 3,922 (23 ) 113,577 (19,375 ) 117,499 (19,398 )
Mortgage-backed securities 20,662 (113 ) 67,376 (11,732 ) 88,038 (11,845 )
U.S. Small Business Administration securities 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 securities $ 58,754 $ (637 ) $ 217,028 $ (36,898 ) $ 275,782 $ (37,535 )

There were no held-to-maturity debt securities in an unrealized loss position of less than one year and seven held-to-maturity debt securities in an unrealized loss position of more than one year at  September 30, 2024.

There were seven available-for-sale securities in an unrealized loss position of less than one year, and 124 available-for-sale securities in an unrealized loss position of more than one year at September 30, 2024. The unrealized losses associated with these securities are believed to be caused by changing market conditions and considered to be temporary, and the Company does not intend and is not likely to be required to sell these securities prior to maturity. Management monitors the published credit ratings of the issuers of the debt securities for material ratings or outlook changes. Substantially all 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 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 nine months ended September 30, 2024, or for the year ended December 31, 2023.

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The contractual maturities of securities available-for-sale and held-to-maturity at the 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.

September 30, 2024 December 31, 2023
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 4,958 4,663 3,947 3,544
Due after five years through ten years 10,974 9,470 11,972 10,139
Due after ten years 4,310 3,549 4,310 3,421
Subtotal 20,242 17,682 21,151 18,018
Corporate securities
Due within one year — — 1,000 1,004
Due after one year through five years 10,000 10,004 6,000 6,609
Due after five years through ten years 4,000 3,944 4,000 3,839
Due after ten years 2,000 1,456 2,000 1,420
Subtotal 16,000 15,404 13,000 12,872
Municipal bonds
Due within one year — — 1,013 1,003
Due after one year through five years 74 74 757 751
Due after five years through ten years 6,295 5,991 7,603 7,101
Due after ten years 76,691 66,261 129,430 110,592
Subtotal 83,060 72,326 138,803 119,447
Mortgage-backed securities
Federal National Mortgage Association (“FNMA”) 82,062 73,923 76,369 66,275
Federal Home Loan Mortgage Corporation (“FHLMC”) 27,525 26,911 32,311 31,376
Government National Mortgage Association (“GNMA”) 10,549 10,085 4,175 3,597
Subtotal 120,136 110,919 112,855 101,248
U.S. Small Business Administration securities
Due within one year 203 200 198 196
Due after one year through five years 1,073 1,046 1,860 1,824
Due after five years through ten years 2,868 2,679 21,420 20,929
Due after ten years 8,690 7,943 19,408 18,399
Subtotal 12,834 11,868 42,886 41,348
Total securities available-for-sale 252,272 228,199 328,695 292,933
SECURITIES HELD-TO-MATURITY
Corporate securities
Due after five years through ten years 8,500 7,983 8,500 7,666
Total securities held-to-maturity 8,500 7,983 8,500 7,666
Total securities $ 260,772 $ 236,182 $ 337,195 $ 300,599

The proceeds and resulting gains and losses from sales of securities available-for-sale for the three and nine months ended September 30, 2024:

For the Three Months Ended
September 30, 2024
Gross Gross
Proceeds Gains (Losses)
Securities available-for-sale $ 3,448 $ 11 $ —

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For the Nine Months Ended
September 30, 2024
Gross Gross
Proceeds Gains (Losses)
Securities available-for-sale $ 101,907 $ 215 $ (8,051 )

There were no sales proceeds, or gains or losses for the sale of securities available-for-sale for the three and nine months ended September 30, 2023.

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES – LOANS

The composition of the loan portfolio was as follows at the dates indicated:

September 30, December 31,
REAL ESTATE LOANS 2024 2023
Commercial ("CRE") $ 352,933 $ 366,328
Construction and development 292,366 303,054
Home equity 75,063 69,488
One-to-four-family (excludes loans held for sale) 591,666 567,742
Multi-family 238,462 223,769
Total real estate loans 1,550,490 1,530,381
CONSUMER LOANS **** ****
Indirect home improvement 552,226 569,903
Marine 76,845 73,310
Other consumer 3,346 3,540
Total consumer loans 632,417 646,753
COMMERCIAL BUSINESS LOANS **** ****
Commercial and industrial ("C&I") 296,773 238,301
Warehouse lending 15,249 17,580
Total commercial business loans 312,022 255,881
Total loans receivable, gross 2,494,929 2,433,015
ACL on loans (31,232 ) (31,534 )
Total loans receivable, net $ 2,463,697 $ 2,401,481

Loan amounts are net of unearned loan fees in excess of unamortized costs and premiums of $5.9 million as of September 30, 2024 and $8.4 million as of December 31, 2023. Net loans include unamortized net discounts on acquired loans of $2.1 million and $2.6 million as of  September 30, 2024 and December 31, 2023, respectively. Net loans do not include accrued interest receivable. Accrued interest receivable on loans was $11.8 million and $11.5 million as of September 30, 2024 and December 31, 2023, respectively, and was reported in “Accrued interest receivable” on the Consolidated Balance Sheets.

Most of the Company’s CRE and multi-family real estate, construction, residential, and/or commercial business lending activities are with customers located in Western Washington, the Oregon Coast, or near our loan production offices in Vancouver 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 New Hampshire.  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 September 30, 2024, the Bank held approximately $1.11 billion in loans that are pledged as collateral for FHLB borrowings, compared to approximately $1.07 billion at December 31, 2023. The Bank held approximately $617.9 million in loans that are pledged as collateral for the Federal Reserve Bank of San Francisco (the “FRB”) line of credit at September 30, 2024, compared to approximately $631.1 million at December 31, 2023.

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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 way management monitors performance and credit quality. The three loan portfolio segments are: (a) real estate, (b) consumer, and (c) commercial business. 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

One-to-Four-Family Real Estate Lending. One-to-four-family residential loans include owner occupied properties (including second homes), and 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-family residences in our market areas that the Company intends to hold (excludes loans held for sale).

Multi-Family Lending. Apartment term lending (five or more units) to current banking customers and community reinvestment loans for low to moderate income individuals in the Company’s footprint.

CRE 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, and multi-family residences and tracts of land for development that are not pre-sold. A portion of the one-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-family residences, including home equity lines of credit in our market areas.

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, including solar related home improvement projects.

Marine. Loans originated by the Company, secured by boats, to borrowers primarily located in 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 and credit cards.

Commercial Business Loans

C&I Lending. C&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. Some C&I loans purchased by the Company are outside of the greater Puget Sound market area. C&I loans are made based on the borrower’s ability to make repayment from the cash flow of the borrower’s business. At September 30, 2024 and  December 31, 2023, C&I loans included Small Business Administration and United States Department of Agriculture guaranteed certificates of $54.8 million and $10.6 million, respectively.

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 commercial construction warehouse lines are secured by notes on construction loans and typically guaranteed by principals with experience in construction lending.  Mortgage warehouse lending loans are funded through third-party residential mortgage bankers. Under this program the Company provides short-term funding to the mortgage banking companies for the purpose of originating residential mortgage loans for sale into the secondary market.

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Allowance for Credit Losses

The main reason for the provision for credit losses on loans recorded in the first nine months of 2024 was elevated net charge-offs.

The following tables detail activity in the ACL on loans by loan categories at or for the three and nine months ended September 30, 2024 and 2023:

At or For the Three Months Ended September 30, 2024
Real Commercial
ACL ON LOANS Estate Consumer Business Unallocated Total
Beginning balance $ 14,088 $ 13,253 $ 3,897 $ — $ 31,238
Provision for (reversal of) credit losses on loans 46 2,102 (557 ) — 1,591
Charge-offs — (1,964 ) — — (1,964 )
Recoveries — 361 6 — 367
Net (charge-offs) recoveries — (1,603 ) 6 — (1,597 )
Total ending ACL balance $ 14,134 $ 13,752 $ 3,346 $ — $ 31,232
At or For the Three Months Ended September 30, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- ---
Real Commercial
ACL ON LOANS Estate Consumer Business Unallocated Total
Beginning balance $ 12,307 $ 14,017 $ 4,026 $ — $ 30,350
Provision for (reversal of) credit losses on loans 496 426 (238 ) — 684
Charge-offs — (830 ) — — (830 )
Recoveries — 297 — — 297
Net charge-offs — (533 ) — — (533 )
Total ending ACL balance $ 12,803 $ 13,910 $ 3,788 $ — $ 30,501
At or For the Nine Months Ended September 30, 2024
--- --- --- --- --- --- --- --- --- --- --- --- --- ---
Real Commercial
ACL ON LOANS Estate Consumer Business Unallocated Total
Beginning balance $ 14,107 $ 13,357 $ 4,070 $ — $ 31,534
Provision for credit losses on loans 27 3,660 326 — 4,013
Charge-offs — (4,465 ) (1,141 ) — (5,606 )
Recoveries — 1,200 91 — 1,291
Net Charge-offs — (3,265 ) (1,050 ) — (4,315 )
Total ending ACL balance $ 14,134 $ 13,752 $ 3,346 $ — $ 31,232
At or For the Nine Months Ended September 30, 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 690 3,383 29 — 4,102
Charge-offs (10 ) (2,415 ) (1 ) — (2,426 )
Recoveries — 833 — — 833
Net charge-offs (10 ) (1,582 ) (1 ) — (1,593 )
Total ending ACL balance $ 12,803 $ 13,910 $ 3,788 $ — $ 30,501

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 nonaccrual 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.

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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, an other-than-insignificant payment delay, or a combination thereof. The Company typically does not offer principal forgiveness. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the ACL on loans because of the measurement methodologies used to estimate the allowance.

The following tables present the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty at the end of the reporting periods by loan class and modification type.

Payment Deferral
Amortized Cost % of Total Loan
September 30, 2024 Basis Type Financial Effect
CRE $ 1,130 0.3 % Deferred payments and capitalized interest for a weighted-average period of 2.3 years.
December 31, 2023
CRE $ 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.

At  September 30, 2024 and  December 31, 2023, the modified loans were in compliance with their modified terms and were classified as current. For the three and nine months ended September 30, 2024 and 2023, no loans experienced a default subsequent to being granted a modification in the last twelve months. There were no unfunded commitments associated with loans modified for borrowers experiencing financial distress as of  September 30, 2024.

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Nonaccrual and Past Due Loans

The following tables provide information pertaining to the aging analysis of contractually past due loans and nonaccrual loans at September 30, 2024 and December 31, 2023:

September 30, 2024
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)^
CRE $ — $ — $ — $ — $ 352,933 $ 352,933 $ 1,130
Construction and development — — 4,737 4,737 287,629 292,366 4,737
Home equity 173 — 156 329 74,734 75,063 156
One-to-four-family — 794 1 795 590,871 591,666 166
Multi-family — — — — 238,462 238,462 —
Total real estate loans 173 794 4,894 5,861 1,544,629 1,550,490 6,189
CONSUMER LOANS
Indirect home improvement 2,074 1,051 718 3,843 548,383 552,226 1,770
Marine 113 130 142 385 76,460 76,845 233
Other consumer 5 3 — 8 3,338 3,346 5
Total consumer loans 2,192 1,184 860 4,236 628,181 632,417 2,008
COMMERCIAL BUSINESS LOANS
C&I — 200 1,701 1,901 294,872 296,773 2,575
Warehouse lending — — — — 15,249 15,249 —
Total commercial business loans — 200 1,701 1,901 310,121 312,022 2,575
Total loans $ 2,365 $ 2,178 $ 7,455 $ 11,998 $ 2,482,931 $ 2,494,929 $ 10,772
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)^
CRE $ — $ — $ — $ — $ 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
(1) Includes loans less than 90 days past due as applicable.
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There were no loans 90 days or more past due and still accruing interest at both September 30, 2024 and December 31, 2023.

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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-performing 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 reported as “Pass” and loans in risk grades 7 to 10 reported as classified loans in the Company’s ACL analysis.

A description of the 10 risk grades is as follows:

● Grades 1 and 2 - These grades include loans to very high-quality borrowers with excellent or desirable business credit.
● Grade 3 - This grade includes loans to borrowers of good business credit with moderate risk.
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● Grades 4 and 5 - These grades include “Pass” grade loans to borrowers of average credit quality and risk.
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● 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.
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● Grade 7 - This grade is for “Other Assets Especially Mentioned (“OAEM”)” or “Special Mention” in accordance with regulatory guidelines and includes borrowers where performance is poor or significantly less than expected.
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● 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.
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● Grade 9 - This grade includes “Doubtful” loans in accordance with regulatory guidelines where a loss is highly probable.
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● Grade 10 - This grade includes “Loss” loans in accordance with regulatory guidelines for which total loss is expected and when identified are charged off.
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Homogeneous loans are risk rated based upon the Federal 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 first and second liens. Under the Uniform Retail Credit Classification and Account Management Policy, loans that are current or less than 90 days past due are graded “Pass” and risk rated “4” or “5” internally. Loans that are past due more than 90 days are classified “Substandard” and risk graded “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.

CRE, 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 CRE 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.

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The following tables summarize risk rated loan balances and total current period gross charge-offs by category, as of the dates indicated. Term loans that were renewed or extended for periods longer than 90 days are presented as new originations in the year of the most recent renewal or extension.

September 30, 2024
Revolving
Loans
REAL ESTATE LOANS Term Loans by Year of Origination Revolving Converted Total
CRE 2024 2023 2022 2021 2020 Prior Loans to Term Loans
Pass $ 13,453 $ 47,964 $ 84,510 $ 57,376 $ 44,025 $ 67,735 $ — $ 691 $ 315,754
Watch — 3,152 10,742 12,716 — 6,568 — — 33,178
Special mention — — — — — 397 — — 397
Substandard — — — — 1,625 1,979 — — 3,604
Total CRE 13,453 51,116 95,252 70,092 45,650 76,679 — 691 352,933
Construction and development
Pass 116,349 91,803 38,290 30,046 — 394 10,324 — 287,206
Watch — — — 423 — — — — 423
Substandard — — 4,737 — — — — — 4,737
Total construction and development 116,349 91,803 43,027 30,469 — 394 10,324 — 292,366
Home equity
Pass 7,181 2,787 332 1,550 5,980 1,714 55,298 65 74,907
Substandard — — — — — 14 142 — 156
Total home equity 7,181 2,787 332 1,550 5,980 1,728 55,440 65 75,063
One-to-four-family
Pass 45,301 106,192 177,351 112,198 78,300 69,528 — — 588,870
Substandard — — 745 — — 2,051 — — 2,796
Total one-to-four-family 45,301 106,192 178,096 112,198 78,300 71,579 — — 591,666
Multi-family
Pass 209 7,050 20,177 90,403 60,088 60,535 — — 238,462
Total multi-family 209 7,050 20,177 90,403 60,088 60,535 — — 238,462
Total real estate loans $ 182,493 $ 258,948 $ 336,884 $ 304,712 $ 190,018 $ 210,915 $ 65,764 $ 756 $ 1,550,490
September 30, 2024
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Revolving
Loans
CONSUMER LOANS Term Loans by Year of Origination Revolving Converted Total
Indirect home improvement 2024 2023 2022 2021 2020 Prior Loans to Term Loans
Pass $ 80,016 $ 140,198 $ 177,755 $ 78,798 $ 29,826 $ 43,861 $ 2 $ — $ 550,456
Substandard 54 488 701 242 63 222 — — 1,770
Total indirect home improvement 80,070 140,686 178,456 79,040 29,889 44,083 2 — 552,226
Indirect home improvement gross charge-offs 235 1,021 1,137 494 500 448 — — 3,835
Marine
Pass 12,738 11,866 21,334 8,712 11,541 10,421 — — 76,612
Substandard — — — — 41 192 — — 233
Total marine 12,738 11,866 21,334 8,712 11,582 10,613 — — 76,845
Marine gross charge-offs — 21 128 51 128 151 — — 479
Other consumer
Pass 219 145 384 83 43 146 2,321 — 3,341
Substandard 1 — — — — — 4 — 5
Total other consumer 220 145 384 83 43 146 2,325 — 3,346
Other consumer gross charge-offs — 33 6 — — — 112 — 151
Total consumer loans $ 93,028 $ 152,697 $ 200,174 $ 87,835 $ 41,514 $ 54,842 $ 2,327 $ — $ 632,417

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September 30, 2024
COMMERCIAL Revolving
Loans
BUSINESS LOANS Term Loans by Year of Origination Revolving Converted Total
C&I 2024 2023 2022 2021 2020 Prior Loans to Term Loans
Pass $ 56,627 $ 20,708 $ 30,522 $ 17,288 $ 9,750 $ 11,787 $ 119,310 $ 846 $ 266,838
Watch — 4,982 — 773 1,941 — 9,792 — 17,488
Special mention — — — 555 — 605 1,408 — 2,568
Substandard — 2,546 — 2,260 1,256 1,552 2,265 — 9,879
Total C&I 56,627 28,236 30,522 20,876 12,947 13,944 132,775 846 296,773
C&I gross charge-offs — — — — — 380 761 — 1,141
Warehouse lending
Pass — — — — — — 13,254 — 13,254
Special mention — — — — — — 1,995 — 1,995
Total warehouse lending — — — — — — 15,249 — 15,249
Total commercial business loans $ 56,627 $ 28,236 $ 30,522 $ 20,876 $ 12,947 $ 13,944 $ 148,024 $ 846 $ 312,022
TOTAL LOANS RECEIVABLE, GROSS
Pass $ 332,093 $ 428,713 $ 550,655 $ 396,454 $ 239,553 $ 266,121 $ 200,509 $ 1,602 $ 2,415,700
Watch — 8,134 10,742 13,912 1,941 6,568 9,792 — 51,089
Special mention — — — 555 — 1,002 3,403 — 4,960
Substandard 55 3,034 6,183 2,502 2,985 6,010 2,411 — 23,180
Total loans receivable, gross $ 332,148 $ 439,881 $ 567,580 $ 413,423 $ 244,479 $ 279,701 $ 216,115 $ 1,602 $ 2,494,929
Total gross charge-offs $ 235 $ 1,075 $ 1,271 $ 545 $ 628 $ 979 $ 873 $ — $ 5,606
December 31, 2023
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Revolving
Loans
REAL ESTATE LOANS Term Loans by Year of Origination Revolving Converted Total
CRE 2023 2022 2021 2020 2019 Prior Loans to Term 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 CRE 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

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December 31, 2023
Revolving
Loans
CONSUMER LOANS Term Loans by Year of Origination Revolving Converted Total
Indirect home improvement 2023 2022 2021 2020 2019 Prior Loans to Term 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
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Revolving
COMMERCIAL Loans
BUSINESS LOANS Term Loans by Year of Origination Revolving Converted Total
C&I 2023 2022 2021 2020 2019 Prior Loans to Term 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

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The following table presents the amortized cost basis of loans on nonaccrual status as of the dates indicated:

September 30, 2024 December 31, 2023
Nonaccrual with Nonaccrual with Total Nonaccrual with Nonaccrual with Total
REAL ESTATE LOANS No ACL ACL Nonaccrual No ACL ACL Nonaccrual
CRE $ 1,130 $ — $ 1,130 $ 1,088 $ — $ 1,088
Construction and development — 4,737 4,737 — 4,699 4,699
Home equity 156 — 156 173 — 173
One-to-four-family 166 — 166 96 — 96
1,452 4,737 6,189 1,357 4,699 6,056
CONSUMER LOANS
Indirect home improvement — 1,770 1,770 — 1,863 1,863
Marine — 233 233 — 342 342
Other consumer — 5 5 — 8 8
— 2,008 2,008 — 2,213 2,213
COMMERCIAL BUSINESS LOANS
C&I 1,650 925 2,575 — 2,683 2,683
Total $ 3,102 $ 7,670 $ 10,772 $ 1,357 $ 9,595 $ 10,952

The Company recognized interest income on a cash basis for nonaccrual loans of $41,000 and $55,000 during the three months ended September 30, 2024 and 2023, and $244,000 and $164,000 during the nine months ended  September 30, 2024 and 2023, respectively.

The following table presents the amortized cost basis of collateral dependent loans by class of loans as of the dates indicated:

September 30, 2024 December 31, 2023
Commercial Residential Other Commercial Residential Other
REAL ESTATE LOANS Real Estate Real Estate Non-Real Estate Total Real Estate Real Estate Non-Real Estate Total
CRE $ 1,130 $ — $ — $ 1,130 $ 1,088 $ — $ — $ 1,088
Construction and development 4,737 — — 4,737 4,699 — 4,699
Home equity — 156 — 156 — 173 — 173
One-to-four-family — 166 — 166 — 96 — 96
5,867 322 — 6,189 5,787 269 — 6,056
CONSUMER LOANS
Indirect home improvement — — 1,770 1,770 — — 1,863 1,863
Marine — — 233 233 — — 342 342
— — 2,003 2,003 — — 2,205 2,205
COMMERCIAL BUSINESS LOANS
C&I — — 2,575 2,575 — — 2,683 2,683
Total $ 5,867 $ 322 $ 4,578 $ 10,767 $ 5,787 $ 269 $ 4,888 $ 10,944

NOTE 4 –MORTGAGE SERVICING RIGHTS

Loans serviced for others are not included on the Consolidated Balance Sheets. The unpaid principal balance of permanent loans serviced for others was $1.62 billion and $2.83 billion at September 30, 2024 and December 31, 2023, respectively.

The following table summarizes MSRs activity at or for the dates indicated:

At or For the Three Months Ended
September 30,
2024 2023
Beginning balance, at the lower of cost or fair value $ 9,352 $ 17,627
Additions 498 954
MSRs amortized (605 ) (924 )
Impairment of MSRs (506 ) —
Ending balance, at the lower of cost or fair value $ 8,739 $ 17,657

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At or For the Nine Months Ended
September 30,
2024 2023
Beginning balance, at the lower of cost or fair value $ 17,176 $ 18,017
Additions 1,891 2,279
Sales (7,953 ) —
MSRs amortized (1,830 ) (2,639 )
Impairment of MSRs (545 ) —
Ending balance, at the lower of cost or fair value $ 8,739 $ 17,657

The fair value of the MSRs’ assets was $19.9 million and $38.2 million at  September 30, 2024 and December 31, 2023, respectively.  Fair value adjustments to MSRs are mainly due to market-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 MSRs portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of MSRs.

The following provides valuation assumptions used in determining the fair value of MSRs at the dates indicated:

At September 30, At December 31,
Key assumptions: 2024 2023
Weighted average discount rate 9.3 % 9.4 %
Conditional prepayment rate (“CPR”) 11.8 % 7.2 %
Weighted average life in years 7.3 8.4

Key economic assumptions of the current fair value for single family MSRs are presented in the table below. Also presented is the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four-family FNMA, FHLMC, GNMA, or FHLB serviced home loan. The table below references a 50 basis point and 100 basis point adverse rate change and the impact on prepayment speeds and discount rates at the dates indicated:

September 30, 2024 December 31, 2023
Aggregate portfolio principal balance $ 1,622,390 $ 2,832,016
Weighted average rate of loans in MSRs portfolio 4.2 % 3.6 %
At September 30, 2024 Base 0.5% Adverse Rate Change 1.0% Adverse Rate Change
--- --- --- --- --- --- --- --- --- ---
Conditional prepayment rate 11.8 % 14.5 % 17.0 %
Fair value MSRs $ 19,901 $ 18,935 $ 18,097
Percentage of MSRs 1.2 % 1.2 % 1.1 %
Discount rate 9.3 % 9.8 % 10.3 %
Fair value MSRs $ 19,901 $ 19,475 $ 19,066
Percentage of MSRs 1.2 % 1.2 % 1.2 %
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 %

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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 MSRs which is extremely sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on the fair 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 MSRs 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 the fair value of MSRs is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different time.

The Company recorded $1.1 million and $1.8 million of gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of loans for the three months ended September 30, 2024 and 2023, respectively, and $3.6 million and $5.4 million for the nine months ended  September 30, 2024 and 2023. The income, net of amortization of MSRs, is reported in “Service charges and fee income” on the Consolidated Statements of Income.

NOTE 5 – 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.

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.

Mortgage Banking Derivatives Not Designated as Hedges

The Company regularly enters into commitments to originate and sell loans held for sale. The Company has exposure to movements 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 changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell one-to-four-family mortgage loans or into contracts to sell forward To-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 or noninterest expense. The Bank recognizes all derivative instruments as either “Other assets” or “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.

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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 Secured Overnight Financing Rate (“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 Company 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 Company has not recorded any hedge ineffectiveness since inception.

The Company expects that approximately $1.0 million will be reclassified from accumulated other comprehensive loss as a decrease to interest expense over the next 12 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 in the statement of financial Hedging Adjustment Included in
position in which the hedged Item is Carrying Amount of the the Carrying Amount of the
included Hedged Assets Hedged Assets
September 30, 2024
Investment securities ^(1)^ $ 57,829 $ 2,171
Total $ 57,829 $ 2,171
December 31, 2023
Investment securities ^(1)^ $ 56,785 $ 3,215
Total $ 56,785 $ 3,215
(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 September 30, 2024, the amortized cost basis of the closed portfolios used in these hedging relationships was $220.6 million; the cumulative basis adjustments associated with these hedging relationships was $2.2 million; and the amounts of the designated hedged items was $60.0 million.
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The following tables summarize the Company’s derivative instruments at the dates indicated. The Company recognizes derivative assets and liabilities in “Other assets” and “Other liabilities,” respectively, on the Consolidated Balance Sheets, as follows:

September 30, 2024
Fair Value
Cash flow and fair value hedges: Notional Asset Liability
Interest rate swaps $ 340,000 $ 1,943 $ 1,175
Non-hedging derivatives:
Fallout adjusted interest rate lock commitments with customers 36,838 292 —
Mandatory and best effort forward commitments with investors 25,199 — 77
Forward TBA mortgage-backed securities 54,000 — 61
Interest rate swaps - customer swap positions 801 — 46
Interest rate swaps - dealer offsets to customer swap positions 801 47 —
December 31, 2023
--- --- --- --- --- --- ---
Fair Value
Cash flow and fair value hedges: Notional Asset Liability
Interest rate swaps $ 310,000 $ 6,431 $ 375
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 —

The following table summarizes the effect of fair value and cash flow hedge accounting on the Consolidated Statements of Income for the three and nine months ended September 30, 2024 and 2023:

Three Months Ended September 30,
2024 2023
Interest Interest Interest Interest
Expense Income Expense Income
Deposits and Borrowings Securities Deposits and Borrowings Securities
Total amounts presented on the Consolidated Statements of Income $ 15,314 $ 3,243 $ 12,151 $ 3,396
Net gains (losses) on fair value hedging relationships:
Interest rate swaps - securities
Recognized on hedged items $ — $ 2,432 $ — $ (1,286 )
Recognized on derivatives designated as hedging instruments — (2,432 ) — 1,286
Net interest income recognized on cash flows of derivatives designated as hedging instruments — 433 — 556
Net income recognized on fair value hedges $ — $ 433 $ — $ 556
Net gain on cash flow hedging relationships:
Interest rate swaps - brokered deposits and borrowings
Realized gains (pre-tax) reclassified from AOCI into net income $ 1,151 $ — $ 1,446 $ —
Net income recognized on cash flow hedges $ 1,151 $ — $ 1,446 $ —

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Nine Months Ended September 30,
2024 2023
Interest Interest Interest Interest
Expense Income Expense Income
Deposits and Borrowings Securities Deposits and Borrowings Securities
Total amounts presented on the Consolidated Statements of Income $ 44,416 $ 10,660 $ 28,445 $ 8,667
Net gains (losses) on fair value hedging relationships:
Interest rate swaps - securities
Recognized on hedged items $ — $ 1,044 $ — $ (689 )
Recognized on derivatives designated as hedging instruments — (1,044 ) — 689
Net interest income recognized on cash flows of derivatives designated as hedging instruments — 1,272 — 1,212
Net income recognized on fair value hedges $ — $ 1,272 $ — $ 1,212
Net gain on cash flow hedging relationships:
Interest rate swaps - brokered deposits and borrowings
Realized gains (pre-tax) reclassified from AOCI into net income $ 4,021 $ — $ 3,624 $ —
Net income recognized on cash flow hedges $ 4,021 $ — $ 3,624 $ —

Changes in the fair value of the non-hedging derivatives recognized in “Noninterest income” on the Consolidated Statements of Income and included in gain on sale of loans resulted in net losses of $149,000 and $107,000 for the three months ended September 30, 2024 and 2023, and net gains of $201,000 and $266,000 for the nine months ended  September 30, 2024 and 2023, respectively.

The following tables present a summary of amounts outstanding in derivative financial instruments, including those entered into in connection with the same counterparty under master netting agreements at the dates 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 Assets Gross Amounts Not Offset
Gross Amounts Offset in the Presented in the in the Statement of Financial Position
of Recognized Statement of Statement of Financial Cash Collateral
Offsetting of derivative assets Assets Financial Position Financial Position Instruments Received Net Amount
At September 30, 2024
Interest rate swaps $ 3,350 $ 1,360 $ 1,990 $ — $ — $ 1,990
At December 31, 2023
Interest rate swaps $ 6,648 $ 153 $ 6,495 $ — $ — $ 6,495
Gross Amounts Net Amounts of Gross Amounts Not Offset
--- --- --- --- --- --- --- --- --- --- --- --- ---
Gross Amounts Offset in the Liabilities in the Statement of Financial Position
of Recognized Statement of Presented in the Statement Financial Cash Collateral
Offsetting of derivative liabilities Liabilities Financial Position of Financial Position Instruments Posted Net Amount
At September 30, 2024
Interest rate swaps $ (2,535) $ (1,360) $ (1,175) $ — $ 1,000 $ (175)
At December 31, 2023
Interest rate swaps $ (722) $ (347) $ (375) $ — $ 270 $ (105)

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Credit Risk–Related Contingent Features

The Company has derivative contracts with its derivative counterparties that contain a provision to post collateral to the counterparties when these contracts are in a net liability position.  At September 30, 2024, the Company had $1.0 million of collateral posted due to this provision.  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 6 – LEASES

The Company has operating leases for retail bank and home lending branches, loan production offices, and certain equipment. These leases have remaining terms ranging from two months to five years and nine months, with some including options to extend for up to five years.

The components of lease cost (included in occupancy expense on the Consolidated Statements of Income) for the three and nine months ended September 30, 2024 and 2023 are as follows:

Three Months Ended September 30,
Lease cost: 2024 2023
Operating lease cost $ 464 $ 476
Short-term lease cost 2 5
Total lease cost $ 466 $ 481
Nine Months Ended September 30,
--- --- --- --- ---
Lease cost: 2024 2023
Operating lease cost $ 1,414 $ 1,357
Short-term lease cost 10 14
Total lease cost $ 1,424 $ 1,371

The following tables provide supplemental information related to operating leases at or for the three and nine months ended September 30, 2024 and 2023:

At or For the Three months Ended September 30,
Cash paid for amounts included in the measurement of lease liabilities: 2024 2023
Operating cash flows from operating leases $ 483 $ 486
Weighted average remaining lease term- operating leases (in years) 3.5 4.2
Weighted average discount rate- operating leases 3.01 % 2.93 %
At or For the Nine Months Ended September 30,
--- --- --- --- --- --- ---
Cash paid for amounts included in the measurement of lease liabilities: 2024 2023
Operating cash flows from operating leases $ 1,462 $ 1,392
Weighted average remaining lease term- operating leases (in years) 3.5 4.2
Weighted average discount rate- operating leases 3.01 % 2.93 %

The Company’s leases typically do not contain a discount rate implicit in 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.

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Maturities of operating lease liabilities at  September 30, 2024 for future periods are as follows:

Remainder of 2024 $ 479
2025 1,628
2026 1,475
2027 1,173
2028 428
Thereafter 954
Total lease payments 6,137
Less imputed interest (589 )
Total $ 5,548

NOTE 7 – OTHER REAL ESTATE OWNED (“OREO”)

The following table presents the activity related to OREO at or for the three and nine months ended September 30, 2024 and 2023:

At or For the Three Months Ended At or For the Nine Months Ended
September 30, September 30,
2024 2023 2024 2023
Beginning balance $ — $ 570 $ — $ 570
Additions — — — —
Loans transferred to OREO — — — —
Ending balance $ — $ 570 $ — $ 570

There were no OREO properties at September 30, 2024 and December 31, 2023. There were no OREO holding costs for the three and nine months ended September 30, 2024 and 2023.

There were $21,000 and $96,000 in portfolio mortgage loans collateralized by residential real estate in the process of foreclosure **** at September 30, 2024 and at December 31, 2023, respectively.

NOTE 8 – DEPOSITS

Deposits are summarized as follows at the dates indicated:

December 31,
2023
Noninterest-bearing checking 641,270 $ 654,048
Interest-bearing checking (1) 165,944 244,028
Savings 151,364 151,630
Money market (2) 340,049 359,063
Certificates of deposit less than 100,000 (3) 533,441 587,858
Certificates of deposit of 100,000 through 250,000 452,705 429,373
Certificates of deposit greater than 250,000 126,075 79,540
Escrow accounts related to mortgages serviced (4) 16,483 16,783
Total 2,427,331 $ 2,522,323

All values are in US Dollars.

(1) Includes $70.2 million of brokered deposits at  December 31, 2023.
(2) Includes $1.0 million and $1,000 of brokered deposits at September 30, 2024 and December 31, 2023, respectively.
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(3) Includes $250.2 million and $361.3 million of brokered deposits at September 30, 2024 and December 31, 2023, respectively.
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(4) Noninterest-bearing accounts.
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Scheduled maturities of certificates of deposits at September 30, 2024 for future periods ending are as follows:

Remainder of 2024 $ 415,152
Maturing in 2025 566,388
Maturing in 2026 102,663
Maturing in 2027 20,688
Maturing in 2028 6,919
Thereafter 411
Total $ 1,112,221

Interest expense by deposit category for the periods indicated is as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
2024 2023 2024 2023
Interest-bearing checking $ 580 $ 643 $ 1,919 $ 1,111
Savings and money market 1,981 1,529 5,593 4,071
Certificates of deposit 10,925 8,290 32,108 19,514
Total $ 13,486 $ 10,462 $ 39,620 $ 24,696

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Commitments – The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. 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.

The following table provides a summary of the Company’s commitments at the dates indicated:

COMMITMENTS TO EXTEND CREDIT September 30, December 31,
REAL ESTATE LOANS 2024 2023
CRE $ 1,240 $ 3,472
Construction and development 173,956 154,611
One-to-four-family (includes locks for saleable loans) 41,387 23,751
Home equity 96,527 94,026
Multi-family 6,289 2,945
Total real estate loans 319,399 278,805
CONSUMER LOANS 28,465 29,517
COMMERCIAL BUSINESS LOANS
C&I 164,181 164,873
Warehouse lending 51,703 61,837
Total commercial business loans 215,884 226,710
Total commitments to extend credit $ 563,748 $ 535,032

Commitments to extend credit are agreements to lend to a customer provided 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 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 an 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.

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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 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 both  September 30, 2024 and December 31, 2023 was $1.5 million. The Company recorded recoveries for credit losses – unfunded loan commitments of $78,000 and $24,000 for the three and nine months ended  September 30, 2024, as compared to a recovery from the ACL of $149,000 and $305,000 for the three and nine months ended September 30, 2023, respectively.

The Company also sells one-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 September 30, 2024, total loans serviced on behalf of the FHLB of Des Moines were $8.7 million with the FLA totaling $581,000 and the CE obligation at $389,000 or 4.5% of the loans outstanding. Management has established a holdback of 10% of the outstanding CE, or $39,000, which is a part of the off-balance sheet holdback for loans sold. At both September 30, 2024 and December 31, 2023, there were no loans sold and serviced on behalf of the FHLB of Des Moines that were greater than 90 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 a holdback reserve of $2.0 million and $2.1 million to cover loss exposure related to these guarantees for one-to-four-family loans sold into the secondary market at September 30, 2024 and December 31, 2023, respectively, which is included in “Other liabilities” on the Consolidated Balance Sheets.

The Company has entered into a severance agreement with its Chief Executive Officer (“CEO”). The severance agreement, subject to certain requirements, generally includes a lump sum payment to the CEO equal to 24 months of base compensation in the event his 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 executives and select key personnel. 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 months of their then current salary, subject to certain requirements in the change of control agreements.

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 September 30, 2024.

NOTE 10 – FAIR VALUE MEASUREMENTS

The Company determines fair value based on the requirements established in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements, which provides a framework for measuring fair value in accordance with U.S. GAAP 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 as the exit 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 under current market conditions.

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.

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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.

The following methods were used to estimate the fair value of certain assets and liabilities on a recurring and nonrecurring basis:

Securities – **** 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-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 (Level 2). Transfers between the fair value hierarchy are determined through the third-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 consider market 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 TBA mortgage-backed security (Level 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 September 30, 2024 and December 31, 2023, there were $13.9 million and $15.1 million, respectively, in residential mortgage loans recorded at fair value as they were previously transferred from held for sale, at fair value to loans held for investment. The aggregate unpaid principal balance of these loans was $14.6 million and $16.3 million as of September 30, 2024 and December 31, 2023, 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 three months ended September 30, 2024, the Company recorded a net increase in fair value of $262,000, as compared to a net decrease in fair value of $343,000 for the three months ended September 30, 2023. For the nine months ended  September 30, 2024, the Company recorded a net increase in fair value of $448,000, as compared to a net decrease in fair value of $285,000 for the nine months ended  September 30, 2023. 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 derivative instruments 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-though rate assumptions based on historical information, where appropriate. TBA mortgage-backed securities are fair valued on similar contracts in active markets (Level 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). 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 the market inputs we use 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.

Other Real Estate Owned – Fair value adjustments to OREO 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).

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Collateral Dependent Loans– **** Expected credit losses on collateral dependent loans are measured based on the fair value of collateral as of the reporting date, less estimated selling costs, as applicable.  If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable) at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off by the subsequent changes in the expected credit losses on collateral dependent loans.  Subsequent adjustments in the expected credit losses for collateral-dependent loans are included within the provision for credit losses in the same way the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported (Level 3).

Mortgage Servicing Rights – The fair value of MSRs is estimated using net present value of expected cash flows using a third-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).

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 September 30, 2024
Securities available-for-sale: Level 1 Level 2 Level 3 Total
U.S. agency securities $ — $ 17,682 $ — $ 17,682
Corporate securities — 15,404 — 15,404
Municipal bonds — 72,326 — 72,326
Mortgage-backed securities — 110,919 — 110,919
U.S. Small Business Administration securities — 11,868 — 11,868
Mortgage loans held for sale, at fair value — 49,373 — 49,373
Loans receivable, at fair value — 13,861 — 13,861
Derivatives:
Interest rate lock commitments with customers — — 292 292
Interest rate swaps - cash flow and fair value hedges — 1,943 — 1,943
Interest rate swaps - dealer offsets to customer swap positions — 47 — 47
Total assets measured at fair value $ — $ 293,376 $ 292 $ 293,668
Financial Liabilities **** **** ****
Derivatives:
Interest rate swaps - customer swap positions $ — $ (46 ) $ — $ (46 )
Interest rate swaps - cash flow and fair value hedges — (1,175 ) — (1,175 )
Mandatory and best effort forward commitments with investors — — (77 ) (77 )
Forward TBA mortgage-backed securities — (61 ) — (61 )
Total liabilities measured at fair value $ — $ (1,282 ) $ (77 ) $ (1,359 )

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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 )

The following table presents financial assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy at September 30, 2024 and  December 31, 2023. Level 3 assets recorded at fair value on a nonrecurring basis included loans for which a partial charge-off was recorded based on the fair value of collateral.

September 30, 2024
Level 1 Level 2 Level 3 Total
Collateral dependent loans $ — $ — $ 1,386 $ 1,386
MSRs — — 19,901 19,901
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 financial instruments measured under a Level 3 unobservable input on a recurring and nonrecurring basis at the dates indicated:

Level 3 Significant Weighted Average Rate
Fair Value Valuation Unobservable September 30, December 31,
Instruments Techniques Inputs Range 2024 2023
RECURRING **** ****
Interest rate lock commitments with customers Quoted market prices Pull-through expectations 80% - 99% 90.2 % 90.5 %
Individual forward sale commitments with investors Quoted market prices Pull-through expectations 80% - 99% 90.2 % 90.5 %
NONRECURRING **** ****
Collateral dependent loans Fair value of underlying collateral Discount applied to the obtained appraisal 0% - 25% — % — %
MSR Industry sources Pre-payment speeds 0% - 50% 11.8 % 7.2 %

The pull-through rate is based on 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.

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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 dates indicated:

Purchases Net change in Net change in
Three Months Ended Beginning and Sales and Ending fair value for fair value for
September 30, 2024 Balance Issuances Settlements Balance gains/(losses) ^(1)^ gains/(losses) ^(2)^
Interest rate lock commitments with customers $ 378 $ 1,587 $ (1,673 ) $ 292 $ (86 ) $ —
Individual forward sale commitments with investors (316 ) (1,138 ) 1,377 (77 ) 239 —
September 30, 2023 **** **** **** **** ****
Interest rate lock commitments with customers $ 273 $ 1,109 $ (1,207 ) $ 175 $ (98 ) $ —
Individual forward sale commitments with investors 123 — (102 ) 21 (102 ) —
Purchases Net change in Net change in
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Nine Months Ended Beginning and Sales and Ending fair value for fair value for
September 30, 2024 Balance Issuances Settlements Balance gains/(losses) ^(1)^ gains/(losses) ^(2)^
Interest rate lock commitments with customers $ 329 $ 3,245 $ (3,282 ) $ 292 $ (37 ) $ —
Individual forward sale commitments with investors (188 ) (1,117 ) 1,228 (77 ) (111 ) —
September 30, 2023 **** **** **** **** ****
Interest rate lock commitments with customers $ 107 $ 3,051 $ (2,983 ) $ 175 $ 68 $ —
Individual forward sale commitments with investors (38 ) 410 (351 ) 21 (59 ) —

(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.

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 held for sale” on the Consolidated Statements of Income.

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The following table provides estimated fair values of the Company’s financial instruments at the dates indicated, whether recognized at fair value or not on the Consolidated Balance Sheets:

September 30, December 31,
2024 2023
Financial Assets Carrying Fair Carrying Fair
Level 1 inputs: Amount Value Amount Value
Cash and cash equivalents $ 40,340 $ 40,340 $ 65,691 $ 65,691
Certificates of deposit at other financial institutions 12,001 12,001 24,167 24,167
Level 2 inputs:
Securities available-for-sale, at fair value 228,199 228,199 292,933 292,933
Securities held-to-maturity, gross 8,500 7,983 8,500 7,666
Loans held for sale, at fair value 49,373 49,373 25,668 25,668
FHLB stock, at cost 9,504 9,504 2,114 2,114
Loans receivable, at fair value 13,861 13,861 15,088 15,088
Interest rate swaps - cash flow and fair value hedges 1,943 1,943 6,431 6,431
Accrued interest receivable 14,014 14,014 14,005 14,005
Interest rate swaps - dealer offsets to customer swap positions 47 47 64 64
Level 3 inputs:
Loans receivable, gross 2,481,068 2,353,912 2,417,927 2,276,397
MSRs, held at lower of cost or fair value 8,739 19,901 9,090 20,552
MSRs held for sale, held at lower of cost or fair value — — 8,086 17,611
Fair value interest rate locks with customers 292 292 — —
Financial Liabilities
Level 2 inputs:
Deposits 2,427,331 2,429,371 2,522,323 2,515,026
Borrowings 163,806 163,723 93,746 93,416
Subordinated notes, excluding unamortized debt issuance costs 50,000 45,514 50,000 43,480
Accrued interest payable 2,349 2,349 5,473 5,473
Interest rate swaps - cash flow and fair value hedges 1,175 1,175 375 375
Forward TBA mortgage-backed securities 61 61 284 284
Interest rate swaps - customer swap positions 46 46 63 63
Level 3 inputs:
Mandatory and best effort forward commitments with investors 77 77 188 188

NOTE 11 – 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 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 Company.

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The following table presents a reconciliation of the components used to compute basic and diluted earnings per share at or for the dates indicated:

At or For the Three Months Ended September 30, At or For the Nine Months Ended September 30,
Numerator 2024 2023 2024 2023
Net income $ 10,286 $ 8,953 $ 27,642 $ 26,281
Dividends and undistributed earnings allocated to participating securities (165 ) (143 ) (450 ) (423 )
Net income available to common shareholders $ 10,121 $ 8,810 $ 27,192 $ 25,858
Denominator (shown as actual):
Basic weighted average common shares outstanding 7,676,102 7,667,981 7,689,277 7,643,086
Dilutive shares 178,287 112,449 188,569 125,662
Diluted weighted average common shares outstanding 7,854,389 7,780,430 7,877,846 7,768,748
Basic earnings per share $ 1.32 $ 1.15 $ 3.54 $ 3.38
Diluted earnings per share $ 1.29 $ 1.13 $ 3.45 $ 3.33
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. — 64,256 14,151 55,174

NOTE 12 – STOCK-BASED COMPENSATION

Stock Options and Restricted Stock

On May 17, 2018, the shareholders of FS Bancorp approved the 2018 Equity Incentive Plan (the “2018 Plan”) that authorized 1.3 million shares of the Company’s common stock to be awarded. The 2018 Plan provides for the grant of incentive stock options, nonqualified stock options, and up to 326,000 shares as restricted stock awards (“RSAs”) to directors, emeritus directors, officers, employees or advisory directors of the Company. At September 30, 2024, there were 190,432 stock option awards and 38,372 RSAs available for future grants under the 2018 Plan.

Total share-based compensation expense was $464,000 and $1.2 million for the three and nine months ended  September 30, 2024, respectively, and $590,000 and $1.6 million for the three and nine months ended  September 30, 2023, respectively.

Stock Options

The 2018 Plan consists of stock option awards that may be granted as incentive stock options or nonqualified stock options. Stock option awards generally vest over a one-year and two-year period for independent directors or over a five-year period for employees and officers with 20% vesting on the anniversary date of each grant date as 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 of the award recipient’s termination of service with the Company or the Bank. 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 fair value of options granted was determined using the following weighted-average assumptions as of the grant date for the periods indicated:

September 30, December 31,
2024 2023
Dividend yield 2.57% 3.25%
Expected volatility 29.55% 28.24%
Risk-free interest rate 3.82% 4.35%
Expected term in years 6.3 6.5
Weighted-average grant date fair value per option granted $ 11.36 $ 7.61

The dividend yield is based on the current quarterly dividend in effect at the time of the grant. The historical volatility of the Company's stock price over a specified period of time is used for the expected volatility.  The Company bases the risk-free interest rate on the comparable U.S. Treasury rate for the discount rate associated with the stock 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, 5.75 years for two-year vesting, and 6.5 years for five-year vesting.

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The following table presents a summary of the Company’s stock option awards during the dates indicated (shown as actual):

Weighted-Average
Weighted- Remaining
Average Contractual Term In Aggregate
Shares Exercise Price Years Intrinsic Value
Outstanding at January 1, 2024 662,279 $ 28.12 6.69 $ 5,852,975
Granted 75,100 $ 41.98 9.87 —
Less exercised 141,878 $ 21.88 — $ 3,042,273
Less forfeited 12,000 30.73 — —
Outstanding at September 30, 2024 583,501 $ 31.37 6.75 $ 7,655,780
Expected to vest, assuming a 0.31% annual forfeiture rate at September 30, 2024 (1) 568,654 $ 31.28 6.70 $ 7,513,895
Exercisable at September 30, 2024 340,743 $ 29.47 5.55 $ 5,119,461
(1) Forfeiture rate has been calculated and estimated, based on historical employment data, to assume a forfeiture of 3.1% of the options over 10 years.
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At September 30, 2024, there was $2.1 million of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 2.1 years.

Restricted Stock Awards

The RSAs’ fair value is equal to the value of the market price of FS Bancorp’s common stock on the grant date and compensation expense is recognized over the vesting period of the awards based on the fair value of the restricted stock. Shares granted under the 2018 Plan generally vest over a one-year or two-year period for independent directors and a five-year period for employees and officers beginning on the grant date. Any nonvested RSAs will be forfeited in the event of the award recipient’s termination of service with the Company or the Bank.

The following table presents a summary of the Company’s nonvested awards during the dates indicated (shown as actual):

Weighted-Average
Grant-Date Fair Value
Nonvested Shares Shares Per Share
Nonvested at January 1, 2024 102,144 $ 29.61
Granted 42,250 41.98
Less vested 36,581 28.19
Less forfeited 4,000 30.73
Nonvested at September 30, 2024 103,813 $ 35.10

At September 30, 2024, there was $3.5 million of total unrecognized compensation cost related to nonvested shares granted under the 2018 Plan as RSAs. The cost is expected to be recognized over the remaining weighted-average vesting period of 2.1 years.

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NOTE 13 – REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by the 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.

Under the risk-based capital adequacy framework, 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 CET 1 capital ratios as set forth in the table below to be categorized as well capitalized. At September 30, 2024, the Bank was categorized as well capitalized under applicable regulatory requirements. There are no conditions or events since that notification that management believes have changed the Bank’s category. Management believes, at September 30, 2024, that the Bank met all capital adequacy requirements.

The following tables compare the Bank’s actual capital amounts and ratios to their minimum regulatory capital requirements and well capitalized regulatory capital at the dates indicated:

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 September 30, 2024
Total risk-based capital
(to risk-weighted assets) $ 363,502 14.17 % $ 205,162 8.00 % $ 269,275 10.50 % $ 256,452 10.00 %
Tier 1 risk-based capital
(to risk-weighted assets) $ 331,442 12.92 % $ 153,871 6.00 % $ 217,984 8.50 % $ 205,162 8.00 %
Tier 1 leverage capital
(to average assets) $ 331,442 11.18 % $ 118,548 4.00 % $ N/A N/A $ 148,185 5.00 %
CET 1 capital
(to risk-weighted assets) $ 331,442 12.92 % $ 115,403 4.50 % $ 179,516 7.00 % $ 166,694 6.50 %
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 %

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In addition to the minimum CET 1, Tier 1, total capital and leverage ratios, the Bank is 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 capital levels 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. At September 30, 2024, the Bank’s capital exceeded the minimum required capital with the required conservation buffer.

The Company 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 the Company were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at September 30, 2024, it would have exceeded all regulatory capital requirements. For informational purposes, the regulatory capital ratios calculated for the Company at  September 30, 2024 were 9.7% for Tier 1 leverage-based capital, 11.2% for Tier 1 risk-based capital, 14.4% for total risk-based capital, and 11.2% for CET 1 capital ratio. The regulatory capital ratios calculated for the Company at December 31, 2023 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.

NOTE 14 – 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 way 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. The Company defines its business segments by product type and customer segment which it has organized into two lines of business: commercial and consumer banking and home lending.

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. The FTP methodology is based on management's estimated cost of originating funds including the cost of overhead for deposit generation;
● 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;
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● 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 full-time employees (“FTEs”) in each segment; and
--- ---
● an allocation of the Company’s consolidated income taxes which are based on the effective tax rate applied to the segment’s pretax income or loss.
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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, 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. The Company originates consumer loans, commercial and multi-family real estate loans, construction loans for residential and multi-family construction, and commercial business loans. At September 30, 2024, the Company’s retail deposit branch network consisted of 27 branches in the Pacific Northwest. This segment is also responsible for the management of the investment portfolio and other assets of the Bank.

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Home Lending Segment

The home lending segment **** originates one-to-four-family residential mortgage loans primarily for sale in the secondary markets as well as loans held for investment. A majority of these mortgage loans are sold to or securitized by FNMA, FHLMC, GNMA, or the FHLB of Des Moines, while the Company generally retains the right to service these loans. Loans originated under the guidelines of the Federal Housing Administration (“FHA”), US Department of Veterans Affairs (“VA”), and United States Department of Agriculture (“USDA”) are generally sold servicing released to a correspondent bank or mortgage company. The Company has the option to sell loans on a servicing-released or servicing-retained basis to correspondent lenders. A small percentage of its loans are brokered to other lenders. On occasion, the Company may sell a portion of its MSRs portfolio and may sell small pools of loans initially originated to be held in the loan portfolio. The Company manages the loan funding and the interest rate risk associated with the secondary market loan sales and the retained one-to-four-family MSRs within this business segment. One-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 on the factors mentioned above within each segment for the three and nine months ended September 30, 2024 and 2023:

At or For the Three Months Ended September 30, 2024
Condensed income statement: Commercial and Consumer Banking Home Lending Total
Net interest income ^(1)^ $ 28,612 $ 2,632 $ 31,244
Provision for credit losses (1,331 ) (182 ) (1,513 )
Noninterest income^(2)^ 2,257 3,710 5,967
Noninterest expense ^(3)^ (20,199 ) (5,633 ) (25,832 )
Income before (provision) benefit for income taxes 9,339 527 9,866
(Provision) benefit for income taxes (71 ) 491 420
Net income $ 9,268 $ 1,018 $ 10,286
Total average assets for period ended $ 2,347,855 $ 612,935 $ 2,960,790
Full-time employees ("FTEs") 442 117 559
At or For the Three Months Ended September 30, 2023
--- --- --- --- --- --- --- --- --- ---
Condensed income statement: Commercial and Consumer Banking Home Lending Total
Net interest income ^(1)^ $ 27,563 $ 3,071 $ 30,634
Provision for credit losses (437 ) (111 ) (548 )
Noninterest income ^(2)^ 2,680 2,302 4,982
Noninterest expense^(3)^ (18,539 ) (5,047 ) (23,586 )
Income before provision for income taxes 11,267 215 11,482
Provision for income taxes (2,480 ) (49 ) (2,529 )
Net income $ 8,787 $ 166 $ 8,953
Total average assets for period ended $ 2,361,014 $ 540,372 $ 2,901,386
FTEs 434 128 562

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At or For the Nine Months Ended September 30, 2024
Commercial
and Consumer
Condensed income statement: Banking Home Lending Total
Net interest income^(1)^ $ 84,749 $ 7,242 $ 91,991
Provision for credit losses (3,796 ) (193 ) (3,989 )
Noninterest income^(2)^ 6,919 10,027 16,946
Noninterest expense^(3)^ (58,250 ) (14,968 ) (73,218 )
Income before (provision) benefit for income taxes 29,622 2,108 31,730
(Provision) benefit for income taxes (4,253 ) 165 (4,088 )
Net income $ 25,369 $ 2,273 $ 27,642
Total average assets for period ended $ 2,369,740 $ 586,001 $ 2,955,741
FTEs 442 117 559
At or For the Nine Months Ended September 30, 2023
--- --- --- --- --- --- --- --- --- ---
Commercial
and Consumer
Condensed income statement: Banking Home Lending Total
Net interest income^(1)^ $ 83,332 $ 9,516 $ 92,848
Provision for credit losses (2,555 ) (817 ) (3,372 )
Noninterest income ^(2)^ 7,766 7,268 15,034
Noninterest expense ^(3)^ (56,099 ) (15,215 ) (71,314 )
Income before provision for income taxes 32,444 752 33,196
Provision for income taxes (6,758 ) (157 ) (6,915 )
Net income $ 25,686 $ 595 $ 26,281
Total average assets for period ended $ 2,288,996 $ 520,513 $ 2,809,509
FTEs 434 128 562
(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.
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(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. The Company recorded a net increase in fair value of $262,000 and $448,000 for the three and nine months ended  September 30, 2024, and a net decrease in fair value of $343,000 and $285,000 for the three and nine months ended  September 30, 2023, respectively. As of three and nine months ended September 30, 2024, there was $13.9 million and $15.2 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.
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(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 three and nine months ended  September 30, 2024, the Home Lending segment included allocated overhead expenses of $1.8 million and $4.8 million, compared to the three and nine months ended  September 30, 2023, of $1.5 million and $4.7 million, respectively.
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NOTE 15 – 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 both  September 30, 2024, and December 31, 2023, 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 Purchase 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 September 30, 2024, 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 year ended  December 31, 2023, and the nine months ended September 30, 2024.

Other Intangible Assets
Accumulated
Gross CDI Amortization Net CDI
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
Amortization — (2,757 ) (2,757 )
Balance, September 30, 2024 $ 24,928 $ (10,342 ) $ 14,586

The CDI represents the fair value of the intangible core deposit base acquired in business combinations. The CDI will be amortized on an accelerated basis over 10 years for the CDI related to the Branch Purchase, on a straight-line basis over 10 years for the CDI related to the Anchor Bank acquisition in  November 2018 (“Anchor Acquisition”) and on an accelerated basis over approximately nine years for the CDI related to the purchase of four retail bank branches from Bank of America on January 22, 2016. Total amortization expense was $897,000 and $2.8 million for the three and nine months ended September 30, 2024, and $1.0 million and $2.5 million for the same periods in 2023, respectively.

Amortization expense for CDI is expected to be as follows at September 30, 2024:

Remainder of 2024 $ 876
2025 3,191
2026 2,846
2027 2,500
2028 2,110
Thereafter 3,063
Total $ 14,586

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward–Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions. Forward-looking statements include, but are not limited to:

● statements of our goals, intentions, and expectations;
● statements regarding our business plans, prospects, growth, and operating strategies;
● statements regarding the quality of our loan and investment portfolios; and
● estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

● adverse impacts to economic conditions in our local markets or other markets where we have lending relationships;
● effects of employment levels, labor shortages, inflation, a recession or slowed economic growth;
● changes in the interest rate environment, including the increases and decreases in the Board of Governors of the Federal Reserve System (“Federal Reserve”) benchmark rate and duration of such interest rate levels, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;
● the impact of inflation and the Federal Reserve monetary policies;
● the effects of any Federal government shutdown;
● credit risks of lending activities, including loan delinquencies, write offs, changes in our allowance for credit losses (“ACL”), and provision for credit losses;
● secondary market conditions and our ability to originate loans for sale and sell loans in the secondary market;
● fluctuations in loan demand, unsold homes, and land, and property values;
● staffing fluctuations in response to product demand or corporate implementation strategies;
● use of estimates in determining the fair value of assets, which may prove incorrect;
● increased competitive pressures among financial services companies;
● our ability to execute our plans to grow our residential construction lending, our home lending operations, our warehouse lending, and the geographic expansion of our indirect home improvement lending;
● our ability to attract and retain deposits;
● our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
● our ability to control operating costs and expenses;
● expectations regarding key growth initiatives and strategic priorities;
● retention of key members of our senior management team;
● changes in consumer spending, borrowing, and savings habits;
● our ability to successfully manage our growth;
● bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;
● legislative or regulatory changes including changes in banking, securities and tax law, and in regulatory policies and principles, or the interpretation of regulatory capital or other rules;

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● our ability to pay dividends on our common stock;
● quality and composition of our securities portfolio and the impact of adverse changes in the securities markets;
● changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board (“FASB”);
● costs and effects of litigation, including settlements and judgments;
● disruptions or security breaches, or other adverse events, failures, or interruptions in, or attacks on, our information technology systems or on the third-party vendors;
● inability of key third-party vendors to perform their obligations to us;
● effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, civil unrest, and other external events;
● environmental, social and governance goals and targets;
● other economic, competitive, governmental, bank regulatory, consumer and technical factors affecting our operations, pricing, products and services, and
● other risks described elsewhere in this Form 10‑Q and our other reports filed with or furnished to SEC, including our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

Any of the forward-looking statements made in this Form 10‑Q and in other public statements may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. The Company undertakes no obligation to update or revise any forward-looking statement included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.

Overview

1st Security Bank has been serving the Puget Sound area since 1907, which includes when the predecessor to Anchor Bank, one of its banking acquisitions, was formed. On July 9, 2012, the Bank converted from mutual to stock ownership and became the wholly owned subsidiary of FS Bancorp.

The Company is relationship-driven, delivering banking and financial services to local families, local and regional businesses and industry niches in suburban communities in the greater Puget Sound area, the Kennewick-Pasco-Richland metropolitan area of Washington, also known as the Tri-Cities, Goldendale, Vancouver, and White Salmon, Washington and Manzanita, Newport, Ontario, Tillamook and Waldport, Oregon.

On February 24, 2023, the Company completed its purchase of seven retail bank branches from Columbia State Bank (the “Branch Acquisition”) and acquired approximately $425.5 million in deposits and $66.1 million in loans. The seven acquired branches are in the communities of Goldendale, and White Salmon, Washington, and Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon. The Branch Acquisition expanded our Puget Sound-focused retail footprint into southeast Washington and the state 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 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's strategic focus involves diversifying revenues, expanding lending channels, and enhancing the banking franchise. Management is committed to establishing varied revenue streams considering credit, interest rate, and concentration risks. The business plan includes:

● Growing and diversifying our loan portfolio;
● Maintaining strong asset quality;
● Emphasizing lower cost core deposits to reduce the costs of funding our loan growth;
● Capturing customers’ complete relationships through a broad array of products and services, leveraging community involvement, and selectively emphasizing offerings aligned with customers’ banking needs; and
● Expanding into new markets.

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As a diversified lender, the Company specializes in originating one-to-four-family loans, commercial real estate (“CRE”) mortgages, second mortgages, consumer loans, marine lending, and commercial business loans.

At September 30, 2024, the Company's loan portfolio included real estate loans, consumer loans, and commercial business loans representing 62.1%, 25.4%, and 12.5% of the portfolio, respectively.

Fixture secured loans to finance window, gutter, siding replacement, solar panels, spas, and other improvement renovations are a large segment of the consumer loan portfolio. These fixture-secured consumer loans are dependent on the Company’s contractor/dealer network of 75 currently active fixture dealerships located throughout Washington, Oregon, California, Idaho, Colorado, Nevada, Arizona, Minnesota, Texas, Utah, Massachusetts, Montana, and New Hampshire. Five of these contractor/dealers were responsible for 68.5% of the dollar volume of funded loans for the three months ended September 30, 2024.  The Company funded $27.2 million, consisting of 1,230 loans in the fixture-secured consumer loan category during the quarter ended September 30, 2024.

The following table details fixture secured loan originations by state for the periods indicated:

(Dollars in thousands) For the Nine Months Ended For the Year Ended
September 30, 2024 December 31, 2023
State Amount Percent Amount Percent
Washington $ 36,286 38.2 % $ 72,166 35.1 %
Oregon 19,615 20.7 48,831 23.8
California 9,952 10.5 34,219 16.7
Idaho 5,735 6.0 13,787 6.7
Colorado 6,046 6.4 7,442 3.6
Arizona 3,250 3.4 5,846 2.8
Nevada 2,640 2.8 4,697 2.3
Minnesota 1,965 2.1 8,312 4.0
Texas 1,480 1.6 1,685 0.8
Utah 3,663 3.9 5,062 2.5
Massachusetts 1,796 1.9 778 0.4
Montana 1,575 1.7 2,200 1.1
New Hampshire 816 0.8 322 0.2
Total fixture secured loans $ 94,819 100.0 % $ 205,347 100.0 %

The Company originates 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 $196.2 million of one-to-four-family loans (which included loans held for sale, loans held for investment and fixed seconds) in addition to $6.7 million of loans brokered to other institutions through the home lending segment during the three months ended September 30, 2024, of which $167.6 million were sold to investors. Of the loans sold to investors, $61.7 million were sold to the FNMA, FHLMC, FHLB, and/or GNMA with servicing rights retained for the purpose of further developing these customer relationships. At September 30, 2024, one-to-four-family residential mortgage loans held for investment totaled $591.7 million, or 23.7%, of the total gross loan portfolio, while loans held for sale totaled $49.4 million and residential home equity loans totaled $75.1 million at that date.

For the three months ended September 30, 2024, one-to-four-family loan originations and refinancing activity increased compared to the prior quarter as a result of slightly decreased market interest rates and seasonal activity. Residential construction and development lending, while not as common as other loan origination options like one-to-four-family loans, continues to be an important element in our total loan portfolio, and we continue to take a disciplined approach by concentrating our efforts on loans to builders and developers in our market areas known to us. These short-term loans typically have a maturity period of six to 18 months, with disbursements not fully realized at origination, leading to a short-term reduction in net loans 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.

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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 interest rates paid on these deposits and borrowings.

The Company’s earnings are also affected by fee income from mortgage banking activities, the provision for (recovery of) credit losses, service charges and fees, gains from sales of assets, operating expenses and income taxes.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate 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 operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Management believes that its critical accounting policies include the following:

ACL 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 or higher. Securities are analyzed individually to establish a reserve.

ACL 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 (recapture of) credit losses. Losses are charged against the ACL when management believes the uncollectibility 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.

ACL 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 uncollectibility of a loan balance is confirmed and recaptures are credited to the ACL when received. In the case of recaptures, 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.

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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 government agency 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 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.

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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.

ACL 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 for unfunded commitments is adjusted through a provision for (recapture 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.

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 accounting policies are discussed in detail in “Note 1 – Basis of Presentation and Summary” of the Notes to Consolidated Financial Statements included in Item 8. “Financial Statement and Supplementary Data” of Form 10–K.

Comparison of Financial Condition at September 30, 2024 and December 31, 2023

Assets. Total assets were relatively unchanged at $2.97 billion at September 30, 2024, and December 31, 2023. There were, however, shifts in a number of categories including decreases of $64.7 million in securities available-for-sale, $25.4 million in total cash and cash equivalents, and $12.2 million in certificates of deposit at other financial institutions, partially offset by increases of $62.2 million in loans receivable, net, $23.7 million in loans held for sale, and $21.2 million in other assets consisting primarily of a federal income tax receivable of $25.7 million.

Loans receivable, net increased $62.2 million to $2.46 billion at September 30, 2024, from $2.40 billion at December 31, 2023.  Total real estate loans increased $20.1 million to $1.55 billion at September 30, 2024, compared to December 31, 2023, reflecting increases in one-to-four-family loans (excluding loans held for sale) of $23.9 million, multi-family loans of $14.7 million, and home equity loans of $5.6 million, partially offset by decreases in CRE loans of $13.4 million and construction and development loans of $10.7 million. Undisbursed construction and development loan commitments increased $19.3 million to $174.0 million at September 30, 2024, as compared to $154.6 million at December 31, 2023.  Commercial business loans increased $56.1 million to $312.0 million at September 30, 2024, compared to December 31, 2023, as a result of increases in C&I loans of $58.5 million, slightly offset by a decrease in warehouse lending of $2.3 million. Consumer loans decreased $14.3 million to $632.4 million at September 30, 2024, compared to December 31, 2023, primarily due to a decrease of $17.7 million in indirect home improvement loans, partially offset by an increase of $3.5 million in marine loans.

Loans held for sale, consisting of one-to-four-family loans, increased by $23.7 million to $49.4 million at September 30, 2024, from $25.7 million at December 31, 2023. The Company continues to invest in its home lending operations and strategically manage production capacity in the markets we serve.

One-to-four-family loan originations for the nine months ended September 30, 2024, included $426.7 million of loans originated for sale, $120.2 million of portfolio loans including first and second liens, and $13.4 million of loans brokered to other institutions.

Originations of one-to-four-family loans for the periods indicated were as follows:

(Dollars in thousands) For the Nine Months Ended September 30,
2024 2023
Amount Percent Amount Percent Change % Change
Purchase $ 497,705 88.8 % $ 387,211 91.8 % 28.5 %
Refinance 62,546 11.2 34,635 8.2 80.6 %
Total $ 560,251 100.0 % $ 421,846 100.0 % 32.8 %

All values are in US Dollars.

During the nine months ended September 30, 2024, the Company sold $426.0 million of one-to-four-family loans compared to $320.9 million for the same period one year ago. Gross margin on home loan sales decreased to 3.06% for the nine months ended September 30, 2024, compared to 3.07% for the nine months ended September 30, 2023. Gross margin is defined as the margin on loans sold (cash sales) without the impact of deferred costs.

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The ACL on loans totaled $31.2 million or 1.25% of gross loans receivable (excluding loans held for sale) at September 30, 2024, compared to $31.5 million or 1.30% of gross loans receivable (excluding loans held for sale) at December 31, 2023. The ACL on unfunded loan commitments was $1.5 million at both  September 30, 2024 and  December 31, 2023.

Classified loans totaled $23.2 million at  September 30, 2024, all of which were classified as substandard, compared to $24.9 million at  December 31, 2023, of which $24.5 million were classified as substandard and $399,000 were classified as doubtful. Nonperforming loans, consisting solely of nonaccrual loans, decreased $180,000 to $10.8 million at  September 30, 2024, from $11.0 million at  December 31, 2023, primarily due to decreases in marine loans of $109,000, commercial business loans of $108,000, and indirect home improvement loans of $93,000, partially offset by increases in one-to-four-family loans of $70,000, CRE of $42,000, and construction and development loans of $38,000.  The ratio of nonperforming loans to total gross loans was 0.43% at September 30, 2024, compared to 0.45% at  December 31, 2023. There were no OREO properties at both  September 30, 2024 and  December 31, 2023.

L iabilities. Total liabilities decreased $26.9 million to $2.68 billion at September 30, 2024, from $2.71 billion at December 31, 2023, primarily due to a decrease of $95.0 million in deposits, offset by an increase of $70.1 million in borrowings.

Total deposits decreased $95.0 million to $2.43 billion at September 30, 2024, from $2.52 billion at December 31, 2023, reflecting decreases in all deposit categories except CDs. Transactional accounts (noninterest-bearing checking, interest-bearing checking and escrow accounts) decreased $91.2 million to $823.7 million at September 30, 2024, from $914.9 million at December 31, 2023, due to decreases of $78.1 million in interest-bearing checking and $12.8 million in noninterest-bearing checking and decrease of $300,000 in escrow accounts related to mortgages serviced. Money market and savings accounts decreased $19.3 million to $491.4 million at September 30, 2024, from $510.7 million at December 31, 2023.

CDs, which include both retail and non-retail CDs, increased $15.5 million to $1.11 billion at September 30, 2024, from December 31, 2023, as customers shifted funds from lower-yielding transaction and savings accounts to higher-yielding CDs.  Retail CDs increased $127.0 million to $849.3 million at September 30, 2024, from $722.3 million at December 31, 2023, while non-retail CDs, which include brokered CDs, online CDs and public funds CDs decreased $111.6 million to $262.9 million, compared to $374.5 million at December 31, 2023. The decrease in non-retail CDs was primarily due to a decrease of $111.0 million in brokered CDs, as management shifted its funding source to FHLB borrowings for more favorable rates. Non-retail CDs represented 23.6% and 34.2% of total CDs at September 30, 2024 and December 31, 2023, respectively.

Deposits are summarized as follows at the dates indicated:

(Dollars in thousands) December 31,
2023
Noninterest-bearing checking 641,270 $ 654,048
Interest-bearing checking (1) 165,944 244,028
Savings 151,364 151,630
Money market (2) 340,049 359,063
CDs less than 100,000 (3) 533,441 587,858
CDs of 100,000 through 250,000 452,705 429,373
CDs greater than 250,000 (4) 126,075 79,540
Escrow accounts related to mortgages serviced (5) 16,483 16,783
Total 2,427,331 $ 2,522,323

All values are in US Dollars.

(1) Includes $0.0 and $70.2 million of brokered deposits at September 30, 2024 and December 31, 2023, respectively.
(2) Includes $1.0 million and $1,000 of brokered deposits at September 30, 2024 and December 31, 2023, respectively.
(3) Includes $250.2 million and $361.3 million of brokered CDs at September 30, 2024 and December 31, 2023, respectively.
(4) CDs that meet or exceed the FDIC insurance limit.
(5) Noninterest-bearing checking.

The Bank had uninsured deposits of approximately $644.9 million or 26.6% of total deposits, at September 30, 2024, compared to approximately $606.5 million or 24.0% of total deposits at December 31, 2023. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

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Borrowings increased $70.1 million to $163.8 million at September 30, 2024, from $93.7 million at December 31, 2023.  The increased borrowings were primarily attributable to a decline in total brokered deposits. At September 30, 2024, borrowings were comprised of FHLB term borrowings of $153.8 million and overnight borrowings of $10.0 million.

Stockholders’ Equity. Total stockholders’ equity increased $24.4 million to $288.9 million at September 30, 2024, from $264.5 million at December 31, 2023.  The increase in stockholders' equity reflects net income of $27.6 million, partially offset by cash dividends totaling $6.2 million and stock repurchases totaling $4.2 million, which included $1.7 million of shares repurchased in connection with withholding taxes paid on the vesting of restricted stock awards, and the net exercise of stock options during the nine months ended September 30, 2024.  Stockholders' equity was also impacted by decreases in unrealized net losses in securities available-for-sale of $9.2 million, net of tax, and by increases in unrealized net losses on fair value and cash flow hedges of $4.2 million, net of tax, reflecting sales of investment securities in unrealized loss positions and changes in market interest rates benefiting hedges during the nine months ended  September 30, 2024 , resulting in a $5.0 million net decline in accumulated other comprehensive loss, net of tax.

Book value per common share was $37.45 at September 30, 2024, compared to $34.36 at December 31, 2023.  The calculation of book value per share at September 30, 2024, was based on 7,713,359 common shares, after deducting the 103,813 unvested restricted stock shares from the 7,817,172 reported common shares outstanding as of that date. Similarly, the book value per share at December 31, 2023, was calculated based on 7,698,401 common shares, after deducting the 102,144 unvested restricted stock shares from the 7,800,545 reported common shares outstanding as of that date.

Comparison of Results of Operations for the Three Months Ended September 30, 2024 and 2023

General. Net income was $10.3 million for the three months ended September 30, 2024, compared to $9.0 million for the three months ended September 30, 2023. The increase in net income was primarily due to a $2.9 million, or 116.6%, decrease in provision for income tax expense due to energy tax credits purchased during the current quarter and a $985,000, or 19.8%, increase in total noninterest income, partially offset by a $2.2 million, or 9.5%, increase in noninterest expense.

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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 for the periods presented. Average balances are daily average balances. The yields on tax-exempt municipal bonds have not been computed on a tax equivalent basis.

(Dollars in thousands) For the Three Months Ended For the Three Months Ended
September 30, 2024 September 30, 2023
Average Balances Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Average Balance Outstanding Interest Earned/ Paid Yield/ Rate
ASSETS **** **** **** ****
Loans receivable, net and loans held for sale ^(1)^ ^(2)^ $ 2,536,106 $ 43,800 6.87 % $ 2,423,691 $ 39,874 6.53 %
Taxable AFS mortgage-backed securities ^(3)^ 115,913 1,000 3.43 % 99,575 738 2.94 %
Taxable AFS investment securities ^(3)(4)^ 56,836 970 6.79 % 66,237 1,111 6.65 %
Tax-exempt AFS investment securities ^(3)^ 78,208 373 1.90 % 128,336 621 1.92 %
Taxable HTM investment securities 8,500 107 5.01 % 8,500 107 4.99 %
FHLB stock 10,739 246 9.11 % 4,626 53 4.55 %
Interest-bearing deposits at other financial institutions 48,546 547 4.48 % 68,369 766 4.45 %
Total interest-earning assets 2,854,848 47,043 6.56 % 2,799,334 43,270 6.13 %
Noninterest-earning assets 105,941 102,052
Total assets $ 2,960,789 $ 2,901,386
LIABILITIES **** **** **** ****
Savings and money market $ 498,396 1,981 1.58 % $ 570,786 1,529 1.06 %
Interest-bearing checking 168,637 580 1.37 % 187,746 643 1.36 %
Certificates of deposit 1,070,760 10,925 4.06 % 982,725 8,290 3.35 %
Borrowings 191,279 1,828 3.80 % 138,013 1,689 4.86 %
Subordinated notes 49,567 485 3.89 % 49,500 485 3.89 %
Total interest-bearing liabilities 1,978,639 15,799 3.18 % 1,928,770 12,636 2.60 %
Noninterest-bearing accounts 650,852 676,000
Other noninterest-bearing liabilities 40,606 39,365
Total liabilities $ 2,670,097 $ 2,644,135
Net interest income $ 31,244 $ 30,634
Net interest rate spread 3.38 % 3.53 %
Net earning assets $ 876,209 $ 870,564
Net interest margin 4.35 % 4.34 %
Average interest-earning assets to average interest-bearing liabilities 144.28 % 145.14 %
(1) The average loans receivable, net balances include nonaccrual loans carrying a zero yield.
--- ---
(2) Includes net deferred fee recognition of $1.3 million and $1.4 million for the three months ended September 30, 2024 and 2023, respectively.
(3) Shown at amortized cost.
(4) Includes income from fair value hedges of $433,000 and $556,000 for the three months ended September 30, 2024 and 2023, respectively.

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Net Interest Income. Net interest income increased $610,000 to $31.2 million for the three months ended September 30, 2024, from $30.6 million for the three months ended September 30, 2023, primarily due to an increase in interest income of $3.8 million, partially offset by an increase in interest expense of $3.2 million. The $3.8 million increase in interest income was primarily due to an increase of $3.9 million in interest income on loans receivable, including fees, driven primarily by a 34-basis point increase in the average yield earned on loans receivable as new loans were originated at higher rates and variable-rate loans repriced higher, and a higher average balance of loans outstanding. The $3.2 million increase in total interest expense was primarily the result of higher market interest rates, higher utilization of borrowings, and a shift in deposit mix from transactional accounts to higher cost CDs.

Net interest margin (“NIM”) increased one basis point to 4.35% for the three months ended September 30, 2024, from 4.34% for the same period the prior year. The change in NIM reflects the increase in yields earned on interest-earning assets, along with higher average capital relative to the prior period.

Interest Income. Interest income for the three months ended September 30, 2024, increased $3.8 million to $47.0 million, from $43.3 million for the three months ended September 30, 2023. The increase was attributable to a $55.5 million increase in the average balance of total interest-earning assets and a 43-basis point increase in the average yield on total interest-earning assets, particularly on loans receivable, net.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended September 30, 2024 and 2023:

(Dollars in thousands) Three Months Ended September 30,
2024 2023
Average Average Change
Balance Balance in Interest
Outstanding Yield Outstanding Yield Income
Loans receivable, net and loans held for sale ^(1)(2)^ $ 2,536,106 6.87 % $ 2,423,691 6.53 %
Taxable AFS mortgage-backed securities ^(3)^ 115,913 3.43 99,575 2.94
Taxable AFS investment securities ^(3)(4)^ 56,836 6.79 66,237 6.65 )
Tax-exempt AFS investment securities ^(3)^ 78,208 1.90 128,336 1.92 )
Taxable HTM investment securities 8,500 5.01 8,500 4.99
FHLB stock 10,739 9.11 4,626 4.55
Interest-bearing deposits at other financial institutions 48,546 4.48 68,369 4.45 )
Total interest-earning assets $ 2,854,848 6.56 % $ 2,799,334 6.13 %

All values are in US Dollars.

(1) The average loans receivable, net balances include nonaccrual loans carrying a zero yield.
(2) Includes net deferred fee recognition of $1.3 million and $1.4 million for the three months ended September 30, 2024 and 2023, respectively.
(3) Shown at amortized cost.
(4) Includes income from fair value hedges of $433,000 and $556,000 for the three months ended September 30, 2024 and 2023, respectively.

Interest Expense. Interest expense increased $3.2 million to $15.8 million for the three months ended September 30, 2024, from $12.6 million for the comparable quarter in 2023, due to an increase of interest expense on deposits of $3.0 million and on borrowings of $139,000. The average cost of total interest-bearing liabilities increased 58 basis points to 3.18% for the three months ended September 30, 2024, from 2.60% for the three months ended September 30, 2023. The increase was predominantly due to higher deposit costs and an increase in the average balances of higher-cost CDs. The average cost of total interest-bearing deposits increased 71 basis points to 3.09%, for the three months ended September 30, 2024, compared to 2.38%, for the three months ended September 30, 2023. While the average balance of total interest-bearing deposits was virtually unchanged at $1.74 billion for the three months ended September 30, 2024 and 2023, there was a shift within the deposit mix: the average balance of higher-cost CDs increased $88.0 million, whereas the average balance of lower-cost transaction and savings accounts decreased $91.5 million. The average cost of funds, including noninterest-bearing checking, increased 47 basis points to 2.39% for the three months ended September 30, 2024, from 1.92% for the three months ended September 30, 2023.

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The following table details average balances of interest-bearing liabilities, associated rates, and resulting change in interest expense for the three months ended September 30, 2024 and 2023:

(Dollars in thousands) Three Months Ended September 30,
2024 2023
Average Average Change
Balance Balance in Interest
Outstanding Rate Outstanding Rate Expense
Savings and money market $ 498,396 1.58 % $ 570,786 1.06 %
Interest-bearing checking 168,637 1.37 187,746 1.36 )
Certificates of deposit 1,070,760 4.06 982,725 3.35
Borrowings 191,279 3.80 138,013 4.86
Subordinated note 49,567 3.89 49,500 3.89
Total interest-bearing liabilities $ 1,978,639 3.18 % $ 1,928,770 2.60 %

All values are in US Dollars.

Provision for Credit Losses. For the three months ended September 30, 2024, the provision for credit losses was $1.5 million, consisting of a $1.6 million provision for credit losses on loans, partially offset by a $79,000 reversal of the ACL on unfunded loan commitments, compared to $548,000 provision for credit losses for the three months ended September 30, 2023, consisting of a $684,000 provision for credit losses on loans and a $14,000 provision for credit losses on securities held-to-maturity, partially offset by a $149,000 reversal of the ACL on unfunded loan commitments. The provision for credit losses on loans reflects the increase in charge-off activity and increases in the loan portfolio.

During the three months ended September 30, 2024, net loan charge-offs totaled $1.6 million, compared to $533,000 during the three months ended September 30, 2023.  This increase was the result of increased net charge-offs of $996,000 in indirect home improvement loans and $82,000 in marine loans, partially offset by a net recovery of $8,000 in other consumer loans. A decline in national and local economic conditions, as a result the effects of inflation, a recession or slowed economic growth, among other economic 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.

Noninterest Income. Noninterest income increased $985,000 to $6.0 million for the three months ended September 30, 2024, from $5.0 million for the three months ended September 30, 2023. The increase reflects a $648,000 increase in gain on sale of loans primarily as a result of the increased volume of loans sold, and an increase of $566,000 in other noninterest income, primarily due to fair value changes on loans.  Noninterest income during the three months ended September 30, 2024, also reflects a $141,000 gain on the sale of MSRs, with no similar transaction occurring in the comparable quarter last year.  These increases were partially offset by a $400,000 decrease in service charges and fee income, primarily due to the sale of MSRs in the first quarter of 2024. Gross margin on home loan sales decreased to 2.96% for the three months ended September 30, 2024, from 3.08% for the three months ended September 30, 2023.

Noninterest Expense. Noninterest expense increased $2.2 million to $25.8 million for the three months ended September 30, 2024, from $23.6 million for the three months ended September 30, 2023. The increase was primarily due to increases of $506,000 in impairment of MSRs due to changes in mortgage interest rates and higher estimated prepayment rates, $482,000 in salaries and benefits due to competitive wage adjustments, additional staffing to support growth, and higher overall benefit costs, $557,000 in professional and board fees, which included $571,000 in nonrecurring consulting charges and legal fees related to application/system upgrades and tax credit work, $418,000 in operations, and $315,000 in data processing.  These increases were slightly offset by a decrease of $105,000 in amortization of CDI.

The efficiency ratio, which is calculated by dividing noninterest expense by total net interest income and noninterest income, weakened to 69.42% for the three months ended September 30, 2024, compared to 66.22% for the three months ended September 30, 2023, due to an increase in noninterest expense that outpaced total revenue growth.

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Provision for Income Taxes. For the three months ended September 30, 2024, the Company recorded a benefit for income taxes of $420,000, as compared to a provision for income taxes of $2.5 million for the three months ended September 30, 2023. The tax benefit was due to the purchase during the quarter ended September 30, 2024, of alternative energy tax credits available under the Inflation Reduction act of 2022, resulting in a gain of $2.3 million, which was partially offset by the $1.8 million provision for income taxes recorded on the net income for the three months ended September 30, 2024.  The Inflation Reduction Act of 2022 introduced several energy tax credits designed to promote clean energy investments, reduce carbon emissions, and accelerate the transition to renewable energy.  The effective corporate income tax rates for the three months ended September 30, 2024 and 2023 were (4.3)%, which was reduced by 2,300 basis points due to the energy tax credits discussed above, and 22.0%, respectively. The decrease in the effective corporate income tax rate, excluding the effects of the energy tax credits, was attributable to tax benefits derived from the exercises of employee stock options during the current quarter.

Comparison of Results of Operations for the Nine Months Ended September 30, 2024 and 2023

General. Net income increased $1.4 million to $27.6 million for the nine months ended September 30, 2024, compared to $26.3 million for the nine months ended September 30, 2023. The increase in net income was primarily due to a $2.8 million decrease in the provision for income taxes and a $1.5 million, or 1.6%, increase in noninterest income, partially offset by a $1.9 million increase in noninterest expense and a $617,000 increase in provision for credit losses.

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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 for the periods presented. Average balances are daily average balances.  The yields on tax-exempt municipal bonds have not been computed on a tax equivalent basis.

(Dollars in thousands) For the Nine Months Ended For the Nine Months Ended
September 30, 2024 September 30, 2023
Average Balances Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Average Balance Outstanding Interest Earned/ Paid Yield/ Rate
ASSETS **** **** **** ****
Loans receivable, net and loans held for sale ^(1)^ ^(2)^ $ 2,504,129 $ 127,203 6.79 % $ 2,362,885 $ 114,082 6.46 %
Taxable AFS mortgage-backed securities ^(3)^ 118,454 3,123 3.52 % 87,357 1,542 2.36 %
Taxable AFS investment securities ^(3)(4)^ 76,844 3,726 6.48 % 60,283 2,581 5.72 %
Tax-exempt AFS investment securities ^(3)^ 93,162 1,356 1.94 % 129,195 1,885 1.95 %
Taxable HTM investment securities 8,500 322 5.06 % 8,500 322 5.06 %
FHLB stock 6,666 432 8.66 % 5,190 210 5.41 %
Interest-bearing deposits at other financial institutions 49,887 1,701 4.55 % 67,163 2,127 4.23 %
Total interest-earning assets 2,857,642 137,863 6.44 % 2,720,573 122,749 6.03 %
Noninterest-earning assets 98,099 88,936
Total assets $ 2,955,741 $ 2,809,509
LIABILITIES **** **** **** ****
Savings and money market $ 504,453 5,593 1.48 % $ 640,461 4,071 0.85 %
Interest-bearing checking 175,993 1,919 1.46 % 171,192 1,111 0.87 %
Certificates of deposit 1,107,878 32,108 3.87 % 892,035 19,514 2.92 %
Borrowings 144,635 4,796 4.43 % 107,254 3,749 4.67 %
Subordinated notes 49,550 1,456 3.93 % 49,484 1,456 3.93 %
Total interest-bearing liabilities 1,982,509 45,872 3.09 % 1,860,426 29,901 2.15 %
Noninterest-bearing accounts 648,345 664,319
Other noninterest-bearing liabilities 41,965 36,095
Total liabilities $ 2,672,819 $ 2,560,840
Net interest income $ 91,991 $ 92,848
Net interest rate spread 3.35 % 3.88 %
Net earning assets $ 875,133 $ 860,147
Net interest margin 4.30 % 4.56 %
Average interest-earning assets to average interest-bearing liabilities 144.14 % 146.23 %
(1) The average loans receivable, net balances include nonaccrual loans carrying a zero yield.
--- ---
(2) Includes net deferred fee recognition of $3.6 million and $4.7 million for the nine months ended September 30, 2024 and 2023, respectively.
(3) Shown at amortized cost.
(4) Includes income from fair value hedges of $1.3 million and $1.2 million for the nine months ended September 30, 2024 and 2023, respectively.

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Net Interest Income. Net interest income decreased $857,000 to $92.0 million for the nine months ended September 30, 2024, from $92.8 million for the nine months ended September 30, 2023, due to an increase in interest expense on deposits and, to a lesser extent, borrowings, partially offset by an increase in interest and dividend income. Total interest expense increased $16.0 million for the nine months ended September 30, 2024, compared to the same period in 2023, primarily as a result of higher market interest rates, higher utilization of borrowings and a shift in deposit mix from lower-cost transactional accounts to higher-cost CDs. Total interest income increased $15.1 million for the nine months ended September 30, 2024, compared to the same period in 2023, primarily due to an increase of $13.1 million in interest income on loans receivable, including fees, impacted primarily as a result of a 33 basis point increase in the average yield earned on loans receivable, as new loans were originated at higher rates and variable-rate loans repriced higher, and a higher average balance of loans outstanding.  In addition, interest income on investment securities, excluding FHLB stock, increased $2.2 million, partially offset by a decrease in interest-bearing deposits at other financial institutions of $426,000, during the nine months ended September 30, 2024, compared to the same period in 2023.  The increase in interest income on investment securities, excluding FHLB stock, was primarily due to higher market interest rates generally, while the decrease in interest income on interest-bearing deposits at other financial institutions was due to a decrease in the average balance outstanding of such deposits.

Net interest margin (“NIM”) decreased 26 basis points to 4.30% for the nine months ended September 30, 2024, from 4.56% for the same period in the prior year. The change in NIM reflects the increased costs of deposits and borrowings which outpaced the increased yields earned on interest-earning assets, as well as an increase in the average balance of interest-earning assets.

Interest Income. Interest income for the nine months ended September 30, 2024, increased $15.1 million to $137.9 million, from $122.7 million for the nine months ended September 30, 2023. The increase was primarily attributable to a $137.1 million increase in the average balance of total interest-earning assets and a 41 basis points increase in the average yield on total interest-earning assets.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the nine months ended September 30, 2024 and 2023:

(Dollars in thousands) Nine Months Ended September 30,
2024 2023
Average Average Change
Balance Balance in Interest
Outstanding Yield Outstanding Yield Income
Loans receivable, net and loans held for sale ^(1)(2)^ $ 2,504,129 6.79 % $ 2,362,885 6.46 %
Taxable AFS mortgage-backed securities ^(3)^ 118,454 3.52 87,357 2.36
Taxable AFS investment securities ^(3)(4)^ 76,844 6.48 60,283 5.72
Tax-exempt AFS investment securities ^(3)^ 93,162 1.94 129,195 1.95 )
Taxable HTM investment securities 8,500 5.06 8,500 5.06
FHLB stock 6,666 8.66 5,190 5.41
Interest-bearing deposits at other financial institutions 49,887 4.55 67,163 4.23 )
Total interest-earning assets $ 2,857,642 6.44 % $ 2,720,573 6.03 %

All values are in US Dollars.

(1) The average loans receivable, net balances include nonaccrual loans carrying a zero yield.
(2) Includes net deferred fee recognition of $3.6 million and $4.7 million for the nine months ended September 30, 2024 and 2023, respectively.
(3) Shown at amortized cost.
(4) Includes income from fair value hedges of $1.3 million and $1.2 million for the nine months ended September 30, 2024 and 2023, respectively.

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Interest Expense. Interest expense increased $16.0 million to $45.9 million for the nine months ended September 30, 2024, from $29.9 million for the comparable period in 2023, primarily due to an increase of interest expense on deposits of $14.9 million and on borrowings of $1.0 million. The average cost of total interest-bearing liabilities increased 94 basis points to 3.09% for the nine months ended September 30, 2024, from 2.15% for the nine months ended September 30, 2023. The increase was due to both an increase in cost for deposits and borrowings, and an increase in the average balances of CDs and borrowings. The average cost of total interest-bearing deposits increased 102 basis points to 2.96%, for the nine months ended September 30, 2024, compared to 1.94%, for the nine months ended September 30, 2023. The average balance of total interest-bearing deposits increased $84.6 million to $1.79 billion for the nine months ended September 30, 2024, compared to $1.70 billion for the nine months ended September 30, 2023, as a result of a $215.8 million increase in the average balance of higher-cost CDs and a $131.2 million decrease in the average balance of lower-cost transaction and savings accounts. The average cost of funds, including noninterest-bearing checking, increased 75 basis points to 2.33% for the nine months ended September 30, 2024, from 1.58% for the nine months ended September 30, 2023.

The following table details average balances of interest-bearing liabilities, associated rates, and resulting change in interest expense for the nine months ended September 30, 2024 and 2023:

(Dollars in thousands) Nine Months Ended September 30,
2024 2023
Average Average Change
Balance Balance in Interest
Outstanding Rate Outstanding Rate Expense
Savings and money market $ 504,453 1.48 % $ 640,461 0.85 %
Interest-bearing checking 175,993 1.46 171,192 0.87
Certificates of deposit 1,107,878 3.87 892,035 2.92
Borrowings 144,635 4.43 107,254 4.67
Subordinated note 49,550 3.93 49,484 3.93
Total interest-bearing liabilities $ 1,982,509 3.09 % $ 1,860,426 2.15 %

All values are in US Dollars.

Provision for Credit Losses. For the nine months ended September 30, 2024, the provision for credit losses was $4.0 million, consisting of a $4.0 million provision for credit losses on loans, compared to $3.4 million provision for credit losses for the nine months ended September 30, 2023, consisting of a $4.1 million provision for credit losses on loans, partially offset by a $745,000 reversal of the ACL on unfunded loan commitments. The provision for credit losses on loans reflects the increase in charge-off activity and increases in the loan portfolio.

During the nine months ended September 30, 2024, net loan charge-offs increased $2.7 million to $4.3 million, compared to $1.6 million during the nine months ended September 30, 2023. This increase included $1.5 million in indirect home improvement loan charge-offs, along with net charge-off increases of $1.0 million in C&I loans, $146,000 in marine loans, and $117,000 in other consumer loans. Management attributes the increase in net charge-offs over the year primarily to volatile economic conditions.  A decline in national and local economic conditions, as a result the effects of inflation, a recession or slowed economic growth, among other economic 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.

Noninterest Income. Noninterest income increased $1.9 million to $16.9 million for the nine months ended September 30, 2024, from $15.0 million for the nine months ended September 30, 2023. This increase was primarily the result of an $8.4 million increase in gain on sale of MSRs recorded during the first nine months of 2024 with no similar transaction occurring in the comparable nine month period in 2023,and a $1.5 million increase in gain on sale of loans, partially offset by a $7.8 million loss on sale of investment securities resulting from management's strategic decision to increase the yields earned on and reduce the duration of the securities portfolio by selling lower-yielding securities, and an $839,000 decrease in service charges and fee income due to a reduction of loan servicing fees due to the sale of MSRs in the first quarter of 2024. Gross margin on home loan sales decreased to 3.06% for the nine months ended September 30, 2024, from 3.07% for the nine months ended September 30, 2023.

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Noninterest Expense. Noninterest expense increased $1.9 million to $73.2 million for the nine months ended September 30, 2024, from $71.3 million for the nine months ended September 30, 2023. This increase was primarily due to increases of $1.1 million in data processing, $1.0 million in professional and board fees which included $824,000 in nonrecurring consulting charges and legal fees for the reasons stated above, $610,000 operations expense, and $545,000 in impairment of MSRs due to increases in estimated prepayment rates, partially offset by a decrease of $1.6 million in acquisition costs as a result of no acquisition costs during the current period.

The efficiency ratio, which is calculated by dividing noninterest expense by total net interest income and noninterest income, weakened to 67.21% for the nine months ended September 30, 2024, compared to 66.10% for the nine months ended September 30, 2023.

Provision for Income Taxes. For the nine months ended September 30, 2024, the Company recorded a provision for income taxes of $4.1 million as compared to $6.9 million for the nine months ended September 30, 2023, primarily due to the purchase of alternative energy tax credits resulting in a gain of $2.3 million. Excluding the effects of tax credits, the effective corporate income tax rates for the nine months ended September 30, 2024 and 2023 were 20.0% and 22.0%, respectively. The decrease in the effective corporate income tax rate was attributable to tax benefits derived from the exercises of employee stock options.

Liquidity

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 several different sources to meet potential liquidity demands. The primary sources are increases in deposit accounts, FHLB borrowings, purchases of 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 September 30, 2024, the Bank’s total borrowing capacity was $695.8 million with the FHLB of Des Moines, with unused borrowing capacity of $531.6 million. The FHLB borrowing limit is based on certain categories of loans, primarily real estate loans that qualify as collateral for FHLB borrowings.  At September 30, 2024, the Bank held approximately $1.11 billion in loans that qualify as collateral for FHLB borrowings.

In addition to the availability of liquidity from the FHLB of Des Moines, the Bank maintains a short-term borrowing line with the FRB with a limit of $275.4 million and a combined credit limit of $101.0 million in written federal funds lines of credit through correspondent banking relationships at September 30, 2024. The FRB borrowing limit is based on certain categories of loans, primarily consumer loans that qualify as collateral for FRB line of credit.  At September 30, 2024, the Bank held approximately $617.9 million in loans that qualify as collateral for the FRB line of credit. There were no outstanding borrowings with the FRB or correspondent banks as of September 30, 2024 and December 31, 2023.   Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

The Bank’s Asset and Liability Management Policy permits management to utilize brokered deposits up to 20% of deposits or $486.9 million at September 30, 2024. Total brokered deposits at September 30, 2024 were $251.3 million. Management utilizes brokered deposits to mitigate interest rate risk and to enhance liquidity when appropriate.

Liquidity management is both a daily and long-term function of the Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-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, fund withdrawals, and to fund loan commitments. At September 30, 2024, outstanding loan commitments, including unused lines of credit totaled $563.7 million. The Company purchased $47.7 million in securities during the nine months ended September 30, 2024. The Company purchased $46.9 million in securities during the nine months ended September 30, 2023. Proceeds from securities repayments, maturities and sales were $115.3 million and $13.5 million during the nine months ended September 30, 2024 and 2023,  respectively.

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the nine months ended September 30, 2024 and 2023, the Bank sold $426.0 million and $320.9 million in loans, respectively.

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Total deposits decreased $95.0 million during the nine months ended September 30, 2024, primarily driven by a net decrease in brokered deposits of $180.3 million. CDs scheduled to mature in three months or less at September 30, 2024, totaled $415.2 million. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this strategy, management believes that a majority of maturing relationship deposits will remain with the Bank.

For the remainder of 2024, we project that fixed commitments will include $479,000 of operating lease payments. For information regarding our operating leases, see “Note 6 – Leases” of the Notes to Consolidated Financial Statements included in this report. FHLB borrowings of $105.0 million are scheduled to mature within the next twelve months.

As a separate legal entity from the Bank, FS Bancorp, Inc. must provide for its own liquidity. In addition to its own operating expenses (many of which are paid to the Bank), FS Bancorp is responsible for paying for any stock repurchases, dividends declared to its stockholders, interest and principal on outstanding debt, and other general corporate expenses. Sources of capital and liquidity for FS Bancorp include distributions from the Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Bank to make distributions.

Dividends and other capital distributions from the Bank are subject to regulatory notice and certain restrictions. The unrestricted cash of FS Bancorp held at the Bank on an unconsolidated basis totaled $7.2 million at September 30, 2024. 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 $0.27 per share, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2024 at this rate of $0.27 per share, our total dividends paid each quarter would be approximately $2.1 million based on the number of the current outstanding shares as of September 30, 2024.

Under FS Bancorp’s existing stock repurchase program, approximately $1.4 million remained available for future repurchases as of September 30, 2024.  On July 11, 2024, the Company publicly announced that its Board of Directors approved an additional stock repurchase program, authorizing the repurchase up to $5.0 million shares of Company common stock.  The repurchases 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, 2025.  See “Unregistered Sales of Equity Securities and Use of Proceeds” in Item 2, Part II of this Form 10-Q for additional information relating to stock repurchases.

Capital Resources

The Bank is subject to minimum capital requirements imposed by the FDIC. Based on its capital levels at September 30, 2024, 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 September 30, 2024, the Bank was considered to be well capitalized. At September 30, 2024, 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 capital ratios of 11.2%, 12.9%, 14.2%, and 12.9%, respectively.

As 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 $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 the Federal Reserve expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations. If FS Bancorp were subject to regulatory capital guidelines for bank holding companies with $3.0 billion or more in assets at September 30, 2024, FS Bancorp would have exceeded all regulatory capital requirements. For informational purposes, the regulatory capital ratios calculated for FS Bancorp at September 30, 2024 were 9.7% for Tier 1 leverage-based capital, 11.2% for Tier 1 risk-based capital, 14.4% for total risk-based capital, and 11.2% for CET 1 capital ratio. For additional information regarding regulatory capital compliance, see the discussion included in “Note 13 – Regulatory Capital” to the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the market risk disclosures contained in FS Bancorp’s 2023 Form 10-K.

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Item 4. Controls and Procedures

(a)         Evaluation of Disclosure Controls and Procedures

An evaluation of the disclosure controls and procedures as defined in Rule 13a‑15(e) of the Exchange Act was carried out as of September 30, 2024, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) and several other members of the 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.

Based upon the foregoing evaluation, the Company’s CEO and CFO concluded that as of September 30, 2024, 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.

(b)         Changes in Internal Controls

There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2024, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control procedure are met. 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. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure 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; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of business, the Company occasionally becomes involved in various legal proceedings. In the opinion of management, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.

Item 1A.  Risk Factors

There have been no material changes in the Risk Factors previously disclosed in FS Bancorp’s 2023 Form 10-K.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable
(b) Not applicable
--- ---
(c) The following table summarizes common stock repurchases during the three months ended September 30, 2024:
--- ---
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
July 1, 2024 - July 31, 2024^(1)^ 18,415 $ 41.52 18,415 $ 4,865,592
August 1 - August 31, 2024^(2)^ 78,709 44.06 78,709 1,397,829
September 1, 2024 - September 30, 2024 — — — —
Total for the quarter 97,124 $ 43.58 97,124 $ 1,397,829

____________________________

(1) Includes 14,078 shares internally repurchased by the Company acting as the cash counterparty for participants exercising options.
(2) Includes 69,516 shares internally repurchased by the Company acting as the cash counterparty for participants exercising options. In addition, 9,193 shares that were surrendered by participants in the 2018 Equity Incentive Plan in satisfaction of payment for withholding taxes upon the vesting of restricted stock shares and repurchased by the Company.

On August 15, 2023, the Company publicly announced that its Board of Directors approved a stock repurchase program, authorizing the repurchase up to $5.0 million of Company common stock, representing approximately 2.5% of its outstanding shares as of that date.  On July 11, 2024, following completion of the August 2023 repurchase program, the Company publicly announced that its Board of Directors approved a new stock repurchase program, authorizing the repurchase of up the $5.0 million of Company common stock.  The repurchases 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, 2025.

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.

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a) None.
(b) None.
--- ---
(c) Trading Plans. During the three months ended  September 30, 2024, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company 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 6.   Exhibits

3.1 Articles of Incorporation of FS Bancorp, Inc. (1)
3.2 Bylaws of FS Bancorp, Inc. (2)
4.1 Form of Common Stock Certificate of FS Bancorp, Inc. (1)
4.2 Indenture dated February 10, 2021, by and between FS Bancorp, Inc. and U.S. Bank National Association, as trustee (3)
4.3 Forms of 3.75 Fixed-to-Floating Rate Subordinated Notes due 2031 (included as Exhibit A-1 and Exhibit A-2 to the Indenture filed as Exhibit 4.2 hereto (3)
10.1 Severance Agreement between 1st Security Bank of Washington and Joseph C. Adams (1)
10.2 Form of Change of Control Agreement between 1st Security Bank of Washington and Matthew D. Mullet (1)
10.3 FS Bancorp, Inc. 2013 Equity Incentive Plan (the “2013 Plan”) (4)
10.4 Form of Incentive Stock Option Agreement under the 2013 Plan (4)
10.5 Form of Non-Qualified Stock Option Agreement under the 2013 Plan (4)
10.6 Form of Restricted Stock Agreement under the 2013 Plan (4)
10.9 Form of change of control agreement with Donn C. Costa, Dennis O’Leary, Erin Burr, Victoria Jarman, Kelli Nielsen, and May-Ling Sowell (5)
10.10 FS Bancorp, Inc. 2018 Equity Incentive Plan (6)
10.11 Form of Incentive Stock Option Award Agreement under the 2018 Equity Incentive Plan (6)
10.12 Form of Non-Qualified Stock Option Award Agreement under the 2018 Equity Incentive Plan (6)
10.13 Form of Restricted Stock Award Agreement under the 2018 Equity Incentive Plan (6)
10.14 FS Bancorp, Inc. Nonqualified 2022 Stock Purchase Plan (7)
10.15 Form of Enrollment/Change Form under the FS Bancorp, Inc. Nonqualified 2022 Stock Purchase Plan (7)
10.16 Form of Change of Control Agreement with Shana Allen, Stephanie Nicklaus, and Benjamin Crowl (8)
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 The following materials from the Company’s Quarterly Report on Form 10‑Q for the quarter ended September 30, 2024 formatted in Inline Extensible Business Reporting Language (IXBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income (Loss); (4) Consolidated Statements of Changes in Stockholders’ Equity; (5) Consolidated Statements of Cash Flows; and (6) Notes to Consolidated Financial Statements.
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
(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 Registration Statement on Form S-8 (333-192990) filed on December 20, 2013 and incorporated by reference.
(5) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 1, 2016 (File No. 001‑35589).
(6) Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (333-22513) filed on May 23, 2018.
(7) Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (333-265729) filed on June 21, 2022.
(8) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on February 2, 2024 (File No. 001-35589).

67

Table of Contents

SIGNATURES

Pursuant to the requirements 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.

FS BANCORP, INC.
Date: November 8, 2024 By: /s/Joseph C. Adams
Joseph C. Adams,
Chief Executive Officer
(Principal Executive Officer)
Date: November 8, 2024 By: /s/Matthew D. Mullet
Matthew D. Mullet
President, Secretary, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)

68

ex_713151.htm

EXHIBIT 31.1

​

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

​

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

​

I, Joseph C. Adams, certify that:

​

1. I have reviewed this Quarterly Report on Form 10-Q of FS Bancorp, Inc.;

​

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

​

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

​

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15-(f)) for the registrant and have:

​

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

​

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

​

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

​

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

​

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

​

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

​

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

​

Date: November 8, 2024 ​ /s/Joseph C. Adams
​ ​ ​ Joseph C. Adams
​ ​ ​ Chief Executive Officer

​

ex_713152.htm

EXHIBIT 31.2

​

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

​

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

​

I, Matthew D. Mullet, certify that:

​

1. I have reviewed this Quarterly Report on Form 10-Q of FS Bancorp, Inc.;

​

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

​

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

​

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15-(f)) for the registrant and have:

​

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

​

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

​

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

​

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

​

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

​

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

​

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

​

Date: November 8, 2024 ​ /s/Matthew D. Mullet
​ ​ ​ Matthew D. Mullet
​ ​ ​ President and Chief Financial Officer

​

ex_713153.htm

EXHIBIT 32.1

​

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

​

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

​

​

In connection with the accompanying Quarterly Report on Form 10-Q of FS Bancorp, Inc. (the “Company”) for the quarter ended September 30, 2024 (the “Report”), I, Joseph C. Adams, in my capacity as Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

​

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

​

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in the Report.

​

Date: November 8, 2024 ​ /s/Joseph C. Adams
​ ​ ​ Joseph C. Adams
​ ​ ​ Chief Executive Officer

​

ex_713154.htm

EXHIBIT 32.2

​

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

​

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

​

​

In connection with the accompanying Quarterly Report on Form 10-Q of FS Bancorp, Inc. (the “Company”) for the quarter ended September 30, 2024 (the “Report”), I, Matthew D. Mullet, in my capacity as President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

​

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

​

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in the Report.

​

Date: November 8, 2024 ​ /s/Matthew D. Mullet
​ ​ ​ Matthew D. Mullet
​ ​ ​ President and Chief Financial Officer

​

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