FS Bancorp Inc

Previous wording

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

Current wording

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

Previous wording

At March 31, 2024, the Company's loan portfolio included real estate loans, consumer loans, and commercial business loans representing 62.8%, 26.3%, and 10.9% of the portfolio, respectively.

Current wording

At June 30, 2024, the Company's loan portfolio included real estate loans, consumer loans, and commercial business loans representing 61.7%, 25.8%, and 12.5% of the portfolio, respectively.

Previous wording

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 77 active dealers 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 77.1% of the dollar volume of funded loans for the three months ended March 31, 2024. The Company funded $34.9 million or approximately 1,600 loans in the fixture-secured consumer loan category during the quarter ended March 31, 2024.

Current wording

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 84 active fixture dealerships that funded a loan during the three months ended June 30, 2024, 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 74.8% of the dollar volume of funded loans for the three months ended June 30, 2024. The Company funded $32.6 million, consisting of approximately 1,500 loans in the fixture-secured consumer loan category during the quarter ended June 30, 2024.

Previous wording

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 $151.4 million of one-to-four-family loans (which included loans held for sale, loans held for investment and fixed seconds) in addition to $2.6 million of loans brokered to other institutions through the home lending segment during the three months ended March 31, 2024, of which $93.9 million were sold to investors. Of the loans sold to investors, $55.5 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 March 31, 2024, one-to-four-family residential mortgage loans held for investment totaled $580.1 million, or 23.7%, of the total gross loan portfolio, while loans held for sale totaled $50.0 million and home equity loans totaled $73.3 million at that date.

Current wording

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 $206.1 million of one-to-four-family loans (which included loans held for sale, loans held for investment and fixed seconds) in addition to $3.8 million of loans brokered to other institutions through the home lending segment during the three months ended June 30, 2024, of which $164.5 million were sold to investors. Of the loans sold to investors, $68.3 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 June 30, 2024, one-to-four-family residential mortgage loans held for investment totaled $589.0 million, or 23.7%, of the total gross loan portfolio, while loans held for sale totaled $53.8 million and residential home equity loans totaled $73.7 million at that date.

Previous wording

For the three months ended March 31, 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. 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.

Current wording

For the three months ended June 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.

Previous wording

The Company’s earnings are also affected by fee income from mortgage banking activities, the provision for (recapture of) credit losses, service charges and fees, gains from sales of assets, operating expenses and income taxes. Most notable of these factors, the Company recorded a provision for credit losses of $1.4 million for the three months ended March 31, 2024, compared to $2.1 million for the same period one year ago. The decreased provision for credit losses in the current period was primarily due to a decrease in net loan growth, particularly in consumer loans, partially offset by an increase in provision for credit losses due to higher net charge-offs in commercial business, indirect home improvement, and marine loans.

Current wording

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

Previous wording

The Company has elected a non-discounted cash flow methodology with probability of default (“PD”) and loss given default (“LGD”) for all call report code cohorts (“cohorts”), except for the indirect and marine portfolios which are evaluated under a vintage methodology. The vintage methodology measures the expected loss calculation for future periods based on historical performance by the origination period of loans with similar life cycles and risk characteristics. Guaranteed portions of loans are measured with zero risk due to cash collateral and full guaranty.

Current wording

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.

Previous wording

***Assets.***Total assets were $2.97 billion at both March 31, 2024 and December 31, 2023. The changes in total assets at March 31, 2024, compared to December 31, 2023, included increases of $24.3 million in loans held for sale, $13.9 million in loans receivable, net, and $3.6 million in other assets, partially offset by decreases of $20.3 million in total cash and cash equivalents, $13.3 million in securities available-for-sale, $8.1 million in MSRs held for sale, and $1.9 million in deferred tax asset, net.

Current wording

***Assets.***Total assets decreased $31.3 million to $2.94 billion at June 30, 2024, from $2.97 billion at December 31, 2023, primarily due to decreases of $71.8 million in securities available-for-sale, $32.7 million in total cash and cash equivalents, and $11.5 million in certificates of deposit at other financial institutions, partially offset by increases of $55.7 million in loans receivable, net, $28.1 million in loans held for sale, and $8.2 million in FHLB stock.

Previous wording

Loans receivable, net increased $13.9 million to $2.42 billion at March 31, 2024, from $2.40 billion at December 31, 2023, Total real estate loans increased $5.8 million to $1.54 billion at March 31, 2024, compared to December 31, 2023, reflecting increases in one-to-four-family loans (excluding loans held for sale) of $12.3 million and home equity loans of $3.8 million, partially offset by decreases in CRE loans of $7.3 million, construction and development loans of $1.7 million, and multi-family loans of $1.4 million. Undisbursed construction and development loan commitments increased $13.6 million, to $168.2 million at March 31, 2024, as compared to $154.6 million at December 31, 2023. Similarly, commercial business loans increased $8.7 million to $264.5 million at March 31, 2024, compared to December 31, 2023, as a result of an increase in commercial and industrial lending of $18.1 million, partially offset by a decrease in warehouse lending of $9.5 million. Consumer loans decreased $621,000 to $646.1 million at March 31, 2024, compared to December 31, 2023, primarily due to a decrease of $1.1 million in indirect home improvement loans and $131,000 in other consumer loans, partially offset by an increase of $611,000 in marine loans.

Current wording

Loans receivable, net increased $55.7 million to $2.46 billion at June 30, 2024, from $2.40 billion at December 31, 2023, Total real estate loans increased $5.6 million to $1.54 billion at June 30, 2024, compared to December 31, 2023, reflecting increases in one-to-four-family loans (excluding loans held for sale) of $21.2 million, multi-family loans of $15.9 million, and home equity loans of $4.3 million, partially offset by decreases in construction and development loans of $28.8 million and CRE loans of $6.9 million. Undisbursed construction and development loan commitments increased $41.2 million to $195.8 million at June 30, 2024, as compared to $154.6 million at December 31, 2023. Similarly, commercial business loans increased $54.9 million to $310.7 million at June 30, 2024, compared to December 31, 2023, as a result of increases in C&I loans of $46.9 million and in warehouse lending of $8.0 million. Consumer loans decreased $5.1 million to $641.7 million at June 30, 2024, compared to December 31, 2023, primarily due to a decrease of $6.3 million in indirect home improvement loans, partially offset by an increase of $1.3 million in marine loans.

Previous wording

Loans held for sale, consisting of one-to-four-family loans, increased by $24.3 million to $50.0 million at March 31, 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.

Current wording

Loans held for sale, consisting of one-to-four-family loans, increased by $28.1 million to $53.8 million at June 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.

Previous wording

One-to-four-family loan originations for the three months ended March 31, 2024, included $110.5 million of loans originated for sale, $40.9 million of portfolio loans including first and second liens, and $2.6 million of loans brokered to other institutions.

Current wording

One-to-four-family loan originations for the six months ended June 30, 2024, included $271.2 million of loans originated for sale, $86.3 million of portfolio loans including first and second liens, and $6.4 million of loans brokered to other institutions.

Previous wording

During the three months ended March 31, 2024, the Company sold $93.9 million of one-to-four-family loans compared to $77.3 million for the same period one year ago. Gross margin on home loan sales increased to 3.43% for the three months ended March 31, 2024, compared to 3.05% for the three months ended March 31, 2023. Gross margin is defined as the margin on loans sold (cash sales) without the impact of deferred costs.

Current wording

During the six months ended June 30, 2024, the Company sold $258.4 million of one-to-four-family loans compared to $204.3 million for the same period one year ago. Gross margin on home loan sales increased to 3.14% for the six months ended June 30, 2024, compared to 3.06% for the six months ended June 30, 2023. Gross margin is defined as the margin on loans sold (cash sales) without the impact of deferred costs.

Previous wording

The ACL on loans totaled $31.5 million or 1.29% of gross loans receivable (excluding loans held for sale), at March 31, 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 March 31, 2024 and December 31, 2023.

Current wording

The ACL on loans totaled $31.2 million or 1.26% of gross loans receivable (excluding loans held for sale) at June 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 $1.6 million and $1.5 million at June 30, 2024 and December 31, 2023, respectively.

Previous wording

Classified loans totaled $24.9 million at March 31, 2024, all of which were classified as substandard, compared to classified loans of $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, increased $1.2 million to $12.1 million at March 31, 2024, from $11.0 million at December 31, 2023, primarily due to increases in commercial business loans of $659,000 and indirect home improvement loans of $332,000. The ratio of nonperforming loans to total gross loans was 0.49% at March 31, 2024, compared to 0.45% at December 31, 2023. There were no OREO properties at both March 31, 2024 and December 31, 2023.

Current wording

Classified loans totaled $24.3 million at June 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, increased $454,000 to $11.4 million at June 30, 2024, from $11.0 million at December 31, 2023, primarily due to an increase in indirect home improvement loans of $456,000. The ratio of nonperforming loans to total gross loans was 0.46% at June 30, 2024, compared to 0.45% at December 31, 2023. There were no OREO properties at both June 30, 2024 and December 31, 2023.

Previous wording

Liabilities. Total liabilities decreased $16.4 million to $2.69 billion at March 31, 2024, from $2.71 billion at December 31, 2023, primarily due to a decrease of $57.0 million in deposits, offset by increases of $36.2 million in borrowings and $4.8 million in other liabilities.

Current wording

Liabilities. Total liabilities decreased $50.8 million to $2.66 billion at June 30, 2024, from $2.71 billion at December 31, 2023, primarily due to a decrease of $139.5 million in deposits, offset by increases of $88.1 million in borrowings and $1.4 million in other liabilities.

Previous wording

Total deposits decreased $57.0 million to $2.47 billion at March 31, 2024, from $2.52 billion at December 31, 2023. CDs, which include retail and non-retail CDs, increased $15.6 million to $1.11 billion at March 31, 2024, from $1.10 billion at December 31, 2023, with non-retail CDs representing 31.0% and 34.2% of total CDs at such dates, respectively. At March 31, 2024, non-retail CDs, which include brokered CDs, online CDs and public funds CDs decreased $30.0 million to $344.5 million, compared to $374.5 million at December 31, 2023, primarily due to a decrease of $30.0 million in brokered CDs.

Current wording

Total deposits decreased $139.5 million to $2.38 billion at June 30, 2024, from $2.52 billion at December 31, 2023. CDs, which include retail and non-retail CDs, increased $451,000 to $1.10 billion at June 30, 2024, from December 31, 2023, with non-retail CDs representing 24.9% and 34.2% of total CDs at such dates, respectively. At June 30, 2024, non-retail CDs, which include brokered CDs, online CDs and public funds CDs decreased $101.1 million to $273.4 million, compared to $374.5 million at December 31, 2023, primarily due to a decrease of $100.3 million in brokered CDs. The decrease in brokered CDs primarily relates to the utilization of FHLB Advances due to overall better rates and factoring FHLB Activity Stock Dividends.

Previous wording

Transactional accounts (noninterest-bearing checking, interest-bearing checking and escrow accounts) decreased $79.9 million to $834.9 million at March 31, 2024, from $914.9 million at December 31, 2023, due to decreases of $56.0 million in interest-bearing checking and $35.5 million in noninterest-bearing checking, partially offset by an increase of $11.6 million in escrow accounts related to mortgages serviced. Money market and savings accounts increased $7.3 million to $518.0 million at March 31, 2024, from $510.7 million at December 31, 2023.

Current wording

Transactional accounts (noninterest-bearing checking, interest-bearing checking and escrow accounts) decreased $124.7 million to $790.2 million at June 30, 2024, from $914.9 million at December 31, 2023, due to decreases of $77.2 million in interest-bearing checking and $40.9 million in noninterest-bearing checking and decrease of $6.6 million in escrow accounts related to mortgages serviced. Money market and savings accounts decreased $15.3 million to $495.4 million at June 30, 2024, from $510.7 million at December 31, 2023.

Previous wording

The Bank had uninsured deposits of approximately $614.1 million or 24.9% of total deposits, at March 31, 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.

Current wording

The Bank had uninsured deposits of approximately $586.6 million or 24.6% of total deposits, at June 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.

Previous wording

At March 31, 2024, borrowings totaled $129.9 million and were comprised of advances from the Federal Reserve Bank’s Bank Term Funding Program (“BTFP”) of $89.9 million, FRB overnight borrowings of $23.0 million, and FHLB fixed-rate advances of $17.1 million. Borrowings increased $36.2 million to $129.9 million at March 31, 2024, from $93.7 million at December 31, 2023. The increased borrowings were partially attributable to a decrease in total deposits.

Current wording

Borrowings increased $88.1 million to $181.9 million at June 30, 2024, from $93.7 million at December 31, 2023. The increased borrowings were primarily attributable to a decrease in total brokered deposits. At June 30, 2024, borrowings totaled $181.9 million and were comprised of FHLB advances of $154.9 million and overnight borrowings of $27.0 million.

Previous wording

Stockholders’*** Equity.*** Total stockholders’ equity increased $13.4 million to $277.9 million at March 31, 2024, from $264.5 million at December 31, 2023. The increase in stockholders’ equity was primarily due to net income of $8.4 million, partially offset by dividends paid of $2.0 million. In addition, stockholders’ equity was positively impacted by decreases in unrealized net losses in securities available-for-sale of $4.3 million, net of tax, and unrealized net gains on fair value and cash flow hedges of $2.6 million, net of tax, reflecting sales of investment securities in unrealized loss positions and changes in market interest rates benefiting hedges during the quarter, resulting in a $6.9 million improvement in accumulated other comprehensive loss.

Current wording

Stockholders’*** Equity.*** Total stockholders’ equity increased $19.5 million to $284.0 million at June 30, 2024, from $264.5 million at December 31, 2023. The increase in stockholders' equity reflects net income of $17.4 million, partially offset by cash dividends totaling $4.1 million and stock repurchases totaling $2.4 million during the six months ended June 30, 2024. Additionally, stockholders' equity was positively impacted by decreases in unrealized net losses in securities available-for-sale of $4.9 million, net of tax, and unrealized net gains on fair value and cash flow hedges of $2.8 million, net of tax, reflecting sales of investment securities in unrealized loss positions and changes in market interest rates benefiting hedges during the quarter, resulting in a $7.8 million decline in accumulated other comprehensive loss.

Previous wording

Book value per common share was $36.06 at March 31, 2024, compared to $34.36 at December 31, 2023. The calculation of book value per share at March 31, 2024, was based on 7,707,651 common shares, after deducting the 98,144 unvested restricted stock shares from the 7,805,795 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.

Current wording

Book value per common share was $37.15 at June 30, 2024, compared to $34.36 at December 31, 2023. The calculation of book value per share at June 30, 2024, was based on 7,764,463 common shares, after deducting the 98,144 unvested restricted stock shares from the 7,742,607 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.

Previous wording

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. Nonaccrual loans have been included in the table as loans carrying a zero yield. The yields on tax-exempt municipal bonds have not been computed on a tax equivalent basis.

Current wording

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.

Previous wording

Net interest margin (“NIM”) decreased 44 basis points to 4.26% for the three months ended March 31, 2024, from 4.70% for the same quarter 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.

Current wording

Net interest margin (“NIM”) decreased 37 basis points to 4.29% for the three months ended June 30, 2024, from 4.66% for the same period 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.

Previous wording

***Interest Income.***Interest income for the three months ended March 31, 2024, increased $6.3 million to $44.9 million, from $38.6 million for the three months ended March 31, 2023. The increase was primarily attributable to a $218.7 million increase in the average balance of total interest-earning assets and a 39-basis point increase in the average yield on total interest-earning assets.

Current wording

***Interest Income.***Interest income for the three months ended June 30, 2024, increased $5.1 million to $45.9 million, from $40.9 million for the three months ended June 30, 2023. The increase was primarily attributable to a $138.7 million increase in the average balance of total interest-earning assets and a 44-basis point increase in the average yield on total interest-earning assets.

Previous wording

***Interest Expense.***Interest expense increased $6.6 million to $14.5 million for the three months ended March 31, 2024, from $8.0 million for the comparable quarter in 2023, primarily due to an increase of interest expense on deposits of $6.3 million and on borrowings of $326,000. The average cost of funds for total interest-bearing liabilities increased 118 basis points to 2.95% for the three months ended March 31, 2024, from 1.77% for the three months ended March 31, 2023. The increase in interest expense was predominantly due to an increase in cost for deposits and borrowings as well as an increase in the average balances of CDs and borrowings. The average cost of total interest-bearing deposits increased 124 basis points to 2.83%, for the three months ended March 31, 2024, compared to 1.59%, for the three months ended March 31, 2023. The average balance of total interest-bearing deposits increased $144.7 million to $1.83 billion for the three months ended March 31, 2024, compared to $1.69 billion for the three months ended March 31, 2023. The average cost of funds, including noninterest-bearing checking, increased 89 basis points to 2.21% for the three months ended March 31, 2024, from 1.32% for the three months ended March 31, 2023.

Current wording

***Interest Expense.***Interest expense increased $6.2 million to $15.5 million for the three months ended June 30, 2024, from $9.3 million for the comparable quarter in 2023, due to an increase of interest expense on deposits of $5.6 million and on borrowings of $582,000. The average cost of funds for total interest-bearing liabilities increased 111 basis points to 3.15% for the three months ended June 30, 2024, from 2.04% for the three months ended June 30, 2023. The increase was predominantly due to an increase in cost for deposits and borrowings as well as an increase in the average balances of CDs and borrowings. The average cost of total interest-bearing deposits increased 115 basis points to 2.97%, for the three months ended June 30, 2024, compared to 1.82%, for the three months ended June 30, 2023. The average balance of total interest-bearing deposits increased $113.8 million to $1.79 billion for the three months ended June 30, 2024, compared to $1.68 billion for the three months ended June 30, 2023. The average cost of funds, including noninterest-bearing checking, increased 90 basis points to 2.38% for the three months ended June 30, 2024, from 1.48% for the three months ended June 30, 2023.

Previous wording

Provision for Credit Losses. For the three months ended March 31, 2024, the provision for credit losses was $1.4 million, consisting of a $1.4 million provision for credit losses on loans, partially offset by a $22,000 recapture of the ACL on unfunded loan commitments, compared to $2.1 million provision for credit losses for the three months ended March 31, 2023, consisting of a $2.4 million provision for credit losses on loans, offset by a $249,000 recapture of the ACL on unfunded loan commitments. The provision for credit losses on loans reflects the increase in the loan portfolio, as well as an increase in nonperforming loans and higher net charge-offs.

Current wording

Provision for Credit Losses. For the three months ended June 30, 2024, the provision for credit losses was $1.1 million, consisting of a $1.0 million provision for credit losses on loans, and a $77,000 provision for credit losses on unfunded loan commitments, compared to $716,000 provision for credit losses for the three months ended June 30, 2023, consisting of a $1.1 million provision for credit losses on loans, offset by a $347,000 recapture of the ACL on unfunded loan commitments. The provision for credit losses on loans reflects the increase in the loan portfolio, as well as an increase in nonperforming loans, and higher net charge-offs.

Previous wording

During the three months ended March 31, 2024, net loan charge-offs totaled $1.5 million, compared to $410,000 during the three months ended March 31, 2023. The increase was primarily due to increases in net charge-offs of $441,000 in indirect home improvement loans, $408,000 in commercial business loans, and $169,000 in marine loans. A further decline in national and local economic conditions, as a result the effects of inflation, a potential 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.

Current wording

During the three months ended June 30, 2024, net loan charge-offs totaled $1.2 million, compared to $650,000 during the three months ended June 30, 2023. This increase was the result of increased net charge-offs of $648,000 in C&I loans and $42,000 in indirect home improvement loans, partially offset by a net recovery of $105,000 in marine loans. A decline in national and local economic conditions, as a result the effects of inflation, a potential 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.

Previous wording

The efficiency ratio, which is calculated by dividing noninterest expense by total net interest income and noninterest income, worsened to 66.36% for the three months ended March 31, 2024, compared to 65.56% for the three months ended March 31, 2023, primarily due to decreases in net interest income and noninterest income.

Current wording

The efficiency ratio, which is calculated by dividing noninterest expense by total net interest income and noninterest income, improved to 65.78% for the three months ended June 30, 2024, compared to 66.52% for the three months ended June 30, 2023, due to a slight decline in noninterest expense as total revenues remained relatively unchanged.

Previous wording

Provision for Income Taxes.* *For the three months ended March 31, 2024, the Company recorded a provision for income taxes of $2.1 million as compared to $2.0 million for the three months ended March 31, 2023. The increase in the income taxes provision was primarily due to a $280,000 increase in pre-tax income during the three months ended March 31, 2024, as compared to the same quarter last year. The effective corporate income tax rates for the three months ended March 31, 2024 and 2023 were 20.2% and 19.9%, respectively. The increase in the effective corporate income tax rate was attributable to a decrease in nontaxable income between periods, to include an increase in non-deductible interest expense attributable to the related assets.

Current wording

Provision for Income Taxes.* *For the three months ended June 30, 2024, the Company recorded a provision for income taxes of $2.4 million as compared to $2.3 million for the three months ended June 30, 2023. The increase in the income taxes provision was primarily due to a decrease in nontaxable income between periods, which included an increase in non-deductible interest expense attributable to the related assets due to rising funding cost. during the three months ended June 30, 2024, as compared to the same quarter last year. The effective corporate income tax rates for the three months ended June 30, 2024 and 2023 were 21.0% and 20.5%, respectively.

Previous wording

***General.***Net income was $8.4 million for the three months ended March 31, 2024, compared to $8.2 million for the three months ended March 31, 2023. The increase in net income was primarily due to a $709,000 or 33.6% decrease in the provision for credit losses, partially offset by a $316,000 or $1.0% decrease in net interest income, a $108,000 or 2.1% decrease in noninterest income and a $95,000 or 4.7% increase in provision for income taxes. Total noninterest expense remained relatively unchanged at $23.5 million for the three months ended March 31, 2024, compared to the same period in 2023.

Current wording

***General.***Net income was $17.4 million for the six months ended June 30, 2024, compared to $17.3 million for the six months ended June 30, 2023. The increase in net income was primarily due to a $927,000 or 9.2% increase in noninterest income, a $348,000 or 12.3% decrease in the provision for loan losses, and a $342,000 or 0.70% decrease in noninterest expense, partially offset by a $1.5 million, or 2.4% decrease in net interest income and a $122,000 or 2.8% increase in the provision for income taxes.

Previous wording

***Net Interest Income.***Net interest income decreased $316,000 to $30.3 million for the three months ended March 31, 2024, from $30.7 million for the three months ended March 31, 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 income increased $6.3 million for the three months ended March 31, 2024, compared to the same period in 2023, primarily due to an increase of $5.0 million in interest income on loans receivable, including fees, impacted primarily as a result of new loans being originated at higher rates and variable-rate loans repricing higher following increased market interest rates during the first six months of 2023. In addition, interest income on investment securities, excluding FHLB stock, increased $1.3 million, and interest-bearing deposits at other financial institutions increased $15,000, during the three months ended March 31, 2024, compared to the same period in 2023, primarily due to recent increases in market interest rates. Total interest expense increased $6.6 million for the three months ended March 31, 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 transactional accounts to higher cost CDs.

Current wording

***Net Interest Income.***Net interest income decreased $1.5 million to $60.7 million for the six months ended June 30, 2024, from $62.2 million for the six months ended June 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 income increased $11.3 million for the six months ended June 30, 2024, compared to the same period in 2023, primarily due to an increase of $9.2 million in interest income on loans receivable, including fees, impacted primarily as a result of a 32 basis point increase in the average yield earned on loans receivable due to new loans being originated at higher rates and variable-rate loans repricing higher, and a higher average balance of loans outstanding. In addition, interest income on investment securities, excluding FHLB stock, increased $2.3 million, partially offset by a decrease in interest-bearing deposits at other financial institutions of $177,000, during the six months ended June 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. Total interest expense increased $12.8 million for the six months ended June 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 transactional accounts to higher cost CDs.

Previous wording

***Noninterest Income.***Noninterest income decreased $108,000 to $5.1 million for the three months ended March 31, 2024, from $5.2 million for the three months ended March 31, 2023. The decrease reflects an $8.0 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, and a $650,000 decrease in other noninterest income, primarily due to fair value adjustments to loans in the loan portfolio, partially offset by an $8.2 million increase in gain on sale of MSRs and a $362,000 gain on sale of loans. Gross margin on home loan sales increased to 3.43% for the three months ended March 31, 2024, from 3.05% for the three months ended March 31, 2023.

Current wording

***Noninterest Income.***Noninterest income increased $927,000 to $11.0 million for the six months ended June 30, 2024, from $10.1 million for the six months ended June 30, 2023. The increase was primarily the result of an $8.2 million increase in gain on sale of MSRs recorded during the first six months of 2024 with no similar transaction occurring in the comparable six month period in 2023, and an $878,000 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 $98.5 million of lower-yielding securities, and a $439,000 decrease in service charges and fee income. Gross margin on home loan sales increased to 3.14% for the six months ended June 30, 2024, from 3.06% for the six months ended June 30, 2023.

Previous wording

***Noninterest Expense.***Noninterest expense was $23.5 million for both the three months ended March 31, 2024 and 2023. The variations in noninterest expense were primarily due to the absence of acquisition costs in the current period, in contrast to $1.5 million incurred in the prior year. Additionally, there was a decrease of $307,000 in salaries and benefits, partially offset by increases of $482,000 in amortization of core deposit intangible, $390,000 in data processing, $316,000 in operations, $245,000 in professional and board fees, $185,000 in occupancy expense, and $115,000 in loan costs.

Current wording

***Noninterest Expense.***Noninterest expense decreased $342,000 to $47.4 million for the six months ended June 30, 2024, from $47.7 million for the six months ended June 30, 2023. The decrease was primarily due to the absence of acquisition costs in the current period, in contrast to $1.6 million incurred in the prior year. Additionally, there was a decrease of $442,000 in salaries and benefits and $275,000 in loan costs, partially offset by increases of $765,000 in data processing primarily related to the Branch Purchase, $476,000 in professional and board fees, $378,000 in amortization of core deposit intangible, $292,000 in occupancy expense, and $192,000 in operations.

Previous wording

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 March 31, 2024, the Bank’s total borrowing capacity was $698.7 million with the FHLB of Des Moines, with unused borrowing capacity of $681.2 million. The FHLB borrowing limit is based on certain categories of loans, primarily real estate loans that qualify as collateral for FHLB advances. At March 31, 2024, the Bank held approximately $1.09 billion in loans that qualify as collateral for FHLB advances.

Current wording

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 June 30, 2024, the Bank’s total borrowing capacity was $694.1 million with the FHLB of Des Moines, with unused borrowing capacity of $511.8 million. The FHLB borrowing limit is based on certain categories of loans, primarily real estate loans that qualify as collateral for FHLB advances. At June 30, 2024, the Bank held approximately $1.11 billion in loans that qualify as collateral for FHLB advances.

Previous wording

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 $269.3 million and a combined credit limit of $101.0 million in written federal funds lines of credit through correspondent banking relationships at March 31, 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 March 31, 2024, the Bank held approximately $632.8 million in loans that qualify as collateral for the FRB line of credit. Additionally, securities with a carrying value of $76.2 million were pledged primarily to provide contingent liquidity through the BTFP at the Federal Reserve Bank at March 31, 2024, with a current limit of $90.1 million and no unused borrowing capacity. 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.

Current wording

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 $267.6 million and a combined credit limit of $101.0 million in written federal funds lines of credit through correspondent banking relationships at June 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 June 30, 2024, the Bank held approximately $627.1 million in loans that qualify as collateral for the FRB line of credit. 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.

Previous wording

The Bank’s Asset and Liability Management Policy permits management to utilize brokered deposits up to 20% of deposits or $494.9 million at March 31, 2024. Total brokered deposits at March 31, 2024 were $339.3 million. Management utilizes brokered deposits to mitigate interest rate risk and to enhance liquidity when appropriate.

Current wording

The Bank’s Asset and Liability Management Policy permits management to utilize brokered deposits up to 20% of deposits or $478.1 million at June 30, 2024. Total brokered deposits at June 30, 2024 were $265.0 million. Management utilizes brokered deposits to mitigate interest rate risk and to enhance liquidity when appropriate.

Previous wording

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 March 31, 2024, outstanding loan commitments, including unused lines of credit totaled $566.6 million. The Company purchased $38.0 million in securities during the three months ended March 31, 2024. The Company purchased no securities during the three months ended March 31, 2023. Proceeds from securities repayments, maturities and sales were $48.3 million and $2.5 million during the three months ended March 31, 2024 and 2023, respectively.

Current wording

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 June 30, 2024, outstanding loan commitments, including unused lines of credit totaled $582.6 million. The Company purchased $38.0 million in securities during the six months ended June 30, 2024. The Company purchased $3.9 million in securities during the six months ended June 30, 2023. Proceeds from securities repayments, maturities and sales were $107.5 million and $8.8 million during the six months ended June 30, 2024 and 2023, respectively.

Previous wording

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the three months ended March 31, 2024 and 2023, the Bank sold $93.9 million and $77.3 million in loans, respectively.

Current wording

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the six months ended June 30, 2024 and 2023, the Bank sold $258.4 million and $204.3 million in loans, respectively.

Previous wording

Total deposits decreased $57.0 million during the three months ended March 31, 2024 primarily driven by a net decrease in brokered deposits of $92.2 million. CDs scheduled to mature in three months or less at March 31, 2024, totaled $336.0 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.

Current wording

Total deposits decreased $139.6 million during the six months ended June 30, 2024 primarily driven by a net decrease in brokered deposits of $166.6 million. CDs scheduled to mature in three months or less at June 30, 2024, totaled $365.8 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.

Previous wording

For the remainder of 2024, we project that fixed commitments will include $1.4 million of operating lease payments. For information regarding our operating leases, see “Note 7 – Leases” of the Notes to Consolidated Financial Statements included in this report. FHLB advances of $1.1 million are scheduled to mature within the next twelve months.

Current wording

For the remainder of 2024, we project that fixed commitments will include $963,000 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 advances of $133.1 million are scheduled to mature within the next twelve months.