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Note 14 - Business Segments
 9 Months Ended
Sep. 30, 2024
Notes to Financial Statements  
Segment Reporting Disclosure [Text Block]

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;

 

●

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.

 

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.

 

 

 

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 

 

 

 

  

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.

(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.

(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.