fsbw20240331

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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 March 31, 2024

☐ 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 May 8, 2024, there were 7,796,048 outstanding shares of the registrant’s common stock.

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FS Bancorp, Inc.

Form 10‑Q

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		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets at March 31, 2024 (Unaudited) and December 31, 2023	3

	Consolidated Statements of Income for the Three Months Ended March 31, 2024 and 2023 (Unaudited)	4

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2024 and 2023 (Unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2024 and 2023 (Unaudited)	6

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (Unaudited)	7 - 8

	Notes to Consolidated Financial Statements	9 - 45

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46 - 59

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59

Item 4.	Controls and Procedures	59

PART II	OTHER INFORMATION	60

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	61

Item 4.	Mine Safety Disclosures	61

Item 5.	Other Information	61

Item 6.	Exhibits	62

SIGNATURES		63

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

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

	March 31,			December 31,
ASSETS	2024			2023
Cash and due from banks	$	17,149		$	17,083
Interest-bearing deposits at other financial institutions		28,257			48,608
Total cash and cash equivalents		45,406			65,691
Certificates of deposit at other financial institutions		23,222			24,167
Securities available-for-sale, at fair value (amortized cost of $309,959 and $328,695, net of allowance for credit losses of $0 and $0, respectively)		279,643			292,933
Securities held-to-maturity, net of allowance for credit losses of $45 and $45 (fair value of $7,785 and $7,666, respectively)		8,455			8,455
Loans held for sale, at fair value		49,957			25,668
Loans receivable, net of allowance for credit losses of $31,479 and $31,534 (includes $15,003 and $15,088 of loans at fair value, respectively)		2,415,379			2,401,481
Accrued interest receivable		14,455			14,005
Premises and equipment, net		30,326			30,578
Operating lease right-of-use (“ROU”) assets		6,202			6,627
Federal Home Loan Bank (“FHLB”) stock, at cost		2,909			2,114
Deferred tax asset, net		4,832			6,725
Bank owned life insurance (“BOLI”), net		37,958			37,719
Mortgage servicing rights (“MSRs”), held at the lower of cost or fair value		9,009			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		16,402			17,343
Other assets		21,958			18,395
TOTAL ASSETS	$	2,969,705		$	2,972,669
LIABILITIES
Deposits:
Noninterest-bearing accounts	$	646,899		$	670,831
Interest-bearing accounts		1,818,398			1,851,492
Total deposits		2,465,297			2,522,323
Borrowings		129,940			93,746
Subordinated notes:
Principal amount		50,000			50,000
Unamortized debt issuance costs		(456	)		(473	)
Total subordinated notes less unamortized debt issuance costs		49,544			49,527
Operating lease liabilities		6,410			6,848
Other liabilities		40,582			35,737
Total liabilities		2,691,773			2,708,181
COMMITMENTS AND CONTINGENCIES (NOTE 10)
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; 7,805,795 and 7,800,545 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively		78			78
Additional paid-in capital		57,552			57,362
Retained earnings		236,720			230,354
Accumulated other comprehensive loss, net of tax		(16,418	)		(23,306	)
Total stockholders’ equity		277,932			264,488
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,969,705		$	2,972,669

See accompanying notes to these consolidated financial statements.

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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

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

	Three Months Ended
	March 31,
	2024			2023
INTEREST INCOME
Loans receivable, including fees	$	40,997		$	35,992
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions		3,883			2,620
Total interest and dividend income		44,880			38,612
INTEREST EXPENSE
Deposits		12,882			6,624
Borrowings		1,167			841
Subordinated notes		485			485
Total interest expense		14,534			7,950
NET INTEREST INCOME		30,346			30,662
PROVISION FOR CREDIT LOSSES		1,399			2,108
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		28,947			28,554
NONINTEREST INCOME
Service charges and fee income		2,552			2,608
Gain on sale of loans held for sale		1,838			1,476
Gain on sale of MSRs		8,215			—
Loss on sale of investment securities		(7,998	)		—
Earnings on cash surrender value of BOLI		240			221
Other noninterest income		264			914
Total noninterest income		5,111			5,219
NONINTEREST EXPENSE
Salaries and benefits		13,557			13,864
Operations		3,008			2,692
Occupancy		1,705			1,520
Data processing		1,958			1,568
Loan costs		585			470
Professional and board fees		923			678
Federal Deposit Insurance Corporation (“FDIC”) insurance		532			580
Marketing and advertising		227			190
Acquisition costs		—			1,501
Amortization of core deposit intangible		941			459
Impairment of MSRs		93			2
Total noninterest expense		23,529			23,524
INCOME BEFORE PROVISION FOR INCOME TAXES		10,529			10,249
PROVISION FOR INCOME TAXES		2,132			2,037
NET INCOME	$	8,397		$	8,212
Basic earnings per share	$	1.07		$	1.06
Diluted earnings per share	$	1.06		$	1.04

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
	March 31,
	2024			2023
Net income	$	8,397		$	8,212
Other comprehensive income:
Securities available-for-sale:
Unrealized holding (loss) gain during period		(2,552	)		6,136
Income tax benefit (provision) related to unrealized holding (loss) gain		549			(1,320	)
Reclassification adjustment for realized loss, net included in net income		7,998			—
Income tax provision related to reclassification for realized loss, net		(1,719	)		—
Derivative financial instruments:
Unrealized derivative gain (loss) during period		5,050			(1,517	)
Income tax (provision) benefit related to unrealized derivative gain (loss)		(1,086	)		322
Reclassification adjustment for realized gain, net included in net income		(1,722	)		(907	)
Income tax provision related to reclassification, net		370			195
Other comprehensive income, net of tax		6,888			2,909
COMPREHENSIVE INCOME	$	15,285		$	11,121

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 March 31, 2024 and 2023

												Accumulated
												Other
						Additional						Comprehensive			Total
	Common Stock					Paid-in			Retained			Loss,			Stockholders'
	Shares			Amount		Capital			Earnings			Net of Tax			Equity
BALANCE, January 1, 2023		7,736,185		$	77	$	55,187		$	202,065		$	(25,632	)	$	231,697
Net income		—		$	—		—			8,212			—		$	8,212
Dividends paid ($0.25 per share)		—		$	—		—			(1,935	)		—		$	(1,935	)
Share-based compensation		—		$	—		654			—			—		$	654
Issuance of common stock-employee stock purchase plan		7,350		$	—		271			—			—		$	271
Restricted stock awards forfeited		(4,812	)	$	—		—			—			—		$	—
Common stock repurchased for employee/director taxes paid on restricted stock awards		(440	)	$	—		(16	)		—			—		$	(16	)
Stock options exercised, net		5,000		$	—		42			—			—		$	42
Other comprehensive income, net of tax		—		$	—		—			—			2,909		$	2,909
BALANCE, March 31, 2023		7,743,283		$	77	$	56,138		$	208,342		$	(22,723	)	$	241,834

BALANCE, January 1, 2024		7,800,545		$	78	$	57,362		$	230,354		$	(23,306	)	$	264,488
Net income		—		$	—		—			8,397			—		$	8,397
Dividends paid ($0.26 per share)		—		$	—		—			(2,031	)		—		$	(2,031	)
Share-based compensation		—		$	—		395			—			—		$	395
Issuance of common stock- employee stock purchase plan		9,250		$	—		302			—			—		$	302
Common stock repurchased - repurchase plan		(17,612	)	$	—		—			—			—		$	—
Restricted stock awards forfeited		(4,000	)	$	—		—			—			—		$	—
Stock options exercised, net		17,612		$	—		(507	)		—			—		$	(507	)
Other comprehensive income, net of tax		—		$	—		—			—			6,888		$	6,888
BALANCE, March 31, 2024		7,805,795		$	78	$	57,552		$	236,720		$	(16,418	)	$	277,932

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)

	Three Months Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES	2024			2023
Net income	$	8,397		$	8,212
Adjustments to reconcile net income to net cash from operating activities
Provision for credit losses		1,399			2,108
Depreciation, amortization and accretion		2,835			3,358
Compensation expense related to stock options and restricted stock awards		395			654
Change in cash surrender value of BOLI		(240	)		(221	)
Gain on sale of loans held for sale		(1,838	)		(1,476	)
Gain on sale of MSRs		(8,215	)		—
Loss on sale of investment securities		7,998			—
Origination of loans held for sale		(109,554	)		(73,050	)
Proceeds from sale of loans held for sale		94,874			78,316
Impairment of MSRs		93			2
Changes in operating assets and liabilities
Accrued interest receivable		(450	)		(662	)
Other assets		(496	)		(470	)
Other liabilities		5,079			1,700
Net cash from operating activities		277			18,471
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in securities available-for-sale:
Proceeds from sale of investment securities		44,036			—
Maturities, prepayments, and calls		4,293			2,497
Purchases		(38,009	)		—
Maturities of certificates of deposit at other financial institutions		1,925			—
Purchase of certificates of deposit at other financial institutions		(980	)		—
Portfolio loan originations and principal collections, net		(8,226	)		(55,269	)
Net cash from acquisitions		—			336,157
Proceeds from sale of mortgage servicing rights		16,168			—
Purchase of portfolio loans		(15,492	)		(829	)
Purchase of premises and equipment		(357	)		(954	)
Change in FHLB stock, net		(795	)		6,748
Net cash from investing activities		2,563			288,350
CASH FLOWS USED BY FINANCING ACTIVITIES
Net decrease in deposits		(57,083	)		(109,439	)
Proceeds from borrowings		175,000			382,500
Repayments of borrowings		(138,806	)		(561,500	)
Dividends paid on common stock		(2,031	)		(1,935	)
(Disbursements) proceeds from stock options exercised, net		(507	)		42
Common stock repurchased for employee/director taxes paid on restricted stock awards		—			(16	)
Issuance of common stock - employee stock purchase plan		302			271
Net cash used by financing activities		(23,125	)		(290,077	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(20,285	)		16,744

CASH AND CASH EQUIVALENTS, beginning of period		65,691			41,437
CASH AND CASH EQUIVALENTS, end of period	$	45,406		$	58,181

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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	$	12,087	$	7,064
Income taxes		—		—

SUPPLEMENTARY DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES
Change in fair value on available-for-sale investment securities	$	5,446	$	6,136
Change in fair value on fair value and cash flow hedges		3,324		(2,424	)
Change in fair value on portfolio loans measured under the fair value option		2		577
Retention in gross MSRs from loan sales		576		405
ROU assets in exchange for lease liabilities		—		1,574
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 months ended March 31, 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”) and business combinations.

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 15 – Business Segments.”

Subsequent Events – The Company has evaluated events and transactions after March 31, 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.

●	Require disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing performance.

This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The amendments should be applied retrospectively to all prior periods presented in the 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.

NOTE 2 – BUSINESS COMBINATION

On February 24, 2023, the Company’s wholly-owned subsidiary, 1st Security Bank, completed the purchase of seven branches (“Branch Purchase”) from Columbia State Bank to expand its franchise in Washington and Oregon. The Branch Purchase included seven retail bank branches located in the communities of Goldendale and White Salmon, Washington and Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon. In accordance with the Purchase and Assumption Agreement, dated as of November 7, 2022, between Columbia State Bank and 1st Security Bank, the Bank acquired $425.5 million of deposits, a portfolio of performing loans, six owned bank branches, one lease associated with the bank branches and certain other assets of the branches. In consideration of the purchased assets and transferred liabilities, 1st Security Bank paid (a) the unpaid principal balance and accrued interest of $66.6 million for the loans acquired, (b) the fair value, or approximately $6.3 million, for the bank facilities and certain other assets associated with the acquired branches, and (c) a deposit premium of 4.15% for core deposits and 2.5% for public funds on substantially all of the deposits assumed, which equated to approximately $16.4 million. The transaction was settled with Columbia State Bank paying cash of $334.7 million to 1st Security Bank for the difference between the total assets purchased and the total liabilities assumed.