NOTE 20 - BUSINESS SEGMENTS

The Company’s business segments are determined based on the products and services provided, as well as the nature of the related business activities, and they reflect the manner in which 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;

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.

The FTP methodology is based on management’s estimated cost of originating funds including the cost of overhead for deposit generation.

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, automated teller machines (“ATM”), 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 December 31, 2019, the Company’s retail deposit branch network consisted of 21 branches in the Pacific Northwest. At December 31, 2019 and December 31, 2018, deposits totaled $1.39 billion and $1.27 billion, respectively. 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 originating adjustable rate mortgage (“ARM”) loans held for investment. The majority of mortgage loans are sold to or securitized by FNMA, FHLMC, GNMA or the FHLB of Des Moines, while the Company retains the right to service these loans. Loans originated under the guidelines of the Federal Housing Administration or FHA, US Department of Veterans Affairs or VA, and United States Department of Agriculture or 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 securitizers and correspondent lenders. A small percentage of loans are brokered to other lenders. On occasion, the Company may sell a portion of its MSR 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 mortgage servicing rights within this business segment. One-to-four-family loans originated for investment are allocated to the home lending segment with a corresponding provision expense and FTP for cost of funds.

Segment Financial Results

The tables below summarize the financial results for each segment based primarily on the number of FTEs and assets within each segment for the years ended December 31, 2019 and 2018:


	At or For the Year Ended December 31, 2019
	Home Lending		Commercial and Consumer Banking		Total
Condensed income statement:
Net interest income (1)	$	6,307	$	64,001	$	70,308
Provision for loan losses (2)		(433)		(2,447)		(2,880)
Noninterest income		13,209		9,826		23,035
Noninterest expense		(14,283)		(48,050)		(62,333)
Income before provision for income taxes		4,800		23,330		28,130
Provision for income taxes		(924)		(4,489)		(5,413)
Net income	$	3,876	$	18,841	$	22,717
Total assets	$	312,404	$	1,400,652	$	1,713,056
Total average assets for year ended	$	272,901	$	1,377,468	$	1,650,369
FTEs		127		325		452


	At or For the Year Ended December 31, 2018
	Home Lending		Commercial and Consumer Banking		Total
Condensed income statement:
Net interest income (1)	$	3,324	$	48,774	$	52,098
Provision for loan losses		(224)		(1,316)		(1,540)
Noninterest income (3)		14,025		12,825		26,850
Noninterest expense		(15,894)		(32,944)		(48,838)
Income before provision for income taxes		1,231		27,339		28,570
Provision for income taxes		(182)		(4,041)		(4,223)
Net income	$	1,049	$	23,298	$	24,347
Total assets	$	246,280	$	1,375,364	$	1,621,644
Total average assets for year ended	$	229,661	$	945,052	$	1,174,713
FTEs		115		309		424

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(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) The allocated provision for loan losses is partially associated with one-to-four-family, and home equity loans acquired from Anchor Bank totaling $198.5 million at December 31, 2019.

(3) Bargain purchase gain of $7.4 million was included in the commercial and consumer banking segment.