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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

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

For the fiscal year ended December 31, 2022         OR

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

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)	(I.R.S. Employer Identification Number)
6920 220th Street SW, Mountlake Terrace, Washington	98043
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code:	(425) 771-5299

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, $0.01 par value per share	FSBW	The NASDAQ Stock Market LLC

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐    No ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐    No ☒

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 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 has filed a report on and attestation to its management’s assessment of the effectiveness of

its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☒

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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

As of March 10, 2023, there were 7,738,283 shares of the Registrant’s common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the Registrant was $196,512,227 based on the closing sales price of $28.71 per share of the Registrant’s common stock as quoted on the NASDAQ Stock Market LLC on June 30, 2022. For purposes of this calculation, common stock held by executive officers and directors of the Registrant is considered to be held by affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders (“Proxy Statement”) are incorporated by reference into Part III.

FS Bancorp, Inc.

Table of Contents

			Page
PART I
Item 1.	Business:		5
		General	5
		Market Area	6
		Lending Activities	7
		Loan Originations, Servicing, Purchases and Sales	15
		Asset Quality	18
		Allowance for Loan Losses	19
		Investment Activities	22
		Deposit Activities and Other Sources of Funds	24
		Subsidiary and Other Activities	27
		Competition	27
		Employees	27
		How We Are Regulated	31
		Taxation	39
Item 1A.	Risk Factors		40
Item 1B.	Unresolved Staff Comments		54
Item 2.	Properties		54
Item 3.	Legal Proceedings		55
Item 4.	Mine Safety Disclosures		55
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		55
Item 6.	Reserved		57
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		57
		Overview	57
		Critical Accounting Policies and Estimates	59
		Our Business and Operating Strategy and Goals	62
		Comparison of Financial Condition at December 31, 2022 and December 31, 2021	63
		Average Balances, Interest and Average Yields/Costs	66
		Rate/Volume Analysis	67
		Comparison of Results of Operations for the Years Ended December 31, 2022 and December 31, 2021	67
		Asset and Liability Management and Market Risk	71
		Recent Accounting Pronouncements	75
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		75
Item 8.	Financial Statements and Supplementary Data		75
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		138
Item 9A.	Controls and Procedures		138
Item 9B.	Other Information		139
Item 9C.	Disclosure Regarding Foreign Jurisdiction that Prevent Inspections		139

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		Page
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	139
Item 11.	Executive Compensation	140
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	140
Item 13.	Certain Relationships and Related Transactions, and Director Independence	140
Item 14.	Principal Accounting Fees and Services	141
PART IV
Item 15.	Exhibits and Financial Statement Schedules	142
Item 16.	Form 10-K Summary	143
SIGNATURES		144

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

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Forward-Looking Statements

This Form 10-K contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions. Forward-looking statements include, but are not limited to:

● statements of our goals, intentions, and expectations;

● statements regarding our business plans, prospects, growth, and operating strategies;

● statements regarding the quality of our loan and investment portfolios; and

● estimates of our risks and future costs and benefits.

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

● expected revenues, cost savings, synergies and other benefits from our  branch acquisitions, might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; and the requisite regulatory approvals for the acquisition might not be obtained;

● potential adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels; labor shortages, the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war, including Russia’s invasion of Ukraine, as well as increasing oil prices and supply chain disruptions, and any governmental or societal response to the COVID-19 pandemic, including the possibility of new COVID-19 variants;

● the credit risks of lending activities, including changes in the level and trend of loan delinquencies, write offs, changes in our allowance for credit losses on loans (“ACLL”), and provision for credit losses on loans that may be impacted by deterioration in the housing and commercial real estate markets;

● secondary market conditions and our ability to originate loans for sale and sell loans in the secondary market;

● fluctuations in the demand for loans, the number of unsold homes, land and other properties, and fluctuations in real estate values in our market area;

● staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

● the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

● changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

● uncertainty regarding the future of the London Interbank Offered Rate (“LIBOR”), and the transition away from LIBOR toward new interest rate benchmarks;

● increased competitive pressures among financial services companies;

● our ability to execute our plans to grow our residential construction lending, our home lending operations, our warehouse lending, and the geographic expansion of our indirect home improvement lending;

● our ability to attract and retain deposits;

● our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

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● our ability to manage operating costs and expenses;

● our ability to retain key members of our senior management team;

● changes in consumer spending, borrowing, and savings habits;

● our ability to successfully manage our growth;

● legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, and in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other governmental initiatives affecting the financial services industry;

● our ability to pay dividends on our common stock;

● the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets;

● changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board, or the Financial Accounting Standards Board (“FASB”);

● costs and effects of litigation, including settlements and judgments;

● disruptions, security breaches, or other adverse events, failures, or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;

● inability of key third-party vendors to perform their obligations to us;

● the effects of natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; and

● other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products and services, and other risks described elsewhere in this Form 10-K and our other reports filed with the U.S. Securities and Exchange Commission (“SEC”).

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

Available Information

The Company provides a link on its investor information page at www.fsbwa.com to filings with the SEC for purposes of providing copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to the SEC. Other than an investor’s own internet access charges, these filings are free of charge and available through the SEC’s website at www.sec.gov. The information contained on the Company’s website is not included as part of, or incorporated by reference into, this Annual Report on Form 10-K.

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PART 1

Item 1. Business

General

FS Bancorp, a Washington corporation, was organized in September 2011 for the purpose of becoming the holding company of 1st Security Bank upon the Bank’s conversion from a mutual to a stock savings bank (“Conversion”). The Conversion was completed on July 9, 2012. At December 31, 2022, the Company had consolidated total assets of $2.63 billion, total deposits of $2.13 billion, and stockholders’ equity of $231.7 million. The Company has not engaged in significant activity other than holding the stock of and providing capital to the Bank. Accordingly, the information set forth in this Annual Report on Form 10-K (“Form 10-K”), including the consolidated financial statements and related data, relates primarily to the Bank.

1st Security Bank is a relationship-driven community bank. The Bank delivers banking and financial services to local families, local and regional businesses and industry niches mostly within distinct Puget Sound area communities. The Bank emphasizes long-term relationships with families and businesses within the communities served, working with them to meet their financial needs. The Bank is also actively involved in community activities and events within these market areas, which further strengthens these relationships. The Bank has been serving the Puget Sound area since 1907. Originally chartered as a credit union, and known as Washington’s Credit Union, the Bank served various select employment groups. On April 1, 2004, the Bank converted from a credit union to a Washington state-chartered mutual savings bank. Upon completion of the Conversion in July 2012, 1st Security Bank became a Washington state-chartered stock savings bank and the wholly-owned subsidiary of the Company.

At December 31, 2022, the Bank maintained the headquarters office that produces loans and accepts deposits located in Mountlake Terrace, Washington, and an administrative office in Aberdeen, Washington, as well as 20 full-service bank branches and 10 home loan production offices in suburban communities in the greater Puget Sound area. The Bank also has one home loan production office in the Tri-Cities, Washington and our newest loan production office in Vancouver, Washington. The headquarters is located in Mountlake Terrace, in Snohomish County, Washington. The administrative office is located in Aberdeen, in Grays Harbor County, Washington.  The 20 full-service bank branches are located in the following counties: three in Snohomish, two in King, two in Clallam, two in Jefferson, two in Pierce, five in Grays Harbor, two in Thurston, and two in Kitsap County. Of these branch locations, 12 are owned and eight are leased facilities.  Our seven stand-alone loan production offices are located in Puyallup and Tacoma, in Pierce County, Bellevue, in King County, Port Orchard, in Kitsap County, and Everett, in Snohomish County in the Puget Sound region and in the Tri-Cities (Kennewick), in Benton County in Eastern Washington, and our newest loan production office is located in Vancouver, in Clark County, Washington.  

The Company is a diversified lender with a focus on the origination of commercial real estate, one-to-four-family, and home equity loans, consumer loans, including a variety of indirect home improvement (“fixture secured loans”), and marine loans, and commercial business loans.  Historically, consumer loans, in particular fixture secured loans, represented the largest portion of the Company’s loan portfolio and has been the mainstay of the Company’s lending strategy.  In recent years, the Company has placed more of an emphasis on real estate lending products, such as one-to-four-family, and commercial real estate loans, including speculative residential construction loans, as well as commercial business loans, while continuing to grow the current size of the consumer loan portfolio. The Company reintroduced in-house originations of residential mortgage loans in 2012, primarily for sale into the secondary market, through a mortgage banking program. The Company’s lending strategies are intended to take advantage of: (1) the Company’s historical strength in indirect consumer lending, (2) recent market consolidation that has created new lending opportunities, and (3) relationship lending. Retail deposits will continue to serve as an important funding source. For more information regarding the business and operations of 1st Security Bank, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.

The Company has from time to time sought strategic acquisitions, through either whole bank acquisitions or branch purchases to increase its customer base and/or to create additional distribution infrastructure. On November 5, 2022, the Bank entered into a Purchase and Assumption Agreement for the acquisition of seven retail bank branches from Columbia State Bank, which was completed on February 24, 2023 (the “Columbia Branch Purchase”).

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The seven branch locations are in the communities of  Goldendale and White Salmon, Washington, and Manzanita, Newport, Ontario, Tillamook,  and Waldport, Oregon. In connection with the Columbia Branch Purchase, the Bank acquired approximately $425.5 million in deposits and $65.8 million in loans based on February 24, 2023 financial information and subject to a post-closing confirmation and adjustment review.  See Item 8, “Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 24 - Recent Developments ” of this Form 10-K.  In 2018, the Company completed its acquisition of Anchor Bancorp and acquired $357.9 million in deposits and $361.6 million in loans. The Anchor Bancorp acquisition expanded our Puget Sound-focused retail footprint by adding nine full-service bank branches within the communities of Aberdeen, Centralia (closed as of December 31, 2022), Elma, Lacey, Montesano, Ocean Shores, Olympia, Puyallup, and Westport, Washington.  In 2016, the Company completed the purchase of four retail bank branches located on the Olympic Peninsula from Bank of America whereby it acquired $186.4 million in deposits and $419,000 in loans.

1st Security Bank is examined and regulated by the Washington State Department of Financial Institutions (“DFI”), its primary regulator, and by the Federal Deposit Insurance Corporation (“FDIC”). 1st Security Bank is required to have certain reserves set by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and is a member of the Federal Home Loan Bank of Des Moines (“FHLB” or “FHLB of Des Moines”), which is one of the 11 regional banks in the Federal Home Loan Bank System.

The principal executive offices of the Company are located at 6920 220th Street SW, Mountlake Terrace, Washington 98043 and the main telephone number is (425) 771-5299.

Market Area

As of December 31, 2022, the Company conducted operations, including loan and/or deposit services out of its headquarters, 10 loan production offices (seven of which stand alone), 20 full-service bank branches in the Puget Sound region of Washington, one stand-alone loan production office in Eastern Washington, and one loan production office in Vancouver, Washington. The headquarters is located in Mountlake Terrace, in Snohomish County, Washington. The five stand-alone loan production offices are located in the Puget Sound region in Puyallup and Tacoma, in Pierce County, Bellevue, in King County, Port Orchard, in Kitsap County, and Everett, in Snohomish County.  The loan production office in Eastern Washington is located in the Tri-Cities (Kennewick), in Benton County, and our newest loan production office is located in Vancouver, in Clark County, Washington. The 20 full-service bank branches are located in the following counties: three in Snohomish, two in King, two in Clallam, two in Jefferson, two in Pierce, five in Grays Harbor, two in Thurston, and two in Kitsap County. See Item 8. “Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 24 - Recent Developments” of this Form 10-K.

The primary market area for business operations is the Seattle-Tacoma-Bellevue, Washington Metropolitan Statistical Area (the “Seattle MSA”).  Kitsap, Clallam, Jefferson, Thurston, and Grays Harbor counties, though not in the Seattle MSA, are also part of the Company’s market area. This overall region is typically known as the Puget Sound region. The population of the Puget Sound region as estimated by Puget Sound Regional Council was 4.4 million in 2022, over half of the state’s population, representing a large population base for potential business. The region has a well-developed urban area in the western portion along Puget Sound, with the north, central and eastern portions containing a mixture of developed residential and commercial neighborhoods and undeveloped, rural neighborhoods.

The Puget Sound region is the largest business center in both the State of Washington and the Pacific Northwest. Currently, key elements of the economy are aerospace, military bases, clean technology, biotechnology, education, information technology, logistics, international trade and tourism. The region is well known for the long presence of The Boeing Corporation and Microsoft, two major industry leaders, and for its leadership in technology. Amazon.com has expanded significantly in the Seattle downtown area. The workforce in general is well-educated and strong in technology. Washington State’s location with regard to the Pacific Rim, along with a deep-water port has made international trade a significant part of the regional economy. Tourism has also developed into a major industry for the area, due to the scenic beauty, temperate climate and easy accessibility.

King County, which includes the city of Seattle, has the largest employment base and overall level of economic activity. Six of the largest employers in the state are headquartered in King County including Microsoft Corporation, University of Washington, Amazon.com, King County Government, Starbucks, and Swedish Health Services. Pierce

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County is the second most populous county in the state and its economy is also well diversified with the presence of military related government employment (Joint Base Lewis-McChord), along with health care (the MultiCare Health System and the Franciscan Health System). In addition, there is a large employment base in the economic sectors of shipping (the Port of Tacoma) and aerospace employment (Boeing). Snohomish County to the north has an economy based on aerospace employment (Boeing), health care (Providence Regional Medical Center), and military (the Everett Naval Station) along with additional employment concentrations in biotechnology, electronics/computers, and wood products.

The United States Navy is a key element for Kitsap County’s economy. The United States Navy is the largest employer in the county, with installations at Puget Sound Naval Shipyard, Naval Undersea Warfare Center Keyport and Naval Base Kitsap (which comprises former Naval Submarine Base Bangor, and Naval Station Bremerton). The largest private employers in the county are the Harrison Medical Center and Port Madison Enterprises.  Clallam County depends on agriculture, forestry, fishing, outdoor recreation and tourism. Jefferson County’s largest private employer is Port Townsend Paper Mill and the largest employer overall (private and public) is Jefferson Healthcare. Thurston County includes Olympia, home of Washington State’s capital and its economic base is largely driven by state government related employment.  

Unemployment in Washington was an estimated 4.2% at December 31, 2022, slightly higher than national trends as disclosed in the U.S. Bureau of Labor Statistics reflecting 3.5%. King County’s estimated unemployment rate was 2.8%, a decrease from 3.2% in the prior year. The estimated unemployment rate in Snohomish County at year end 2022 was 3.2%, a decrease from 3.8% at year end 2021.  Kitsap County’s estimated unemployment rate was 4.3% at December 31, 2022, compared to 3.3% at December 31, 2021.  At December 31, 2022, the estimated unemployment rate in Pierce County was 5.3%, up from 4.1% at December 31, 2021. Grays Harbor County’s, and Thurston County’s, estimated unemployment rates increased to 7.6% and 4.7%, respectively at December 31, 2022, compared to 5.5% and 3.5%, at year end 2021, respectively. Outside of the Puget Sound area, the Tri-Cities market includes two counties, Benton and Franklin, and we have two full-service branches in Clallam County and two in Jefferson County. The estimated unemployment rate in Benton County at year end 2022 was 5.6%, up from 4.2% at year end 2021. At December 31, 2022, the estimated unemployment rate in Franklin County was up to 7.7%, from 5.5% at December 31, 2021. For Clallam and Jefferson counties, the estimated unemployment rates at December 31, 2022 increased to 6.1% and 5.4%, respectively, compared to 4.5% and 4.1%, respectively at December 31, 2021.  The estimated unemployment rate in Clark County was up to 4.6% at year end 2022, from 4.0% at year end 2021.

For a discussion regarding the competition in the Company’s primary market area, see “Competition.”

Lending Activities

General. Historically, the Company’s primary emphasis was the origination of consumer loans (primarily indirect home improvement loans), one-to-four-family residential first mortgages, and second mortgage/home equity loan products. As a result of the Company’s initial public offering in 2012, while maintaining the active indirect consumer lending program, the Company shifted its lending focus to include non-mortgage commercial business loans, as well as commercial real estate which includes construction and development loans. The Company reintroduced in-house originations of residential mortgage loans in 2012, primarily for sale in the secondary market. While maintaining the Company’s historical strength in consumer lending, the Company has added management and personnel in the commercial and home lending areas to take advantage of the relatively favorable long-term business and economic environments prevailing in the markets.  In addition, the Company recently expanded its loan products by offering residential mortgage and commercial construction warehouse lending consistent with its business plan to further diversify revenues.

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The following table sets forth the amount of total loans with fixed or adjustable interest rates maturing subsequent to December 31, 2023:

(Dollars in thousands)
Real estate loans:	Fixed		Adjustable		Total
Commercial	$	175,794	$	138,810	$	314,604
Construction		28,044		76,278		104,322
Home equity		12,242		38,821		51,063
One-to-four-family		245,528		214,000		459,528
Multi-family		104,389		113,619		218,008
Consumer		572,124		945		573,069
Commercial Business		80,233		57,809		138,042
Total	$	1,218,354	$	640,282	$	1,858,636

Loan Maturity. The following table sets forth certain information at December 31, 2022, regarding the dollar amount for the loans maturing in the portfolio based on their contractual terms to maturity but does not include scheduled payments or potential prepayments. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income, and allowance for credit losses on loans.

	Real Estate
			Construction and										Commercial
(Dollars in thousands)	Commercial		Development		Home Equity		One-to-Four-Family (2)		Multi-family		Consumer		Business		Total
	Amount		Amount		Amount		Amount		Amount		Amount		Amount		Amount
Due in one year or less (1)	$	20,524	$	240,143	$	3,874	$	10,545	$	2,463	$	1,427	$	89,487	$	368,463
Due after one year through five years		118,227		25,465		1,231		17,929		30,664		25,266		76,258		295,040
Due after five years through 15 years		196,155		62,626		1,872		75,534		184,909		473,111		54,314		1,048,521
Due after 15 years		222		16,231		47,960		366,065		2,435		74,692		7,470		515,075
Total	$	335,128	$	344,465	$	54,937	$	470,073	$	220,471	$	574,496	$	227,529	$	2,227,099

________________________

(1) Includes demand loans, loans having no stated maturity and overdraft loans.

(2) Excludes loans held for sale.

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Lending Authority. The Chief Credit Officer has the authority to approve multiple loans to one borrower up to $20.0 million in aggregate.  Loans in excess of $20.0 million and up to $35.0 million require additional approval from management’s senior loan committee. All loans that are approved over $10.0 million are reported to the asset quality committee (“AQC”) at each AQC meeting. Loans in excess of $35.0 million require AQC approval.  The Chief Credit Officer may delegate lending authority to other individuals at levels consistent with their responsibilities.

The Board of Directors has implemented a lending limit policy that it believes is more stringent than the Washington State legal lending limit, 20% of Bank Tier 1 Capital, or $58.8 million at December 31, 2022. The Bank’s largest lending relationship at December 31, 2022 totaled $47.9 million and consisted of a mix of acquisition and construction real estate loans, a multi-family construction loan, and a commercial line of credit.  At December 31, 2022, the acquisition and construction real estate loans had an outstanding balance of $12.4 million, with a total commitment of $20.9 million, and were secured by 10 residential real estate properties, the multi-family construction loan had an outstanding balance of $15.6 million, with a total commitment of $17.0 million, and the commercial construction warehouse line of credit had an outstanding balance of $9.7 million, with a total available commitment of $10.0 million.  The second largest lending relationship at December 31, 2022, totaled $31.2 million and consisted of $26.5 million of loans to four related limited liability companies secured by four commercial real estate properties, one unsecured line of credit to an additional related limited liability company for $1.5 million, of which none was drawn at December 31, 2022, and a $3.3 million mortgage to the primary owner of the companies.  The third largest lending relationship consisted of two commercial lines of credit secured by residential real estate with the Bank’s total potential commitment of $22.8 million, of which $12.7 million was drawn at December 31, 2022, and one permanent one-to-four-family loan having combined commitments of $7.3 million.  The outstanding balance of these three loans at December 31, 2022 was $20.0 million.  At December 31, 2022, all of the borrowers listed above were in compliance with the original repayment terms of their respective loans.

At December 31, 2022, the Company had $60.0 million in approved commercial construction warehouse lending lines to four companies, with $31.2 million outstanding at that date (including the $9.7 million discussed above).  These commitments individually range from $10.0 million to $20.0 million.  In addition, at December 31, 2022, the Company had $36.0 million approved in mortgage warehouse lending lines to four companies, with no amounts outstanding at that date. These commitments individually ranged from $5.0 million to $15.0 million. At December 31, 2022, all of these warehouse lines were in compliance with the original repayment terms of their respective lending lines.

Commercial Real Estate Lending. The Company offers a variety of commercial real estate loans. Most of these loans are secured by income producing properties, including multi-family residences, retail centers, warehouses and owner occupied buildings located in the market areas. At December 31, 2022, commercial real estate loans (including $219.7 million of multi-family residential loans) totaled $553.8 million, or 25.0%, of the gross loan portfolio.

The Company’s loans secured by commercial real estate are originated with a fixed or variable interest rate for up to a 15-year maturity and a 30-year amortization. The variable rate loans are indexed to the prime rate of interest or five, seven, or ten-year FHLB rate, with rates equal to the prevailing index rate up to 3.5% above the prevailing rate. Loan-to-value ratios on the Company’s commercial real estate loans typically do not exceed 80% of the appraised value of the property securing the loan. In addition, personal guarantees are typically obtained from a principal of the borrower on substantially all credits.

Loans secured by commercial real estate are generally underwritten based on the net operating income of the property and the financial strength of the borrower. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt plus an additional coverage requirement. The Company generally requires an assignment of rents or leases in order to be assured that the cash flow from the project will be sufficient to repay the debt. Appraisals on properties securing commercial real estate loans are performed by independent state certified or licensed fee appraisers. The Company does not generally maintain insurance or tax escrows for loans secured by commercial real estate. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is required to provide financial information on at least an annual basis.

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Loans secured by commercial real estate properties generally involve a greater degree of credit risk than one-to-four-family residential mortgage loans. These loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by commercial and multi-family real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. Commercial and multi-family loans also expose a lender to greater credit risk than loans secured by one-to-four-family because the collateral securing these loans typically cannot be sold as easily as one-to-four-family. In addition, most of our commercial and multi-family loans are not fully amortizing and include balloon payments upon maturity. Balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. The largest single commercial or multi-family real estate loan at December 31, 2022 was a performing $17.0 million loan secured by a 105-unit apartment building (which includes two retail spaces totaling 12,200 square feet) located in Seattle, Washington.  

The Company intends to continue to emphasize commercial real estate lending and has hired experienced commercial loan officers to support the Company’s commercial real estate lending objectives. As the commercial real estate loan portfolio expands, the Company intends to bring in additional experienced personnel in the areas of loan analysis and commercial deposit relationship management.

Construction and Development Lending. The Company expanded its residential construction lending team in 2011 with a focus on vertical, in-city one-to-four-family development in our market area. This team has over 60 years of combined experience and expertise in acquisition, development and construction (“ADC”) lending in the Puget Sound market area. The Company has implemented this strategy to take advantage of what is believed to be a strong demand for construction and ADC loans to experienced, successful and relationship driven builders in our market area after many other banks abandoned this segment because of previous overexposure. At December 31, 2022, outstanding construction and development loans totaled $342.6 million, or 15.4%, of the gross loan portfolio and consisted of 327 loans, compared to $240.6 million and 308 loans at December 31, 2021. The construction and development loans at December 31, 2022, consisted of loans for residential and commercial construction projects primarily for vertical construction and $17.1 million of land acquisition and development loans for finished lots. Total committed, including unfunded construction and development loans at December 31, 2022, was $544.3 million. At December 31, 2022, $165.2 million, or 48.2% of our outstanding construction and development loan portfolio was comprised of speculative one-to-four-family construction loans. Approximately $31.3 million of our residential construction loans at December 31, 2022 were made through our Home Lending segment to finance the custom construction of owner-occupied homes and are structured to be converted to permanent loans at the end of the construction phase.  Approximately 52.0% of these custom home loans consisted of custom manufactured homes.  In addition, included in commercial business loans, the Company had four commercial secured lines of credit, secured by notes to residential construction borrowers with guarantees from principals with experience in the construction re-lending market. These loans had combined bank-owned commitments of $60.0 million, and an outstanding balance of $31.2 million at December 31, 2022.

The Company’s residential construction lending program includes loans for the purpose of constructing both speculative and pre-sold one-to-four-family residences, the acquisition of in-city lots with and without existing improvements for later development of one-to-four-family residences, the acquisition of land to be developed, and loans for the acquisition and development of land for future development of single-family residences. The Company generally limits these types of loans to known builders and developers in the market area. Construction loans generally provide for the payment of interest-only during the construction phase, which is typically 12 - 18 months. At the end of the construction phase, the construction loan is generally paid off through the sale of the newly constructed home and a permanent loan from another lender, although commitments to convert to a permanent loan may be made by us. Construction loans are generally made with a maximum loan amount of the lower of 95% of cost or 75% of appraised value at completion. During the term of construction, the accumulated interest on the loan is typically added to the principal balance of the loan through an interest reserve set at six to 10 months of interest based on a fully disbursed note at the starting interest rate for the loan.

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Commitments to fund construction loans generally are made subject to an appraisal of the property by an independent licensed appraiser. The Company also reviews and has a licensed third-party inspect each property before disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection by a third-party inspector based on the percentage of completion method.

The Company may also make land acquisition and development loans to builders or residential lot developers on a limited basis. These loans involve a higher degree of credit risk, similar to commercial construction loans. At December 31, 2022, included in the $342.6 million of construction and development loans, were seven residential land acquisition and development loans for finished lots totaling $11.4 million, with total commitments of $25.8 million. These land loans also involve additional risks because the loan amount is based on the projected value of the lots after development. Loans are made for up to 75% of the estimated value with a term of up to two years. These loans are required to be paid on an accelerated basis as the lots are sold, so that the Company is repaid before all the lots are sold.

Construction financing is generally considered to involve a higher degree of credit risk than longer-term financing on improved, owner-occupied real estate.  Construction and development lending contains the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost (including interest) of the project. Changes in the demand, such as for new housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. This type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. In addition, during the term of most of our construction loans, an interest reserve is created at origination and is added to the principal of the loan through the construction phase. If the estimate of value upon completion proves to be inaccurate, we may be confronted at, or prior to, the maturity of the loan with a project, the value of which is insufficient to assure full repayment. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor.

Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers’ borrowing costs, thereby reducing the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. Furthermore, speculative construction loans to a builder are often associated with homes that are not pre-sold, and thus pose a greater potential risk than construction loans to individuals on their personal residences as there is the added risk associated with identifying an end-purchaser for the finished project. Loans on land under development or held for future construction pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can be significantly impacted by supply and demand. As a result, this type of lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor themselves to repay principal and interest.

The Company seeks to address the forgoing risks associated with construction development lending by developing and adhering to underwriting policies, disbursement procedures, and monitoring practices. Specifically, the Company (i) seeks to diversify the number of loans and projects in the market area, (ii) evaluate and document the creditworthiness of the borrower and the viability of the proposed project, (iii) limit loan-to-value ratios to specified levels, (iv) control disbursements on construction loans on the basis of on-site inspections by a licensed third-party,  (v) monitor economic conditions and the housing inventory in each market, and (iv) typically obtains personal guarantees from a principal of the borrower on substantially all credits. No assurances, however, can be given that these practices will be successful in mitigating the risks of construction development lending.

Home Equity Lending. The Company has been active in second lien mortgage and home equity lending, with the focus of this lending being conducted in the Company’s primary market area. The home equity lines of credit generally have adjustable rates tied to the prime rate of interest with a draw term of 10 years plus and a term to maturity of 15 years. Monthly payments are based on 1.0% of the outstanding balance with a maximum combined loan-to-

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value ratio of up to 90%, including any underlying first mortgage. Fixed second lien mortgage home equity loans are typically amortizing loans with terms of up to 30 years. Total second lien mortgage/home equity loans totaled $55.4 million, or 2.5% of the gross loan portfolio, at December 31, 2022, $39.1 million of which were adjustable-rate home equity lines of credit. Unfunded commitments on home equity lines of credit at December 31, 2022, was $77.2 million.

Residential. The Company originates loans secured by first mortgages on one-to-four-family residences primarily in the market area. 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 important referral sources of the Company’s loan originations. The Company originated $828.8 million of one-to-four-family mortgages (including $13.5 million of loans brokered to other institutions) and sold $715.6 million to investors in 2022. Of the loans sold to investors, $477.5 million were sold to the Federal National Mortgage Association (“Fannie Mae”), the Government National Mortgage Association (“Ginnie Mae”), the FHLB, and/or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) with servicing rights retained in order to further build the relationship with the customer. At December 31, 2022, one-to-four-family residential mortgage loans totaled $469.5 million, or 21.2%, of the gross loan portfolio, excluding loans held for sale of $20.1 million. In addition, the Company originates residential loans through its commercial lending channel, secured by single family rental homes in Washington, with an outstanding balance of $101.1 million at December 31, 2022.

The Company generally underwrites the one-to-four-family loans based on the applicant’s ability to repay. This includes employment and credit history and the appraised value of the subject property. The Company will lend up to 100% of the lesser of the appraised value or purchase price for one-to-four-family first mortgage loans. For first mortgage loans with a loan-to-value ratio in excess of 80%, the Company generally requires either private mortgage insurance or government sponsored insurance in order to mitigate the higher risk level associated with higher loan-to-value loans. Fixed-rate loans secured by one-to-four-family residences have contractual maturities of up to 30 years and are generally fully amortizing, with payments due monthly. Adjustable-rate mortgage loans generally pose different credit risks than fixed-rate loans, primarily because as interest rates rise the borrower’s payments rise, increasing the potential for default. Properties securing the one-to-four-family loans are appraised by independent fee appraisers who are selected in accordance with industry and regulatory standards. The Company requires borrowers to obtain title and hazard insurance, and flood insurance, if necessary. Loans are generally underwritten to the secondary market guidelines with overlays as determined by the internal underwriting department.

Consumer Lending. Consumer lending represents a significant and important historical activity for the Company, primarily reflecting the indirect lending through home improvement contractors and dealers. At December 31, 2022, consumer loans totaled $569.6 million, or 25.6% of the gross loan portfolio.

The Company’s indirect home improvement loans, also referred to as fixture secured loans, represent the largest portion of the consumer loan portfolio and have traditionally been the mainstay of the Company’s consumer lending strategy. These loans totaled $495.9 million, or 22.3% of the gross loan portfolio, and 87.1% of total consumer loans, at December 31, 2022. Indirect home improvement loans are originated through a network of 119 home improvement contractors and dealers located in Washington, Oregon, California, Idaho, Colorado, Arizona, Minnesota, Nevada, and recently Texas, Utah, Massachusetts, and Montana. Five dealers are responsible for 53.0% of the loan volume. These fixture secured loans consist of loans for a wide variety of products, such as replacement windows, siding, roofs, HVAC systems, pools, and other home fixture installations, including solar related home improvement projects.

In connection with fixture secured loans, the Company receives loan applications from the dealers, and originates the loans based on pre-defined lending criteria. These loans are processed through the loan origination software, with approximately 40.0% of the loan applications receiving an automated decision based on the information provided. All loan applications are evaluated by the Company’s credit analysts who use the automated data to expedite the loan approval process. The Company follows the internal underwriting guidelines in evaluating loans obtained through the indirect dealer program, including using a Fair Isaac and Company, Incorporated (“FICO”) credit score to approve loans. A FICO score is a principal measure of credit quality and is one of the significant criteria we rely upon in our underwriting in addition to the borrower’s debt to income.

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The Company’s fixture secured loans generally range in amounts from $2,500 to $100,000, and generally carry terms of 12 to 20 years with fixed rates of amortizing payments and interest. In some instances, the participating dealer may pay a fee to buy down the borrower’s interest rate to a rate below the Company’s published rate. Fixture secured loans are secured by the personal property installed in, on or at the borrower’s real property, and may be perfected with a financing statement under the Uniform Commercial Code (“UCC”) filed in the county of the borrower’s residence. The Company generally files a UCC financing statement to perfect the security interest in the personal property in situations where the borrower’s credit score is below 720 or the home improvement loan is for an amount in excess of $5,000. Perfection gives the Company a claim to the collateral that is superior to someone that obtains a lien through the judicial process subsequent to the perfection of a security interest. The failure to perfect a security interest does not render the security interest unenforceable against the borrower. However, failure to perfect a security interest risks avoidance of the security interest in bankruptcy or subordination to the claims of third parties.

The Company also offers consumer marine loans secured by boats. At December 31, 2022, the marine loan portfolio totaled $70.6 million, or 3.2% of total loans. Marine loans are originated with borrowers on both a direct and indirect basis, and generally carry terms of up to 20 years with fixed rates of interest. The Company generally requires a 10% down payment, and the loan amount may be up to the lesser of 120% of factory invoice or 90% of the purchase price.

The Company originates other consumer loans which totaled $3.1 million at December 31, 2022.  These loans primarily include personal lines of credit, credit cards, automobile, direct home improvement, loans on deposit, and recreational loans.

In evaluating any consumer loan application, a borrower’s FICO score is utilized as an important indicator of credit risk. The FICO score represents the creditworthiness of a borrower based on the borrower’s credit history, as reported by an independent third party. A higher FICO score typically indicates a greater degree of creditworthiness. Over the last several years the Company has emphasized originations of loans to consumers with higher credit scores. This has resulted in a lower level of loan charge-offs in recent periods.  At December 31, 2022, 80.8% of the consumer loan portfolio was originated with borrowers having a FICO score over 720 at the time of origination, and 17.9% was originated with borrowers having a FICO score of and between 660 and 720 at the time of origination.  Generally, a FICO score of 660 or higher indicates the borrower has an acceptable credit reputation. A consumer credit score at the time of loan origination of less than 660 is associated as “subprime” by federal banking regulators and these loans comprised just 1.3% of our consumer loan portfolio at December 31, 2022. Consideration for loans with FICO scores below 660 require additional management oversight and approval.

Consumer loans generally have shorter average lives with faster prepayment, which reduces the Company’s exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

Consumer and other loans generally entail greater risk than do one-to-four-family residential mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as boats, automobiles and other recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. In the case of fixture secured loans, it is very difficult to repossess the personal property securing these loans as they are typically attached to the borrower’s personal residence. Accordingly, if a borrower defaults on a fixture secured loan the only practical recourse is to wait until the borrower wants to sell or refinance the home, at which time if there is a perfected security interest the Company generally will be able to collect a portion of the loan previously charged off.

Commercial Business Lending. The Company originates commercial business loans and lines of credit to local small- and mid-sized businesses in the Puget Sound market area that are secured by accounts receivable, inventory, or personal/business property, plant and equipment. Commercial business loans may be fixed-rate but are usually adjustable-rate loans indexed to the prime rate of interest, plus a margin. Some of these commercial business

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loans, such as those made pursuant to the warehouse lending program, are structured as lines of credit with terms of 12 months and interest-only payments required during the term, while other loans may reprice on an annual basis and amortize over a two-to-five-year period. Due to the current interest rate environment, these loans and lines of credit are generally originated with a floor, which is set between 3.75% and 7.50%. Loan fees are generally charged at origination depending on the credit quality and account relationships of the borrower. Advance rates on these types of lines are generally limited to 80% of accounts receivable and 50% of inventory. The Company also generally requires the borrower to establish a deposit relationship as part of the loan approval process. At December 31, 2022, the commercial business loan portfolio totaled $228.0 million, or 10.3%, of the gross loan portfolio including warehouse lending loans.

The Company also has commercial construction warehouse lending lines secured by notes on construction loans and typically guaranteed by principals with experience in construction lending. In April 2013, we commenced an expansion of our mortgage warehouse lending program to include construction re-lending warehouse lines. These lines are secured by notes provided to construction lenders and are typically guaranteed by a principal of the borrower with experience in construction lending.  Terms for the underlying notes can be up to 18 months and the Bank will lend a percentage (typically 70 - 80%) of the underlying note which may have a loan-to-value ratio up to 75%.  Combined, the loan-to-value ratio on the underlying note would be up to 60% with additional credit support provided by the guarantor. At December 31, 2022, the Company had $60.0 million in approved commercial construction warehouse lending lines to four companies. The individual commitments range from $10.0  million to $20.0 million. At December 31, 2022, there was $31.2 million outstanding, compared to $63.0 million approved in commercial warehouse lending lines to four companies with $27.1 million outstanding at December 31, 2021.  

Consistent with management’s objectives to expand commercial business lending, in 2009, the Company commenced a mortgage warehouse lending program through which the Company funds third-party residential mortgage bankers. Under this program the Company provides short-term funding to the mortgage banking companies for the purpose of originating residential mortgage loans for sale into the secondary market. The Company’s warehouse lending lines are secured by the underlying notes associated with one-to-four-family mortgage loans made to borrowers by the mortgage banking company and generally require guarantees from the principal shareholder(s) of the mortgage banking company. These loans are repaid when the note is sold by the mortgage bank into the secondary market, with the proceeds from the sale used to pay down the outstanding loan before being dispersed to the mortgage bank. The Company had $36.0 million approved in residential mortgage warehouse lending lines to four companies at December 31, 2022. The commitments ranged from $5.0 million to $15.0 million. At December 31, 2022, there were no amounts outstanding under the residential warehouse lines, compared to $43.5 million in approved residential warehouse lending lines with $6.3 million outstanding at December 31, 2021. During the year ended December 31, 2022, we processed approximately 232 loans and funded approximately $108.0 million in total under our mortgage warehouse lending program.

At December 31, 2022, most of the commercial business loans were secured. The Company’s commercial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present, and future cash flows is also an important aspect of credit analysis. The Company generally requires personal guarantees on these commercial business loans. Nonetheless, commercial business loans are believed to carry higher credit risk than residential mortgage loans. The largest commercial business lending relationships at December 31, 2022, consisted of construction warehouse line of credit with a commitment of $20.0 million and outstanding balance of $4.8 million at December 31, 2022.  This loan is secured by underlying notes associated with one-to-four-family mortgage loans made to borrower.  The next largest commercial business lending relationship totaled $15.0 million, of which there were four separate commercial relationships.  One relationship consisted of two commercial lines of credit up to $15.0 million in the aggregate, of which $12.0 million was disbursed at December 31, 2021.  The lines are secured by assets of the borrower.  There are two commercial construction warehouse lending lines secured by notes on construction loans with commitments up to $15.0 million, of which the Bank has disbursed $11.7 million and $5.0 million as of December 31, 2022.  The final relationship is a mortgage warehouse lending line with a commitment of $15.0 million of which no amounts had been disbursed as of December 31, 2022.  

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Unlike residential mortgage loans, commercial business loans, particularly unsecured loans, are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business and, therefore, are of higher risk. The Company makes commercial business loans secured by business assets, such as accounts receivable, inventory, equipment, real estate and cash as collateral with loan-to-value ratios in most cases up to 80%, based on the type of collateral. This collateral depreciates over time, may be difficult to appraise and may fluctuate in value based on the specific type of business and equipment used. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions).

Loan Originations, Servicing, Purchases and Sales

The Company originates both fixed-rate and adjustable-rate loans. The ability to originate loans, however, is dependent upon customer demand for loans in the market areas. From time to time to supplement our loan originations and based on our asset/liability objectives we will also purchase bulk loans or pools of loans from other financial institutions.

Over the past few years, the Company has continued to originate consumer loans, and increased emphasis on commercial real estate loans, including construction and development lending, as well as commercial business loans. Demand is affected by competition and the interest rate environment. In periods of economic uncertainty, the ability of financial institutions, including the Bank, to originate large dollar volumes of commercial business and real estate loans may be substantially reduced or restricted, with a resultant decrease in interest income. In addition to interest earned on loans and loan origination fees, the Company receives fees for loan commitments, late payments, and other miscellaneous services. The fees vary from time to time, generally depending on the supply of funds and other competitive conditions in the market.  

The Company will sell long-term, conforming fixed-rate residential real estate loans in the secondary market to mitigate credit and interest rate risk.  Gains and losses from the sale of these loans are recognized based on the difference between the sales proceeds and carrying value of the loans at the time of the sale. Some residential real estate loans originated as Federal Housing Administration or FHA, U.S. Department of Veterans Affairs or VA, or United States Department of Agriculture or USDA Rural Housing loans were sold by the Company as servicing released loans to other companies. A majority of residential real estate loans sold by the Company were sold with servicing retained at a specified servicing fee. The Company earned gross mortgage servicing fees of $7.1 million for the year ended December 31, 2022.  The Company was servicing $2.78 billion of one-to-four-family loans at December 31, 2022, for Fannie Mae, Freddie Mac, Ginnie Mae, the FHLB, and another financial institution. These mortgage servicing rights (“MSRs”) constituted a $18.0 million asset on our books on that date, which is amortized in proportion to and over the period of the net servicing income. These MSRs are periodically evaluated for impairment based on their fair value, which takes into account the rates and potential prepayments of those sold loans being serviced. The fair value of our MSRs at December 31, 2022 was $35.5 million based on third-party valuation reports. See “Note 4 - Servicing Rights” and “Note 15 - Fair Value Measurements” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

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The following table presents the notional balance activity during the year ended December 31, 2022, related to loans serviced for others:

	(In thousands)
Beginning balance at January 1, 2022
One-to-four-family	$	2,609,776
Consumer		208
Subtotal		2,609,984
Additions
One-to-four-family		477,517
Repayments
One-to-four-family		303,835
Consumer		113
Subtotal		303,948
Ending balance at December 31,  2022
One-to-four-family		2,783,458
Consumer		95
Total	$	2,783,553

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The following table shows total loans originated, purchased, sold and repaid during the years indicated:

	Year Ended December 31,
(Dollars in thousands)	2022		2021
Originations by type:
Fixed-rate:
Commercial real estate	$	77,561	$	42,328
Construction and development		81,820		64,280
Home equity		22,849		8,446
One-to-four-family (1)		71,015		124,756
Loans held for sale (one-to-four-family)		566,117		1,338,609
Multi-family		19,919		40,383
Consumer		350,028		249,199
Commercial business (2)		28,980		78,043
Total fixed-rate		1,218,289		1,946,044
Adjustable-rate:
Commercial real estate		23,906		36,068
Construction and development		330,108		273,097
Home equity		29,830		24,244
One-to-four-family (1)		113,933		37,490
Loans held for sale (one-to-four-family)		14,154		15,027
Multi-family		24,030		25,695
Consumer		2,295		1,924
Commercial business (2)		93,514		94,746
Warehouse lines, net		(2,120)		(15,753)
Total adjustable-rate		629,650		492,538
Total loans originated		1,847,939		2,438,582
Purchases by type
Fixed-rate:
One-to-four-family (1) (4)		665		1,618
Commercial business (2)		2,400		—
Adjustable-rate:
Commercial business (3)		2,345		—
Total loans purchased		5,410		1,618
Sales and repayments:
One-to-four-family (1)