NOTE 13 - BUSINESS SEGMENTS The Companys 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 managements current view of the Companys operations and is not necessarily comparable with similar information for other financial institutions. We define our business segments by product type and customer segment which we have organized into two lines of business: commercial and consumer banking and home lending. We use 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 Companys consolidated income taxes which are based on the effective tax rate applied to the segments pretax income or loss. The FTP methodology is based on managements estimated cost of originating funds including the cost of overhead for deposit generation. A description of the Companys 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. We originate consumer loans, commercial and multi-family real estate loans, residential and multi-family construction loans, and commercial business loans. At September 30, 2018, our retail deposit branch network consisted of 12 branches and one administrative office that accepts deposits in the Pacific Northwest. At September 30, 2018 and December 31, 2017, our deposits totaled $944.5 million and $829.8 million, respectively. This segment is also responsible for the management of our 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 our mortgage loans are sold to or securitized by FNMA, FHLMC, GNMA, or FHLB, while we retain 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. We have the option to sell loans on a servicing-released or servicing-retained basis to securitizers and correspondent lenders. A small percentage of our loans are brokered to other lenders. On occasion, we may sell a portion of our MSR portfolio and we may sell small pools of loans originated for the portfolio. We manage 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 three and nine months ended September 30, 2018 and 2017: At or For the Three Months Ended September 30, 2018 Home Lending Commercial and Consumer Banking Total Condensed income statement: Net interest income (1) $ 946 $ 11,912 $ 12,858 Provision for loan losses (55) (395) (450) Noninterest income 3,606 1,196 4,802 Noninterest expense (4,113) (7,725) (11,838) Income before provision for income taxes 384 4,988 5,372 Provision for income taxes (104) (1,216) (1,320) Net income $ 280 $ 3,772 $ 4,052 Total average assets at period end $ 241,164 $ 920,742 $ 1,161,906 FTEs 114 231 345 At or For the Three Months Ended September 30, 2017 Home Lending Commercial and Consumer Banking Total Condensed income statement: Net interest income (1) $ 812 $ 10,210 $ 11,022 Provision for loan losses (127) (323) (450) Noninterest income 5,014 1,413 6,427 Noninterest expense (4,586) (7,003) (11,589) Income before provision for income taxes 1,113 4,297 5,410 Provision for income taxes (407) (1,549) (1,956) Net income $ 706 $ 2,748 $ 3,454 Total average assets at period end $ 220,898 $ 744,820 $ 965,718 FTEs 119 204 323 At or For the Nine Months Ended September 30, 2018 Home Lending Commercial and Consumer Banking Total Condensed income statement: Net interest income (1) $ 2,425 $ 33,855 $ 36,280 Provision for loan losses (200) (1,050) (1,250) Noninterest income 11,819 3,621 15,440 Noninterest expense (12,677) (22,341) (35,018) Income before provision for income taxes 1,367 14,085 15,452 Provision for income taxes (250) (2,572) (2,822) Net income $ 1,117 $ 11,513 $ 12,630 Total average assets at period end $ 226,836 $ 860,858 $ 1,087,694 FTEs 114 231 345 At or For the Nine Months Ended September 30, 2017 Home Lending Commercial and Consumer Banking Total Condensed income statement: Net interest income (1) $ 1,857 $ 28,105 $ 29,962 Provision for loan losses (324) (126) (450) Noninterest income 14,863 3,941 18,804 Noninterest expense (12,985) (19,924) (32,909) Income before provision for income taxes 3,411 11,996 15,407 Provision for income taxes (1,107) (3,894) (5,001) Net income $ 2,304 $ 8,102 $ 10,406 Total average assets at period end $ 196,765 $ 706,017 $ 902,782 FTEs 119 204 323 ___________________________ (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.