FS Bancorp, Inc. Fair Value Disclosure

NOTE 14 – FAIR VALUE MEASUREMENTS

 

The Company determines fair value based on the requirements established in ASC Topic 820, Fair Value Measurements, which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Topic 820 defines fair value as the exit price, or the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. 

 

The following definitions describe the levels of inputs that may be used to measure fair value:

 

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The following methods were used to estimate the fair value of certain assets and liabilities on a recurring and nonrecurring basis:

 

Securities – The fair value of securities available-for-sale are recorded on a recurring basis. The fair value of investments and mortgage-backed securities are provided by a third-party pricing service. These valuations are based on market data using pricing models that vary by asset class and incorporate available current trade, bid and other market information, and for structured securities, cash flow, and loan performance data. The pricing processes utilize benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. Option adjusted spread models are also used to assess the impact of changes in interest rates and to develop prepayment scenarios (Level 2). Transfers between the fair value hierarchy are determined through the third-party service provider which, from time to time will transfer between levels based on market conditions per the related security. All models and processes used consider market convention.

 

Mortgage Loans Held for Sale – The fair value of loans held for sale reflects the value of commitments with investors and/or the relative price as delivered into a To-Be-Announced (“TBA”) mortgage-backed security (Level 2).

 

Loans Receivable – Certain residential mortgage loans were initially originated for sale with the fair value option elected; after origination, these loans were transferred to loans held for investment. As of December 31, 2025 and 2024, there were $13.2 million and $12.7 million, respectively, in residential mortgage loans recorded at fair value as they were previously transferred from held for sale to loans held for investment. The aggregate unpaid principal balance of these loans were $13.8 million as of December 31, 2025 and 2024.Gains and losses from changes in fair value for these loans are reported in earnings as a component of “Other noninterest income” on the Consolidated Statements of Income. For the years ended December 31, 2025, 2024 and 2023, the Company recorded net increases in fair value of $534,000, $52,000, and $447,000, respectively. For loans originated as held for sale and transferred into loans held for investment, the fair value is determined based on quoted secondary market prices for similar loans (Level 2).

 

Derivative Instruments – Fair values for derivative assets and liabilities are measured on a recurring basis. The primary use of derivative instruments is related to the mortgage banking activities of the Company. The fair value of the interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. TBA mortgage-backed securities are fair valued on similar contracts in active markets (Level 2) while locks and forwards with customers and investors are fair valued using similar contracts in the market and changes in the market interest rates (Level 2 and 3). Derivative instruments not related to mortgage banking activities include interest rate swap agreements. The fair values of interest rate swap agreements are based on valuation models using observable market data as of the measurement date (Level 2). The Company’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including market transactions and third-party pricing services. The fair values of all interest rate swaps are determined from third-party pricing services without adjustment.

 

Collateral Dependent Loans – Expected credit losses on collateral-dependent loans are measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of collateral is less than the amortized cost basis of the loan, the Company will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable) at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis is limited to the amount previously charged-off. Subsequent changes in expected credit losses on collateral-dependent loans are included within the provision for credit losses, either as an additional provision or as a reduction of the provision that would otherwise be reported (Level 3).

 

Mortgage Servicing Rights – The fair value of MSRs is estimated using net present value of expected cash flows using a third-party model that incorporates assumptions used in the industry to value such rights, adjusted for factors such as weighted average prepayments speeds based on historical information where appropriate (Level 3).

 

The following tables present securities available-for-sale, mortgage loans held for sale, loans receivable, at fair value, and derivative assets and liabilities measured at fair value on a recurring basis at the dates indicated:

 

Financial Assets		At December 31, 2025
Securities available-for-sale:		Level 1				Level 2				Level 3				Total
U.S. agency securities		$	—			$	18,127			$	—			$	18,127
Corporate securities			—				15,386				—				15,386
Municipal bonds			—				71,405				—				71,405
Mortgage-backed securities			—				173,567				—				173,567
Asset-backed securities			—				10,182				—				10,182
Mortgage loans held for sale, at fair value			—				43,705				—				43,705
Loans receivable, at fair value			—				13,183				—				13,183
Derivatives:
Mandatory and best effort forward commitments with investors			—				—				8				8
Interest rate lock commitments with customers			—				—				241				241
Interest rate swaps - cash flow and fair value hedges			—				1,894				—				1,894
Interest rate swaps - dealer offsets to customer swap positions			—				36				—				36
Total assets measured at fair value		$	—			$	347,485			$	249			$	347,734
Financial Liabilities
Derivatives:
Interest rate swaps - customer swap positions		$	—			$	(36	)		$	—			$	(36	)
Interest rate swaps - cash flow and fair value hedges			—				(656	)			—				(656	)
Forward TBA mortgage-backed securities			—				(146	)			—				(146	)
Total liabilities measured at fair value		$	—			$	(838	)		$	—			$	(838	)

 

 

Financial Assets		At December 31, 2024
Securities available-for-sale:		Level 1				Level 2				Level 3				Total
U.S. agency securities		$	—			$	17,138			$	—			$	17,138
Corporate securities			—				15,126				—				15,126
Municipal bonds			—				70,344				—				70,344
Mortgage-backed securities			—				167,186				—				167,186
Asset-backed securities			—				11,381				—				11,381
Mortgage loans held for sale, at fair value			—				27,835				—				27,835
Loans receivable, at fair value			—				12,728				—				12,728
Derivatives:
Mandatory and best effort forward commitments with investors			—				—				31				31
Interest rate lock commitments with customers			—				—				103				103
Forward TBA mortgage-backed securities			—				180				—				180
Interest rate swaps- cash flow and fair value hedges			—				7,244				—				7,244
Interest rate swaps - dealer offsets to customer swap positions			—				62				—				62
Total assets measured at fair value		$	—			$	329,224			$	134			$	329,358
Financial Liabilities
Derivatives:
Interest rate swaps - customer swap positions		$	—			$	(61	)		$	—			$	(61	)
Total liabilities measured at fair value		$	—			$	(61	)		$	—			$	(61	)

 

The following tables present financial assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy at the dates indicated. Level 3 assets recorded at fair value on a nonrecurring basis included loans for which a partial charge-off was recorded based on the estimated fair value of the underlying collateral.

 

		December 31, 2025
		Level 1				Level 2				Level 3				Total
Collateral dependent loans		$	—			$	—			$	9,236			$	9,236
MSRs			—				—				21,800				21,800

 

		December 31, 2024
		Level 1				Level 2				Level 3				Total
Collateral dependent loans		$	—			$	—			$	1,130			$	1,130
MSRs			—				—				21,043				21,043

 

Quantitative Information about Level 3 Fair Value Measurements – Shown in the table below is the fair value of financial instruments measured under a Level 3 unobservable input on a recurring and nonrecurring basis at the dates indicated:

 

Level 3		Significant						Weighted Average Rate
Fair Value	Valuation	Unobservable						December 31,				December 31,
Instruments	Techniques	Inputs		Range				2025				2024
RECURRING
Interest rate lock commitments with customers	Quoted market prices	Pull-through expectations			80% - 99%				93.7	%			94.0	%
Individual forward sale commitments with investors	Quoted market prices	Pull-through expectations			80% - 99%				93.7	%			94.0	%
NONRECURRING
Collateral dependent loans	Fair value of underlying collateral	Discount applied to the obtained appraisal			0% - 25%				—	%			—	%
MSRs	Industry sources	Pre-payment speeds			0% - 50%				8.5	%			8.3	%

 

The pull-through rate is based on historical loan closing rates for similar interest rate lock commitments. An increase or decrease in the pull-through rate would have a corresponding positive or negative fair value adjustment.

 

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years indicated:

 

						Purchases												Net change in				Net change in
		Beginning				and				Sales and				Ending				fair value for				fair value for
2025		Balance				Issuances				Settlements				Balance				gains/(losses) (1)				gains/(losses) (2)
Interest rate lock commitments with customers		$	103			$	3,903			$	(3,765	)		$	241			$	138			$	—
Individual forward sale commitments with investors			31				(144	)			121				8				(23	)			—
2024
Interest rate lock commitments with customers		$	329			$	4,279			$	(4,505	)		$	103			$	(226	)		$	—
Individual forward sale commitments with investors			(188	)			(1,626	)			1,845				31				219				—
2023
Interest rate lock commitments with customers		$	107			$	4,291			$	(4,069	)		$	329			$	222			$	—
Individual forward sale commitments with investors			(38	)			66				(216	)			(188	)			(150	)			—

_____________________________

(1) Relating to items held at end of period included in income.

(2) Relating to items held at end of period included in other comprehensive income.

 

Gains on interest rate lock commitments and on forward sale commitments with investors carried at fair value are recorded in “Gain on sale of loans held for sale” on the Consolidated Statements of Income.

 

 

The following table provides estimated fair values of the Company’s financial instruments at the dates indicated, whether recognized at fair value or not on the Consolidated Balance Sheets:

 

		December 31, 2025								December 31, 2024
Financial Assets		Carrying				Fair				Carrying				Fair
Level 1 inputs:		Amount				Value				Amount				Value
Cash and cash equivalents		$	28,219			$	28,219			$	31,635			$	31,635
Certificates of deposit at other financial institutions			—				—				1,727				1,727
Level 2 inputs:
Securities available-for-sale, at fair value			288,667				288,667				281,175				281,175
Securities held-to-maturity, gross			33,501				34,396				8,500				8,144
Loans held for sale, at fair value			43,705				43,705				27,835				27,835
Forward TBA mortgage-backed securities			—				—				180				180
Loans receivable, at fair value			13,183				13,183				12,728				12,728
Interest rate swaps - cash flow and fair value hedges			1,894				1,894				7,244				7,244
Interest rate swaps - dealer offsets to customer swap positions			36				36				62				62
Level 3 inputs:
Loans receivable, gross			2,641,926				2,578,744				2,521,093				2,385,213
MSRs, held at lower of cost or fair value			8,608				21,800				9,204				21,043
Mandatory and best effort forward commitments with investors			8				8				31				31
Fair value interest rate locks with customers			241				241				103				103
Financial Liabilities
Level 2 inputs:
Time deposits			1,130,396				1,129,892				1,028,896				1,024,663
Borrowings			129,305				128,360				307,806				307,408
Subordinated notes, excluding unamortized debt issuance costs			50,000				48,856				50,000				45,504
Interest rate swaps - cash flow and fair value hedges			656				656				—				—
Forward TBA mortgage-backed securities			146				146				—				—
Interest rate swaps - customer swap positions			36				36				61				61