Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

fsbw_Current_Folio_10Q

Table of Contents

k

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(Mark One)

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019              OR

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

For the transition period from                     to                    

Commission File Number:   001‑35589

FS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Washington

 

45‑4585178

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

6920 220th Street SW, Mountlake Terrace, Washington  98043

(Address of principal executive offices; Zip Code)

(425) 771‑5299

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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 [X]          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 [X]          No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

Large accelerated filer [   ]

 

Accelerated filer [ X ]

Non-accelerated filer [   ]

 

Smaller reporting company [ X ]

Emerging growth company [  ]

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).    Yes [   ]          No [X]

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

FSBW

The NASDAQ Stock Market LLC

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of May 3, 2019, there were 4,492,542 outstanding shares of the registrant’s common stock.

 

 


 

Table of Contents

FS Bancorp, Inc.

Form 10‑Q

Table of Contents

 

 

 

 

 

 

    

 

    

Page Number

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2019 and December 31, 2018 (Unaudited)

 

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

7 - 8 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

9 - 43 

 

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

44 - 54 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

54 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

54 

 

 

 

 

 

PART II 

 

OTHER INFORMATION

 

55 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

55 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

55 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

55 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

56 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

56 

 

 

 

 

 

Item 5. 

 

Other Information

 

56 

 

 

 

 

 

Item 6. 

 

Exhibits

 

56 - 57 

 

 

 

 

 

SIGNATURES 

 

 

 

58 

 

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” in this report, we are referring to 1st Security Bank of Washington, the wholly owned subsidiary of FS Bancorp.

 

 

2


 

Table of Contents

Item 1. Financial Statements

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts) (Unaudited)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

ASSETS

 

2019

 

2018

Cash and due from banks

 

$

9,126

 

$

9,408

Interest-bearing deposits at other financial institutions

 

 

53,948

 

 

23,371

Total cash and cash equivalents

 

 

63,074

 

 

32,779

Certificates of deposit at other financial institutions

 

 

22,073

 

 

22,074

Securities available-for-sale, at fair value

 

 

99,783

 

 

97,205

Loans held for sale, at fair value

 

 

45,591

 

 

51,195

Loans receivable, net

 

 

1,283,923

 

 

1,312,519

Accrued interest receivable

 

 

5,812

 

 

5,761

Premises and equipment, net

 

 

29,318

 

 

29,110

Operating lease right-of-use (“ROU”) assets

 

 

4,849

 

 

 —

Federal Home Loan Bank (“FHLB”) stock, at cost

 

 

8,157

 

 

9,887

Other real estate owned (“OREO”)

 

 

167

 

 

689

Bank owned life insurance (“BOLI”), net

 

 

34,700

 

 

34,485

Servicing rights, held at the lower of cost or fair value

 

 

10,611

 

 

10,429

Goodwill

 

 

2,312

 

 

2,312

Core deposit intangible, net

 

 

6,027

 

 

6,217

Other assets

 

 

9,719

 

 

6,982

TOTAL ASSETS

 

$

1,626,116

 

$

1,621,644

LIABILITIES

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest-bearing accounts

 

$

245,585

 

$

234,532

Interest-bearing accounts

 

 

1,075,965

 

 

1,039,687

Total deposits

 

 

1,321,550

 

 

1,274,219

Borrowings

 

 

86,824

 

 

137,149

Subordinated note:

 

 

 

 

 

 

Principal amount

 

 

10,000

 

 

10,000

Unamortized debt issuance costs

 

 

(130)

 

 

(135)

Total subordinated note less unamortized debt issuance costs

 

 

9,870

 

 

9,865

Operating lease liabilities

 

 

4,976

 

 

 —

Deferred tax liability, net

 

 

663

 

 

361

Other liabilities

 

 

16,281

 

 

20,012

Total liabilities

 

 

1,440,164

 

 

1,441,606

COMMITMENTS AND CONTINGENCIES (NOTE 10)

 

 

  

 

 

  

STOCKHOLDERS’ EQUITY

 

 

  

 

 

  

Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued or outstanding

 

 

 —

 

 

 —

Common stock, $.01 par value; 45,000,000 shares authorized; 4,489,042 and 4,492,478 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

45

 

 

45

Additional paid-in capital

 

 

91,742

 

 

91,466

Retained earnings

 

 

95,383

 

 

90,854

Accumulated other comprehensive loss, net of tax

 

 

(436)

 

 

(1,479)

Unearned shares – Employee Stock Ownership Plan (“ESOP”)

 

 

(782)

 

 

(848)

Total stockholders’ equity

 

 

185,952

 

 

180,038

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,626,116

 

$

1,621,644

 

See accompanying notes to these consolidated financial statements.

3


 

Table of Contents

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

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

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

INTEREST INCOME

 

 

 

 

Loans receivable, including fees

 

$

21,109

 

$

12,256

Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions

 

 

1,202

 

 

732

Total interest and dividend income

 

 

22,311

 

 

12,988

INTEREST EXPENSE

 

 

 

 

 

 

Deposits

 

 

3,710

 

 

1,244

Borrowings

 

 

744

 

 

80

Subordinated note

 

 

168

 

 

167

Total interest expense

 

 

4,622

 

 

1,491

NET INTEREST INCOME

 

 

17,689

 

 

11,497

PROVISION FOR LOAN LOSSES

 

 

750

 

 

350

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

16,939

 

 

11,147

NONINTEREST INCOME

 

 

 

 

 

 

Service charges and fee income

 

 

1,658

 

 

659

Gain on sale of loans

 

 

2,397

 

 

3,978

Gain on sale of investment securities

 

 

 —

 

 

113

Earnings on cash surrender value of BOLI

 

 

215

 

 

82

Other noninterest income

 

 

285

 

 

192

Total noninterest income

 

 

4,555

 

 

5,024

NONINTEREST EXPENSE

 

 

 

 

 

 

Salaries and benefits

 

 

8,243

 

 

7,048

Operations

 

 

2,044

 

 

1,359

Occupancy

 

 

1,112

 

 

648

Data processing

 

 

1,286

 

 

641

Gain on sale of OREO

 

 

(85)

 

 

 —

OREO expenses

 

 

 4

 

 

 —

Loan costs

 

 

673

 

 

629

Professional and board fees

 

 

550

 

 

444

Federal Deposit Insurance Corporation (“FDIC”) insurance

 

 

248

 

 

41

Marketing and advertising

 

 

135

 

 

149

Acquisition costs

 

 

374

 

 

 —

Amortization of core deposit intangible

 

 

190

 

 

77

Impairment on mortgage servicing rights

 

 

23

 

 

 —

Total noninterest expense

 

 

14,797

 

 

11,036

INCOME BEFORE PROVISION FOR INCOME TAXES

 

 

6,697

 

 

5,135

PROVISION FOR INCOME TAXES

 

 

1,505

 

 

813

NET INCOME

 

$

5,192

 

$

4,322

Basic earnings per share

 

$

1.19

 

$

1.22

Diluted earnings per share

 

$

1.15

 

$

1.15

 

See accompanying notes to these consolidated financial statements.

4


 

Table of Contents

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)  (Unaudited)

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

 

2019

 

2018

 

Net Income

 

$

5,192

 

$

4,322

 

Other comprehensive income (loss), before tax:

 

 

  

 

 

  

 

Securities available-for-sale:

 

 

  

 

 

  

 

Unrealized holding gain (loss) during year

 

 

1,328

 

 

(1,468)

 

Income tax (provision) benefit related to unrealized holding gain (loss)

 

 

(285)

 

 

316

 

Reclassification adjustment for realized gain included in net income

 

 

 —

 

 

(113)

 

Income tax provision related to reclassification for realized gain

 

 

 —

 

 

24

 

Other comprehensive income (loss), net of tax

 

 

1,043

 

 

(1,241)

 

COMPREHENSIVE INCOME

 

$

6,235

 

$

3,081

 

 

See accompanying notes to these consolidated financial statements.

5


 

Table of Contents

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands, except share amounts) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

 

 

    

Accumulated

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Comprehensive

 

Unearned

 

Total

 

 

Common Stock

 

Paid-in

 

Retained

 

(Loss) Income,

 

ESOP

 

Stockholders’

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Net of Tax

 

Shares

 

Equity

BALANCE, January 1, 2018

 

3,680,152

 

$

37

 

$

55,135

 

$

68,422

 

$

(475)

 

$

(1,117)

 

$

122,002

Net income

 

 —

 

$

 —

 

 

 —

 

 

4,322

 

 

 —

 

 

 —

 

$

4,322

Dividends paid ($0.11 per share)

 

 —

 

$

 —

 

 

 —

 

 

(395)

 

 

 —

 

 

 —

 

$

(395)

Share-based compensation

 

 —

 

$

 —

 

 

135

 

 

 —

 

 

 —

 

 

 —

 

$

135

Stock options exercised

 

15,400

 

$

 —

 

 

260

 

 

 —

 

 

 —

 

 

 —

 

$

260

Other comprehensive loss, net of tax

 

 —

 

$

 —

 

 

 —

 

 

 —

 

 

(1,241)

 

 

 —

 

$

(1,241)

ESOP shares allocated

 

 —

 

$

 —

 

 

293

 

 

 —

 

 

 —

 

 

66

 

$

359

BALANCE, March 31, 2018

 

3,695,552

 

$

37

 

$

55,823

 

$

72,349

 

$

(1,716)

 

$

(1,051)

 

$

125,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, January 1, 2019

 

4,492,478

 

$

45

 

$

91,466

 

$

90,854

 

$

(1,479)

 

$

(848)

 

$

180,038

Net income

 

 —

 

$

 —

 

 

 —

 

 

5,192

 

 

 —

 

 

 —

 

$

5,192

Dividends paid ($0.15 per share)

 

 —

 

$

 —

 

 

 —

 

 

(663)

 

 

 —

 

 

 —

 

$

(663)

Share-based compensation

 

 —

 

$

 —

 

 

262

 

 

 —

 

 

 —

 

 

 —

 

$

262

Common stock repurchased

 

(6,036)

 

$

 —

 

 

(285)

 

 

 —

 

 

 —

 

 

 —

 

$

(285)

Stock options exercised

 

2,600

 

$

 —

 

 

44

 

 

 —

 

 

 —

 

 

 —

 

$

44

Other comprehensive income, net of tax

 

 —

 

$

 —

 

 

 —

 

 

 —

 

 

1,043

 

 

 —

 

$

1,043

ESOP shares allocated

 

 —

 

$

 —

 

 

255

 

 

 —

 

 

 —

 

 

66

 

$

321

BALANCE, March 31, 2019

 

4,489,042

 

$

45

 

$

91,742

 

$

95,383

 

$

(436)

 

$

(782)

 

$

185,952

 

See accompanying notes to these consolidated financial statements.

 

 

6


 

Table of Contents

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

 

 

 

 

 

 

 

 

     

Three Months Ended March 31, 

 

    

2019

     

2018

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

5,192

 

$

4,322

Adjustments to reconcile net income to net cash from operating activities

 

 

  

 

 

  

Provision for loan losses

 

 

750

 

 

350

Depreciation, amortization and accretion

 

 

2,321

 

 

1,139

Compensation expense related to stock options and restricted stock awards

 

 

262

 

 

135

ESOP compensation expense for allocated shares

 

 

321

 

 

359

Increase in cash surrender value of BOLI

 

 

(215)

 

 

(82)

Gain on sale of loans held for sale

 

 

(2,397)

 

 

(3,896)

Gain on sale of portfolio loans

 

 

 —

 

 

(82)

Gain on sale of investment securities

 

 

 —

 

 

(113)

Origination of loans held for sale

 

 

(125,281)

 

 

(147,603)

Proceeds from sale of loans held for sale

 

 

132,461

 

 

152,419

Impairment of servicing rights

 

 

23

 

 

 —

Gain on sale of OREO

 

 

(85)

 

 

 —

Changes in operating assets and liabilities

 

 

  

 

 

  

Accrued interest receivable

 

 

(51)

 

 

(107)

Other assets

 

 

(7,953)

 

 

845

Other liabilities

 

 

1,517

 

 

(912)

Net cash from operating activities

 

 

6,865

 

 

6,774

CASH FLOWS USED BY INVESTING ACTIVITIES

 

 

  

 

 

  

Activity in securities available-for-sale:

 

 

  

 

 

  

Proceeds from sale of investment securities

 

 

 —

 

 

5,305

Maturities, prepayments, and calls

 

 

4,659

 

 

2,340

Purchases

 

 

(6,005)

 

 

(18,145)

Maturities of certificates of deposit at other financial institutions

 

 

 —

 

 

496

Loan originations and principal collections, net

 

 

26,997

 

 

(32,911)

Purchase of portfolio loans

 

 

(321)

 

 

(17,000)

Proceeds from sale of portfolio loans

 

 

538

 

 

5,551

Proceeds from sale of OREO, net

 

 

684

 

 

 —

Purchase of premises and equipment

 

 

(860)

 

 

(749)

Purchase of BOLI

 

 

 —

 

 

(3,000)

Net change in FHLB stock, net

 

 

1,730

 

 

(1,437)

Net cash from (used) by investing activities

 

 

27,422

 

 

(59,550)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

  

 

 

  

Net increase in deposits

 

 

47,331

 

 

27,636

Proceeds from borrowings

 

 

155,306

 

 

166,505

Repayments of borrowings

 

 

(205,725)

 

 

(134,505)

Dividends paid

 

 

(663)

 

 

(395)

Proceeds from stock options exercised

 

 

44

 

 

260

Common stock repurchased

 

 

(285)

 

 

 —

Net cash (used) from financing activities

 

 

(3,992)

 

 

59,501

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

30,295

 

 

6,725

CASH AND CASH EQUIVALENTS, beginning of period

 

 

32,779

 

 

18,915

CASH AND CASH EQUIVALENTS, end of period

 

$

63,074

 

$

25,640

 

 

 

 

 

 

 

7


 

Table of Contents

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands) (Unaudited)

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

 

 

  

 

 

  

Cash paid during the period for:

 

 

  

 

 

  

Interest on deposits and borrowings

 

$

4,462

 

$

1,416

Income taxes

 

 

 —

 

 

 —

 

 

 

 

 

 

 

SUPPLEMENTARY DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

Change in unrealized gain (loss) on investment securities, net

 

 

1,328

 

 

(1,581)

Property taken in settlement of loans

 

 

92

 

 

 —

Retention of gross mortgage servicing rights from loan sales

 

$

844

 

$

1,138

 

See accompanying notes to these consolidated financial statements

 

 

 

 

8


 

Table of Contents

NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations - FS Bancorp, Inc. (the “Company”) was incorporated in September 2011 as the holding company for 1st Security Bank of Washington (the “Bank” or “1st Security Bank”) in connection with the Bank’s conversion from the mutual to stock form of ownership which was completed on July 9, 2012. The Bank is a community-based savings bank with 21 full-service bank branches, an administrative office that accepts deposits, and eight home loan production offices in suburban communities in the greater Puget Sound area which includes Snohomish, King, Pierce, Jefferson, Kitsap, Clallam, Grays Harbor, Thurston, and Lewis counties, and one loan production office in the market area of the Tri-Cities, Washington. The Bank provides loan and deposit services to customers who are predominantly small- and middle-market businesses and individuals. The Company and its subsidiary are subject to regulation by certain federal and state agencies and undergo periodic examination by these regulatory agencies.

On November 15, 2018, the Company completed its acquisition of Anchor Bancorp (“Anchor”), pursuant to the Agreement and Plan of Merger dated as of July 17, 2018 (the “Merger Agreement”) by and between FS Bancorp and Anchor.  Under the terms of the Merger Agreement, Anchor merged with and into FS Bancorp (“Anchor Acquisition”), with FS Bancorp as the surviving corporation. Immediately after the Anchor Acquisition, FS Bancorp merged Anchor Bank, a wholly-owned subsidiary of Anchor, with and into 1st Security Bank of Washington, a wholly-owned subsidiary of FS Bancorp, with 1st Security Bank of Washington as the surviving bank. For additional information, see “Note 2 - Business Combination.”

Financial Statement Presentation - The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10‑Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10‑K with all of the audited information and footnotes required by U.S. GAAP for complete financial statements for the year ended December 31, 2018, as filed with the SEC on March 15, 2019. In the opinion of management, all normal adjustments and recurring accruals considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.

The results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any other future period. The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses, fair value of financial instruments, the valuation of servicing rights, and the deferred income taxes.

Amounts presented in the consolidated financial statements and footnote tables are rounded and presented to the nearest thousands of dollars except per share amounts. If the amounts are above $1.0 million, they are rounded one decimal point, and if they are above $1.0 billion, they are rounded two decimal points.

Principles of Consolidation - The consolidated financial statements include the accounts of FS Bancorp, Inc. and its wholly owned subsidiary, 1st Security Bank of Washington. All material intercompany accounts have been eliminated in consolidation.

Segment Reporting - The Company operates in two business segments through the Bank: commercial and consumer banking and home lending. The Company’s business segments are determined based on the products and services provided, as well as the nature of the related business activities, and they reflect the manner in which financial information is regularly reviewed for the purpose of allocating resources and evaluating performance of the Company’s businesses. The results for these business segments are based on management’s accounting process, which assigns income statement items and assets to each responsible operating segment. This process is dynamic and is based on management’s view of the Company’s operations. See “Note 16 - Business Segments.”

Subsequent Events - The Company has evaluated events and transactions subsequent to March 31, 2019 for potential recognition or disclosure.

9


 

Table of Contents

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016‑13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all current expected credit losses (“CECL”) for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of CECL. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements. Once adopted, we anticipate our allowance for loan losses to increase through a one‑time adjustment to retained earnings, however, until our evaluation is complete the magnitude of the increase will be unknown.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.   This ASU contains some technical adjustments related to the fair value disclosure requirements of public companies.  Included in this ASU is the additional disclosure requirement of unrealized gains and losses for the period in recurring level 3 fair value disclosures and the range and weighted average of significant unobservable inputs, among other technical changes.  ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption is permitted for any removed or modified disclosures. The adoption of ASU 2018-13 is not expected to have a material impact on the Company's consolidated financial statements.

In August 2018, FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract.  The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).  The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for costs for internal-use software.  The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).  The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU.  This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.  The amendments in this ASU should be applied either retrospectively to all implementation costs incurred after the date of adoption.  Adoption of ASU 2018-15 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Application of New Accounting Guidance Adopted in 2019

On January 1, 2019, the Company adopted FASB ASU No. 2016‑02, Leases (Topic 842). ASU No. 2016‑02 requires lessees to recognize on the balance sheet the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease payments and an ROU asset representing its right to use the underlying asset for the lease term. A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis.  In July 2018, the FASB issued ASU No, 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements

10


 

Table of Contents

These ASUs contain clarifications to ASU 2016-02, including providing a new transition method in addition to the existing transition method contained in ASU No. 2016-02 to allow entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.  These amendments have the same effective date as ASU 2016-02.  In March 2019, FASB issued ASU 2019-01, Leases (Topic 842), Codification Improvements. The amendment in this ASU that is applicable to the Company is Item 3 which clarifies interim disclosure requirements that allow omission of required transition disclosures. The effective date for this item is the same as ASU 2016-02.

 

For financial reporting purposes, the Company applied the modified retrospective transition approach and elected to apply the transition option included in ASU 2018-11 on the effective date, January 1, 2019 which eliminates the requirement for reporting comparative periods presented in the financial statements prior to that date.

   

The new standard provides for a number of practical expedients in transition. The Company elected the package of practical expedients, which permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the use-of-hindsight and elected the practical expedient to not separate lease and non-lease components on our real estate leases where we are the lessee.  The Company did not elect the practical expedient pertaining to land easement as it is not applicable to us.

 

The new standard also provides practical expedients for an entity's ongoing accounting. The Company has elected the short-term lease recognition exemption for certain leases which are less than 12 months in duration or month-to-month. This means, for those leases that qualify, ROU assets or lease liabilities will not be recognized.

 

The adoption of this ASU created ROU assets of $4.8 million and operating lease liabilities of $5.0 million, and the related impact to the Company’s March 31, 2019 Consolidated Balance Sheet was approximately 0.3%.  Additional disclosures required by the ASU have been included in “Note 7 - Leases.”

NOTE 2 - BUSINESS COMBINATION

On November 15, 2018, the Company completed its acquisition of Anchor Bancorp, pursuant to the Agreement and Plan of Merger dated as of July 17, 2018 by and between FS Bancorp and Anchor.  Under the terms of the Merger Agreement, Anchor merged with and into FS Bancorp, with FS Bancorp as the surviving corporation. Immediately after the Anchor Acquisition, FS Bancorp merged Anchor Bank, a wholly-owned subsidiary of Anchor, with and into 1st Security Bank of Washington, a wholly-owned subsidiary of FS Bancorp, with 1st Security Bank of Washington as the surviving bank.  Anchor’s principal business activities prior to the acquisition were attracting retail deposits from the general public and utilizing those deposits to originate loans including one-to-four-family residences, commercial real estate, and multi-family residences located in Western Washington.  Anchor’s principal lending activity had consisted of the origination of loans secured by first mortgages on owner-occupied, one-to-four-family residences and loans for the construction of one-to-four-family residences, as well as consumer loans, with an emphasis on home equity loans and lines of credit. The primary objective for the acquisition was to significantly expand FS Bancorp’s presence throughout Western Washington, increase nonmaturity deposits, and offer additional banking and lending products to former Anchor customers as well as new customers.

The Anchor Acquisition was accounted for under the acquisition method of accounting and accordingly, the assets and liabilities were recorded at their fair values on November 15, 2018, the date of acquisition. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as information relative to the closing date fair values become available.

 

 

 

11


 

Table of Contents

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition:

 

 

 

 

 

 

 

 

 

 

 

    

Acquired Book

    

Fair Value

    

Amount

November 15, 2018

    

Value

    

Adjustments

    

Recorded

Assets

 

 

  

 

 

  

 

 

  

Cash and cash equivalents

 

$

54,558

 

$

 —

 

$

54,558

Securities available-for-sale

 

 

19,609

 

 

(54)

 

 

19,555

Loans receivable, net

 

 

361,596

 

 

(5,321)

(1)

 

356,275

Premises and equipment, net

 

 

8,411

 

 

3,354

(2)

 

11,765

Other real estate owned

 

 

689

 

 

 —

 

 

689

Deferred tax asset

 

 

4,097

 

 

(3,358)

 

 

739

Mortgage servicing rights

 

 

218

 

 

564

 

 

782

Core deposit intangible ("CDI")

 

 

 —

 

 

5,251

(3)

 

5,251

Other assets

 

 

25,231

 

 

18

 

 

25,249

Total assets acquired

 

$

474,409

 

$

454

 

$

474,863

Liabilities

 

 

  

 

 

  

 

 

  

Deposits

 

$

357,863

 

$

(1,052)

(4)

$

356,811

Borrowings

 

 

37,000

 

 

(282)

 

 

36,718

Other liabilities

 

 

9,286

 

 

63

 

 

9,349

Total liabilities assumed

 

$

404,149

 

$

(1,271)

 

$

402,878

 

Explanation of Fair Value Adjustments

(1) The fair value discount for acquired loans from Anchor was $5.3 million and was determined by separate adjustments to reflect a credit risk and marketability component and a yield component reflecting the differential between portfolio and market yields.  The discount on acquired loans will be accreted back into interest income over an estimated average life of 60 months.

(2) The fair value adjustment represents the difference between the fair value of the premises and the book value of those assets acquired. The Company utilized third-party valuations including appraisals, comparative market analysis, and tax-assessed values to assist in the determination of the fair value.

(3) The fair value adjustment of $5.3 million represents the value of the core deposit base assumed on a study performed by an independent consulting firm. This amount was recorded by the Company as an identifiable intangible asset and will be amortized as an expense on a straight-line basis over an estimated 10 year life of the core deposit base and will be reviewed for impairment annually. See “Note 17 - Goodwill and Other Intangible Assets.”

(4) The fair value of transaction and savings accounts was determined to be equal to their carrying values.  The fair value of time deposits was calculated using a discounted cash flow analysis that calculated the present value of the projected cash flows from the portfolio versus the present value of a similar portfolio with a similar maturity profile at current market rates.  As of the acquisition date, the portfolio of time deposits was valued at a pre-tax discount of $1.1 million, or 0.65% of core deposits.  This adjustment represents a difference in interest rates from the time deposits acquired and the estimated wholesale funding rates used in the application of fair value accounting. The discounted amount will be accreted into expense as an increase in interest expense over the maturity profile of the acquired time deposits.

 

 

 

 

12


 

Table of Contents

The following table summarizes the consideration paid, the aggregate amount recognized for each major class of assets acquired and liabilities assumed by 1st Security Bank in the Anchor Acquisition:

 

 

 

 

 

 

 

 

    

At November 15, 2018

Purchase price of Anchor

 

 

 

 

 

 

Fair value of FS Bancorp common stock at $46.54 (1) per share for 725,518 shares

 

 

 

 

$

33,766

Cash paid

 

 

 

 

 

30,805

Total purchase price

 

 

 

 

 

64,571

 

 

 

 

 

 

 

Fair value of assets acquired:

 

 

  

 

 

 

Cash and cash equivalents

 

$

54,558

 

 

 

Securities available-for-sale

 

 

19,555

 

 

 

Loans receivable, net

 

 

356,275

 

 

 

Premises and equipment

 

 

11,765

 

 

 

OREO

 

 

689

 

 

 

Deferred tax asset

 

 

739

 

 

 

Mortgage servicing rights

 

 

782

 

 

 

Intangible assets – CDI

 

 

5,251

 

 

 

Other assets

 

 

25,249

 

 

 

Total assets and identifiable intangible assets acquired

 

$

474,863

 

 

 

 

 

 

 

 

 

 

Fair value of liabilities assumed:

 

 

 

 

 

 

Deposits

 

$

356,811

 

 

 

Borrowings

 

 

36,718

 

 

 

Other liabilities

 

 

9,349

 

 

 

Total liabilities assumed

 

$

402,878

 

 

 

 

 

 

 

 

 

 

Fair value of net assets and identifiable intangible assets acquired

 

 

 

 

 

71,985

Bargain purchase gain

 

 

 

 

$

(7,414)

_______________________

(1) Stock price is as of the closing date.

 

The application of the acquisition method of accounting resulted in a bargain purchase gain of $7.4 million for the year ended December 31, 2018 and was reported as a component of noninterest income on our Consolidated Statements of Income.  The bargain purchase gain was primarily due to the decline in the value of the stock portion of the merger consideration between signing and closing the Anchor Acquisition which resulted in the purchase price for Anchor being less than the fair market value of the net assets acquired.  In the merger, each Anchor shareholder received 0.291 of a share of FS Bancorp common stock for each share of Anchor common stock along with $12.40 in cash.

 

The Company determined that the disclosure requirements related to the amounts of revenues and earnings of Anchor included in the consolidated statements of operations since the November 15, 2018 acquisition date was impracticable. The financial activity and operating results of Anchor were commingled with the Company’s financial activity and operating results as of the acquisition date.

 

 

 

 

 

 

 

13


 

Table of Contents

NOTE 3 - SECURITIES AVAILABLE-FOR-SALE

The following tables present the amortized costs, unrealized gains, unrealized losses, and estimated fair values of securities available-for-sale at March 31, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

 

 

    

 

 

    

 

 

    

Estimated

 

 

Amortized 

 

Unrealized 

 

Unrealized 

 

Fair 

 

 

Cost

 

Gains

 

Losses

 

Values

SECURITIES AVAILABLE-FOR-SALE

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

$

13,045

 

$

42

 

$

(42)

 

$

13,045

Corporate securities

 

 

8,556

 

 

21

 

 

(37)

 

 

8,540

Municipal bonds

 

 

14,412

 

 

178

 

 

(116)

 

 

14,474

Mortgage-backed securities

 

 

49,632

 

 

123

 

 

(503)

 

 

49,252

U.S. Small Business Administration securities

 

 

14,694

 

 

 —

 

 

(222)

 

 

14,472

Total securities available-for-sale

 

$

100,339

 

$

364

 

$

(920)

 

$

99,783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

 

 

    

 

 

    

 

 

    

Estimated

 

 

Amortized 

 

Unrealized

 

Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

Values

SECURITIES AVAILABLE-FOR-SALE

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

$

16,052

 

$

32

 

$

(197)

 

$

15,887

Corporate securities

 

 

7,074

 

 

 —

 

 

(209)

 

 

6,865

Municipal bonds

 

 

14,446

 

 

23

 

 

(275)

 

 

14,194

Mortgage-backed securities

 

 

45,827

 

 

83

 

 

(1,074)

 

 

44,836

U.S. Small Business Administration securities

 

 

15,690

 

 

 —

 

 

(267)

 

 

15,423

Total securities available-for-sale

 

$

99,089

 

$

138

 

$

(2,022)

 

$

97,205

 

At March 31, 2019, the Bank had pledged 11 securities held at the FHLB of Des Moines with a carrying value of $13.9 million to secure Washington State public deposits of $11.5 million with a $4.4 million collateral requirement by the Washington Public Deposit Protection Commission.  At December 31, 2018, the Bank pledged 11 securities held at the FHLB of Des Moines with a carrying value of $13.7 million to secure Washington State public deposits of $19.9 million with an $8.4 million minimum collateral requirement by the Washington Public Deposit Protection Commission.

Investment securities that were in an unrealized loss position at March 31, 2019 and December 31, 2018 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. Management believes that these securities are only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

Less than 12 Months

 

12 Months or Longer

 

Total

 

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

SECURITIES AVAILABLE-FOR-SALE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

$

 —

 

$

 —

 

$

4,952

 

$

(42)

 

$

4,952

 

$

(42)

Corporate securities

 

 

2,486

 

 

(6)

 

 

5,033

 

 

(31)

 

 

7,519

 

 

(37)

Municipal bonds

 

 

 —

 

 

 —

 

 

5,082

 

 

(116)

 

 

5,082

 

 

(116)

Mortgage-backed securities

 

 

2,305

 

 

(6)

 

 

28,913

 

 

(497)

 

 

31,218

 

 

(503)

U.S. Small Business Administration securities

 

 

 —

 

 

 —

 

 

14,472

 

 

(222)

 

 

14,472

 

 

(222)

Total

 

$

4,791

 

$

(12)

 

$

58,452

 

$

(908)

 

$

63,243

 

$

(920)

 

14


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

Less than 12 Months

 

12 Months or Longer

 

Total

 

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

SECURITIES AVAILABLE-FOR-SALE