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Section 1: 10-Q (10-Q)

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Table of Contents

 

 

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 June 30, 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)

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 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]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of August 2, 2019, there were 4,477,864 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 June 30, 2019 and December 31, 2018 (Unaudited)

 

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)

 

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited)

 

8 - 9 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

10 - 46 

 

 

 

 

 

Item 2. 

 

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

 

47 - 60 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

60 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

60 

 

 

 

 

 

PART II 

 

OTHER INFORMATION

 

61 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

61 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

61 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

61 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

62 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

62 

 

 

 

 

 

Item 5. 

 

Other Information

 

62 

 

 

 

 

 

Item 6. 

 

Exhibits

 

63 - 64 

 

 

 

 

 

SIGNATURES 

 

 

 

65 

 

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)

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

ASSETS

 

2019

 

2018

Cash and due from banks

 

$

15,214

 

$

9,408

Interest-bearing deposits at other financial institutions

 

 

44,380

 

 

23,371

Total cash and cash equivalents

 

 

59,594

 

 

32,779

Certificates of deposit at other financial institutions

 

 

24,297

 

 

22,074

Securities available-for-sale, at fair value

 

 

96,252

 

 

97,205

Loans held for sale, at fair value

 

 

66,508

 

 

51,195

Loans receivable, net

 

 

1,282,119

 

 

1,312,519

Accrued interest receivable

 

 

5,779

 

 

5,761

Premises and equipment, net

 

 

29,517

 

 

29,110

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

 

 

4,582

 

 

 —

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

 

 

8,329

 

 

9,887

Other real estate owned (“OREO”)

 

 

254

 

 

689

Bank owned life insurance (“BOLI”), net

 

 

34,917

 

 

34,485

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

 

 

10,849

 

 

10,429

Goodwill

 

 

2,312

 

 

2,312

Core deposit intangible, net

 

 

5,837

 

 

6,217

Other assets

 

 

9,919

 

 

6,982

TOTAL ASSETS

 

$

1,641,065

 

$

1,621,644

LIABILITIES

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest-bearing accounts

 

$

279,221

 

$

234,532

Interest-bearing accounts

 

 

1,054,996

 

 

1,039,687

Total deposits

 

 

1,334,217

 

 

1,274,219

Borrowings

 

 

83,211

 

 

137,149

Subordinated note:

 

 

 

 

 

 

Principal amount

 

 

10,000

 

 

10,000

Unamortized debt issuance costs

 

 

(125)

 

 

(135)

Total subordinated note less unamortized debt issuance costs

 

 

9,875

 

 

9,865

Operating lease liabilities

 

 

4,721

 

 

 —

Deferred tax liability, net

 

 

1,003

 

 

361

Other liabilities

 

 

18,612

 

 

20,012

Total liabilities

 

 

1,451,639

 

 

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; 4,476,864 and 4,492,478 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

 

45

 

 

45

Additional paid-in capital

 

 

90,418

 

 

91,466

Retained earnings

 

 

99,184

 

 

90,854

Accumulated other comprehensive gain (loss), net of tax

 

 

496

 

 

(1,479)

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

 

 

(717)

 

 

(848)

Total stockholders’ equity

 

 

189,426

 

 

180,038

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,641,065

 

$

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

    

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2019

    

2018

    

2019

    

2018

INTEREST INCOME

 

 

 

 

 

 

 

 

Loans receivable, including fees

 

$

21,102

 

$

13,135

 

$

42,211

 

$

25,391

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

 

 

1,263

 

 

887

 

 

2,465

 

 

1,619

Total interest and dividend income

 

 

22,365

 

 

14,022

 

 

44,676

 

 

27,010

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

4,056

 

 

1,432

 

 

7,766

 

 

2,675

Borrowings

 

 

606

 

 

496

 

 

1,350

 

 

576

Subordinated note

 

 

169

 

 

169

 

 

337

 

 

337

Total interest expense

 

 

4,831

 

 

2,097

 

 

9,453

 

 

3,588

NET INTEREST INCOME

 

 

17,534

 

 

11,925

 

 

35,223

 

 

23,422

PROVISION FOR LOAN LOSSES

 

 

910

 

 

450

 

 

1,660

 

 

800

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

16,624

 

 

11,475

 

 

33,563

 

 

22,622

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

Service charges and fee income

 

 

1,854

 

 

670

 

 

3,512

 

 

1,329

Gain on sale of loans

 

 

3,576

 

 

4,671

 

 

5,973

 

 

8,649

Gain on sale of investment securities

 

 

32

 

 

 —

 

 

32

 

 

113

Earnings on cash surrender value of BOLI

 

 

217

 

 

88

 

 

432

 

 

170

Other noninterest income

 

 

404

 

 

185

 

 

689

 

 

377

Total noninterest income

 

 

6,083

 

 

5,614

 

 

10,638

 

 

10,638

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

8,649

 

 

7,671

 

 

16,892

 

 

14,719

Operations

 

 

2,658

 

 

1,541

 

 

4,702

 

 

2,901

Occupancy

 

 

1,230

 

 

704

 

 

2,342

 

 

1,353

Data processing

 

 

1,336

 

 

679

 

 

2,622

 

 

1,319

Gain on sale of OREO

 

 

 —

 

 

 —

 

 

(85)

 

 

 —

OREO expenses

 

 

 7

 

 

 —

 

 

11

 

 

 —

Loan costs

 

 

707

 

 

704

 

 

1,379

 

 

1,332

Professional and board fees

 

 

616

 

 

463

 

 

1,166

 

 

907

Federal Deposit Insurance Corporation (“FDIC”) insurance

 

 

139

 

 

90

 

 

387

 

 

131

Marketing and advertising

 

 

191

 

 

215

 

 

327

 

 

364

Acquisition costs

 

 

1,224

 

 

 —

 

 

1,598

 

 

 —

Amortization of core deposit intangible

 

 

190

 

 

77

 

 

380

 

 

153

Impairment of servicing rights

 

 

124

 

 

 —

 

 

147

 

 

 —

Total noninterest expense

 

 

17,071

 

 

12,144

 

 

31,868

 

 

23,179

INCOME BEFORE PROVISION FOR INCOME TAXES

 

 

5,636

 

 

4,945

 

 

12,333

 

 

10,081

PROVISION FOR INCOME TAXES

 

 

1,173

 

 

688

 

 

2,678

 

 

1,502

NET INCOME

 

$

4,463

 

$

4,257

 

$

9,655

 

$

8,579

Basic earnings per share

 

$

1.00

 

$

1.19

 

$

2.17

 

$

2.40

Diluted earnings per share

 

$

0.98

 

$

1.13

 

$

2.12

 

$

2.28

 

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

    

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2019

 

2018

 

2019

 

2018

 

Net Income

 

$

4,463

 

$

4,257

 

$

9,655

 

$

8,579

 

Other comprehensive income (loss), before tax:

 

 

  

 

 

  

 

 

  

 

 

  

 

Securities available-for-sale:

 

 

  

 

 

  

 

 

  

 

 

  

 

Unrealized holding gain (loss) during year

 

 

1,220

 

 

(524)

 

 

2,548

 

 

(1,991)

 

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

 

 

(263)

 

 

113

 

 

(548)

 

 

428

 

Reclassification adjustment for realized gain included in net income

 

 

(32)

 

 

 —

 

 

(32)

 

 

(113)

 

Income tax provision related to reclassification for realized gain

 

 

 7

 

 

 —

 

 

 7

 

 

24

 

Other comprehensive income (loss), net of tax

 

 

932

 

 

(411)

 

 

1,975

 

 

(1,652)

 

COMPREHENSIVE INCOME

 

$

5,395

 

$

3,846

 

$

11,630

 

$

6,927

 

 

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)

Three Months Ended June 30, 2018 and 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

 

 

    

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, April 1, 2018

 

3,695,552

 

$

37

 

$

55,823

 

$

72,349

 

$

(1,716)

 

$

(1,051)

 

$

125,442

Net income

 

 —

 

$

 —

 

 

 —

 

 

4,257

 

 

 —

 

 

 —

 

$

4,257

Dividends paid ($0.14 per share)

 

 —

 

$

 —

 

 

 —

 

 

(504)

 

 

 —

 

 

 —

 

$

(504)

Share-based compensation

 

 —

 

$

 —

 

 

150

 

 

 —

 

 

 —

 

 

 —

 

$

150

Common stock repurchased

 

(4,325)

 

$

 —

 

 

(250)

 

 

 —

 

 

 —

 

 

 —

 

$

(250)

Stock options exercised

 

17,433

 

$

 —

 

 

294

 

 

 —

 

 

 —

 

 

 —

 

$

294

Other comprehensive loss, net of tax

 

 —

 

$

 —

 

 

 —

 

 

 —

 

 

(411)

 

 

 —

 

$

(411)

ESOP shares allocated

 

 —

 

$

 —

 

 

327

 

 

 —

 

 

 —

 

 

66

 

$

393

BALANCE, June 30, 2018

 

3,708,660

 

$

37

 

$

56,344

 

$

76,102

 

$

(2,127)

 

$

(985)

 

$

129,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, April 1, 2019

 

4,489,042

 

$

45

 

$

91,742

 

$

95,383

 

$

(436)

 

$

(782)

 

$

185,952

Net income

 

 —

 

$

 —

 

 

 —

 

 

4,463

 

 

 —

 

 

 —

 

$

4,463

Dividends paid ($0.15 per share)

 

 —

 

$

 —

 

 

 —

 

 

(662)

 

 

 —

 

 

 —

 

$

(662)

Share-based compensation

 

 —

 

$

 —

 

 

190

 

 

 —

 

 

 —

 

 

 —

 

$

190

Common stock repurchased

 

(49,978)

 

$

 —

 

 

(2,413)

 

 

 —

 

 

 —

 

 

 —

 

$

(2,413)

Stock options exercised

 

37,800

 

$

 —

 

 

638

 

 

 —

 

 

 —

 

 

 —

 

$

638

Other comprehensive income, net of tax

 

 —

 

$

 —

 

 

 —

 

 

 —

 

 

932

 

 

 —

 

$

932

ESOP shares allocated

 

 —

 

$

 —

 

 

261

 

 

 —

 

 

 —

 

 

65

 

$

326

BALANCE, June 30, 2019

 

4,476,864

 

$

45

 

$

90,418

 

$

99,184

 

$

496

 

$

(717)

 

$

189,426

 

 

6

Table of Contents

Six Months Ended June 30, 2018 and 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

 

 

    

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

 

 —

 

$

 —

 

 

 —

 

 

8,579

 

 

 —

 

 

 —

 

$

8,579

Dividends paid ($0.25 per share)

 

 —

 

$

 —

 

 

 —

 

 

(899)

 

 

 —

 

 

 —

 

$

(899)

Share-based compensation

 

 —

 

$

 —

 

 

285

 

 

 —

 

 

 —

 

 

 —

 

$

285

Common stock repurchased

 

(4,325)

 

$

 —

 

 

(250)

 

 

 —

 

 

 —

 

 

 —

 

$

(250)

Stock options exercised

 

32,833

 

$

 —

 

 

554

 

 

 —

 

 

 —

 

 

 —

 

$

554

Other comprehensive loss, net of tax

 

 —

 

$

 —

 

 

 —

 

 

 —

 

 

(1,652)

 

 

 —

 

$

(1,652)

ESOP shares allocated

 

 —

 

$

 —

 

 

620

 

 

 —

 

 

 —

 

 

132

 

$

752

BALANCE, June 30, 2018

 

3,708,660

 

$

37

 

$

56,344

 

$

76,102

 

$

(2,127)

 

$

(985)

 

$

129,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, January 1, 2019

 

4,492,478

 

$

45

 

$

91,466

 

$

90,854

 

$

(1,479)

 

$

(848)

 

$

180,038

Net income

 

 —

 

$

 —

 

 

 —

 

 

9,655

 

 

 —

 

 

 —

 

$

9,655

Dividends paid ($0.30 per share)

 

 —

 

$

 —

 

 

 —

 

 

(1,325)

 

 

 —

 

 

 —

 

$

(1,325)

Share-based compensation

 

 —

 

$

 —

 

 

452

 

 

 —

 

 

 —

 

 

 —

 

$

452

Common stock repurchased

 

(56,014)

 

$

 —

 

 

(2,698)

 

 

 —

 

 

 —

 

 

 —

 

$

(2,698)

Stock options exercised

 

40,400

 

$

 —

 

 

682

 

 

 —

 

 

 —

 

 

 —

 

$

682

Other comprehensive income, net of tax

 

 —

 

$

 —

 

 

 —

 

 

 —

 

 

1,975

 

 

 —

 

$

1,975

ESOP shares allocated

 

 —

 

$

 —

 

 

516

 

 

 —

 

 

 —

 

 

131

 

$

647

BALANCE, June 30, 2019

 

4,476,864

 

$

45

 

$

90,418

 

$

99,184

 

$

496

 

$

(717)

 

$

189,426

 

See accompanying notes to these consolidated financial statements.

 

 

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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

 

 

 

 

 

 

 

 

     

Six Months Ended June 30, 

 

    

2019

     

2018

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

9,655

 

$

8,579

Adjustments to reconcile net income to net cash from operating activities

 

 

  

 

 

  

Provision for loan losses

 

 

1,660

 

 

800

Depreciation, amortization and accretion

 

 

4,303

 

 

2,640

Compensation expense related to stock options and restricted stock awards

 

 

452

 

 

285

ESOP compensation expense for allocated shares

 

 

647

 

 

752

Increase in cash surrender value of BOLI

 

 

(432)

 

 

(170)

Gain on sale of loans held for sale

 

 

(5,973)

 

 

(8,567)

Gain on sale of portfolio loans

 

 

 —

 

 

(82)

Gain on sale of investment securities

 

 

(32)

 

 

(113)

Origination of loans held for sale

 

 

(321,784)

 

 

(313,203)

Proceeds from sale of loans held for sale

 

 

310,730

 

 

317,431

Impairment of servicing rights

 

 

147

 

 

 —

Gain on sale of OREO

 

 

(85)

 

 

 —

Changes in operating assets and liabilities

 

 

  

 

 

  

Accrued interest receivable

 

 

(18)

 

 

(468)

Other assets

 

 

(8,153)

 

 

(74)

Other liabilities

 

 

3,931

 

 

4,565

Net cash (used) from operating activities

 

 

(4,952)

 

 

12,375

CASH FLOWS USED BY INVESTING ACTIVITIES

 

 

  

 

 

  

Activity in securities available-for-sale:

 

 

  

 

 

  

Proceeds from sale of investment securities

 

 

10,554

 

 

5,305

Maturities, prepayments, and calls

 

 

8,343

 

 

4,315

Purchases

 

 

(15,599)

 

 

(27,845)

Maturities of certificates of deposit at other financial institutions

 

 

2,488

 

 

496

Purchase of certificates of deposit at other financial institutions

 

 

(4,712)

 

 

 —

Loan originations and principal collections, net

 

 

27,982

 

 

(104,670)

Purchase of portfolio loans

 

 

(321)

 

 

(21,618)

Proceeds from sale of portfolio loans

 

 

 —

 

 

5,551

Proceeds from sale of OREO, net

 

 

684

 

 

 —

Purchase of premises and equipment

 

 

(1,741)

 

 

(1,649)

Purchase of BOLI

 

 

 —

 

 

(3,000)

Change in FHLB stock, net

 

 

1,558

 

 

(4,871)

Net cash from (used) by investing activities

 

 

29,236

 

 

(147,986)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

  

 

 

  

Net increase in deposits

 

 

59,998

 

 

40,271

Proceeds from borrowings

 

 

296,282

 

 

513,985

Repayments of borrowings

 

 

(350,408)

 

 

(414,988)

Dividends paid

 

 

(1,325)

 

 

(899)

Proceeds from stock options exercised

 

 

682

 

 

554

Common stock repurchased

 

 

(2,698)

 

 

(250)

Net cash from financing activities

 

 

2,531

 

 

138,673

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

26,815

 

 

3,062

CASH AND CASH EQUIVALENTS, beginning of period

 

 

32,779

 

 

18,915

CASH AND CASH EQUIVALENTS, end of period

 

$

59,594

 

$

21,977

 

 

 

 

 

 

 

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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

 

$

9,529

 

$

3,513

Income taxes

 

 

2,467

 

 

1,200

 

 

 

 

 

 

 

SUPPLEMENTARY DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

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

 

 

2,517

 

 

(2,105)

Property taken in settlement of loans

 

 

179

 

 

 —

Retention of gross mortgage servicing rights from loan sales

 

$

2,059

 

$

2,519

 

See accompanying notes to these consolidated financial statements

 

 

 

 

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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 and six months ended June 30, 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, deferred income taxes, and if needed, a deferred tax asset valuation allowance.

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 June 30, 2019 for potential recognition or disclosure.

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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, as amended by ASU 2018-19, ASU 2019-04, and ASU 2019-05. 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, however, the FASB board proposed in July 2019 extending the adoption date for certain registrants, including the Company, to fiscal years beginning after December 15, 2022. 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, the Company anticipates the allowance for loan losses to increase through a one‑time adjustment to retained earnings, however, until the evaluation is complete the magnitude of the increase will be unknown.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various FASB Transition Resource Group meetings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.

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

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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 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.  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 clarifies interim disclosure requirements that allow omission of required transition disclosures. 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 on January 1, 2019 created ROU assets of $4.8 million and operating lease liabilities of $5.0 million, and the related impact to the Company’s first quarter 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-

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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.

Anchor Bank’s operating system conversion into the Bank’s core system occurred on June 15, 2019, with related expenses in the second quarter of 2019 of $1.2 million.

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