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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, 2020 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)
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Washington |
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45‑4585178 |
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(State or other jurisdiction of incorporation or organization) |
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(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:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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.
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Large accelerated filer [ ] |
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Accelerated filer [ X ] |
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Non-accelerated filer [ ] |
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Smaller reporting company [ X ] |
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Emerging growth company [ ] |
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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 April 30, 2020, there were 4,281,541 outstanding shares of the registrant’s common stock.
FS Bancorp, Inc.
Form 10‑Q
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Page Number |
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PART I |
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FINANCIAL INFORMATION |
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Consolidated Balance Sheets at March 31, 2020 and December 31, 2019 (Unaudited) |
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3 |
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Consolidated Statements of Income for the Three Months Ended March 31, 2020 and 2019 (Unaudited) |
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4 |
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5 |
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6 |
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Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (Unaudited) |
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7 - 8 |
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9 - 39 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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41 - 54 |
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54 |
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54 |
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54 |
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54 |
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55 |
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56 |
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56 |
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57 |
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57 |
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58 |
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59 |
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
FS BANCORP, INC. AND SUBSIDIARY
(Dollars in thousands, except share amounts) (Unaudited)
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March 31, |
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December 31, |
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ASSETS |
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2020 |
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2019 |
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Cash and due from banks |
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$ |
12,928 |
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$ |
13,175 |
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Interest-bearing deposits at other financial institutions |
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35,993 |
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32,603 |
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Total cash and cash equivalents |
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48,921 |
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45,778 |
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Certificates of deposit at other financial institutions |
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17,926 |
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20,902 |
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Securities available-for-sale, at fair value |
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156,466 |
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126,057 |
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Loans held for sale, at fair value |
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115,632 |
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69,699 |
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Loans receivable, net |
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1,393,070 |
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1,336,346 |
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Accrued interest receivable |
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6,326 |
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5,908 |
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Premises and equipment, net |
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28,655 |
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28,770 |
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Operating lease right-of-use (“ROU”) assets |
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4,692 |
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5,016 |
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Federal Home Loan Bank (“FHLB”) stock, at cost |
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10,921 |
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8,045 |
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Other real estate owned (“OREO”) |
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90 |
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168 |
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Bank owned life insurance (“BOLI”), net |
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35,572 |
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35,356 |
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Servicing rights, held at the lower of cost or fair value |
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10,626 |
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11,560 |
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Goodwill |
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2,312 |
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2,312 |
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Core deposit intangible, net |
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5,281 |
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5,457 |
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Other assets |
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10,678 |
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11,682 |
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TOTAL ASSETS |
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$ |
1,847,168 |
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$ |
1,713,056 |
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LIABILITIES |
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Deposits: |
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Noninterest-bearing accounts |
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$ |
285,566 |
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$ |
273,602 |
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Interest-bearing accounts |
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1,160,703 |
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1,118,806 |
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Total deposits |
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1,446,269 |
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1,392,408 |
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Borrowings |
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159,114 |
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84,864 |
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Subordinated note: |
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Principal amount |
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10,000 |
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10,000 |
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Unamortized debt issuance costs |
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(110) |
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(115) |
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Total subordinated note less unamortized debt issuance costs |
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9,890 |
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9,885 |
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Operating lease liabilities |
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4,898 |
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5,214 |
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Deferred tax liability, net |
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2,260 |
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1,971 |
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Other liabilities |
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23,908 |
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18,472 |
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Total liabilities |
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1,646,339 |
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1,512,814 |
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COMMITMENTS AND CONTINGENCIES (NOTE 9) |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued or outstanding |
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— |
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— |
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Common stock, $.01 par value; 45,000,000 shares authorized; 4,332,196 and 4,459,041 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively |
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43 |
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44 |
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Additional paid-in capital |
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84,517 |
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89,268 |
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Retained earnings |
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114,957 |
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110,715 |
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Accumulated other comprehensive income, net of tax |
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1,819 |
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788 |
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Unearned shares – Employee Stock Ownership Plan (“ESOP”) |
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(507) |
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(573) |
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Total stockholders’ equity |
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200,829 |
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200,242 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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$ |
1,847,168 |
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$ |
1,713,056 |
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See accompanying notes to these consolidated financial statements.
3
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts) (Unaudited)
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Three Months Ended |
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March 31, |
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2020 |
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2019 |
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INTEREST INCOME |
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Loans receivable, including fees |
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$ |
20,740 |
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$ |
21,109 |
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Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions |
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1,209 |
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1,202 |
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Total interest and dividend income |
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21,949 |
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22,311 |
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INTEREST EXPENSE |
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Deposits |
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3,807 |
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3,710 |
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Borrowings |
|
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497 |
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|
744 |
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Subordinated note |
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172 |
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|
168 |
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Total interest expense |
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4,476 |
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4,622 |
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NET INTEREST INCOME |
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17,473 |
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17,689 |
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PROVISION FOR LOAN LOSSES |
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3,686 |
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|
750 |
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
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13,787 |
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16,939 |
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NONINTEREST INCOME |
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Service charges and fee income |
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924 |
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1,658 |
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Gain on sale of loans |
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5,899 |
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2,397 |
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Earnings on cash surrender value of BOLI |
|
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216 |
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215 |
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Other noninterest income |
|
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1,852 |
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285 |
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Total noninterest income |
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8,891 |
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4,555 |
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NONINTEREST EXPENSE |
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Salaries and benefits |
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9,547 |
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8,243 |
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Operations |
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2,403 |
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2,044 |
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Occupancy |
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1,109 |
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1,112 |
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Data processing |
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980 |
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1,286 |
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Loss (gain) on sale of OREO |
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2 |
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(85) |
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OREO expenses |
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— |
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4 |
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Loan costs |
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500 |
|
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673 |
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Professional and board fees |
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681 |
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550 |
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Federal Deposit Insurance Corporation (“FDIC”) insurance |
|
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126 |
|
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248 |
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Marketing and advertising |
|
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146 |
|
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135 |
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Acquisition costs |
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— |
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374 |
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Amortization of core deposit intangible |
|
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176 |
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190 |
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Impairment of servicing rights |
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514 |
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23 |
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Total noninterest expense |
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16,184 |
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14,797 |
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INCOME BEFORE PROVISION FOR INCOME TAXES |
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6,494 |
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6,697 |
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PROVISION FOR INCOME TAXES |
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1,327 |
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1,505 |
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NET INCOME |
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$ |
5,167 |
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$ |
5,192 |
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Basic earnings per share |
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$ |
1.16 |
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$ |
1.19 |
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Diluted earnings per share |
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$ |
1.14 |
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$ |
1.15 |
See accompanying notes to these consolidated financial statements.
4
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands ) (Unaudited)
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Three Months Ended |
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March 31, |
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||||
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2020 |
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2019 |
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Net Income |
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$ |
5,167 |
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$ |
5,192 |
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Other comprehensive income: |
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Securities available-for-sale: |
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Unrealized holding gain during period |
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2,364 |
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1,328 |
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Income tax provision related to unrealized holding gain |
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|
(508) |
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(285) |
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Cash flow hedges: |
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|
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Unrealized holding loss during period |
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(1,052) |
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|
— |
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Reclassification for losses included in net income |
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1 |
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— |
|
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Income tax benefit related to unrealized holding loss |
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226 |
|
|
— |
|
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Other comprehensive income, net of tax |
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1,031 |
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|
1,043 |
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COMPREHENSIVE INCOME |
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$ |
6,198 |
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$ |
6,235 |
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See accompanying notes to these consolidated financial statements.
5
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share amounts) (Unaudited)
Three Months Ended March 31, 2019 and 2020
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Accumulated |
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Other |
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Additional |
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Comprehensive |
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Unearned |
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Total |
||||
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Common Stock |
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Paid-in |
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Retained |
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(Loss) Income, |
|
ESOP |
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Stockholders’ |
||||||||
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Shares |
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Amount |
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Capital |
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Earnings |
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Net of Tax |
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Shares |
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Equity |
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BALANCE, January 1, 2019 |
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4,492,478 |
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$ |
45 |
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$ |
91,466 |
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$ |
90,854 |
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$ |
(1,479) |
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$ |
(848) |
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$ |
180,038 |
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Net income |
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— |
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$ |
— |
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|
— |
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|
5,192 |
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|
— |
|
|
— |
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$ |
5,192 |
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Dividends paid ($0.14 per share) |
|
— |
|
$ |
— |
|
|
— |
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(663) |
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|
— |
|
|
— |
|
$ |
(663) |
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Share-based compensation |
|
— |
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$ |
— |
|
|
262 |
|
|
— |
|
|
— |
|
|
— |
|
$ |
262 |
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Common stock repurchased - repurchase plan |
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(6,036) |
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$ |
— |
|
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(285) |
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|
— |
|
|
— |
|
|
— |
|
$ |
(285) |
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Stock options exercised, net |
|
2,600 |
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$ |
— |
|
|
44 |
|
|
— |
|
|
— |
|
|
— |
|
$ |
44 |
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Other comprehensive income, net of tax |
|
— |
|
$ |
— |
|
|
— |
|
|
— |
|
|
1,043 |
|
|
— |
|
$ |
1,043 |
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ESOP shares allocated |
|
— |
|
$ |
— |
|
|
255 |
|
|
— |
|
|
— |
|
|
66 |
|
$ |
321 |
|
BALANCE, March 31, 2019 |
|
4,489,042 |
|
$ |
45 |
|
$ |
91,742 |
|
$ |
95,383 |
|
$ |
(436) |
|
$ |
(782) |
|
$ |
185,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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BALANCE, January 1, 2020 |
|
4,459,041 |
|
$ |
44 |
|
$ |
89,268 |
|
$ |
110,715 |
|
$ |
788 |
|
$ |
(573) |
|
$ |
200,242 |
|
Net income |
|
— |
|
$ |
— |
|
|
— |
|
|
5,167 |
|
|
— |
|
|
— |
|
$ |
5,167 |
|
Dividends paid ($0.21 per share) |
|
— |
|
$ |
— |
|
|
— |
|
|
(925) |
|
|
— |
|
|
— |
|
$ |
(925) |
|
Share-based compensation |
|
— |
|
$ |
— |
|
|
224 |
|
|
— |
|
|
— |
|
|
— |
|
$ |
224 |
|
Common stock repurchased |
|
(136,243) |
|
$ |
(1) |
|
|
(4,988) |
|
|
— |
|
|
— |
|
|
— |
|
$ |
(4,989) |
|
Stock options exercised, net |
|
9,398 |
|
$ |
— |
|
|
(246) |
|
|
— |
|
|
— |
|
|
— |
|
$ |
(246) |
|
Other comprehensive income, net of tax |
|
— |
|
$ |
— |
|
|
— |
|
|
— |
|
|
1,031 |
|
|
— |
|
$ |
1,031 |
|
ESOP shares allocated |
|
— |
|
$ |
— |
|
|
259 |
|
|
— |
|
|
— |
|
|
66 |
|
$ |
325 |
|
BALANCE, March 31, 2020 |
|
4,332,196 |
|
$ |
43 |
|
$ |
84,517 |
|
$ |
114,957 |
|
$ |
1,819 |
|
$ |
(507) |
|
$ |
200,829 |
See accompanying notes to these consolidated financial statements.
6
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
||||
|
|
|
2020 |
|
2019 |
||
|
CASH FLOWS (USED BY) FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Net income |
|
$ |
5,167 |
|
$ |
5,192 |
|
Adjustments to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
|
Provision for loan losses |
|
|
3,686 |
|
|
750 |
|
Depreciation, amortization and accretion |
|
|
2,178 |
|
|
2,321 |
|
Compensation expense related to stock options and restricted stock awards |
|
|
224 |
|
|
262 |
|
ESOP compensation expense for allocated shares |
|
|
325 |
|
|
321 |
|
Increase in cash surrender value of BOLI |
|
|
(216) |
|
|
(215) |
|
Gain on sale of loans held for sale |
|
|
(5,899) |
|
|
(2,397) |
|
Origination of loans held for sale |
|
|
(259,191) |
|
|
(125,281) |
|
Proceeds from sale of loans held for sale |
|
|
218,574 |
|
|
132,461 |
|
Impairment of servicing rights |
|
|
514 |
|
|
23 |
|
Loss (gain) on sale of OREO |
|
|
2 |
|
|
(85) |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
(418) |
|
|
(51) |
|
Other assets |
|
|
5,058 |
|
|
(7,953) |
|
Other liabilities |
|
|
14 |
|
|
1,517 |
|
Net cash (used by) from operating activities |
|
|
(29,982) |
|
|
6,865 |
|
CASH FLOWS (USED BY) FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Activity in securities available-for-sale: |
|
|
|
|
|
|
|
Maturities, prepayments, and calls |
|
|
12,002 |
|
|
4,659 |
|
Purchases |
|
|
(40,236) |
|
|
(6,005) |
|
Maturities of certificates of deposit at other financial institutions |
|
|
2,976 |
|
|
— |
|
Loan originations and principal collections, net |
|
|
(27,573) |
|
|
26,997 |
|
Purchase of portfolio loans |
|
|
(32,743) |
|
|
(321) |
|
Proceeds from sale of portfolio loans |
|
|
— |
|
|
538 |
|
Proceeds from sale of OREO, net |
|
|
76 |
|
|
684 |
|
Purchase of premises and equipment, net |
|
|
(583) |
|
|
(860) |
|
Change in FHLB stock, net |
|
|
(2,876) |
|
|
1,730 |
|
Net cash (used by) from investing activities |
|
|
(88,957) |
|
|
27,422 |
|
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Net increase in deposits |
|
|
53,992 |
|
|
47,331 |
|
Proceeds from borrowings |
|
|
203,750 |
|
|
155,306 |
|
Repayments of borrowings |
|
|
(129,500) |
|
|
(205,725) |
|
Dividends paid on common stock |
|
|
(925) |
|
|
(663) |
|
(Disbursements) proceeds from stock options exercised, net |
|
|
(246) |
|
|
44 |
|
Common stock repurchased |
|
|
(4,989) |
|
|
(285) |
|
Net cash from (used by) financing activities |
|
|
122,082 |
|
|
(3,992) |
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
3,143 |
|
|
30,295 |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
45,778 |
|
|
32,779 |
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
48,921 |
|
$ |
63,074 |
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
Interest on deposits and borrowings |
|
$ |
4,285 |
|
$ |
4,462 |
|
Income taxes |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
7
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands) (Unaudited)
|
SUPPLEMENTARY DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Change in unrealized gain on investment securities, net |
|
$ |
2,364 |
|
$ |
1,328 |
|
Change in unrealized loss on cash flow hedges, net |
|
|
(1,051) |
|
|
— |
|
Retention of gross mortgage servicing rights from loan sales |
|
|
1,185 |
|
|
844 |
|
Property taken in settlement of loans |
|
|
— |
|
|
92 |
See accompanying notes to these consolidated financial statements
8
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, a headquarters that accepts deposits, and seven 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.
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, 2019, as filed with the SEC on March 16, 2020. 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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, 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 15 - Business Segments.”
Subsequent Events - The Company has evaluated events and transactions subsequent to March 31, 2020 for potential recognition or disclosure.
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 2019-10, and ASU 2019-11. 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 recognition and measurement of all current expected credit losses (“CECL”) for
9
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 approach under 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 and associated amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has selected a third-party vendor to assist in the implementation of this ASU and has run parallel computations as it continues to evaluate the impact of adoption of the new standard. As part of the implementation, management is also evaluating economic variables and forecast time horizons it believes to be most relevant based on the composition of the loans portfolio to develop a reasonable and supportable forecast, likely to include forecasted levels of employment, gross domestic product, and home price index, depending on the nature of the loan segment, as well as various loss methodologies to estimate expected credit losses. In addition, management has kept current on evolving interpretations and industry practices related to ASU 2016-13 via webcasts, publications, and conferences. 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 potential 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. Early adoption is permitted. The Company plans to adopt Topic 326 of this ASU, in conjunction with ASU No. 2016-13, on January 1, 2023. The adoption of Topic 815 is not expected to have a material impact on the Company’s 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. This ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The ASU 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 December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. For a cash flow hedge, a change in the method used to assess hedge effectiveness will not result in dedesignation of the hedging relationship if certain criteria are met. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is party to cash
10
flow hedge arrangements where the hedge effectiveness is based on LIBOR. The Company is currently evaluating the impact of the reference rate reform on the Company’s consolidated financial statements.
Recent Events - On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of the novel coronavirus of 2019 (“COVID-19”) pandemic. The guidance provides that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not Troubled Debt Restructurings (“TDRs”). The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ("CARES Act") provided similar guidance around the modification of loans as a result of the COVID-19 pandemic, providing, among other criteria, that modifications made between March 1, 2020, and the earlier of December 31, 2020, or 60 days after the COVID-19 emergency is terminated, on a good faith basis to borrowers who were current as of December 31, 2019, are not TDRs. This includes modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment. Borrowers are considered current under the CARES Act if they are not more than 30 days past due on their contractual payments as of December 31, 2019. Through March 31, 2020, the Bank had applied the interagency statement guidance and modified 66 individual loans with aggregate principal balances totaling $12.5 million. More of these types of modifications are likely to be executed in the second quarter of 2020. The majority of these modifications involved short-term extensions and/or interest-only periods. For additional information, see “NOTE 18 - COVID - 19 Pandemic.”
Application of New Accounting Guidance Adopted in 2020
On January 1, 2020, the Company adopted FASB 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. The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements.
NOTE 2 - INVESTMENTS
The following tables present the amortized costs, unrealized gains, unrealized losses, and estimated fair values of securities available-for-sale at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
||||
|
SECURITIES AVAILABLE-FOR-SALE |
|
Cost |
|
Gains |
|
Losses |
|
Values |
||||
|
U.S. agency securities |
|
$ |
6,991 |
|
$ |
136 |
|
$ |
— |
|
$ |
7,127 |
|
Corporate securities |
|
|
19,858 |
|
|
144 |
|
|
(151) |
|
|
19,851 |
|
Municipal bonds |
|
|
31,062 |
|
|
475 |
|
|
(131) |
|
|
31,406 |
|
Mortgage-backed securities |
|
|
74,503 |
|
|
2,271 |
|
|
(41) |
|
|
76,733 |
|
U.S. Small Business Administration securities |
|
|
20,684 |
|
|
672 |
|
|
(7) |
|
|
21,349 |
|
Total securities available-for-sale |
|
$ |
153,098 |
|
$ |
3,698 |
|
$ |
(330) |
|
$ |
156,466 |
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
||||
|
SECURITIES AVAILABLE-FOR-SALE |
|
Cost |
|
Gains |
|
Losses |
|
Values |
||||
|
U.S. agency securities |
|
$ |
8,986 |
|
$ |
95 |
|
$ |
(15) |
|
$ |
9,066 |
|
Corporate securities |
|
|
10,525 |
|
|
52 |
|
|
(7) |
|
|
10,570 |
|
Municipal bonds |
|
|
20,516 |
|
|
604 |
|
|
— |
|
|
21,120 |
|
Mortgage-backed securities |
|
|
62,745 |
|
|
405 |
|
|
(300) |
|
|
62,850 |
|
U.S. Small Business Administration securities |
|
|
22,281 |
|
|
191 |
|
|
(21) |
|
|
22,451 |
|
Total securities available-for-sale |
|
$ |
125,053 |
|
$ |
1,347 |
|
$ |
(343) |
|
$ |
126,057 |
At March 31, 2020, the Bank pledged seven securities held at the FHLB of Des Moines with a carrying value of $6.9 million to secure Washington State public deposits of $11.4 million with a $4.1 million collateral requirement by the Washington Public Deposit Protection Commission. At Decemb er 31, 2019, t he Bank pledged seven securities held at the FHLB of Des Moines with a carrying value of $7.4 million to secure Washington State public deposits of $10.3 million with a $4.0 million minimum collateral requirement by the Washington Public Deposit Protection Commission.
Investment securities that were in an unrealized loss position at March 31, 2020 and December 31, 2019 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, 2020 |
||||||||||||||||
|
|
|
Less than 12 Months |
|
12 Months or Longer |
|
Total |
||||||||||||
|
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
||||||
|
SECURITIES AVAILABLE-FOR-SALE |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
||||||
|
Corporate securities |
|
$ |
7,729 |
|
$ |
(151) |
|
$ |
— |
|
$ |
— |
|
$ |
7,729 |
|
$ |
(151) |
|
Municipal bonds |
|
|
10,285 |
|
|
(131) |
|
|
— |
|
|
— |
|
|
10,285 |
|
|
(131) |
|
Mortgage-backed securities |
|
|
4,578 |
|
|
(19) |
|
|
2,411 |
|
|
(22) |
|
|
6,989 |
|
|
(41) |
|
U.S. Small Business Administration securities |
|
|
1,955 |
|
|
(7) |
|
|
— |
|
|
— |
|
|
1,955 |
|
|
(7) |
|
Total |
|
$ |
24,547 |
|
$ |
(308) |
|
$ |
2,411 |
|
$ |
(22) |
|
$ |
26,958 |
|
$ |
(330) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
||||||||||||||||
|
|
|
Less than 12 Months |
|
12 Months or Longer |
|
Total |
||||||||||||
|
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
||||||
|
SECURITIES AVAILABLE-FOR-SALE |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
||||||
|
U.S. agency securities |
|
$ |
2,977 |
|
$ |
(15) |
|
$ |
— |
|
$ |
— |
|
$ |
2,977 |
|
$ |
(15) |
|
Corporate securities |
|
|
1,993 |
|
|
(7) |
|
|
— |
|
|
— |
|
|
1,993 |
|
|
(7) |
|
Mortgage-backed securities |
|
|
12,345 |
|
|
(154) |
|
|
11,459 |
|
|
(146) |
|
|
23,804 |
|
|
(300) |
|
U.S. Small Business Administration securities |
|
|
4,395 |
|
|
(21) |
|
|
— |
|
|
— |
|
|
4,395 |
|
|
(21) |
|
Total |
|
$ |
21,710 |
|
$ |
(197) |
|
$ |
11,459 |
|
$ |
(146) |
|
$ |
33,169 |
|
$ |
(343) |
There were 14 investments with unrealized losses of less than one year, and two investments with unrealized losses of more than one year at March 31, 2020. There were 13 investments with unrealized losses of less than one year, and 10 investments with unrealized losses of more than one year at December 31, 2019. The unrealized losses associated with these investments are believed to be caused by changing market conditions that are considered to be temporary and the Company does not intend to sell the securities, and it is not likely to be required to sell these securities prior to maturity. Based on the Company’s evaluation of these securities, no other-than-temporary impairment was recorded for the three months ended March 31, 2020, or for the year ended December 31, 2019. Additional deterioration in market and
12
economic conditions related to the COVID-19 pandemic, may have an adverse impact on credit quality in the future and result in other-than-temporary impairment charges.
The contractual maturities of securities available-for-sale at March 31, 2020 and December 31, 2019 are listed below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations; therefore, these securities are classified separately with no specific maturity date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|
December 31, 2019 |
||||||||
|
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
||||
|
U.S. agency securities |
|
Cost |
|
Value |
|
Cost |
|
Value |
||||
|
Due after one year through five years |
|
$ |
992 |
|
$ |
1,068 |
|
$ |
996 |
|
$ |
1,036 |
|
Due after five years through ten years |
|
|
3,999 |
|
|
4,041 |
|
|
3,997 |
|
|
4,027 |
|
Due after ten years |
|
|
2,000 |
|
|
2,018 |
|
|
3,993 |
|
|
4,003 |
|
Subtotal |
|
|
6,991 |
|
|
7,127 |
|
|
8,986 |
|
|
9,066 |
|
Corporate securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
|
5,024 |
|
|
5,003 |
|
|
5,034 |
|
|
5,044 |
|
Due after one year through five years |
|
|
5,854 |
|
|
5,763 |
|
|
3,491 |
|
|
3,532 |
|
Due after five years through ten years |
|
|
8,980 |
|
|
9,085 |
|
|
2,000 |
|
|
1,994 |
|
Subtotal |
|
|
19,858 |
|
|
19,851 |
|
|
10,525 |
|
|
10,570 |
|
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years |
|
|
3,768 |
|
|
3,680 |
|
|
3,774 |
|
|
3,833 |
|
Due after five years through ten years |
|
|
5,215 |
|
|
5,301 |
|
|
3,162 |
|
|
3,307 |
|
Due after ten years |
|
|
22,079 |
|
|
22,425 |
|
|
13,580 |
|
|
13,980 |
|
Subtotal |
|
|
31,062 |
|
|
31,406 |
|
|
20,516 |
|
|
21,120 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association (“FNMA”) |
|
|
51,139 |
|
|
52,933 |
|
|
42,131 |
|
|
42,333 |
|
Federal Home Loan Mortgage Corporation (“FHLMC”) |
|
|
17,698 |
|
|
18,083 |
|
|
15,250 |
|
|
15,179 |
|
Government National Mortgage Association (“GNMA”) |
|
|
5,666 |
|
|
5,717 |
|
|
5,364 |
|
|
5,338 |
|
Subtotal |
|
|
74,503 |
|
|
76,733 |
|
|
62,745 |
|
|
62,850 |
|
U.S. Small Business Administration securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years |
|
|
1,186 |
|
|
1,210 |
|
|
1,546 |
|
|
1,555 |
|
Due after five years through ten years |
|
|
10,467 |
|
|
10,787 |
|
|
11,500 |
|
|
11,598 |
|
Due after ten years |
|
|
9,031 |
|
|
9,352 |
|
|
9,235 |
|
|
9,298 |
|
Subtotal |
|
|
20,684 |
|
|
21,349 |
|
|
22,281 |
|
|
22,451 |
|
Total |
|
$ |
153,098 |
|
$ |
156,466 |
|
$ |
125,053 |
|
$ |
126,057 |
There were no sales proceeds, gains or losses for the three months ended March 31, 2020, or March 31, 2019, from securities available-for-sale.
The Bank received 7,158 shares of Class B common stock in Visa, Inc. (“Visa”) at no cost as a result of the Visa initial public offering in March 2008. During the first quarter of 2020, a one-time net gain of $1.5 million on the sale of equity investment securities included in other noninterest income on the Consolidated Statements of Income related to the sale of Class B Visa stock was recognized, which had been held at a carrying cost and fair value of zero due to the litigation liability associated with the stock. At March 31, 2020, the Bank no longer had any involvement or exposure to Visa litigation related to the shares sold during the quarter ended March 31, 2020.
13
NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio was as follows at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
||
|
REAL ESTATE LOANS |
|
2020 |
|
2019 |
||
|
Commercial |
|
$ |
220,509 |
|
$ |
210,749 |
|
Construction and development |
|
|
168,658 |
|
|
179,654 |
|
Home equity |
|
|
37,503 |
|
|
38,167 |
|
One-to-four-family (excludes loans held for sale) |
|
|
305,436 |
|
|
261,539 |
|
Multi-family |
|
|
130,570 |
|
|
133,931 |
|
Total real estate loans |
|
|
862,676 |
|
|
824,040 |
|
CONSUMER LOANS |
|
|
|
|
|
|
|
Indirect home improvement |
|
|
261,566 |
|
|
254,691 |
|
Marine |
|
|
69,473 |
|
|
67,179 |
|
Other consumer |
|
|
4,056 |
|
|
4,340 |
|
Total consumer loans |
|
|
335,095 |
|
|
326,210 |
|
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
Commercial and industrial |
|
|
149,086 |
|
|
140,531 |
|
Warehouse lending |
|
|
65,017 |
|
|
61,112 |
|
Total commercial business loans |
|
|
214,103 |
|
|
201,643 |
|
Total loans receivable, gross |
|
|
1,411,874 |
|
|
1,351,893 |
|
Allowance for loan losses |
|
|
(16,872) |
|
|
(13,229) |
|
Deferred costs and fees, net |
|
|
(3,425) |
|
|
(3,273) |
|
Premiums on purchased loans, net |
|
|
1,493 |
|
|
955 |
|
Total loans receivable, net |
|
$ |
1,393,070 |
|
$ |
1,336,346 |
Most of the Company’s commercial and multi-family real estate, construction, residential, and/or commercial business lending activities are with customers located in Western Washington and near the loan production office located in the Tri-Cities, Washington. The Company originates real estate, consumer, and commercial business loans and has concentrations in these areas, however, indirect home improvement loans, including solar-related home improvement loans, are originated through a network of home improvement contractors and dealers located throughout Washington, Oregon, California, Idaho, Colorado, Arizona, and just recently, Minnesota and Nevada. Loans are generally secured by collateral and rights to collateral vary and are legally documented to the extent practicable. Local economic conditions may affect borrowers’ ability to meet the stated repayment terms.
At March 31, 2020, the Bank held approximately $706.4 million in loans that qualify as collateral for FHLB advances, compared to approximately $646.1 million at December 31, 2019. The Bank held approximately $327.4 million in loans that qualify as collateral for the Federal Reserve Bank line of credit at March 31, 2020, compared to approximately $318.8 million at December 31, 2019.
The Company has defined its loan portfolio into three segments that reflect the structure of the lending function, the Company’s strategic plan and the manner in which management monitors performance and credit quality. The three loan portfolio segments are: (a) Real Estate Loans, (b) Consumer Loans, and (c) Commercial Business Loans. Each of these segments is disaggregated into classes based on the risk characteristics of the borrower and/or the collateral type securing the loan. The following is a summary of each of the Company’s loan portfolio segments and classes:
Real Estate Loans
Commercial Lending . Loans originated by the Company primarily secured by income producing properties, including retail centers, warehouses, and office buildings located in our market areas.
Construction and Development Lending . Loans originated by the Company for the construction of, and secured by, commercial real estate, one-to-four-family, and multi-family residences and tracts of land for development that are not pre-
14
sold. A small portion of the one-to-four-family construction portfolio is custom construction loans to the intended occupant of the residence.
Home Equity Lending . Loans originated by the Company secured by second mortgages on one-to-four-family residences, including home equity lines of credit in our market areas.
One-to-Four-Family Real Estate Lending . One-to-four-family residential loans include owner occupied properties (including second homes), and non-owner occupied properties with four or less units. These loans originated by the Company or purchased from banks are secured by first mortgages on one-to-four-family residences in our market areas that the Company intends to hold (excludes loans held for sale).
Multi-Family Lending . Apartment term lending (five or more units) to current banking customers and community reinvestment loans for low to moderate income individuals in the Company’s footprint.
Consumer Loans
Indirect Home Improvement . Fixture secured loans for home improvement are originated by the Company through its network of home improvement contractors and dealers and are secured by the personal property installed in, on, or at the borrower’s real property, and may be perfected with a UCC‑2 financing statement filed in the county of the borrower’s residence. These indirect home improvement loans include replacement windows, siding, roofing, pools, and other home fixture installations, including solar related home improvement projects.
Marine . Loans originated by the Company, secured by boats, to borrowers primarily located in the states we originate consumer loans.
Other Consumer. Loans originated by the Company to consumers in our retail branch footprint, including automobiles, recreational vehicles, direct home improvement loans, loans on deposits, and other consumer loans, primarily consisting of personal lines of credit and credit cards.
Commercial Business Loans
Commercial and Industrial Lending (“C&I”) . Loans originated by the Company to local small- and mid-sized businesses in our Puget Sound market area are secured primarily by accounts receivable, inventory, or personal property, plant and equipment. Some of the C&I loans purchased by the Company are outside of the Greater Puget Sound market area. C&I loans are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.
Warehouse Lending . Loans originated to non-depository financial institutions and secured by notes originated by the non-depository financial institution. The Company has two distinct warehouse lending divisions: commercial warehouse re-lending secured by notes on construction loans and mortgage warehouse re-lending secured by notes on one-to-four-family loans. The Company’s commercial construction warehouse lines are secured by notes on construction loans and typically guaranteed by principals with experience in construction lending. Mortgage warehouse lending loans are funded through third-party residential mortgage bankers. Under this program the Company provides short-term funding to the mortgage banking companies for the purpose of originating residential mortgage loans for sale into the secondary market.
15
The following tables detail activity in the allowance for loan losses by loan categories at or for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Three Months Ended March 31, 2020 |
|||||||||||||
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
ALLOWANCE FOR LOAN LOSSES |
|
Real Estate |
|
Consumer |
|
Business |
|
Unallocated |
|
Total |
|||||
|
Beginning balance |
|
$ |
6,206 |
|
$ |
3,766 |
|
$ |
3,254 |
|
$ |
3 |
|
$ |
13,229 |
|
Provision for loan losses |
|
|
1,019 |
|
|
660 |
|
|
824 |
|
|
1,183 |
|
|
3,686 |
|
Charge-offs |
|
|
— |
|
|
(370) |
|
|
(11) |
|
|
— |
|
|
(381) |
|
Recoveries |
|
|
18 |
|
|
143 |
|
|
177 |
|
|
— |
|
|
338 |
|
Net recoveries (charge-offs) |
|
|
18 |
|
|
(227) |
|
|
166 |
|
|
— |
|
|
(43) |
|
Ending balance |
|
$ |
7,243 |
|
$ |
4,199 |
|
$ |
4,244 |
|
$ |
1,186 |
|
$ |
16,872 |
|
Period end amount allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
|
$ |
15 |
|
$ |
231 |
|
$ |
— |
|
$ |
— |
|
$ |
246 |
|
Loans collectively evaluated for impairment |
|
|
7,228 |
|
|
3,968 |
|
|
4,244 |
|
|
1,186 |
|
|
16,626 |
|
Ending balance |
|
$ |
7,243 |
|
$ |
4,199 |
|
$ |
4,244 |
|
$ |
1,186 |
|
$ |
16,872 |
|
LOANS RECEIVABLE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
|
$ |
2,528 |
|
$ |
664 |
|
$ |
— |
|
$ |
— |
|
$ |
3,192 |
|
Loans collectively evaluated for impairment |
|
|
860,148 |
|
|
334,431 |
|
|
214,103 |
|
|
— |
|
|
1,408,682 |
|
Ending balance |
|
$ |
862,676 |
|
$ |
335,095 |
|
$ |
214,103 |
|
$ |
— |
|
$ |
1,411,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Three Months Ended March 31, 2019 |
|||||||||||||
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
ALLOWANCE FOR LOAN LOSSES |
|
Real Estate |
|
Consumer |
|
Business |
|
Unallocated |
|
Total |
|||||
|
Beginning balance |
|
$ |
5,761 |
|
$ |
3,351 |
|
$ |
3,191 |
|
$ |
46 |
|
$ |
12,349 |
|
Provision (recapture) for loan losses |
|
|
24 |
|
|
114 |
|
|
691 |
|
|
(79) |
|
|
750 |
|
Charge-offs |
|
|
— |
|
|
(250) |
|
|
(1,152) |
|
|
— |
|
|
(1,402) |
|
Recoveries |
|
|
— |
|
|
148 |
|
|
— |
|
|
— |
|
|
148 |
|
Net charge-offs |
|
|
— |
|
|
(102) |
|
|
(1,152) |
|
|
— |
|
|
(1,254) |
|
Ending balance |
|
$ |
5,785 |
|
$ |
3,363 |
|
$ |
2,730 |
|
$ |
(33) |
|
$ |
11,845 |
|
Period end amount allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
|
$ |
173 |
|
$ |
160 |
|
$ |
— |
|
$ |
— |
|
$ |
333 |
|
Loans collectively evaluated for impairment |
|
|
5,612 |
|
|
3,203 |
|
|
2,730 |
|
|
(33) |
|
|
11,512 |
|
Ending balance |
|
$ |
5,785 |
|
$ |
3,363 |
|
$ |
2,730 |
|
$ |
(33) |
|
$ |
11,845 |
|
LOANS RECEIVABLE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
|
$ |
1,156 |
|
$ |
457 |
|
$ |
431 |
|
$ |
— |
|
$ |
2,044 |
|
Loans collectively evaluated for impairment |
|
|
832,259 |
|
|
283,959 |
|
|
178,808 |
|
|
— |
|
|
1,295,026 |
|
Ending balance |
|
$ |
833,415 |
|
$ |
284,416 |
|
$ |
179,239 |
|
$ |
— |
|
$ |
1,297,070 |
Non-accrual and Past Due Loans . Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are automatically placed on non-accrual once the loan is 90 days past due or sooner if, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, or as required by regulatory authorities. The exception is the legacy Anchor Bank credit card portfolio which is serviced externally and loans are manually placed on non-accrual once the credit card payment is 90 days past due.
As a result of the negative impact on employment from the COVID-19 pandemic, we are anticipating higher levels of financial hardship for our customers, which we expect will lead to higher levels of forbearance, delinquency and defaults. We expect that, left unabated, this deterioration in forbearance, delinquency and default rates will persist until such time as the economy and employment return to relatively normal levels. We assist customers with an array of payment programs during periods of financial hardship, including forbearance. Forbearance allows a borrower to temporarily not make scheduled payments or to make smaller than scheduled payments, in each case for a specified period of time. Forbearance
16
does not grant any reduction in the total principal or interest repayment obligation. While a loan is in forbearance status, interest continues to accrue and is repaid over a specified time period when the loan re-enters repayment status.
The following tables provide information pertaining to the aging analysis of contractually past due loans and non-accrual loans at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|||||||||||||||||||
|
|
|
30-59 |
|
60-89 |
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
Days |
|
Days |
|
90 Days |
|
Total |
|
|
|
Total |
|
|
|||||||
|
|
|
Past |
|
Past |
|
or More |
|
Past |
|
|
|
Loans |
|
Non- |
|||||||
|
REAL ESTATE LOANS |
|
Due |
|
Due |
|
Past Due |
|
Due |
|
Current |
|
Receivable |
|
Accrual |
|||||||
|
Commercial |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
220,509 |
|
$ |
220,509 |
|
$ |
1,083 |
|
Construction and development |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
168,658 |
|
|
168,658 |
|
|
— |
|
Home equity |
|
|
204 |
|
|
289 |
|
|
220 |
|
|
713 |
|
|
36,790 |
|
|
37,503 |
|
|
220 |
|
One-to-four-family |
|
|
2,203 |
|
|
— |
|
|
1,112 |
|
|
3,315 |
|
|
302,121 |
|
|
305,436 |
|
|
1,225 |
|
Multi-family |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
130,570 |
|
|
130,570 |
|
|
— |
|
Total real estate loans |
|
|
2,407 |
|
|
289 |
|
|
1,332 |
|
|
4,028 |
|
|
858,648 |
|
|
862,676 |
|
|
2,528 |
|
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect home improvement |
|
|
654 |
|
|
266 |
|
|
171 |
|
|
1,091 |
|
|
260,475 |
|
|
261,566 |
|
|
533 |
|
Marine |
|
|
14 |
|
|
— |
|
|
124 |
|
|
138 |
|
|
69,335 |
|
|
69,473 |
|
|
124 |
|
Other consumer |
|
|
22 |
|
|
12 |
|
|
2 |
|
|
36 |
|
|
4,020 |
|
|
4,056 |
|
|
7 |
|
Total consumer loans |
|
|
690 |
|
|
278 |
|
|
297 |
|
|
1,265 |
|
|
333,830 |
|
|
335,095 |
|
|
664 |
|
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
149,086 |
|
|
149,086 |
|
|
— |
|
Warehouse lending |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
65,017 |
|
|
65,017 |
|
|
— |
|
Total commercial business loans |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
214,103 |
|
|
214,103 |
|
|
— |
|
Total loans |
|
$ |
3,097 |
|
$ |
567 |
|
$ |
1,629 |
|
$ |
5,293 |
|
$ |
1,406,581 |
|
$ |
1,411,874 |
|
$ |
3,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|||||||||||||||||||
|
|
|
30-59 |
|
60-89 |
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
Days |
|
Days |
|
90 Days |
|
Total |
|
|
|
Total |
|
|
|||||||
|
|
|
Past |
|
Past |
|
or More |
|
Past |
|
|
|
Loans |
|
Non- |
|||||||
|
REAL ESTATE LOANS |
|
Due |
|
Due |
|
Past Due |
|
Due |
|
Current |
|
Receivable |
|
Accrual |
|||||||
|
Commercial |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
210,749 |
|
$ |
210,749 |
|
$ |
1,086 |
|
Construction and development |
|
|
533 |
|
|
— |
|
|
— |
|
|
533 |
|
|
179,121 |
|
|
179,654 |
|
|
— |
|
Home equity |
|
|
109 |
|
|
— |
|
|
185 |
|
|
294 |
|
|
37,873 |
|
|
38,167 |
|
|
190 |
|
One-to-four-family |
|
|
894 |
|
|
114 |
|
|
1,150 |
|
|
2,158 |
|
|
259,381 |
|
|
261,539 |
|
|
1,264 |
|
Multi-family |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
133,931 |
|
|
133,931 |
|
|
— |
|
Total real estate loans |
|
|
1,536 |
|
|
114 |
|
|
1,335 |
|
|
2,985 |
|
|
821,055 |
|
|
824,040 |
|
|
2,540 |
|
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect home improvement |
|
|
692 |
|
|
227 |
|
|
147 |
|
|
1,066 |
|
|
253,625 |
|
|
254,691 |
|
|
468 |
|
Marine |
|
|
15 |
|
|
— |
|
|
— |
|
|
15 |
|
|
67,164 |
|
|
67,179 |
|
|
— |
|
Other consumer |
|
|
71 |
|
|
2 |
|
|
20 |
|
|
93 |
|
|
4,247 |
|
|
4,340 |
|
|
25 |
|
Total consumer loans |
|
|
778 |
|
|
229 |
|
|
167 |
|
|
1,174 |
|
|
325,036 |
|
|
326,210 |
|
|
493 |
|
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
140,531 |
|
|
140,531 |
|
|
— |
|
Warehouse lending |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
61,112 |
|
|
61,112 |
|
|
— |
|
Total commercial business loans |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
201,643 |
|
|
201,643 |
|
|
— |
|
Total loans |
|
$ |
2,314 |
|
$ |
343 |
|
$ |
1,502 |
|
$ |
4,159 |
|
$ |
1,347,734 |
|
$ |
1,351,893 |
|
$ |
3,033 |
17
There were no loans 90 days or more past due and still accruing interest at March 31, 2020, or at December 31, 2019.
The following tables provide additional information about our impaired loans that have been segregated to reflect loans for which an allowance for loan losses has been provided and loans for which no allowance was provided at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|||||||
|
|
|
Unpaid |
|
|
|
|
|
|
|
|
WITH NO RELATED ALLOWANCE RECORDED |
|
Principal |
|
Recorded |
|
Related |
|||
|
Real estate loans: |
|
Balance |
|
Investment |
|
Allowance |
|||
|
Commercial |
|
$ |
1,094 |
|
$ |
1,083 |
|
$ |
— |
|
Home equity |
|
|
271 |
|
|
220 |
|
|
— |
|
One-to-four-family |
|
|
1,193 |
|
|
1,165 |
|
|
— |
|
Consumer loans: |
|
|
|
|
|
|
|
|
|
|
Other consumer |
|
|
5 |
|
|
5 |
|
|
— |
|
|
|
|
2,563 |
|
|
2,473 |
|
|
— |
|
WITH RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
One-to-four-family |
|
|
61 |
|
|
60 |
|
|
15 |
|
Consumer loans: |
|
|
|
|
|
|
|
|
|
|
Indirect |
|
|
533 |
|
|
533 |
|
|
187 |
|
Marine |
|
|
124 |
|
|
124 |
|
|
43 |
|
Other consumer |
|
|
2 |
|
|
2 |
|
|
1 |
|
|
|
|
720 |
|
|
719 |
|
|
246 |
|
Total |
|
$ |
3,283 |
|
$ |
3,192 |
|
$ |
246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|||||||
|
|
|
Unpaid |
|
|
|
|
|
|
|
|
WITH NO RELATED ALLOWANCE RECORDED |
|
Principal |
|
Recorded |
|
Related |
|||
|
Real estate loans: |
|
Balance |
|
Investment |
|
Allowance |
|||
|
Commercial |
|
$ |
1,097 |
|
$ |
1,086 |
|
$ |
— |
|
Home equity |
|
|
278 |
|
|
225 |
|
|
— |
|
One-to-four-family |
|
|
1,293 |
|
|
1,264 |
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
Other consumer |
|
|
17 |
|
|
17 |
|
|
— |
|
|
|
|
2,685 |
|
|
2,592 |
|
|
— |
|
WITH RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
One-to-four-family |
|
|
61 |
|
|
60 |
|
|
15 |
|
Consumer loans: |
|
|
|
|
|
|
|
|
|
|
Indirect |
|
|
468 |
|
|
468 |
|
|
164 |
|
Other consumer |
|
|
8 |
|
|
8 |
|
|
3 |
|
|
|
|
537 |
|
|
536 |
|
|
182 |
|
Total |
|
$ |
3,222 |
|
$ |
3,128 |
|
$ |
182 |
18
The following tables present the average recorded investment in loans individually evaluated for impairment and the interest income recognized and received for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Three Months Ended |
||||||||||
|
|
|
March 31, 2020 |
|
March 31, 2019 |
||||||||
|
WITH NO RELATED ALLOWANCE RECORDED |
|
Average Recorded |
|
Interest Income |
|
Average Recorded |
|
Interest Income |
||||
|
Real estate loans: |
|
Investment |
|
Recognized |
|
Investment |
|
Recognized |
||||
|
Commercial |
|
$ |
1,084 |
|
$ |
8 |
|
$ |
— |
|
$ |
— |
|
Home equity |
|
|
220 |
|
|
— |
|
|
267 |
|
|
— |
|
One-to-four-family |
|
|
1,230 |
|
|
5 |
|
|
830 |
|
|
15 |
|
Consumer loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other consumer |
|
|
5 |
|
|
— |
|
|
— |
|
|
— |
|
Commercial business loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
— |
|
|
— |
|
|
431 |
|
|
— |
|
|
|
|
2,539 |
|
|
13 |
|
|
1,528 |
|
|
15 |
|
WITH RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four-family |
|
|
60 |
|
|
— |
|
|
1,156 |
|
|
— |
|
Consumer loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect |
|
|
548 |
|
|
13 |
|
|
441 |
|
|
9 |
|
Marine |
|
|
41 |
|
|
— |
|
|
13 |
|
|
— |
|
Other consumer |
|
|
1 |
|
|
— |
|
|
5 |
|
|
— |
|
Commercial business loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
— |
|
|
— |
|
|
1,152 |
|
|
7 |
|
|
|
|
650 |
|
|
13 |
|
|
2,767 |
|
|
16 |
|
Total |
|
$ |
3,189 |
|
$ |
26 |
|
$ |
4,295 |
|
$ |
31 |
Credit Quality Indicators
As part of the Company’s on-going monitoring of credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grading of loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) non-performing loans, and (v) the general economic conditions in the Company’s markets.
The Company utilizes a risk grading matrix to assign a risk grade to its real estate and commercial business loans. Loans are graded on a scale of 1 to 10, with loans in risk grades 1 to 6 considered “Pass” and loans in risk grades 7 to 10 are reported as classified loans in the Company’s allowance for loan loss analysis.
A description of the 10 risk grades is as follows:
|
|
· |
|
Grades 1 and 2 - These grades include loans to very high quality borrowers with excellent or desirable business credit. |
|
|
· |
|
Grade 3 - This grade includes loans to borrowers of good business credit with moderate risk. |
|
|
· |
|
Grades 4 and 5 - These grades include “Pass” grade loans to borrowers of average credit quality and risk. |
|
|
· |
|
Grade 6 - This grade includes loans on management’s “Watch” list and is intended to be utilized on a temporary basis for “Pass” grade borrowers where frequent and thorough monitoring is required due to credit weaknesses and where significant risk-modifying action is anticipated in the near term. |
|
|
· |
|
Grade 7 - This grade is for “Other Assets Especially Mentioned” (“OAEM”) in accordance with regulatory guidelines and includes borrowers where performance is poor or significantly less than expected. |
19
|
|
· |
|
Grade 8 - This grade includes “Substandard” loans in accordance with regulatory guidelines which represent an unacceptable business credit where a loss is possible if loan weakness is not corrected. |
|
|
· |
|
Grade 9 - This grade includes “Doubtful” loans in accordance with regulatory guidelines where a loss is highly probable. |
|
|
· |
|
Grade 10 - This grade includes “Loss” loans in accordance with regulatory guidelines for which total loss is expected and when identified are charged off. |
Consumer, Home Equity, and One-to-Four-Family Real Estate Loans
Homogeneous loans are risk rated based upon the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy. Loans classified under this policy at the Company are consumer loans which include indirect home improvement, solar, marine, other consumer, and one-to-four-family first and second liens. Under the Uniform Retail Credit Classification Policy, loans that are current or less than 90 days past due are graded “Pass” and risk rated “4” or “5” internally. Loans that are past due more than 90 days are classified “Substandard” and risk rated “8” internally until the loan has demonstrated consistent performance, typically six months of contractual payments. Closed-end loans that are 120 days past due and open-end loans that are 180 days past due are charged off based on the value of the collateral less cost to sell.
Commercial real estate, construction and development, multi-family and commercial business loans are evaluated individually for their risk classification and may be classified as “Substandard” even if current on their loan payment obligations.
The following tables summarize risk rated loan balances by category at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|||||||||||||||||||
|
|
|
|
|
|
|
Special |
|
|
|
|
|
|
|
|
|||||||
|
|
|
Pass |
|
Watch |
|
Mention |
|
Substandard |
|
Doubtful |
|
Loss |
|
|
|||||||
|
REAL ESTATE LOANS |
|
(1 - 5) |
|
(6) |
|
(7) |
|
(8) |
|
(9) |
|
(10) |
|
Total |
|||||||
|
Commercial |
|
$ |
168,015 |
|
$ |
46,802 |
|
$ |
3,675 |
|
$ |
2,017 |
|
$ |
— |
|
$ |
— |
|
$ |
220,509 |
|
Construction and development |
|
|
165,848 |
|
|
2,810 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
168,658 |
|
Home equity |
|
|
37,283 |
|
|
— |
|
|
— |
|
|
220 |
|
|
— |
|
|
— |
|
|
37,503 |
|
One-to-four-family |
|
|
304,046 |
|
|
165 |
|
|
— |
|
|
1,225 |
|
|
— |
|
|
— |
|
|
305,436 |
|
Multi-family |
|
|
130,570 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
130,570 |
|
Total real estate loans |
|
|
805,762 |
|
|
49,777 |
|
|
3,675 |
|
|
3,462 |
|
|
— |
|
|
— |
|
|
862,676 |
|
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect home improvement |
|
|
261,033 |
|
|
— |
|
|
— |
|
|
533 |
|
|
— |
|
|
— |
|
|
261,566 |
|
Marine |
|
|
69,349 |
|
|
— |
|
|
— |
|
|
124 |
|
|
— |
|
|
— |
|
|
69,473 |
|
Other consumer |
|
|
4,049 |
|
|
— |
|
|
— |
|
|
7 |
|
|
— |
|
|
— |
|
|
4,056 |
|
Total consumer loans |
|
|
334,431 |
|
|
— |
|
|
— |
|
|
664 |
|
|
— |
|
|
— |
|
|
335,095 |
|
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
105,396 |
|
|
32,119 |
|
|
8,058 |
|
|
3,513 |
|
|
— |
|
|
— |
|
|
149,086 |
|
Warehouse lending |
|
|
61,202 |
|
|
3,815 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
65,017 |
|
Total commercial business loans |
|
|
166,598 |
|
|
35,934 |
|
|
8,058 |
|
|
3,513 |
|
|
— |
|
|
— |
|
|
214,103 |
|
Total loans receivable, gross |
|
$ |
1,306,791 |
|
$ |
85,711 |
|
$ |
11,733 |
|
$ |
7,639 |
|
$ |
— |
|
$ |
— |
|
$ |
1,411,874 |
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|||||||||||||||||||
|
|
|
|
|
|
|
Special |
|
|
|
|
|
|
|
|
|||||||
|
|
|
Pass |
|
Watch |
|
Mention |
|
Substandard |
|
Doubtful |
|
Loss |
|
|
|||||||
|
REAL ESTATE LOANS |
|
(1 - 5) |
|
(6) |
|
(7) |
|
(8) |
|
(9) |
|
(10) |
|
Total |
|||||||
|
Commercial |
|
$ |
203,703 |
|
$ |
2,274 |
|
$ |
3,686 |
|
$ |
1,086 |
|
$ |
— |
|
$ |
— |
|
$ |
210,749 |
|
Construction and development |
|
|
177,109 |
|
|
2,545 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
179,654 |
|
Home equity |
|
|
37,942 |
|
|
— |
|
|
35 |
|
|
190 |
|
|
— |
|
|
— |
|
|
38,167 |
|
One-to-four-family |
|
|
259,580 |
|
|
635 |
|
|
60 |
|
|
1,264 |
|
|
— |
|
|
— |
|
|
261,539 |
|
Multi-family |
|
|
127,792 |
|
|
6,139 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
133,931 |
|
Total real estate loans |
|
|
806,126 |
|
|
11,593 |
|
|
3,781 |
|
|
2,540 |
|
|
— |
|
|
— |
|
|
824,040 |
|
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect home improvement |
|
|
254,223 |
|
|
— |
|
|
— |
|
|
468 |
|
|
— |
|
|
— |
|
|
254,691 |
|
Marine |
|
|
67,179 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
67,179 |
|
Other consumer |
|
|
4,315 |
|
|
— |
|
|
— |
|
|
25 |
|
|
— |
|
|
— |
|
|
4,340 |
|
Total consumer loans |
|
|
325,717 |
|
|
— |
|
|
— |
|
|
493 |
|
|
— |
|
|
— |
|
|
326,210 |
|
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
125,025 |
|
|
10,435 |
|
|
1,442 |
|
|
3,629 |
|
|
— |
|
|
— |
|
|
140,531 |
|
Warehouse lending |
|
|
61,112 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
61,112 |
|
Total commercial business loans |
|
|
186,137 |
|
|
10,435 |
|
|
1,442 |
|
|
3,629 |
|
|
— |
|
|
— |
|
|
201,643 |
|
Total loans receivable, gross |
|
$ |
1,317,980 |
|
$ |
22,028 |
|
$ |
5,223 |
|
$ |
6,662 |
|
$ |
— |
|
$ |
— |
|
$ |
1,351,893 |
NOTE 4 - SERVICING RIGHTS
Loans serviced for others are not included on the Consolidated Balance Sheets. The unpaid principal balances of permanent loans serviced for others were $1.49 billion and $1.46 billion at March 31, 2020 and December 31, 2019, respectively.
The following tables summarize servicing rights activity for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
At or For the Three Months Ended |
||||
|
|
|
March 31, |
||||
|
|
|
2020 |
|
2019 |
||
|
Beginning balance |
|
$ |
11,560 |
|
$ |
10,429 |
|
Additions |
|
|
1,185 |
|
|
844 |
|
Servicing rights amortized |
|
|
(1,605) |
|
|
(639) |
|
Impairment of servicing rights |
|
|
(514) |
|
|
(23) |
|
Ending balance |
|
$ |
10,626 |
|
$ |
10,611 |
The fair market value of the servicing rights’ assets was $10.9 million and $13.3 million at March 31, 2020 and December 31, 2019, respectively. Fair value adjustments to servicing rights are mainly due to market-based assumptions associated with discounted cash flows, loan prepayment speeds, and changes in interest rates. A significant change in prepayments of the loans in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of servicing rights.
The following provides valuation assumptions used in determining the fair value of mortgage servicing rights (“MSR”) at the dates indicated:
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
At December 31, |
|
|
Key assumptions: |
|
2020 |
|
2019 |
|
|
Weighted average discount rate |
|
9.1 |
% |
9.7 |
% |
|
Conditional prepayment rate (“CPR”) |
|
23.3 |
% |
17.1 |
% |
|
Weighted average life in years |
|
3.9 |
|
5.1 |
|
21
Key economic assumptions of the current fair value for single family MSR are presented in the table below. Also presented is the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four-family FNMA, FHLMC, GNMA, or FHLB serviced home loan. The table below references a 50 basis point and 100 basis point adverse rate change and the impact on prepayment speeds and discount rates at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|
December 31, 2019 |
|
||
|
Aggregate portfolio principal balance |
|
|
|
|
$ |
1,490,874 |
|
$ |
1,463,732 |
|
|
Weighted average rate of note |
|
|
|
|
|
4.2 |
% |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2020 |
|
Base |
|
0.5% Adverse Rate Change |
|
1.0% Adverse Rate Change |
|
|||
|
Conditional prepayment rate |
|
|
23.3 |
% |
|
31.9 |
% |
|
36.4 |
% |
|
Fair value MSR |
|
$ |
10,855 |
|
$ |
8,638 |
|
$ |
7,796 |
|
|
Percentage of MSR |
|
|
0.7 |
% |
|
0.6 |
% |
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
9.1 |
% |
|
9.6 |
% |
|
10.1 |
% |
|
Fair value MSR |
|
$ |
10,855 |
|
$ |
10,706 |
|
$ |
10,561 |
|
|
Percentage of MSR |
|
|
0.7 |
% |
|
0.7 |
% |
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2019 |
|
Base |
|
0.5% Adverse Rate Change |
|
1.0% Adverse Rate Change |
|
|||
|
Conditional prepayment rate |
|
|
17.1 |
% |
|
24.6 |
% |
|
32.5 |
% |
|
Fair value MSR |
|
$ |
13,255 |
|
$ |
10,582 |
|
$ |
8,674 |
|
|
Percentage of MSR |
|
|
0.9 |
% |
|
0.7 |
% |
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
9.7 |
% |
|
10.2 |
% |
|
10.7 |
% |
|
Fair value MSR |
|
$ |
13,255 |
|
$ |
13,037 |
|
$ |
12,826 |
|
|
Percentage of MSR |
|
|
0.9 |
% |
|
0.9 |
% |
|
0.9 |
% |
These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of the MSR which is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance, however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.
The Company recorded $977,000 and $802,000 of gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of loans for the three months ended March 31, 2020 and 2019, respectively. The income, net of amortization, or the reduction in income, if MSR amortization is greater than servicing fees, is reported in noninterest income on the Consolidated Statements of Income.
NOTE 5 - DERIVATIVES
The Company regularly enters into commitments to originate and sell loans held for sale. The Company has established a hedging strategy to protect itself against the risk of loss associated with interest rate movements on loan commitments. The Company enters into contracts to sell forward To-Be-Announced (“TBA”) mortgage-backed securities. These commitments and contracts are considered derivatives but have not been designated as hedging instruments for reporting purposes under U.S. GAAP. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in noninterest income or noninterest expense. The Company recognizes all derivative instruments as either other assets or other liabilities on the Consolidated Balance Sheets and measures those instruments at fair value.
22
Derivative instruments not related to mortgage banking activities primarily relate to interest rate swap agreements. The Company's objectives in using certain interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The Company has entered into interest rate swaps to reduce the exposure to variability in interest-related cash outflows attributable to changes in forecasted LIBOR-based FHLB borrowings and brokered deposits. These derivative instruments are designated as cash flow hedges. The hedged item is the LIBOR portion of the series of future adjustable rate borrowings and deposits over the term of the interest rate swap. Accordingly, changes to the amount of interest payment cash flows for the hedged transactions attributable to a change in credit risk are excluded from management’s assessment of hedge effectiveness. The Company tests for hedging effectiveness on a quarterly basis. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company has not recorded any hedge ineffectiveness since inception. The Company has master netting agreements with derivative dealers with which it does business, but reflects gross assets and liabilities as other assets and other liabilities, respectively, on the Consolidated Balance Sheets.
The net unrealized loss on cash flow hedges recorded in accumulated other comprehensive income was $825,000 and $0, net of tax, at March 31, 2020 and December 31, 2019, respectively. The Company reclassified expense of $1,000 and $0 from accumulated other comprehensive income to interest expense related to these cash flow hedges for the three months ended March 31, 2020 and March 31, 2019, respectively. The Company expects that approximately $188,000 will be reclassified from accumulated other comprehensive income as an increase to interest expense over the next twelve months related to these cash flow hedges.
The following tables summarize the Company’s derivative instruments at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|||||||
|
|
|
|
|
|
Fair Value |
||||
|
Cash flow hedges: |
|
Notional |
|
Asset |
|
Liability |
|||
|
Interest rate swaps |
|
$ |
60,000 |
|
$ |
— |
|
$ |
1,051 |
|
Non-hedging derivatives: |
|
|
|
|
|
|
|
|
|
|
Fallout adjusted interest rate lock commitments with customers |
|
|
207,564 |
|
|
4,291 |
|
|
— |
|
Mandatory and best effort forward commitments with investors |
|
|
60,368 |
|
|
— |
|
|
181 |
|
Forward TBA mortgage-backed securities |
|
|
248,000 |
|
|
— |
|
|
3,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|||||||
|
|
|
|
|
|
Fair Value |
||||
|
Non-hedging derivatives: |
|
Notional |
|
Asset |
|
Liability |
|||
|
Fallout adjusted interest rate lock commitments with customers |
|
$ |
33,914 |
|
$ |
557 |
|
$ |
— |
|
Mandatory and best effort forward commitments with investors |
|
|
43,752 |
|
|
— |
|
|
195 |
|
Forward TBA mortgage-backed securities |
|
|
46,000 |
|
|
— |
|
|
8 |
At March 31, 2020 and December 31, 2019, the Company had $248.0 million and $46.0 million of TBA trades with counterparties that required margin collateral of $5.3 million and $1.2 million , respectively . At March 31, 2020, and December 31, 2019, interest rate swaps designated as cash flow hedges required margin collateral of $910,000 and $0.0, respectively. This restricted cash collateral is included in interest-bearing deposits at other financial institutions on the Consolidated Balance Sheets.
Changes in the fair value of the non-hedging derivatives recognized in other noninterest income on the Consolidated Statements of Income and included in gain on sale of loans resulted in net gains of $1.7 million and $299,000 for the three months ended March 31, 2020 and 2019, respectively.
23
NOTE 6 - LEASES
The Company has operating leases for retail bank and home lending branches, and certain equipment. The Company’s leases have remaining lease terms of one month to seven years and six months, some of which include options to extend the leases for up to five years.
The components of lease cost (included in occupancy expense on the Consolidated Statements of Income) are as follows for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
||
|
Lease cost: |
|
March 31, 2020 |
|
March 31, 2019 |
||
|
Operating lease cost |
|
$ |
343 |
|
$ |
308 |
|
Short-term lease cost |
|
|
8 |
|
|
46 |
|
Total lease cost |
|
$ |
351 |
|
$ |
354 |
The following table provides supplemental information related to operating leases at or for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement |
|
At or For the Three Months Ended |
|
At or For the Three Months Ended |
||||
|
of lease liabilities: |
|
March 31, 2020 |
|
March 31, 2019 |
||||
|
Operating cash flows from operating leases |
|
$ |
336 |
|
|
$ |
334 |
|
|
Weighted average remaining lease term- operating leases |
|
|
5.2 |
years |
|
|
5.8 |
years |
|
Weighted average discount rate- operating leases |
|
|
2.97 |
% |
|
|
3.08 |
% |
The Company’s leases typically do not contain a discount rate implicit in the lease contract. As an alternative, the discount rate used in determining the lease liability for each individual lease was the FHLB of Des Moines’ fixed advance rate.
Maturities of operating lease liabilities at March 31, 2020 for future periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2020 |
|
$ |
944 |
|
2021 |
|
|
1,169 |
|
2022 |
|
|
1,065 |
|
2023 |
|
|
674 |
|
2024 |
|
|
614 |
|
Thereafter |
|
|
884 |
|
Total lease payments |
|
|
5,350 |
|
Less imputed interest |
|
|
(452) |
|
Total |
|
$ |
4,898 |
The Company has secured one new lease commencing between April 1, 2020 and June 30, 2020. The initial lease term is 60 months and includes one option to extend for five years. This lease was not included in the ROU assets or operating lease liabilities at March 31, 2020.
24
NOTE 7 - OTHER REAL ESTATE OWNED (“OREO”)
The following table presents the activity related to OREO at or for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
At or For the Three Months Ended |
||||
|
|
|
March 31, |
||||
|
|
|
2020 |
|
2019 |
||
|
Beginning balance |
|
$ |
168 |
|
$ |
689 |
|
Additions |
|
|
— |
|
|
77 |
|
Gross proceeds from sale of OREO |
|
|
(76) |
|
|
(684) |
|
(Loss) gain on sale of OREO |
|
|
(2) |
|
|
85 |
|
Ending balance |
|
$ |
90 |
|
$ |
167 |
There was one OREO property in the amount of $90,000 at March 31, 2020, and two OREO properties totaling $167,000 at March 31, 2019. There were no holding costs for the three months ended March 31, 2020, compared to $4,000 for the three months ended March 31, 2019.
There were $1.2 million in mortgage loans collateralized by residential real estate property in the process of foreclosure at March 31, 2020.
NOTE 8 - DEPOSITS
Deposits are summarized as follows at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
||
|
|
|
2020 |
|
2019 |
||
|
Noninterest-bearing checking |
|
$ |
267,966 |
|
$ |
260,131 |
|
Interest-bearing checking |
|
|
208,952 |
|
|
177,972 |
|
Savings |
|
|
123,052 |
|
|
118,845 |
|
Money market |
|
|
303,405 |
|
|
270,489 |
|
Certificates of deposit less than $100,000 |
|
|
263,787 |
|
|
277,988 |
|
Certificates of deposit of $100,000 through $250,000 |
|
|
176,322 |
|
|
181,402 |
|
Certificates of deposit of $250,000 and over |
|
|
85,185 |
|
|
92,110 |
|
Escrow accounts related to mortgages serviced |
|
|
17,600 |
|
|
13,471 |
|
Total |
|
$ |
1,446,269 |
|
$ |
1,392,408 |
Federal Reserve regulations require that the Bank maintain reserves in the form of cash on hand when there are deposit balances with the Federal Reserve Bank based on a percentage of deposits. At March 31, 2020 and December 31, 2019, the Bank had no reserve requirement based on its reserve calculation.
Scheduled maturities of time deposits at March 31, 2020 for future periods ending are as follows:
|
|
|
|
|
|
|
|
At March 31, 2020 |
|
|
Maturing in 2020 |
|
$ |
273,650 |
|
Maturing in 2021 |
|
|
152,427 |
|
Maturing in 2022 |
|
|
63,458 |
|
Maturing in 2023 |
|
|
15,111 |
|
Maturing in 2024 |
|
|
17,505 |
|
Thereafter |
|
|
3,143 |
|
Total |
|
$ |
525,294 |
25
Interest expense by deposit category for the three months ended March 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
||||
|
|
|
March 31, |
||||
|
|
|
2020 |
|
2019 |
||
|
Interest-bearing checking |
|
$ |
136 |
|
$ |
196 |
|
Savings and money market |
|
|
826 |
|
|
763 |
|
Certificates of deposit |
|
|
2,845 |
|
|
2,751 |
|
Total |
|
$ |
3,807 |
|
$ |
3,710 |
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Commitments - The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the Consolidated Balance Sheets.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
The following table provides a summary of the Company’s commitments at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
COMMITMENTS TO EXTEND CREDIT |
|
March 31, |
|
December 31, |
||
|
REAL ESTATE LOANS |
|
2020 |
|
2019 |
||
|
Commercial |
|
$ |
1,332 |
|
$ |
247 |
|
Construction and development |
|
|
106,862 |
|
|
95,031 |
|
One-to-four-family (includes locks for salable loans) |
|
|
218,244 |
|
|
39,697 |
|
Home equity |
|
|
46,558 |
|
|
47,880 |
|
Multi-family |
|
|
630 |
|
|
622 |
|
Total real estate loans |
|
|
373,626 |
|
|
183,477 |
|
CONSUMER LOANS |
|
|
22,331 |
|
|
22,176 |
|
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
Commercial and industrial |
|
|
82,202 |
|
|
72,731 |
|
Warehouse lending |
|
|
26,983 |
|
|
33,888 |
|
Total commercial business loans |
|
|
109,185 |
|
|
106,619 |
|
Total commitments to extend credit |
|
$ |
505,142 |
|
$ |
312,272 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the amount of the total commitments do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon an extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.
Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and ultimately may not be drawn upon to the total extent to which the Company is committed. The Company has established reserves for estimated losses from unfunded commitments of $312,000 at March 31, 2020 and $293,000 at December 31, 2019. One-to-four-family commitments included in the table above are accounted for as fair value derivatives and do not carry an associated holdback.
26
The Company also sells one-to-four-family loans to the FHLB of Des Moines that require a limited level of recourse if the loans default and exceed a certain loss exposure. Specific to that recourse, the FHLB of Des Moines established a first loss account (“FLA”) related to the loans and required a credit enhancement (“CE”) obligation by the Bank to be utilized after the FLA is used. Based on loans sold through March 31, 2020, the total loans sold to the FHLB were $60.7 million with the FLA totaling $938,000 and the CE obligation at $811,000 or 1.3% of the loans outstanding. Management has established a holdback of 10% of the outstanding CE, or $272,000, which is a part of the off-balance sheet holdback for loans sold. At March 31, 2020, there were $482,000 of loans sold to the FHLB of Des Moines greater than 30 days past their contractual payment due date, compared to none at December 31, 2019.
Contingent liabilities for loans held for sale - In the ordinary course of business, loans are sold with limited recourse against the Company and may have to subsequently be repurchased due to defects that occurred during the origination of the loan. The defects are categorized as documentation errors, underwriting errors, early payoff, early payment defaults, breach of representation or warranty, servicing errors, and/or fraud. When a loan sold to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred. If a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no such defects, the Company has no commitment to repurchase the loan. The Company has recorded a holdback reserve of $1.3 million to cover loss exposure related to these guarantees for one-to-four-family loans sold into the secondary market at March 31, 2020, and $1.2 million at December 31, 2019, which is included in other liabilities on the Consolidated Balance Sheets.
The Company has entered into a severance agreement with its Chief Executive Officer (“CEO”). The severance agreement, subject to certain requirements, generally includes a lump sum payment to the CEO equal to 24 months of base compensation in the event his employment is involuntarily terminated, other than for cause or the executive terminates his employment with good reason, as defined in the severance agreement.
The Company has entered into change of control agreements with its Chief Financial Officer/Chief Operating Officer, Chief Lending Officer, Chief Credit Officer, Chief Risk Officer, Chief Human Resources Officer, Senior Vice President Compliance Officer, Executive Vice President of Retail Banking and Marketing, and the Executive Vice President of Home Lending. The change of control agreements, subject to certain requirements, generally remain in effect until canceled by either party upon at least 24 months prior written notice. Under the change of control agreements, the executive generally will be entitled to a change of control payment from the Company if the executive is involuntarily terminated within six months preceding or 12 months after a change in control (as defined in the change of control agreements). In such an event, the executives would each be entitled to receive a cash payment in an amount equal to 12 months of their then current salary, subject to certain requirements in the change of control agreements.
As a result of the nature of our activities, the Company is subject to various pending and threatened legal actions, which arise in the ordinary course of business. From time to time, subordination liens may create litigation which requires us to defend our lien rights. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on our financial position. The Company had no material pending legal actions at March 31, 2020.
NOTE 10 - FAIR VALUE MEASUREMENTS
The Company determines fair value based on the requirements established in Accounting Standards Codification (“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 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. ASU 2016-01 , Financial Instruments - Overall (Subtopic 825‑10), Recognition and Measurement of Financial Assets and Financial Liabilities, requires us to use the exit price notion when measuring the fair value of instruments for disclosure purposes.
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.
27
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 Available-for-Sale - 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). Certain other corporate securities and municipal bonds are generally measured at fair value based on discounted cash flow models (Level 3). 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 take into account 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 TBA mortgage-backed security (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-though 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.
Impaired Loans - Fair value adjustments to impaired collateral dependent loans are recorded to reflect partial write-downs based on the current appraised value of the collateral or internally developed models, which contain management’s assumptions. Management will utilize discounted cashflow impairment for troubled debt restructures when the change in terms results in a discount to the overall cashflows to be received (Level 3).
Other Real Estate Owned - Fair value adjustments to OREO are recorded at the lower of carrying amount of the loan or fair value of the collateral less selling costs. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell (Level 3).
Servicing Rights - The fair value of mortgage servicing rights are 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).
28
The following tables present securities available-for-sale, mortgage loans held for sale, and derivative assets and liabilities measured at fair value on a recurring basis at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets |
|
At March 31, 2020 |
||||||||||
|
Securities available-for-sale: |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
|
U.S. agency securities |
|
$ |
— |
|
$ |
7,127 |
|
$ |
— |
|
$ |
7,127 |
|
Corporate securities |
|
|
— |
|
|
18,815 |
|
|
1,036 |
|
|
19,851 |
|
Municipal bonds |
|
|
— |
|
|
31,271 |
|
|
135 |
|
|
31,406 |
|
Mortgage-backed securities |
|
|
— |
|
|
76,733 |
|
|
— |
|
|
76,733 |
|
U.S. Small Business Administration securities |
|
|
— |
|
|
21,349 |
|
|
— |
|
|
21,349 |
|
Mortgage loans held for sale, at fair value |
|
|
— |
|
|
115,632 |
|
|
— |
|
|
115,632 |
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments with customers |
|
|
— |
|
|
— |
|
|
4,291 |
|
|
4,291 |
|
Total assets measured at fair value |
|
$ |
— |
|
$ |
270,927 |
|
$ |
5,462 |
|
$ |
276,389 |
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual forward sale commitments with investors |
|
$ |
— |
|
$ |
(3,723) |
|
$ |
(181) |
|
$ |
(3,904) |
|
Interest rate swaps |
|
|
— |
|
|
(1,051) |
|
|
— |
|
|
(1,051) |
|
Total liabilities measured at fair value |
|
$ |
— |
|
$ |
(3,723) |
|
$ |
(181) |
|
$ |
(3,904) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets |
|
At December 31, 2019 |
||||||||||
|
Securities available-for-sale: |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
|
U.S. agency securities |
|
$ |
— |
|
$ |
9,066 |
|
$ |
— |
|
$ |
9,066 |
|
Corporate securities |
|
|
— |
|
|
9,546 |
|
|
1,024 |
|
|
10,570 |
|
Municipal bonds |
|
|
— |
|
|
20,982 |
|
|
138 |
|
|
21,120 |
|
Mortgage-backed securities |
|
|
— |
|
|
62,850 |
|
|
— |
|
|
62,850 |
|
U.S. Small Business Administration securities |
|
|
— |
|
|
22,451 |
|
|
— |
|
|
22,451 |
|
Mortgage loans held for sale, at fair value |
|
|
— |
|
|
69,699 |
|
|
— |
|
|
69,699 |
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments with customers |
|
|
— |
|
|
— |
|
|
557 |
|
|
557 |
|
Total assets measured at fair value |
|
$ |
— |
|
$ |
194,594 |
|
$ |
1,719 |
|
$ |
196,313 |
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual forward sale commitments with investors |
|
$ |
— |
|
$ |
(8) |
|
$ |
(195) |
|
$ |
(203) |
|
Total liabilities measured at fair value |
|
$ |
— |
|
$ |
(8) |
|
$ |
(195) |
|
$ |
(203) |
The following tables present impaired loans, OREO, and servicing rights measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting periods indicated. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were evaluated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
||||||||||
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
|
Impaired loans |
|
$ |
— |
|
$ |
— |
|
$ |
3,192 |
|
$ |
3,192 |
|
OREO |
|
|
— |
|
|
— |
|
|
90 |
|
|
90 |
|
Servicing rights |
|
|
— |
|
|
— |
|
|
10,855 |
|
|
10,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
||||||||||
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
|
Impaired loans |
|
$ |
— |
|
$ |
— |
|
$ |
3,128 |
|
$ |
3,128 |
|
OREO |
|
|
— |
|
|
— |
|
|
168 |
|
|
168 |
|
Servicing rights |
|
|
— |
|
|
— |
|
|
13,255 |
|
|
13,255 |
29
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 March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 |
|
|
|
Significant |
|
|
|
Weighted Average |
||||
|
Fair Value |
|
Valuation |
|
Unobservable |
|
|
|
March 31, |
|
|
December 31, |
|
|
Instruments |
|
Techniques |
|
Inputs |
|
Range |
|
2020 |
|
|
2019 |
|
|
RECURRING |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments with customers |
|
Quoted market prices |
|
Pull-through expectations |
|
80% - 99% |
|
91.5 |
% |
|
94.5 |
% |
|
Individual forward sale commitments with investors |
|
Quoted market prices |
|
Pull-through expectations |
|
80% - 99% |
|
91.5 |
% |
|
94.5 |
% |
|
Corporate securities |
|
Discounted cash flows |
|
Discount rate |
|
1.6% |
|
1.6 |
% |
|
2.1 |
% |
|
Municipal bonds |
|
Discounted cash flows |
|
Discount rate |
|
2.5% - 2.6% |
|
2.6 |
% |
|
3.4 |
% |
|
NONRECURRING |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
Fair value of underlying collateral |
|
Discount applied to the obtained appraisal |
|
10.0% |
|
10.0 |
% |
|
10.0 |
% |
|
OREO |
|
Fair value of collateral |
|
Discount applied to the obtained appraisal |
|
10.0% |
|
10.0 |
% |
|
10.0 |
% |
|
Servicing rights |
|
Industry sources |
|
Pre-payment speeds |
|
0% - 50% |
|
23.3 |
% |
|
17.1 |
% |
An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitments with customers and forward sale commitments with investors will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).
The following tables provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
|
|
|
|
|
Net change |
|
Net change |
|||||||
|
|
|
Beginning |
|
and |
|
Sales and |
|
Transfers |
|
Ending |
|
in fair value |
|
in fair value |
|||||||
|
2020 |
|
Balance |
|
Issuances |
|
Settlements |
|
In |
|
Balance |
|
for gains/(losses) (1) |
|
for gains (2) |
|||||||
|
Interest rate lock commitments with customers |
|
$ |
557 |
|
$ |
7,411 |
|
$ |
(3,677) |
|
$ |
— |
|
$ |
4,291 |
|
$ |
3,734 |
|
$ |
— |
|
Individual forward sale commitments with investors |
|
|
(195) |
|
|
(531) |
|
|
545 |
|
|
— |
|
|
(181) |
|
|
14 |
|
|
— |
|
Securities available-for-sale, at fair value |
|
|
1,162 |
|
|
12 |
|
|
(3) |
|
|
— |
|
|
1,171 |
|
|
— |
|
|
12 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments with customers |
|
$ |
503 |
|
$ |
1,931 |
|
$ |
(1,748) |
|
$ |
— |
|
$ |
686 |
|
$ |
183 |
|
$ |
— |
|
Individual forward sale commitments with investors |
|
|
(34) |
|
|
(162) |
|
|
100 |
|
|
— |
|
|
(96) |
|
|
(62) |
|
|
— |
__________________________
(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 (losses) on interest rate lock commitments carried at fair value are recorded in other noninterest income. Gains (losses) on forward sale commitments with investors carried at fair value are recorded within other noninterest income or noninterest expense.
30
The following table provides estimated fair values of the Company’s financial instruments at March 31, 2020 and December 31, 2019, whether or not recognized at fair value on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
||||||||
|
|
|
2020 |
|
2019 |
|
||||||||
|
Financial Assets |
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
||||
|
Level 1 inputs: |
|
Amount |
|
Value |
|
Amount |
|
Value |
|
||||
|
Cash and cash equivalents |
|
$ |
48,921 |
|
$ |
48,921 |
|
$ |
|
|
$ |
|
|
|
Certificates of deposit at other financial institutions |
|
|
17,926 |
|
|
17,926 |
|
|
|
|
|
|
|
|
Level 2 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale, at fair value |
|
|
155,295 |
|
|
155,295 |
|
|
|
|
|
|
|
|
Loans held for sale, at fair value |
|
|
115,632 |
|
|
115,632 |
|
|
|
|
|
|
|
|
FHLB stock, at cost |
|
|
10,921 |
|
|
10,921 |
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
6,326 |
|
|
6,326 |
|
|
|
|
|
|
|
|
Level 3 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale, at fair value |
|
|
1,171 |
|
|
1,171 |
|
|
1,162 |
|
|
1,162 |
|
|
Loans receivable, gross |
|
|
1,411,874 |
|
|
1,413,954 |
|
|
|
|
|
|
|
|
Servicing rights, held at lower of cost or fair value |
|
|
10,626 |
|
|
10,855 |
|
|
|
|
|
|
|
|
Fair value interest rate locks with customers |
|
|
4,291 |
|
|
4,291 |
|
|
|
|
|
|
|
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
1,446,269 |
|
|
1,452,760 |
|
|
|
|
|
|
|
|
Borrowings |
|
|
159,114 |
|
|
163,294 |
|
|
|
|
|
|
|
|
Subordinated note |
|
|
9,890 |
|
|
10,599 |
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
293 |
|
|
293 |
|
|
|
|
|
|
|
|
Paired off commitments with investors |
|
|
112 |
|
|
112 |
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
1,051 |
|
|
1,051 |
|
|
— |
|
|
— |
|
|
Individual forward sale commitments with investors |
|
|
3,723 |
|
|
3,723 |
|
|
|
|
|
|
|
|
Level 3 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual forward sale commitments with investors |
|
|
181 |
|
|
181 |
|
|
|
|
|
|
|
NOTE 11 - EMPLOYEE BENEFITS
Employee Stock Ownership Plan
On January 1, 2012, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank are eligible to participate in the ESOP if they have been credited with at least 1,000 hours of service during the employees’ first 12‑month period and based on the employee’s anniversary date will be vested in the ESOP. The employee will be 100% vested in the ESOP after two years of working at least 1,000 hours in each of those two years.
The ESOP borrowed $2.6 million from FS Bancorp, Inc. and used those funds to acquire 259,210 shares of FS Bancorp, Inc. common stock in the open market at an average price of $10.17 per share during the second half of 2012. It is anticipated that the Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to FS Bancorp, Inc. over a period of 10 years, bearing interest at 2.30%. Intercompany expenses associated with the ESOP are eliminated in consolidation. Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to FS Bancorp, Inc. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank’s discretionary contributions to the ESOP and earnings on the ESOP assets. Payments of principal and interest are due annually on December 31, the Company’s fiscal year end. On December 31, 2019, the ESOP paid the eighth annual installment of principal in the amount of $275,000, plus accrued interest of $20,000 pursuant to the ESOP loan agreement.
31
As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares at March 31, 2020 for the prior 90 days. These shares become outstanding for earnings per share computations. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.
Compensation expense related to the ESOP for the three months ended March 31, 2020 and 2019 was $325,000 and $321,000, respectively.
Shares held by the ESOP at March 31, 2020 and 2019 were as follows (shown as actual):
|
|
|
|
|
|
|
|
|
|
|
Balances |
|
Balances |
||
|
|
|
at March 31, 2020 |
|
at March 31, 2019 |
||
|
Allocated shares |
|
|
189,511 |
|
|
176,809 |
|
Committed to be released shares |
|
|
6,480 |
|
|
6,480 |
|
Unallocated shares |
|
|
45,362 |
|
|
71,283 |
|
Total ESOP shares |
|
|
241,353 |
|
|
254,572 |
|
|
|
|
|
|
|
|
|
Fair value of unallocated shares (in thousands) |
|
$ |
2,276 |
|
$ |
3,530 |
NOTE 12 - EARNINGS PER SHARE
The Company computes earnings per share using the two-class method, which is an earnings allocation method for computing earnings per share that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Unvested share-based awards containing non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For earnings per share calculations, the ESOP shares committed to be released are included as outstanding shares for both basic and diluted earnings per share.
The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
At or For the Three Months Ended March 31, |
||||
|
Numerator (in thousands): |
|
2020 |
|
2019 |
||
|
Net income |
|
$ |
5,167 |
|
$ |
5,192 |
|
Dividends and undistributed earnings allocated to participating securities |
|
|
(56) |
|
|
— |
|
Net income available to common shareholders |
|
$ |
5,111 |
|
$ |
5,192 |
|
Denominator (shown as actual): |
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
4,391,499 |
|
|
4,355,307 |
|
Dilutive shares |
|
|
87,419 |
|
|
138,119 |
|
Diluted weighted average common shares outstanding |
|
|
4,478,918 |
|
|
4,493,426 |
|
Basic earnings per share |
|
$ |
1.16 |
|
$ |
1.19 |
|
Diluted earnings per share |
|
$ |
1.14 |
|
$ |
1.15 |
|
Potentially dilutive weighted average share options that were not included in the computation of diluted earnings per share because to do so would be anti-dilutive |
|
|
41,627 |
|
|
44,488 |
32
NOTE 13 - STOCK-BASED COMPENSATION
Stock Options and Restricted Stock
On May 17, 2018, the shareholders of FS Bancorp, Inc. approved the 2018 Equity Incentive Plan (the “2018 Plan”) that authorizes 650,000 shares of the Company’s common stock to be awarded. The 2018 Plan pr ovides for the grant of incentive stock options, non-qualified stock options, and up to 163,000 restricted stock awards (“RSAs”) to directors, emeritus directors, officers, employees or advisory directors of the Company. On August 15, 2019, the Company awarded grants of 20,215 RSAs and 50,655 stock options with an exercise price equal to the market price of FS Bancorp’s common stock on the grant date of $48.74 per share.
In September 2013, the shareholders of FS Bancorp, Inc. approved the FS Bancorp, Inc. 2013 Equity Incentive Plan (the “2013 Plan”). The Plan provided for the grant of stock options and RSAs. The 2013 Plan authorized the grant of stock options totaling 324,013 shares of common stock to Company directors and employees of which 322,000 stock options were granted with an exercise price equal to the market price of FS Bancorp’s common stock on the grant date of May 8, 2014, of $16.89 per share. The 2013 Plan authorized the grant of RSAs totaling 129,605 shares to Company directors, advisory directors, emeritus directors, officers, and employees, all of which have been granted. All options and RSAs previously granted have vested as of March 31, 2020.
Total share-based compensation expense for the 2018 Plan was $224,000 for the three months ended March 31, 2020, and for the 2013 and 2018 Plans was $262,000 for the three months ended March 31, 2019.
Stock Options
Both plans consist of stock option awards that may be granted as incentive stock options or non-qualified stock options. Stock option awards generally vest at one year for independent directors or over five years for employees and officers with 20% vesting on the anniversary date of each grant date as long as the award recipient remains in service to the Company. The options are exercisable after vesting for up to the remaining term of the original grant. The maximum term of the options granted is 10 years. Any unexercised stock options will expire 10 years after the grant date or sooner in the event of the award recipient’s termination of service with the Company or the Bank. At March 31, 2020, there were 336,345 and 6,013 stock option awards available to be granted under the 2018 Plan and the 2013 Plan, respectively.
The fair value of each stock option award is estimated on the grant date using a Black-Scholes Option pricing model that uses the following assumptions. The dividend yield is based on the current quarterly dividend in effect at the time of the grant. Historical employment data is used to estimate the forfeiture rate. The Company elected to use Staff Accounting Bulletin 107, simplified expected term calculation for the “Share-Based Payments” method permitted by the SEC to calculate the expected term. This method uses the vesting term of an option along with the contractual term, setting the expected life at 5.5 years for one-year vesting and 6.5 years for five-year vesting.
33
The following table presents a summary of the Company’s stock option awards during the three months ended March 31, 2020 (shown as actual):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
|
|
|
|
|
|
|
|
Average |
|
Contractual Term In |
|
Aggregate |
||
|
|
|
Shares |
|
Exercise Price |
|
Years |
|
Intrinsic Value |
||
|
Outstanding at January 1, 2020 |
|
287,990 |
|
$ |
36.98 |
|
6.77 |
|
$ |
7,722,369 |
|
Granted |
|
— |
|
|
— |
|
— |
|
|
— |
|
Less exercised |
|
9,398 |
|
$ |
16.89 |
|
— |
|
$ |
350,414 |
|
Forfeited or expired |
|
— |
|
|
— |
|
— |
|
|
— |
|
Outstanding at March 31, 2020 |
|
278,592 |
|
$ |
37.65 |
|
6.57 |
|
$ |
2,444,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest, assuming a 0.31% annual forfeiture rate (1) |
|
277,770 |
|
$ |
37.60 |
|
6.57 |
|
$ |
2,444,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2020 |
|
147,937 |
|
$ |
22.53 |
|
4.63 |
|
$ |
2,444,876 |
__________________________
(1) Forfeiture rate has been calculated and estimated to assume a forfeiture of 3.1% of the options forfeited over 10 years.
At March 31, 2020, there was $1.3 million of total unrecognized compensation cost related to nonvested stock options granted under both plans. The cost is expected to be recognized over the remaining weighted-average vesting period of 3.7 years.
Restricted Stock Awards
The RSAs’ fair value is equal to the value of the stock based on the market price of FS Bancorp’s common stock on the grant date and compensation expense is recognized over the vesting period of the awards based on the fair value of the restricted stock. Shares for the 2018 Plan generally vest at one-year for independent directors or over a five-year period for employees and officers beginning on the grant date. Any unvested RSAs will expire after vesting or sooner in the event of the award recipient’s termination of service with the Company or the Bank.
The following table presents a summary of the Company’s nonvested awards during the three months ended March 31, 2020 (shown as actual):
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Grant-Date Fair Value |
|
|
Nonvested Shares |
|
Shares |
|
Per Share |
|
|
Nonvested at January 1, 2020 |
|
40,215 |
|
$ |
53.64 |
|
Granted |
|
— |
|
$ |
— |
|
Less vested |
|
— |
|
$ |
— |
|
Forfeited or expired |
|
— |
|
|
— |
|
Nonvested at March 31, 2020 |
|
40,215 |
|
$ |
53.64 |
At March 31, 2020, there was $1.8 million of total unrecognized compensation cost related to nonvested shares granted under the 2018 Plan as RSAs. The cost is expected to be recognized over the remaining weighted-average vesting period of 3.8 years.
NOTE 14 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by the Federal Reserve and the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines of the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance
34
sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the community bank leverage ratio framework, for qualifying community banking organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. This final rule is applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets. The community bank leverage ratio (“CBLR”) final rule was effective on January 1, 2020, and will allow qualifying community banking organizations to calculate a leverage ratio to measure capital adequacy. Banks opting into the CBLR framework will not be required to calculate or report risk-based capital. A qualifying community banking organization is defined as having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. The final rule adopts Tier 1 capital and the existing leverage ratio into the community bank leverage ratio framework. A bank electing the framework will not be subject to other capital and leverage requirements. A bank electing the framework that ceases to meet any qualifying criteria in a future period and that has a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or comply with the generally applicable capital requirements. A bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rule.
In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. Among other things, the CARES Act directs federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal banking agencies issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.
The Bank qualified and elected the CBLR framework as of March 31, 2020. The Tier 1 leverage-based capital ratio calculated for the Bank at March 31, 2020 was 11.3%, compared to 11.6% at December 31, 2019. At March 31, 2020, the Bank had Tier 1 capital of $194.3 million and a minimum Tier 1 capital requirement of $138.0 million to be considered well capitalized under the CBLR framework. At December 31, 2019, The Bank had Tier 1 capital of $196.0 million and a minimum Tier 1 capital requirement of $84.8 million to be considered well capitalized for the Tier 1 leverage-based ratio under the Basel Committee on Companying Supervision’s capital guidelines for U.S. Banks (“Basel III”) requirements. At March 31, 2020 and December 31, 2019, the Bank was categorized as well capitalized under applicable regulatory requirements. There are no conditions or events since that notification that management believes have changed the Bank’s category. Management believes, at March 31, 2020, that the Bank met all capital adequacy requirements.
FS Bancorp, Inc. is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Bank holding companies with less than $3.0 billion in assets are generally not subject to compliance with the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to the Bank. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to the holding company’s subsidiary bank and expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations. If FS Bancorp, Inc. was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at March 31, 2020, FS Bancorp, Inc. would have exceeded all regulatory capital requirements. The Tier 1 leverage-based capital ratio calculated for FS Bancorp, Inc. at March 31, 2020 was 11.1%, compared to 11.3% at December 31, 2019.
35
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 currently evaluated by management. This process is dynamic and is based on management’s current view of the Company’s operations and is not necessarily comparable with similar information for other financial institutions. The Company defines its business segments by product type and customer segment which it has organized into two lines of business: commercial and consumer banking and home lending.
The Company uses various management accounting methodologies to assign certain income statement items to the responsible operating segment, including:
a funds transfer pricing (“FTP”) system, which allocates interest income credits and funding charges between the segments, assigning to each segment a funding credit for its liabilities, such as deposits, and a charge to fund its assets;
a cost per loan serviced allocation based on the number of loans being serviced on the balance sheet and the number of loans serviced for third parties;
an allocation based upon the approximate square footage utilized by the home lending segment in Company owned locations;
an allocation of charges for services rendered to the segments by centralized functions, such as corporate overhead, which are generally based on the number of full time employees (“FTEs”) in each segment; and
an allocation of the Company’s consolidated income taxes which are based on the effective tax rate applied to the segment’s pretax income or loss.
The FTP methodology is based on management’s estimated cost of originating funds including the cost of overhead for deposit generation.
A description of the Company’s business segments and the products and services that they provide is as follows:
Commercial and Consumer Banking Segment
The commercial and consumer banking segment provides diversified financial products and services to its commercial and consumer customers through Bank branches, automated teller machines (“ATM”), online banking platforms, mobile banking apps, and telephone banking. These products and services include deposit products; residential, consumer, business and commercial real estate lending portfolios and cash management services. The Company originates consumer loans, commercial and multi-family real estate loans, construction loans for residential and multi-family construction, and commercial business loans. At March 31, 2020, the Company’s retail deposit branch network consisted of 21 branches in the Pacific Northwest. At March 31, 2020 and December 31, 2019, deposits totaled $1.45 billion and $1.39 billion, respectively. This segment is also responsible for the management of the investment portfolio and other assets of the Bank.
Home Lending Segment
The home lending segment originates one-to-four-family residential mortgage loans primarily for sale in the secondary markets as well as originating adjustable rate mortgage (“ARM”) loans held for investment. The majority of mortgage loans are sold to or securitized by FNMA, FHLMC, GNMA, or FHLB of Des Moines, while the Company retains the right to service these loans. Loans originated under the guidelines of the Federal Housing Administration or FHA, US Department of Veterans Affairs or VA, and United States Department of Agriculture or USDA are generally sold servicing released to a correspondent bank or mortgage company. The Company has the option to sell loans on a servicing-released or servicing-retained basis to securitizers and correspondent lenders. A small percentage of its loans are brokered to other lenders. On occasion, the Company may sell a portion of its MSR portfolio and may sell small pools of loans initially originated to be held in the loan portfolio. The Company manages the loan funding and the interest rate risk associated with the secondary market loan sales and the retained one-to-four-family mortgage servicing rights within this business
36
segment. One-to-four-family loans originated for investment are allocated to the home lending segment with a corresponding provision expense and FTP for cost of funds.
Segment Financial Results
The tables below summarize the financial results for each segment based primarily on the number of FTEs and assets within each segment for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Three Months Ended March 31, 2020 |
|||||||
|
Condensed income statement: |
|
Home Lending |
|
Commercial and Consumer Banking |
|
Total |
|||
|
Net interest income (1) |
|
$ |
1,181 |
|
$ |
16,292 |
|
$ |
17,473 |
|
Provision for loan losses |
|
|
(559) |
|
|
(3,127) |
|
|
(3,686) |
|
Noninterest income |
|
|
5,158 |
|
|
3,733 |
|
|
8,891 |
|
Noninterest expense |
|
|
(4,162) |
|
|
(12,022) |
|
|
(16,184) |
|
Income before provision for income taxes |
|
|
1,618 |
|
|
4,876 |
|
|
6,494 |
|
Provision for income taxes |
|
|
(331) |
|
|
(996) |
|
|
(1,327) |
|
Net income |
|
$ |
1,287 |
|
$ |
3,880 |
|
$ |
5,167 |
|
Total average assets for period ended |
|
$ |
327,441 |
|
$ |
1,406,594 |
|
$ |
1,734,035 |
|
FTEs |
|
|
127 |
|
|
317 |
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Three Months Ended March 31, 2019 |
|||||||
|
Condensed income statement: |
|
Home Lending |
|
Commercial and Consumer Banking |
|
Total |
|||
|
Net interest income (1) |
|
$ |
1,071 |
|
$ |
16,618 |
|
$ |
17,689 |
|
Provision for loan losses |
|
|
(59) |
|
|
(691) |
|
|
(750) |
|
Noninterest income |
|
|
2,419 |
|
|
2,136 |
|
|
4,555 |
|
Noninterest expense |
|
|
(3,304) |
|
|
(11,493) |
|
|
(14,797) |
|
Income before provision for income taxes |
|
|
127 |
|
|
6,570 |
|
|
6,697 |
|
Provision for income taxes |
|
|
(29) |
|
|
(1,476) |
|
|
(1,505) |
|
Net income |
|
$ |
98 |
|
$ |
5,094 |
|
$ |
5,192 |
|
Total average assets for period ended |
|
$ |
239,287 |
|
$ |
1,375,574 |
|
$ |
1,614,861 |
|
FTEs |
|
|
112 |
|
|
314 |
|
|
426 |
____________________________
NOTE 16 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and certain other intangibles generally arise from business combinations accounted for under the acquisition method of accounting. Goodwill totaled $2.3 million at March 31, 2020 and December 31, 2019, and represents the excess of the total acquisition price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed as a result of the purchase of four retail bank branches from Bank of America, National Association on January 22, 2016 (“Branch Purchase”). Goodwill is not amortized but is evaluated for impairment on an annual basis at December 31 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company performed an impairment analysis at December 31, 2019, and determined that no impairment of goodwill
37
existed. No events or circumstances since the December 31, 2019 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment existed at March 31, 2020.
As of March 31, 2020, the Company had positive equity, however, if adverse economic conditions as a result of the COVID-19 pandemic were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill. Accordingly, no assurances can be given that the Company will not record an impairment loss on goodwill in the future.
Core deposit intangible (“CDI”) is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life. As of March 31, 2020, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI.
The following table summarizes the changes in the Company’s other intangible assets comprised solely of CDI for the year ended December 31, 2019, and the three months ended March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Intangible Assets |
|||||||
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Gross CDI |
|
Amortization |
|
Net CDI |
|||
|
Balance, December 31, 2018 |
|
$ |
7,490 |
|
$ |
(1,273) |
|
$ |
6,217 |
|
Amortization |
|
|
— |
|
|
(760) |
|
|
(760) |
|
Balance, December 31, 2019 |
|
|
7,490 |
|
|
(2,033) |
|
|
5,457 |
|
Amortization |
|
|
— |
|
|
(176) |
|
|
(176) |
|
Balance, March 31, 2020 |
|
$ |
7,490 |
|
$ |
(2,209) |
|
$ |
5,281 |
The CDI represents the fair value of the intangible core deposit base acquired in business combinations. The CDI will be amortized on a straight-line basis over 10 years for the CDI related to the Anchor Merger on November 15, 2018 (“Anchor Acquisition”) and on an accelerated basis over approximately nine years for the CDI related to the Branch Purchase. Total amortization expense was $176,000 for the three months ended March 31, 2020, and $190,000 for the same period in 2019. Amortization expense for CDI is expected to be as follows at March 31, 2020:
|
|
|
|
|
|
Remainder of 2020 |
|
$ |
530 |
|
2021 |
|
|
691 |
|
2022 |
|
|
691 |
|
2023 |
|
|
691 |
|
2024 |
|
|
621 |
|
Thereafter |
|
|
2,057 |
|
Total |
|
$ |
5,281 |
NOTE 17 - REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are
38
promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
All of the Company’s revenue from contracts with customers in-scope of ASC 606 is recognized in noninterest income and included in our commercial and consumer banking segment. The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
(Dollars in thousands): |
|
At or For the Three Months Ended March 31, |
||||
|
Noninterest income |
|
2020 |
|
2019 |
||
|
In-scope of Topic 606: |
|
|
|
|
|
|
|
Debit card interchange fees |
|
$ |
435 |
|
$ |
423 |
|
Deposit service and account maintenance fees |
|
|
266 |
|
|
271 |
|
Noninterest income (in-scope of Topic 606) |
|
|
701 |
|
|
694 |
|
Noninterest income (out-of-scope of Topic 606) |
|
|
8,190 |
|
|
3,861 |
|
Total noninterest income |
|
$ |
8,891 |
|
$ |
4,555 |
Deposit Fees
The Bank earns fees from its deposit customers for account maintenance, transaction-based services, and overdraft charges. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as wire fees, as well as charges against the account, such as fees for non-sufficient funds and overdrafts. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.
Debit Interchange Income
Debit and ATM interchange income represent fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ debit card .
NOTE 18 - COVID-19 PANDEMIC
In response to the current global situation surrounding the COVID-19 pandemic, the Company is offering a variety of relief options designed to support our customers and the communities we serve.
The Company is following the Federal Housing Finance Agency guidelines for forbearance, foreclosure relief, and late payment reporting for the COVID-19 pandemic on all serviced loans and a modified format for portfolio loans. As of May 5, 2020, the amount of one-to-four-family loans that have entered into forbearance agreements with the borrowers is $59.1 million for serviced loans and $20.7 million for portfolio loans, and the amount of consumer loans that we have entered into a skip pay/interest deferral agreements with the borrower is $8.2 million.
All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.
The Company participated in the PPP and has secured 433 approvals and 414 fundings as of May 5, 2020 for borrowers in the communities we serve. The Company has funded over $72.0 million in PPP loans to date.
39
We intend to utilize the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company will pledge its PPP loans as collateral to obtain FRB non-recourse loans. The PPPLF will take the PPP loans as collateral at face value. As of May 5, 2020 the Company has borrowed $63.3 million under the PPPLF, with additional unused borrowing capacity of $9.6 million.
All of our branches are open via drive thru and by appointment; and to enhance health and safety measures, approximately 70% of our staff have been approved to work remotely, where feasible.
40
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions. Forward-looking statements include, but are not limited to:
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|
· |
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statements of our goals, intentions, and expectations; |
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|
· |
|
statements regarding our business plans, prospects, growth, and operating strategies; |
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|
· |
|
statements regarding the quality of our loan and investment portfolios; and |
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|
· |
|
estimates of our risks and future costs and benefits. |
These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
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|
· |
|
the effect of the COVID-19 pandemic, including on the Company’ credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; |
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|
· |
|
general economic conditions either nationally or in our market area, that are worse than expected; |
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· |
|
the credit risks of lending activities, including changes in the level and trend of loan delinquencies, write offs, changes in our allowance for loan losses, and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; |
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|
· |
|
secondary market conditions and our ability to originate loans for sale and sell loans in the secondary market; |
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|
· |
|
fluctuations in the demand for loans, the number of unsold homes, land and other properties, and fluctuations in real estate values in our market area; |
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· |
|
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; |
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· |
|
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; |
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· |
|
changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments; |
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· |
|
uncertainty regarding the future of the London Interbank Offered Rate (“LIBOR”), and the potential transition away from LIBOR toward new interest rate benchmarks; |
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· |
|
increased competitive pressures among financial services companies; |
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|
· |
|
our ability to execute our plans to grow our residential construction lending, our home lending operations, our warehouse lending, and the geographic expansion of our indirect home improvement lending; |
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· |
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our ability to attract and retain deposits; |
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· |
|
our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; |
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|
· |
|
our ability to control operating costs and expenses; |
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· |
|
our ability to retain key members of our senior management team; |
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· |
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changes in consumer spending, borrowing, and savings habits; |
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· |
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our ability to successfully manage our growth; |
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· |
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legislative or regulatory changes that adversely affect our business, including the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, changes in regulation policies and principles, an increase in regulatory capital requirements or change in the interpretation of regulatory capital or other rules, including as a result of Basel III; |
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· |
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adverse changes in the securities markets; |
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· |
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changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board (“FASB”); |
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· |
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costs and effects of litigation, including settlements and judgments; |
41
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· |
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disruptions, security breaches, or other adverse events, failures, or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; |
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· |
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inability of key third-party vendors to perform their obligations to us; and |
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· |
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other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products, and services, including the potential effects of the CARES Act, and other risks described elsewhere in this Form 10‑Q and our other reports filed with the U.S. Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10‑K for the year ended December 31, 2019. |
Any of the forward-looking statements made in this Form 10‑Q and in other public statements may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. The Company undertakes no obligation to update or revise any forward-looking statement included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.
Highlights in Response to the COVID-19 Pandemic:
Due to the current global situation surrounding the COVID-19 pandemic, the Company is offering a variety of relief options designed to support our customers and the communities we serve.
Paycheck Protection Program ("PPP") Participation. The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program called the Paycheck Protection Program, or PPP. The goal of the PPP is to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. The Company has accepted more than 400 applications for PPP loans, including applications from new and existing customers who are small to midsize businesses as well as independent contractors, sole proprietors and partnerships as allowed under the PPP guidance issued in April 2020.
We intend to utilize the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company will pledge its PPP loans as collateral to obtain FRB non-recourse loans. The PPPLF will take the PPP loans as collateral at face value.
Allowance for Loan Losses and Loan Modifications
The Company recorded a provision of $3.7 million for the first quarter of 2020, compared to $750,000 in the first quarter a year ago due primarily to credit deterioration incurred but not yet evident reflecting the probable future impact of COVID-19 on the economy. As of March 31, 2020, the Bank had modified 66 loans totaling $12.5 million due to COVID-19 related issues. These modifications were not classified as TDRs at March 31, 2020 in accordance with the guidance of the CARES Act. The CARES Act provided that the short-term modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.
42
Branch Operations and Additional Client Support
We have taken various steps to ensure the safety of our customers and our personnel. Many of our employees are working remotely or have flexible work schedules, and we have established protective measures within our offices to help ensure the safety of those employees who must work on-site. The Family First Coronavirus Response Act also provides additional flexibility to our employees to help navigate their individual challenges.
The COVID-19 pandemic has caused significant disruptions to our branch operations resulting in the implementation of various social distancing measures at the Company to address client and community needs, including branch lobby closures. To ensure the safety of our customers and employees, services are offered through drive up facilities and/or by appointment.
Overdraft and fee reversals are waived on a case-by-case basis. We are cautious when paying overdrafts beyond the client's total deposit relationship, overdraft protection options or their overdraft coverage limits.
Overview
FS Bancorp, Inc. and its subsidiary bank, 1st Security Bank of Washington have been serving the Puget Sound area since 1936. Originally chartered as a credit union, known as Washington’s Credit Union, the credit union served various select employment groups. On April 1, 2004, the credit union converted to a Washington state-chartered mutual savings bank. On July 9, 2012, the Bank converted from mutual to stock ownership and became the wholly owned subsidiary of FS Bancorp, Inc.
The Company is relationship-driven, delivering banking and financial services to local families, local and regional businesses and industry niches within distinct Western Washington communities, predominately, the Puget Sound area, and one loan production office located in the Tri-Cities, Washington.
The Company also maintains its long-standing indirect consumer lending platform which operates throughout the West Coast. The Company emphasizes long-term relationships with families and businesses within the communities served, working with them to meet their financial needs. The Company is also actively involved in community activities and events within these market areas, which further strengthens our relationships within those markets.
The Company focuses on diversifying revenues, expanding lending channels, and growing the banking franchise. Management remains focused on building diversified revenue streams based upon credit, interest rate, and concentration risks. Our business plan remains as follows:
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· |
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Growing and diversifying our loan portfolio; |
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· |
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Maintaining strong asset quality; |
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· |
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Emphasizing lower cost core deposits to reduce the costs of funding our loan growth; |
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· |
|
Capturing our customers’ full relationship by offering a wide range of products and services by leveraging our well-established involvement in our communities and by selectively emphasizing products and services designed to meet our customers’ banking needs; and |
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· |
|
Expanding the Company’s markets. |
The Company is a diversified lender with a focus on the origination of one-to-four-family loans, commercial real estate mortgage loans, second mortgage or home equity loan products, consumer loans including indirect home improvement (“fixture secured”) loans which also include solar-related home improvement loans, marine lending, and commercial business loans. As part of our expanding lending products, the Company experienced growth in residential mortgage and commercial construction warehouse lending consistent with our business plan to further diversify revenues. Historically, consumer loans, in particular, fixture secured loans had represented the largest portion of the Company’s loan portfolio and had traditionally been the mainstay of the Company’s lending strategy. At March 31, 2020, consumer loans represented 23.7% of the Company’s total gross loan portfolio, up from 21.9% at March 31, 2019. In recent years, the Company has placed more of an emphasis on real estate lending products, such as one-to-four-family loans, commercial real estate loans, including speculative residential construction loans, as well as commercial business loans, while growing the current size of the consumer loan portfolio.
43
Fixture secured loans to finance window, gutter, and siding replacement, solar panels, pools, and other improvement renovations are a large and regionally expanding segment of the consumer loan portfolio. These fixture secured consumer loans are dependent on the Bank’s contractor/dealer network of 85 active dealers located throughout Washington, Oregon, California, Idaho, Colorado, and Arizona, with four contractor/dealers responsible for 49.7% of the funded loans dollar volume. The Company funded $34.3 million, or approximately 2,000 loans during the quarter ended March 31, 2020. The following table details fixture secured loan originations by state for the periods indicated:
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|
|
|
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|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Twelve Months Ended |
|
||||||
|
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||||||
|
State |
|
Amount |
|
Percent |
|
|
Amount |
|
Percent |
|
||
|
Washington |
|
$ |
14,801 |
|
43.1 |
% |
|
$ |
66,834 |
|
|
% |
|
Oregon |
|
|
8,048 |
|
23.5 |
|
|
|
43,036 |
|
|
|
|
California |
|
|
7,836 |
|
22.8 |
|
|
|
34,027 |
|
|
|
|
Idaho |
|
|
2,372 |
|
6.9 |
|
|
|
9,371 |
|
|
|
|
Colorado |
|
|
908 |
|
2.6 |
|
|
|
3,493 |
|
|
|
|
Arizona |
|
|
372 |
|
1.1 |
|
|
|
2,586 |
|
|
|
|
Total consumer loans |
|
$ |
34,337 |
|
100.0 |
% |
|
$ |
159,347 |
|
|
% |
The Company originates one-to-four-family residential mortgage loans through referrals from real estate agents, financial planners, builders, and from existing customers. Retail banking customers are also an important source of the Company’s loan originations. The Company originated $285.6 million of one-to-four-family loans which includes loans held for sale, loans held for investment, and fixed seconds in addition to loans brokered to other institutions of $1.9 million through the home lending segment during the three months ended March 31, 2020, of which $212.4 million were sold to investors. Of the loans sold to investors, $147.4 million were sold to the FNMA, FHLMC, FHLB, and/or GNMA with servicing rights retained for the purpose of further developing these customer relationships. At March 31, 2020, one-to-four-family residential mortgage loans held for investment, which excludes loans held for sale of $115.6 million, totaled $305.4 million, or 21.6%, of the total gross loan portfolio. The Company purchased a pool of residential jumbo adjustable rate (“ARM”) loans in the first quarter of 2020 for $28.1 million. Those loans are collateralized by residential properties located in the markets served and were purchased to supplement portfolio lending growth.
For the three months ended March 31, 2020, there were higher volumes of refinances and sales of one-to-four-family homes, compared to the prior years’ surge in construction loans due to lower housing inventories. Residential construction and development lending, while not as common as other options like one-to-four-family loans, will continue to be an important element in our total loan portfolio, and we will continue to take a disciplined approach by concentrating our efforts on loans to builders and developers in our market areas known to us. These short-term loans typically mature in six to twelve months. In addition, the funding is usually not fully disbursed at origination, thereby reducing our net loans receivable in the short-term.
The Company is significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs. Deposit flows are influenced by a number of factors, including interest rates paid on time deposits, other investments, account maturities, and the overall level of personal income and savings. Lending activities are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles. Sources of funds for lending activities include primarily deposits, including brokered deposits, borrowings, payments on loans, and income provided from operations.
The Company’s earnings are primarily dependent upon net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on these loans and investments. Interest expense is a function of the amount of deposits and borrowings outstanding during the same period and interest rates paid on these deposits and borrowings. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reductions in the targeted federal funds rate, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in 2020 and possibly longer.
44
Another significant influence on the Company’s earnings is fee income from mortgage banking activities. The Company’s earnings are also affected by the provision for loan losses, service charges and fees, gains from sales of assets, operating expenses and income taxes. The Company recorded a provision of $3.7 million for the first quarter of 2020, compared to $750,000 in the first quarter a year ago due primarily to the incurred but not yet reported credit deterioration due to the impact of the COVID-19 pandemic, the increase in the loan portfolio due to organic growth and net charge-offs.
Critical Accounting Policies and Estimates
Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex, or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, and changes in the financial condition of borrowers. Management believes that its critical accounting policies include the following:
Allowance for Loan and Lease Losses (“ALLL”). The ALLL is the amount estimated by management as necessary to cover probable losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. A high degree of judgment is necessary when determining the amount of the ALLL. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions, and other factors related to the collectability of the loan portfolio. Although the Company believes that use of the best information available currently establishes the ALLL, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. As the Company adds new products to the loan portfolio and expands the Company’s market area, management intends to enhance and adapt the methodology to keep pace with the size and complexity of the loan portfolio. Changes in any of the above factors could have a significant effect on the calculation of the ALLL in any given period. Management believes that its systematic methodology continues to be appropriate.
Servicing Rights. Servicing assets are recognized as separate assets when rights are acquired through the purchase or through the sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage, commercial and consumer loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage, commercial, or consumer servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses.
Servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranches. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as a recovery and an increase to income. Capitalized servicing rights are stated separately on the Consolidated Balance Sheets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
Derivatives and Hedging Activity. ASC 815, “ Derivatives and Hedging, ” requires that derivatives of the Company be recorded in the consolidated financial statements at fair value. Management considers its accounting policy for derivatives to be a critical accounting policy because these instruments have certain interest rate risk characteristics that change in value based upon changes in the capital markets. Fair values for derivative assets and liabilities are measured on a recurring basis. The Company’s primary use of derivative instruments are related to the mortgage banking activities in the form of commitments to extend credit, commitments to sell loans, TBA mortgage-backed securities trades and option contracts to
45
mitigate the risk of the commitments to extend credit. Estimates of the percentage of commitments to extend credit on loans to be held for sale that may not fund are based upon historical data and current market trends. The fair value adjustments of the derivatives are recorded in the Consolidated Statements of Income with offsets to other assets or other liabilities on the Consolidated Balance Sheets.
Derivative instruments not related to mortgage banking activities primarily relate to interest rate swap agreements accounted for as cash flow hedges. To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. If derivative instruments are designated as cash flow hedges, fair value adjustments related to the effective portion are recorded in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of cash flow hedges are reflected in earnings as they occur. Actual cash receipts and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the interest income or interest expense associated with the hedged item. During the life of the hedge, the Company formally assesses whether derivatives designated as hedging instruments continue to be highly effective in offsetting changes in the fair value or cash flows of hedged items. If it is determined that a hedge has ceased to be highly effective, the Company will discontinue hedge accounting prospectively. At such time, previous adjustments to the carrying value of the hedged item are reversed into current earnings and the derivative instrument is reclassified to a trading position recorded at fair value. For derivatives not designated as hedges, changes in fair value are recognized in earnings, in noninterest income.
Fair Value. ASC 820, “Fair Value Measurements and Disclosures ,” establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). For additional details, see “Note 10 - Fair Value Measurements” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
Income Taxes . Income taxes are reflected in the Company’s consolidated financial statements to show the tax effects of the operations and transactions reported in the consolidated financial statements and consist of taxes currently payable plus deferred taxes. ASC 740, “ Accounting for Income Taxes ,” requires the asset and liability approach for financial accounting and reporting for deferred income taxes. Deferred tax assets and liabilities result from temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. They are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled and are determined using the assets and liability method of accounting. The deferred income provision represents the difference between net deferred tax asset/liability at the beginning and end of the reported period. In formulating the deferred tax asset, the Company is required to estimate income and taxes in the jurisdiction in which the Company operates. This process involves estimating the actual current tax exposure for the reported period together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses, for tax and financial reporting purposes.
Deferred tax assets and liabilities occur when taxable income is larger or smaller than reported income on the income statements due to accounting valuation methods that differ from tax, as well as tax rate estimates and payments made quarterly and adjusted to actual at the end of the year. Deferred tax assets and liabilities are temporary differences deductible or payable in future periods. The Company had net deferred tax liabilities of $2.3 million and $2.0 million, at March 31, 2020 and December 31, 2019, respectively.
46
Comparison of Financial Condition at March 31, 2020 and December 31, 2019
Assets. Total assets increased $134.1 million, or 7.8%, to $1.85 billion at March 31, 2020, compared to $1.71 billion at December 31, 2019, primarily due to increases in loans receivable, net of $56.7 million, loans held for sale of $45.9 million, and securities available-for-sale, at fair value of $30.4 million, partially offset by decreases in certificates of deposit at other financial institutions of $3.0 million, other assets of $1.0 million, and servicing rights of $934,000. The increases in total assets were primarily funded by deposit growth and the use of FHLB advances.
Loans receivable, net increased $56.7 million to $1.39 billion at March 31, 2020, from $1.34 billion at December 31, 2019. Total real estate loans increased $38.6 million, including increases in one-to-four-family portfolio loans of $43.9 million, which includes the $28.1 million purchase of ARM loans, and commercial real estate loans of $9.8 million, partially offset by decreases in construction and development of $11.0 million and multi-family loans of $3.4 million. Undisbursed construction and development loan commitments increased $11.8 million, or 12.4%, to $106.9 million at March 31, 2020, as compared to $95.0 million at December 31, 2019. Commercial business loans increased $12.5 million, due to increases in commercial and industrial loans of $8.6 million, of which $3.7 million was associated with the purchase of a U.S. Department of Agriculture guaranteed loan, and warehouse lending of $3.9 million. Consumer loans increased $8.9 million, primarily due to increases of $6.9 million in indirect home improvement loans and $2.3 million in marine loans.
Loans held for sale, consisting of one-to-four-family loans, increased by $45.9 million, or 65.9%, to $115.6 million at March 31, 2020, from $69.7 million at December 31, 2019. The Company continues to build its home lending operations and strategically add production staff in the markets we serve. In addition, lower market interest rates have increased the volume of refinance activity which subsequently increased the balance of loans held for sale.
One-to-four-family loan originations, including $259.2 million of loans originated for sale, $24.5 million of portfolio loans including first and second liens, and $1.9 million of loans brokered to other institutions, increased $141.9 million, or 98.8% to $285.6 million during the three months ended March 31, 2020, compared to $143.7 million during the three months ended March 31, 2019.
Originations of one-to-four-family loans to purchase and to refinance a home for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
For the Three Months Ended |
|
|
|
For the Three Months Ended |
|
Year |
|
Year |
|||||||
|
|
|
March 31, 2020 |
|
|
|
March 31, 2019 |
|
over Year |
|
over Year |
|||||||
|
|
|
Amount |
|
Percent |
|
|
|
Amount |
|
Percent |
|
$ Change |
|
% Change |
|||
|
Purchase |
|
$ |
114,652 |
|
|
% |
|
|
$ |
105,518 |
|
|
% |
$ |
9,134 |
|
|
|
Refinance |
|
|
170,950 |
|
|
|
|
|
|
38,155 |
|
|
|
|
132,795 |
|
|
|
Total |
|
$ |
285,602 |
|
|
% |
|
|
$ |
143,673 |
|
|
% |
$ |
141,929 |
|
|
During the three months ended March 31, 2020, the Company sold $212.4 million of one-to-four-family loans, compared to sales of $130.9 million for the same period one year ago. In addition, the cash margin on loans sold increased to 1.71% for the three months ended March 31, 2020, compared to 1.51% for the three months ended March 31, 2019. Margin reported is based on actual loans sold into the secondary market and the related value of capitalized servicing, partially offset by recognized deferred loans fees and capitalized expenses. The gross cash margins on loans sold, excluding capitalized costs and deferred fees, were 3.50% and 3.06% for the three months ended March 31, 2020 and 2019, respectively.
The ALLL was $16.9 million, or 1.20% of gross loans receivable, excluding loans held for sale at March 31, 2020, compared to $13.2 million, or 0.98% of gross loans receivable, excluding loans held for sale at December 31, 2019. Substandard loans increased to $7.6 million at March 31, 2020, compared to $6.7 million at December 31, 2019. This increase in substandard loans was mostly driven by the down grade of a commercial real estate loan in the amount of $934,000 which was unrelated to the COVID-19 pandemic. Non-performing loans, consisting solely of non-accruing loans 90 days or more past due, increased to $3.2 million at March 31, 2020, from $3.0 million at December 31, 2019. At March 31, 2020, non-performing loans consisted of $1.2 million in one-to-four-family loans, $1.1 million in commercial real estate loans, $533,000 of indirect home improvement loans, $220,000 of home equity loans, $124,000 of marine loans, and $7,000 of other consumer loans. The ratio of non-performing loans to total gross loans was 0.23% at March 31, 2020,
47
compared to 0.22% at December 31, 2019. There was one OREO property in the amount of $90,000 at March 31, 2020, and two OREO properties totaling $168,000 at December 31, 2019.
In accordance with acquisition accounting, the allowance does not include the recorded discount on loans acquired in the Anchor Acquisition of $2.3 million and $2.7 million on $178.2 million and $198.5 million of gross loans at March 31, 2020 and December 31, 2019, respectively.
In response to the COVID-19 pandemic, the commercial lending team identified risk rating downgrades at March 31, 2020, of $84.4 million of loans based on the type of industry listed in the table below. Management downgraded $76.3 million to Watch, $6.8 million to Special Mention, and $1.3 million to Substandard.
Loans by type of industry downgraded as a result of the COVID-19 pandemic are as follows:
|
|
|
|
|
|
Loan Types: |
|
At March 31, 2020 |
|
|
Hospitality |
|
$ |
15,578 |
|
Transportation |
|
|
5,111 |
|
Food and beverage |
|
|
12,988 |
|
Manufacturing |
|
|
18,122 |
|
Other |
|
|
32,600 |
|
Total |
|
$ |
84,399 |
Additionally, management increased the economic factors of the ALLL associated with the consumer portfolio based on the growing unemployment reports. Management recognizes the potential impact on all of our customers and will continue to assess and evaluate our level of reserves against our homogenous residential and consumer portfolios during the COVID-19 pandemic.
Liabilities. Total liabilities increased $133.5 million to $1.65 billion at March 31, 2020, from $1.51 billion at December 31, 2019, primarily due to increases of $74.3 million in borrowings and $53.9 million in deposits.
Total deposits increased $53.9 million to $1.45 billion at March 31, 2020, from $1.39 billion at December 31, 2019. Relationship-based transactional accounts (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased $42.9 million to $494.5 million at March 31, 2020, from $451.6 million at December 31, 2019, primarily due to a $31.0 million increase in interest-bearing checking, a $7.8 million increase in noninterest-bearing checking, and a $4.1 million increase in escrow deposits. Money market and savings accounts increased $37.1 million to $426.5 million at March 31, 2020, from $389.3 million at December 31, 2019. Time deposits decreased $26.2 million to $525.3 million at March 31, 2020, from $551.5 million at December 31, 2019. Non-retail certificates of deposit (“CDs”) which includes brokered CDs, online CDs, and public funds decreased $17.4 million to $128.8 million at March 31, 2020, compared to $146.2 million at December 31, 2019, primarily due to an $18.0 million decreases in brokered CDs. Management remains focused on increasing its lower cost relationship-based deposits to fund long-term asset growth.
Deposits are summarized as follows at the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
||
|
|
|
2020 (1)(2) |
|
2019 (1)(2) |
||
|
Noninterest-bearing checking |
|
$ |
267,966 |
|
$ |
260,131 |
|
Interest-bearing checking |
|
|
208,952 |
|
|
177,972 |
|
Savings |
|
|
123,052 |
|
|
118,845 |
|
Money market (3) |
|
|
303,405 |
|
|
270,489 |
|
Certificates of deposit less than $100,000 (4) |
|
|
263,787 |
|
|
277,988 |
|
Certificates of deposit of $100,000 through $250,000 |
|
|
176,322 |
|
|
181,402 |
|
Certificates of deposit of $250,000 and over (5) |
|
|
85,185 |
|
|
92,110 |
|
Escrow accounts related to mortgages serviced |
|
|
17,600 |
|
|
13,471 |
|
Total |
|
$ |
1,446,269 |
|
$ |
1,392,408 |
__________________________
48
|
|
(1) |
|
Includes $113.7 million of deposits at March 31, 2020 from the Branch Purchase and $117.1 million at December 31, 2019. |
|
|
(2) |
|
Includes $282.4 million and $299.0 million of deposits at March 31, 2020 and December 31, 2019, respectively, from the Anchor Acquisition. |
|
|
(3) |
|
Includes $20.0 million and $6.2 million of brokered deposits at March 31, 2020 and December 31, 2019, respectively. |
|
|
(4) |
|
Includes $123.4 and $141.4 million of brokered deposits at March 31, 2020 and December 31, 2019, respectively. |
|
|
(5) |
|
Time deposits that meet or exceed the FDIC insurance limit. |
Borrowings increased $74.3 million to $159.1 million at March 31, 2020, from $84.9 million at December 31, 2019, primarily related to the use of FHLB advances in relation to the fluctuating activity in deposits.
Management entered into two liability interest rate swap arrangements in the first quarter of 2020 to lock the expense costs associated with $30.0 million in deposits and $30.0 million in borrowings. The average cost of these $60 million in notional pay fixed for four years interest rate swap agreements was 91 basis points for which the Bank will pay a fixed rate of 91 basis points to the interest rate swap counterparty, compared to the quarterly reset of three month LIBOR that will adjust quarterly. Management will continue to implement processes to match balance sheet funding duration and minimize interest rate risk and costs.
Stockholders’ Equity. Total stockholders’ equity increased $587,000 to $200.8 million at March 31, 2020, from $200.2 million at December 31, 2019. The increase in stockholders’ equity during the three months ended March 31, 2020, was primarily due to net income of $5.2 million and $1.0 million of other comprehensive income, net, partially offset by the common stock repurchase of $5.4 million. The Company repurchased 136,243 shares of its common stock during the three months ended March 31, 2020, at an average price of $39.30 per share. Book value per common share was $47.29 at March 31, 2020, compared to $45.85 at December 31, 2019.
We calculated book value based on common shares outstanding of 4,332,196 at March 31, 2020, less 40,215 unvested restricted stock shares, and 45,362 of unallocated ESOP shares for the reported common shares outstanding of 4,246,619. Common shares outstanding was calculated using 4,459,041 shares at December 31, 2019, less 40,215 unvested restricted stock shares, and 51,842 of unallocated ESOP shares for the reported common shares outstanding of 4,366,984.
Comparison of Results of Operations for the Three Months Ended March 31, 2020 and 2019
General. Net income was virtually unchanged at $5.2 million for the three months ended March 31, 2020, and the three months ended March 31, 2019. Net income for the three months ended March 31, 2020 was primarily impacted by a $4.3 million, or 95.2% increase in noninterest income, partially offset by a $3.2 million, or 18.6% decrease in net interest income after provision for loan losses and a $1.4 million, or 9.4% increase in noninterest expense. Earnings for the quarter also reflect the impact of the COVID-19 pandemic which resulted in the closing of businesses in the market areas we operate.
49
The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities to calculate the comparison of results of operations for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
For the Three Months Ended |
|
For the Three Months Ended |
|||||||||||||||||||||||
|
|
|
March 31, 2020 |
|
March 31, 2019 |
|||||||||||||||||||||||
|
(Dollars in thousands) |
|
Average Balance Outstanding |
|
Interest Earned/ Paid |
|
Yield/ Rate |
|
Average Balance Outstanding |
|
Interest Earned/ Paid |
|
Yield/ Rate |
|||||||||||||||
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Loans receivable, net deferred loan fees (1) |
|
$ |
1,420,227 |
|
$ |
20,740 |
|
|
|
$ |
1,348,418 |
|
$ |
21,109 |
|
|
|||||||||||
|
Mortgage-backed securities |
|
|
66,670 |
|
|
383 |
|
|
|
|
46,786 |
|
|
320 |
|
|
|||||||||||
|
Investment securities |
|
|
69,590 |
|
|
446 |
|
|
|
|
52,864 |
|
|
375 |
|
|
|||||||||||
|
Federal Home Loan Bank stock |
|
|
8,259 |
|
|
107 |
|
|
|
|
8,930 |
|
|
130 |
|
|
|||||||||||
|
Interest-bearing deposits at other financial institutions |
|
|
69,763 |
|
|
273 |
|
|
|
|
68,169 |
|
|
377 |
|
|
|||||||||||
|
Total interest-earning assets |
|
|
1,634,509 |
|
|
21,949 |
|
|
|
|
1,525,167 |
|
|
22,311 |
|
|
|||||||||||
|
Noninterest-earning assets |
|
|
99,526 |
|
|
|
|
|
|
|
89,694 |
|
|
|
|
|
|||||||||||
|
Total assets |
|
$ |
1,734,035 |
|
|
|
|
|
|
$ |
1,614,861 |
|
|
|
|
|
|||||||||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Savings and money market |
|
$ |
405,354 |
|
$ |
826 |
|
|
|
$ |
395,315 |
|
$ |
763 |
|
|
|||||||||||
|
Interest-bearing checking |
|
|
180,472 |
|
|
136 |
|
|
|
|
163,244 |
|
|
196 |
|
|
|||||||||||
|
Certificates of deposit |
|
|
545,293 |
|
|
2,845 |
|
|
|
|
495,590 |
|
|
2,751 |
|
|
|||||||||||
|
Borrowings |
|
|
92,611 |
|
|
497 |
|
|
|
|
110,445 |
|
|
744 |
|
|
|||||||||||
|
Subordinated note |
|
|
9,887 |
|
|
172 |
|
|
|
|
9,867 |
|
|
168 |
|
|
|||||||||||
|
Total interest-bearing liabilities |
|
|
1,233,617 |
|
|
4,476 |
|
|
|
|
1,174,461 |
|
|
4,622 |
|
|
|||||||||||
|
Noninterest-bearing accounts |
|
|
273,442 |
|
|
|
|
|
|
|
239,598 |
|
|
|
|
|
|||||||||||
|
Other noninterest-bearing liabilities |
|
|
23,806 |
|
|
|
|
|
|
|
17,082 |
|
|
|
|
|
|||||||||||
|
Stockholders’ equity |
|
|
203,170 |
|
|
|
|
|
|
|
183,720 |
|
|
|
|
|
|||||||||||
|
Total liabilities and stockholders’ equity |
|
$ |
1,734,035 |
|
|
|
|
|
|
$ |
1,614,861 |
|
|
|
|
|
|||||||||||
|
Net interest income |
|
|
|
|
$ |
17,473 |
|
|
|
|
|
|
$ |
17,689 |
|
|
|||||||||||
|
Net interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Net earning assets |
|
$ |
400,892 |
|
|
|
|
|
|
$ |
350,706 |
|
|
|
|
|
|||||||||||
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Average interest-earning assets to average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
_______________________
|
|
(1) |
|
Includes loans held for sale. |
Net Interest Income. Net interest income decreased $216,000 to $17.5 million for the three months ended March 31, 2020, from $17.7 million for the three months ended March 31, 2019. This decline was primarily due to a $369,000, or 1.7% decrease in loans receivable interest income, impacted by the reduction of higher interest rate and recognition of deferred fee income loans, particularly construction and development loans, and the impact of refinances of one-to-four-family loans, partially offset by a $247,000, or 33.2% reduction in interest expense on borrowings, primarily due to the reduction of interest rates for the use of FHLB advances and FHLB federal funds.
50
The net interest margin (“NIM”) decreased 40 basis points to 4.30% for the three months ended March 31, 2020, from 4.70% for the same period in the prior year. The decrease in NIM was primarily impacted by lower note rates on recent fixed-rate real estate loan originations and adjustable-rate commercial loans. Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.
Interest Income. Interest income for the three months ended March 31, 2020, decreased $362,000, to $21.9 million, from $22.3 million for the three months ended March 31, 2019. The decrease during the period was primarily attributable to a 53 basis point decrease in the average yield on interest-earning assets to 5.40% for the three months ended March 31, 2020, compared to 5.93% for the three months ended March 31, 2019. The decrease in average yield on interest-earning assets compared to the same period a year earlier primarily reflects the reduction of higher interest rate and fee income loans, particularly construction and development loans, and the impact of refinances of one-to-four-family loans.
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|||||||||||
|
|
|
2020 |
|
2019 |
|
(Decrease)/ |
|||||||
|
|
|
Average |
|
|
|
Average |
|
|
|
Increase |
|||
|
|
|
Balance |
|
Yield/ |
|
Balance |
|
Yield/ |
|
in Interest |
|||
|
(Dollars in thousands) |
|
Outstanding |
|
Rate |
|
Outstanding |
|
Rate |
|
Income |
|||
|
Loans receivable, net and loans held for sale |
|
$ |
1,420,227 |
|
5.87 |
% |
$ |
1,348,418 |
|
6.35 |
% |
$ |
(369) |
|
Mortgage-backed securities |
|
|
66,670 |
|
2.31 |
|
|
46,786 |
|
2.77 |
|
|
63 |
|
Investment securities |
|
|
69,590 |
|
2.58 |
|
|
52,864 |
|
2.88 |
|
|
71 |
|
FHLB stock |
|
|
8,259 |
|
5.21 |
|
|
8,930 |
|
5.90 |
|
|
(23) |
|
Interest-bearing deposits at other financial institutions |
|
|
69,763 |
|
1.57 |
|
|
68,169 |
|
2.24 |
|
|
(104) |
|
Total interest-earning assets |
|
$ |
1,634,509 |
|
5.40 |
% |
$ |
1,525,167 |
|
5.93 |
% |
$ |
(362) |
Interest Expense. Interest expense decreased $146,000, to $4.5 million for the three months ended March 31, 2020, from $4.6 million for the same prior year period, primarily due to decreased interest expense on borrowings of $247,000, partially offset by an increase in interest expense on deposits of $97,000. The average cost of funds for total interest-bearing liabilities decreased 14 basis points to 1.46% for the three months ended March 31, 2020, from 1.60% for the three months ended March 31, 2019. The decrease was predominantly due to repricing CD deposits and lowered borrowing interest expense, primarily due to the reduction of interest rates for the use of FHLB advances and FHLB federal funds. The average cost of total deposits decreased four basis points to 1.09%, for the three months ended March 31, 2020, compared to 1.13%, for the three months ended March 31, 2019, reflecting lower market interest rates primarily in interest-bearing checking, brokered CDs, and CDs.
The following table details average balances for cost of funds on interest-bearing liabilities and the change in interest expense for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|||||||||||
|
|
|
2020 |
|
2019 |
|
Increase/ |
|||||||
|
|
|
Average |
|
|
|
Average |
|
|
|
(Decrease) |
|||
|
|
|
Balance |
|
Yield/ |
|
Balance |
|
Yield/ |
|
in Interest |
|||
|
(Dollars in thousands) |
|
Outstanding |
|
Rate |
|
Outstanding |
|
Rate |
|
Expense |
|||
|
Savings and money market |
|
$ |
405,354 |
|
0.82 |
% |
$ |
395,315 |
|
0.78 |
% |
$ |
63 |
|
Interest-bearing checking |
|
|
180,472 |
|
0.30 |
|
|
163,244 |
|
0.49 |
|
|
(60) |
|
Certificates of deposit |
|
|
545,293 |
|
2.10 |
|
|
495,590 |
|
2.25 |
|
|
94 |
|
Borrowings |
|
|
92,611 |
|
2.16 |
|
|
110,445 |
|
2.73 |
|
|
(247) |
|
Subordinated note |
|
|
9,887 |
|
7.00 |
|
|
9,867 |
|
6.91 |
|
|
4 |
|
Total interest-bearing liabilities |
|
$ |
1,233,617 |
|
1.46 |
% |
$ |
1,174,461 |
|
1.60 |
% |
$ |
(146) |
Provision for Loan Losses. For the three months ended March 31, 2020, the provision for loan losses was $3.7 million, compared to $750,000 for the three months ended March 31, 2019, due primarily to the incurred but not yet reported credit
51
deterioration due to the impact of the COVID-19 pandemic, the increase in the loan portfolio due to organic growth and net charge-offs. During the three months ended March 31, 2020, net loan charge-offs totaled $43,000, compared to net loan charge-offs of $1.3 million during the three months ended March 31, 2019, primarily due to a commercial business loan charge-off of $1.2 million during the three months ended March 31, 2019. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations.
Noninterest Income. Noninterest income increased $4.3 million, or 95.2%, to $8.9 million for the three months ended March 31, 2020, from $4.6 million for the three months ended March 31, 2019. The increase between periods was driven by a $3.5 million increase in gain on sale of loans, primarily due to higher sales volume, and a $1.6 million, or 549.8% increase in other noninterest income, mostly due to the net gain from a one-time sale of Class B Visa stock shares of $1.5 million, partially offset by a $734,000, or 44.3% decrease in net service charges and fee income, primarily due to an increase in amortization expense attributable to the Bank’s mortgage servicing rights. The increased amortization was primarily a result of higher volumes of payoffs in the underlying servicing portfolio.
Noninterest Expense. Noninterest expense increased $1.4 million, or 9.4%, to $16.2 million for the three months ended March 31, 2020, from $14.8 million for the three months ended March 31, 2019. The increase was primarily as a result of strong loan production growth during the quarter with an increase of $1.3 million in salaries and benefits, which included a $1.6 million increase in incentives and commissions, as well as increases in impairment of servicing rights of $491,000 and operations of $359,000, partially offset by no acquisition costs in the current quarter, compared to $374,000 for the comparable period last year, and a decrease of $306,000 in data processing. Data processing expenses for the three months ended March 31, 2019, included conversion costs from the Anchor Acquisition. In addition, FDIC insurance decreased $122,000, primarily as a result of the FDIC’s small bank credit of $26,000 in the first quarter of 2020, and a decrease in the year over year quarterly assessment rate.
The efficiency ratio, which is noninterest expense as a percentage of net interest income and noninterest income, improved to 61.39% for the three months ended March 31, 2020, compared to 66.52% for the three months ended March 31, 2019, representing a greater increase in net interest income and noninterest income, as compared to smaller increases in noninterest expense.
Provision for Income Tax. For the three months ended March 31, 2020, the Company recorded a provision for income tax expense of $1.3 million on pre-tax income as compared to $1.5 million for the three months ended March 31, 2019. The effective corporate income tax rates for the three months ended March 31, 2020 and 2019 were 20.4% and 22.5%, respectively. The decrease in the tax provision is primarily due to a $203,000 decrease in pre-tax income and the lack of non-deductible acquisition costs during the three months ended March 31, 2020, compared to non-deductible acquisition costs of $374,000 during the same period last year.
Liquidity
Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit runoff that may occur in the normal course of business. The Company relies on a number of different sources in order to meet potential liquidity demands. The primary sources are increases in deposit accounts, FHLB advances, purchases of federal funds, sale of securities available-for-sale, cash flows from loan payments, sales of one-to-four-family loans held for sale, and maturing securities.
At March 31, 2020, the Bank’s total borrowing capacity was $521.6 million with the FHLB of Des Moines, with unused borrowing capacity of $356.6 million. The FHLB borrowing limit is based on certain categories of loans, primarily real estate loans that qualify as collateral for FHLB advances. At March 31, 2020, the Bank held approximately $706.4 million in loans that qualify as collateral for FHLB advances.
In addition to the availability of liquidity from the FHLB of Des Moines, the Bank maintained a short-term borrowing line with the Federal Reserve Bank, with a current limit of $160.3 million, and a combined credit limit of $71.0 million in written federal funds lines of credit through correspondent banking relationships at March 31, 2020. The Federal Reserve Bank borrowing limit is based on certain categories of loans, primarily consumer loans that qualify as collateral for Federal
52
Reserve Bank line of credit. At March 31, 2020, the Bank held approximately $327.4 million in loans that qualify as collateral for the Federal Reserve Bank line of credit.
At March 31, 2020, $159.1 million in FHLB advances were outstanding, and no advances were outstanding against the Federal Reserve Bank line of credit, or the federal funds lines of credit. The Bank’s Asset and Liability Management Policy permits management to utilize brokered deposits up to 20% of deposits or $290.6 million at March 31, 2020. Total brokered deposits at March 31, 2020 were $123.4 million. Management utilizes brokered deposits to mitigate interest rate risk and liquidity risk exposure when appropriate.
Liquidity management is both a daily and long-term function of the Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S. Government obligations and U.S. agency securities. The Company uses sources of funds primarily to meet ongoing commitments, pay maturing deposits, fund withdrawals, and to fund loan commitments. At March 31, 2020, the approved outstanding loan commitments, including unused lines of credit amounted to $505.1 million. Certificates of deposit scheduled to mature in three months or less at March 31, 2020, totaled $97.2 million. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, the Company believes that a majority of maturing relationship deposits will remain with the Bank.
As a separate legal entity from the Bank, FS Bancorp, Inc. must provide for its own liquidity. Sources of capital and liquidity for FS Bancorp, Inc. include distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory notice. At March 31, 2020, FS Bancorp, Inc. had $6.8 million in unrestricted cash to meet liquidity needs.
Commitments and Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers. For information regarding our commitments and off-balance sheet arrangements, see “Note 9 - Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
Capital Resources
The Bank is subject to minimum capital requirements imposed by the FDIC. Based on its capital levels at March 31, 2020, the Bank exceeded these requirements as of that date. Consistent with our goals to operate a sound and profitable organization, our policy is for the Bank to maintain a well capitalized status under the capital categories of the FDIC. Based on capital levels at March 31, 2020, the Bank was considered to be well capitalized. Effective January 1, 2020, a bank that elects to use the Community Bank Leverage Ratio (“CBLR”) will generally be considered well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%. At March 31, 2020, the Bank qualified and elected to use the CBLR to measure capital adequacy. The Tier 1 leverage-based capital ratio calculated for the Bank at March 31, 2020 was 11.3%, compared to 11.6% at December 31, 2019. As required by the CARES Act, the FDIC has temporarily lowered the CBLR to 8% beginning in the second quarter of 2020 through the end of the year. Beginning in 2021, the CBLR will increase to 8.5% for that calendar year. The CBLR will return to 9% on Jan. 1, 2022.
As a bank holding company registered with the Federal Reserve, the Company is subject to the capital adequacy requirements of the Federal Reserve. Bank holding companies with less than $3.0 billion in assets are generally not subject to compliance with the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to the Bank. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to the holding company’s subsidiary bank and the Federal Reserve expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations. If FS Bancorp, Inc. were subject to regulatory capital guidelines for bank holding companies with $3.0 billion or more in assets at March 31, 2020, FS Bancorp, Inc. would have exceeded all regulatory capital requirements. The Tier 1 leverage-based capital ratio calculated for FS Bancorp, Inc. at March 31, 2020 was 11.1%. For additional information regarding regulatory capital
53
compliance, see the discussion included in “Note 14 - Regulatory Capital” to the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the market risk disclosures contained in FS Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of the disclosure controls and procedures as defined in Rule 13a‑15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) was carried out as of March 31, 2020 under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) and several other members of the Company’s senior management. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
The Company’s CEO and CFO concluded that based on their evaluation at March 31, 2020, the Company’s disclosure controls and procedures were effective in ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to FS Bancorp management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC’s rules and forms.
(b) Changes in Internal Controls
There were no significant changes in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2020, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
In the normal course of business, the Company occasionally becomes involved in various legal proceedings. In the opinion of management, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.
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In light of recent developments relating to the novel coronavirus of 2019 (“COVID-19”), the Company is supplementing its risk factors contained in Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 16, 2020. The following risk factor should be read in conjunction with the risk factors described in FS Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
The COVID-19 pandemic has significantly affected some of our operations and the way we provide banking services to businesses and individuals, most of whom are currently under government issued stay-at-home orders. As an essential business, we continue to provide banking and financial services to our customers with drive-thru access available at the majority of our branch locations and in-person services available by appointment. In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens it could potentially limit or disrupt our ability to provide banking and financial services to our customers. The ultimate impact of the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
In response to the stay-at-home orders, the majority our employees currently are working remotely to enable us to continue to provide banking services to our customers. Heightened cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic. We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.
There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations, other than through government sponsored programs such as the Payroll Protection Program (“PPP”), deposit availability, market interest rates and negatively impacted many of our business and consumer borrower’s ability to make their loan payments. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including recent reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will be unfavorably affected in the near term, if not longer. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.
The impact of the pandemic is expected to continue to unfavorably affect us during 2020 and possibly longer as the ability of many of our customers to make loan payments has been significantly affected. Although the Company makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It is likely that increased loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the pandemic. Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved. Any increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.
The PPP loans made by the Bank are guaranteed by the SBA and, if used by the borrower for authorized purposes, may be fully forgiven. However, in the event of a loss resulting from a default on a PPP loan and a determination by the SBA that
55
there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from the Bank. In addition, since the commencement of the PPP, several larger banks have been subject to litigation regarding their processing of PPP loan applications. The Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank seeking PPP loans. PPP lenders, including the Bank, may also be subject to the risk of litigation in connection with other aspects of the PPP, including but not limited to borrowers seeking forgiveness of their loans. If any such litigation is filed against the Bank, it may result in significant financial or reputational harm to us.
In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. If adverse economic conditions or the recent decrease in our stock price and market capitalization as a result of the pandemic were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on our results of operations and financial condition. Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown, and during which we may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery. To the extent the effects of the COVID-19 pandemic adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled "Risk Factors" in FS Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and any subsequent Quarterly Reports on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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(a) |
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Not applicable |
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(b) |
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Not applicable |
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(c) |
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The following table summarizes common stock repurchases during the three months ended March 31, 2020: |
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Maximum |
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Total Number |
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Number of |
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of Shares |
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Shares that |
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Average |
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Repurchased as |
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May Yet Be |
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Total Number |
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Price |
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Part of Publicly |
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Repurchased |
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of Shares |
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Paid per |
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Announced |
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Under the |
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Period |
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Purchased |
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Share |
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Plan |
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Plan |
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January 1, 2020 - January 31, 2020 |
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4,798 |
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$ |
55.22 |
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— |
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220,202 |
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February 1, 2020 - February 29, 2020 |
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12,124 |
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51.02 |
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9,524 |
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208,078 |
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March 1, 2020 - March 31, 2020 |
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119,321 |
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37.47 |
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119,321 |
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87,757 |
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Total for the quarter |
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136,243 |
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$ |
39.30 |
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128,845 |
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87,757 |
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On January 28, 2020, the Company announced that its Board of Directors authorized the repurchase of up to 225,000 shares of the Company’s common stock, or 5% of the Company’s outstanding shares authorized and outstanding at December 31, 2019. The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, from time to time over a 12-month period until January 28, 2021, depending on market conditions and other factors, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission.
Item 3. Defaults Upon Senior Securities
Not applicable.
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Severance Agreement between 1st Security Bank of Washington and Joseph C. Adams (2) |
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FS Bancorp, Inc. 2013 Equity Incentive Plan (the “2013 Plan”) (4) |
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Form of Incentive Stock Option Agreement under the 2013 Plan (4) |
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Form of Non-Qualified Stock Option Agreement under the 2013 Plan (4) |
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Form of Incentive Stock Option Award Agreement under the 2018 Equity Incentive Plan (8) |
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Form of Non-Qualified Stock Option Award Agreement under the 2018 Equity Incentive Plan (8) |
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Form of Restricted Stock Award Agreement under the 2018 Equity Incentive Plan (8) |
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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The following materials from the Company’s Quarterly Report on Form 10‑Q for the quarter ended March 31, 2020 formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Changes in Stockholders’ Equity; (5) Consolidated Statements of Cash Flows; and (6) Notes to Consolidated Financial Statements. |
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Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on July 18, 2018 (File No. 001-35589) and incorporated by reference. |
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Filed as an exhibit to the Registrant’s Registration Statement on Form S‑1 (333‑177125) filed on October 3, 2011, and incorporated by reference. |
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Filed as an exhibit to the Registrant’s Current Report on Form 8‑K filed on July 10, 2013 (File No. 001‑35589) and incorporated by reference. |
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Filed as an exhibit to the Registrant’s Registration Statement on Form S‑8 (333‑192990) filed on December 20, 2013, and incorporated by reference. |
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Filed as an exhibit to the Registrant’s Current Report on Form 8‑K filed on September 2, 2015 (File No. 001‑35589) and incorporated by reference. |
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Filed as an exhibit to the Registrant’s Current Report on Form 8‑K filed on October 19, 2015 (File No. 001‑35589) and incorporated by reference. |
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Filed as an exhibit to the Registrant’s Current Report on Form 8‑K filed on February 1, 2016 (File No. 001‑35589) and incorporated by reference. |
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Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (333-225135) filed on May 23, 2018. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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FS BANCORP, INC. |
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Date: May 11, 2020 |
By: |
/s/Joseph C. Adams |
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Joseph C. Adams, |
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Chief Executive Officer |
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(Duly Authorized Officer) |
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Date: May 11, 2020 |
By: |
/s/Matthew D. Mullet |
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Matthew D. Mullet |
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Secretary, Treasurer and |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
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| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
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No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|