UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q10-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 September 30, 20172021 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: 001‑35589001-35589
FS BANCORP, INC.
(Exact name of registrant as specified in its charter)
| | |
Washington | |
|
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
6920 220th Street SW, Mountlake Terrace, Washington98043
(Address of principal executive offices; Zip Code)
(425) 771‑5299(425) 771-5299
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $.01 per share | FSBW | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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“emerging growth company"company” in Rule 12b‑212b-2 of the Exchange Act.
| | |
Large accelerated filer | | Accelerated filer |
Non-accelerated filer | | Smaller reporting company |
Emerging growth company | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [X]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑212b-2 of the Exchange Act). Yes [ ]☐ No [X]☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 3, 2017,5, 2021, there were 3,674,9028,187,383 outstanding shares of the registrant’s common stock.
FS Bancorp, Inc.
Form 10‑Q10-Q
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PART I | | FINANCIAL INFORMATION | |
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| | Consolidated Balance Sheets at September 30, | | 3 |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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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, Inc.Bancorp.
2
FS BANCORP, INC. AND SUBSIDIARY
(Dollars in thousands, except share amounts) (Unaudited)
| | | | | | |
|
| September 30, |
| December 31, | ||
ASSETS | | 2021 | | 2020 | ||
Cash and due from banks | | $ | 11,426 | | $ | 11,554 |
Interest-bearing deposits at other financial institutions | |
| 16,906 | |
| 80,022 |
Total cash and cash equivalents | |
| 28,332 | |
| 91,576 |
Certificates of deposit at other financial institutions | |
| 11,782 | |
| 12,278 |
Securities available-for-sale, at fair value | |
| 268,802 | |
| 178,018 |
Securities held-to-maturity (fair value of $8,113 and $7,556, respectively) | | | 7,500 | | | 7,500 |
Loans held for sale, at fair value | |
| 118,106 | |
| 166,448 |
Loans receivable, net | |
| 1,678,043 | |
| 1,544,981 |
Accrued interest receivable | |
| 7,797 | |
| 7,030 |
Premises and equipment, net | |
| 27,243 | |
| 27,343 |
Operating lease right-of-use (“ROU”) assets | | | 4,875 | | | 4,949 |
Federal Home Loan Bank (“FHLB”) stock, at cost | |
| 4,871 | |
| 7,439 |
Other real estate owned (“OREO”) | | | — | | | 90 |
Deferred tax asset, net | | | 303 | | | — |
Bank owned life insurance (“BOLI”), net | |
| 36,873 | |
| 36,226 |
Servicing rights, held at the lower of cost or fair value | |
| 16,497 | |
| 12,595 |
Goodwill | |
| 2,312 | |
| 2,312 |
Core deposit intangible, net | |
| 4,220 | |
| 4,751 |
Other assets | |
| 11,138 | |
| 9,705 |
TOTAL ASSETS | | $ | 2,228,694 | | $ | 2,113,241 |
LIABILITIES | |
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| |
|
|
Deposits: | |
|
| |
|
|
Noninterest-bearing accounts | | $ | 446,606 | | $ | 362,853 |
Interest-bearing accounts | |
| 1,417,044 | |
| 1,311,218 |
Total deposits | |
| 1,863,650 | |
| 1,674,071 |
Borrowings | |
| 42,528 | |
| 165,809 |
Subordinated notes: | |
| | |
| |
Principal amount | |
| 50,000 | |
| 10,000 |
Unamortized debt issuance costs | |
| (623) | |
| — |
Total subordinated notes less unamortized debt issuance costs | |
| 49,377 | |
| 10,000 |
Operating lease liabilities | | | 5,097 | | | 5,176 |
Deferred tax liability, net | |
| — | |
| 58 |
Other liabilities | | | 27,589 | |
| 28,120 |
Total liabilities | |
| 1,988,241 | |
| 1,883,234 |
COMMITMENTS AND CONTINGENCIES (NOTE 9) | |
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| |
|
|
STOCKHOLDERS’ EQUITY | |
|
| |
|
|
Preferred stock, $.01 par value; 5,000,000 shares authorized; NaN issued or outstanding | |
| — | |
| — |
Common stock, $.01 par value; 45,000,000 shares authorized; 8,208,045 and 8,475,912 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | |
| 82 | |
| 85 |
Additional paid-in capital | |
| 68,481 | |
| 81,275 |
Retained earnings | |
| 171,786 | |
| 146,405 |
Accumulated other comprehensive income, net of tax | | | 198 | | | 2,533 |
Unearned shares – Employee Stock Ownership Plan (“ESOP”) | |
| (94) | |
| (291) |
Total stockholders’ equity | |
| 240,453 | |
| 230,007 |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 2,228,694 | | $ | 2,113,241 |
Per share data has been adjusted for all periods to reflect a 2-for-one stock split effective July 14, 2021.
See accompanying notes to these consolidated financial statements.
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|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
ASSETS |
|
|
|
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|
|
|
Cash and due from banks |
| $ | 3,299 |
| $ | 3,590 |
|
Interest-bearing deposits at other financial institutions |
|
| 27,996 |
|
| 32,866 |
|
Total cash and cash equivalents |
|
| 31,295 |
|
| 36,456 |
|
Certificates of deposit at other financial institutions |
|
| 18,108 |
|
| 15,248 |
|
Securities available-for-sale, at fair value |
|
| 78,103 |
|
| 81,875 |
|
Loans held for sale, at fair value |
|
| 65,055 |
|
| 52,553 |
|
Loans receivable, net |
|
| 753,854 |
|
| 593,317 |
|
Accrued interest receivable |
|
| 3,217 |
|
| 2,524 |
|
Premises and equipment, net |
|
| 15,463 |
|
| 16,012 |
|
Federal Home Loan Bank (“FHLB”) stock, at cost |
|
| 3,047 |
|
| 2,719 |
|
Bank owned life insurance (“BOLI”), net |
|
| 10,262 |
|
| 10,054 |
|
Servicing rights, held at the lower of cost or fair value |
|
| 5,811 |
|
| 8,459 |
|
Goodwill |
|
| 2,312 |
|
| 2,312 |
|
Core deposit intangible, net |
|
| 1,417 |
|
| 1,717 |
|
Other assets |
|
| 5,947 |
|
| 4,680 |
|
TOTAL ASSETS |
| $ | 993,891 |
| $ | 827,926 |
|
LIABILITIES |
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Deposits: |
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|
|
|
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Noninterest-bearing accounts |
| $ | 166,964 |
| $ | 152,913 |
|
Interest-bearing accounts |
|
| 673,614 |
|
| 559,680 |
|
Total deposits |
|
| 840,578 |
|
| 712,593 |
|
Borrowings |
|
| 10,270 |
|
| 12,670 |
|
Subordinated note: |
|
|
|
|
|
|
|
Principal amount |
|
| 10,000 |
|
| 10,000 |
|
Unamortized debt issuance costs |
|
| (160) |
|
| (175) |
|
Total subordinated note less unamortized debt issuance costs |
|
| 9,840 |
|
| 9,825 |
|
Other liabilities |
|
| 14,964 |
|
| 11,805 |
|
Total liabilities |
|
| 875,652 |
|
| 746,893 |
|
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 |
|
| — |
|
| — |
|
Common stock, $.01 par value; 45,000,000 shares authorized; 3,674,902 and 3,059,503 shares issued and outstanding at September 30, 2017, and December 31, 2016, respectively |
|
| 37 |
|
| 31 |
|
Additional paid-in capital |
|
| 54,463 |
|
| 27,334 |
|
Retained earnings |
|
| 65,049 |
|
| 55,584 |
|
Accumulated other comprehensive loss, net of tax |
|
| (128) |
|
| (536) |
|
Unearned shares – Employee Stock Ownership Plan (“ESOP”) |
|
| (1,182) |
|
| (1,380) |
|
Total stockholders’ equity |
|
| 118,239 |
|
| 81,033 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 993,891 |
| $ | 827,926 |
|
3
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts) (Unaudited)
| | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
INTEREST INCOME | | |
| |
| |
| | ||||
Loans receivable, including fees | | $ | 23,520 | | $ | 21,066 | | $ | 67,538 | | $ | 62,370 |
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions | |
| 1,487 | |
| 1,162 | |
| 4,050 | |
| 3,520 |
Total interest and dividend income | |
| 25,007 | |
| 22,228 | |
| 71,588 | |
| 65,890 |
INTEREST EXPENSE | |
| | |
| | |
| | |
| |
Deposits | |
| 1,629 | |
| 2,637 | |
| 5,481 | |
| 9,670 |
Borrowings | |
| 227 | |
| 503 | |
| 895 | |
| 1,458 |
Subordinated notes | |
| 496 | |
| 170 | |
| 1,237 | |
| 511 |
Total interest expense | |
| 2,352 | |
| 3,310 | |
| 7,613 | |
| 11,639 |
NET INTEREST INCOME | |
| 22,655 | |
| 18,918 | |
| 63,975 | |
| 54,251 |
PROVISION FOR LOAN LOSSES | |
| 0 | |
| 3,100 | |
| 1,500 | |
| 11,435 |
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | |
| 22,655 | |
| 15,818 | |
| 62,475 | |
| 42,816 |
NONINTEREST INCOME | |
| | |
| | |
| | |
| |
Service charges and fee income | |
| 1,073 | |
| 546 | |
| 3,026 | |
| 1,566 |
Gain on sale of loans | |
| 6,885 | |
| 16,228 | |
| 24,962 | |
| 35,492 |
Gain on sale of investment securities | | | — | | | 118 | | | — | | | 300 |
Earnings on cash surrender value of BOLI | |
| 218 | |
| 219 | |
| 647 | |
| 650 |
Other noninterest income | |
| 222 | |
| 435 | |
| 983 | |
| 2,560 |
Total noninterest income | |
| 8,398 | |
| 17,546 | |
| 29,618 | |
| 40,568 |
NONINTEREST EXPENSE | |
| | |
| | |
| | |
| |
Salaries and benefits | |
| 12,790 | |
| 10,225 | |
| 36,331 | |
| 27,192 |
Operations | |
| 2,628 | |
| 2,809 | |
| 7,760 | |
| 7,785 |
Occupancy | |
| 1,227 | |
| 1,167 | |
| 3,592 | |
| 3,492 |
Data processing | |
| 1,309 | |
| 1,127 | |
| 3,819 | |
| 3,158 |
Loss on sale of OREO | |
| — | |
| — | |
| 9 | |
| 2 |
OREO expenses | | | — | | | — | | | — | | | 2 |
Loan costs | |
| 842 | |
| 593 | |
| 2,013 | |
| 1,544 |
Professional and board fees | |
| 757 | |
| 601 | |
| 2,365 | |
| 1,950 |
Federal Deposit Insurance Corporation (“FDIC”) insurance | |
| 120 | |
| 290 | |
| 491 | |
| 574 |
Marketing and advertising | |
| 177 | |
| 109 | |
| 429 | |
| 358 |
Amortization of core deposit intangible | |
| 177 | | | 176 | | | 531 | | | 529 |
(Recovery) impairment of servicing rights | | | (11) | | | 82 | | | (2,057) | | | 1,399 |
Total noninterest expense | |
| 20,016 | |
| 17,179 | |
| 55,283 | |
| 47,985 |
INCOME BEFORE PROVISION FOR INCOME TAXES | |
| 11,037 | |
| 16,185 | |
| 36,810 | |
| 35,399 |
PROVISION FOR INCOME TAXES | |
| 2,706 | |
| 3,472 | |
| 8,047 | |
| 7,499 |
NET INCOME | | $ | 8,331 | | $ | 12,713 | | $ | 28,763 | | $ | 27,900 |
Basic earnings per share | | $ | 0.99 | | $ | 1.50 | | $ | 3.38 | | $ | 3.25 |
Diluted earnings per share | | $ | 0.97 | | $ | 1.47 | | $ | 3.30 | | $ | 3.19 |
Per share data has been adjusted for all periods to reflect a 2-for-one stock split effective July 14, 2021.
See accompanying notes to these consolidated financial statements.
34
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands) (Unaudited)
(Dollars in thousands, except share amounts) (Unaudited)
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| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
INTEREST INCOME |
|
|
|
|
|
|
|
|
| ||||
Loans receivable, including fees |
| $ | 11,715 |
| $ | 9,241 |
| $ | 31,488 |
| $ | 26,014 |
|
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions |
|
| 637 |
|
| 538 |
|
| 2,034 |
|
| 1,751 |
|
Total interest and dividend income |
|
| 12,352 |
|
| 9,779 |
|
| 33,522 |
|
| 27,765 |
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 1,045 |
|
| 808 |
|
| 2,793 |
|
| 2,411 |
|
Borrowings |
|
| 114 |
|
| 50 |
|
| 259 |
|
| 177 |
|
Subordinated note |
|
| 171 |
|
| 171 |
|
| 508 |
|
| 512 |
|
Total interest expense |
|
| 1,330 |
|
| 1,029 |
|
| 3,560 |
|
| 3,100 |
|
NET INTEREST INCOME |
|
| 11,022 |
|
| 8,750 |
|
| 29,962 |
|
| 24,665 |
|
PROVISION FOR LOAN LOSSES |
|
| 450 |
|
| 600 |
|
| 450 |
|
| 1,800 |
|
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
|
| 10,572 |
|
| 8,150 |
|
| 29,512 |
|
| 22,865 |
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fee income |
|
| 879 |
|
| 899 |
|
| 2,743 |
|
| 2,489 |
|
Gain on sale of loans |
|
| 5,025 |
|
| 5,922 |
|
| 13,840 |
|
| 14,722 |
|
Gain on sale of investment securities |
|
| 143 |
|
| 146 |
|
| 380 |
|
| 146 |
|
Gain on sale of mortgage servicing rights (“MSR”) |
|
| 38 |
|
| — |
|
| 996 |
|
| — |
|
Earnings on cash surrender value of BOLI |
|
| 68 |
|
| 71 |
|
| 208 |
|
| 211 |
|
Other noninterest income |
|
| 274 |
|
| 210 |
|
| 637 |
|
| 557 |
|
Total noninterest income |
|
| 6,427 |
|
| 7,248 |
|
| 18,804 |
|
| 18,125 |
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
| 7,140 |
|
| 6,287 |
|
| 20,174 |
|
| 16,510 |
|
Operations |
|
| 1,577 |
|
| 1,450 |
|
| 4,506 |
|
| 4,221 |
|
Occupancy |
|
| 650 |
|
| 597 |
|
| 1,939 |
|
| 1,775 |
|
Data processing |
|
| 651 |
|
| 537 |
|
| 1,811 |
|
| 1,576 |
|
Gain on sale of other real estate owned (“OREO”) |
|
| — |
|
| — |
|
| — |
|
| (150) |
|
Loan costs |
|
| 726 |
|
| 715 |
|
| 1,977 |
|
| 1,789 |
|
Professional and board fees |
|
| 378 |
|
| 502 |
|
| 1,261 |
|
| 1,490 |
|
Federal Deposit Insurance Corporation (“FDIC”) insurance |
|
| 175 |
|
| 98 |
|
| 428 |
|
| 306 |
|
Marketing and advertising |
|
| 192 |
|
| 202 |
|
| 512 |
|
| 553 |
|
Acquisition costs |
|
| — |
|
| — |
|
| — |
|
| 389 |
|
Amortization of core deposit intangible |
|
| 100 |
|
| 140 |
|
| 300 |
|
| 382 |
|
(Recovery) impairment on servicing rights |
|
| — |
|
| (216) |
|
| 1 |
|
| (2) |
|
Total noninterest expense |
|
| 11,589 |
|
| 10,312 |
|
| 32,909 |
|
| 28,839 |
|
INCOME BEFORE PROVISION FOR INCOME TAXES |
|
| 5,410 |
|
| 5,086 |
|
| 15,407 |
|
| 12,151 |
|
PROVISION FOR INCOME TAXES |
|
| 1,956 |
|
| 1,629 |
|
| 5,001 |
|
| 4,198 |
|
NET INCOME |
| $ | 3,454 |
| $ | 3,457 |
| $ | 10,406 |
| $ | 7,953 |
|
Basic earnings per share |
| $ | 1.13 |
| $ | 1.21 |
| $ | 3.53 |
| $ | 2.74 |
|
Diluted earnings per share |
| $ | 1.07 |
| $ | 1.18 |
| $ | 3.31 |
| $ | 2.66 |
|
| | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Net income | | $ | 8,331 | | $ | 12,713 | | $ | 28,763 | | $ | 27,900 |
Other comprehensive (loss) income: | |
|
| |
|
| |
|
| |
|
|
Securities available-for-sale: | |
|
| |
|
| |
|
| |
|
|
Unrealized holding (loss) gain during period | |
| (1,653) | |
| 1 | |
| (4,162) | |
| 4,882 |
Income tax benefit (provision) related to unrealized holding (loss) gain | |
| 356 | |
| — | |
| 896 | |
| (1,049) |
Reclassification adjustment for realized gains, net included in net income | | | — | | | (118) | | | — | | | (300) |
Income tax provision related to reclassification for realized gains, net | | | — | | | 26 | | | — | | | 65 |
Cash flow hedges: | | | | | | | | | | | | |
Unrealized derivative (losses) gains during period | |
| (57) | |
| (43) | |
| 814 | |
| (1,485) |
Income tax benefit (provision) related to unrealized derivative (losses) gains | | | 12 | | | 8 | | | (175) | | | 318 |
Reclassification adjustment for realized loss, net included in net income | | | 135 | | | 98 | | | 373 | | | 84 |
Income tax benefit related to reclassification, net | |
| (29) | |
| (21) | |
| (81) | |
| (18) |
Other comprehensive (loss) income, net of tax | |
| (1,236) | |
| (49) | |
| (2,335) | |
| 2,497 |
COMPREHENSIVE INCOME | | $ | 7,095 | | $ | 12,664 | | $ | 26,428 | | $ | 30,397 |
See accompanying notes to these consolidated financial statements.
45
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share amounts) (Unaudited)
Three Months Ended September 30, 2020 and 2021
| | | | | | | | | | | | | | | | | | | | |
|
| |
| | |
| | |
| | |
| Accumulated |
| | |
| | | |
| | | | | | | | | | | | | Other | | | | | | | |
| | | | | | | Additional | | | | | Comprehensive | | Unearned | | Total | ||||
| | Common Stock | | Paid-in | | Retained | | Income, | | ESOP | | Stockholders’ | ||||||||
| | Shares | | Amount | | Capital | | Earnings | | Net of Tax | | Shares | | Equity | ||||||
BALANCE, July 1, 2020 |
| 8,490,082 | | $ | 84 | | $ | 81,574 | | $ | 124,090 | | $ | 3,334 | | $ | (441) | | $ | 208,641 |
Net income |
| — | | $ | — | |
| — | |
| 12,713 | |
| — | |
| — | | $ | 12,713 |
Dividends paid ($0.11 per share) |
| — | | $ | — | |
| — | |
| (882) | |
| — | |
| — | | $ | (882) |
Share-based compensation |
| — | | $ | — | |
| 272 | |
| — | |
| — | |
| — | | $ | 272 |
Restricted stock awards | | 49,760 | | $ | 1 | | | — | | | — | | | — | | | — | | $ | 1 |
Common stock repurchased |
| (22,020) | | $ | — | |
| (447) | |
| — | |
| — | |
| — | | $ | (447) |
Common stock repurchased for employee/director taxes paid on restricted stock awards | | (1,640) | | $ | — | | | (35) | | | — | | | — | | | — | | $ | (35) |
Stock options exercised, net |
| 10,000 | | $ | — | |
| 85 | |
| — | |
| — | |
| — | | $ | 85 |
Other comprehensive loss, net of tax |
| — | | $ | — | |
| — | |
| — | |
| (49) | |
| — | | $ | (49) |
ESOP shares allocated |
| — | | $ | — | |
| 185 | |
| — | |
| — | |
| 66 | | $ | 251 |
BALANCE, September 30, 2020 |
| 8,526,182 | | $ | 85 | | $ | 81,634 | | $ | 135,921 | | $ | 3,285 | | $ | (375) | | $ | 220,550 |
| | | | | | | | | | | | | | | | | | | | |
BALANCE, July 1, 2021 |
| 8,333,566 | | $ | 83 | | $ | 75,797 | | $ | 164,606 | | $ | 1,434 | | $ | (160) | | $ | 241,760 |
Net income |
| — | | $ | — | |
| — | |
| 8,331 | |
| — | |
| — | | $ | 8,331 |
Dividends paid ($0.14 per share) |
| — | | $ | — | |
| — | |
| (1,151) | |
| — | |
| — | | $ | (1,151) |
Share-based compensation |
| — | | $ | — | |
| 402 | |
| — | |
| — | |
| — | | $ | 402 |
Restricted stock awards | | 41,350 | | $ | — | | | — | | | — | | | — | | | — | | $ | — |
Common stock repurchased | | (264,805) | | $ | (2) | | | (6,825) | | | — | | | — | | | — | | $ | (6,827) |
Common stock repurchased for employee/director taxes paid on restricted stock |
| (5,970) | | $ | — | |
| (212) | |
| — | |
| — | |
| — | | $ | (212) |
Stock options exercised, net | | 103,904 | | $ | 1 | | | (1,054) | | | — | | | — | | | — | | $ | (1,053) |
Other comprehensive loss, net of tax |
| — | | $ | — | |
| — | |
| — | |
| (1,236) | |
| — | | $ | (1,236) |
ESOP shares allocated |
| — | | $ | — | |
| 373 | |
| — | |
| — | |
| 66 | | $ | 439 |
BALANCE, September 30, 2021 |
| 8,208,045 | | $ | 82 | | $ | 68,481 | | $ | 171,786 | | $ | 198 | | $ | (94) | | $ | 240,453 |
(In thousands) (Unaudited)Per share data has been adjusted for all periods to reflect a 2-for-one stock split effective July 14, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net Income |
| $ | 3,454 |
| $ | 3,457 |
| $ | 10,406 |
| $ | 7,953 |
|
Other comprehensive income, before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain during period |
|
| 80 |
|
| 29 |
|
| 1,012 |
|
| 1,224 |
|
Income tax provision related to unrealized holding gain |
|
| (28) |
|
| (8) |
|
| (357) |
|
| (433) |
|
Reclassification adjustment for realized gain included in net income |
|
| (143) |
|
| (146) |
|
| (380) |
|
| (146) |
|
Income tax provision related to reclassification for realized gain |
|
| 50 |
|
| 50 |
|
| 133 |
|
| 50 |
|
Other comprehensive (loss) income, net of tax |
|
| (41) |
|
| (75) |
|
| 408 |
|
| 695 |
|
COMPREHENSIVE INCOME |
| $ | 3,413 |
| $ | 3,382 |
| $ | 10,814 |
| $ | 8,648 |
|
See accompanying notes to these consolidated financial statements.
56
Nine Months Ended September 30, 2020 and 2021
| | | | | | | | | | | | | | | | | | | | |
|
| |
| | |
| | |
| | |
| Accumulated |
| | |
| | | |
| | | | | | | | | | | | | Other | | | | | | | |
| | | | | | | Additional | | | | | Comprehensive | | Unearned | | Total | ||||
| | Common Stock | | Paid-in | | Retained | | Income, | | ESOP | | Stockholders’ | ||||||||
| | Shares | | Amount | | Capital | | Earnings | | Net of Tax | | Shares | | Equity | ||||||
BALANCE, January 1, 2020 |
| 8,918,082 | | $ | 89 | | $ | 89,223 | | $ | 110,715 | | $ | 788 | | $ | (573) | | $ | 200,242 |
Net income |
| — | | $ | — | |
| — | |
| 27,900 | |
| — | |
| — | | $ | 27,900 |
Dividends paid ($0.31 per share) |
| — | | $ | — | |
| — | |
| (2,694) | |
| — | |
| — | | $ | (2,694) |
Share-based compensation |
| — | | $ | — | |
| 719 | |
| — | |
| — | |
| — | | $ | 719 |
Restricted stock awards | | 49,760 | | $ | 1 | | | — | | | — | | | — | | | — | | $ | 1 |
Common stock repurchased - repurchase plan |
| (468,816) | | $ | (5) | |
| (8,670) | |
| — | |
| — | |
| — | | $ | (8,675) |
Common stock repurchased for employee/director taxes paid on restricted stock awards | | (1,640) | | $ | — | | | (35) | | | — | | | — | | | — | | $ | (35) |
Stock options exercised |
| 28,796 | | $ | — | |
| (161) | |
| — | |
| — | |
| — | | $ | (161) |
Other comprehensive income, net of tax |
| — | | $ | — | |
| — | |
| — | |
| 2,497 | |
| — | | $ | 2,497 |
ESOP shares allocated |
| — | | $ | — | |
| 558 | |
| — | |
| — | |
| 198 | | $ | 756 |
BALANCE, September 30, 2020 |
| 8,526,182 | | $ | 85 | | $ | 81,634 | | $ | 135,921 | | $ | 3,285 | | $ | (375) | | $ | 220,550 |
| | | | | | | | | | | | | | | | | | | | |
BALANCE, January 1, 2021 |
| 8,475,912 | | $ | 85 | | $ | 81,275 | | $ | 146,405 | | $ | 2,533 | | $ | (291) | | $ | 230,007 |
Net income |
| — | | $ | — | |
| — | |
| 28,763 | |
| — | |
| — | | $ | 28,763 |
Dividends paid ($0.41 per share) |
| — | | $ | — | |
| — | |
| (3,382) | |
| — | |
| — | | $ | (3,382) |
Share-based compensation |
| — | | $ | — | |
| 995 | |
| — | |
| — | |
| — | | $ | 995 |
Restricted stock awards |
| 41,350 | | $ | — | |
| — | |
| — | |
| — | |
| — | | $ | — |
Common stock repurchased | | (480,225) | | $ | (4) | | | (12,638) | | | — | | | — | | | — | | $ | (12,642) |
Common stock repurchased for employee/director taxes paid on restricted stock awards |
| (5,970) | | $ | — | |
| (212) | |
| — | |
| — | |
| — | | $ | (212) |
Stock options exercised, net |
| 176,978 | | $ | 1 | |
| (2,077) | |
| — | |
| — | |
| — | | $ | (2,076) |
Other comprehensive loss, net of tax |
| — | | $ | — | |
| — | |
| — | |
| (2,335) | |
| — | | $ | (2,335) |
ESOP shares allocated |
| — | | $ | — | |
| 1,138 | |
| — | |
| — | |
| 197 | | $ | 1,335 |
BALANCE, September 30, 2021 |
| 8,208,045 | | $ | 82 | | $ | 68,481 | | $ | 171,786 | | $ | 198 | | $ | (94) | | $ | 240,453 |
FS BANCORP, INC. AND SUBSIDIARYPer share data has been adjusted for all periods to reflect 2-for-one split effective July 14, 2021.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share amounts) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
| |
|
|
|
|
|
|
| Additional |
|
|
|
| Other |
| Unearned |
| Total | ||||
|
| Common Stock |
| Paid-in |
| Retained |
| Comprehensive |
| ESOP |
| Stockholders’ | ||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Income, Net of Tax |
| Shares |
| Equity | ||||||
BALANCE, January 1, 2016 |
| 3,242,120 |
| $ | 32 |
| $ | 30,692 |
| $ | 46,175 |
| $ | 78 |
| $ | (1,637) |
| $ | 75,340 |
Net income |
| — |
| $ | — |
|
| — |
|
| 7,953 |
|
| — |
|
| — |
| $ | 7,953 |
Dividends paid ($0.26 per share) |
| — |
| $ | — |
|
| — |
|
| (802) |
|
| — |
|
| — |
| $ | (802) |
Share-based compensation |
| — |
| $ | — |
|
| 588 |
|
| — |
|
| — |
|
| — |
| $ | 588 |
Restricted stock awards |
| 4,500 |
| $ | — |
|
| — |
|
| — |
|
| — |
|
| — |
| $ | — |
Common stock repurchased |
| (198,167) |
| $ | (1) |
|
| (4,902) |
|
| — |
|
| — |
|
| — |
| $ | (4,903) |
Stock options exercised |
| 9,300 |
| $ | — |
|
| 157 |
|
| — |
|
| — |
|
| — |
| $ | 157 |
Other comprehensive income, net of tax |
| — |
| $ | — |
|
| — |
|
| — |
|
| 695 |
|
| — |
| $ | 695 |
ESOP shares allocated |
| — |
| $ | — |
|
| 331 |
|
| — |
|
| — |
|
| 198 |
| $ | 529 |
BALANCE, September 30, 2016 |
| 3,057,753 |
| $ | 31 |
| $ | 26,866 |
| $ | 53,326 |
| $ | 773 |
| $ | (1,439) |
| $ | 79,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, January 1, 2017 |
| 3,059,503 |
| $ | 31 |
| $ | 27,334 |
| $ | 55,584 |
| $ | (536) |
| $ | (1,380) |
| $ | 81,033 |
Net income |
| — |
| $ | — |
|
| — |
|
| 10,406 |
|
| — |
|
| — |
| $ | 10,406 |
Dividends paid ($0.31 per share) |
| — |
| $ | — |
|
| — |
|
| (941) |
|
| — |
|
| — |
| $ | (941) |
Proceeds from public offering, net of expenses |
| 587,234 |
| $ | 6 |
|
| 25,612 |
|
| — |
|
| — |
|
| — |
| $ | 25,618 |
Share-based compensation |
| — |
| $ | — |
|
| 496 |
|
| — |
|
| — |
|
| — |
| $ | 496 |
Common stock repurchased |
| (6,198) |
| $ | — |
|
| (275) |
|
| — |
|
| — |
|
| — |
| $ | (275) |
Stock options exercised |
| 34,363 |
| $ | — |
|
| 580 |
|
| — |
|
| — |
|
| — |
| $ | 580 |
Other comprehensive income, net of tax |
| — |
| $ | — |
|
| — |
|
| — |
|
| 408 |
|
| — |
| $ | 408 |
ESOP shares allocated |
| — |
| $ | — |
|
| 716 |
|
| — |
|
| — |
|
| 198 |
| $ | 914 |
BALANCE, September 30, 2017 |
| 3,674,902 |
| $ | 37 |
| $ | 54,463 |
| $ | 65,049 |
| $ | (128) |
| $ | (1,182) |
| $ | 118,239 |
See accompanying notes to these consolidated financial statements.
67
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
.
| | | | | | |
|
| Nine Months Ended September 30, | ||||
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES |
| 2021 |
| 2020 | ||
Net income | | $ | 28,763 | | $ | 27,900 |
Adjustments to reconcile net income to net cash from (used by) operating activities | |
|
| |
|
|
Provision for loan losses | |
| 1,500 | |
| 11,435 |
Depreciation, amortization and accretion | |
| 11,674 | |
| 9,336 |
Compensation expense related to stock options and restricted stock awards | |
| 995 | |
| 719 |
ESOP compensation expense for allocated shares | |
| 1,335 | |
| 756 |
Increase in cash surrender value of BOLI | |
| (647) | |
| (650) |
Gain on sale of loans held for sale | |
| (24,856) | |
| (35,492) |
Gain on sale of portfolio loans | | | (106) | | | 0 |
Gain on sale of investment securities | | | 0 | | | (300) |
Origination of loans held for sale | |
| (1,048,120) | |
| (1,260,250) |
Proceeds from sale of loans held for sale | |
| 1,133,395 | |
| 1,140,003 |
(Recovery) impairment of servicing rights | | | (2,057) | | | 1,399 |
Loss on sale of OREO | |
| 9 | |
| 2 |
Changes in operating assets and liabilities | |
|
| |
|
|
Accrued interest receivable | |
| (767) | |
| (901) |
Other assets | |
| (2,590) | |
| (246) |
Other liabilities | |
| 997 | |
| 6,897 |
Net cash from (used by) operating activities | |
| 99,525 | |
| (99,392) |
CASH FLOWS USED BY INVESTING ACTIVITIES | |
|
| |
|
|
Activity in securities available-for-sale: | |
|
| |
|
|
Proceeds from sale of investment securities | | | 0 | | | 12,214 |
Maturities, prepayments, and calls | |
| 20,923 | |
| 30,034 |
Purchases | |
| (117,152) | |
| (90,610) |
Maturities of certificates of deposit at other financial institutions | |
| 496 | |
| 6,640 |
Portfolio loan originations and principal collections, net | |
| (156,603) | |
| (134,436) |
Purchase of portfolio loans | | | (1,070) | | | (32,743) |
Proceeds from sale of portfolio loans | |
| 2,699 | |
| 0 |
Proceeds from sale of OREO, net | | | 81 | | | 76 |
Purchase of premises and equipment, net | | | (1,921) | | | (1,189) |
Change in FHLB stock, net | |
| 2,568 | |
| 1,492 |
Net cash used by investing activities | |
| (249,979) | |
| (208,522) |
CASH FLOWS FROM FINANCING ACTIVITIES | |
|
| |
|
|
Net increase in deposits | |
| 189,470 | |
| 220,997 |
Proceeds from borrowings | |
| 8,000 | |
| 549,557 |
Repayments of borrowings | | | (131,281) | | | (460,781) |
Dividends paid on common stock | |
| (3,382) | |
| (2,694) |
Net proceeds from issuance of subordinated notes | | | 49,333 | | | 0 |
Repayment of subordinated notes | | | (10,000) | | | 0 |
Disbursements from stock options exercised, net | |
| (2,076) | |
| (161) |
Restricted stock awards | | | (212) | | | (34) |
Common stock repurchased | |
| (12,642) | |
| (8,675) |
Net cash from financing activities | |
| 87,210 | |
| 298,209 |
NET DECREASE IN CASH AND CASH EQUIVALENTS | |
| (63,244) | |
| (9,705) |
| | | | | | |
CASH AND CASH EQUIVALENTS, beginning of period | |
| 91,576 | |
| 45,778 |
CASH AND CASH EQUIVALENTS, end of period | | $ | 28,332 | | $ | 36,073 |
8
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands) (Unaudited)
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION | |
|
| |
|
|
Cash paid during the period for: | |
|
| |
|
|
Interest on deposits and borrowings | | $ | 6,540 | | $ | 11,128 |
Income taxes | | | 7,824 | | | 7,804 |
| | | | | | |
SUPPLEMENTARY DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES | |
| | |
| |
Change in unrealized (loss) gain on investment securities | | $ | (4,162) | | $ | 4,582 |
Change in unrealized gain (loss) on cash flow hedges | | | 1,187 | | | (1,401) |
Retention in gross mortgage servicing rights from loan sales | | | 7,567 | | | 7,634 |
Right-of-use assets in exchange for lease liabilities | | | 979 | | | 1,202 |
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | ||||
|
| 2017 |
| 2016 | ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
Net income |
| $ | 10,406 |
| $ | 7,953 |
Adjustments to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
Provision for loan losses |
|
| 450 |
|
| 1,800 |
Depreciation, amortization and accretion |
|
| 2,577 |
|
| 3,779 |
Compensation expense related to stock options and restricted stock awards |
|
| 496 |
|
| 588 |
ESOP compensation expense for allocated shares |
|
| 914 |
|
| 529 |
Increase in cash surrender value of BOLI |
|
| (208) |
|
| (211) |
Gain on sale of loans held for sale |
|
| (13,840) |
|
| (14,722) |
Gain on sale of investment securities |
|
| (380) |
|
| (146) |
Gain on sale of OREO |
|
| — |
|
| (150) |
Gain on sale of MSR |
|
| (996) |
|
| — |
Origination of loans held for sale |
|
| (520,358) |
|
| (584,073) |
Proceeds from sale of loans held for sale |
|
| 520,091 |
|
| 564,218 |
Impairment (recovery) of servicing rights |
|
| 1 |
|
| (2) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
Accrued interest receivable |
|
| (693) |
|
| (450) |
Other assets |
|
| (79) |
|
| (7,481) |
Other liabilities |
|
| 2,668 |
|
| 5,063 |
Net cash from (used by) operating activities |
|
| 1,049 |
|
| (23,305) |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
Activity in securities available-for-sale: |
|
|
|
|
|
|
Proceeds from sale of investment securities |
|
| 39,103 |
|
| 13,577 |
Maturities, prepayments, sales, and calls |
|
| 6,531 |
|
| 9,039 |
Purchases |
|
| (41,320) |
|
| (47,432) |
Maturities of certificates of deposit at other financial institutions |
|
| 1,240 |
|
| 292 |
Purchase of certificates of deposit at other financial institutions |
|
| (4,102) |
|
| (1,882) |
Loan originations and principal collections, net |
|
| (129,763) |
|
| (93,871) |
Purchase of portfolio loans |
|
| (32,342) |
|
| — |
Proceeds from sale of other real estate owned, net |
|
| — |
|
| 682 |
Purchase of premises and equipment, net |
|
| (623) |
|
| (2,287) |
FHLB stock, net |
|
| (328) |
|
| 2,547 |
Proceeds from sale of MSR |
|
| 4,827 |
|
| — |
Net cash received from acquisition |
|
| — |
|
| 180,356 |
Net cash (used by) from investing activities |
|
| (156,777) |
|
| 61,021 |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
Net increase in deposits |
|
| 127,985 |
|
| 37,630 |
Borrowings, net |
|
| (2,400) |
|
| (77,740) |
Dividends paid |
|
| (941) |
|
| (802) |
Proceeds from stock options exercised |
|
| 580 |
|
| 157 |
Common stock repurchased |
|
| (275) |
|
| (4,903) |
Proceeds from issuance of common stock |
|
| 25,618 |
|
| — |
Net cash from (used by) financing activities |
|
| 150,567 |
|
| (45,658) |
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
| (5,161) |
|
| (7,942) |
CASH AND CASH EQUIVALENTS, beginning of period |
|
| 36,456 |
|
| 24,455 |
CASH AND CASH EQUIVALENTS, end of period |
| $ | 31,295 |
| $ | 16,513 |
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
Interest |
| $ | 3,528 |
| $ | 2,931 |
Income taxes |
| $ | 5,800 |
| $ | 4,420 |
Assets acquired in acquisition of branches (Note 2) |
| $ | — |
| $ | 181,575 |
Liabilities assumed in acquisition of branches (Note 2) |
| $ | — |
| $ | 186,393 |
SUPPLEMENTARY DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
Change in unrealized gain on investment securities |
| $ | 631 |
| $ | 1,079 |
Transfer portfolio loans to loans held for sale |
| $ | 1,886 |
| $ | — |
Property received in settlement of loans |
| $ | — |
| $ | 525 |
Retention of gross mortgage servicing rights from loan sales |
| $ | 3,569 |
| $ | 2,927 |
See accompanying notes to these consolidated financial statements
79
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 proposed 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 1121 full-service bank branches, a headquarters that produces loans and sevenaccepts deposits, and 11 loan production offices in suburban communities in the greater Puget Sound area which includes Snohomish, King, Pierce, Jefferson, Kitsap, Clallam, Grays Harbor, Thurston, and ClallamLewis counties, and one1 loan production office in the market area of the Tri-Cities, Washington. The Bank provides loan and deposit services to customers who are predominantly smallsmall- and middle-market businesses and individuals. The Bank acquired four retail bank branches from Bank of America, National Association (“Bank of America”) (two in Clallam and two in Jefferson counties) on January 22, 2016, and these branches opened as 1st Security Bank branches on January 25, 2016. The Company and its subsidiary are subject to regulation by certain federal and state agencies and undergo periodic examination by these regulatory agencies.
Pursuant to the Plan of Conversion (the “Plan”), the Company’s Board of Directors adopted an employee stock ownership plan (“ESOP”) which purchased 8% of the common stock in the open market or 259,210 shares. As provided for in the Plan, the Bank also established a liquidation account in the amount of retained earnings at December 31, 2011. The liquidation account is maintained for the benefit of eligible savings account holders at June 30, 2007, and supplemental eligible account holders as of March 31, 2012, who maintain deposit accounts at the Bank after the conversion. The conversion was accounted for as a change in corporate form with the historic basis of the Company’s assets, liabilities, and equity unchanged as a result.
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‑Q10-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‑K10-K with all of the audited information and footnotes required by U.S. GAAP for complete financial statements for the year ended December 31, 2016,2020, as filed with the SEC on March 16, 2017.2021. In the opinion of management, all normal adjustments and recurring accruals considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.
The results for the three and nine months ended September 30, 20172021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017,2021, 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, and the valuation of servicing rights.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 into the nearest thousands of dollars except per share amounts. In the narrative footnote discussion, amounts are rounded and presented in millions of dollars to one decimal point ifIf the amounts are above $1.0 million. Amounts below $1.0 million, they are rounded one decimal point, and presented in dollars to the nearest thousands. Certain prior year amounts have been reclassified to conform to the 2017 presentation with no change to consolidated net income or stockholders’ equity previously reported.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 two2 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
8
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“Note 15 - Business Segments.”
Subsequent Events - The Company has evaluated events and transactions subsequent to September 30, 2017,2021 for potential recognition or disclosure.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014,June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014‑09, Revenue from Contracts with Customers (Topic 606), which creates Topic 606 and supersedes Topic 605, Revenue Recognition. In August 2015, FASB issued ASU No. 2015‑14, Revenue from Contracts with Customers (Topic 606), which postponed the effective date of 2014‑09. In March 2016, the FASB issued ASU 2016‑08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amended the principal versus agent implementation guidance set for in ASU 2014‑09. Among other things, ASU 2016‑08 clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued ASU No. 2016‑10, Revenue from Contracts with Customers (Topic 606):Identifying Performance Obligations and Licensing. The ASU amends certain aspects of the guidance set forth in the FASB’s new revenue standard related to identifying performance obligations and licensing implementation. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In May 2016, the FASB issued ASU No. 2016‑12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in certain narrow areas and adds some practical expedients, but does not change the core revenue recognition principle in Topic 606. The ASU is effective for public entities for interim and annual periods beginning after December 15, 2017; early adoption is not permitted. For financial reporting purposes, the ASU allows for either full retrospective adoption, meaning the ASU is applied to all of the periods presented, or modified retrospective adoption, meaning the ASU is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. As a bank holding company, key revenue sources, such as interest income have been identified as out of the scope of this new guidance. The Company’s preliminary analysis suggests that the adoption of this accounting standard is not expected to have a material impact on the Company’s consolidated financial statements as substantially all of the Company’s other revenues are also excluded from the scope of the new guidance. New accounting guidance related to the adoption of this standard continues to be released by the FASB, which could impact the Company’s preliminary analysis of materiality and may change the preliminary conclusions reached as to the application of this new guidance.
In January 2016, the FASB issued ASU No. 2016‑01, Financial Instruments - Overall (Subtopic 825‑10), Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendments in this ASU require the exit price notion be used when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The ASU also requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU No. 2016‑01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within
9
those fiscal years. Early adoption is permitted for certain provisions. The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016‑02, Leases (Topic 842). ASU No. 2016‑02 requires lessees to recognize on the balance sheet the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income. For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis. The amendments in ASU 2016‑02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in the ASU is permitted. Once adopted, we expect to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, however, based on current leases, the adoption of ASU 2016‑02 is expected to increase the new lease asset and related lease liability on our Consolidated Balance Sheets by less than 5% and not to have a material impact on our regulatory capital ratios.
In June 2016, the FASB issued ASU No. 2016‑13, 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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
10
organizations. The ASU requires the recognition and measurement of all current expected credit losses (“CECL”) for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.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 isand associated amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.2022. Early applicationadoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. 2019.
The Company is currently evaluatinghas 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 this ASUadoption 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 Company’s consolidated financial statements.composition of the loan 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, we expect ourthe Company anticipates the allowance for loan losses to increasechange through a one‑timeone-time adjustment to retained earnings, however, until ourthe evaluation is complete the magnitude of the increasepotential change will be unknown.
In August 2016,April 2019, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts2019-04, Codification Improvements to Topic 326: Financial Instruments-Credit Losses, Topic 815, Derivatives and Cash PaymentsHedging, and Topic 825, Financial Instruments. This ASU is intended to address the appropriate classificationclarifies and improves areas of eight specific cash flow issues on the cash flow statement. Debt prepayment costs should be classified as an outflow for financing activities. Settlement of zero-coupon debt instruments divides the interest portion as an outflow for operating activities and the principal portion as an outflow for financing activities. Contingent consideration payments made after a business combination should be classified as outflows for financing and operating activities. Proceeds from the settlement of bank-owned life insurance policies should be classified as inflows from investing activities. Other specific areas are identified in the ASU asguidance related to the appropriate classification of the cash inflows or outflows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017,recently issued standards on credit losses, hedging, and recognition and measurement including interim periods within those fiscal years.improvements resulting from various FASB Transition Resource Group meetings. Early adoption is permitted and must be applied using a retrospective transition methodpermitted. The Company plans to each period presented. Adoptionadopt Topic 326 of this ASU, 2016-15in conjunction with ASU No. 2016-13, on January 1, 2022. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017,May 2019, the FASB issued ASU 2017‑04, Intangibles - Goodwill and Other2019-05, Financial Instruments-Credit Losses (Topic 350)326): SimplifyingTargeted Transition Relief. The amendments in this ASU provide entities that have certain instruments within the Test for Goodwill Impairment. The ASU was issuedscope of Subtopic 326-20 with an option to simplify the subsequent measurement of goodwill and the amendment eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by
10
comparingirrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’sTopic 326. The fair value; however, the loss recognized shouldvalue option election does not exceed the total amount of goodwill allocatedapply to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.held-to-maturity debt securities. An entity still hasthat elects the fair value option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. This ASU is effective for annual reporting periodsfiscal years beginning after December 31, 2019.15, 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 of the ASU is permitted. The Company expectsplans to adopt this ASU, to provide a simplified methodin conjunction with ASU No. 2016-13, on January 1, 2022. The adoption of measuring goodwill impairment and doesTopic 326 is not expect this ASUexpected to have a material impact on the Company’s consolidated financial statements.
In March 2017,2020, the FASB issued ASU No. 2017‑08, 2020-04, “Reference Rate Reform” (“Topic 848”). This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU apply to contract modifications that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) Modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) Modifications of contracts within the scope of Topics 840, Leases, and 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (for example, the incremental borrowing rate) or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted
11
for as separate contracts; and 3) Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging - Embedded Derivatives. In January 2021, ASU 2021-01 updated amendments in the new ASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this ASU and the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the effective dates. The amendments in this ASU have differing effective dates, beginning with an interim period including and subsequent to March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.
Recent Events - On December 27, 2020, the Consolidated Appropriations Act (“CAA 2021”) was signed into law. Among other purposes, this act provides additional coronavirus emergency response and relief, including extending relief offered under the Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 (“CARES Act”) related to troubled debt restructurings (“TDRs”) as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.
Application of New Accounting Guidance Adopted in 2021
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20: Receivables – Nonrefundable Fees and Other Costs (Subtopic 310‑20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortensclarifies that the amortization period for certainCompany should reevaluate whether a callable debt securities held atsecurity is within the scope of paragraph 310-20-35-33 for each reporting period. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The adoption of ASU 2020-08 did not have a premium.material impact on the consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The standard will take effectamendments in this ASU simplify the accounting for SEC filersincome 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, 2018.2020. The adoption of ASU No. 2017‑08 is2019-12 did not expected to have a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017‑09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to this ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award is the same after the modification as compared to the original award prior to the modification. The standard is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of ASU No. 2017‑09 is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting recognition and presentation requirements in ASC 815 to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU No. 2017-12 is not expected to have a material impact on the Company's consolidated financial statements.
NOTE 2 - BUSINESS COMBINATION
On January 22, 2016, the Company’s wholly-owned subsidiary, 1st Security Bank, completed the purchase of four branches (“Branch Purchase”) from Bank of America. The Branch Purchase included four retail bank branches located in the communities of Port Angeles, Sequim, Port Townsend, and Hadlock, Washington. In accordance with the Purchase and Assumption Agreement, dated as of September 1, 2015, between Bank of America and 1st Security Bank, the Bank acquired $186.4 million of deposits, a small portfolio of performing loans, two owned bank branches, three leases associated with the bank branches and parking facilities and certain other assets of the branches. In consideration of the purchased assets and transferred liabilities, 1st Security Bank paid (a) the unpaid principal balance and accrued interest of $419,000 for the loans acquired, (b) the net book value, or approximately $778,000, for the bank facilities and certain other assets associated with the acquired branches, and (c) a deposit premium of 2.50% on substantially all of the deposits assumed, which equated to approximately $4.8 million. The transaction was settled with Bank of America paying cash of $180.4 million to 1st Security Bank for the difference between these amounts and the total deposits assumed.
The Branch Purchase was accounted for under the acquisition method of accounting and accordingly, the assets and liabilities were recorded at their fair values on January 22, 2016, the date of acquisition. Determining the fair value of
11
assets and liabilities is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values become available. During the second quarter of 2016, the Company completed a re-evaluation of the core deposit intangible because a portion of the core deposits were excluded from the original valuation. The updated valuation of the core deposit intangible increased the fair value adjustment by $100,000 to $2.2 million from $2.1 million resulting in a decrease of $100,000 to the fair value adjustment of goodwill. The impact to consolidated net income was an increase in the amortization of the core deposit intangible for the six months ended June 30, 2016 of $6,000 and was not considered material to the consolidated financial statements.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
| Acquired Book |
| Fair Value |
| Amount | |||
January 22, 2016 |
| Value |
| Adjustments |
| Recorded | |||
Assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 180,356 |
| $ | — |
| $ | 180,356 |
Loans receivable |
|
| 417 |
|
| — |
|
| 417 |
Premises and equipment, net |
|
| 697 |
|
| 267 | (1) |
| 964 |
Accrued interest receivable |
|
| 2 |
|
| — |
|
| 2 |
Core deposit intangible |
|
| — |
|
| 2,239 | (2) |
| 2,239 |
Goodwill |
|
| — |
|
| 2,312 | (3) |
| 2,312 |
Other assets |
|
| 103 |
|
| — |
|
| 103 |
Total assets acquired |
| $ | 181,575 |
| $ | 4,818 |
| $ | 186,393 |
Liabilities |
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
Noninterest-bearing accounts |
| $ | 79,966 |
| $ | — |
| $ | 79,966 |
Interest-bearing accounts |
|
| 106,398 |
|
| — |
|
| 106,398 |
Total deposits |
|
| 186,364 |
|
| — |
|
| 186,364 |
Accrued interest payable |
|
| 7 |
|
| — |
|
| 7 |
Other liabilities |
|
| 22 |
|
| — |
|
| 22 |
Total liabilities assumed |
| $ | 186,393 |
| $ | — |
| $ | 186,393 |
Explanation of Fair Value Adjustments
|
|
|
|
|
|
Goodwill - The acquired goodwill represents the excess purchase price over the estimated fair value of the net assets acquired and was recorded at $2.3 million on January 22, 2016.
12
The following table summarizes the aggregate amount recognized for each major class of assets acquired and liabilities assumed by 1st Security Bank in the Branch Purchase:
|
|
|
|
|
| At January 22, | |
|
| 2016 | |
Purchase price (1) |
| $ | 6,015 |
Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value: |
|
|
|
Cash and cash equivalents |
|
| 186,371 |
Acquired loans |
|
| 417 |
Premises and equipment, net |
|
| 964 |
Accrued interest receivable |
|
| 2 |
Core deposit intangible |
|
| 2,239 |
Other assets |
|
| 103 |
Deposits |
|
| (186,364) |
Accrued interest payable |
|
| (7) |
Other liabilities |
|
| (22) |
Total fair value of identifiable net assets |
|
| 3,703 |
Goodwill |
| $ | 2,312 |
|
|
Core deposit intangible
The core deposit intangible represents the fair value of the acquired core deposit base. The core deposit intangible will be amortized on an accelerated basis over approximately nine years. Total amortization expense was $100,000 and $300,000 for the three and nine months ended September 30, 2017, and $140,000 and $382,000 for the same periods in 2016. Amortization expense for core deposit intangible is expected to be as follows at September 30, 2017:
|
|
|
|
Fourth Quarter 2017 |
| $ | 100 |
2018 |
|
| 307 |
2019 |
|
| 235 |
2020 |
|
| 181 |
2021 |
|
| 166 |
Thereafter |
|
| 428 |
Total |
| $ | 1,417 |
13
NOTE 3 - SECURITIES AVAILABLE-FOR-SALEINVESTMENTS
The following tables present the amortized costs, unrealized gains, unrealized losses, and estimated fair values of securities available-for-sale and held-to-maturity at September 30, 20172021 and December 31, 2016:2020:
| | | | | | | | | | | | |
| | September 30, 2021 | ||||||||||
|
| | |
| | |
| | |
| Estimated | |
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
SECURITIES AVAILABLE-FOR-SALE | | Cost | | Gains | | Losses | | Values | ||||
U.S. agency securities | | $ | 26,155 | | $ | 175 | | $ | (148) | | $ | 26,182 |
Corporate securities | |
| 9,495 | |
| 35 | |
| (388) | |
| 9,142 |
Municipal bonds | |
| 130,806 | |
| 1,443 | |
| (2,940) | |
| 129,309 |
Mortgage-backed securities | |
| 85,314 | |
| 2,181 | |
| (364) | |
| 87,131 |
U.S. Small Business Administration securities | |
| 16,736 | |
| 356 | |
| (54) | |
| 17,038 |
Total securities available-for-sale | | | 268,506 | | | 4,190 | | | (3,894) | | | 268,802 |
| | | | | | | | | | | | |
SECURITIES HELD-TO-MATURITY | | | | | | | | | | | | |
Corporate securities | | | 7,500 | | | 613 | | | — | | | 8,113 |
Total securities held-to-maturity | | | 7,500 | | | 613 | | | — | | | 8,113 |
| | | | | | | | | | | | |
Total securities | | $ | 276,006 | | $ | 4,803 | | $ | (3,894) | | $ | 276,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 | ||||||||||
|
|
|
|
|
|
|
|
|
|
| Estimated | |
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair | ||||
|
| Cost |
| Gains |
| Losses |
| Values | ||||
SECURITIES AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
| $ | 6,086 |
| $ | 59 |
| $ | (23) |
| $ | 6,122 |
Corporate securities |
|
| 7,123 |
|
| 29 |
|
| (77) |
|
| 7,075 |
Municipal bonds |
|
| 11,342 |
|
| 213 |
|
| (116) |
|
| 11,439 |
Mortgage-backed securities |
|
| 39,733 |
|
| 85 |
|
| (344) |
|
| 39,474 |
U.S. Small Business Administration securities |
|
| 14,018 |
|
| 43 |
|
| (68) |
|
| 13,993 |
Total securities available-for-sale |
| $ | 78,302 |
| $ | 429 |
| $ | (628) |
| $ | 78,103 |
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | ||||||||||
|
|
|
|
|
|
|
|
|
|
| Estimated | |
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair | ||||
|
| Cost |
| Gains |
| Losses |
| Values | ||||
SECURITIES AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
| $ | 8,150 |
| $ | 12 |
| $ | (94) |
| $ | 8,068 |
Corporate securities |
|
| 7,654 |
|
| 14 |
|
| (168) |
|
| 7,500 |
Municipal bonds |
|
| 15,183 |
|
| 164 |
|
| (83) |
|
| 15,264 |
Mortgage-backed securities |
|
| 45,856 |
|
| 52 |
|
| (713) |
|
| 45,195 |
U.S. Small Business Administration securities |
|
| 5,862 |
|
| 27 |
|
| (41) |
|
| 5,848 |
Total securities available-for-sale |
| $ | 82,705 |
| $ | 269 |
| $ | (1,099) |
| $ | 81,875 |
| | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||
|
| | |
| | |
| | |
| Estimated | |
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
SECURITIES AVAILABLE-FOR-SALE | | Cost | | Gains | | Losses | | Values | ||||
U.S. agency securities | | $ | 7,940 | | $ | 166 | | $ | (1) | | $ | 8,105 |
Corporate securities | |
| 11,885 | |
| 54 | |
| (939) | |
| 11,000 |
Municipal bonds | |
| 69,572 | |
| 2,435 | |
| (150) | |
| 71,857 |
Mortgage-backed securities | |
| 65,722 | |
| 2,541 | |
| (76) | |
| 68,187 |
U.S. Small Business Administration securities | |
| 18,441 | |
| 443 | |
| (15) | |
| 18,869 |
Total securities available-for-sale | | | 173,560 | | | 5,639 | | | (1,181) | | | 178,018 |
| | | | | | | | | | | | |
SECURITIES HELD-TO-MATURITY | | | | | | | | | | | | |
Corporate securities | | | 7,500 | | | 77 | | | (21) | | | 7,556 |
Total securities held-to-maturity | | | 7,500 | | | 77 | | | (21) | | | 7,556 |
| | | | | | | | | | | | |
Total securities | | $ | 181,060 | | $ | 5,716 | | $ | (1,202) | | $ | 185,574 |
At September 30, 2017,2021, the Bank had pledged nine7 securities held at the FHLB of Des Moines with a carrying value of $10.9$8.4 million to secure Washington State public deposits of $5.2$13.1 million with a $2.0$5.1 million collateral requirement by the Washington Public Deposit Protection Commission. At December 31, 2020, the Bank pledged 7 securities held at the FHLB of Des Moines with a carrying value of $8.8 million to secure Washington State public deposits of $13.2 million with a $5.3 million minimum collateral requirement by the Washington Public Deposit Protection Commission. At September 30, 2021, the Bank had pledged 2 securities with a total carrying value of $3.4 million to secure interest rate swaps designated as cash flow hedges. See “Note 5- Derivatives”, for detail on the Bank’s interest rate swaps.
Investment securities that were in an unrealized loss position at September 30, 20172021 and December 31, 20162020 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 | ||||||||||||||||
|
| Less than 12 Months |
| 12 Months or Longer |
| Total | ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
SECURITIES AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
| $ | 3,014 |
| $ | (23) |
| $ | — |
| $ | — |
| $ | 3,014 |
| $ | (23) |
Corporate securities |
|
| — |
|
| — |
|
| 1,919 |
|
| (77) |
|
| 1,919 |
|
| (77) |
Municipal bonds |
|
| 4,834 |
|
| (116) |
|
| — |
|
| — |
|
| 4,834 |
|
| (116) |
Mortgage-backed securities |
|
| 22,266 |
|
| (247) |
|
| 4,773 |
|
| (97) |
|
| 27,039 |
|
| (344) |
U.S. Small Business Administration securities |
|
| 9,425 |
|
| (68) |
|
| — |
|
| — |
|
| 9,425 |
|
| (68) |
Total |
| $ | 39,539 |
| $ | (454) |
| $ | 6,692 |
| $ | (174) |
| $ | 46,231 |
| $ | (628) |
| | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | ||||||||||||||||
| | 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 | | $ | 2,903 | | $ | (74) | | $ | 1,914 | | $ | (74) | | $ | 4,817 | | $ | (148) |
Corporate securities | | | — | | | — | | | 5,612 | | | (388) | | | 5,612 | | | (388) |
Municipal bonds | | | 73,562 | | | (2,757) | | | 6,114 | | | (183) | | | 79,676 | | | (2,940) |
Mortgage-backed securities | |
| 17,442 | |
| (227) | |
| 4,790 | | | (137) | |
| 22,232 | |
| (364) |
U.S. Small Business Administration securities | | | 2,107 | | | (54) | | | — | | | — | | | 2,107 | | | (54) |
Total securities available-for-sale | | $ | 96,014 | | $ | (3,112) | | $ | 18,430 | | $ | (782) | | $ | 114,444 | | $ | (3,894) |
1413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | ||||||||||||||||
|
| Less than 12 Months |
| 12 Months or Longer |
| Total | ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
SECURITIES AVAILABLE-FOR-SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
| $ | 6,998 |
| $ | (94) |
| $ | — |
| $ | — |
| $ | 6,998 |
| $ | (94) |
Corporate securities |
|
| 5,048 |
|
| (106) |
|
| 1,438 |
|
| (62) |
|
| 6,486 |
|
| (168) |
Municipal bonds |
|
| 6,741 |
|
| (83) |
|
| — |
|
| — |
|
| 6,741 |
|
| (83) |
Mortgage-backed securities |
|
| 39,373 |
|
| (713) |
|
| — |
|
| — |
|
| 39,373 |
|
| (713) |
U.S. Small Business Administration securities |
|
| 2,963 |
|
| (41) |
|
| — |
|
| — |
|
| 2,963 |
|
| (41) |
Total |
| $ | 61,123 |
| $ | (1,037) |
| $ | 1,438 |
| $ | (62) |
| $ | 62,561 |
| $ | (1,099) |
| | | | | | | | | | | | | | | | | | |
| | December 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 | ||||||
U.S. agency securities | | $ | 1,986 | | $ | (1) | | $ | — | | $ | — | | $ | 1,986 | | $ | (1) |
Corporate securities | |
| 7,059 | |
| (939) | |
| — | |
| — | |
| 7,059 | |
| (939) |
Municipal bonds | | | 8,377 | | | (150) | | | — | | | — | | | 8,377 | | | (150) |
Mortgage-backed securities | |
| 6,903 | |
| (65) | |
| 3,002 | |
| (11) | |
| 9,905 | |
| (76) |
U.S. Small Business Administration securities | |
| 2,314 | |
| (15) | |
| — | |
| — | |
| 2,314 | |
| (15) |
Total securities available-for-sale | | | 26,639 | | | (1,170) | | | 3,002 | | | (11) | | | 29,641 | | | (1,181) |
| | | | | | | | | | | | | | | | | | |
SECURITIES HELD-TO-MATURITY | | | | | | | | | | | | | | | | | | |
Corporate securities | | | 4,979 | | | (21) | | | — | | | — | | | 4,979 | | | (21) |
Total securities held-to-maturity | | | 4,979 | | | (21) | | | — | | | — | | | 4,979 | | | (21) |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 31,618 | | $ | (1,191) | | $ | 3,002 | | $ | (11) | | $ | 34,620 | | $ | (1,202) |
There were 2863 investments with unrealized losses of less than one year, and five10 investments with an unrealized lossesloss of more than one year at September 30, 2017.2021. There were 4821 investments with unrealized losses of less than one year, and two investments1 investment with an unrealized lossesloss of more than one year at December 31, 2016.2020. The unrealized losses associated with these investments are believed to be caused by changes inchanging market interest ratesconditions 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. NoBased on the Company’s evaluation of these securities, 0 other-than-temporary impairment was recorded for the nine months ended September 30, 2017,2021, or for the year ended December 31, 2016.
15
2020. Additional deterioration in market and economic conditions, 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 and held-to-maturity at September 30, 20172021 and December 31, 20162020 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.
| | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | ||||||||
SECURITIES AVAILABLE-FOR-SALE |
| Amortized |
| Fair |
| Amortized |
| Fair | ||||
U.S. agency securities | | Cost | | Value | | Cost | | Value | ||||
Due after one year through five years | | $ | 964 | | $ | 1,025 | | $ | 978 | | $ | 1,060 |
Due after five years through ten years | | | 6,916 | | | 6,939 | | | 1,000 | | | 1,036 |
Due after ten years | | | 18,275 | | | 18,218 | | | 5,962 | | | 6,009 |
Subtotal | |
| 26,155 | |
| 26,182 | |
| 7,940 | |
| 8,105 |
Corporate securities | |
|
| |
|
| |
|
| |
|
|
Due in one year or less | |
| 0 | |
| 0 | |
| 2,392 | |
| 2,433 |
Due after one year through five years | |
| 3,495 | |
| 3,530 | |
| 3,493 | |
| 3,491 |
Due after five years through ten years | | | 4,000 | | | 3,691 | | | 4,000 | | | 3,676 |
Due after ten years | | | 2,000 | | | 1,921 | | | 2,000 | | | 1,400 |
Subtotal | |
| 9,495 | |
| 9,142 | |
| 11,885 | |
| 11,000 |
Municipal bonds | |
|
| |
|
| |
|
| |
|
|
Due in one year or less | |
| 0 | |
| 0 | |
| 101 | |
| 101 |
Due after one year through five years | |
| 3,730 | |
| 3,899 | |
| 3,749 | |
| 3,980 |
Due after five years through ten years | |
| 6,879 | |
| 7,069 | |
| 7,994 | |
| 8,321 |
Due after ten years | |
| 120,197 | |
| 118,341 | |
| 57,728 | |
| 59,455 |
Subtotal | |
| 130,806 | |
| 129,309 | |
| 69,572 | |
| 71,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 | ||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair | ||||
|
| Cost |
| Value |
| Cost |
| Value | ||||
U.S. agency securities |
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years |
| $ | — |
| $ | — |
| $ | 4,000 |
| $ | 3,956 |
Due after five years through ten years |
|
| 4,086 |
|
| 4,141 |
|
| 4,150 |
|
| 4,112 |
Due after ten years |
|
| 2,000 |
|
| 1,981 |
|
| — |
|
| — |
Subtotal |
|
| 6,086 |
|
| 6,122 |
|
| 8,150 |
|
| 8,068 |
Corporate securities |
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years |
|
| 5,127 |
|
| 5,156 |
|
| 5,659 |
|
| 5,625 |
Due after five years through ten years |
|
| 1,996 |
|
| 1,919 |
|
| 1,995 |
|
| 1,875 |
Subtotal |
|
| 7,123 |
|
| 7,075 |
|
| 7,654 |
|
| 7,500 |
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
| — |
|
| — |
|
| 509 |
|
| 513 |
Due after one year through five years |
|
| 2,013 |
|
| 2,059 |
|
| 5,326 |
|
| 5,386 |
Due after five years through ten years |
|
| 3,297 |
|
| 3,420 |
|
| 7,476 |
|
| 7,492 |
Due after ten years |
|
| 6,032 |
|
| 5,960 |
|
| 1,872 |
|
| 1,873 |
Subtotal |
|
| 11,342 |
|
| 11,439 |
|
| 15,183 |
|
| 15,264 |
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association (“FNMA”) |
|
| 22,287 |
|
| 22,187 |
|
| 23,522 |
|
| 23,197 |
Federal Home Loan Mortgage Corporation (“FHLMC”) |
|
| 11,123 |
|
| 10,970 |
|
| 14,950 |
|
| 14,662 |
Government National Mortgage Association (“GNMA”) |
|
| 6,323 |
|
| 6,317 |
|
| 7,384 |
|
| 7,336 |
Subtotal |
|
| 39,733 |
|
| 39,474 |
|
| 45,856 |
|
| 45,195 |
U.S. Small Business Administration securities |
|
|
|
|
|
|
|
|
|
|
|
|
Due after five years through ten years |
|
| 12,069 |
|
| 12,051 |
|
| 5,862 |
|
| 5,848 |
Due after ten years |
|
| 1,949 |
|
| 1,942 |
|
| — |
|
| — |
Subtotal |
|
| 14,018 |
|
| 13,993 |
|
| 5,862 |
|
| 5,848 |
Total |
| $ | 78,302 |
| $ | 78,103 |
| $ | 82,705 |
| $ | 81,875 |
14
Mortgage-backed securities | |
|
| |
|
| |
|
| |
|
|
Federal National Mortgage Association (“FNMA”) | |
| 71,249 | |
| 72,877 | |
| 47,675 | |
| 50,005 |
Federal Home Loan Mortgage Corporation (“FHLMC”) | |
| 9,789 | |
| 9,907 | |
| 11,825 | |
| 11,913 |
Government National Mortgage Association (“GNMA”) | |
| 4,276 | |
| 4,347 | |
| 6,222 | |
| 6,269 |
Subtotal | |
| 85,314 | |
| 87,131 | |
| 65,722 | |
| 68,187 |
U.S. Small Business Administration securities | |
|
| |
|
| |
|
| |
|
|
Due after one year through five years | |
| 2,518 | |
| 2,568 | |
| 2,266 | |
| 2,353 |
Due after five years through ten years | | | 4,463 | | | 4,605 | | | 8,097 | | | 8,333 |
Due after ten years | | | 9,755 | | | 9,865 | | | 8,078 | | | 8,183 |
Subtotal | | | 16,736 | | | 17,038 | | | 18,441 | | | 18,869 |
Total securities available-for-sale | | | 268,506 | | | 268,802 | | | 173,560 | | | 178,018 |
| | | | | | | | | | | | |
SECURITIES HELD-TO-MATURITY | | | | | | | | | | | | |
Corporate securities | | | | | | | | | | | | |
Due after five years through ten years | | | 7,500 | | | 8,113 | | | 7,500 | | | 7,556 |
Total securities held-to-maturity | | | 7,500 | | | 8,113 | | | 7,500 | | | 7,556 |
| | | | | | | | | | | | |
Total securities | | $ | 276,006 | | $ | 276,915 | | $ | 181,060 | | $ | 185,574 |
TheThere were 0 sales proceeds, and resulting gains andor losses computed using specific identification, from salesthe sale of securities available-for-sale for the three and nine months ended September 30, 20172021, compared to $3.0 million and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||||||||
|
| September 30, 2017 |
| September 30, 2017 | ||||||||||||||
|
|
|
| Gross |
| Gross |
|
|
| Gross |
| Gross | ||||||
|
| Proceeds |
| Gains |
| (Losses) |
| Proceeds |
| Gains |
| (Losses) | ||||||
Securities available-for-sale |
| $ | 9,115 |
| $ | 143 |
| $ | - |
| $ | 39,103 |
| $ | 413 |
| $ | (33) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||||||||
|
| September 30, 2016 |
| September 30, 2016 | ||||||||||||||
|
|
|
| Gross |
| Gross |
|
|
| Gross |
| Gross | ||||||
|
| Proceeds |
| Gains |
| (Losses) |
| Proceeds |
| Gains |
| (Losses) | ||||||
Securities available-for-sale |
| $ | 13,577 |
| $ | 149 |
| $ | (3) |
| $ | 13,577 |
| $ | 149 |
| $ | (3) |
$12.2 million in proceeds and $119,000 and $300,000 in gains for the three and nine months ended September 30, 2020, respectively.
16
NOTE 43 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio was as follows at September 30, 20172021 and December 31, 2016:2020:
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
REAL ESTATE LOANS | �� |
|
|
|
|
|
Commercial |
| $ | 63,180 |
| $ | 55,871 |
Construction and development |
|
| 129,407 |
|
| 94,462 |
Home equity |
|
| 24,026 |
|
| 20,081 |
One-to-four-family (excludes loans held for sale) |
|
| 170,187 |
|
| 124,009 |
Multi-family |
|
| 43,408 |
|
| 37,527 |
Total real estate loans |
|
| 430,208 |
|
| 331,950 |
CONSUMER LOANS |
|
|
|
|
|
|
Indirect home improvement |
|
| 124,387 |
|
| 107,759 |
Solar |
|
| 40,082 |
|
| 36,503 |
Marine |
|
| 35,173 |
|
| 28,549 |
Other consumer |
|
| 2,032 |
|
| 1,915 |
Total consumer loans |
|
| 201,674 |
|
| 174,726 |
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
Commercial and industrial |
|
| 83,221 |
|
| 65,841 |
Warehouse lending |
|
| 50,468 |
|
| 32,898 |
Total commercial business loans |
|
| 133,689 |
|
| 98,739 |
Total loans receivable, gross |
|
| 765,571 |
|
| 605,415 |
Allowance for loan losses |
|
| (10,598) |
|
| (10,211) |
Deferred costs, fees, premiums, and discounts, net |
|
| (1,119) |
|
| (1,887) |
Total loans receivable, net |
| $ | 753,854 |
| $ | 593,317 |
| | | | | | |
|
| September 30, |
| December 31, | ||
REAL ESTATE LOANS | | 2021 |
| 2020 | ||
Commercial | | $ | 217,911 | | $ | 222,719 |
Construction and development | |
| 250,099 | |
| 216,975 |
Home equity | |
| 42,095 | |
| 43,093 |
One-to-four-family (excludes loans held for sale) | |
| 365,326 | |
| 311,093 |
Multi-family | |
| 165,240 | |
| 131,601 |
Total real estate loans | |
| 1,040,671 | |
| 925,481 |
CONSUMER LOANS | |
| | |
|
|
Indirect home improvement | |
| 325,630 | |
| 286,020 |
Marine | |
| 83,827 | |
| 85,740 |
Other consumer | |
| 3,188 | |
| 3,418 |
Total consumer loans | |
| 412,645 | |
| 375,178 |
COMMERCIAL BUSINESS LOANS | |
| | |
|
|
Commercial and industrial | |
| 207,064 | |
| 224,476 |
Warehouse lending | |
| 49,289 | |
| 49,092 |
Total commercial business loans | |
| 256,353 | |
| 273,568 |
Total loans receivable, gross | |
| 1,709,669 | |
| 1,574,227 |
Allowance for loan and lease losses | |
| (26,925) | |
| (26,172) |
Deferred costs and fees, net | | | (4,978) | | | (4,017) |
Premiums on purchased loans, net | |
| 277 | |
| 943 |
Total loans receivable, net | | $ | 1,678,043 | | $ | 1,544,981 |
Most of the Company’s commercial and multi-family real estate, construction, residential, and/or commercial business lending activities are with customers located in the greater Puget Sound areaWestern Washington and near our onethe loan production office located in the Tri-Cities, Washington. The Company originates real estate, consumer, and commercial business loans and has concentrations
15
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, Minnesota, and California. The Company also originates solar loans through contractors and dealers in the state of California.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 September 30, 2021, the Bank held approximately $742.8 million in loans that are pledged as collateral for FHLB advances, compared to approximately $774.8 million at December 31, 2020. The Bank held approximately $415.1 million in loans that are pledged as collateral for the Federal Reserve Bank of San Francisco (“FRB”) line of credit at September 30, 2021, compared to approximately $369.2 million at December 31, 2020.
Included in the carrying value of gross loans are net discounts on loans purchased in the Anchor Bank acquisition in November 2018 (“Anchor Acquisition”). The remaining net discount on loans acquired was $868,000 and $1.5 million, on $90.8 million and $132.6 million of gross loans at September 30, 2021 and December 31, 2020, respectively.
The Company has defined its loan portfolio into three3 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 three3 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
17
generally not pre-sold. A portion of the one-to-four-family construction portfolio areis 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.non-owner-occupied properties with four or less units. These loans originated by the Company or periodically 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(5 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‑2UCC-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.
Solar. Fixture secured loans forinstallations, including solar related home improvement projects are originated by the Company through its network of contractors and dealers, and are secured by the personal property installed in, on, or at the borrower’s real property, and which may be perfected with a UCC‑2 financing statement filed in the county of the borrower’s residence.projects.
Marine. Loans originated by the Company, secured by boats, to borrowers primarily located in its market areas.the states the Company originates 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.credit and credit cards.
16
Commercial Business Loans
Commercial and Industrial Lending (“C&I”). Loans originated by the Company to local smallsmall- and mid-sized businesses in our Puget Sound market area are secured primarily by accounts receivable, inventory, or personal property, and plant and equipment. Commercial and industrialSome 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. PPP loans originated by the Company are also included in this loan class.
Warehouse Lending. Loans originated to non-depository financial institutions and secured by notes originated by the non-depository financial institution. The Company has 2 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 mortgage andcommercial construction warehouse lines are secured by notes on construction loans and typically guaranteed by principals with experience in construction lending. Mortgage warehouse lending programloans are funded through whichthird-party residential mortgage bankers. Under this program the Company funds third-party lendersprovides short-term funding to the mortgage banking companies for the purpose of originating residential mortgage and construction loans for sale into the secondary market and speculative construction loans for residential properties built for sale to single family households. These loans are secured by the notes and assigned deeds of trust associated with the residential mortgage and construction loans on properties primarily located in the Company’s market areas.
18
market.
The following tables detail activity in the allowance for loan losses by loan categories at or for the three and nine months ended September 30, 20172021 and 2016:2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At or For the Three Months Ended September 30, 2017 | |||||||||||||
|
|
|
|
|
|
|
| Commercial |
|
|
|
|
|
| |
|
| Real Estate |
| Consumer |
| Business |
| Unallocated |
| Total | |||||
ALLOWANCE FOR LOAN LOSSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | 4,144 |
| $ | 2,669 |
| $ | 2,453 |
| $ | 877 |
| $ | 10,143 |
Provision for loan losses |
|
| 481 |
|
| 65 |
|
| (130) |
|
| 34 |
|
| 450 |
Charge-offs |
|
| (55) |
|
| (152) |
|
| (33) |
|
| — |
|
| (240) |
Recoveries |
|
| 35 |
|
| 208 |
|
| 2 |
|
| — |
|
| 245 |
Net (charge-offs) recoveries |
|
| (20) |
|
| 56 |
|
| (31) |
|
| — |
|
| 5 |
Ending balance |
| $ | 4,605 |
| $ | 2,790 |
| $ | 2,292 |
| $ | 911 |
| $ | 10,598 |
Period end amount allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
Loans collectively evaluated for impairment |
|
| 4,605 |
|
| 2,790 |
|
| 2,292 |
|
| 911 |
|
| 10,598 |
Ending balance |
| $ | 4,605 |
| $ | 2,790 |
| $ | 2,292 |
| $ | 911 |
| $ | 10,598 |
LOANS RECEIVABLE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
| $ | 210 |
| $ | — |
| $ | 551 |
| $ | — |
| $ | 761 |
Loans collectively evaluated for impairment |
|
| 429,998 |
|
| 201,674 |
|
| 133,138 |
|
| — |
|
| 764,810 |
Ending balance |
| $ | 430,208 |
| $ | 201,674 |
| $ | 133,689 |
| $ | — |
| $ | 765,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| At or For the Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| Commercial |
|
|
|
|
|
| ||||||||||||||||
|
| Real Estate |
| Consumer |
| Business |
| Unallocated |
| Total | ||||||||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
| | At or For the Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
|
| | |
| | |
| Commercial |
| | |
| | | ||||||||||||||||
ALLOWANCE FOR LOAN LOSSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Real Estate | | Consumer | | Business | | Unallocated | | Total | |||||
Beginning balance |
| $ | 3,547 |
| $ | 2,082 |
| $ | 2,675 |
| $ | 1,907 |
| $ | 10,211 | | $ | 14,308 | | $ | 7,023 | | $ | 5,674 | | $ | 229 | | $ | 27,234 |
Provision for loan losses |
|
| 1,077 |
|
| 726 |
|
| (357) |
|
| (996) |
|
| 450 | |||||||||||||||
Provision (recapture) for loan losses | |
| 124 | |
| (2,315) | |
| 620 | |
| 1,571 | |
| — | |||||||||||||||
Charge-offs |
|
| (55) |
|
| (536) |
|
| (33) |
|
| — |
|
| (624) | |
| — | |
| (428) | |
| — | |
| — | |
| (428) |
Recoveries |
|
| 36 |
|
| 518 |
|
| 7 |
|
| — |
|
| 561 | |
| — | |
| 119 | |
| — | |
| — | |
| 119 |
Net charge-offs |
|
| (19) |
|
| (18) |
|
| (26) |
|
| — |
|
| (63) | |
| — | |
| (309) | |
| — | |
| — | |
| (309) |
Ending balance |
| $ | 4,605 |
| $ | 2,790 |
| $ | 2,292 |
| $ | 911 |
| $ | 10,598 | | $ | 14,432 | | $ | 4,399 | | $ | 6,294 | | $ | 1,800 | | $ | 26,925 |
Period end amount allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Loans individually evaluated for impairment |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — | | $ | — | | $ | 243 | | $ | 991 | | $ | — | | $ | 1,234 |
Loans collectively evaluated for impairment |
|
| 4,605 |
|
| 2,790 |
|
| 2,292 |
|
| 911 |
|
| 10,598 | |
| 14,432 | |
| 4,156 | |
| 5,303 | |
| 1,800 | |
| 25,691 |
Ending balance |
| $ | 4,605 |
| $ | 2,790 |
| $ | 2,292 |
| $ | 911 |
| $ | 10,598 | | $ | 14,432 | | $ | 4,399 | | $ | 6,294 | | $ | 1,800 | | $ | 26,925 |
LOANS RECEIVABLE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Loans individually evaluated for impairment |
| $ | 210 |
| $ | — |
| $ | 551 |
| $ | — |
| $ | 761 | | $ | 755 | | $ | 694 | | $ | 4,487 | | $ | — | | $ | 5,936 |
Loans collectively evaluated for impairment |
|
| 429,998 |
|
| 201,674 |
|
| 133,138 |
|
| — |
|
| 764,810 | |
| 1,039,916 | |
| 411,951 | |
| 251,866 | |
| — | |
| 1,703,733 |
Ending balance |
| $ | 430,208 |
| $ | 201,674 |
| $ | 133,689 |
| $ | — |
| $ | 765,571 | | $ | 1,040,671 | | $ | 412,645 | | $ | 256,353 | | $ | — | | $ | 1,709,669 |
1917
| | | | | | | | | | | | | | | |
| | At or For the Three Months Ended September 30, 2020 | |||||||||||||
|
| | |
| | |
| Commercial |
| | |
| | | |
ALLOWANCE FOR LOAN LOSSES | | Real Estate | | Consumer | | Business | | Unallocated | | Total | |||||
Beginning balance | | $ | 11,912 | | $ | 5,132 | | $ | 4,248 | | $ | 232 | | $ | 21,524 |
Provision (recapture) for loan losses | |
| 907 | |
| 1,891 | |
| 335 | |
| (33) | |
| 3,100 |
Charge-offs | |
| — | |
| (196) | |
| (11) | |
| — | |
| (207) |
Recoveries | |
| — | |
| 254 | |
| 128 | |
| — | |
| 382 |
Net recoveries | |
| — | |
| 58 | |
| 117 | |
| — | |
| 175 |
Ending balance | | $ | 12,819 | | $ | 7,081 | | $ | 4,700 | | $ | 199 | | $ | 24,799 |
Period end amount allocated to: | |
|
| |
|
| |
|
| |
|
| |
|
|
Loans individually evaluated for impairment | | $ | 15 | | $ | 274 | | $ | 1,057 | | $ | — | | $ | 1,346 |
Loans collectively evaluated for impairment | |
| 12,804 | |
| 6,807 | |
| 3,643 | |
| 199 | |
| 23,453 |
Ending balance | | $ | 12,819 | | $ | 7,081 | | $ | 4,700 | | $ | 199 | | $ | 24,799 |
LOANS RECEIVABLE | |
|
| |
|
| |
|
| |
|
| |
|
|
Loans individually evaluated for impairment | | $ | 2,456 | | $ | 781 | | $ | 4,324 | | $ | — | | $ | 7,561 |
Loans collectively evaluated for impairment | |
| 888,396 | |
| 364,027 | |
| 259,434 | |
| — | |
| 1,511,857 |
Ending balance | | $ | 890,852 | | $ | 364,808 | | $ | 263,758 | | $ | — | | $ | 1,519,418 |
FS BANCORP, INC. AND SUBSIDIARY
| | | | | | | | | | | | | | | |
| | At or For the Nine Months Ended September 30, 2021 | |||||||||||||
|
| | |
| | |
| Commercial |
| | |
| | | |
ALLOWANCE FOR LOAN LOSSES | | Real Estate | | Consumer | | Business | | Unallocated | | Total | |||||
Beginning balance | | $ | 13,846 | | $ | 6,696 | | $ | 4,939 | | $ | 691 | | $ | 26,172 |
Provision (recapture) for loan losses | |
| 586 | |
| (1,588) | |
| 1,393 | |
| 1,109 | |
| 1,500 |
Charge-offs | |
| — | |
| (1,280) | |
| (38) | |
| — | |
| (1,318) |
Recoveries | |
| — | |
| 571 | |
| — | |
| — | |
| 571 |
Net charge-offs | |
| — | |
| (709) | |
| (38) | |
| — | |
| (747) |
Ending balance | | $ | 14,432 | | $ | 4,399 | | $ | 6,294 | | $ | 1,800 | | $ | 26,925 |
Period end amount allocated to: | |
|
| |
|
| |
|
| |
|
| |
|
|
Loans individually evaluated for impairment | | $ | — | | $ | 243 | | $ | 991 | | $ | — | | $ | 1,234 |
Loans collectively evaluated for impairment | |
| 14,432 | |
| 4,156 | |
| 5,303 | |
| 1,800 | |
| 25,691 |
Ending balance | | $ | 14,432 | | $ | 4,399 | | $ | 6,294 | | $ | 1,800 | | $ | 26,925 |
LOANS RECEIVABLE | |
|
| |
|
| |
|
| |
|
| |
|
|
Loans individually evaluated for impairment | | $ | 755 | | $ | 694 | | $ | 4,487 | | $ | — | | $ | 5,936 |
Loans collectively evaluated for impairment | |
| 1,039,916 | |
| 411,951 | |
| 251,866 | |
| — | |
| 1,703,733 |
Ending balance | | $ | 1,040,671 | | $ | 412,645 | | $ | 256,353 | | $ | — | | $ | 1,709,669 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At or For the Three Months Ended September 30, 2016 | |||||||||||||
|
|
|
|
|
|
|
| Commercial |
|
|
|
|
|
| |
|
| Real Estate |
| Consumer |
| Business |
| Unallocated |
| Total | |||||
ALLOWANCE FOR LOAN LOSSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | 3,477 |
| $ | 2,039 |
| $ | 1,823 |
| $ | 1,612 |
| $ | 8,951 |
Provision for loan losses |
|
| 242 |
|
| 1 |
|
| 252 |
|
| 105 |
|
| 600 |
Charge-offs |
|
| (65) |
|
| (232) |
|
| — |
|
| — |
|
| (297) |
Recoveries |
|
| 64 |
|
| 262 |
|
| 6 |
|
| — |
|
| 332 |
Net (charge-offs) recoveries |
|
| (1) |
|
| 30 |
|
| 6 |
|
| — |
|
| 35 |
Ending balance |
| $ | 3,718 |
| $ | 2,070 |
| $ | 2,081 |
| $ | 1,717 |
| $ | 9,586 |
Period end amount allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
Loans collectively evaluated for impairment |
|
| 3,718 |
|
| 2,070 |
|
| 2,081 |
|
| 1,717 |
|
| 9,586 |
Ending balance |
| $ | 3,718 |
| $ | 2,070 |
| $ | 2,081 |
| $ | 1,717 |
| $ | 9,586 |
LOANS RECEIVABLE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
| $ | 209 |
| $ | — |
| $ | — |
| $ | — |
| $ | 209 |
Loans collectively evaluated for impairment |
|
| 316,309 |
|
| 170,576 |
|
| 117,124 |
|
| — |
|
| 604,009 |
Ending balance |
| $ | 316,518 |
| $ | 170,576 |
| $ | 117,124 |
| $ | — |
| $ | 604,218 |
| | | | | | | | | | | | | | | |
| | At or For the Nine Months Ended September 30, 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 | |
| 6,595 | |
| 3,606 | |
| 1,038 | |
| 196 | |
| 11,435 |
Charge-offs | |
| — | |
| (869) | |
| (22) | |
| — | |
| (891) |
Recoveries | |
| 18 | |
| 578 | |
| 430 | |
| — | |
| 1,026 |
Net recoveries (charge-offs) | |
| 18 | |
| (291) | |
| 408 | |
| — | |
| 135 |
Ending balance | | $ | 12,819 | | $ | 7,081 | | $ | 4,700 | | $ | 199 | | $ | 24,799 |
Period end amount allocated to: | |
|
| |
|
| |
|
| |
|
| |
|
|
Loans individually evaluated for impairment | | $ | 15 | | $ | 274 | | $ | 1,057 | | $ | — | | $ | 1,346 |
Loans collectively evaluated for impairment | |
| 12,804 | |
| 6,807 | |
| 3,643 | |
| 199 | |
| 23,453 |
Ending balance | | $ | 12,819 | | $ | 7,081 | | $ | 4,700 | | $ | 199 | | $ | 24,799 |
LOANS RECEIVABLE | |
|
| |
|
| |
|
| |
|
| |
|
|
Loans individually evaluated for impairment | | $ | 2,456 | | $ | 781 | | $ | 4,324 | | $ | — | | $ | 7,561 |
Loans collectively evaluated for impairment | |
| 888,396 | |
| 364,027 | |
| 259,434 | |
| — | |
| 1,511,857 |
Ending balance | | $ | 890,852 | | $ | 364,808 | | $ | 263,758 | | $ | — | | $ | 1,519,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At or For the Nine Months Ended September 30, 2016 | |||||||||||||
|
|
|
|
|
|
|
| Commercial |
|
|
|
|
|
| |
|
| Real Estate |
| Consumer |
| Business |
| Unallocated |
| Total | |||||
ALLOWANCE FOR LOAN LOSSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | 2,874 |
| $ | 1,681 |
| $ | 1,396 |
| $ | 1,834 |
| $ | 7,785 |
Provision for loan losses |
|
| 794 |
|
| 519 |
|
| 604 |
|
| (117) |
|
| 1,800 |
Charge-offs |
|
| (65) |
|
| (801) |
|
| — |
|
| — |
|
| (866) |
Recoveries |
|
| 115 |
|
| 671 |
|
| 81 |
|
| — |
|
| 867 |
Net recoveries (charge-offs) |
|
| 50 |
|
| (130) |
|
| 81 |
|
| — |
|
| 1 |
Ending balance |
| $ | 3,718 |
| $ | 2,070 |
| $ | 2,081 |
| $ | 1,717 |
| $ | 9,586 |
Period end amount allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
Loans collectively evaluated for impairment |
|
| 3,718 |
|
| 2,070 |
|
| 2,081 |
|
| 1,717 |
|
| 9,586 |
Ending balance |
| $ | 3,718 |
| $ | 2,070 |
| $ | 2,081 |
| $ | 1,717 |
| $ | 9,586 |
LOANS RECEIVABLE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment |
| $ | 209 |
| $ | — |
| $ | — |
| $ | — |
| $ | 209 |
Loans collectively evaluated for impairment |
|
| 316,309 |
|
| 170,576 |
|
| 117,124 |
|
| — |
|
| 604,009 |
Ending balance |
| $ | 316,518 |
| $ | 170,576 |
| $ | 117,124 |
| $ | — |
| $ | 604,218 |
Nonaccrual 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 nonaccrual 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 nonaccrual once the credit card payment is 90 days past due.
As a result of the COVID-19 pandemic, the Company has and will continue to 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 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.
As of September 30, 2021, the amount of loans remaining under payment/relief agreements included commercial real estate loans of $6.9 million and commercial business loans of $5.4 million. These loans were classified as current and accruing interest as of September 30, 2021, with the exception of $4.5 million in commercial business loans which were classified as nonaccrual, yet current on contractual payments. These modifications were not classified as TDRs at September 30, 2021 in accordance with the CARES Act and related bank agency regulatory guidance. Loan modifications in accordance with the CARES Act and related banking agency regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. At September 30, 2021 and December 31, 2020, the Company had 0 TDRs.
There were 0 TDRs which incurred a payment default within twelve months of the restructure date during the three and nine-month periods ended September 30, 2021 and 2020.
2019
The following tables provide information pertaining to the aging analysis of contractually past due loans and nonaccrual loans at September 30, 20172021 and December 31, 2016:2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 | |||||||||||||||||||
|
| 30-59 |
| 60-89 |
|
|
|
|
|
|
|
|
|
| |||||||
|
| Days |
| Days |
| 90 Days |
| Total |
|
|
| Total |
|
| |||||||
|
| Past |
| Past |
| or More |
| Past |
|
|
| Loans |
| Non- | |||||||
|
| Due |
| Due |
| Past Due |
| Due |
| Current |
| Receivable |
| Accrual | |||||||
REAL ESTATE LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 63,180 |
| $ | 63,180 |
| $ | — |
Construction and development |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 129,407 |
|
| 129,407 |
|
| — |
Home equity |
|
| 111 |
|
| 16 |
|
| 138 |
|
| 265 |
|
| 23,761 |
|
| 24,026 |
|
| 154 |
One-to-four-family |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 170,187 |
|
| 170,187 |
|
| 142 |
Multi-family |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 43,408 |
|
| 43,408 |
|
| — |
Total real estate loans |
|
| 111 |
|
| 16 |
|
| 138 |
|
| 265 |
|
| 429,943 |
|
| 430,208 |
|
| 296 |
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect home improvement |
|
| 261 |
|
| 77 |
|
| 174 |
|
| 512 |
|
| 123,875 |
|
| 124,387 |
|
| 316 |
Solar |
|
| 83 |
|
| 22 |
|
| 81 |
|
| 186 |
|
| 39,896 |
|
| 40,082 |
|
| 81 |
Marine |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 35,173 |
|
| 35,173 |
|
| 9 |
Other consumer |
|
| 7 |
|
| — |
|
| 1 |
|
| 8 |
|
| 2,024 |
|
| 2,032 |
|
| 11 |
Total consumer loans |
|
| 351 |
|
| 99 |
|
| 256 |
|
| 706 |
|
| 200,968 |
|
| 201,674 |
|
| 417 |
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 83,221 |
|
| 83,221 |
|
| 551 |
Warehouse lending |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 50,468 |
|
| 50,468 |
|
| — |
Total commercial business loans |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 133,689 |
|
| 133,689 |
|
| 551 |
Total loans |
| $ | 462 |
| $ | 115 |
| $ | 394 |
| $ | 971 |
| $ | 764,600 |
| $ | 765,571 |
| $ | 1,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
| December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
|
| 30-59 |
| 60-89 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
|
| Days |
| Days |
| 90 Days |
| Total |
|
|
| Total |
|
| ||||||||||||||||||||||||||||
|
| Past |
| Past |
| or More |
| Past |
|
|
| Loans |
| Non- | ||||||||||||||||||||||||||||
|
| Due |
| Due |
| Past Due |
| Due |
| Current |
| Receivable |
| Accrual | ||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
| | September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
|
| 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 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 55,871 |
| $ | 55,871 |
| $ | — | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 217,911 | | $ | 217,911 | | $ | 0 |
Construction and development |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 94,462 |
|
| 94,462 |
|
| — | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 250,099 | |
| 250,099 | |
| 0 |
Home equity |
|
| 34 |
|
| — |
|
| 210 |
|
| 244 |
|
| 19,837 |
|
| 20,081 |
|
| 210 | |
| 124 | |
| 13 | |
| 174 | |
| 311 | |
| 41,784 | |
| 42,095 | |
| 430 |
One-to-four-family |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 124,009 |
|
| 124,009 |
|
| — | |
| 0 | |
| 267 | |
| 325 | |
| 592 | |
| 364,734 | |
| 365,326 | |
| 325 |
Multi-family |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 37,527 |
|
| 37,527 |
|
| — | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 165,240 | |
| 165,240 | |
| 0 |
Total real estate loans |
|
| 34 |
|
| — |
|
| 210 |
|
| 244 |
|
| 331,706 |
|
| 331,950 |
|
| 210 | |
| 124 | |
| 280 | |
| 499 | |
| 903 | |
| 1,039,768 | |
| 1,040,671 | |
| 755 |
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
Indirect home improvement |
|
| 268 |
|
| 278 |
|
| 167 |
|
| 713 |
|
| 107,046 |
|
| 107,759 |
|
| 435 | |
| 539 | |
| 355 | |
| 284 | |
| 1,178 | |
| 324,452 | |
| 325,630 | |
| 610 |
Solar |
|
| 92 |
|
| — |
|
| 69 |
|
| 161 |
|
| 36,342 |
|
| 36,503 |
|
| 69 | |||||||||||||||||||||
Marine |
|
| 8 |
|
| — |
|
| — |
|
| 8 |
|
| 28,541 |
|
| 28,549 |
|
| — | |
| 30 | |
| 0 | |
| 0 | |
| 30 | |
| 83,797 | |
| 83,827 | |
| 84 |
Other consumer |
|
| 3 |
|
| 2 |
|
| 4 |
|
| 9 |
|
| 1,906 |
|
| 1,915 |
|
| 7 | |
| 48 | |
| 2 | |
| 0 | |
| 50 | |
| 3,138 | |
| 3,188 | |
| 0 |
Total consumer loans |
|
| 371 |
|
| 280 |
|
| 240 |
|
| 891 |
|
| 173,835 |
|
| 174,726 |
|
| 511 | |
| 617 | |
| 357 | |
| 284 | |
| 1,258 | |
| 411,387 | |
| 412,645 | |
| 694 |
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial and industrial |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 65,841 |
|
| 65,841 |
|
| — | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 207,064 | |
| 207,064 | |
| 4,487 |
Warehouse lending |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 32,898 |
|
| 32,898 |
|
| — | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 49,289 | |
| 49,289 | |
| 0 |
Total commercial business loans |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 98,739 |
|
| 98,739 |
|
| — | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 256,353 | |
| 256,353 | |
| 4,487 |
Total loans |
| $ | 405 |
| $ | 280 |
| $ | 450 |
| $ | 1,135 |
| $ | 604,280 |
| $ | 605,415 |
| $ | 721 | | $ | 741 | | $ | 637 | | $ | 783 | | $ | 2,161 | | $ | 1,707,508 | | $ | 1,709,669 | | $ | 5,936 |
| | | | | | | | | | | | | | | | | | | | | |
| | December 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 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 222,719 | | $ | 222,719 | | $ | 0 |
Construction and development | |
| 1,850 | |
| 0 | |
| 0 | |
| 1,850 | |
| 215,125 | |
| 216,975 | |
| 0 |
Home equity | |
| 127 | |
| 137 | |
| 219 | |
| 483 | |
| 42,610 | |
| 43,093 | |
| 636 |
One-to-four-family | |
| 389 | |
| 404 | |
| 512 | |
| 1,305 | |
| 309,788 | |
| 311,093 | |
| 644 |
Multi-family | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 131,601 | |
| 131,601 | |
| 0 |
Total real estate loans | |
| 2,366 | |
| 541 | |
| 731 | |
| 3,638 | |
| 921,843 | |
| 925,481 | |
| 1,280 |
CONSUMER LOANS | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Indirect home improvement | |
| 683 | |
| 331 | |
| 325 | |
| 1,339 | |
| 284,681 | |
| 286,020 | |
| 826 |
Marine | |
| 28 | |
| 77 | |
| 22 | |
| 127 | |
| 85,613 | |
| 85,740 | |
| 44 |
Other consumer | |
| 73 | |
| 22 | |
| 0 | |
| 95 | |
| 3,323 | |
| 3,418 | |
| 1 |
Total consumer loans | |
| 784 | |
| 430 | |
| 347 | |
| 1,561 | |
| 373,617 | |
| 375,178 | |
| 871 |
COMMERCIAL BUSINESS LOANS | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial and industrial | |
| 0 | |
| 1,204 | |
| 0 | |
| 1,204 | |
| 223,272 | |
| 224,476 | |
| 5,610 |
Warehouse lending | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 49,092 | |
| 49,092 | |
| 0 |
Total commercial business loans | |
| 0 | |
| 1,204 | |
| 0 | |
| 1,204 | |
| 272,364 | |
| 273,568 | |
| 5,610 |
Total loans | | $ | 3,150 | | $ | 2,175 | | $ | 1,078 | | $ | 6,403 | | $ | 1,567,824 | | $ | 1,574,227 | | $ | 7,761 |
There were no0 loans 90 days or more past due and still accruing interest at both September 30, 20172021 and December 31, 2016.
2020.
2120
The following tables provide additional information about our impaired loans that have been segregated to reflect loans for which anno allowance for creditloan losses has been provided and loans for which noan allowance has beenwas provided at September 30, 20172021 and December 31, 2016:2020:
| | | | | | | | | |
| | September 30, 2021 | |||||||
|
| Unpaid |
| | |
| | | |
WITH NO RELATED ALLOWANCE RECORDED | | Principal | | Recorded | | Related | |||
Real estate loans: | | Balance | | Investment | | Allowance | |||
Home equity | | $ | 485 | | $ | 430 | | $ | 0 |
One-to-four-family | | | 361 | | | 325 | | | 0 |
| | | 846 | | | 755 | | | 0 |
WITH RELATED ALLOWANCE RECORDED | | | | | | | | | |
Consumer loans: | | | | | | | | | |
Indirect | | | 610 | | | 610 | | | 214 |
Marine | | | 84 | | | 84 | | | 29 |
Commercial business loans: | | | | | | | | | |
Commercial and industrial | | | 4,487 | | | 4,487 | | | 991 |
| | | 5,181 | | | 5,181 | | | 1,234 |
Total | | $ | 6,027 | | $ | 5,936 | | $ | 1,234 |
| | | | | | | | | |
| | December 31, 2020 | |||||||
|
| Unpaid |
| | |
| | | |
WITH NO RELATED ALLOWANCE RECORDED | | Principal | | Recorded | | Related | |||
Real estate loans: | | Balance | | Investment | | Allowance | |||
Home equity | | | 687 | | | 636 | | | 0 |
One-to-four-family | | | 645 | | | 584 | | | 0 |
Commercial business loans: | | | | | | | | | |
Commercial and industrial | | | 1,203 | | | 1,203 | | | 0 |
| | | 2,535 | |
| 2,423 | | | 0 |
WITH RELATED ALLOWANCE RECORDED | | | | | | | | | |
Real estate loans: | | | | | | | | | |
One-to-four-family | | | 61 | | | 60 | | | 15 |
Consumer loans: | | | | | | | | | |
Indirect | | | 826 | | | 826 | | | 289 |
Marine | | | 44 | | | 44 | | | 15 |
Other consumer | | | 1 | | | 1 | | | 1 |
Commercial business loans: | | | | | | | | | |
Commercial and industrial | | | 4,407 | | | 4,407 | | | 990 |
| | | 5,339 | | | 5,338 | | | 1,310 |
Total | | $ | 7,874 | | $ | 7,761 | | $ | 1,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 | ||||||||||
|
| Unpaid |
|
|
|
|
|
|
|
|
| |
|
| Principal |
| Write- |
| Recorded |
| Related | ||||
|
| Balance |
| downs |
| Investment |
| Allowance | ||||
WITH NO RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| $ | 154 |
| $ | — |
| $ | 154 |
| $ | — |
One-to-four-family |
|
| 68 |
|
| (12) |
|
| 56 |
|
| — |
Total real estate loans |
|
| 222 |
|
| (12) |
|
| 210 |
|
| — |
WITH AN ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans |
|
| 551 |
|
| — |
|
| 551 |
|
| 88 |
Total |
| $ | 773 |
| $ | (12) |
| $ | 761 |
| $ | 88 |
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | ||||||||||
|
| Unpaid |
|
|
|
|
|
|
|
|
| |
|
| Principal |
| Write- |
| Recorded |
| Related | ||||
|
| Balance |
| downs |
| Investment |
| Allowance | ||||
WITH NO RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| $ | 137 |
| $ | — |
| $ | 137 |
| $ | — |
One-to-four-family |
|
| 69 |
|
| (12) |
|
| 57 |
|
| — |
Total |
| $ | 206 |
| $ | (12) |
| $ | 194 |
| $ | — |
The following tables present the average recorded investment in loans individually evaluated for impairment and the interest income recognized and received for the three and nine months ended September 30, 20172021 and 2016:2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||||||
|
| September 30, 2017 |
| September 30, 2016 | ||||||||
|
| Average Recorded |
| Interest Income |
| Average Recorded |
| Interest Income | ||||
|
| Investment |
| Recognized |
| Investment |
| Recognized | ||||
WITH NO RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| $ | 201 |
| $ | — |
| $ | 152 |
| $ | — |
One-to-four-family |
|
| 56 |
|
| 1 |
|
| 58 |
|
| 1 |
Total real estate loans |
|
| 257 |
|
| 1 |
|
| 210 |
|
| 1 |
WITH AN ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans |
|
| 551 |
|
| 23 |
|
| — |
|
| — |
Total |
| $ | 808 |
| $ | 24 |
| $ | 210 |
| $ | 1 |
| | | | | | | | | | | | |
| | At or For the Three Months Ended | ||||||||||
| | September 30, 2021 | | September 30, 2020 | ||||||||
WITH NO RELATED ALLOWANCE RECORDED |
| Average Recorded |
| Interest Income |
| Average Recorded |
| Interest Income | ||||
Real estate loans: | | Investment | | Recognized | | Investment | | Recognized | ||||
Commercial | | $ | 0 | | $ | 0 | | $ | 1,089 | | $ | 14 |
Home equity | | | 455 | | | 12 | | | 672 | | | 11 |
One-to-four-family | |
| 488 | |
| 3 | |
| 733 | |
| 10 |
| | | 943 | | | 15 | | | 2,494 | | | 35 |
WITH AN ALLOWANCE RECORDED | | | | | | | | | | | | |
Real estate loans: | | | | | | | | | | | | |
One-to-four-family | | | 0 | | | 0 | | | 60 | | | 0 |
Consumer loans: | | | | | | | | | | | | |
Indirect | | | 554 | | | 12 | | | 723 | | | 16 |
Marine | | | 85 | | | 2 | | | 0 | | | 0 |
Other consumer | | | 2 | | | 0 | | | 0 | | | 0 |
Commercial business loans: | | | | | | | | | | | | |
Commercial and industrial | | | 4,487 | | | 86 | | | 4,310 | | | 0 |
| | | 5,128 | | | 100 | | | 5,093 | | | 16 |
Total | | $ | 6,071 | | $ | 115 | | $ | 7,587 | | $ | 51 |
| | | | | | | | | | | | |
| | At or For the Nine Months Ended | ||||||||||
| | September 30, 2021 | | September 30, 2020 | ||||||||
WITH NO RELATED ALLOWANCE RECORDED |
| Average Recorded |
| Interest Income |
| Average Recorded |
| Interest Income | ||||
Real estate loans: | | Investment | | Recognized | | Investment | | Recognized | ||||
Commercial | | $ | — | | $ | — | | $ | 1,088 | | $ | 41 |
Construction and development | | | 1,028 | | | — | | | — | | | — |
Home equity | | | 538 | | | 21 | | | 434 | | | 22 |
One-to-four-family | |
| 559 | |
| 9 | |
| 1,029 | |
| 17 |
Consumer loans: | | | | | | | | | | | | |
Other consumer | | | — | | | — | | | 4 | | | — |
| | | 2,125 | | | 30 | | | 2,555 | | | 80 |
WITH AN ALLOWANCE RECORDED | | | | | | | | | | | | |
Real estate loans: | | | | | | | | | | | | |
One-to-four-family | | | 27 | | | — | | | 60 | | | — |
Consumer loans: | | | | | | | | | | | | |
Indirect | | | 670 | | | 34 | | | 624 | | | 40 |
Marine | | | 74 | | | 5 | | | 42 | | | 1 |
Other consumer | | | 8 | | | 1 | | | — | | | — |
Commercial business loans: | | | | | | | | | | | | |
Commercial and industrial | | | 4,884 | | | 191 | | | 1,910 | | | 162 |
| | | 5,663 | | | 231 | | | 2,636 | | | 203 |
Total | | $ | 7,788 | | $ | 261 | | $ | 5,191 | | $ | 283 |
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||||||||
|
| September 30, 2017 |
| September 30, 2016 | ||||||||
|
| Average Recorded |
| Interest Income |
| Average Recorded |
| Interest Income | ||||
|
| Investment |
| Recognized |
| Investment |
| Recognized | ||||
WITH NO RELATED ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
| $ | 220 |
| $ | — |
| $ | 154 |
| $ | 2 |
One-to-four-family |
|
| 56 |
|
| 3 |
|
| 58 |
|
| 2 |
Total real estate loans |
|
| 276 |
|
| 3 |
|
| 212 |
|
| 4 |
WITH AN ALLOWANCE RECORDED |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans |
|
| 551 |
|
| 23 |
|
| — |
|
| — |
Total |
| $ | 827 |
| $ | 26 |
| $ | 212 |
| $ | 4 |
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. All loans modified due to COVID-19 are 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 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.
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.
● | 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. |
● | 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 FDIC’sFederal 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,
23
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 ratedgraded “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. Management may more conservatively risk rate credits even if paying in accordance with the loan’s repayment terms.
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.
23
The following tables summarize risk rated loan balances by category at September 30, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 | |||||||||||||||||||
|
|
|
|
|
| Special |
|
|
|
|
|
|
|
| |||||||
|
| Pass |
| Watch |
| Mention |
| Substandard |
| Doubtful |
| Loss |
|
| |||||||
|
| (1 - 5) |
| (6) |
| (7) |
| (8) |
| (9) |
| (10) |
| Total | |||||||
REAL ESTATE LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| $ | 56,533 |
| $ | 5,072 |
| $ | 1,575 |
| $ | — |
| $ | — |
| $ | — |
| $ | 63,180 |
Construction and development |
|
| 129,407 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 129,407 |
Home equity |
|
| 23,872 |
|
| — |
|
| — |
|
| 154 |
|
| — |
|
| — |
|
| 24,026 |
One-to-four-family |
|
| 169,352 |
|
| — |
|
| 693 |
|
| 142 |
|
| — |
|
| — |
|
| 170,187 |
Multi-family |
|
| 43,408 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 43,408 |
Total real estate loans |
|
| 422,572 |
|
| 5,072 |
|
| 2,268 |
|
| 296 |
|
| — |
|
| — |
|
| 430,208 |
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect home improvement |
|
| 124,071 |
|
| — |
|
| — |
|
| 316 |
|
| — |
|
| — |
|
| 124,387 |
Solar |
|
| 40,001 |
|
| — |
|
| — |
|
| 81 |
|
| — |
|
| — |
|
| 40,082 |
Marine |
|
| 35,164 |
|
| — |
|
| — |
|
| 9 |
|
| — |
|
| — |
|
| 35,173 |
Other consumer |
|
| 1,961 |
|
| — |
|
| — |
|
| 71 |
|
| — |
|
| — |
|
| 2,032 |
Total consumer loans |
|
| 201,197 |
|
| — |
|
| — |
|
| 477 |
|
| — |
|
| — |
|
| 201,674 |
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| 76,302 |
|
| 306 |
|
| 828 |
|
| 5,785 |
|
| — |
|
| — |
|
| 83,221 |
Warehouse lending |
|
| 44,969 |
|
| 5,499 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 50,468 |
Total commercial business loans |
|
| 121,271 |
|
| 5,805 |
|
| 828 |
|
| 5,785 |
|
| — |
|
| — |
|
| 133,689 |
Total loans |
| $ | 745,040 |
| $ | 10,877 |
| $ | 3,096 |
| $ | 6,558 |
| $ | — |
| $ | — |
| $ | 765,571 |
|
|
24
Table of Contentsthe dates indicated:
FS BANCORP, INC. AND SUBSIDIARY
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | |||||||||||||||||||
|
| |
| |
| Special |
| |
| |
| |
| | |||||||
| | Pass | | Watch | | Mention | | Substandard | | Doubtful | | Loss | | | |||||||
REAL ESTATE LOANS | | (1 - 5) | | (6) | | (7) | | (8) | | (9) | | (10) | | Total | |||||||
Commercial | | $ | 196,922 | | $ | 17,876 | | $ | 2,190 | | $ | 923 | | $ | — | | $ | — | | $ | 217,911 |
Construction and development | |
| 250,099 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 250,099 |
Home equity | |
| 41,665 | |
| — | |
| — | |
| 430 | |
| — | |
| — | |
| 42,095 |
One-to-four-family | |
| 362,807 | |
| — | |
| 185 | |
| 2,334 | |
| — | |
| — | |
| 365,326 |
Multi-family | |
| 165,240 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 165,240 |
Total real estate loans | |
| 1,016,733 | |
| 17,876 | |
| 2,375 | |
| 3,687 | |
| — | |
| — | |
| 1,040,671 |
CONSUMER LOANS | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Indirect home improvement | |
| 325,020 | |
| — | |
| — | |
| 610 | |
| — | |
| — | |
| 325,630 |
Marine | |
| 83,743 | |
| — | |
| — | |
| 84 | |
| — | |
| — | |
| 83,827 |
Other consumer | |
| 3,188 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 3,188 |
Total consumer loans | |
| 411,951 | |
| — | |
| — | |
| 694 | |
| — | |
| — | |
| 412,645 |
COMMERCIAL BUSINESS LOANS | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial and industrial | |
| 186,318 | |
| 6,132 | |
| 1,474 | |
| 13,140 | |
| — | |
| — | |
| 207,064 |
Warehouse lending | |
| 49,289 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 49,289 |
Total commercial business loans | |
| 235,607 | |
| 6,132 | |
| 1,474 | |
| 13,140 | |
| — | |
| — | |
| 256,353 |
Total loans receivable, gross | | $ | 1,664,291 | | $ | 24,008 | | $ | 3,849 | | $ | 17,521 | | $ | — | | $ | — | | $ | 1,709,669 |
| | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | |||||||||||||||||||
| | | | | | Special | | | | | | | | | |||||||
| | Pass | | Watch | | Mention | | Substandard | | Doubtful | | Loss | | | |||||||
REAL ESTATE LOANS |
| (1 - 5) |
| (6) |
| (7) |
| (8) |
| (9) |
| (10) |
| Total | |||||||
Commercial | | $ | 157,932 | | $ | 60,834 | | $ | 3,013 | | $ | 940 | | $ | — | | $ | — | | $ | 222,719 |
Construction and development | |
| 212,209 | |
| 2,917 | |
| 1,849 | |
| 0 | |
| — | |
| — | |
| 216,975 |
Home equity | |
| 42,457 | |
| 0 | |
| 0 | |
| 636 | |
| — | |
| — | |
| 43,093 |
One-to-four-family | |
| 303,610 | |
| 162 | |
| 187 | |
| 7,134 | |
| — | |
| — | |
| 311,093 |
Multi-family | |
| 131,601 | |
| 0 | |
| 0 | |
| 0 | |
| — | |
| — | |
| 131,601 |
Total real estate loans | |
| 847,809 | |
| 63,913 | |
| 5,049 | |
| 8,710 | |
| — | |
| — | |
| 925,481 |
CONSUMER LOANS | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Indirect home improvement | |
| 285,194 | |
| 0 | |
| 0 | |
| 826 | |
| — | |
| — | |
| 286,020 |
Marine | |
| 85,696 | |
| 0 | |
| 0 | |
| 44 | |
| — | |
| — | |
| 85,740 |
Other consumer | |
| 3,417 | |
| 0 | |
| 0 | |
| 1 | |
| — | |
| — | |
| 3,418 |
Total consumer loans | |
| 374,307 | |
| 0 | |
| 0 | |
| 871 | |
| — | |
| — | |
| 375,178 |
COMMERCIAL BUSINESS LOANS | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial and industrial | |
| 190,392 | |
| 23,945 | |
| 2,073 | |
| 8,066 | |
| — | |
| — | |
| 224,476 |
Warehouse lending | |
| 49,092 | |
| 0 | |
| 0 | |
| 0 | |
| — | |
| — | |
| 49,092 |
Total commercial business loans | |
| 239,484 | |
| 23,945 | |
| 2,073 | |
| 8,066 | |
| — | |
| — | |
| 273,568 |
Total loans receivable, gross | | $ | 1,461,600 | | $ | 87,858 | | $ | 7,122 | | $ | 17,647 | | $ | — | | $ | — | | $ | 1,574,227 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | |||||||||||||||||||
|
|
|
|
|
| Special |
|
|
|
|
|
|
|
| |||||||
|
| Pass |
| Watch |
| Mention |
| Substandard |
| Doubtful |
| Loss |
|
| |||||||
|
| (1 - 5) |
| (6) |
| (7) |
| (8) |
| (9) |
| (10) |
| Total | |||||||
REAL ESTATE LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| $ | 53,234 |
| $ | 2,637 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 55,871 |
Construction and development |
|
| 94,462 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 94,462 |
Home equity |
|
| 19,871 |
|
| — |
|
| — |
|
| 210 |
|
| — |
|
| — |
|
| 20,081 |
One-to-four-family |
|
| 124,009 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 124,009 |
Multi-family |
|
| 37,527 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 37,527 |
Total real estate loans |
|
| 329,103 |
|
| 2,637 |
|
| — |
|
| 210 |
|
| — |
|
| — |
|
| 331,950 |
CONSUMER LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect home improvement |
|
| 107,324 |
|
| — |
|
| — |
|
| 435 |
|
| — |
|
| — |
|
| 107,759 |
Solar |
|
| 36,434 |
|
| — |
|
| — |
|
| 69 |
|
| — |
|
| — |
|
| 36,503 |
Marine |
|
| 28,549 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 28,549 |
Other consumer |
|
| 1,813 |
|
| — |
|
| — |
|
| 102 |
|
| — |
|
| — |
|
| 1,915 |
Total consumer loans |
|
| 174,120 |
|
| — |
|
| — |
|
| 606 |
|
| — |
|
| — |
|
| 174,726 |
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| 58,105 |
|
| 525 |
|
| — |
|
| 7,211 |
|
| — |
|
| — |
|
| 65,841 |
Warehouse lending |
|
| 32,898 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 32,898 |
Total commercial business loans |
|
| 91,003 |
|
| 525 |
|
| — |
|
| 7,211 |
|
| — |
|
| — |
|
| 98,739 |
Total loans |
| $ | 594,226 |
| $ | 3,162 |
| $ | — |
| $ | 8,027 |
| $ | — |
| $ | — |
| $ | 605,415 |
Troubled Debt Restructured Loans
Troubled debt restructured (“TDR”) loans are loans for which the Company, for economic or legal reasons related to the borrower’s financial condition, has granted a significant concession to the borrower that it would otherwise not consider. The Company had one TDR loan on accrual and included in impaired loans at both September 30, 2017 and December 31, 2016, with a balance of $56,000 and $57,000, respectively, which was a one-to-four-family loan. The Company had no commitments to lend additional funds on this TDR loan at September 30, 2017.
For the three and nine months ended September 30, 2017 and 2016, there were no TDR loans that were modified in the previous 12 months that subsequently defaulted in the reporting period.
NOTE 54 - 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 $662.0 million$2.52 billion and $977.1 million$2.17 billion at September 30, 20172021 and December 31, 2016, respectively, and are carried at the lower of cost or market.
During the quarter ended June 30, 2017, the Company sold a portion of its mortgage servicing rights (“MSR”) with a book value of $4.8 million, generating an associated gain of $958,000. During the third quarter of 2017, a $38,000 adjustment was made to mortgage servicing rights resulting in a revised gain of $996,000 due to better than expected prepayments.
2020, respectively.
2524
The following tables summarize servicing rights activity and the respective book value at or for the three and nine months ended September 30, 20172021 and 2016:2020:
|
|
|
|
|
|
|
|
| At or For the Three Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
Beginning balance |
| $ | 4,899 |
| $ | 6,751 |
Additions |
|
| 1,326 |
|
| 1,095 |
Servicing rights amortized |
|
| (414) |
|
| (408) |
Recovery on servicing rights |
|
| — |
|
| 216 |
Ending balance |
| $ | 5,811 |
| $ | 7,654 |
|
|
|
|
|
|
|
|
| At or For the Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
Beginning balance |
| $ | 8,459 |
| $ | 5,811 |
Additions |
|
| 3,569 |
|
| 2,927 |
Sales |
|
| (4,751) |
|
| — |
Servicing rights amortized |
|
| (1,465) |
|
| (1,086) |
(Impairment) recovery on servicing rights |
|
| (1) |
|
| 2 |
Ending balance |
| $ | 5,811 |
| $ | 7,654 |
| | | | | | |
| | At or For the Three Months Ended | ||||
| | September 30, | ||||
|
| 2021 |
| 2020 | ||
Beginning balance, at the lower of cost or fair value | | $ | 16,356 | | $ | 10,672 |
Additions | |
| 1,967 | |
| 3,233 |
Servicing rights amortized | |
| (1,837) | |
| (2,087) |
Recovery (impairment) of servicing rights | |
| 11 | |
| (82) |
Ending balance, at the lower of cost or fair value | | $ | 16,497 | | $ | 11,736 |
| | | | | | |
| | At or For the Nine Months Ended | ||||
| | September 30, | ||||
|
| 2021 |
| 2020 | ||
Beginning balance, at the lower of cost or fair value | | $ | 12,595 | | $ | 11,560 |
Additions | |
| 7,567 | |
| 7,634 |
Servicing rights amortized | |
| (5,722) | |
| (6,059) |
Recovery (impairment) of servicing rights | | | 2,057 | | | (1,399) |
Ending balance, at the lower of cost or fair value | | $ | 16,497 | | $ | 11,736 |
The fair market value of the permanent servicing rights’ assets was $7.3$24.9 million and $11.7$12.8 million at September 30, 20172021 and December 31, 2016,2020, respectively. Fair value adjustments to servicing rights are mainly due to market basedmarket-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 MSRmortgage servicing rights (“MSR”) at the dates indicated:
|
|
|
|
|
|
|
| At September 30, |
| ||
|
| 2017 |
| 2016 |
|
Key assumptions: |
|
|
|
|
|
Weighted average discount rate |
| 9.5 | % | 9.5 | % |
Conditional prepayment rate (“CPR”) |
| 11.3 | % | 16.4 | % |
Weighted average life in years |
| 6.8 |
| 5.2 |
|
| | | | | |
| | At September 30, | | At December 31, |
|
Key assumptions: |
| 2021 |
| 2020 | |
Weighted average discount rate |
| 9.1 | % | 9.1 | % |
Conditional prepayment rate (“CPR”) |
| 14.6 | % | 32.6 | % |
Weighted average life in years |
| 5.9 |
| 3.0 | |
2625
Key economic assumptions and the sensitivity of the current fair value for single family MSR to immediate adverse changesare presented in those assumptions at September 30, 2017 and December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| ||
Aggregate portfolio principal balance |
|
|
|
| $ | 658,599 |
| $ | 973,139 |
|
Weighted average rate of note |
|
|
|
|
| 4.0 | % |
| 3.9 | % |
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2017 |
| Base |
| 0.5%Adverse Rate Change |
| 1.0%Adverse Rate Change |
| |||
Conditional prepayment rate |
|
| 11.3 | % |
| 18.2 | % |
| 25.4 | % |
Fair value MSR |
| $ | 7,283 |
| $ | 5,764 |
| $ | 4,682 |
|
Percentage of MSR |
|
| 1.1 | % |
| 0.9 | % |
| 0.7 | % |
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 9.5 | % |
| 10.0 | % |
| 10.5 | % |
Fair value MSR |
| $ | 7,283 |
| $ | 7,139 |
| $ | 7,000 |
|
Percentage of MSR |
|
| 1.1 | % |
| 1.1 | % |
| 1.1 | % |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016 |
| Base |
| 0.5%Adverse Rate Change |
| 1.0%Adverse Rate Change |
| |||
Conditional prepayment rate |
|
| 8.8 | % |
| 12.8 | % |
| 20.2 | % |
Fair value MSR |
| $ | 11,735 |
| $ | 9,991 |
| $ | 7,808 |
|
Percentage of MSR |
|
| 1.2 | % |
| 1.0 | % |
| 0.8 | % |
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 9.5 | % |
| 10.0 | % |
| 10.5 | % |
Fair value MSR |
| $ | 11,735 |
| $ | 11,480 |
| $ | 11,235 |
|
Percentage of MSR |
|
| 1.2 | % |
| 1.2 | % |
| 1.2 | % |
The abovethe table showsbelow. Also presented is the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four-family FNMA/FHLMC/GNMA/FNMA, FHLMC, GNMA, or FHLB serviced home loan. The above table below references a 50 basis point and 100 basis point decrease in note rates.adverse rate change and the impact on prepayment speeds and discount rates at September 30, 2021 and December 31, 2020:
| | | | | | | | | | |
|
| | |
| September 30, 2021 |
| December 31, 2020 (1) |
| ||
Aggregate portfolio principal balance |
| |
|
| $ | 2,520,674 |
| $ | 2,133,473 | |
Weighted average rate of note |
| |
|
| | 3.2 | % | | 3.5 | % |
| | | | | | | | | | |
At September 30, 2021 |
| Base |
| 0.5% Adverse Rate Change |
| 1.0% Adverse Rate Change | | |||
Conditional prepayment rate |
| | 14.6 | % | | 21.7 | % | | 34.3 | % |
Fair value MSR | | $ | 24,894 |
| $ | 19,830 |
| $ | 14,172 | |
Percentage of MSR | |
| 1.0 | % |
| 0.8 | % |
| 0.6 | % |
| | | | | | | | | | |
Discount rate | |
| 9.1 | % |
| 9.6 | % |
| 10.1 | % |
Fair value MSR | | $ | 24,894 |
| $ | 24,431 |
| $ | 23,985 | |
Percentage of MSR | |
| 1.0 | % |
| 1.0 | % |
| 1.0 | % |
| | | | | | | | | | |
At December 31, 2020 | | Base |
| 0.5% Adverse Rate Change |
| 1.0% Adverse Rate Change | | |||
Conditional prepayment rate | |
| 32.6 | % | | 40.6 | % | | 59.6 | % |
Fair value MSR | | $ | 12,833 |
| $ | 10,922 |
| $ | 8,286 | |
Percentage of MSR | |
| 0.6 | % |
| 0.5 | % |
| 0.4 | % |
| | | | | | | | | | |
Discount rate | |
| 9.1 | % �� |
| 9.6 | % |
| 10.1 | % |
Fair value MSR | | $ | 12,833 |
| $ | 12,696 |
| $ | 12,562 | |
Percentage of MSR | |
| 0.6 | % |
| 0.6 | % |
| 0.6 | % |
___________________________
(1) | Excludes nonperforming serviced loans in forbearance. |
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 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;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 $430,000$1.7 million and $534,000$1.1 million of gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of mortgage and commercial loans for the three months ended September 30, 20172021 and 2016,2020, respectively, and $1.8$4.6 million and $1.4$3.1 million for the nine months ended September 30, 2017 and 2016,2021and 2020, respectively. The income, net of MSR amortization, is reported in noninterest income on the Consolidated Statements of Income.
NOTE 65 - DERIVATIVES
The CompanyBank regularly enters into commitments to originate and sell loans held for sale. The CompanyBank has established a hedging strategy to protect itself against the risk of loss associated with interest rate movements on loan commitments. The CompanyBank 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
27
in the fair value of the derivatives reported in noninterest income.income or noninterest expense. The CompanyBank recognizes all derivative instruments as either other assets or other liabilities on the Consolidated Balance Sheets and measures those instruments at fair value.
26
Derivative instruments not related to mortgage banking activities primarily relate to interest rate swap agreements. The Bank'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 Bank 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 Bank making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The Bank has entered into interest rate swaps to reduce the exposure to variability in interest-related cash outflows attributable to changes in forecasted LIBOR-based 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 Bank 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 Bank has not recorded any hedge ineffectiveness since inception. The Bank 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 $34,000 and $967,000, net of tax, at September 30, 2021 and December 31, 2020, respectively. The Bank reclassified realized losses of $135,000 and $98,000 from accumulated other comprehensive income to interest expense related to these cash flow hedges for the three months ended September 30, 2021 and September 30, 2020, respectively, and realized losses of $373,000 and $84,000 for the nine months ended September 30, 2021 and September 30, 2020, respectively. The Bank expects that approximately $468,000 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’sBank’s derivative instruments at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 | |||||||
|
|
|
|
| Fair Value | ||||
|
| Notional |
| Asset |
| Liability | |||
Fallout adjusted interest rate lock commitments with customers |
| $ | 59,741 |
| $ | 1,131 |
| $ | — |
Mandatory and best effort forward commitments with investors |
|
| 33,491 |
|
| 4 |
|
| — |
Forward TBA mortgage-backed securities |
|
| 77,000 |
|
| 104 |
|
| — |
TBA mortgage-backed securities forward sales paired off with investors |
|
| 32,500 |
|
| — |
|
| 140 |
|
|
|
|
|
|
|
|
|
| |||||||||
|
| December 31, 2016 | ||||||||||||||||
|
|
|
|
| Fair Value | |||||||||||||
|
| Notional |
| Asset |
| Liability | ||||||||||||
| | | | | | | | | | |||||||||
| | September 30, 2021 | ||||||||||||||||
| | | | | Fair Value | |||||||||||||
Cash flow hedges: |
| Notional |
| Asset |
| Liability | ||||||||||||
Interest rate swaps | | $ | 90,000 | | $ | 527 | | $ | 571 | |||||||||
Non-hedging derivatives: | | | | | | | | | | |||||||||
Fallout adjusted interest rate lock commitments with customers |
| $ | 33,289 |
| $ | 818 |
| $ | — | | | 90,277 | | | 1,171 | | | 0 |
Mandatory and best effort forward commitments with investors |
|
| 23,536 |
|
| 177 |
|
| — | |
| 50,658 | |
| 558 | |
| 0 |
Forward TBA mortgage-backed securities |
|
| 53,000 |
|
| 495 |
|
| — | |
| 147,000 | |
| 587 | |
| 0 |
TBA mortgage-backed securities forward sales paired off with investors |
|
| 44,000 |
|
| 747 |
|
| — |
The fair value of derivatives was impacted during the third quarter of 2017 by an increase in notional asset value partially offset by a decrease in the fair value on the derivative asset, specifically loan locks and loan commitments.
| | | | | | | | | |
| | December 31, 2020 | |||||||
| | | | | Fair Value | ||||
Cash flow hedges: | | Notional |
| Asset |
| Liability | |||
Interest rate swaps | | $ | 90,000 | | $ | 21 | | $ | 1,252 |
Non-hedging derivatives: |
| | | | | | | | |
Fallout adjusted interest rate lock commitments with customers | | | 136,739 | | | 4,024 | | | 0 |
Mandatory and best effort forward commitments with investors | |
| 25,027 | |
| 0 | |
| 67 |
Forward TBA mortgage-backed securities | |
| 232,000 | |
| 0 | |
| 1,602 |
At September 30, 20172021 and 2016,December 31, 2020, the CompanyBank had $77.0$147.0 million and $99.5$232.0 million of TBA trades with counterparties that requiredheld margin collateral of $485,000$1.1 million and $872,000,$3.3 million, respectively. This collateral is included in interest-bearing deposits at other financial institutions onAt September 30, 2021, the Consolidated Balance Sheets.Bank had pledged 2 securities with a carrying value of $3.4 million to secure interest rate swaps designated as cash flow hedges.
27
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 a net gainsloss of $374,000$402,000 and $697,000a net gain of $2.8 million for the three months ended September 30, 20172021 and 2016,2020, respectively, and a net (loss)loss of $4.3 million and net gain of ($7,000) and $1.7$8.8 million for the nine months ended September 30, 20172021 and 2016,2020, respectively.
NOTE 6 - LEASES
The Company has operating leases for retail bank branches, home lending branches, and certain equipment. The Company’s leases have remaining lease terms of three months to eight years and nine 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 and nine months ended September 30, 2021 and 2020:
| | | | | | | |
| | | Three Months Ended | | Three Months Ended | ||
Lease cost: | |
| September 30, 2021 |
| September 30, 2020 | ||
Operating lease cost | | | $ | 353 | | $ | 339 |
Short-term lease cost | | |
| 2 | |
| 1 |
Total lease cost | | | $ | 355 | | $ | 340 |
| | | | | | |
| | Nine Months Ended | | Nine Months Ended | ||
Lease cost: |
| September 30, 2021 |
| September 30, 2020 | ||
Operating lease cost | | $ | 1,063 | | $ | 1,038 |
Short-term lease cost | |
| 3 | |
| 10 |
Total lease cost | | $ | 1,066 | | $ | 1,048 |
The following tables provides supplemental information related to operating leases at or for the three and nine months ended September 30, 2021 and 2020:
| | | | | | | | |
| | At or For the | | At or For the | ||||
Cash paid for amounts included in the | | Three Months Ended | | Three Months Ended | ||||
measurement of lease liabilities: |
| September 30, 2021 |
| September 30, 2020 | ||||
Operating cash flows from operating leases | | $ | 329 | | | $ | 349 | |
Weighted average remaining lease term- operating leases | | | 4.9 | years | |
| 5.5 | years |
Weighted average discount rate- operating leases | | | 2.18 | % | |
| 2.48 | % |
| | | | | | | | |
| | At or For the | | At or For the | ||||
Cash paid for amounts included in the | | Nine Months Ended | | Nine Months Ended | ||||
measurement of lease liabilities: |
| September 30, 2021 |
| September 30, 2020 | ||||
Operating cash flows from operating leases | | $ | 1,058 | | | $ | 1,033 | |
Weighted average remaining lease term- operating leases | | | 4.9 | years | |
| 5.5 | years |
Weighted average discount rate- operating leases | | | 2.18 | % | |
| 2.48 | % |
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.
28
Maturities of operating lease liabilities at September 30, 2021 for future periods are as follows:
| | | |
Remainder of 2021 |
| $ | 449 |
2022 |
| | 1,398 |
2023 |
| | 1,027 |
2024 |
| | 968 |
2025 | | | 650 |
Thereafter |
| | 1,059 |
Total lease payments | | | 5,551 |
Less imputed interest | | | (454) |
Total | | $ | 5,097 |
NOTE 7 - OTHER REAL ESTATE OWNED (“OREO”)
There was no OREO activity for the three months ended September 30, 2017 and 2016. The following table presents the activity related to OREO at or for the three and nine months ended September 30, 20172021 and 2016:2020:
|
|
|
|
|
|
|
|
| At or For the Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
Beginning balance |
| $ | — |
| $ | — |
Net loans transferred to OREO |
|
| — |
|
| 525 |
Capitalized costs |
|
| — |
|
| 7 |
Gross proceeds from sale of OREO |
|
| — |
|
| (682) |
Gain on sale of OREO |
|
| — |
|
| 150 |
Ending balance |
| $ | — |
| $ | — |
| | | | | | | | | | | | |
| | At or For the Three Months Ended | | At or For the Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Beginning balance | | $ | 0 | | $ | 90 | | $ | 90 | | $ | 168 |
Additions | |
| — | |
| — | |
| — | |
| — |
Gross proceeds from sale of OREO | |
| — | |
| — | |
| (81) | |
| (76) |
Loss on sale of OREO | |
| — | |
| — | |
| (9) | |
| (2) |
Ending balance | | $ | 0 | | $ | 90 | | $ | 0 | | $ | 90 |
There were no0 OREO properties at September 30, 2017 and2021, compared to 1 OREO property in the amount of $90,000 at September 30, 2016. For2020. There were no OREO holding costs for both the three and nine months ended September 30, 2017,2021, and for the three months ended September 30, 2016, the Company recorded no net gain or loss on the disposal of OREO. For the nine months ended September 30, 2016, the Company recorded a $150,000 net gain on the
28
disposal of OREO. There were no holding costs associated with OREONaN and $2,000 for the three and nine months ended September 30, 2017 and 2016.2020, respectively.
There were nowas $283,000 in portfolio mortgage loan properties in the process of foreclosure at September 30, 2017. At December 31, 2016, there was a $43,000 mortgage loanloans collateralized by residential real estate property in the process of foreclosure.foreclosureat September 30, 2021.
NOTE 8 - DEPOSITS
Deposits are summarized as follows at September 30, 20172021 and December 31, 2016:2020:
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2017(1) |
| 2016(1) | ||
Noninterest-bearing checking |
| $ | 156,017 |
| $ | 143,236 |
Interest-bearing checking |
|
| 115,775 |
|
| 66,119 |
Savings |
|
| 72,974 |
|
| 54,995 |
Money market(4) |
|
| 236,036 |
|
| 242,849 |
Certificates of deposit less than $100,000(2) |
|
| 143,169 |
|
| 93,791 |
Certificates of deposit of $100,000 through $250,000 |
|
| 73,733 |
|
| 74,832 |
Certificates of deposit of $250,000 and over(3) |
|
| 31,927 |
|
| 27,094 |
Escrow accounts related to mortgages serviced |
|
| 10,947 |
|
| 9,677 |
Total |
| $ | 840,578 |
| $ | 712,593 |
| | | | | | |
|
| September 30, |
| December 31, | ||
| | 2021 |
| 2020 | ||
Noninterest-bearing checking | | $ | 423,091 | | $ | 348,421 |
Interest-bearing checking | |
| 308,142 | |
| 226,282 |
Savings | |
| 191,487 | |
| 152,842 |
Money market | |
| 497,571 | |
| 429,548 |
Certificates of deposit less than $100,000 | |
| 231,453 | |
| 299,157 |
Certificates of deposit of $100,000 through $250,000 | |
| 126,095 | |
| 135,901 |
Certificates of deposit of $250,000 and over | |
| 62,296 | |
| 67,488 |
Escrow accounts related to mortgages serviced | |
| 23,515 | |
| 14,432 |
Total | | $ | 1,863,650 | | $ | 1,674,071 |
29
|
|
|
|
|
|
|
|
Federal Reserve regulations require that the Bank maintain reserves in the form of cash on hand and deposit balances with the Federal Reserve Bank, based on a percentage of deposits. The amounts of such balances at September 30, 2017 and December 31, 2016 were $19.3 million and $10.7 million, respectively.
Scheduled maturities of time deposits at September 30, 20172021 for future periods ending are as follows:
|
|
|
|
|
| At September 30, 2017 | |
Maturing in 2017 |
| $ | 81,162 |
Maturing in 2018 |
|
| 75,057 |
Maturing in 2019 |
|
| 45,868 |
Maturing in 2020 |
|
| 14,980 |
Maturing in 2021 |
|
| 15,816 |
Thereafter |
|
| 15,946 |
Total |
| $ | 248,829 |
| | | |
|
| At September 30, 2021 | |
Maturing in 2021 | | $ | 90,527 |
Maturing in 2022 | | | 191,477 |
Maturing in 2023 | | | 39,064 |
Maturing in 2024 | | | 28,014 |
Maturing in 2025 | | | 57,085 |
Thereafter | | | 13,677 |
Total | | $ | 419,844 |
Interest expense by deposit category for the three and nine months ended September 30, 20172021 and 20162020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Interest-bearing checking |
| $ | 44 |
| $ | 7 |
| $ | 66 |
| $ | 20 |
Savings and money market |
|
| 356 |
|
| 257 |
|
| 937 |
|
| 757 |
Certificates of deposit |
|
| 645 |
|
| 544 |
|
| 1,790 |
|
| 1,634 |
Total |
| $ | 1,045 |
| $ | 808 |
| $ | 2,793 |
| $ | 2,411 |
| | | | | | | | | | | | |
| | Three Months Ended |
| Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Interest-bearing checking | | $ | 56 | | $ | 86 | | $ | 154 | | $ | 299 |
Savings and money market | |
| 348 | |
| 464 | |
| 1,232 | |
| 1,932 |
Certificates of deposit | |
| 1,225 | |
| 2,087 | |
| 4,095 | |
| 7,439 |
Total | | $ | 1,629 | | $ | 2,637 | | $ | 5,481 | | $ | 9,670 |
29
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 September 30, 20172021 and December 31, 2016:2020:
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
COMMITMENTS TO EXTEND CREDIT |
|
|
|
|
|
|
REAL ESTATE LOANS |
|
|
|
|
|
|
Commercial |
| $ | 108 |
| $ | 108 |
Construction and development |
|
| 82,115 |
|
| 57,016 |
One-to-four-family (includes loans held for sale) |
|
| 117,997 |
|
| 79,870 |
Home equity |
|
| 31,258 |
|
| 26,129 |
Multi-family |
|
| 418 |
|
| 426 |
Total real estate loans |
|
| 231,896 |
|
| 163,549 |
CONSUMER LOANS |
|
| 10,025 |
|
| 8,527 |
COMMERCIAL BUSINESS LOANS |
|
|
|
|
|
|
Commercial and industrial |
|
| 46,912 |
|
| 31,775 |
Warehouse lending |
|
| 58,231 |
|
| 51,102 |
Total commercial business loans |
|
| 105,143 |
|
| 82,877 |
Total commitments to extend credit |
| $ | 347,064 |
| $ | 254,953 |
| | | | | | |
COMMITMENTS TO EXTEND CREDIT |
| September 30, |
| December 31, | ||
REAL ESTATE LOANS | | 2021 |
| 2020 | ||
Commercial | | $ | 2,310 | | $ | 1,293 |
Construction and development | |
| 181,402 | |
| 143,666 |
One-to-four-family (includes locks for saleable loans) | |
| 114,933 | |
| 147,712 |
Home equity | |
| 58,809 | |
| 52,457 |
Multi-family | |
| 3,226 | |
| 658 |
Total real estate loans | |
| 360,680 | |
| 345,786 |
CONSUMER LOANS | |
| 37,966 | |
| 23,365 |
COMMERCIAL BUSINESS LOANS | |
|
| |
|
|
Commercial and industrial | |
| 123,175 | |
| 106,171 |
Warehouse lending | |
| 48,211 | |
| 52,909 |
Total commercial business loans | |
| 171,386 | |
| 159,080 |
Total commitments to extend credit | | $ | 570,032 | | $ | 528,231 |
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
30
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 $237,000$496,000 at September 30, 20172021 and $179,000$407,000 at December 31, 2016.2020. One-to-four-family commitments included in the table above are accounted for as fair value derivatives and do not carry an associated loss reserve.holdback. The Company’s derivative positions are presented with discussion in “Note 5 - Derivatives.”
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 September 30, 2017,2021, the total loans sold to the FHLB were $40.5$15.3 million with the FLA being $433,000totaling $938,000 and the CE obligation at $1.1 million$811,000 or 2.6%5.3% of the loans outstanding. Management has established a holdback of 10% of the outstanding CE, or $110,000,$81,000, which is a part of the off-balance sheet holdback for loans sold.
At September 30,
There 2021, there were no outstanding delinquencies on the0 loans sold to the FHLB of Des Moines at Septembergreater than 30 2017 anddays past their contractual payment due date, compared to loans totaling $498,000 at December 31, 2016.2020.
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 reservesa holdback reserve of $1.0$2.5 million and $955,000$2.0 million to cover loss exposure related to these guarantees for one-to-four-family loans sold into the secondary market at September 30, 20172021 and December 31, 2016,2020, respectively, which is included in other liabilities on the Consolidated Balance Sheets.
The Company has entered into a severance agreement with its Chief Executive Officer.Officer (“CEO”). The severance agreement, subject to certain requirements, generally includes a lump sum payment to the Chief Executive OfficerCEO 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, and twoChief Credit Officer, Chief Risk Officer, Chief Human Resources Officer, Senior Vice President Compliance Officer, Executive Vice PresidentsPresident 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.
The Bank received 7,158 shares of Class B common stock in Visa, Inc. asAs a result of the Visa initial public offering (“IPO”) in March 2008. These Class B shares of stock held by the Bank could be converted to Class A shares at a conversion rate of 1.6483 when all litigation pending as of the date of the IPO is concluded. However, at September 30, 2017, the date that litigation will be concluded cannot be determined. Until such time, the stock cannot be redeemed or sold by the Bank; therefore, it is not readily marketable and has a current carrying value of $0. Visa, Inc. Class A stock’s market value at September 30, 2017 and December 31, 2016 was $105.24 per share and $77.73 per share, respectively.
Due to 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 no0 material pending legal actions at September 30, 2017.2021.
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTSMEASUREMENTS
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, thedetermines fair value ofbased on the Company’s consolidated financial instruments will change when interest rate levels change and that change may either be favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed interest rate obligations are less likely to prepayrequirements established in a rising interest rate environment and more likely to prepay in a falling interest rate environment. Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors interest rates and maturities of assets and liabilities, and attempts to minimize interest rate risk by adjusting terms of new loans and deposits, and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
31
Accounting guidance regarding fair value measurements defines fair value and establishesStandards Codification (“ASC”) Topic 820, Fair Value Measurements, which provides a framework for measuring fair value in accordance with U.S. GAAP. FairGAAP
31
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 isas the exchangeexit 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. 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.
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.
DeterminationThe following methods were used to estimate the fair value of Fair Market Values:certain assets and liabilities on a recurring and nonrecurring basis:
Securities Available-for-Sale-The fair value of securities available-for-sale and held-to-maturity 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.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 (Level 2).convention.
Mortgage and Nonmortgage 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-throughpull-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 (Levels(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 cash flowcashflow impairment for TDRs when the change in terms results in a discount to the overall cash flowscashflows to be received (Level 3).
32
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 is estimated using net present value of expected cash flows using a third-party model that incorporates assumptions used in the industry to value such rights, adjusted for factors such as weighted average prepayments speeds based on historical information where appropriate (Level 3).
The following tables present securities available-for-sale, mortgage loans held for sale, and derivative assets and liabilities measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Securities Available-for-Sale | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
At September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency securities |
| $ | — |
| $ | 6,122 |
| $ | — |
| $ | 6,122 |
Corporate securities |
|
| — |
|
| 7,075 |
|
| — |
|
| 7,075 |
Municipal bonds |
|
| — |
|
| 11,439 |
|
| — |
|
| 11,439 |
Mortgage-backed securities |
|
| — |
|
| 39,474 |
|
| — |
|
| 39,474 |
U.S. Small Business Administration securities |
|
| — |
|
| 13,993 |
|
| — |
|
| 13,993 |
Total |
| $ | — |
| $ | 78,103 |
| $ | — |
| $ | 78,103 |
32
Table of Contentsthe dates indicated:
FS BANCORP, INC. AND SUBSIDIARY
| | | | | | | | | | | | |
Financial Assets | | At September 30, 2021 | ||||||||||
Securities available-for-sale: |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
U.S. agency securities | | $ | 0 | | $ | 26,182 | | $ | 0 | | $ | 26,182 |
Corporate securities | |
| 0 | |
| 8,139 | |
| 1,003 | |
| 9,142 |
Municipal bonds | |
| 0 | |
| 129,173 | |
| 136 | |
| 129,309 |
Mortgage-backed securities | |
| 0 | |
| 87,131 | |
| 0 | |
| 87,131 |
U.S. Small Business Administration securities | |
| 0 | |
| 17,038 | |
| 0 | |
| 17,038 |
Mortgage loans held for sale, at fair value | | | 0 | | | 118,106 | | | 0 | | | 118,106 |
Derivatives: | | | | | | | | | | | | |
Mandatory and best effort forward commitments with investors | | | 0 | | | 0 | | | 558 | | | 558 |
Forward TBA mortgage-backed securities | | | 0 | | | 587 | | | 0 | | | 587 |
Interest rate swaps | | | 0 | | | 527 | | | 0 | | | 527 |
Interest rate lock commitments with customers | | | 0 | | | 0 | | | 1,171 | | | 1,171 |
Total assets measured at fair value | | $ | 0 | | $ | 386,883 | | $ | 2,868 | | $ | 389,751 |
Financial Liabilities | | | | | | | | | | | | |
Derivatives: | | | | | | | | | | | | |
Interest rate swaps | | | 0 | | | (571) | | | 0 | | | (571) |
Total liabilities measured at fair value | | $ | 0 | | $ | (571) | | $ | 0 | | $ | (571) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Securities Available-for-Sale | ||||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||||||||||
At December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Financial Assets | | At December 31, 2020 | ||||||||||||||||||||||
Securities available-for-sale: |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||||||||||
U.S. agency securities |
| $ | — |
| $ | 8,068 |
| $ | — |
| $ | 8,068 | | $ | 0 | | $ | 8,105 | | $ | 0 | | $ | 8,105 |
Corporate securities |
|
| — |
|
| 7,500 |
|
| — |
|
| 7,500 | |
| 0 | |
| 10,016 | |
| 984 | |
| 11,000 |
Municipal bonds |
|
| — |
|
| 15,264 |
|
| — |
|
| 15,264 | |
| 0 | |
| 71,730 | |
| 127 | |
| 71,857 |
Mortgage-backed securities |
|
| — |
|
| 45,195 |
|
| — |
|
| 45,195 | |
| 0 | |
| 68,187 | |
| 0 | |
| 68,187 |
U.S. Small Business Administration securities |
|
| — |
|
| 5,848 |
|
| — |
|
| 5,848 | |
| 0 | |
| 18,869 | |
| 0 | |
| 18,869 |
Total |
| $ | — |
| $ | 81,875 |
| $ | — |
| $ | 81,875 | ||||||||||||
Mortgage loans held for sale, at fair value | | | 0 | | | 166,448 | | | 0 | | | 166,448 | ||||||||||||
Derivatives: | | | | | | | | | | | | | ||||||||||||
Interest rate swaps | | | 0 | | | 21 | | | 0 | | | 21 | ||||||||||||
Interest rate lock commitments with customers | | | 0 | | | 0 | | | 4,024 | | | 4,024 | ||||||||||||
Total assets measured at fair value | | $ | 0 | | $ | 343,376 | | $ | 5,135 | | $ | 348,511 | ||||||||||||
Financial Liabilities | | | | | | | | | | | | | ||||||||||||
Derivatives: | | | | | | | | | | | | | ||||||||||||
Mandatory and best effort forward commitments with investors | | $ | 0 | | $ | 0 | | $ | (67) | | $ | (67) | ||||||||||||
Forward TBA mortgage-backed securities | | | 0 | | | (1,602) | | | 0 | | | (1,602) | ||||||||||||
Interest rate swaps | | | 0 | | | (1,252) | | | 0 | | | (1,252) | ||||||||||||
Total liabilities measured at fair value | | $ | 0 | | $ | (2,854) | | $ | (67) | | $ | (2,921) |
The following table presents mortgage loans held for sale measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mortgage Loans Held for Sale | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
September 30, 2017 |
| $ | — |
| $ | 65,055 |
| $ | — |
| $ | 65,055 |
December 31, 2016 |
| $ | — |
| $ | 52,553 |
| $ | — |
| $ | 52,553 |
The following tables present the fair value of interest rate lock commitments with customers, individual forward sale commitments with investors,impaired loans, OREO, and paired off commitments with investors measured at their fair value on a recurring basis at September 30, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest Rate Lock Commitments with Customers | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
September 30, 2017 |
| $ | — |
| $ | — |
| $ | 1,131 |
| $ | 1,131 |
December 31, 2016 |
| $ | — |
| $ | — |
| $ | 818 |
| $ | 818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Individual Forward Sale Commitments with Investors | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
September 30, 2017 |
| $ | — |
| $ | 104 |
| $ | 4 |
| $ | 108 |
December 31, 2016 |
| $ | — |
| $ | 495 |
| $ | 177 |
| $ | 672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Paired Off Commitments with Investors | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
September 30, 2017 |
| $ | — |
| $ | (140) |
| $ | — |
| $ | (140) |
December 31, 2016 |
| $ | — |
| $ | 747 |
| $ | — |
| $ | 747 |
The following table presents impaired loansservicing rights measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded at September 30, 2017 and December 31, 2016.during the reporting periods indicated. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were evaluated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Impaired Loans | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
September 30, 2017 |
| $ | — |
| $ | — |
| $ | 761 |
| $ | 761 |
December 31, 2016 |
| $ | — |
| $ | — |
| $ | 194 |
| $ | 194 |
33
FS BANCORP, INC. AND SUBSIDIARY
| | | | | | | | | | | | |
| | September 30, 2021 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Impaired loans | | $ | 0 |
| $ | 0 |
| $ | 5,936 |
| $ | 5,936 |
Servicing rights | | | 0 |
| | 0 |
| | 24,894 |
| | 24,894 |
| | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Impaired loans | | $ | 0 |
| $ | 0 |
| $ | 7,761 |
| $ | 7,761 |
OREO | | | 0 | | | 0 | | | 90 | | | 90 |
Servicing rights | | | 0 |
| | 0 |
| | 12,833 |
| | 12,833 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2017:2021 and December 31, 2020:
|
|
| |||||||
|
|
|
|
| |||||
| |||||||||
|
|
|
|
|
| ||||
|
|
|
|
|
| ||||
| |||||||||
|
|
|
|
|
|
| | | | | | | | | | | | |
Level 3 |
| |
| Significant |
| |
| Weighted Average | ||||
Fair Value | | Valuation | | Unobservable | | | | September 30, | | | December 31, | |
Instruments |
| Techniques |
| Inputs |
| Range |
| 2021 | |
| 2020 |
|
RECURRING |
|
|
|
|
|
|
|
| | | | |
Interest rate lock commitments with customers |
| Quoted market prices |
| Pull-through expectations |
| 80% - 99% | | 92.9 | % | | 91.6 | % |
Individual forward sale commitments with investors |
| Quoted market prices |
| Pull-through expectations |
| 80% - 99% | | 92.9 | % | | 91.6 | % |
Corporate securities | | Discounted cash flows | | Discount rate | | 2.5% - 4.0% | | 4.0 | % | | 2.5 | % |
Municipal bonds | | Discounted cash flows | | Discount rate | | 5.8% - 6.4% | | 6.0 | % | | 6.4 | % |
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% | | N/A | | | 10.0 | % |
Servicing rights | | Industry sources | | Pre-payment speeds | | 0% - 50% | | 14.6 | % | | 32.6 | % |
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).
34
The following tabletables provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine months ended September 30, 20172021 and 2016:2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change in fair | |
|
|
|
|
|
|
|
|
|
|
|
|
| value for gains/ | ||
|
|
|
|
| Purchases |
|
|
|
|
|
|
| (losses) relating to | ||
|
| Beginning |
| and |
| Sales and |
| Ending |
| items held at end of | |||||
Three Months Ended September 30, |
| Balance |
| Issuances |
| Settlements |
| Balance |
| period | |||||
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments with customers |
| $ | 1,212 |
| $ | 3,891 |
| $ | (3,972) |
| $ | 1,131 |
| $ | (81) |
Individual forward sale commitments with investors |
|
| 83 |
|
| 40 |
|
| (119) |
|
| 4 |
|
| (79) |
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments with customers |
| $ | 2,058 |
| $ | 5,763 |
| $ | (5,971) |
| $ | 1,850 |
| $ | (208) |
Individual forward sale commitments with investors |
|
| (3) |
|
| (60) |
|
| 23 |
|
| (40) |
|
| (37) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net change in fair | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| value for gains/ | ||||||||||||||||||||
|
|
|
| Purchases |
|
|
|
|
| (losses) relating to | |||||||||||||||||||||||
|
| Beginning |
| and |
| Sales and |
| Ending |
| items held at end of | |||||||||||||||||||||||
Nine Months Ended September 30, |
| Balance |
| Issuances |
| Settlements |
| Balance |
| period | |||||||||||||||||||||||
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||
| | | | Purchases | | | | | | Net change in | | Net change in | |||||||||||||||||||||
Three Months Ended |
| Beginning |
| and |
| Sales and |
| Ending | | fair value for | | fair value for | |||||||||||||||||||||
September 30, 2021 |
| Balance |
| Issuances |
| Settlements |
| Balance |
| gains/(losses) (1) |
| gains/(losses) (2) | |||||||||||||||||||||
Interest rate lock commitments with customers |
| $ | 818 |
| $ | 11,440 |
| $ | (11,127) |
| $ | 1,131 |
| $ | 313 | | $ | 2,106 | | $ | 4,920 | | $ | (5,855) | | $ | 1,171 | | $ | (935) | | $ | — |
Individual forward sale commitments with investors |
|
| 177 |
|
| (49) |
|
| (124) |
|
| 4 |
|
| (173) | | | (553) | | | 1,081 | | | 30 | | | 558 | | | 1,111 | | | — |
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Securities available-for-sale, at fair value | | | 1,117 | | | 25 | | | (3) | | | 1,139 | | | — | | | 25 | |||||||||||||||
September 30, 2020 | | | | | | | | | | | | | | | | ��� | | | |||||||||||||||
Interest rate lock commitments with customers |
| $ | 698 |
| $ | 14,039 |
| $ | (12,887) |
| $ | 1,850 |
| $ | 1,152 | | $ | 4,722 | | $ | 18,863 | | $ | (17,399) | | $ | 6,186 | | $ | 1,464 | | $ | — |
Individual forward sale commitments with investors |
|
| 74 |
|
| (267) |
|
| 153 |
|
| (40) |
|
| (114) | | | (144) | | | (1,591) | | | 973 | | | (762) | | | (618) | | | — |
Securities available-for-sale, at fair value | | | 1,163 | | | — | | | (54) | | | 1,109 | | | — | | | (51) |
| | | | | | | | | | | | | | | | | | |
|
| |
| Purchases |
| |
| |
| Net change in |
| Net change in | ||||||
Nine Months Ended |
| Beginning |
| and |
| Sales and |
| Ending |
| fair value for |
| fair value for | ||||||
September 30, 2021 |
| Balance |
| Issuances |
| Settlements |
| Balance |
| gains/(losses) (1) |
| gains/(losses) (2) | ||||||
Interest rate lock commitments with customers | | $ | 4,024 | | $ | 19,780 | | $ | (22,633) | | $ | 1,171 | | $ | (2,853) | | $ | — |
Individual forward sale commitments with investors | | | (67) | | | 534 | | | 91 | | | 558 | | | 625 | | | — |
Securities available-for-sale, at fair value | | | 1,111 | | | 38 | | | (10) | | | 1,139 | | | — | | | 38 |
September 30, 2020 | | | | | | | | | | | | | | | | | | |
Interest rate lock commitments with customers | | $ | 557 | | $ | 38,966 | | $ | (33,337) | | $ | 6,186 | | $ | 5,629 | | $ | — |
Individual forward sale commitments with investors | | | (195) | | | (3,211) | | | 2,644 | | | (762) | | | (567) | | | — |
Securities available-for-sale, at fair value | | | 1,162 | | | — | | | (53) | | | 1,109 | | | — | | | (44) |
(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 otherin noninterest income.
34
Fair Values of Financial Instruments - The following methods and assumptions were used by the Company in estimating the fair values of financial instruments disclosed in these financial statements:
Cash, and Cash Equivalents and Certificates of Deposit Unrealized gains (losses) on securities available-for-sale, at Other Financial Institutions - The carrying amounts of cash and short-term instruments approximate their fair value (Level 1).
Federal Home Loan Bank stock - The par value of FHLB stock approximates its fair value (Level 2).
Bank-owned Life Insurance - The estimated fair value is equal to the cash surrender value of policies, net of surrender charges (Level 1).
Accrued Interest - The carrying amounts of accrued interest approximate its fair value (Level 2).
Loans Receivable, Net - For variable rate loans that re-price frequently and have no significant changeare recorded in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers or similar credit quality (Level 3).
Servicing Rights - The fair value of mortgage, commercial, and consumer 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).
Deposits - The fair value of deposits with no stated maturity date is included at the amount payable on demand. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation on interest rates currently offered on similar certificates (Level 2).
Borrowings - The carrying amounts of advances maturing within 90 days approximate their fair values. The fair values of long-term advances are estimated using discounted cash flow analyses based on the Bank’s current incremental borrowing rates for similar types of borrowing arrangements (Level 2).
Subordinated Note - The fair value of the Subordinated Note is based upon the average yield of debt issuances for similarly sized issuances (Level 2).
Off-Balance Sheet Instruments - The fair value of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the customers. The majority of the Company’s off-balance sheet instruments consist of non-fee producing, variable-rate commitments, the Company has determined they do not have a distinguishable fair value. The fair value of loan lock commitments with customers and investors reflect an estimate of value based upon the interest rate lock date, the expected pull-through percentage for the commitment, and the interest rate at year end (Level 2 and 3).
accumulated other comprehensive income.
35
The following table provides estimated fair values of the Company’s financial instruments at September 30, 20172021 and December 31, 2016:2020, whether or not recognized at fair value on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair | ||||
|
| Amount |
| Value |
| Amount |
| Value | ||||
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 31,295 |
| $ | 31,295 |
| $ | 36,456 |
| $ | 36,456 |
Certificates of deposit at other financial institutions |
|
| 18,108 |
|
| 18,108 |
|
| 15,248 |
|
| 15,248 |
Level 2 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale, at fair value |
|
| 78,103 |
|
| 78,103 |
|
| 81,875 |
|
| 81,875 |
Loans held for sale, at fair value |
|
| 65,055 |
|
| 65,055 |
|
| 52,553 |
|
| 52,553 |
FHLB stock, at cost |
|
| 3,047 |
|
| 3,047 |
|
| 2,719 |
|
| 2,719 |
Accrued interest receivable |
|
| 3,217 |
|
| 3,217 |
|
| 2,524 |
|
| 2,524 |
Individual forward sale commitments with investors |
|
| 104 |
|
| 104 |
|
| 495 |
|
| 495 |
Paired off commitments with investors |
|
| — |
|
| — |
|
| 747 |
|
| 747 |
Level 3 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, gross |
|
| 765,571 |
|
| 779,284 |
|
| 605,415 |
|
| 670,183 |
Servicing rights, held at lower of cost or fair value |
|
| 5,811 |
|
| 7,289 |
|
| 8,459 |
|
| 11,741 |
Fair value interest rate locks with customers |
|
| 1,131 |
|
| 1,131 |
|
| 818 |
|
| 818 |
Individual forward sale commitments with investors |
|
| 4 |
|
| 4 |
|
| 177 |
|
| 177 |
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 inputs: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 840,578 |
|
| 844,288 |
|
| 712,593 |
|
| 718,970 |
Borrowings |
|
| 10,270 |
|
| 9,049 |
|
| 12,670 |
|
| 12,660 |
Subordinated note |
|
| 9,840 |
|
| 9,805 |
|
| 9,825 |
|
| 9,805 |
Accrued interest payable |
|
| 217 |
|
| 217 |
|
| 192 |
|
| 192 |
Paired off commitments with investors |
|
| 140 |
|
| 140 |
|
| — |
|
| — |
| | | | | | | | | | | | |
| | September 30, | | December 31, | ||||||||
| | 2021 | | 2020 | ||||||||
Financial Assets |
| Carrying |
| Fair |
| Carrying |
| Fair | ||||
Level 1 inputs: |
| Amount |
| Value |
| Amount |
| Value | ||||
Cash and cash equivalents | | $ | 28,332 | | $ | 28,332 | | $ | 91,576 | | $ | 91,576 |
Certificates of deposit at other financial institutions | |
| 11,782 | |
| 11,782 | |
| 12,278 | |
| 12,278 |
Level 2 inputs: | | | | | | | | | | | | |
Securities available-for-sale, at fair value | |
| 267,663 | |
| 267,663 | |
| 176,907 | |
| 176,907 |
Securities held-to-maturity | | | 7,500 | | | 8,113 | | | 7,500 | | | 7,556 |
Loans held for sale, at fair value | |
| 118,106 | |
| 118,106 | |
| 166,448 | |
| 166,448 |
FHLB stock, at cost | |
| 4,871 | |
| 4,871 | |
| 7,439 | |
| 7,439 |
Forward TBA mortgage-backed securities | | | 587 | | | 587 | | | — | | | — |
Interest rate swaps | | | 527 | | | 527 | | | 21 | | | 21 |
Accrued interest receivable | |
| 7,797 | |
| 7,797 | |
| 7,030 | |
| 7,030 |
Level 3 inputs: | | | | | | | | | | | | |
Securities available-for-sale, at fair value | | | 1,139 | | | 1,139 | | | 1,111 | | | 1,111 |
Loans receivable, gross | |
| 1,709,669 | |
| 1,708,741 | |
| 1,574,227 | |
| 1,580,360 |
Servicing rights, held at lower of cost or fair value | |
| 16,497 | |
| 24,894 | |
| 12,595 | |
| 12,833 |
Fair value interest rate locks with customers | |
| 1,171 | |
| 1,171 | |
| 4,024 | |
| 4,024 |
Mandatory and best effort forward commitments with investors | |
| 558 | |
| 558 | |
| — | | | — |
Financial Liabilities | | | | | | | | | | | | |
Level 2 inputs: | | | | | | | | | | | | |
Deposits | |
| 1,863,650 | |
| 1,861,964 | |
| 1,674,071 | |
| 1,674,328 |
Borrowings | |
| 42,528 | |
| 43,631 | |
| 165,809 | |
| 167,680 |
Subordinated notes, excluding unamortized debt issuance costs | |
| 50,000 | |
| 50,500 | |
| 10,000 | |
| 11,083 |
Accrued interest payable | |
| 305 | |
| 305 | |
| 406 | |
| 406 |
Interest rate swaps | | | 571 | | | 571 | | | 1,252 | | | 1,252 |
Forward TBA mortgage-backed securities | |
| — | |
| — | |
| 1,602 | |
| 1,602 |
Level 3 inputs: | | | | | | | | | | | | |
Mandatory and best effort forward commitments with investors | | | — | | | — | | | 67 | | | 67 |
NOTE 11 - EMPLOYEE BENEFITS
Employee Stock Ownership Plan (“ESOP”)
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‑month12-month period and based on the employee’s anniversary date will be vested intoin the ESOP. After two years of working at least 1,000 hours in each of those two years, theThe employee will be 100% vested in the ESOP.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 259,210518,420 shares of FS Bancorp, Inc. common stock in the open market at an average price of $10.17$5.09 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, 2016,2020, the ESOP paid the fifth ninth
36
annual installment of principal in the amount of $257,000,$282,000, plus accrued interest of $38,000$13,000 pursuant to the ESOP loan agreement.
36
As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares atfor the quarter ended September 30, 2017 for the prior 90 days.2021. 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 September 30, 2017 and 2016 was $360,000 and $204,000, respectively, and $914,000 and $529,000 for the nine months ended September 30, 20172021 and 2016,2020 was $439,000 and $1.3 million, respectively and $251,000 and $756,000, respectively.
Shares held by the ESOP at September 30, 20172021 and 2016December 31, 2020 were as follows (shown as actual)actual, post stock split):
| | | | | | |
| | Balances | | Balances | ||
|
| at September 30, 2021 |
| at December 31, 2020 | ||
Allocated shares | | | 427,488 | | | 427,488 |
Committed to be released shares |
| | 38,881 |
| | — |
Unallocated shares |
| | 12,961 |
| | 51,842 |
Total ESOP shares |
| | 479,330 |
| | 479,330 |
| | | | | | |
Fair value of unallocated shares (in thousands) | | $ | 445 | | $ | 1,307 |
|
|
|
|
|
|
|
|
| Balances |
| Balances | ||
|
| at September 30, 2017 |
| at September 30, 2016 | ||
Allocated shares |
|
| 126,589 |
|
| 102,359 |
Committed to be released shares |
|
| 19,441 |
|
| 19,441 |
Unallocated shares |
|
| 110,164 |
|
| 136,085 |
Total ESOP shares |
|
| 256,194 |
|
| 257,885 |
|
|
|
|
|
|
|
Fair value of unallocated shares (in thousands) |
| $ | 5,180 |
| $ | 3,703 |
Share data has been adjusted for all periods to reflect the 2-for-one stock split effective July 14, 2021.
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.
37
The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three endand nine months ended September 30, 20172021 and 2016:2020:
| | | | | | | | | | | | |
| | At or For the Three Months Ended September 30, | | At or For the Nine Months Ended September 30, | ||||||||
Numerator (in thousands): |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net income | | $ | 8,331 | | $ | 12,713 | | $ | 28,763 | | $ | 27,900 |
Dividends and undistributed earnings allocated to participating securities | | | (139) | | | (73) | | | (465) | | | (69) |
Net income available to common shareholders | | $ | 8,192 | | $ | 12,640 | | $ | 28,298 | | $ | 27,831 |
Denominator (shown as actual, post stock split): | | | | | | | | | | | | |
Basic weighted average common shares outstanding | |
| 8,240,218 | |
| 8,449,642 | |
| 8,360,249 | |
| 8,571,910 |
Dilutive shares | |
| 207,733 | |
| 141,026 | |
| 213,948 | |
| 154,666 |
Diluted weighted average common shares outstanding | |
| 8,447,951 | |
| 8,590,668 | |
| 8,574,197 | |
| 8,726,576 |
Basic earnings per share | | $ | 0.99 | | $ | 1.50 | | $ | 3.38 | | $ | 3.25 |
Diluted earnings per share | | $ | 0.97 | | $ | 1.47 | | $ | 3.30 | | $ | 3.19 |
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 | | | 23,067 | | | 204,374 | | | 7,774 | | | 151,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At or For the Three Months Ended September 30, |
| At or For the Nine Months Ended September 30, | ||||||||
Numerator: |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net income (in thousands) |
| $ | 3,454 |
| $ | 3,457 |
| $ | 10,406 |
| $ | 7,953 |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
| 3,051,744 |
|
| 2,851,147 |
|
| 2,949,092 |
|
| 2,901,572 |
Dilutive shares |
|
| 187,584 |
|
| 87,292 |
|
| 192,685 |
|
| 84,102 |
Diluted weighted average common shares outstanding |
|
| 3,239,328 |
|
| 2,938,439 |
|
| 3,141,777 |
|
| 2,985,674 |
Basic earnings per share |
| $ | 1.13 |
| $ | 1.21 |
| $ | 3.53 |
| $ | 2.74 |
Diluted earnings per share |
| $ | 1.07 |
| $ | 1.18 |
| $ | 3.31 |
| $ | 2.66 |
Share data has been adjusted for all periods to reflect the 2-for-one stock split effective July 14, 2021.
NOTE 13 - STOCK-BASED COMPENSATION
Stock Options and Restricted Stock
In September 2013,On May 17, 2018, the shareholders of FS Bancorp, Inc. approved the FS Bancorp, Inc. 20132018 Equity Incentive Plan (“(the “2018 Plan”). that authorizes 1.3 million shares of the Company’s common stock to be awarded. The 2018 Plan provides for the grant of incentive stock options, non-qualified stock options, and up to 326,000 restricted stock awards.awards (“RSAs”) to directors, emeritus directors, officers, employees or advisory directors of the Company. At September 30, 2021, there were 429,270 stock option awards and 144,160 RSAs available to be granted under the 2018 Plan (post stock split).
Total share-based compensation expense for the Plan was $138,000$402,000 and $496,000$995,000 for the three and nine months ended September 30, 2017,2021, respectively, and $195,000$272,000 and $588,000$719,000 for the three and nine months ended September 30, 2016,2020, respectively.
37
Stock Options
The 2018 Plan authorizes the grantconsists of stock options totaling 324,013 shares to Company directors and employees in which 322,000 option share awards under the Plan were granted with an exercise price equal to the market price of FS Bancorp’s common stock at the grant date of May 8, 2014, of $16.89 per share. These option share awards werethat may be granted as incentive stock options or non-qualified stock options, havingoptions. Stock option awards generally vest at one year for independent directors or over a vestingfive-year period of five years,for employees and officers with 20% vesting on the anniversary date of each grant date and a contractual lifeas 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 September 30, 2017, 2,013 option share awards are available to be granted.
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 became a publicly held company in July 2012, therefore historical data was not available to calculate the volatility for FS Bancorp stock. Management utilized a proxy to determine the expected volatility of FS Bancorp’s stock at grant date for the majority of stock options granted in 2014. The proxy chosen was the NASDAQ Bank Index, or NASDAQ Bank (NASDAQ symbol: BANK). This index provides the volatility of the banking sector for NASDAQ traded banks. The majority of smaller banks are traded on the NASDAQ given the costs and daily interaction required with trading on the New York Stock Exchange. The Company utilized the comparable Treasury rate for the discount rate associated with the stock options granted. 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, 6.0 years for three-year vesting, and 6.5 years.years for five-year vesting.
38
The following table presents a summary of the Company’s stock option plan awards during the nine months ended September 30, 20172021 (shown as actual)actual, post stock split):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
|
|
|
|
|
|
| Weighted- |
| Remaining |
|
|
| |
|
|
|
| Average |
| Contractual Term In |
| Aggregate | ||
|
| Shares |
| Exercise Price |
| Years |
| Intrinsic Value | ||
Outstanding at January 1, 2017 |
| 295,850 |
| $ | 16.89 |
| 7.36 |
| $ | 5,638,901 |
Granted |
| — |
|
| — |
| — |
|
| — |
Less exercised |
| 34,363 |
| $ | 16.89 |
| — |
| $ | 919,380 |
Forfeited or expired |
| — |
|
| — |
| — |
|
| — |
Outstanding at September 30, 2017 |
| 261,487 |
| $ | 16.89 |
| 6.61 |
| $ | 9,089,288 |
|
|
|
|
|
|
|
|
|
|
|
Expected to vest, assuming a 0.31% annual forfeiture rate |
| 261,053 |
| $ | 16.89 |
| 6.61 |
| $ | 9,074,192 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017 |
| 134,687 |
| $ | 16.89 |
| 6.61 |
| $ | 4,681,720 |
| | | | | | | | | | |
|
| |
| | |
| Weighted-Average |
| | |
| | | | Weighted- | | Remaining | | | | |
| | | | Average | | Contractual Term In | | Aggregate | ||
| | Shares | | Exercise Price | | Years | | Intrinsic Value | ||
Outstanding at January 1, 2021 |
| 671,754 | | $ | 19.45 |
| 6.58 | | $ | 5,721,159 |
Granted |
| 118,850 | | | 35.46 |
| 6.41 | | | — |
Less exercised |
| 176,978 | | $ | 12.73 |
| — | | $ | 4,265,369 |
Forfeited or expired |
| — | |
| — |
| — | |
| — |
Outstanding at September 30, 2021 |
| 613,626 | | $ | 25.24 |
| 7.43 | | $ | 5,847,783 |
| | | | | | | | | | |
Expected to vest, assuming a 0.31% annual forfeiture rate (1) |
| 611,361 | | $ | 25.23 |
| 7.42 | | $ | 5,833,496 |
| | | | | | | | | | |
Exercisable at September 30, 2021 |
| 261,822 | | $ | 20.98 |
| 5.85 | | $ | 3,569,689 |
__________________________
(1) Forfeiture rate has been calculated and estimated to assume a forfeiture of 3.1% of the options forfeited over 10 years.
Share data has been adjusted to reflect the 2-for-one stock split effective July 14, 2021.
At September 30, 2017,2021, there was $368,000$2.3 million of total unrecognized compensation cost related to nonvested stock options granted under the Plan.2018 plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 1.63.7 years.
Restricted Stock Awards
The Plan authorizesRSAs’ fair value is equal to the value of the stock based on the market price of FS Bancorp’s common stock on the grant of restricted stock awards totaling 129,605 shares to Company directorsdate and employees, and 125,105 shares were granted on May 8, 2014 at a grant date fair value of $16.89 per share. The remaining 4,500 restricted stock awards were granted January 1, 2016 at a grant date fair value of $26.00 per share. Compensationcompensation expense is recognized over the vesting period of the awards based on the fair value of the restricted stock. The restricted stock awards’ fair value is equal toShares for the value on the grant date. Shares awarded as restricted stock2018 Plan generally vest ratablyat one or three years for independent directors or over a three-year period for directors and a five-year period for employees and officers beginning aton the grant date. Any unvested restricted stock awardsRSAs will expire after vesting or sooner in the event of the award recipient’s termination of service with the Company or the Bank.
38
The following table presents a summary of the Company’s nonvested awards during the nine months ended September 30, 20172021 (shown as actual)actual, post stock split):
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
|
|
| |
|
|
|
| Grant-Date Fair Value |
| Weighted-Average | ||
Nonvested Shares |
| Shares |
| Per Share |
| Grant-Date Fair Value | ||
Nonvested at January 1, 2017 |
| 68,763 |
| $ | 17.49 |
| $ | 1,202,401 |
Granted |
| — |
|
| — |
|
| — |
Less vested |
| 31,921 |
| $ | 17.32 |
| $ | 552,810 |
Forfeited or expired |
| — |
|
| — |
|
| — |
Nonvested at September 30, 2017 |
| 36,842 |
| $ | 17.63 |
| $ | 649,591 |
| | | | | |
|
| |
| Weighted-Average | |
| | | | Grant-Date Fair Value | |
Nonvested Shares | | Shares | | Per Share | |
Nonvested at January 1, 2021 |
| 110,184 | | $ | 24.35 |
Granted |
| 41,350 | | | 35.46 |
Less vested |
| 29,862 | | | 24.78 |
Forfeited or expired |
| 0 | |
| 0 |
Nonvested at September 30, 2021 |
| 121,672 | | $ | 28.02 |
Share data has been adjusted to reflect the 2-for-one stock split effective July 14, 2021.
At September 30, 2017,2021, there was $508,000$3.3 million of total unrecognized compensation costscost related to nonvested shares granted under the 2018 Plan as restricted stock awards.RSAs. The cost is expected to be recognized over the remaining weighted-average vesting period of 1.63.7 years.
NOTE 14 - REGULATORY CAPITAL
The Company and the Bank areis subject to various regulatory capital requirements administered by the federal banking agencies.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.
39
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 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.
Quantitative measures established by regulation to ensureThe federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, require the Bankcommunity 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 maintain minimum amountsall 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 ratios (set forthwill 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 the table below)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 (as definedand 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 regulations)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 total average assets (as defined),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 minimumto 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 ratio falls no more than one percentage point below the applicable CBLR requirement, so long as the banking organization maintains a leverage ratio of 7.5% or greater in 2021, or 8% thereafter. 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 8.5% 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. Effective October 1, 2020, the final rule made no change to the interim final rule issued in April 2020.
The Bank qualified for and elected the CBLR framework as of September 30, 2021. The Tier 1 totalleverage-based capital (as defined) and common equity Tier 1 (“CET 1”) capitalratio calculated for the Bank at September 30, 2021 was 11.9%, compared to risk-weighted assets (as defined).
The Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below to be categorized as well capitalized.10.9% at December 31, 2020. At September 30, 20172021, the Bank had Tier 1 capital of $263.7 million and a minimum Tier 1 capital requirement of $187.8 million to be considered well capitalized under the CBLR framework. At December 31, 2020, the Bank had Tier 1 capital of $215.9 million and a minimum Tier 1 capital requirement of $159.1 million to be considered well capitalized for the Tier 1 leverage-based ratio under the Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (“Basel III”) requirements. At both September 30, 2021 and December 31, 2016,2020, 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 September 30, 2017,2021, that the Company and the Bank met all capital adequacy requirements.
39
The following table compares the Bank’s actual capital amounts and ratios at September 30, 2017 and December 31, 2016 to their minimum regulatory capital requirements and well capitalized regulatory capital at those dates (dollars in thousands):
|
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|
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|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
| To be Well Capitalized |
| |||
|
|
|
|
|
|
|
|
|
|
|
| Under Prompt |
| |||
|
|
|
|
|
|
| For Capital |
| Corrective |
| ||||||
|
| Actual |
| Adequacy Purposes |
| Action Provisions |
| |||||||||
Bank Only |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
At September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets) |
| $ | 130,246 |
| 16.14 | % | $ | 64,556 |
| 8.00 | % | $ | 80,696 |
| 10.00 | % |
Tier 1 risk-based capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets) |
| $ | 120,150 |
| 14.89 | % | $ | 48,417 |
| 6.00 | % | $ | 64,556 |
| 8.00 | % |
Tier 1 leverage capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to average assets) |
| $ | 120,150 |
| 12.50 | % | $ | 38,459 |
| 4.00 | % | $ | 48,074 |
| 5.00 | % |
CET 1 capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets) |
| $ | 120,150 |
| 14.89 | % | $ | 36,313 |
| 4.50 | % | $ | 52,452 |
| 6.50 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets) |
| $ | 93,309 |
| 13.87 | % | $ | 53,813 |
| 8.00 | % | $ | 67,266 |
| 10.00 | % |
Tier 1 risk-based capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets) |
| $ | 84,876 |
| 12.62 | % | $ | 40,360 |
| 6.00 | % | $ | 53,813 |
| 8.00 | % |
Tier 1 leverage capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to average assets) |
| $ | 84,876 |
| 10.33 | % | $ | 32,862 |
| 4.00 | % | $ | 41,078 |
| 5.00 | % |
CET 1 capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets) |
| $ | 84,876 |
| 12.62 | % | $ | 30,270 |
| 4.50 | % | $ | 43,723 |
| 6.50 | % |
In addition to the minimum CET 1, Tier 1 and total capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional CET 1 capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount equal to 2.5% of risk-weighted assets in January 2019. At September 30, 2017, the Bank’s CET1 capital exceeded the required capital conservation buffer of 1.25%.
FS Bancorp, Inc. is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to the capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. ForBank 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 with less than $1.0 billion in assets,is required to serve as a source of financial and managerial strength to the capital guidelines apply on aholding company’s subsidiary bank only basis and the Federal Reserve expects the holding company’s subsidiary banksbank to be well capitalized under the prompt corrective action regulations. If FS Bancorp, Inc. was subject to regulatory guidelines for bank holding companies with $1.0$3.0 billion or more in assets at September 30, 2017, the Company2021, FS Bancorp, Inc. would
40
have exceeded all regulatory capital requirements. The regulatoryTier 1 leverage-based capital ratiosratio calculated for FS Bancorp, Inc. at September 30, 2017 were 11.9% for Tier 1 leverage-based capital, 14.2% for Tier 1 risk-based capital, 15.5% for total risk-based capital,2021 and 14.2% for CET 1 capital ratio.December 31, 2020 was 10.6% and 11.1%, respectively.
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. We define ourThe Company defines its business segments by
40
product type and customer segment which we haveit has organized into two2 lines of business: commercial and consumer banking and home lending.
We useThe 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 timefull-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.
●an allocation of ALLL provisioning based on Home Lending’s portfolio loans included in the Company’s incurred loss model and their respective calculated allowance balance.
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 ourits commercial and consumer customers through Bank branches, ATMs,automated teller machines (“ATM”), online banking platforms, mobile banking apps, and telephone banking. These products and services include deposit products; residential, consumer, business and commercial real estate lending portfolios and cash management services. We originateThe Company originates consumer loans, commercial and multi-family real estate loans, construction loans onfor residential and multi-family construction, and commercial business loans. At September 30, 2017, our2021, the Company’s retail deposit branch network consisted of 1121 branches in the Pacific Northwest. At September 30, 2017 and December 31, 2016, our deposits totaled $840.6 million and $712.6 million, respectively. This segment is also responsible for the management of ourthe investment portfolio and other assets of the Bank.
Home Lending Segment
The home lending segmentoriginates one-to-four-family residential mortgage loans primarily for sale in the secondary markets as well as originating adjustable rate mortgage (“ARM”) loans held for investment. The majority of our mortgage loans are sold to or securitized by FNMA, FHLMC, GNMA, or the FHLB of Des Moines, while we retainthe 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
41
Department of Agriculture or USDA are generally sold servicing released to a correspondent bank or mortgage company. We haveThe Company has the option to sell loans on a servicing-released or servicing-retained basis to securitizers and correspondent lenders. A small percentage of ourits loans are brokered to other lenders. On occasion, wethe Company may sell a portion of ourits MSR portfolio and may sell small pools of loans initially originated to be held in the loan portfolio. We manageThe 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 segment. One-to-four-family loans originated for investment and held in this segment are allocated to the home lending segment with a corresponding provision expense and FTP for cost of funds.
41
Segment Financial Results
The tables below summarize the financial results for each segment based primarily on the number of FTEs and assetsfactors mentioned above within each segment for the three and nine months ended September 30, 20172021 and 2016:
|
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|
|
|
|
|
|
|
|
| At or For the Three Months Ended September 30, 2017 | |||||||
|
| Home Lending |
| Commercial and Consumer Banking |
| Total | |||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
Net interest income (1) |
| $ | 812 |
| $ | 10,210 |
| $ | 11,022 |
Provision for loan losses |
|
| (127) |
|
| (323) |
|
| (450) |
Noninterest income |
|
| 5,014 |
|
| 1,413 |
|
| 6,427 |
Noninterest expense |
|
| (4,586) |
|
| (7,003) |
|
| (11,589) |
Income before provision for income taxes |
|
| 1,113 |
|
| 4,297 |
|
| 5,410 |
Provision for income taxes |
|
| (407) |
|
| (1,549) |
|
| (1,956) |
Net income |
| $ | 706 |
| $ | 2,748 |
| $ | 3,454 |
Total average assets at period end |
| $ | 220,898 |
| $ | 744,820 |
| $ | 965,718 |
FTEs |
|
| 119 |
|
| 204 |
|
| 323 |
|
|
|
|
|
|
|
|
|
|
|
| At or For the Three Months Ended September 30, 2016 | |||||||
|
| Home Lending |
| Commercial and Consumer Banking |
| Total | |||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
Net interest income (1) |
| $ | 793 |
| $ | 7,957 |
| $ | 8,750 |
Provision for loan losses |
|
| (16) |
|
| (584) |
|
| (600) |
Noninterest income |
|
| 5,982 |
|
| 1,266 |
|
| 7,248 |
Noninterest expense |
|
| (3,861) |
|
| (6,451) |
|
| (10,312) |
Income before provision for income taxes |
|
| 2,898 |
|
| 2,188 |
|
| 5,086 |
Provision for income taxes |
|
| (948) |
|
| (681) |
|
| (1,629) |
Net income |
| $ | 1,950 |
| $ | 1,507 |
| $ | 3,457 |
Total average assets at period end |
| $ | 168,722 |
| $ | 634,735 |
| $ | 803,457 |
FTEs |
|
| 110 |
|
| 195 |
|
| 305 |
2020:
| | | | | | | | | |
| | At or For the Three Months Ended September 30, 2021 | |||||||
Condensed income statement: |
| Home Lending |
| Commercial and Consumer Banking |
| Total | |||
Net interest income (1) |
| $ | 2,278 | | $ | 20,377 |
| $ | 22,655 |
Benefit (provision) for loan losses (2) | |
| 1,986 | |
| (1,986) | |
| — |
Noninterest income | |
| 6,439 | |
| 1,959 | |
| 8,398 |
Noninterest expense | |
| (5,612) | |
| (14,404) | |
| (20,016) |
Income before provision for income taxes | |
| 5,091 | |
| 5,946 | |
| 11,037 |
Provision for income taxes | |
| (1,244) | |
| (1,462) | |
| (2,706) |
Net income |
| $ | 3,847 | | $ | 4,484 |
| $ | 8,331 |
Total average assets for period ended |
| $ | 417,763 | | $ | 1,799,890 |
| $ | 2,217,653 |
FTEs | |
| 154 | |
| 373 | |
| 527 |
| | | | | | | | | |
| | At or For the Three Months Ended September 30, 2020 | |||||||
Condensed income statement: |
| Home Lending |
| Commercial and Consumer Banking |
| Total | |||
Net interest income (1) |
| $ | 1,085 | | $ | 17,833 |
| $ | 18,918 |
Provision for loan losses (2) | |
| (960) | |
| (2,140) | |
| (3,100) |
Noninterest income | |
| 15,078 | |
| 2,468 | |
| 17,546 |
Noninterest expense | |
| (4,117) | |
| (13,062) | |
| (17,179) |
Income before provision for income taxes | |
| 11,086 | |
| 5,099 | |
| 16,185 |
Provision for income taxes | |
| (2,372) | |
| (1,100) | |
| (3,472) |
Net income |
| $ | 8,714 | | $ | 3,999 |
| $ | 12,713 |
Total average assets for period ended |
| $ | 445,927 | | $ | 1,568,582 |
| $ | 2,014,509 |
FTEs | |
| 137 | |
| 336 | |
| 473 |
42
| | | | | | | | | |
| | At or For the Nine Months Ended September 30, 2021 | |||||||
Condensed income statement: |
| Home Lending |
| Commercial and Consumer Banking |
| Total | |||
Net interest income (1) |
| $ | 6,146 | | $ | 57,829 |
| $ | 63,975 |
Provision for loan losses (2) | |
| 1,545 | |
| (3,045) | |
| (1,500) |
Noninterest income | |
| 23,072 | |
| 6,546 | |
| 29,618 |
Noninterest expense | |
| (14,132) | |
| (41,151) | |
| (55,283) |
Income before provision for income taxes | |
| 16,631 | |
| 20,179 | |
| 36,810 |
Provision for income taxes | |
| (3,636) | |
| (4,411) | |
| (8,047) |
Net income |
| $ | 12,995 | | $ | 15,768 |
| $ | 28,763 |
Total average assets for period ended |
| $ | 402,693 | | $ | 1,771,216 |
| $ | 2,173,909 |
FTEs | |
| 154 | |
| 373 | |
| 527 |
| | | | | | | | | |
| | At or For the Nine Months Ended September 30, 2020 | |||||||
Condensed income statement: |
| Home Lending |
| Commercial and Consumer Banking |
| Total | |||
Net interest income (1) |
| $ | 3,470 | | $ | 50,781 |
| $ | 54,251 |
Provision for loan losses (2) | |
| (2,016) | |
| (9,419) | |
| (11,435) |
Noninterest income | |
| 32,312 | |
| 8,256 | |
| 40,568 |
Noninterest expense | |
| (12,348) | |
| (35,637) | |
| (47,985) |
Income before provision for income taxes | |
| 21,418 | |
| 13,981 | |
| 35,399 |
Provision for income taxes | |
| (4,537) | |
| (2,962) | |
| (7,499) |
Net income |
| $ | 16,881 | | $ | 11,019 |
| $ | 27,900 |
Total average assets for period ended |
| $ | 383,363 | | $ | 1,512,515 |
| $ | 1,895,878 |
FTEs | |
| 137 | |
| 336 | |
| 473 |
_________________________
|
|
|
|
|
|
|
|
|
|
|
| At or For the Nine Months Ended September 30, 2017 | |||||||
|
| Home Lending |
| Commercial and Consumer Banking |
| Total | |||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
Net interest income (1) |
| $ | 1,857 |
| $ | 28,105 |
| $ | 29,962 |
Provision for loan losses |
|
| (324) |
|
| (126) |
|
| (450) |
Noninterest income |
|
| 14,863 |
|
| 3,941 |
|
| 18,804 |
Noninterest expense |
|
| (12,985) |
|
| (19,924) |
|
| (32,909) |
Income before provision for income taxes |
|
| 3,411 |
|
| 11,996 |
|
| 15,407 |
Provision for income taxes |
|
| (1,107) |
|
| (3,894) |
|
| (5,001) |
Net income |
| $ | 2,304 |
| $ | 8,102 |
| $ | 10,406 |
Total average assets at period end |
| $ | 196,765 |
| $ | 706,017 |
| $ | 902,782 |
FTEs |
|
| 119 |
|
| 204 |
|
| 323 |
|
|
|
|
|
|
|
|
|
|
|
| At or For the Nine Months Ended September 30, 2016 | |||||||
|
| Home Lending |
| Commercial and Consumer Banking |
| Total | |||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
Net interest income (1) |
| $ | 1,706 |
| $ | 22,959 |
| $ | 24,665 |
Provision for loan losses |
|
| (142) |
|
| (1,658) |
|
| (1,800) |
Noninterest income |
|
| 14,852 |
|
| 3,273 |
|
| 18,125 |
Noninterest expense |
|
| (10,593) |
|
| (18,246) |
|
| (28,839) |
Income before provision for income taxes |
|
| 5,823 |
|
| 6,328 |
|
| 12,151 |
Provision for income taxes |
|
| (2,012) |
|
| (2,186) |
|
| (4,198) |
Net income |
| $ | 3,811 |
| $ | 4,142 |
| $ | 7,953 |
Total average assets at period end |
| $ | 147,873 |
| $ | 642,283 |
| $ | 790,156 |
FTEs |
|
| 110 |
|
| 195 |
|
| 305 |
(2) | Provision for loan losses includes shifts in allocation between segments due to various changes, to include adjustments to qualitative factors, changes in loan balances, and charge-off and recovery activity. |
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 September 30, 2021 and December 31, 2020, 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 four retail branches purchased from Bank of America, N.A. in 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, 2020, and determined that 0 impairment of goodwill existed. However, if adverse economic conditions or the decrease in the Company’s stock price and market capitalization 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
43
revised remaining life. As of September 30, 2021, 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, 2020, and the nine months ended September 30, 2021.
| | | | | | | | | |
| | Other Intangible Assets | |||||||
| | | | | Accumulated | | | | |
|
| Gross CDI |
| Amortization |
| Net CDI | |||
Balance, December 31, 2019 | | $ | 7,490 | | $ | (2,033) | | $ | 5,457 |
Amortization | | | — | | | (706) | | | (706) |
Balance, December 31, 2020 | | | 7,490 | | | (2,739) | | | 4,751 |
Amortization | | | — | | | (531) | | | (531) |
Balance, September 30, 2021 | | $ | 7,490 | | $ | (3,270) | | $ | 4,220 |
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 Acquisition and on an accelerated basis over approximately nine years for the CDI related to the Branch Purchase. Total amortization expense was $177,000 and $531,000 for the three and nine months ended September 30, 2021, respectively, and $176,000 and $529,000 for the same periods, respectively, in 2020.
Amortization expense for CDI is expected to be as follows at September 30, 2021:
| | | |
Remainder of 2021 | | $ | 160 |
2022 |
| | 691 |
2023 |
| | 691 |
2024 |
| | 621 |
2025 |
| | 525 |
Thereafter |
| | 1,532 |
Total | | $ | 4,220 |
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 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.
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All 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 and nine months ended September 30, 2021 and 2020.
| | | | | | | | | | | | |
(Dollars in thousands): | | At or For the Three Months Ended September 30, | | At or For the Nine Months Ended September 30, | ||||||||
Noninterest income |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
In-scope of Topic 606: | | | | | | | | | | | | |
Debit card interchange fees | | $ | 585 | | $ | 504 | | $ | 1,685 | | $ | 1,382 |
Deposit service and account maintenance fees | | | 192 | | | 172 | | | 538 | | | 583 |
Noninterest income (in-scope of Topic 606) | | | 777 | | | 676 | | | 2,223 | | | 1,965 |
Noninterest income (out-of-scope of Topic 606) | | | 7,621 | | | 16,870 | | | 27,395 | | | 38,603 |
Total noninterest income | | $ | 8,398 | | $ | 17,546 | | $ | 29,618 | | $ | 40,568 |
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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report may containcontains 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:
● |
| statements of our goals, intentions, and expectations; |
● |
| statements regarding our business plans, prospects, growth, and operating strategies; |
● |
| statements regarding the quality of our loan and investment portfolios; and |
● |
| 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:
● |
|
● | general economic conditions either nationally or in our market area, that are worse than expected; |
● |
| 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; |
● |
| secondary market conditions and our ability to originate loans for sale and sell loans in the secondary market; |
● |
| 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; |
● |
|
|
● |
| 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; |
● |
| changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments; |
● |
|
● | increased competitive pressures among financial services companies; |
● |
| 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; |
● |
| our ability to attract and retain deposits; |
● |
| 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; |
● |
| our ability to control operating costs and expenses; |
● |
|
● | changes in consumer spending, borrowing, and savings habits; |
● |
| our ability to successfully manage our growth; |
● |
| 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; |
● |
| adverse changes in the securities markets; |
● |
| 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 |
46
|
● | costs and effects of litigation, including settlements and judgments; |
● |
| disruptions, security breaches, or other adverse events, failures, or interruptions in, or attacks on, our |
● |
| inability of key third-party vendors to perform their obligations to us; and |
● |
| other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products, and services, including as a result of the CARES Act and the CAA 2021 and recent COVID-19 vaccination and economic stimulus efforts, and other risks described elsewhere in this Form |
44
Any of the forward-looking statements made in this Form 10‑Q10-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 CARES Act was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a loan program called the Paycheck Protection Program, or PPP. The goal of the PPP was 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 or five-year loan term to maturity, and (c) principal and interest payments deferred for six months or less 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 provided that certain criteria is met by the borrower. The PPP program concluded on May 31, 2021. Cumulative to date as of September 30, 2021, PPP loan balances totaling $88.6 million were submitted for approval and forgiven by the SBA. The Company has 171 PPP loans totaling $38.3 million outstanding as of September 30, 2021 for customers in the communities we serve who are small- to mid-size businesses as well as independent contractors, sole proprietors and partnerships as allowed under the PPP guidance issued in April 2020. We also from time-to-time utilized the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”) created on April 9, 2020, pursuant to which the Company pledged its PPP loans as collateral at face value to obtain FRB non-recourse loans. Extensions of credit under the PPPLF concluded on July 30, 2021. As of September 30, 2021, no PPPLF loans were outstanding.
Allowance for Loan Losses and Loan Modifications. The Company recorded a provision for loan losses of $0 and $1.5 million for the quarter and nine months ended September 30, 2021, respectively, compared to $3.1 million and $11.4 million for the quarter and nine months ended September 30, 2020, respectively. The prior periods provision for loan losses was due primarily to probable loan losses reflecting the adverse impact of the COVID-19 pandemic on the economy. According to the CARES Act and related banking agency guidance, banks are not required to designate as TDRs the 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. This includes short-term (e.g., less than 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 and related banking agency guidance if they are not more than 30 days past due on their contractual payments as of December 31, 2019, or prior to any relief, respectively, and have experienced financial difficulty as a result of COVID-19. As of September 30, 2021, the amount of portfolio loans remaining under payment/relief agreements includes commercial real estate loans of $6.9 million and commercial business
47
loans of $5.4 million. The primary method of relief is to allow the borrowers up to 90-days of interest only payments and/or loan payment deferments, and, on a more limited basis, waived interest, late fees, or interest only loan payments and suspended foreclosure proceedings. These modifications were not classified as TDRs at September 30, 2021 in accordance with the guidance of the CARES Act and related banking agency guidance. Loan modifications in accordance with the CARES Act and related banking agency guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.
Branch Operations and Additional Client Support. We have taken various steps to ensure the safety of our customers and our personnel. The majority 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 Families First Coronavirus Response Act also provides additional flexibility to our employees to help navigate their individual challenges with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. Since the termination of the stay-at-home order in Washington State and phased re-opening of businesses, the Company has taken steps to resume more normal branch activities with specific guidelines in place to ensure the safety of the Company’s customers and personnel. All of our branches are currently open.
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 1936.1907. 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, communities, and one loan production office located in the Tri-Cities, Washington. On January 22, 2016, the Company completed the Branch Purchase and acquired $186.4 million in deposits and $419,000 in loans based on financial information at that date. The four branches acquired are located in the communities of Port Angeles, Sequim, Port Townsend, and Hadlock, Washington. The Branch Purchase expanded our Puget Sound-focused retail footprint onto the Olympic Peninsula and provided an opportunity to extend our unique brand of community banking into those communities.
The Company also maintains its long-standing indirect consumer lending platform which operates primarily 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:
● |
| Growing and diversifying our loan portfolio; |
● |
| Maintaining strong asset quality; |
● |
| Emphasizing lower cost core deposits to reduce the costs of funding our loan growth; |
● |
| 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 |
● |
| Expanding the Company’s markets. |
The Company is a diversified lender with a focus on the origination of indirect home improvement loans, also referred to as fixture securedone-to-four-family loans, commercial real estate mortgage loans, home loans, commercial business loans, and second mortgage/mortgage or home equity loan products. Consumerproducts, 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, indirect home improvementfixture secured loans to finance window replacement, gutter replacement, siding replacement, solar panels, and other improvement renovations, representhad represented the largest portion of the Company’s loan portfolio and havehad traditionally been the mainstay of ourthe Company’s lending strategy. At September 30, 2017,2021 consumer loans
48
represented 26.3%24.1% of the Company’s total gross loan portfolio, down from 28.9%compared to 24.0% at December 31, 2016, asSeptember 30, 2020. In recent years, the Company has placed more of an emphasis on real estate andlending products, such as one-to-four-family loans, commercial real estate loans, including speculative residential construction loans, as well as commercial business loan originations have increased at a faster pace thanloans, while growing the current size of the consumer loan originations.portfolio.
Indirect homeFixture secured loans to finance window, gutter, siding replacement, solar panels, pools, and other improvement lending isrenovations are a large and regionally expanding segment of the consumer loan portfolio. These fixture secured consumer loans are dependent on the Bank’s relationshipscontractor/dealer network of 101 active dealers located throughout Washington, Oregon, California, Idaho, Colorado, Nevada, Arizona, and Minnesota with home improvement contractors and dealers.four contractor/dealers responsible for 51.6% of the funded loans dollar volume for the three months ended September 30, 2021. The Company funded $24.6$63.3 million, or 1,490approximately 3,000 loans during the quarter ended September 30, 2017, using its indirect home improvement contractor/dealer network located throughout Washington, Oregon, Idaho, and California with four contractors/dealers responsible2021.
The following table details fixture secured loan originations by state for 45.5% of the funded loans dollar volume. During the nine months ended September 30,periods indicated:
45
2017, the Company originated $15.5 million in the state of California, and at September 30, 2017, held $42.9 million in California originated consumer loans. Management has established a concentration limit of no more than 100% of the Bank’s total risk-based capital for loans originated in California. At September 30, 2017, the limit was $130.2 million.
| | | | | | | | | | | | |
| | For the Nine Months Ended | | | For the Year Ended | | ||||||
| | September 30, 2021 | |
| December 31, 2020 | | ||||||
State | | Amount | | Percent | | | Amount | | Percent | | ||
Washington | | $ | 79,440 | | 42.5 | % | | $ | 79,063 | | 42.6 | % |
Oregon | | | 42,382 |
| 22.7 | | | | 48,272 | | 26.0 | |
California | |
| 38,676 | | 20.7 |
| | | 37,835 | | 20.4 | |
Idaho | |
| 14,615 | | 7.8 |
| | | 10,681 | | 5.7 | |
Colorado | |
| 5,102 | | 2.7 |
| | | 5,005 | | 2.7 | |
Nevada | | | 2,773 | | 1.5 | | | | 1,222 | | 0.6 | |
Arizona | | | 2,915 | | 1.6 | | | | 2,728 | | 1.5 | |
Minnesota | | | 952 | | 0.5 | | | | 918 | | 0.5 | |
Total consumer loans | | $ | 186,855 | | 100.0 | % | | $ | 185,724 | | 100.0 | % |
The Company originates one-to-four-family residential mortgage loans through referrals from real estate agents, financial planners, builders, and from existing customers. Walk-inRetail banking customers are also an important source of the Company’s loan originations. During the nine months ended, theThe Company originated $603.4$380.5 million of one-to-four-family loans which includes loans held for sale, (“HFS”), loans held for investment, and fixed seconds andin addition to loans brokered to other institutions of $527,000 through the home lending segment including brokered loans of $5.7 million. Duringduring the ninethree months ended September 30, 2017, $511.82021, of which $319.9 million of the loans originated were sold to investors. Of the loans sold to investors, of which $321.3$208.1 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 September 30, 2017,2021, one-to-four-family residential mortgage loans held for investment, which excludes loans held for sale of $65.1$118.1 million, totaled $170.2$365.3 million, or 22.2%21.4%, of the total gross loan portfolio.
The Company generally underwritesFor the three months ended September 30, 2021, there were more one-to-four-family loans based onoriginated to finance home purchases, reflecting increased sales of one-to-four-family homes, and decreased refinance activity, compared to the applicant’s abilitysame period in the prior year as refinances surged due to repay. This includes employment and credit history and the appraised valuelowering of the subject property. The Company lends up to 100% of the lesser of the appraised value or purchase price for one-to-four-family first mortgage loans. For first mortgage loans with a loan-to-value ratio in excess of 80%, the Company generally requires either private mortgage insurance or government sponsored insurance in order to mitigate the higher risk level associated with higher loan-to-value loans. Fixed-rate loans secured by one-to-four-family residences have contractual maturities of up to 30 years and are generally fully amortizing, with payments due monthly. Adjustable-rate mortgage loans may pose different credit risks than fixed-rate loans, primarily because asmarket interest rates increase, the borrower’s payments rise, increasing the potential for default. Properties securing thein response to COVID-19. Residential construction and development lending, while not as common as other options like one-to-four-family loans, are appraised by independent fee appraisers who are selected in accordance with industry and regulatory standards. The Company requires borrowers to obtain title and hazard insurance, and flood insurance, if necessary. Loans are generally underwritten to the secondary market guidelines with additional requirements as determined by the internal underwriting department.
Since 2012, the Company has had an emphasis on diversifying lending products by expanding commercial real estate, commercial business and residential lending, while maintaining the current volume of production and historical growth of the consumer loan portfolio. The Company’s lending strategies are intended to take advantage of: (1) historical strength in indirect consumer lending, (2) recent market consolidation that has created new lending opportunities and the availability of experienced bankers, and (3) strength in relationship lending. Retail deposits will continue to serve asbe 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 source.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. Retail deposits serve as an important funding source. 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.
49
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. The significant 150 basis point reduction in the targeted federal funds rate during the quarter ended June 30, 2020, resulted in a larger impact to our interest-earning assets than to our interest-bearing liabilities, reducing our net interest margin. In addition, our net interest margin is adversely impacted by the low loan yields from the PPP loan portfolio. The continuing low interest rate environment is expected to continue to put downward pressure on loan yields and the yields on other floating rate interest earning assets as well. 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, until the pandemic subsides the Company expects its net interest income and net interest margin will be adversely affected in 2021 and possibly longer.
Another significant influence on the Company’s earnings is fee income from home lendingmortgage 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 $1.5 million for the nine months ended September 30, 2021, compared to $11.4 million for the same period one year ago, reflecting improved economic factors on credit-deterioration due to the adverse impact of the COVID-19 pandemic at September 30, 2021, the increase in the loan portfolio due to organic growth, and net loan charge-offs. The reduction of the provision for loan losses also reflects improvements in “watch” classified loans that were downgraded based on the COVID-19 pandemic and have shown loan-level improvements at September 30, 2021.
Diluted EPS was reported for the nine months ended September 30, 2021at $3.27 on the October 28, 2021 press release. Management revised the diluted EPS calculation to update the number of dilutive shares due to the stock split and recalculated with the stock-split-adjusted price. The corrected diluted EPS for the nine months ended September 30, 2021 of $3.30 reflects the updates made subsequent to the October 28th press release.
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,
46
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. The allowance for loan and lease lossesLosses (“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 allowanceALLL 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 allowance for loan losses.ALLL. Among the material estimates required to establish the allowanceALLL 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 allowanceALLL 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 it usesthat use of the best information available to establishcurrently establishes the allowance for loan losses,ALLL, future adjustments to the allowanceALLL 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 ourthe 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 allowance for loan lossesALLL in any given period. Management believes that its systematic methodology continues to be appropriate given the Company’s increased size and level of complexity.appropriate.
Troubled Debt Restructured Loans. TDRs are loans whose terms have been modified or restructured due to a borrower’s financial difficulty, including but not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals. TDR loans are considered impaired loans and are individually evaluated for impairment. TDR loans can be classified as either accrual or non-accrual. TDR loans are classified as non-performing loans unless they have been performing in accordance with their modified terms for a period of at least six months in which case they are placed on accrual status.
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 portionthe value of servicing is capitalized during the costmonth of originating the loan is allocated to the servicing right based on relative fair value.sale. 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
50
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.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 derivativesprimary use of derivative instruments are primarilyrelated to the result of its home lendingmortgage banking activities in the form of commitments to extend credit, commitments to sell loans, TBA MBSmortgage-backed securities trades and option contracts to 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 onin the Consolidated Statements of Income with offsets to other assets or other liabilities on the Consolidated Balance Sheets.
47
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. Accounting Standards Codification, 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
51
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 a net deferred tax liabilityassets of $1.4 million,$303,000 and $1.2 million,net deferred tax liabilities of $58,000, at September 30, 20172021 and December 31, 2016,2020, respectively.
Comparison of Financial Condition at September 30, 20172021 and December 31, 20162020
Assets. Total assets increased $166.0$115.5 million or 20.0%, to $993.9 million$2.23 billion at September 30, 2017, from $827.9 million2021, compared to $2.11 billion at December 31, 2016,2020, primarily as a result of a $160.5 million, or 27.1% increasedue to increases in loans receivable, net a $12.5of $133.1 million, or 23.8% increase in loans HFS, a $2.9securities available-for-sale of $90.8 million, or 18.8% increase in certificatesservicing rights of deposit at$3.9 million, and other financial institutions, and a $1.3assets of $1.4 million, or 27.1% increase in other assets, partially offset by a $5.2 million, or 14.2% decreasedecreases in total cash and cash equivalents a $3.8of $63.2 million, or 4.6% decreaseloans held for sale of $48.3 million, and Federal Home Loan Bank stock of $2.6 million. The increases in securities available-for-sale,total assets were primarily funded by deposit growth and a $2.6 million, or 31.3% decrease in servicing rights.net proceeds from the issuance of subordinated notes during the nine months ended September 30, 2021.
Loans receivable, net increased $160.5$133.1 million or 27.1% to $753.9 million$1.68 billion at September 30, 2017,2021, from $593.3 million$1.54 billion at December 31, 2016. The increase in2020. Total real estate loans receivable, net was primarily a result ofincreased $115.2 million, including increases in real estate and commercial business loans. Real estate loan increases included one-to-four-family loans held for investment of $46.2$54.2 million, multi-family loans of $33.6 million, and construction and development loans of $34.9$33.1 million, partially offset by a decrease in commercial real estate loans of $7.3 million, multi-family loans of $5.9$4.8 million and home equity loans of $3.9 million. Changes$998,000. Undisbursed construction and development loan commitments increased $37.7 million to $181.4 million at September 30, 2021, as compared to $143.7 million at December 31, 2020. Consumer loans increased $37.5 million, primarily due to an increase of $39.6 million in indirect home improvement loans, partially offset by a decrease of $1.9 million in marine loans. Commercial business loans decreased $17.2 million, primarily due to a decrease in commercial business lending includedand industrial loans of $17.4 million, including a $17.6 millionnet decrease in PPP loans of $23.8 million. The focused increase in commercial and industrial loans, excluding PPP loans, is tied to the Bank’s investment in our business lending platform, including employees to service business lending customers and cash management teams to support business deposits.
Loans held for sale, consisting of one-to-four-family loans, associated with our warehousedecreased by $48.3 million, or 29.0%, to $118.1 million at September 30, 2021, from $166.4 million at December 31, 2020. The Company continues to invest its home lending programoperations and strategically add production staff in the markets we serve.
One-to-four-family loan originations for the nine months ended September 30, 2021, included $1.05 billion of loans originated for sale, $160.3 million of portfolio loans including first and second liens, and $3.5 million of loans brokered to other institutions. Purchase activity was driven by a strong housing market in the Pacific Northwest while slightly higher market rates in 2021 reduced refinance activity.
Originations of one-to-four-family loans to purchase and to refinance a home for the periods indicated were as follows:
| | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended | | | | For the Nine Months Ended | | | | Year | | Year | |||||||
| | September 30, 2021 | | | | September 30, 2020 | | | | over Year | | over Year | |||||||
|
| Amount |
| Percent |
|
|
| Amount |
| Percent |
| | | $ Change |
| % Change | |||
Purchase | | $ | 682,181 | | 56.3 | % | | | $ | 501,686 | | 37.1 | % | | | $ | 180,495 | | 36.0 |
Refinance | | | 529,705 |
| 43.7 | | | | | 852,202 | | 62.9 | | | | | (322,497) | | (37.8) |
Total | | $ | 1,211,886 | | 100.0 | % | | | $ | 1,353,888 | | 100.0 | % | | | $ | (142,002) | | (10.5) |
52
During the nine months ended September 30, 2021, the Company sold $1.11 billion of one-to-four-family loans compared to sales of $1.12 billion for the same period one year ago. Gross margins on home loan sales increased slightly to 4.05% for the nine months ended September 30, 2021, compared to 4.02% for the nine months ended September 30, 2020. Gross margins are defined as the margin on loans sold (cash sales) without the impact of deferred costs.
The ALLL was $26.9 million, or 1.57% of gross loans receivable, excluding loans held for sale at September 30, 2021, compared to $26.2 million, or 1.66% of gross loans receivable, excluding loans held for sale at December 31, 2020. Substandard loans decreased $126,000 to $17.5 million at September 30, 2021, compared to $17.6 million at December 31, 2020. The slight decrease was primarily due to a $4.8 million decrease in one-to-four-family loans and a $17.4$177,000 decrease in consumer loans, partially offset by a $5.1 million increase in commercial and industrial loans. Growth in consumer lending was $26.9Nonperforming loans, consisting solely of nonaccruing loans 90-days or more past due, decreased $1.8 million reflecting growth in the Bank’s long established indirect home improvement lending platform.
Loans HFS, consisting of one-to-four-family loans and one commercial and industrial loan, increased by $12.5 million, or 23.8% to $65.1$5.9 million at September 30, 2017,2021, from $52.6$7.8 million at December 31, 2016 due to increased loan originations.2020. The Company will continue selling one-to-four-family loans into the secondary market for asset/liability management purposes.
One-to-four-family loans originated through the home lending segment which includes loans HFS, loans held for investment, fixed seconds, and loans brokered to other institutions increased $27.3 million, or 12.6% to $244.1 million during the quarter ended September 30, 2017, compared to $232.9 million for the same quarter one year ago. One-to-four-family loans originated through the home lending segment increased $19.3 million, or 3.3% to $603.4 million during the nine months ended September 30, 2017, compared to $584.1 million during the nine months ended September 30, 2016. Originationsratio of one-to-four-family loans to purchase a home (purchase production) increased by $68.0 million, or 17.2% with $464.3 million in loan purchase production closing during the nine months ended September 30, 2017, up from $396.3 million for the nine months ended September 30, 2016. One-to-four-family loan originations for refinance (refinance production) decreased $58.9 million, or 30.1% with $136.6 million in refinance production closing during the nine months ended September 30, 2017, down from $195.5 million for the nine months ended September 30, 2016. During the quarter ended September 30, 2017, the Company sold $204.3 million of one-to-four-family loans, compared to sales of $205.1 million for the same quarter one year ago. In addition, the margin on loans sold increased to 2.53% for the nine months ended September 30, 2017, from 2.48% for the nine months ended September 30, 2016.
48
Purchase production was 76.1% of the total one-to-four-family loan originations versus 23.9% for refinance production during the third quarter of 2017, compared to 60.9% in purchase production versus 39.1% in refinance production during the same period 2016. Purchase production for the nine months ended September 30, 2017 was 77.3% of the total one-to-four-family loan originations versus 22.7% for refinance production, compared to 67.0% in purchase volume versus 33.0% in refinances for the nine months ended September 30, 2016. The increase in originations and purchase activity was primarily associated with the strong home purchase demand in the Pacific Northwest, while the decline in refinance activity reflects the rise in mortgage interest rates over the past year.
The ALLL at September 30, 2017 increased to $10.6 million, or 1.4% of gross loans receivable, excluding loans HFS, compared to $10.2 million, or 1.7% of gross loans receivable, excluding loans HFS, at December 31, 2016. Non-performing loans, consisting of non-accrual loans, increased to $1.3 million at September 30, 2017, from $721,000 at December 31, 2016. At September 30, 2017, non-performing loans consisted of $551,000 of commercial and industrial loans, $316,000 of indirect home improvement loans, $154,000 of home equity loans, $142,000 of one-to-four-family loans, $81,000 of solar loans, $11,000 of other consumer loans, and $9,000 of marine loans. Non-performingnonperforming loans to total gross loans was 0.2%0.35% at September 30, 2017,2021, compared to 0.1%0.49% at December 31, 2016. Substandard loans decreased $1.5 million, or 18.3%, to $6.6 million2020. There were no OREO properties at September 30, 2017, compared to $8.0 million2021, and one OREO property of $90,000 at December 31, 2016,2020.
In accordance with acquisition accounting, the ALLL does not include the recorded discount on loans acquired in the Anchor Bank acquisition in November 2018 (“Anchor Acquisition”) of $868,000 and $1.5 million on $90.8 million and $132.6 million of gross loans at September 30, 2021 and December 31, 2020, respectively.
Commercial loans reported at a risk rating below “pass” or receiving elevated risk monitoring as a result of the COVID-19 pandemic and their respective industries at the dates indicated are as follows:
| | | | | | | | | | | |
(Dollars in thousands) | | | | | | | | | | | |
Loan types: |
| September 30, 2021 |
|
| December 31, 2020 |
|
| September 30, 2020 | |||
Construction and development | | $ | 2,771 | | | $ | 3,480 | | | $ | 4,335 |
Education/worship | | | — | | | | 734 | | | | 4,796 |
Food and beverage | |
| 6,600 | | | | 14,577 | | |
| 14,346 |
Hospitality | | | 16,188 | | | | 43,960 | | | | 43,903 |
Manufacturing | |
| 602 | | | | 12,579 | | |
| 18,765 |
Retail | | | 1,736 | | | | 2,554 | | | | 2,663 |
Transportation | |
| 4,487 | | | | 4,407 | | |
| 4,992 |
Other | |
| 4,454 | | | | 20,979 | | |
| 23,241 |
Total | | $ | 36,838 | | | $ | 103,270 | | | $ | 117,041 |
Management recognizes the potential impact of COVID-19 on all of our customers and will continue to prudently reserve for probable loan losses, including reserves against our homogenous residential and consumer portfolios.
Liabilities. Total liabilities increased $105.0 million to $1.99 billion at September 30, 2021, from $1.88 billion at December 31, 2020, primarily due to the transferincreases of $1.9$189.6 million in substandard shared national creditsdeposits, and $39.4 million in subordinated notes, partially offset by a decrease of $123.3 million in borrowings and $531,000 in other liabilities.
Total deposits increased $189.6 million to loans HFS sold at a slight discount to market early in October 2017. The Company recorded the expected discount based on the sales price as a loan charge-off during the third quarter of 2017. The Company had no OREO$1.86 billion at September 30, 2017, or2021, from $1.67 billion at December 31, 2016.
2020. The Company sold $9.0 million of securities AFS during the third quarter of 2017 realizing a gain of $143,000. Those sales primarily provided additional funds for loan growth during the quarter. The sales of lower coupon investments enabled us to capitalize on the lower Treasury rates for a gain during the third quarter of 2017. The average yield on sold securities AFS during the quarter was 2.48%.
Liabilities. Total liabilities increased $128.8 million, or 17.2%, to $875.7 million at September 30, 2017, from $746.9 million at December 31, 2016, due primarily to an increase in deposits. Total deposits increased $128.0 million, or 18.0%,was primarily driven by organic growth in customer relationships, proceeds from PPP loans and government stimulus checks deposited directly into customer accounts, and reduced withdrawals from deposit accounts due to $840.6 million at September 30, 2017, from $712.6 million at December 31, 2016. Relationship-based transactionala change in spending habits as a result of COVID-19. Transactional accounts (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased $63.7$165.6 million or 29.1%, to $282.7$754.7 million at September 30, 2017,2021, from $219.0$589.1 million at December 31, 2016.2020, primarily due to increases of $81.9 million in interest-bearing checking and $74.7 million in noninterest-bearing checking. Nonretail transaction accounts increased to $60.0 million from none at December 31, 2020 due to an increase in brokered interest-bearing checking accounts. Money market and savings accounts increased $11.2$106.7 million or 3.7%, to $309.0$689.1 million at September 30, 2017,2021, from $297.8$582.4 million at December 31, 2016.2020. Time deposits increased $53.1decreased $82.7 million or 27.1%, to $248.8$419.8 million at September 30, 2017,2021, from $195.7$502.5 million at December 31, 2016. Non-retail2020. Nonretail certificates of deposit (“CDs”) which includes brokered certificates of deposit,CDs, online certificates of deposit,CDs, and public funds increased $39.4decreased $44.0 million or 65.5%, to $99.7$152.6 million at September 30, 2017,2021, compared to $60.2$196.6 million at December 31, 2016. Wholesale funding (brokered deposits) were utilized2020, primarily due to bridge short-term asset growth such as loans HFS and pay down higher cost short-term Federal Home Loan Bank (“FHLB”) Fed Funds advances. Approximately $138.2a $50.9 million of the acquired deposits from the Branch Purchase remain at 1st Security Bank at September 30, 2017. These branch locations have attracted new deposits with an aggregated total of $220.8decrease in brokered CDs, primarily offset by a $6.9 million including public funds at September 30, 2017. Management remains focused on growthincrease in lower cost relationship-based depositsonline CDs. Escrow accounts related to fund long-term asset growth.
Borrowings decreased $2.4mortgages serviced increased $9.1 million or 18.9%, to $10.3$23.5 million at September 30, 2017,2021, reflecting an increase in the servicing portfolio.
53
Deposits are summarized as follows at the dates indicated:
| | | | | | |
|
| September 30, |
| December 31, | ||
| | 2021 (1)(2) |
| 2020(1)(2) | ||
Noninterest-bearing checking | | $ | 423,091 | | $ | 348,421 |
Interest-bearing checking (6) | |
| 308,142 | |
| 226,282 |
Savings | |
| 191,487 | |
| 152,842 |
Money market (3) | |
| 497,571 | |
| 429,548 |
Certificates of deposit less than $100,000(4) | |
| 231,453 | |
| 299,157 |
Certificates of deposit of $100,000 through $250,000 | |
| 126,095 | |
| 135,901 |
Certificates of deposit of $250,000 and over(5) | |
| 62,296 | |
| 67,488 |
Escrow accounts related to mortgages serviced | |
| 23,515 | |
| 14,432 |
Total | | $ | 1,863,650 | | $ | 1,674,071 |
__________________________
(1) | Includes $147.5 million of deposits at September 30, 2021 and $129.5 million at December 31, 2020 from the Branch Purchase. |
(2) | Includes $282.2 million and $286.5 million of deposits at September 30, 2021 and December 31, 2020, respectively, from the Anchor Acquisition. |
(3) | Includes $5.0 million and $15.0 million of brokered deposits at September 30, 2021 and December 31, 2020, respectively. |
(4) | Includes $135.5 million and $186.4 million of brokered deposits at September 30, 2021 and December 31, 2020, respectively. |
(5) | Time deposits that meet or exceed the FDIC insurance limit. |
(6) | Includes $60.0 million and $0 of brokered deposits at September 30, 2021 and December 31, 2020, respectively. |
As a result, primarily due to the COVID-19 pandemic and the resulting availability of PPP loan funds and stimulus funds made available during the first half of 2021, the tables above reflect increases as well as changes in deposits, partially impacted by customers transferring funds from $12.7CDs to more liquid interest-bearing accounts, such as money market and interest-bearing checking.
Borrowings decreased $123.3 million to $42.5 million at September 30, 2021, from $165.8 million at December 31, 2016,2020, primarily duerelated to the repayment of $63.3 million of PPPLF borrowings, due in part to SBA forgiveness of the underlying PPP loans and the maturity of $60.0 million of FHLB Fed Funds advances.borrowings utilizing funds attributable to deposit growth.
Management entered into two liability interest rate swap arrangements designated as cash flow hedges in the first quarter of 2020 and one liability interest rate swap arrangement in the third quarter of 2020 to lock the expense costs associated with $90.0 million in brokered deposits and borrowings. The average cost of these $90.0 million in notional pay fixed interest rate swap agreements was 73 basis points for which the Bank will pay a fixed rate of 73 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 $37.2$10.4 million or 45.9% to $118.2$240.5 million at September 30, 2017,2021, from $81.0$230.0 million at December 31, 2016.2020. The increase in stockholders’ equity during the nine months ended September 30, 2017,2021, was primarily due to the issuance during the third quarter of 2017 of 587,234 shares of common stock at a price of $47.00 per share for net proceeds of $25.6 million and net income of $10.4$28.8 million, partially offset by common stock repurchases of $12.7 million, cash dividends of $3.4 million and a reduction in accumulated other comprehensive income of $2.3 million. The Company repurchased 486,195 shares of its common stock during the nine months ended September 30, 2021, at an average price of $34.43 per share. Book value per common share was $33.52$29.78 at September 30, 2017,2021, compared to $28.32$27.67 at December 31, 2016.2020.
Net proceeds received from the stock offering were used to fund the majority of a $26.0 million contribution to the Bank at the end of the third quarter 2017 to provide additional Tier 1 capital for growth planned over the next 24 months. Management expects continued lending growth due to strong economic factors in the Pacific Northwest and, specifically, the communities we serve.
49
We havecalculated book value based on common shares outstanding of 3,527,896 that were calculated using shares outstanding of 3,674,9028,208,045 at September 30, 2017,2021, less 36,842121,672 unvested restricted stock shares, and 110,16412,961 of unallocated ESOP shares.shares for the reported common shares outstanding of 8,073,412. Common shares of 2,861,135 wereoutstanding was calculated using 8,475,912 shares outstanding at December 31, 2016 of 3,059,503,2020, less 68,763110,184 unvested restricted stock shares, and 129,60551,842 of unallocated ESOP shares.shares for the reported common shares outstanding of 8,313,886.
54
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 20172021 and 20162020
General. Net income was unchanged at $3.5$8.3 million for both the three months ended September 30, 20172021, and 2016 as$12.7 million for the $2.4three months ended September 30, 2020. The decrease in net income for the three months ended September 30, 2021 was primarily due to a $9.1 million, or 52.1% decrease in noninterest income and a $2.8 million increase in noninterest expenses, partially offset by a $3.7 million increase in net interest income, aftera $3.1 million decrease in the provision for loan losses, was offset byand a decline$766,000 decrease in noninterest income, an increase in noninterest expense, and an increase inthe provision for income taxes. Net income for the nine months ended September 30, 2017, increased $2.5 million, or 30.8%, to $10.4 million, from $8.0 million for the nine months ended September 30, 2016. The increase in net income was primarily a result of a $6.6 million, or 29.1% increase in net interest income, after provision for loan losses, partially offset by a $4.1 million, or 14.1% increase in noninterest expense.tax.
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 and nine months ended September 30, 20172021 and 2016:2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, | ||||||||
Average Balances |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net (1) |
| $ | 803,399 |
| $ | 643,989 |
| $ | 725,247 |
| $ | 600,343 |
Securities available-for-sale, at fair value |
|
| 79,377 |
|
| 83,643 |
|
| 90,206 |
|
| 80,214 |
Interest-bearing deposits and certificates of deposit at other financial institutions |
|
| 42,990 |
|
| 36,744 |
|
| 46,153 |
|
| 74,573 |
FHLB stock, at cost |
|
| 4,034 |
|
| 1,407 |
|
| 3,658 |
|
| 2,004 |
Total interest-earning assets |
|
| 929,800 |
|
| 765,783 |
|
| 865,264 |
|
| 757,134 |
Noninterest-earning assets (2) |
|
| 35,868 |
|
| 37,674 |
|
| 37,501 |
|
| 33,022 |
Total assets |
| $ | 965,668 |
| $ | 803,457 |
| $ | 902,765 |
| $ | 790,156 |
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing accounts |
| $ | 642,811 |
| $ | 532,069 |
| $ | 603,449 |
| $ | 517,625 |
Borrowings |
|
| 34,372 |
|
| 20,239 |
|
| 27,994 |
|
| 28,660 |
Subordinated note |
|
| 9,837 |
|
| 9,817 |
|
| 9,832 |
|
| 9,812 |
Total interest-bearing liabilities |
|
| 687,020 |
|
| 562,125 |
|
| 641,275 |
|
| 556,097 |
Noninterest-bearing accounts |
|
| 169,367 |
|
| 153,209 |
|
| 163,079 |
|
| 147,848 |
Other noninterest-bearing liabilities |
|
| 13,966 |
|
| 12,048 |
|
| 11,318 |
|
| 11,222 |
Stockholders’ equity |
|
| 95,315 |
|
| 76,075 |
|
| 87,093 |
|
| 74,989 |
Total liabilities and stockholders’ equity |
| $ | 965,668 |
| $ | 803,457 |
| $ | 902,765 |
| $ | 790,156 |
|
|
|
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Three Months Ended | ||||||||||||
|
| September 30, 2021 |
| September 30, 2020 | ||||||||||||
Average Balances |
| Average Balance Outstanding |
| Interest Earned/ Paid |
| Yield/ Rate |
| Average Balance Outstanding |
| Interest Earned/ Paid |
| Yield/ Rate | ||||
ASSETS | | | | | | | | | | | | | | | | |
Loans receivable, net deferred loan fees (1) |
| $ | 1,776,424 |
| $ | 23,520 | | 5.25% | | $ | 1,648,070 | | $ | 21,066 | | 5.09% |
Mortgage-backed securities | | | 79,264 | | | 427 | | 2.14% | | | 70,502 | | | 408 | | 2.30% |
Investment securities available-for-sale | |
| 168,915 | |
| 797 | | 1.87% | |
| 94,593 | | | 502 | | 2.11% |
Investment securities held-to-maturity | | | 7,500 | | | 95 | | 5.03% | | | 2,462 | | | 31 | | 5.01% |
Federal Home Loan Bank stock | |
| 4,973 | |
| 56 | | 4.47% | |
| 7,219 | | | 83 | | 4.57% |
Interest-bearing deposits at other financial institutions | |
| 87,440 | |
| 112 | | 0.51% | |
| 97,473 | | | 138 | | 0.56% |
Total interest-earning assets | |
| 2,124,516 | | | 25,007 | | 4.67% | |
| 1,920,319 | | | 22,228 | | 4.60% |
Noninterest-earning assets | |
| 93,137 | |
| | | | |
| 94,190 | | | | | |
Total assets |
| $ | 2,217,653 |
| | | | | | $ | 2,014,509 | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | |
Savings and money market | | $ | 678,738 | | $ | 348 | | 0.20% | | $ | 499,138 | | $ | 464 | | 0.37% |
Interest-bearing checking | | | 269,546 | | | 56 | | 0.08% | | | 223,578 | | | 87 | | 0.15% |
Certificates of deposit |
| | 466,855 |
| | 1,225 | | 1.04% | | | 546,079 | | | 2,086 | | 1.52% |
Borrowings | |
| 42,528 | |
| 227 | | 2.12% | |
| 152,045 | | | 503 | | 1.32% |
Subordinated notes | |
| 49,367 | |
| 496 | | 3.99% | |
| 9,897 | | | 170 | | 6.83% |
Total interest-bearing liabilities | |
| 1,507,034 | |
| 2,352 | | 0.62% | |
| 1,430,737 | | | 3,310 | | 0.92% |
Noninterest-bearing accounts | |
| 442,291 | |
| | | | |
| 344,731 | | | | | |
Other noninterest-bearing liabilities | |
| 29,224 | |
| | | | |
| 28,698 | | | | | |
Stockholders’ equity | |
| 239,104 | |
| | | | |
| 210,343 | | | | | |
Total liabilities and stockholders’ equity | | $ | 2,217,653 | | | | | | | $ | 2,014,509 | | | | | |
Net interest income | | | | | $ | 22,655 | | | | | | | $ | 18,918 | | |
Net interest rate spread | | | | | | | | 4.05% | | | | | | | | 3.68% |
Net earning assets | | $ | 617,482 | | | | | | | $ | 489,582 | | | | | |
Net interest margin | | | | | | | | 4.23% | | | | | | | | 3.92% |
Average interest-earning assets to average interest-bearing liabilities |
| | 140.97% |
| | | | | | | 134.22% | | | | | |
_________________________
(1) Includes loans held for sale and recognized “net” deferred PPP fees.
Net Interest Income. Net interest income increased $2.3$3.7 million or 26.0%, to $11.0$22.7 million for the three months ended September 30, 2017,2021, from $8.8$18.9 million for the three months ended September 30, 2016. The2020. This comparable quarter over quarter increase in net interest income was primarily due to a $2.5the result of an improved mix of loans versus other interest-earning assets and increased balances in higher yielding loans funded by lower cost deposits. Interest income increased $2.8 million, or 26.8% increase in loans receivable interest income,primarily due to an increase of $2.5 million in the averageinterest income on loans receivable, including fees, impacted primarily by loan growth and net balance.deferred fees recognized upon SBA forgiveness of PPP loans. Interest expense decreased $958,000, primarily as a result of repricing
Net interest income increased $5.3 million, or 21.5%, to $30.0 million for55
deposit rates and a reduction in higher cost borrowings. For the ninethree months ended September 30, 2017, from $24.7 million for2021, the nine months ended September 30, 2016. The increase intotal recognition of net interest incomedeferred fees on forgiven and amortizing PPP loans was primarily due to a $5.5 million, or 21.0% increase in loans receivable interest income, due to an increase in the average loans receivable, net balance.
50
$823,000.
The net interest margin (“NIM”) increased 1531 basis points to 4.70%4.23% for the three months ended September 30, 2017,2021, from 4.55%3.92% for the three months ended September 30, 2016, and increased 27 basis points to 4.63% forsame period in the nine months ended September 30, 2017, from 4.36% for the nine months ended September 30, 2016.prior year. The increasedcomparable quarter over quarter increase in NIM reflects growth inwas impacted by an improved mix of interest-bearing assets, including a higher balance of higher yielding portfolio loans compared to short term investments and cash. Management remains focused on matchinginvestment securities instead of interest-bearing cash, earning a nominal yield combined with declining deposit duration with the duration of earning assets where appropriate.and borrowing costs.
Interest Income. Interest income for the three months ended September 30, 2017,2021, increased $2.6$2.8 million, or 26.3%, to $12.4$25.0 million, from $9.8$22.2 million for the three months ended September 30, 2016.2020. The increase during the period was primarily attributable to the $204.2 million increase in the average balance of loans receivabletotal interest-earning assets, and to $803.4 million fora lesser extent, an increase in the three months ended September 30, 2017, compared to $644.0 million for the three months ended September 30, 2016. The average yield on interest-earning assets increased 18 basis points to 5.27% forfrom the three months ended September 30, 2017, compared to 5.09% for the three months ended September 30, 2016.same period last year. The increase in average yield on interest-earning assets compared to the same period a year earlier primarily reflects the growthincrease in higher yielding and fee income loans, in particular construction and development loans, and an increase in deferred SBA PPP loan fees recognized due to an increase in the loan portfolio andvolume of forgiven PPP loans during the proportionally larger level ofquarter ended September 30, 2021 which benefited the average yield on loans compared to a reduction in the average interest-earningyield on loans from the Company's origination of low yielding PPP loans during the same period in 2020. The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the maturity of the loans.
The following table compares average earning asset mix.
Interestbalances, associated yields, and resulting changes in interest income for the ninethree months ended September 30, 2017, increased $5.8 million, or 20.7%, to $33.5 million, from $27.8 million for the nine months ended September 30, 2016. The increase during the period was primarily attributable to the increase in the average balance of loans receivable to $725.2 million for the nine months ended September 30, 2017, compared to $600.3 million for the nine months ended September 30, 2016. The average yield on interest-earning assets increased 27 basis points to 5.18% for the nine months ended September 30, 2017, compared to 4.91% for the nine months ended September 30, 2016. The increase in average yield on interest-earning assets compared to the same period a year earlier primarily reflects the growth in the loan portfolio2021 and the proportionally larger level of loans in the average interest-earning asset mix.2020:
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | |||||||||||
| | 2021 | | 2020 | | Increase/ | |||||||
| | Average | | | | Average | | | | (Decrease) | |||
| | Balance | | Yield/ | | Balance | | Yield/ | | in Interest | |||
(Dollars in thousands) | | Outstanding | | Rate | | Outstanding | | Rate | | Income | |||
Loans receivable, net and loans held for sale |
| $ | 1,776,424 |
| 5.25 | % | $ | 1,648,070 |
| 5.09 | % | $ | 2,454 |
Mortgage-backed securities | |
| 79,264 |
| 2.14 | |
| 70,502 |
| 2.30 | |
| 19 |
Investment securities available-for-sale | |
| 168,915 |
| 1.87 | |
| 94,593 |
| 2.11 | |
| 295 |
Investment securities held-to-maturity | | | 7,500 | | 5.03 | | | 2,462 | | 5.01 | | | 64 |
FHLB stock | |
| 4,973 |
| 4.47 | |
| 7,219 |
| 4.57 | |
| (27) |
Interest-bearing deposits at other financial institutions | |
| 87,440 |
| 0.51 | |
| 97,473 |
| 0.56 | |
| (26) |
Total interest-earning assets | | $ | 2,124,516 |
| 4.67 | % | $ | 1,920,319 |
| 4.60 | % | $ | 2,779 |
Interest Expense. Interest expense increased $301,000, or 29.3%,decreased $958,000, to $1.3$2.4 million for the three months ended September 30, 2017,2021, from $1.0$3.3 million for the same prior year period, primarily due to a decrease of interest expense on deposits of $1.0 million. The average cost of funds for total interest-bearing liabilities decreased 30 basis points to 0.62% for the three months ended September 30, 2021, from 0.92% for the three months ended September 30, 2020. The decrease was predominantly due to the decrease in cost for market rate deposits and decreased borrowing costs reflecting a decrease in borrowings from the same period in the prior year. The average cost of funds increased fourtotal interest-bearing deposits decreased 37 basis points to 0.61%0.46%, for the three months ended September 30, 2017,2021, compared to 0.57%0.83%, for the three months ended September 30, 2016 primarily2020, predominantly due to the growthdecrease in interest-bearing deposits. cost for market rate deposits as well as a strategic shift away from higher cost CDs.
56
The following table details average balances for cost of deposits increased four basis points to 0.51%funds on interest-bearing liabilities and the change in interest expense for the three months ended September 30, 2017, compared to 0.47%2021 and 2020:
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | |||||||||||
| | 2021 | | 2020 | | (Decrease)/ | |||||||
|
| Average |
| |
| Average |
| |
| Increase | |||
| | Balance | | Yield/ | | Balance | | Yield/ | | in Interest | |||
(Dollars in thousands) | | Outstanding | | Rate | | Outstanding | | Rate | | Expense | |||
Savings and money market | | $ | 678,738 |
| 0.20 | % | $ | 499,138 |
| 0.37 | % | $ | (116) |
Interest-bearing checking | |
| 269,546 |
| 0.08 | |
| 223,578 |
| 0.15 | |
| (31) |
Certificates of deposit | |
| 466,855 |
| 1.04 | |
| 546,079 |
| 1.52 | |
| (861) |
Borrowings | |
| 42,528 |
| 2.12 | |
| 152,045 |
| 1.32 | |
| (276) |
Subordinated note | |
| 49,367 |
| 3.99 | |
| 9,897 |
| 6.83 | |
| 326 |
Total interest-bearing liabilities | | $ | 1,507,034 |
| 0.62 | % | $ | 1,430,737 |
| 0.92 | % | $ | (958) |
Provision for Loan Losses. There was no provision for loan losses for the three months ended, September 30, 2016, reflecting rising interest rates over the last year and the increase in non-retail certificates of deposit.
Interest expense increased $460,000, or 14.8%, to $3.6 million for the nine months ended September 30, 2017, from $3.1 million for the same period of the prior year, primarily due to growth in deposits. The average cost of funds was unchanged at 0.59% for the nine months ended September 30, 2017 and 2016. The average cost of deposits was also unchanged at 0.48% for both the nine months ended September 30, 2017 and 2016, reflecting steady deposit interest rates year over year. Management remains focused on matching deposit duration with the duration of earning assets where appropriate.
Provision for Loan Losses For the three and nine months ended September 30, 2017, the provision for loan losses was $450,000,2021, compared to $600,000 and $1.8 million, for the three and nine months ended September 30, 2016, respectively. The reduced provision for loan losses for the three and nine months ended September 30, 2017 was a result of the low level of charge-offs and the relatively low level of delinquent, nonperforming and classified loans, as well as the increasing percentage of real estate loans and improving real estate values in our market areas. Management also reviewed during the quarter the historical loss activity over the past 17 quarters and incorporated the decrease in the level of historical loss as a factor in determining a reduction in the required unallocated allowance for loan and lease losses at September 30, 2017. During the three months ended September 30, 2017, net recoveries totaled $5,000 compared to $35,000 during the three months ended September 30, 2016. Net charge-offs totaled $63,000 during the nine months ended September 30, 2017, compared to net recoveries of $1,000 during the nine months ended September 30, 2016.
Noninterest Income. Noninterest income decreased $821,000, or 11.3%, to $6.4$3.1 million for the three months ended September 30, 2017, from $7.22020 with the reduction of the provision primarily reflecting improved economic factors on credit-deterioration due to the adverse impact of the COVID-19 pandemic at September 30, 2021, the increase in the loan portfolio as a result of organic growth, and net loan charge-offs. The reduction of the provision for loan losses also reflects improvements in “watch” classified loans that were downgraded based on the COVID-19 pandemic and shown loan-level improvements at September 30, 2021, compared to the same time last year. During the three months ended September 30, 2021, net loan charge-offs totaled $309,000, compared to net loan recoveries of $175,000 during the three months ended September 30, 2020. The increase in net charge-offs was primarily due to increased consumer loan charge-offs. 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 ALLL and may adversely affect the Company’s financial condition and results of operations.
Noninterest Income. Noninterest income decreased $9.1 million, or 52.1%, to $8.4 million for the three months ended September 30, 2016. The decrease during the period was due to an $897,000 reduction in gain on sale of loans, primarily associated with a decrease in the volume of loans/locks fair valued, and a reduction of gain on sale margins associated with the product mix in the Pacific Northwest, partially offset by a $64,000 increase in other noninterest income.
51
Noninterest income increased $679,000, or 3.7%, to $18.8 million for the nine months ended September 30, 2017,2021, from $18.1 million for the nine months ended September 30, 2016. The increase during the period was primarily due to increases in gain on sale of servicing rights of $996,000, service charges and fee income of $254,000, and gain on sale of investment securities of $234,000, primarily offset by a decrease in gain on sale of loans of $882,000 primarily associated with a decrease in the volume of loans/locks fair valued, and a reduction of gain on sale margins associated with the product mix in the Pacific Northwest.
Noninterest Expense. Noninterest expense increased $1.3 million, or 12.4%, to $11.6$17.5 million for the three months ended September 30, 2017, from $10.32020. The decrease during the period primarily reflects a $9.3 million, or 57.6% decrease in gain on sale of loans due to reductions in the amount of originated and sold refinance loans and market pricing, partially offset by a $527,000 increase in service charges and fee income due to less MSR amortization and increased servicing fees. Refinance originations were $136.8 million for the three months ended September 30, 2016.2021 compared to $345.9 million for the same period last year. Gross margins on home loan sales decreased to 3.61% for the three months ended September 30, 2021, from 4.44% for the three months ended September 30, 2020.
Noninterest Expense. Noninterest expense increased $2.8 million to $20.0 million for the three months ended September 30, 2021, from $17.2 million for the three months ended September 30, 2020. The increase in noninterest expense was primarilyreflects a result of an $853,000 increase in salaries and benefits, which included $42,000 in incentives and commissions for the loan production staff associated with continued strong loan production growth, a $216,000 decrease in recovery of mortgage servicing rights, a $127,000 increase in operations, and a $114,000 increase in data processing, partially offset by a $124,000 decrease in professional and board fees.
Noninterest expense increased $4.1 million 14.1%, to $32.9 million for the nine months ended September 30, 2017, from $28.8 million for the nine months ended September 30, 2016. The increase in noninterest expense was primarily a result of a $3.7$2.6 million increase in salaries and benefits, which included $935,000primarily attributable to a reduction in recognized deferred costs on direct loan origination activities of $4.4 million, an increase in additional staffing costs to support loan growth of $1.4 million and an increase in medical expense of $827,000, partially offset by a decrease in incentives and commissions for the loan production staff, a $285,000 increase in operations, a $235,000 increase in data processing, a $188,000 increase in loan costs, and a $164,000 increase in occupancy expense, partially offset by a $389,000 decrease in acquisition costs and a $229,000 decrease in professional and board fees.of $4.1 million.
The efficiency ratio, which is noninterest expense as a percentage of net interest income and noninterest income, weakened slightlyrose to 66.4%64.46% for the three months ended September 30, 2017,2021, compared to 64.5%47.11% for the three months ended September 30, 2016, and 67.5% for2020, representing the nine months ended September 30, 2017, compared to 67.4% for the nine months ended September 30, 2016, representing a greater increase in noninterest expense as compared to a smaller increasewell as the decrease in interest and noninterest income.income noted above.
Provision for Income Tax.For the three months ended September 30, 2017,2021, the Company recorded a provision for income tax expense of $2.0$2.7 million on pre-tax income as compared to $1.6$3.5 million for the three months ended September 30, 2016.2020. The decrease in the tax provision is primarily due to a $5.1 million decrease in pre-tax income during the three months ended September 30, 2021, as compared to the same period last year. The effective corporate income tax rates for the three months ended September 30, 20172021 and 20162020 were 36.2%24.5% and 32.0%21.5%, respectively. The increase in the effective corporate income tax rate was primarily due to nondeductible compensation cost attributable to Internal Revenue Code Section 162(m) limitations.
57
Comparison of Results of Operations for the Nine Months Ended September 30, 2021 and 2020
General. Net income was $28.8 million for the nine months ended September 30, 2021, and $27.9 million for the nine months ended September 30, 2020. The increase in net income for the nine months ended September 30, 2021 was primarily impacted by a $9.9 million reduction in the provision for loan losses, and a $9.7 million, or 17.9% increase in net interest income, partially offset by an $11.0 million, or 27.0% decrease in noninterest income and a $7.3 million, or 15.2% increase in noninterest expense. Earnings for the period also reflect the impact of the COVID-19 pandemic.
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 nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | |
| | For the Nine Months Ended | | For the Nine Months Ended | ||||||||||||
|
| September 30, 2021 | | September 30, 2020 | ||||||||||||
Average Balances | | Average Balance Outstanding | | Interest Earned/ Paid | | Yield/ Rate | | Average Balance Outstanding | | Interest Earned/ Paid | | Yield/ Rate | ||||
ASSETS | | | | | | | | | | | | | | | | |
Loans receivable, net deferred loan fees (1) |
| $ | 1,745,616 |
| $ | 67,538 | | 5.17% | | $ | 1,537,365 | | $ | 62,370 | | 5.42% |
Mortgage-backed securities | | | 71,728 | | | 1,197 | | 2.23% | | | 68,996 | | | 1,231 | | 2.38% |
Investment securities available-for-sale | |
| 144,394 | |
| 2,029 | | 1.88% | |
| 82,180 | |
| 1,370 | | 2.23% |
Investment securities held-to-maturity | | | 7,500 | | | 285 | | 5.08% | | | 826 | | | 31 | | 5.01% |
Federal Home Loan Bank stock | |
| 5,783 | |
| 205 | | 4.74% | |
| 8,240 | |
| 301 | | 4.88% |
Interest-bearing deposits at other financial institutions | |
| 108,536 | |
| 334 | | 0.41% | |
| 100,836 | |
| 587 | | 0.78% |
Total interest-earning assets | |
| 2,083,557 | | | 71,588 | | 4.59% | |
| 1,798,443 | | | 65,890 | | 4.89% |
Noninterest-earning assets |
|
| 90,352 |
|
| | | | |
| 97,435 | |
| | | |
Total assets | | $ | 2,173,909 | | | | | | | $ | 1,895,878 | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY |
| | |
| | | | | | | | | | | | |
Savings and money market | | $ | 643,361 | | $ | 1,233 | | 0.26% | | $ | 450,731 | | $ | 1,932 | | 0.57% |
Interest-bearing checking | | | 251,467 | | | 153 | | 0.08% | | | 204,592 | | | 299 | | 0.20% |
Certificates of deposit | | | 488,032 | | | 4,095 | | 1.12% | | | 545,473 | | | 7,439 | | 1.82% |
Borrowings | |
| 71,452 | |
| 895 | | 1.67% | |
| 138,749 | |
| 1,458 | | 1.40% |
Subordinated notes | |
| 42,399 | |
| 1,237 | | 3.90% | |
| 9,892 | |
| 511 | | 6.90% |
Total interest-bearing liabilities | |
| 1,496,711 | |
| 7,613 | | 0.68% | |
| 1,349,437 | |
| 11,639 | | 1.15% |
Noninterest-bearing accounts | |
| 413,551 | |
| | | | |
| 314,789 | |
| | | |
Other noninterest-bearing liabilities | |
| 28,093 | |
| | | | |
| 25,837 | |
| | | |
Stockholders’ equity | |
| 235,554 | |
| | | | |
| 205,815 | |
| | | |
Total liabilities and stockholders’ equity | | $ | 2,173,909 | | | | | | | $ | 1,895,878 | | | | | |
Net interest income | | | | | $ | 63,975 | | | | | | | $ | 54,251 | | |
Net interest rate spread | | | | | | | | 3.91% | | | | | | | | 3.74% |
Net earning assets | | $ | 586,846 | |
| | | | | $ | 449,006 | | | | | |
Net interest margin | | | | |
| | | 4.11% | | | | | | | | 4.03% |
Average interest-earning assets to average interest-bearing liabilities |
| | 139.21% |
| | | | | | | 133.27% | | | | | |
_________________________
(1) Includes loans held for sale and recognized “net” deferred PPP fees.
58
Net Interest Income. Net interest income increased $9.7 million to $64.0 million for the nine months ended September 30, 2021, from $54.3 million for the nine months ended September 30, 2020 in a similar manner as for the three-month comparison described above, with an increase in interest income of $5.7 million and a decrease in interest expense of $4.0 million. For the nine months ended September 30, 2017,2021, the total recognition of net deferred fees on forgiven and amortizing PPP loans was $1.9 million.
The NIM increased eight basis points to 4.11% for the nine months ended September 30, 2021, from 4.03% for the same period in the prior year. The slight increase in NIM between the nine months ended September 30, 2021 and 2020 reflects the reduction in our deposit and borrowing costs. Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.
Interest Income. Interest income for the nine months ended September 30, 2021, increased $5.7 million, to $71.6 million, from $65.9 million for the nine months ended September 30, 2020. The increase during the period was primarily attributable to an increase in the average balance of total interest-earning assets, partially offset by the decline in the average loan yield. The decrease in average yield on interest-earning assets compared to the same period a year earlier primarily reflects decreases in the average yield for almost all interest earning assets, in particular, loan yields impacted by refinances of one-to-four-family loans and loan repricing to a lower market interest rate, and the origination last year of low-yielding PPP loans. The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the maturity of the loans.
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, | |||||||||||
| | 2021 | | 2020 | | Increase/ | |||||||
| | Average | | | | Average | | | | (Decrease) | |||
| | Balance | | Yield/ | | Balance | | Yield/ | | in Interest | |||
(Dollars in thousands) | | Outstanding | | Rate | | Outstanding | | Rate | | Income | |||
Loans receivable, net and loans held for sale |
| $ | 1,745,616 |
| 5.17 | % | $ | 1,537,365 |
| 5.42 | % | $ | 5,168 |
Mortgage-backed securities | |
| 71,728 |
| 2.23 | |
| 68,996 |
| 2.38 | |
| (34) |
Investment securities available-for-sale | |
| 144,394 |
| 1.88 | |
| 82,180 |
| 2.23 | |
| 659 |
Investment securities held-to-maturity | | | 7,500 | | 5.08 | | | 826 | | 5.01 | | | 254 |
FHLB stock | |
| 5,783 |
| 4.74 | |
| 8,240 |
| 4.88 | |
| (96) |
Interest-bearing deposits at other financial institutions | |
| 108,536 |
| 0.41 | |
| 100,836 |
| 0.78 | |
| (253) |
Total interest-earning assets | | $ | 2,083,557 |
| 4.59 | % | $ | 1,798,443 |
| 4.89 | % | $ | 5,698 |
Interest Expense. Interest expense decreased $4.0 million, to $7.6 million for the nine months ended September 30, 2021, from $11.6 million for the same prior year period, primarily due to decreased interest expense on deposits of $4.2 million. The average cost of funds for total interest-bearing liabilities decreased 47 basis points to 0.68% for the nine months ended September 30, 2021, from 1.15% for the nine months ended September 30, 2020. The decrease was predominantly due to the repricing of CDs to a lower market interest rate. The average cost of total interest-bearing deposits decreased 55 basis points to 0.53%, for the nine months ended September 30, 2021, compared to 1.08%, for the nine months ended September 30, 2020, reflecting lower market interest rates.
59
The following table details average balances for cost of funds on interest-bearing liabilities and the change in interest expense for the nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, | |||||||||||
| | 2021 | | 2020 | | (Decrease)/ | |||||||
|
| Average |
| |
| Average |
| |
| Increase | |||
| | Balance | | Yield/ | | Balance | | Yield/ | | in Interest | |||
(Dollars in thousands) | | Outstanding | | Rate | | Outstanding | | Rate | | Expense | |||
Savings and money market | | $ | 643,361 |
| 0.26 | % | $ | 450,731 |
| 0.57 | % | $ | (699) |
Interest-bearing checking | |
| 251,467 |
| 0.08 | |
| 204,592 |
| 0.20 | |
| (146) |
Certificates of deposit | |
| 488,032 |
| 1.12 | |
| 545,473 |
| 1.82 | |
| (3,344) |
Borrowings | |
| 71,452 |
| 1.67 | |
| 138,749 |
| 1.40 | |
| (563) |
Subordinated note | |
| 42,399 |
| 3.90 | |
| 9,892 |
| 6.90 | |
| 726 |
Total interest-bearing liabilities | | $ | 1,496,711 |
| 0.68 | % | $ | 1,349,437 |
| 1.15 | % | $ | (4,026) |
Provision for Loan Losses. For the nine months ended September 30, 2021, the provision for loan losses was $1.5 million, compared to $11.4 million for the nine months ended September 30, 2020, with the reduction of the provision primarily reflecting improved economic factors on credit-deterioration due to the adverse impact of the COVID-19 pandemic at September 30, 2021. The reduction of the provision for loan losses also reflects improvements in “watch” classified loans that were downgraded based on the COVID-19 pandemic and have shown loan-level improvements at September 30, 2021. During the nine months ended September 30, 2021, net loan charge-offs totaled $747,000, primarily in consumer loans, compared to net loan recoveries of $135,000 during the nine months ended September 30, 2020. 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 decreased $11.0 million, to $29.6 million for the nine months ended September 30, 2021, from $40.6 million for the nine months ended September 30, 2020. This decrease was the result of a $10.5 million decrease in gain on sale of loans, and a $1.6 million decrease in other noninterest income due to the one- time sale of Class B Visa stock shares of $1.5 million during the same period last year, partially offset by a $1.5 million increase in service charges and fee income.
Noninterest Expense. Noninterest expense increased $7.3 million, or 15.2%, to $55.3 million for the nine months ended September 30, 2021, from $48.0 million for the nine months ended September 30, 2020. The increase was primarily due to increases of $9.1 million in salaries and benefits, mostly attributable to a reduction in recognized deferred costs on direct loan origination activities of $5.9 million and increases in compensation of $3.0 million and medical expenses of $1.9 million, partially offset by a decrease in incentives and commissions of $2.7 million. Other increases included $661,000 in data processing, $469,000 in loan costs, and $415,000 in professional and board fees, partially offset by the $3.5 million net change on servicing rights which reflect a recovery of servicing rights of $2.1 million. In the comparable period for 2020, we recognized an impairment of $1.4 million on our servicing rights asset due to falling interest rates as a result of the COVID-19 pandemic.
The efficiency ratio, which is noninterest expense as a percentage of net interest income and noninterest income, rose to 59.07% for the nine months ended September 30, 2021, compared to 50.61% for the nine months ended September 30, 2020, representing the decrease in noninterest income and the increase in noninterest expense noted above.
Provision for Income Tax.For the nine months ended September 30, 2021, the Company recorded a provision for income tax expense of $5.0$8.0 million on pre-tax income of $36.8 million, as compared to $4.2a provision of income tax expense of $7.5 million on pre-tax income of $35.4 million for the nine months ended September 30, 2016.2020. The effective corporate income tax rates for the nine months ended September 30, 20172021 and 20162020 were 32.5%21.9% and 34.5%21.2%, respectively.
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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 its potential liquidity demands. The primary sources are increases in deposit accounts, FHLB advances, purchases of Fed Funds,federal funds, sale of securities available-for-sale, cash flows from loan payments, sales of one-to-four-family loans HFS,held for sale, and maturing securities.
At September 30, 2017,2021, the Bank’s total borrowing capacity was $247.1$505.8 million with the FHLB of Des Moines, with unused borrowing capacity of $235.8$457.4 million. The FHLB borrowing limit is based on certain categories of loans, primarily real estate loans that qualify as collateral for FHLB advances. At September 30, 2017,2021, the Bank held approximately $320.1$742.8 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,FRB, with a current limit of $96.0$195.5 million, and a combined credit limit of $43.0$101.0 million in written Fed Fundsfederal funds lines of credit through correspondent banking relationships at September 30, 2017.2021. The Federal Reserve BankFRB borrowing limit is based on certain categories of loans, primarily consumer loans that qualify as collateral for Federal Reserve BankFRB line of credit. At September 30, 2017,2021, the Bank held approximately $195.3$415.1 million in loans that qualify as collateral for the Federal Reserve BankFRB line of credit.
At September 30, 2017, $10.3 million in FHLB advances were outstanding, and no advances were outstanding against the Federal Reserve Bank line of credit, or the Fed Funds lines of credit. The Bank’s Asset and Liability Management Policy permits management to utilize brokered deposits up to 20% of Bank deposits or $168.8$376.3 million at September 30, 2017.
52
2021. Total brokered deposits at September 30, 20172021 were $102.2$200.5 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 Companythe Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and Fed Funds.federal funds. On a longer termlonger-term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S. Government obligations and federalU.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 September 30, 2017,2021, the approved outstanding loan commitments, including unused lines of credit amounted to $347.1 million, including undisbursed construction and development loans in process totaling $82.1$570.0 million. Certificates of deposit scheduled to mature in three months or less at September 30, 2017,2021, totaled $81.2$90.5 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 September 30, 2017,2021, FS Bancorp, Inc. had $3.7$18.0 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“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 SeptemberJune 30, 2017,2021, 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 September 30, 2017,2021, 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 September 30, 2017,2021, 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 September 30, 2021 was 11.9%, compared to 10.9% at December
61
31, 2020. As required by the CARES Act, the FDIC has temporarily lowered the CBLR to 8.5% beginning on January 1, 2021 for this calendar year. The CBLR will return to 9% on January 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 September 30, 2021, FS Bancorp, Inc. would have exceeded all regulatory capital requirements withrequirements. The Tier 1 leverage-based capital Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 capital ratios of 12.5%, 14.9%, 16.1%, and 14.9%, respectively.ratio calculated for FS Bancorp, Inc. at September 30, 2021 was 10.6%. For additional information regarding the Bank’s regulatory capital compliance, see the discussion included in Note“Note 14 - Regulatory Capital” to the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
For a bank holding company with less than $1 billion in consolidated assets, such as FS Bancorp, Inc., the capital guidelines apply on a bank only basis and the Federal Reserve requires the holding company’s subsidiary banks to be well capitalized under the prompt corrective action regulations. If FS Bancorp, Inc. was subject to regulatory guidelines for bank holding companies with $1 billion or more in assets, at September 30, 2017, FS Bancorp, Inc. would have exceeded all regulatory capital requirements.
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, 2020.
Not required for smaller reporting companies.
Item 4. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
An evaluation of the disclosure controls and procedures (asas defined in Rule 13a‑15(e)13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Act”)“Exchange Act”) atwas carried out as of September 30, 2017 was carried out2021 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. The Company’s Chief Executive OfficerIn designing and Chief Financial Officer concluded thatevaluating 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 effectdesigning 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 September 30, 20172021, the Company’s disclosure controls and procedures were effective in ensuring that the information we are required to be disclosed by the Companydisclose in the reports it fileswe file or submitssubmit under the Exchange Act is: (i) accumulated and communicated to the Company’s
53
management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii)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 have beenwere no significant changes in the Company’s internal control over financial reporting (as defined in Rule 13a‑15(f) of the Act) that occurred during the three months ended September 30, 2017,2021, 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
62
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.
54
PART II. OTHER INFORMATION
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.
There have been no material changes toin the risk factors set forthRisk Factors previously disclosed in Part I. Item 1A of the Company’sFS Bancorp’s Annual Report on Form 10‑K10-K for the fiscal year ended December 31, 2016.2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) |
| Not applicable |
(b) |
| Not applicable |
(c) |
|
|
| | | | | | | | | | | |
| | | | | | | | Maximum | | ||
| | | | | | Total Number | | Dollar Value of | | ||
| | | | | | of Shares | | Shares that | | ||
| | | | Average | | Repurchased as | | May Yet Be | | ||
| | Total Number | | Price | | Part of Publicly | | Repurchased | | ||
| | of Shares | | Paid per | | Announced | | Under the | | ||
Period |
| Purchased (1) |
| Share (1) |
| Plan (1) |
| Plan |
| ||
July 1, 2021 - July 31, 2021 (2) | | 93,467 | | $ | 35.16 | | 93,467 | | $ | 4,702,338 |
|
August 1, 2021 - August 31, 2021 (2) (3) |
| 129,283 | |
| 34.23 |
| 129,283 |
|
| 10,276,470 | |
September 1, 2021 - September 30, 2021 |
| 48,025 | |
| 33.46 |
| 48,025 |
|
| 8,669,393 | |
Total for the quarter |
| 270,775 |
| $ | 34.42 |
| 270,775 |
| $ | 8,669,393 | |
_________________________
(1) | Share data has been adjusted to reflect a two-for-one stock split effective July 14, 2021. |
(2) | 66,890 shares were internally repurchased by the Company acting as the cash counterparty for participants exercising options. |
(3) | 5,970 shares were surrendered by participants included in the 2018 Equity Incentive Plan in satisfaction of payment for withholding taxes for vesting of restricted stock shares . |
On August 30, 2021, the Company announced that its Board of Directors approved an additional share repurchase program of up to $10.0 million of the Company’s common shares authorized and outstanding in addition to the $900,000 remaining common shares authorized and available for repurchase under the previous share repurchase plan. The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, from time to time, to be repurchased through June 30, 2022, 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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55
| | |
3.1 |
| |
3.2 | | |
4.1 | | |
4.2 | | |
4.3 | | |
10.1 | | Severance Agreement between 1st Security Bank of Washington and Joseph C. Adams (1) |
10.2 | | |
10.3 | | FS Bancorp, Inc. 2013 Equity Incentive Plan (the “2013 Plan”) |
10.4 | | Form of Incentive Stock Option Agreement under the 2013 Plan |
10.5 | | Form of Non-Qualified Stock Option Agreement under the 2013 Plan |
10.6 | | Form of Restricted Stock Agreement under the 2013 Plan |
10.9 | | |
10.10 | | |
10.11 | | Form of Incentive Stock Option Award Agreement under the 2018 Equity Incentive Plan (6) |
10.12 | | Form of Non-Qualified Stock Option Award Agreement under the 2018 Equity Incentive Plan (6) |
10.13 | | Form of Restricted Stock Award Agreement under the 2018 Equity Incentive Plan (6) |
10.14 | | Form of Registration Rights Agreement for Subordinated Notes (7) |
31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | | The following materials from the Company’s Quarterly Report on Form |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
(1) | | Filed as an exhibit to the Registrant’s Registration Statement on Form |
(2) | | Filed as an exhibit to the Registrant’s Current Report on Form |
(3) | | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 11, 2021 (File No. 001-35589). |
(4) | | Filed as an exhibit to the Registrant’s Registration Statement on Form |
(5) | | Filed as an exhibit to the Registrant’s Current Report on Form |
(6) | | Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (333-22513) filed on May 23, 2018. |
(7) | | Filed as an exhibit to the Registrant’s Current Report on Form |
|
5664
Exhibit Index
|
| |
| ||
| ||
| ||
| ||
|
57
SIGNATURES
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.
| | |
| FS BANCORP, INC. | |
| | |
| | |
Date: November | By: | /s/Joseph C. Adams |
| | Joseph C. Adams, |
| | Chief Executive Officer |
| | ( |
| | |
Date: November | By: | /s/Matthew D. Mullet |
| | Matthew D. Mullet |
| | Secretary, Treasurer and |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
5865