FS Bancorp(FSBW) - 2019 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for FS Bancorp, Inc. as of June 30, 2019, and for the three and six-month periods then ended, including Balance Sheets, Statements of Income, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows, along with detailed notes Consolidated Balance Sheets As of June 30, 2019, total assets were $1.64 billion, a slight increase from $1.62 billion at December 31, 2018, driven by increases in cash and cash equivalents and loans held for sale, partially offset by a decrease in net loans receivable, while total liabilities rose to $1.45 billion, primarily due to a $60.0 million increase in deposits, and stockholders' equity increased to $189.4 million from $180.0 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $1,641,065 | $1,621,644 | | Total cash and cash equivalents | $59,594 | $32,779 | | Loans receivable, net | $1,282,119 | $1,312,519 | | Loans held for sale, at fair value | $66,508 | $51,195 | | Total Liabilities | $1,451,639 | $1,441,606 | | Total deposits | $1,334,217 | $1,274,219 | | Borrowings | $83,211 | $137,149 | | Total Stockholders' Equity | $189,426 | $180,038 | Consolidated Statements of Income For the six months ended June 30, 2019, net income was $9.7 million, an increase from $8.6 million in the same period of 2018, driven by a significant rise in net interest income to $35.2 million from $23.4 million, primarily due to the Anchor acquisition, partially offset by a higher provision for loan losses and increased noninterest expenses, including acquisition-related costs Income Statement Summary (in thousands) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $17,534 | $11,925 | $35,223 | $23,422 | | Provision for Loan Losses | $910 | $450 | $1,660 | $800 | | Noninterest Income | $6,083 | $5,614 | $10,638 | $10,638 | | Noninterest Expense | $17,071 | $12,144 | $31,868 | $23,179 | | Net Income | $4,463 | $4,257 | $9,655 | $8,579 | | Diluted EPS | $0.98 | $1.13 | $2.12 | $2.28 | Consolidated Statements of Comprehensive Income Comprehensive income for the six months ended June 30, 2019, was $11.6 million, significantly higher than the $6.9 million reported for the same period in 2018, driven by both higher net income and a positive change in other comprehensive income, which saw a $2.0 million gain from unrealized holding gains on securities, compared to a $1.7 million loss in the prior year Comprehensive Income (in thousands) | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net Income | $9,655 | $8,579 | | Other comprehensive income (loss), net of tax | $1,975 | $(1,652) | | Comprehensive Income | $11,630 | $6,927 | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased from $180.0 million at the start of 2019 to $189.4 million at June 30, 2019, primarily due to $9.7 million in net income and a $2.0 million positive change in accumulated other comprehensive income, partially offset by $1.3 million in dividends paid and $2.7 million in common stock repurchases - Key drivers for the change in stockholders' equity for the six months ended June 30, 2019 include: - Net income: +$9.7 million - Dividends paid: -$1.3 million - Common stock repurchased: -$2.7 million - Other comprehensive income, net of tax: +$2.0 million[14] Consolidated Statements of Cash Flows For the six months ended June 30, 2019, net cash from operating activities was a use of $5.0 million, while investing activities provided $29.2 million, primarily from net loan collections, and financing activities provided $2.5 million, driven by a net increase in deposits that offset repayments of borrowings, resulting in an overall increase of $26.8 million in cash and cash equivalents Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash (used) from operating activities | $(4,952) | $12,375 | | Net cash from (used) by investing activities | $29,236 | $(147,986) | | Net cash from financing activities | $2,531 | $138,673 | | Net Increase in Cash and Cash Equivalents | $26,815 | $3,062 | Notes to Consolidated Financial Statements This section provides detailed explanations of the accounting policies and financial data presented in the statements, covering topics such as the basis of presentation, the significant impact of the Anchor Bancorp acquisition, composition of securities and loan portfolios, servicing rights, derivatives, leases, regulatory capital, and business segment performance Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results of operations, highlighting the impact of the Anchor Bancorp acquisition completed in November 2018, covering changes in the balance sheet, a detailed breakdown of net interest income and margin, noninterest income and expenses, and asset quality, while also reviewing the company's liquidity position and capital resources, confirming a 'well capitalized' status, and emphasizing its strategy of diversifying revenues and expanding lending channels - The acquisition of Anchor Bancorp in November 2018 significantly impacted financial results, contributing to increased net interest income, higher operating expenses, and expanded market presence[174] - The company's business plan focuses on growing and diversifying the loan portfolio, maintaining strong asset quality, emphasizing lower-cost core deposits, and expanding its markets[176] Key Performance Metrics Comparison | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income (in thousands) | $4,463 | $4,257 | $9,655 | $8,579 | | Net Interest Margin (NIM) | 4.60% | 4.58% | 4.65% | 4.66% | | Efficiency Ratio | 72.3% | 69.2% | 69.5% | 68.1% | | Non-performing loans to gross loans | 0.1% | N/A | 0.1% | N/A | Comparison of Financial Condition Total assets grew by $19.4 million to $1.64 billion at June 30, 2019, from year-end 2018, funded by deposit growth, while net loans receivable decreased by $30.4 million, mainly in construction and commercial business loans, offset by a $28.3 million increase in consumer loans, and total deposits increased by $60.0 million, with strong growth in relationship-based checking accounts, leading to stockholders' equity rising by $9.4 million, driven by net income, despite $2.5 million in stock repurchases - Total assets increased by 1.2% to $1.64 billion at June 30, 2019, compared to $1.62 billion at December 31, 2018[191] - Net loans receivable decreased by $30.4 million, primarily due to declines in construction & development (-$33.2M) and commercial business loans (-$22.1M), offset by a $28.3M increase in consumer loans[193] - Total deposits increased by $60.0 million to $1.33 billion, with relationship-based transactional accounts growing by $74.1 million[198] Comparison of Results of Operations For the six months ended June 30, 2019, net income rose 12.5% to $9.7 million year-over-year, driven by a 50.4% increase in net interest income to $35.2 million, largely from the Anchor acquisition, with the Net Interest Margin (NIM) remaining stable at 4.65%, while noninterest income was flat at $10.6 million as higher service fees were offset by lower gains on loan sales, and noninterest expense increased 37.5% to $31.9 million, reflecting acquisition costs and operational growth Results of Operations for the Six Months Ended June 30 | Metric (in thousands) | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $35,223 | $23,422 | +50.4% | | Provision for Loan Losses | $1,660 | $800 | +107.5% | | Noninterest Income | $10,638 | $10,638 | 0.0% | | Noninterest Expense | $31,868 | $23,179 | +37.5% | | Net Income | $9,655 | $8,579 | +12.5% | - The Net Interest Margin (NIM) for the six months ended June 30, 2019 was 4.65%, a slight decrease of one basis point from 4.66% in the prior year period, with the impact of higher-cost deposits nearly offset by a positive 18 basis point impact from interest accretion on acquired loans[222][223] - Acquisition costs related to the Anchor integration totaled $1.6 million for the first six months of 2019, contributing significantly to the rise in noninterest expense[229] Liquidity and Capital Resources The company maintains a strong liquidity position with primary sources including deposit growth, FHLB advances, and cash flows from loans, with the Bank having $390.3 million in unused borrowing capacity with the FHLB at June 30, 2019, and remaining 'well capitalized' under all regulatory measures, with a Tier 1 leverage ratio of 11.4% and a total risk-based capital ratio of 14.7%, well above the required minimums - At June 30, 2019, the Bank had total borrowing capacity of $484.2 million with the FHLB of Des Moines, with $390.3 million unused[233] - The Bank also maintained a $144.8 million borrowing line with the Federal Reserve Bank and $51.0 million in federal funds lines with correspondent banks[234] Bank Capital Ratios at June 30, 2019 | Ratio | Actual | Well Capitalized Minimum | | :--- | :--- | :--- | | Tier 1 Leverage Capital | 11.4% | 5.00% | | Common Equity Tier 1 (CET 1) Capital | 13.8% | 6.50% | | Tier 1 Risk-Based Capital | 13.8% | 8.00% | | Total Risk-Based Capital | 14.7% | 10.00% | Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes in the market risk disclosures from those presented in its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 - No material changes in market risk disclosures were reported for the period[242] Controls and Procedures Based on an evaluation as of June 30, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective, and they also reported no significant changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[245] - No significant changes to internal controls over financial reporting were identified during the second quarter of 2019[246] PART II OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings in the normal course of business, and management believes that any potential liability from these proceedings will not have a material adverse effect on the company's financial condition - In management's opinion, any liability from pending legal proceedings would not have a material adverse effect on the company's business or financial condition[248] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes to risk factors were reported from the company's 2018 Annual Report on Form 10-K[249] Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2019, the company repurchased 49,978 shares of its common stock at an average price of $48.27 per share as part of a publicly announced plan authorized in January 2019, with 172,378 shares remaining available for repurchase under the plan as of June 30, 2019 Common Stock Repurchases (Q2 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2019 | — | $— | | May 2019 | 38,241 | $48.42 | | June 2019 | 11,737 | $47.78 | | Total for Quarter | 49,978 | $48.27 | - On January 28, 2019, the Board authorized the repurchase of up to 225,000 shares, and as of the end of Q2 2019, 172,378 shares were still available for repurchase under this plan[253] Exhibits This section lists the exhibits filed with the Form 10-Q, including the CEO and CFO certifications required under the Sarbanes-Oxley Act (Sections 302 and 906) and the XBRL interactive data files - Key exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906[259][261] - The report includes financial statements and notes formatted in Extensible Business Reporting Language (XBRL)[259][261]