FS Bancorp, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2022. FS Bancorp operates 1st Security Bank of Washington, a community bank with commercial and consumer banking and home lending segments, primarily serving Washington and the broader West Coast through its indirect home-improvement lending network.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior date |
|---|---|---|
| Net interest income | $22.7 million | $20.1 million in Q1 2021 |
| Net interest margin | 4.24% | 3.99% in Q1 2021 |
| Provision for credit losses | $1.043 million | $1.500 million in Q1 2021 |
| Noninterest income | $5.9 million | $13.0 million in Q1 2021 |
| Noninterest expense | $19.1 million | $16.3 million in Q1 2021 |
| Net income; diluted EPS | $6.9 million; $0.81 | $11.9 million; $1.35 in Q1 2021 |
| Efficiency ratio | 66.67% | 49.34% in Q1 2021 |
| Cash flow | Operating +$97.9 million; investing −$86.8 million; financing −$8.0 million; cash increased $3.1 million | Operating +$18.2 million; investing −$75.6 million; financing +$51.3 million; cash decreased $6.1 million in Q1 2021 |
| Total assets; net loans | $2.274 billion; $1.798 billion | $2.286 billion; $1.729 billion at December 31, 2021 |
| Deposits; borrowings | $1.920 billion; $35.5 million | $1.916 billion; $42.5 million at December 31, 2021 |
| Stockholders’ equity | $236.0 million | $247.5 million at December 31, 2021 |
| Regulatory capital | Bank CBLR 12.2%; holding-company Tier 1 leverage ratio 10.8% | Bank CBLR 12.2% at December 31, 2021 |
Interest income rose to $24.6 million from $22.8 million, while interest expense declined to $1.9 million from $2.7 million. Management attributed the stronger net interest income and margin to loan growth and a more favorable earning-asset mix, alongside lower deposit and borrowing costs. Mortgage banking remained a significant income source, but loan-sale gains fell to $3.9 million from $11.7 million; home-loan sale gross margins were 2.94% versus 4.60%.
Material changes and notable items
- Net income fell to $6.9 million from $11.9 million, principally reflecting lower mortgage loan-sale gains and a $2.7 million increase in noninterest expense. The prior-year quarter also included a $2.05 million recovery of servicing rights; the current-period recovery was negligible.
- Net loans grew $69.1 million from year-end, with growth in real estate and consumer loans. Gross loans were $1.821 billion; indirect home-improvement loans were $359.4 million. Loans held for sale declined $83.7 million to $42.1 million.
- Nonperforming loans increased to $6.8 million, or 0.37% of gross loans, from $5.8 million, or 0.33%, at year-end. Classified substandard loans declined to $13.1 million from $18.1 million. There were no troubled debt restructurings or loans 90 days past due and still accruing.
- First-time CECL adoption on January 1, 2022 reduced the loan-loss allowance by $2.9 million, increased the unfunded-commitment allowance by $2.4 million and added $297,000, net of tax, to opening retained earnings. The quarter’s allowance for credit losses on loans was $23.4 million; the unfunded-commitment allowance was $3.1 million.
- Rising market rates drove a $20.973 million pre-tax unrealized loss on available-for-sale securities. Accumulated other comprehensive loss moved to $13.9 million from income of $252,000 at year-end; comprehensive loss was $7.3 million despite positive net income.
- The company repurchased 115,356 shares for $3.445 million during the quarter. On April 6, 2022, it announced a new repurchase authorization of up to $10 million, in addition to $3.8 million remaining under the prior plan.
Outlook, risks and contingencies
The filing provides no earnings or financial forecast. Management’s stated priorities are to diversify and grow lending, maintain asset quality, emphasize lower-cost core deposits, deepen customer relationships and expand markets. Management said it expects to continue quarterly cash dividends at $0.20 per share, subject to board discretion; the filing notes this could be changed or stopped.
Liquidity included $29.6 million of consolidated cash and cash equivalents and $17.0 million of unrestricted cash at the holding company. The Bank reported $478.8 million of unused FHLB borrowing capacity, a $189.6 million Federal Reserve line and $101.0 million in correspondent-bank federal-funds lines. Brokered deposits totaled $187.8 million, within the stated policy limit of 20% of deposits. Outstanding loan commitments were $616.2 million.
Key risks identified include economic and credit deterioration, interest-rate and securities-market changes, mortgage origination and secondary-market conditions, deposit competition and retention, servicing-right valuation and prepayment assumptions, geographic and lending concentrations, third-party and technology disruptions, and regulatory or accounting changes. Four contractor/dealers accounted for 48.1% of Q1 funded indirect home-improvement loan volume. Management reported no material pending legal actions and no material change in previously disclosed risk factors. Disclosure controls were assessed as effective; no significant internal-control changes were reported.
Important facts for investors to verify
- Whether mortgage production, sale margins and gains continue to weaken as refinance activity declines and market rates rise.
- Whether loan growth, delinquency trends and the CECL allowance remain appropriate, particularly for indirect home-improvement and commercial lending exposures.
- The effect of unrealized securities losses on equity, liquidity flexibility and any future need to sell securities.
- Deposit mix and pricing, including brokered deposits and near-term certificate maturities, alongside use of borrowing facilities.
- Servicing-right valuation sensitivity to prepayments and rates, and the concentration of originations among a small number of home-improvement dealers.
- Capital, dividends and share repurchases after the reported quarter, including the execution of the new repurchase authorization.