FS Bancorp, Inc. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; comparison is FY2020. FS Bancorp is the holding company for 1st Security Bank of Washington, a community bank focused on the Puget Sound region, with consumer, commercial and home-lending operations. Figures below are in U.S. dollars; “million” and “billion” are used for readability.
Financial performance and position
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Total assets | $2.286 billion | $2.113 billion |
| Gross loans | $1.759 billion | $1.574 billion |
| Deposits | $1.916 billion | $1.674 billion |
| Net interest income | $86.6 million | $74.1 million |
| Net interest margin | 4.13% | 4.02% |
| Net income | $37.4 million | $39.3 million |
| Diluted earnings per share | $4.32 | $4.49 |
| Operating cash flow | $109.0 million | $(32.3) million |
| Stockholders’ equity | $247.5 million | $230.0 million |
- Interest income increased to $96.4 million from $88.8 million, while interest expense fell to $9.7 million from $14.7 million. Net interest margin improved 11 basis points; the yield on average earning assets declined to 4.59% from 4.82%, while the average cost of interest-bearing liabilities fell to 0.65% from 1.07%.
- Net interest income after loan-loss provision was $86.1 million, compared with $61.1 million. The provision fell to $0.5 million from $13.0 million.
- Noninterest income fell 32.2% to $37.5 million, mainly as loan-sale gains declined to $31.1 million from $48.8 million. Noninterest expense rose 14.5% to $76.2 million, including a $11.6 million increase in salaries and benefits. The efficiency ratio worsened to 61.41% from 51.43%.
- Net income declined 4.7%; return on assets was 1.71% versus 2.02%, and return on equity was 15.74% versus 18.74%.
- Loans receivable, net, increased $183.6 million. Consumer loans were 24.1% of gross loans; commercial real estate, including multifamily, was 25.2%; construction and development was 13.8%.
- Cash and cash equivalents were $26.5 million, down from $91.6 million. The company reported $315.9 million of liquid assets including cash, certificates at other institutions and investment securities. Net cash from investing was $(310.8) million and financing activities provided $136.7 million.
- FHLB borrowings were $42.5 million, down from $165.8 million. The company issued $50 million of 3.75% fixed-to-floating subordinated notes due 2031 and repaid $10 million of older subordinated notes. Deposits included $192.9 million of brokered deposits, or 10.1% of total deposits; $569.3 million, or 29.7%, exceeded FDIC insurance limits.
- The Bank’s community bank leverage ratio was 12.2% (10.9% in 2020) and it was categorized as well capitalized. The allowance for loan losses was $25.6 million, or 1.46% of gross loans, versus $26.2 million, or 1.66%.
Material changes and notable items
- Deposits grew 14.4%, supported by customer growth and pandemic-related stimulus and PPP funds; customers also shifted balances from certificates of deposit toward checking, savings and money-market accounts.
- Mortgage originations and sales remained significant but moderated: one-to-four-family loan sales were $1.42 billion versus $1.64 billion, as refinancing activity declined. Loan-sale gains fell accordingly.
- Asset-quality indicators improved: nonperforming loans declined to $5.8 million, or 0.33% of gross loans, from $7.8 million, or 0.49%. There was no other real estate owned at year-end and no troubled debt restructurings. Net charge-offs nevertheless rose to $1.0 million from $93,000, primarily reflecting consumer loans.
- The company repurchased 524,353 shares during 2021 at an average $34.40 per share; total common-stock repurchases were $18.0 million. Cash dividends were $4.6 million. A two-for-one stock split took effect July 14, 2021.
- Unrealized losses on available-for-sale securities contributed to a $2.3 million other comprehensive loss, compared with $1.7 million of other comprehensive income in 2020. Management reported no other-than-temporary impairment charges.
- PPP ended May 31, 2021. At year-end, 107 PPP loans totaling $24.2 million remained outstanding; these SBA-guaranteed loans were excluded from the allowance calculation.
Outlook, risks and contingencies
- Management said the low-rate environment was expected to continue pressuring loan and floating-rate asset yields and could adversely affect net interest income and margin in 2022. The filing does not provide formal earnings or revenue guidance. Management noted the Federal Reserve had indicated rate increases could begin in 2022.
- The company elected to adopt CECL effective January 1, 2022. Management estimated adoption would decrease the combined allowance for credit losses and reserve for unfunded commitments by 1% to 5%; this is an estimate, not a reported 2021 result.
- Key exposures include COVID-19-related economic uncertainty, inflation and supply-chain disruption; local real estate and construction conditions; consumer and commercial credit risk; dealer concentration in indirect home-improvement lending; interest-rate, mortgage-banking and mortgage-servicing-rights sensitivity; deposit retention and liquidity; and cybersecurity, third-party and LIBOR-transition risks.
- Construction and development loans were $242.4 million, including $120.0 million of speculative one-to-four-family construction loans. Commercial real estate and construction concentrations may attract additional regulatory scrutiny, although reported balances were below cited supervisory thresholds.
- Outstanding loan commitments, including unused lines, totaled $558.6 million. The company had $483.9 million of unused FHLB capacity, $200.1 million of FRB capacity and $101.0 million of correspondent Fed Funds lines. Management believed available liquidity was adequate for at least the next 12 months.
- COVID-related interest-only or relief agreements totaled $9.0 million at year-end; $1.2 million of commercial business loans were nonaccrual but current on contractual payments. Management disclosed ordinary-course legal matters but no material pending legal actions.
- Management expected to continue quarterly common dividends at $0.20 per share, subject to Board discretion and regulatory restrictions. The filing reports no guarantee that dividends will continue at that level.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded internal controls were effective as of year-end.
Most important facts for investors to verify
- Whether loan and deposit growth can be sustained without weakening underwriting or asset quality, particularly in construction, commercial real estate and consumer lending.
- Whether mortgage-sale income and volumes continue to moderate, and how compensation and other expense growth affect efficiency and earnings.
- How actual CECL adoption compares with management’s estimated 1%–5% decrease in combined credit-loss allowances and unfunded-commitment reserve.
- Deposit stability and funding costs, including uninsured and brokered deposit levels, as market rates change; also monitor liquidity and unused borrowing capacity.
- Credit performance of the $24.2 million remaining PPP portfolio and the resolution of COVID-related modified loans.
- Interest-rate sensitivity, securities valuation and mortgage servicing rights; the filing’s projected net interest income increases under rate shocks are model estimates and depend on assumptions.
- Capital distribution plans, including dividends and repurchases, in light of regulatory limits and the holding company’s reliance on Bank distributions.