Business context and reporting period
FS Bancorp, Inc. is the holding company for 1st Security Bank of Washington, a community bank serving Washington’s Puget Sound region and the Tri-Cities. This Form 10-K covers the fiscal year ended December 31, 2019; it is an annual report, not a standalone fourth-quarter filing. The comparison with 2018 is affected by the November 2018 Anchor Bancorp acquisition.
Key financial metrics
Amounts are in U.S. dollars; balance-sheet figures are as of December 31.
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets | $1.713 billion | $1.622 billion |
| Gross loans | $1.352 billion | $1.326 billion |
| Deposits | $1.392 billion | $1.274 billion |
| Stockholders’ equity | $200.2 million | $180.0 million |
| Net interest income | $70.3 million | $52.1 million |
| Net income | $22.7 million | $24.3 million |
| Diluted EPS | $5.01 | $6.29 |
| Net interest margin | 4.53% | 4.61% |
| Return on assets / equity | 1.38% / 11.92% | 2.07% / 18.15% |
- Revenue and margins: Total interest income rose 43.8% to $89.6 million, while interest expense increased 88.9% to $19.3 million. Net interest income grew 35.0%, but NIM declined 8 basis points. Noninterest income was $23.0 million, including $14.2 million in gains on loan sales; noninterest expense was $62.3 million.
- Credit costs and quality: Provision for loan losses was $2.9 million, versus $1.5 million; net charge-offs were $2.0 million, versus net recoveries of $53,000. The allowance was $13.2 million, or 0.98% of gross loans. Nonperforming assets were $3.2 million, or 0.19% of assets, down from $4.6 million and 0.28% a year earlier.
- Cash flow: Operating activities provided $9.2 million; investing activities used $55.2 million; financing activities provided $59.0 million. Cash and cash equivalents increased $13.0 million to $45.8 million.
- Debt and liquidity: FHLB advances were $84.9 million, down from $137.1 million; the Company also had a $10 million subordinated note due in 2025 bearing 6.50% interest. Available FHLB capacity was $386.5 million, with additional Federal Reserve capacity of $156.1 million and $71.0 million in unsecured Fed Funds lines; none of the latter facilities was drawn at year-end. Brokered deposits totaled $147.6 million, or 10.6% of deposits. The parent company had $5.6 million of unrestricted cash.
- Capital: The Bank was well capitalized, with total risk-based capital of 14.64%, Tier 1 risk-based capital of 13.70%, and Tier 1 leverage capital of 11.56%. Year-end equity was 11.69% of assets.
Material changes versus the prior comparable period
- Net income declined 6.7%, despite substantial growth in net interest income, as higher funding costs, operating expenses, loan-loss provision, and taxes outweighed the increase in interest income. The 2018 comparison included a one-time $7.4 million bargain purchase gain from the Anchor acquisition; there was no such gain in 2019.
- Net interest income increased $18.2 million, primarily reflecting higher average loan balances. Funding costs rose: average cost of interest-bearing liabilities increased to 1.64% from 1.22%, and average cost of interest-bearing deposits to 1.51% from 0.97%.
- Noninterest expense increased 27.6% to $62.3 million, with increases in salaries, operations, data processing, and occupancy. Acquisition costs were $1.8 million, mainly related to integrating Anchor’s core processing platform. The efficiency ratio rose to 66.8% from 61.9%.
- Loans grew modestly overall, but portfolio mix shifted: consumer loans increased to 24.1% of gross loans, while construction and development loans fell to $179.7 million from $247.3 million. Multi-family loans rose to $133.9 million from $104.7 million. Residential mortgage originations increased to $891.4 million; $785.4 million of loans were sold.
- Deposits increased 9.3%, while borrowings fell $52.3 million. Stockholders’ equity increased 11.2%; the Company repurchased 102,384 shares for $5.0 million and paid $2.9 million in dividends.
Outlook, commentary, risks, and unusual items
- Management’s stated strategy is to diversify and grow lending, maintain asset quality, expand relationship-based core deposits, deepen customer relationships, and selectively expand markets. It expects residential construction and development lending to remain an important portfolio component, while emphasizing disciplined underwriting. The filing provides no quantified earnings or growth guidance.
- Management attributed the NIM decline to movement from higher-yielding construction loans toward lower-yielding multi-family loans, lower rates on new real estate loans, and funding-cost pressure. Federal Reserve rate cuts during 2019 and March 2020 were noted; management described interest-rate and margin exposure as important risks.
- Key credit and concentration risks include consumer lending, indirect home-improvement lending, commercial real estate, construction and development, and commercial business/warehouse lending. Ten dealers accounted for 62.3% of indirect home-improvement loan volume. Speculative one-to-four-family construction loans were $115.6 million at year-end. The filing notes potential added regulatory scrutiny for real estate concentrations.
- Other disclosed risks include local economic and real-estate deterioration, deposit competition and liquidity, LIBOR transition, mortgage banking volatility and repurchase obligations, cybersecurity and third-party service disruptions, and natural disasters. Coronavirus was identified as a potential economic and customer risk, but the filing does not quantify its expected financial effect.
- CECL was expected to become effective for the Company in 2023; management anticipated a one-time allowance adjustment but had not determined its amount. The 2019 financial statements received an unqualified audit opinion, and the auditor and management reported effective internal control over financial reporting. No material pending legal actions were reported.
Important facts for investors to verify
- How the Anchor acquisition affects year-over-year comparability, expenses, deposit retention, and reported profitability; in particular, separate recurring results from the 2018 bargain purchase gain.
- Whether loan-loss provision and charge-offs remain elevated, especially in commercial business and consumer portfolios, and whether the allowance adequately reflects acquired-loan discounts and portfolio growth.
- Construction and commercial real estate exposures, unfunded commitments, borrower concentrations, and performance if housing demand or property values weaken.
- Funding mix and repricing: certificate maturities, brokered-deposit dependence, deposit costs, FHLB borrowing, and the effect on net interest margin.
- Mortgage banking volumes, loan-sale margins, servicing-right valuation and prepayment assumptions, and potential investor repurchase claims.
- Coronavirus-related developments and their possible effects on borrowers, local markets, credit quality, liquidity, and earnings; the filing offers no quantified outlook.