FS Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. FS Bancorp is the holding company for 1st Security Bank of Washington, a community bank operating primarily in Washington, with commercial and consumer banking and home lending segments. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
- Q2 earnings: Net income was $8.5 million, down from $10.0 million in Q2 2020. Basic and diluted EPS were $1.00 and $0.97, respectively, adjusted for the subsequent two-for-one stock split.
- First-half earnings: Net income was $20.4 million versus $15.2 million a year earlier. Basic and diluted EPS were $2.39 and $2.32.
- Revenue and margin: Q2 net interest income rose to $21.2 million from $17.9 million; noninterest income fell to $8.2 million from $14.1 million. First-half net interest income was $41.3 million versus $35.3 million, while noninterest income was $21.2 million versus $23.0 million. Net interest margin was 4.09% in Q2 (up from 3.91%) and 4.04% for the first half (down from 4.09%).
- Credit costs and expenses: Loan-loss provision was zero in Q2 and $1.5 million for the first half, compared with $4.6 million and $8.3 million, respectively, in 2020. Noninterest expense rose 29.7% in Q2 to $19.0 million and 14.5% for the first half to $35.3 million. The efficiency ratio was 64.33% in Q2 and 56.39% for the first half.
- Balance sheet: Total assets were $2.22 billion at June 30, up $109.4 million from year-end 2020. Net loans were $1.65 billion, up $100.7 million; gross deposits were $1.86 billion, up $184.5 million. Cash and cash equivalents were $86.6 million, down from $91.6 million.
- Debt and capital: Borrowings declined to $42.5 million from $165.8 million, while subordinated notes increased to $49.4 million from $10.0 million, reflecting a $50 million issuance and repayment of $10 million in prior notes. Bank Tier 1 leverage ratio was 11.9%; the Bank reported that it was well capitalized.
- Cash flow and liquidity: First-half operating cash flow was $73.4 million, investing cash outflow was $169.9 million, and financing cash inflow was $91.4 million; cash declined by $5.0 million. At June 30, unused FHLB borrowing capacity was $515.7 million; the FRB line limit was $191.4 million and correspondent federal-funds lines totaled $101.0 million.
Material changes versus comparable periods
- Q2 net income declined despite higher net interest income, primarily as loan-sale gains fell and expenses—especially salaries and benefits—increased. The absence of a loan-loss provision, versus a $4.6 million provision in Q2 2020, partly offset those pressures.
- First-half net income improved as higher net interest income and much lower loan-loss provision outweighed increased expenses and lower noninterest income. The prior-year period included a $1.5 million one-time gain from Visa stock, while 2021 included a $2.0 million recovery of servicing-right impairment compared with a $1.3 million impairment in 2020.
- Loan growth included commercial real estate, construction and development, indirect home improvement, and commercial and industrial lending. Available-for-sale securities increased to $232.6 million from $178.0 million at year-end.
Outlook, commentary, risks and unusual items
- Management said the low-rate environment and low-yielding PPP loans were expected to pressure net interest income and margin in 2021 and possibly longer. The filing provides no numerical earnings or revenue guidance.
- The Bank held 412 PPP loans totaling $73.2 million at June 30. The PPP program had ended, and the PPPLF facility concluded July 30, 2021; no PPPLF borrowings were outstanding at quarter-end.
- COVID-19 relief agreements remained on $24.4 million of commercial real estate loans, $9.3 million of commercial business loans and $147,000 of consumer loans. The filing reported no TDRs at quarter-end. Management cited improving credit conditions but warned that economic deterioration could require higher reserves. The allowance was $27.2 million, or 1.62% of gross loans excluding loans held for sale; nonperforming loans were $6.3 million, or 0.38% of gross loans.
- Concentration risks include regional real estate and commercial lending, and indirect home-improvement originations through contractors: four dealers accounted for 46.8% of funded loan volume in Q2. Other risks identified include interest-rate and loan-sale market changes, competition, deposit retention, operational/vendor and cybersecurity disruptions, and valuation uncertainty in servicing rights.
- The company distributed a two-for-one stock split on July 14, 2021. Management also revised first-half EPS after its July 23 press release to update participating-security allocations and days outstanding; the updated figures are reported above.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material pending legal actions and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and deposit inflows are sustainable, and how deposit mix and funding costs affect future net interest margin.
- Credit performance of COVID-relief borrowers, PPP forgiveness and repayment, the $4.5 million C&I relationship identified as substandard/nonaccrual, and adequacy of the allowance.
- Home-lending volumes, gain-on-sale margins, servicing-right valuation sensitivity, and the impact of elevated compensation and operating costs.
- Use and terms of the $50 million subordinated-note issuance, future borrowing needs, and continued compliance with regulatory capital requirements.
- Updated EPS calculations and share counts following the split and repurchases; confirm all per-share comparisons are on a split-adjusted basis.