FS Bancorp, Inc. — Second Quarter 2022 Form 10-Q
Business context and reporting period. FS Bancorp is the holding company for 1st Security Bank of Washington, a community bank serving Washington markets and conducting indirect consumer lending across multiple states. The filing covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are to December 31, 2021. Amounts below are in millions unless otherwise noted.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $26.9 | $23.8 | $51.6 | $46.6 |
| Net interest income | $24.7 | $21.2 | $47.5 | $41.3 |
| Provision for credit losses | $1.9 | $0.0 | $2.9 | $1.5 |
| Noninterest income | $4.4 | $8.2 | $10.2 | $21.2 |
| Noninterest expense | $18.9 | $19.0 | $38.0 | $35.3 |
| Net income | $6.7 | $8.5 | $13.6 | $20.4 |
| Diluted earnings per share | $0.83 | $0.98 | $1.66 | $2.35 |
| Net interest margin | 4.39% | 4.09% | 4.32% | 4.04% |
| Efficiency ratio | 65.08% | 64.33% | 65.87% | 56.39% |
- Balance sheet at June 30: Assets were $2.40 billion, up $112.8 million from year-end. Net loans were $1.95 billion, up $217.5 million; deposits were $2.02 billion, up $100.4 million.
- Funding and debt: Borrowings were $78.0 million, versus $42.5 million at year-end. Subordinated notes had $50.0 million principal outstanding. Brokered deposits totaled $260.4 million, within the Bank’s stated $404.7 million policy limit.
- Liquidity and cash flow: Cash and cash equivalents were $28.7 million. The Bank reported $436.1 million of unused FHLB borrowing capacity, a $194.9 million Federal Reserve borrowing limit, and $101.0 million in correspondent-bank federal funds lines. Six-month operating cash flow was $129.0 million; investing cash use was $244.8 million and financing cash provided was $118.0 million. Cash increased $2.2 million during the period.
- Credit and capital: The allowance for credit losses on loans was $25.0 million, or 1.27% of gross loans excluding loans held for sale. Nonperforming loans were $6.7 million, or 0.34% of gross loans. The Bank’s community bank leverage ratio was 11.9% and it was categorized as well capitalized.
Material changes versus comparable periods
- Quarterly net income fell $1.9 million year over year, despite a $3.5 million increase in net interest income. Lower loan-sale gains and a $1.9 million credit-loss provision were the main offsets.
- For the first half, net income declined $6.9 million. Noninterest income fell $11.0 million, principally because loan-sale gains decreased $12.2 million; net interest income rose $6.1 million, while noninterest expense increased $2.7 million.
- Loan growth was led by real estate lending and indirect home improvement loans. Gross loans increased from $1.75 billion at year-end to $1.97 billion. Loans held for sale fell $90.8 million to $35.0 million.
- Home-loan sales and margins weakened: six-month loan sales were $497.4 million versus $792.0 million, and gross sale margins were 3.01% versus 4.23%. Refinance originations decreased 67.6%, which management attributed to higher rates; purchase originations fell 14.1%.
- Stockholders’ equity declined $24.9 million to $222.6 million, largely reflecting after-tax unrealized securities losses, share repurchases, and dividends, partly offset by net income and hedge gains. The Company repurchased 476,607 shares during the half for $13.9 million and paid $4.0 million in dividends.
Outlook, commentary, risks and unusual items
- No quantified earnings or financial guidance is provided. Management describes priorities as growing and diversifying loans, maintaining asset quality, emphasizing lower-cost core deposits, and expanding markets.
- Management cited higher market interest rates as reducing mortgage refinancing and affecting securities values. Available-for-sale securities had $33.5 million of unrealized losses at June 30; accumulated other comprehensive loss was $21.6 million, net of tax. Management said it did not intend, and was not likely required, to sell the securities before recovery or maturity, and recorded no credit impairment for the period.
- Risks identified include inflation, recession or slower growth, labor and supply-chain conditions, real estate and borrower credit quality, interest-rate and liquidity risk, deposit retention, mortgage secondary-market conditions, competition, and technology or third-party disruptions. Management reported no material changes to previously disclosed risk factors or market-risk disclosures.
- CECL was adopted January 1, 2022. Adoption reduced the loan allowance by $2.9 million, increased the unfunded-commitment allowance by $2.4 million, and increased opening retained earnings by $297,000 net of tax. The filing also describes an immaterial prior-period EPS presentation correction; prior statements were not restated.
- Commitments to extend credit were $639.9 million. The Company reported no material pending legal actions. Disclosure controls were concluded effective, and no significant changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether loan growth, borrower performance, delinquencies, and credit-loss provisions remain consistent with management’s assumptions, particularly in construction, commercial real estate, and indirect home improvement lending.
- How rising rates affect deposit pricing and mix, brokered-deposit reliance, borrowing costs, net interest margin, and the fair value or recoverability of securities.
- Whether mortgage originations, sale volumes, and margins continue to weaken, and how that affects noninterest income and the home-lending segment.
- The size and duration of unrealized securities losses, and any effect on capital, liquidity, or management’s ability to hold securities to recovery or maturity.
- Capital and liquidity headroom after loan growth, $639.9 million in credit commitments, share repurchases, and dividends; confirm the status of the remaining repurchase authorization.