FS Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. 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 businesses. Unless indicated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net income | $11.9 million; diluted EPS $2.70 | $5.2 million; diluted EPS $1.14 in Q1 2020 |
| Net interest income | $20.1 million | $17.5 million in Q1 2020 |
| Net interest margin | 3.99% | 4.30% in Q1 2020 |
| Noninterest income | $13.0 million | $8.9 million in Q1 2020 |
| Provision for loan losses | $1.5 million | $3.7 million in Q1 2020 |
| Noninterest expense | $16.3 million; efficiency ratio 49.34% | $16.2 million; efficiency ratio 61.39% in Q1 2020 |
| Total assets | $2.18 billion | $2.11 billion at December 31, 2020 |
| Net loans | $1.59 billion | $1.54 billion at December 31, 2020 |
| Deposits | $1.78 billion | $1.67 billion at December 31, 2020 |
| Borrowings | $72.5 million | $165.8 million at December 31, 2020 |
| Subordinated notes, net | $49.3 million | $10.0 million at December 31, 2020 |
| Cash and cash equivalents | $85.4 million | $91.6 million at December 31, 2020 |
| Operating cash flow | $18.2 million | $(30.0) million in Q1 2020 |
Interest income was $22.8 million, against interest expense of $2.7 million. The effective tax rate was 22.3%, compared with 20.4% in Q1 2020. The Bank’s allowance for loan losses was $27.4 million, or 1.68% of gross loans excluding loans held for sale. Nonperforming loans were $9.3 million, or 0.57% of gross loans, up from $7.8 million and 0.49% at year-end.
Cash flow from investing activities was $(75.6) million and financing activities provided $51.3 million; cash and cash equivalents decreased $6.1 million during the quarter. Stockholders’ equity was $240.3 million. The Bank’s Tier 1 leverage ratio was 11.8%, up from 10.9% at year-end, and it was categorized as well capitalized under applicable requirements.
Material changes and management commentary
- Net income more than doubled year over year, primarily reflecting higher loan-sale gains, increased net interest income, and a lower loan-loss provision.
- Gain on sale of loans rose to $11.7 million from $5.9 million, alongside higher mortgage originations and sales. The Company originated $434.5 million in one-to-four-family loans and sold $414.0 million during the quarter.
- Net interest income increased $2.6 million, helped by loan growth and lower funding costs. However, net interest margin fell 31 basis points year over year as asset yields declined, including from low-yield PPP loans and new loan originations.
- Noninterest expense was broadly stable. Higher salaries, incentives and commissions were partly offset by a $2.1 million recovery in servicing-rights value; Q1 2020 included a $514,000 impairment charge.
- Deposits grew $106.7 million, which management attributed partly to customer relationship growth, PPP and stimulus funds, and reduced withdrawals. Borrowings fell $93.3 million, including repayment of PPPLF and FHLB advances.
- The Company issued $50 million of fixed-to-floating subordinated notes at an initial fixed rate of 3.75%, due February 15, 2031, and repaid $10 million of older subordinated notes bearing 6.5% interest.
- The Company paid a $0.26-per-share dividend. It repurchased 7,416 shares in Q1 at an average $55.42 per share. On April 26, 2021, the Board authorized a renewed repurchase plan of up to $15 million through June 30, 2022.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance is provided. Management expected the low-interest-rate environment to pressure net interest income and margin during 2021 and possibly longer.
- The Company held 471 PPP loans totaling $83.8 million at March 31; it excludes these SBA-guaranteed loans from its loan-loss allowance calculation. PPP forgiveness and repayments also reduced PPPLF borrowing.
- Loans remaining under COVID-related payment or relief arrangements totaled approximately $34.9 million. Of these, $4.5 million in commercial business loans were current but not accruing interest. The Company reported no TDRs at March 31 under applicable relief guidance.
- Management cited risks from pandemic-related economic conditions, credit deterioration, interest-rate changes, mortgage secondary-market conditions, deposit retention, competition, operational and vendor disruptions, and fair-value estimates. It also noted possible future credit-loss and goodwill valuation impacts.
- Customer credit commitments totaled $512.0 million. Loan-sale repurchase or indemnification exposure is reserved at $2.2 million; the Company also had a $398,000 reserve for estimated losses on unfunded commitments. Management reported no material pending legal actions.
- Liquidity included $487.4 million of unused FHLB borrowing capacity, a $182.7 million FRB line, and $101.0 million in correspondent federal-funds lines. No PPPLF advances were outstanding at quarter-end.
Important facts for investors to verify
- Whether the lower net interest margin persists and how management’s expected rate environment affects earnings.
- Trends in nonperforming, substandard, and COVID-relief loans; adequacy of the allowance; and PPP forgiveness and repayment timing.
- Sustainability of mortgage production, loan-sale gains, servicing-rights valuations, and the sensitivity of those valuations to prepayment speeds and interest rates.
- Deposit growth and funding mix, including maturities, brokered deposits, and the impact of the new subordinated notes on capital and funding costs.
- Concentration in indirect home-improvement lending: four contractor/dealers accounted for 45.7% of funded loan dollar volume in Q1.
- Execution and scale of the $15 million share-repurchase authorization and the Bank’s continued compliance with capital requirements.