FS Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. FS Bancorp is the holding company for 1st Security Bank of Washington, a community bank serving Washington and Oregon. Unless noted, amounts below are in millions of dollars.
Key financial results and condition
- Earnings: Net income was $8.2 million, up 19.5% from $6.9 million. Diluted EPS was $1.04 versus revised prior-year EPS of $0.83. The filing says 2022 EPS was revised because certain unvested shares had been improperly included in the denominator.
- Net interest income and margins: Net interest income rose 34.9% to $30.7 million; net interest margin increased to 4.70% from 4.24%. Interest income increased to $38.6 million from $24.6 million, while interest expense rose to $8.0 million from $1.9 million. Average cost of interest-bearing liabilities increased to 1.77% from 0.55%.
- Noninterest items: Noninterest income declined to $5.2 million from $5.9 million, primarily reflecting lower loan-sale gains. Noninterest expense increased to $23.5 million from $19.1 million, including $1.5 million of acquisition costs. The efficiency ratio improved to 65.56% from 66.67%.
- Credit costs and asset quality: The income statement reports provision for credit losses of $2.1 million, versus $1.0 million. Management separately describes $2.4 million of loan provision, partly offset by a $0.2 million reversal for unfunded commitments. Net loan charge-offs were $0.4 million versus $0.3 million. Nonperforming loans were $8.7 million, or 0.37% of gross loans, compared with 0.39% at year-end; the allowance for loan losses was $29.9 million, or 1.29% of gross loans excluding loans held for sale.
- Cash flow: Operating cash flow was $18.5 million versus $97.9 million. Investing cash flow was positive $288.4 million, mainly reflecting $336.2 million of net cash from the branch acquisition. Financing cash flow was negative $290.1 million, including net borrowing repayments and a $109.4 million decrease in deposits on the cash flow statement. Cash and cash equivalents ended at $58.2 million.
- Balance sheet and funding: Total assets were $2.78 billion, up from $2.63 billion at year-end. Net loans were $2.30 billion, deposits were $2.44 billion, and stockholders’ equity was $241.8 million. Borrowings fell to $7.5 million from $186.5 million; subordinated notes remained at $50.0 million principal.
- Capital and liquidity: The Bank was categorized as well capitalized. Its total risk-based, Tier 1 risk-based, Tier 1 leverage, and CET1 ratios were 12.69%, 11.44%, 10.39%, and 11.44%, respectively. The Bank reported $633.5 million of unused FHLB capacity, a $213.3 million Federal Reserve line, and $101.0 million in correspondent-bank lines. FS Bancorp reported $8.0 million of unrestricted cash.
- Other comprehensive income: A $2.9 million improvement in other comprehensive income reduced accumulated other comprehensive loss to $22.7 million. Available-for-sale securities had $36.5 million of gross unrealized losses; management attributed these to market conditions and said it did not intend, and was not likely to be required, to sell before recovery or maturity.
Material changes versus the prior comparable period
- On February 24, 2023, the Bank acquired seven Columbia State Bank branches, approximately $425.5 million of deposits, and a performing loan portfolio. The acquired branches expanded the company’s footprint in Washington and Oregon. The transaction added $17.4 million of core deposit intangible and $1.3 million of goodwill; acquired-branch revenue and expenses were not available because stand-alone historical reporting was impracticable.
- Average interest-earning assets increased to $2.65 billion from $2.17 billion, and their average yield rose to 5.91% from 4.59%. Higher loan balances and repricing lifted interest income, while higher deposit and borrowing costs partly offset the benefit.
- Home-loan originations fell to $111.0 million from $245.1 million; loan sales declined to $77.3 million from $301.1 million. Management attributed weaker purchase and refinance activity to higher market rates and the prior-year comparison to stronger refinancing during the low-rate period.
- Deposits at quarter-end increased $315.5 million from year-end, primarily due to the branch purchase, while the company used acquisition-related excess liquidity to repay borrowings. The deposit increase in the balance-sheet comparison should be distinguished from the net decrease shown in quarterly cash flows.
- Indirect home-improvement loans grew to $531.6 million. The company funded $67.8 million of these loans during the quarter; four dealers accounted for 52.5% of funded loan dollar volume.
Outlook, commentary, risks and contingencies
- Management’s stated priorities are loan growth and diversification, maintaining asset quality, growing lower-cost core deposits, expanding customer relationships, and entering additional markets. The filing provides no specific numeric earnings or margin guidance and cautions that first-quarter results are not necessarily indicative of full-year results.
- Management cited loan growth, acquired loans, and higher reserves on individually evaluated loans as drivers of credit provision. It warned that weaker economic conditions, inflation, recession or slower growth, and deterioration in housing or commercial real estate markets could increase credit losses.
- Key risks include interest-rate effects on margins and securities values, deposit retention and funding costs, acquisition integration and customer or employee retention, loan-sale market conditions, concentration and credit risks, competition, operating costs, and technology or third-party disruptions.
- At March 31, 2023, $319.0 million of deposits were brokered; the company’s policy permits brokered deposits up to 20% of deposits or $490.3 million. Certificates of deposit totaling $193.7 million were scheduled to mature within three months.
- Commitments to extend credit totaled $604.4 million. The company also reported $2.1 million of reserves for potential repurchases or indemnification on sold mortgage loans. Management said there were no material pending legal actions and no material changes to previously disclosed risk factors.
- The current quarterly common dividend was $0.25 per share, subject to board discretion. Approximately $0.9 million remained available under the share repurchase program, which was scheduled to expire June 30, 2023.
- Management concluded disclosure controls were effective as of March 31, 2023; no significant changes in internal control over financial reporting were reported for the quarter.
Important facts for investors to verify
- Track deposit retention, deposit pricing, brokered-deposit usage, and upcoming certificate maturities as the acquired branches are integrated.
- Monitor loan growth and credit performance, particularly nonaccrual and individually evaluated commercial loans, consumer charge-offs, and the allowance relative to portfolio growth.
- Assess whether the higher net interest margin can be sustained as funding costs rise and rates change.
- Verify integration progress and the eventual contribution of the acquired branches; the filing does not provide their post-acquisition revenue and expenses separately.
- Review exposure to unrealized securities losses, dealer concentration in indirect home-improvement lending, and the company’s reliance on assumptions in credit-loss and servicing-right valuations.
- Consider the distinction between the $2.1 million income-statement credit-loss provision and management’s discussion of $2.4 million of loan provision partly offset by the unfunded-commitment reversal.