FS Bancorp(FSBW) - 2020 Q4 - Annual Report

PART I Item 1. Business FS Bancorp, Inc. operates as a holding company for 1st Security Bank of Washington, a community bank with diversified lending and significant COVID-19 response efforts - Company Consolidated Financials (December 31, 2020): | Metric | Amount (in billions) | | :----- | :------------------- | | Total Assets | $2.11 | | Total Deposits | $1.67 | | Stockholders' Equity | $0.23 | - The Company's lending strategy has shifted from indirect consumer lending to an increased emphasis on real estate and commercial business loans[26][43] - The Bank participated in the SBA Paycheck Protection Program, funding $75.8 million in loans in 2020, with $62.1 million outstanding, and offered payment relief to borrowers[28][29] General Provides an overview of FS Bancorp, Inc. and its subsidiary, 1st Security Bank of Washington Market Area Describes the geographic regions where the Bank primarily conducts its operations Lending Activities Details the various types of loans offered and the Bank's lending strategies General Outlines the general principles and objectives of the Bank's lending operations Loan Portfolio Analysis Presents a breakdown and analysis of the Bank's loan portfolio composition Loan Maturity and Repricing Discusses the maturity distribution and interest rate repricing characteristics of the loan portfolio Lending Authority Defines the internal limits and approval processes for loan originations Commercial Real Estate Lending Focuses on the Bank's activities in commercial real estate loans Construction and Development Lending Describes the Bank's involvement in financing construction and development projects Home Equity Lending Details the Bank's home equity loan and line of credit programs Residential Covers the Bank's residential mortgage lending activities Consumer Lending Explains the Bank's offerings in various consumer loan products Commercial Business Lending Describes the Bank's lending to commercial businesses Loan Originations, Servicing, Purchases and Sales Discusses the processes for originating, servicing, and trading loans Asset Quality Reviews the quality of the Bank's assets and related risk management General Provides an overview of the Bank's asset quality management framework Nonperforming Assets Details the Bank's nonperforming loans and other nonperforming assets Other Real Estate Owned Describes properties acquired through foreclosure or deed in lieu of foreclosure Restructured Loans Covers loans whose terms have been modified due to borrower financial difficulties Other Assets Especially Mentioned Identifies assets requiring special attention due to potential credit weaknesses Classified Assets Discusses assets categorized by regulators as having credit deficiencies Allowance for Loan Losses Explains the methodology and adequacy of the allowance for loan losses Investment Activities Describes the Bank's strategies and holdings in investment securities General Outlines the general approach to managing the Bank's investment portfolio Securities Portfolio Provides details on the composition and characteristics of the Bank's securities holdings Deposit Activities and Other Sources of Funds Details the Bank's deposit gathering and other funding strategies General Provides an overview of the Bank's funding sources and deposit strategies Deposits Details the types and characteristics of the Bank's deposit accounts Debt Describes the Bank's various debt obligations and borrowing activities Subsidiary and Other Activities Covers operations of the Bank's subsidiaries and other non-lending activities Competition Analyzes the competitive landscape in which the Bank operates Employees Provides information on the Company's workforce, compensation, and human capital initiatives Executive Officers Lists and describes the Company's key executive management personnel Human Capital Discusses the Company's approach to managing and developing its human resources Employee Compensation and Benefits Details the compensation and benefits programs offered to employees Diversity and Inclusion Outlines the Company's initiatives and commitment to diversity and inclusion Talent Acquisition Describes the Company's strategies for recruiting and hiring new employees Operation Safe and Secure 2020 Highlights specific initiatives related to employee safety and security in 2020 Volunteerism Discusses employee involvement in community service and volunteer activities Human Capital Metrics Presents key data and statistics related to the Company's workforce How We Are Regulated Explains the regulatory framework governing the Company and its Bank subsidiary Regulation of 1st Security Bank of Washington Details the specific regulations applicable to 1st Security Bank of Washington Regulation and Supervision of FS Bancorp Describes the regulatory oversight of FS Bancorp as a holding company Recent Regulatory Reform Discusses recent changes in banking regulations affecting the Company Taxation Provides an overview of the tax considerations for the Company Federal Taxation Details the federal income tax implications for the Company Washington Taxation Describes the state-level tax obligations in Washington Item 1A. Risk Factors The Company faces significant risks from macroeconomic conditions, lending activities, interest rate changes, accounting matters, regulatory scrutiny, and operational vulnerabilities - The COVID-19 pandemic has caused major economic disruption, impacting loan demand, net interest income, and increasing potential for loan defaults and goodwill impairment[267][271][274] - The loan portfolio carries increased risk due to a large percentage of consumer loans (23.8% of gross loans) and higher risks associated with commercial real estate and construction lending[282][283][289][295] - Earnings are highly sensitive to interest rate changes, which can reduce net interest income, impact mortgage banking revenues, and affect the fair value of MSRs and securities[308][313][315][318] - Regulatory scrutiny over commercial real estate loan concentrations (construction, land development, and land loans at 89.6% of regulatory capital; all CRE loans at 253.6% of regulatory capital) could require additional risk management and capital levels[226][328] - Reliance on external vendors, cybersecurity threats, and LIBOR transition uncertainty (affecting $90.0 million in notional interest rate swaps) pose significant operational and financial risks[332][334][342][702] Risks Related to Macroeconomic Conditions Discusses potential impacts of broader economic trends on the Company's financial performance Risks Related to our Lending Activities Highlights specific risks inherent in the Company's various loan portfolios Risk Related to Changes in Market Interest Rates Examines the Company's exposure to fluctuations in market interest rates Risks Related to Accounting Matters Addresses potential risks associated with critical accounting policies and estimates Risk Related to Regulatory and Compliance Matters Covers risks arising from regulatory oversight and compliance requirements Risks Related to Cybersecurity, Third Parties and Technology Details operational risks stemming from technology, cybersecurity, and vendor reliance Risks Related to Our Business and Industry Generally Outlines broader business and industry-specific risks affecting the Company Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report for the Company - No unresolved staff comments[351] Item 2. Properties As of December 31, 2020, the Company owned headquarters and administrative offices, operated 21 branches (13 owned, 8 leased) and five leased loan production offices, with an aggregate net book value of $27.3 million - At December 31, 2020, the Company owned one headquarters office and one administrative office, operating 21 full-service bank branches (13 owned, 8 leased) and five stand-alone loan production offices (leased)[352] - The aggregate net book value of properties was $27.3 million at December 31, 2020[352] - The book value of data processing and computer equipment was $1.2 million at December 31, 2020, with a business continuity plan in place[353] Item 3. Legal Proceedings The Company is involved in various ordinary course legal actions, with management believing any liabilities will not materially affect its financial position - The Company is subject to various pending and threatened legal actions in the ordinary course of business, including those related to subordination liens[354] - Management believes that liabilities arising from these claims will not have a material effect on the Company's financial position[354] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[355] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities FS Bancorp's common stock trades on NASDAQ under 'FSBW', with 4,237,956 shares outstanding and a $5.0 million share repurchase program authorized in September 2020, demonstrating strong shareholder return performance - Common stock trades on The NASDAQ Stock Market LLC under the symbol 'FSBW'[358] - As of December 31, 2020, there were 4,237,956 shares of common stock outstanding and approximately 227 shareholders of record[358] - The Board authorized a $5.0 million share repurchase program on September 17, 2020, repurchasing 25,135 shares in Q4 2020 at an average price of $44.78, with $3,427,254 remaining[361][362] Cumulative Total Shareholder Return (Dec 31, 2015 = 100) | Index | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | | :-------------------- | :------- | :------- | :------- | :------- | :------- | :------- | | FS Bancorp, Inc. | 100.00 | 140.21 | 214.88 | 170.49 | 256.84 | 224.91 | | S&P 500 Index | 100.00 | 111.96 | 136.40 | 130.42 | 171.49 | 203.04 | | SNL Bank $1B-$5B | 100.00 | 143.87 | 153.37 | 134.37 | 163.35 | 138.81 | | SNL Thrift $1B-$5B | 100.00 | 136.30 | 138.06 | 96.07 | 116.56 | 93.62 | Issuer Purchases of Equity Securities Details the Company's share repurchase programs and activities Equity Compensation Plan Information Provides data on outstanding options and securities available under equity compensation plans Performance Graph Illustrates the Company's cumulative total shareholder return compared to market indices Item 6. Selected Financial Data This section presents a five-year summary of the Company's consolidated financial position and results of operations, highlighting $2.11 billion in total assets and $39.26 million net income in 2020 Selected Financial Condition Data (in thousands) | Metric | 2020 | 2019 | | :-------------------------- | :-------- | :-------- | | Total assets | $2,113,241 | $1,713,056 | | Loans receivable, net | $1,544,981 | $1,336,346 | | Loans held for sale, at fair value | $166,448 | $69,699 | | Securities available-for-sale, at fair value | $178,018 | $126,057 | | Deposits | $1,674,071 | $1,392,408 | | Borrowings | $165,809 | $84,864 | | Total stockholders' equity | $230,007 | $200,242 | Selected Operations Data (in thousands) | Metric | 2020 | 2019 | | :-------------------------- | :-------- | :-------- | | Total interest and dividend income | $88,837 | $89,625 | | Total interest expense | $14,717 | $19,317 | | Net interest income | $74,120 | $70,308 | | Provision for loan losses | $13,036 | $2,880 | | Total noninterest income | $55,359 | $23,035 | | Total noninterest expense | $66,593 | $62,333 | | Net income | $39,264 | $22,717 | Selected Financial Ratios | Metric | 2020 | 2019 | | :------------------------------------- | :-------- | :-------- | | Return on assets | 2.02 % | 1.38 % | | Return on equity | 18.74 % | 11.92 % | | Net interest margin | 4.02 % | 4.53 % | | Nonperforming assets to total assets at end of period | 0.37 % | 0.19 % | | Allowance for loan losses to gross loans receivable | 1.66 % | 0.98 % | | Basic earnings per share | $9.14 | $5.13 | | Diluted earnings per share | $8.97 | $5.01 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews the Company's financial condition and results for 2020 and 2019, highlighting a significant increase in net income to $39.3 million, asset growth to $2.11 billion, and a decrease in net interest margin to 4.02% - Net income for 2020 increased by $16.5 million (72.8%) to $39.3 million, driven by a $32.3 million increase in noninterest income and a $3.8 million increase in net interest income, partially offset by higher provision for loan losses and noninterest expenses[439] - Net interest margin (NIM) decreased by 51 basis points to 4.02% for 2020, from 4.53% in 2019, primarily due to lower interest rates and the impact of low-yielding PPP loans[385][441] - Total assets increased by $400.2 million to $2.11 billion at December 31, 2020, funded by a $281.7 million increase in deposits and an $80.9 million increase in borrowings[413][423] - The provision for loan losses increased to $13.0 million in 2020 (from $2.9 million in 2019), reflecting COVID-19 credit deterioration and loan portfolio growth, with PPP loans ($62.1 million) excluded due to SBA guarantees[387][449] - The Bank maintained a 'well capitalized' status at December 31, 2020, with a Tier 1 leverage-based capital ratio of 10.9%, exceeding the temporary 8% Community Bank Leverage Ratio (CBLR) requirement[481] Overview Provides a high-level summary of the Company's financial performance and condition Highlights in Response to the COVID-19 Pandemic Summarizes the Company's key actions and impacts related to the COVID-19 pandemic Critical Accounting Policies and Estimates Discusses the accounting policies requiring significant judgment and estimation Our Business and Operating Strategy and Goals Outlines the Company's strategic objectives and operational plans Comparison of Financial Condition at December 31, 2020 and December 31, 2019 Analyzes changes in the Company's balance sheet between the two fiscal years Average Balances, Interest and Average Yields/Cost Presents average balance sheet data, interest income/expense, and corresponding yields/costs Rate/Volume Analysis Explains the impact of interest rate and volume changes on net interest income Comparison of Results of Operations for the Years Ended December 31, 2020 and 2019 Compares the Company's income statement performance for the two fiscal years Asset and Liability Management and Market Risk Describes how the Company manages its balance sheet and exposure to market risks Liquidity Discusses the Company's ability to meet its financial obligations and funding needs Commitments and Off-Balance Sheet Arrangements Details the Company's contractual obligations and off-balance sheet exposures Capital Resources Reviews the Company's capital structure and regulatory capital adequacy Recent Accounting Pronouncements Summarizes the impact of recently issued accounting standards Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company's primary market risk is interest rate risk, actively monitored and managed due to its potential material effect on financial condition and operations - The Company's primary market risk is interest rate risk, stemming from lending, investing, deposit, and borrowing activities[485] - Management actively monitors and manages interest rate risk, recognizing its potential material effect on financial condition and results of operations[485] - Detailed information on market risk is incorporated by reference from 'Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management'[485] Item 8. Financial Statements and Supplementary Data This item presents the Company's audited consolidated financial statements for 2020 and 2019, including balance sheets, income statements, and comprehensive notes on accounting policies and financial details - Includes audited consolidated financial statements for the years ended December 31, 2020 and 2019[491] - The financial statements comprise Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows[487] - Notes to Consolidated Financial Statements provide detailed information on accounting policies, investments, loans, servicing rights, debt, employee benefits, income taxes, commitments, regulatory capital, and fair value measurements[487][517] Index to Consolidated Financial Statements Provides a listing of all financial statements included in the report Report of Independent Registered Public Accounting Firm Presents the auditor's opinion on the financial statements and internal controls Consolidated Balance Sheets Presents the Company's financial position at specific points in time Consolidated Statements of Income Reports the Company's revenues, expenses, and net income over periods Consolidated Statements of Comprehensive Income Details changes in equity from non-owner sources, including net income and other comprehensive income Consolidated Statements of Changes in Stockholders' Equity Shows the changes in the Company's equity accounts over periods Consolidated Statements of Cash Flows Reports the cash inflows and outflows from operating, investing, and financing activities Notes to Consolidated Financial Statements Provides detailed explanations and disclosures supporting the financial statements NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Explains the accounting principles and policies used in preparing the financial statements NOTE 2 - INVESTMENTS Provides details on the Company's investment securities portfolio NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Details the loan portfolio and the methodology for the allowance for loan losses NOTE 4 - SERVICING RIGHTS Describes the accounting for mortgage servicing rights NOTE 5 - PREMISES AND EQUIPMENT Provides information on the Company's property, plant, and equipment NOTE 6 - LEASES Details the Company's lease agreements and related accounting NOTE 7 - OTHER REAL ESTATE OWNED Provides information on real estate acquired through foreclosure NOTE 8 - DEPOSITS Details the composition and types of the Company's deposits NOTE 9 - DEBT Provides information on the Company's outstanding debt obligations NOTE 10 - EMPLOYEE BENEFITS Describes the Company's employee benefit plans NOTE 11 - INCOME TAXES Details the Company's income tax provisions and related balances NOTE 12 - COMMITMENTS AND CONTINGENCIES Discloses significant commitments and potential liabilities NOTE 13 - SIGNIFICANT CONCENTRATION OF CREDIT RISK Identifies areas of significant credit risk concentration within the loan portfolio NOTE 14 - REGULATORY CAPITAL Provides details on the Company's compliance with regulatory capital requirements NOTE 15 - FAIR VALUE MEASUREMENTS Explains the fair value hierarchy and valuation techniques for financial instruments NOTE 16 - EARNINGS PER SHARE Details the calculation of basic and diluted earnings per share NOTE 17 - DERIVATIVES Describes the Company's use of derivative financial instruments NOTE 18 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Provides a breakdown of components of accumulated other comprehensive income or loss NOTE 19 - STOCK-BASED COMPENSATION Details the Company's stock-based compensation plans and expenses NOTE 20 - BUSINESS SEGMENTS Provides financial information segmented by the Company's business lines NOTE 21 - REVENUE FROM CONTRACTS WITH CUSTOMERS Details revenue recognition policies from customer contracts NOTE 22 - GOODWILL AND OTHER INTANGIBLE ASSETS Provides information on goodwill and other intangible assets NOTE 23 - PARENT COMPANY ONLY FINANCIAL INFORMATION Presents separate financial information for the parent company Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure for the Company - No changes in or disagreements with accountants on accounting and financial disclosure[738] Item 9A. Controls and Procedures The CEO and CFO concluded disclosure controls were effective as of December 31, 2020, and management assessed internal control over financial reporting as effective, with no significant changes during the quarter - The Company's CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2020[740] - Management assessed and concluded that the Company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[744] - Moss Adams LLP, the independent registered public accounting firm, audited and attested to the effectiveness of the Company's internal control over financial reporting[744][745] - There were no significant changes in internal control over financial reporting during the most recent fiscal quarter[746] Item 9B. Other Information No other information is reported in this item - No other information is reported[747] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement, including the Code of Ethics and designated audit committee financial experts - Information regarding Directors, Executive Officers, and Corporate Governance is incorporated by reference from the Company's Proxy Statement[749] - The Board of Directors has adopted a Code of Ethics for officers (including senior financial officers), directors, and employees, which is posted on the Company's website[752] - Mr. Ted A. Leech (Chairperson) and Mr. Michael J. Mansfield are designated as 'audit committee financial experts' as defined by the SEC[753] Code of Ethics for Senior Financial Officers Describes the ethical guidelines for the Company's senior financial management Audit Committee Financial Expert Identifies the designated financial experts on the Company's audit committee Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the Company's definitive Proxy Statement for the 2021 Annual Meeting of Shareholders - Information on executive compensation is incorporated by reference from the Proxy Statement[754] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and changes in control is incorporated by reference from the Proxy Statement, with 335,877 securities outstanding from equity compensation plans at a weighted-average exercise price of $68.49 - Information on security ownership of certain beneficial owners and management, and changes in control, is incorporated by reference from the Proxy Statement[755][756][757] Equity Compensation Plan Information (December 31, 2020) | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted-average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | :------------------------------------------------ | :------------------------------------------------- | :------------------------------ | :------------------------------------------------- | | 2013 Equity Incentive Plan | 122,937 | $16.89 | 6,013 | | 2018 Equity Incentive Plan | 212,940 | $51.60 | 366,965 | | Total | 335,877 | $68.49 | 372,978 | Security Ownership of Certain Beneficial Owners Details the ownership stakes of major shareholders Security Ownership of Management Details the ownership stakes of the Company's directors and executive officers Changes in Control Discusses any arrangements that could result in a change of control of the Company Equity Compensation Plan Information Provides details on the Company's equity compensation plans Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the Company's Proxy Statement - Information on certain relationships and related transactions, and director independence, is incorporated by reference from the Proxy Statement[761] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the Company's Proxy Statement - Information on principal accounting fees and services is incorporated by reference from the Proxy Statement[762] PART IV Item 15. Exhibits and Financial Statement Schedules This item lists the financial statements and provides a detailed index of exhibits, including corporate documents, various agreements, the Code of Ethics, and regulatory certifications - Financial statements filed as part of this report are listed in 'Part II - Item 8. Financial Statements and Supplementary Data'[766] - Exhibits include Articles of Incorporation, Bylaws, Common Stock Certificate, Subordinated Note Indenture, Severance Agreement, Equity Incentive Plans, Purchase and Assumption Agreement, Subordinated Loan Agreement, Change of Control Agreements, Code of Ethics, Subsidiaries, Consent of Independent Registered Public Accounting Firm, and Certifications[766][770] Item 16. Form 10-K Summary This item indicates that there is no Form 10-K Summary provided in the report - No Form 10-K Summary is provided[769] SIGNATURES Contains the required legal attestations for the annual report