FS Bancorp, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. FS Bancorp is the holding company for 1st Security Bank of Washington, a community bank operating seven branches in the Puget Sound area. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Financial performance and position
- Revenue and earnings: Interest income was $5.51 million and noninterest income was $2.04 million, for combined income of $7.55 million, up about 1.5% from $7.44 million a year earlier. Net interest income rose 5.1% to $4.90 million. Net income fell 29.1% to $875,000 from $1.24 million; diluted EPS was $0.29 versus $0.41.
- Margins and expenses: Net interest margin declined to 4.96% from 5.45%. Noninterest expense increased 16.0% to $5.19 million. The efficiency ratio rose to 74.7% from 64.5%; management said it would have been 79.0% without a one-time $275,000 Washington State B&O excise tax refund.
- Credit costs: Loan-loss provision was $450,000, down from $600,000; net charge-offs increased to approximately $299,000 from $254,000. The allowance for loan losses was $5.24 million, or 1.8% of gross loans.
- Cash flow: Operating activities generated $683,000, versus $9.20 million used in Q1 2013. Investing activities used $21.70 million and financing activities provided $12.99 million. Cash and cash equivalents decreased $8.03 million to $30.43 million.
- Balance sheet and liquidity: Total assets were $433.2 million, up 3.3% from year-end. Net loans were $288.5 million; available-for-sale securities were $72.1 million. Deposits increased 4.0% to $350.3 million. Borrowings, primarily FHLB advances, declined to $16.3 million. Unused FHLB borrowing capacity was $26.9 million; the Bank also reported additional Federal Reserve and other credit lines.
- Capital and shareholder returns: Stockholders’ equity was $63.5 million and book value per share was $20.88. The Bank was “well capitalized,” with total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios of 16.4%, 15.1%, and 12.2%, respectively. The quarter included dividends of $0.05 per share.
Material changes versus comparable periods
- Despite higher net interest income and a lower loan-loss provision, net income decreased, principally because noninterest expense rose $717,000 and noninterest income declined $223,000. Higher personnel costs associated with expanding lending and deposit operations were a major expense driver.
- Net interest margin contracted 49 basis points year over year. Management attributed pressure to growth in lower-yielding assets and loans, including real estate and commercial business lending, and a reduction in higher-yielding consumer loans.
- Loans grew 2.6% from year-end. Commercial business loans increased 17.3% to $57.7 million, while consumer loans declined 4.4% to $117.3 million. The Bank sold 419 consumer solar loans with $12.8 million in principal during the quarter, recording a reported pre-tax gain of $507,000.
- Asset quality measures improved from year-end: nonaccrual loans fell to $433,000 from $1.10 million, nonperforming assets to $968,000 from $3.21 million, and substandard loans to $1.0 million from $2.1 million. OREO declined to $535,000, primarily following property sales.
- Available-for-sale securities increased 28.2% from year-end to $72.1 million. Accumulated other comprehensive loss improved to $541,000 from $898,000, reflecting a net-of-tax securities valuation gain during the quarter.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or financial guidance. Management described priorities as diversifying and growing loans, maintaining asset quality, expanding lending channels, and increasing relationship-based, lower-cost deposits.
- Management cautioned that results depend on economic and regional conditions, borrower credit quality, interest rates and margins, loan-sale market conditions, deposit retention, competition, expense control, regulatory changes, and execution of growth plans. It noted that quarterly results are not necessarily indicative of full-year results.
- Loan commitments totaled $135.7 million; management noted that many may expire undrawn. Time deposits of $44.1 million were scheduled to mature within three months. Brokered deposits were $16.9 million, within the Bank’s stated policy limit.
- Other exposures include $234,000 reserved for possible repurchases or indemnification on certain sold mortgage loans, and a $35,000 reserve for recourse exposure on a previously sold consumer loan pool. The Company also reported ordinary-course legal proceedings, which management did not expect to have a material effect.
- Management considered securities with unrealized losses temporarily impaired and reported no other-than-temporary impairment write-downs for the quarter. The filing identifies estimates for loan-loss allowances, fair values, and deferred tax asset realization as areas involving judgment.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the risk factors in the 2013 Form 10-K.
Important facts for investors to verify
- Whether loan growth, particularly in commercial business and real estate lending, can offset margin pressure and the decline in consumer loan balances.
- How sustainable earnings are after considering the $275,000 tax refund and the solar-loan sale gain, and whether higher staffing and operating costs continue.
- Whether the improvement in nonperforming assets and classified loans persists, and whether the $5.24 million allowance remains adequate as the loan portfolio changes.
- Funding and liquidity sensitivity, including deposit mix and maturities, brokered deposits, outstanding commitments, and available borrowing capacity.
- Interest-rate and securities valuation exposure, including the portfolio’s unrealized losses and potential effects on net interest margin and equity.