FS Bancorp, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report; the filing text does not provide a clear set of Q4-only financial results. FS Bancorp became the holding company of 1st Security Bank of Washington upon the bank’s mutual-to-stock conversion and IPO on July 9, 2012. The bank is a community lender concentrated in the Puget Sound region.
Financial performance and condition
| Metric | FY 2012 / Dec. 31, 2012 | FY 2011 / Dec. 31, 2011 |
|---|---|---|
| Total assets | $359.0 million | $283.8 million |
| Net loans receivable | $274.9 million | $217.1 million |
| Deposits | $288.9 million | $246.4 million |
| Borrowings | $6.8 million | $8.9 million |
| Stockholders’ equity | $59.9 million | $26.8 million |
| Net interest income | $16.4 million | $13.5 million |
| Provision for loan losses | $2.9 million | $2.4 million |
| Noninterest income | $6.2 million | $2.5 million |
| Noninterest expense | $16.5 million | $12.0 million |
| Net income | $5.3 million | $1.5 million |
- Profitability: Net income rose by $3.8 million. Reported earnings included a $2.1 million income-tax benefit from reversing substantially all of the prior-year deferred-tax-asset valuation allowance. Pre-tax income was $3.2 million.
- Margins and returns: Net interest margin increased to 5.43% from 5.19%; return on assets was 1.64% versus 0.56%, and return on equity was 12.71% versus 5.92%. The efficiency ratio improved to 72.95% from 75.46%.
- Credit quality: The allowance for loan losses was $4.7 million, or 1.68% of gross loans, compared with $4.3 million, or 1.97%. Net charge-offs declined to $2.6 million from $3.9 million. Nonperforming loans fell to $1.9 million from $2.2 million; nonperforming assets were $4.1 million, or 1.13% of assets, versus $6.9 million, or 2.43%.
- Cash flow and liquidity: Cash and cash equivalents ended the year at $6.8 million, down $12.5 million. Operating activities used $0.8 million and investing activities used $80.8 million; financing activities provided $69.1 million. The bank had $20.8 million of unused FHLB capacity and $67.5 million of Federal Reserve borrowing capacity, subject to collateral requirements. Approved loan commitments, including unused lines, totaled $109.6 million.
- Capital: The bank was categorized as well capitalized. Its year-end total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 16.00%, 14.75%, and 13.26%, respectively.
Material changes versus the prior period
- Assets grew 26.5%; net loans grew 26.6%; deposits increased 17.3%. Equity more than doubled, principally due to approximately $29.9 million in net IPO proceeds and annual earnings. The offering issued 3,240,125 shares at $10 per share; approximately $15.5 million of proceeds was contributed to the bank.
- Loan growth reflected a strategic shift toward commercial business, commercial real estate, and construction lending. Commercial business loans increased 69.5% to $73.5 million, while consumer loans declined to $108.7 million from $114.2 million. Consumer loans remained 38.8% of gross loans, including $86.2 million of indirect home-improvement loans.
- Mortgage banking became a significant new source of fee income: gain on loan sales increased to $3.7 million from $0.1 million. The bank originated $145.7 million of one-to-four-family mortgages and sold $130.1 million in 2012. It also sold $12.6 million of marine loans in the fourth quarter.
- Noninterest expense rose 36.9%, driven in part by higher staffing and lending activity. Salaries and benefits increased 51.3% to $8.5 million; full-time-equivalent employees rose to 130 from 86.
Outlook, risks, contingencies, and unusual items
- Management’s strategy is to grow and diversify commercial, construction, and mortgage-banking activities while maintaining the consumer portfolio, increasing core deposits, and preserving strong asset quality and capital. A Seattle Capitol Hill branch was under construction and expected to open in Q2 2013. The filing gives no numerical earnings or growth guidance.
- Key risks include Puget Sound economic and real-estate conditions; consumer-loan and indirect-dealer concentration; growth in relatively unseasoned commercial and construction portfolios; mortgage-warehouse lending exposures; interest-rate and liquidity risk; competition; regulatory changes, including proposed Basel III capital rules; and dependence on key employees and third-party technology providers.
- Four home-improvement dealers generated 50.4% of that loan channel’s volume. Warehouse lending lines approved for eight mortgage companies totaled $58.0 million; approximately $555 million was funded during 2012, with $38.9 million outstanding at year-end.
- The marine-loan sale carried limited recourse through June 12, 2013, with a $67,000 reserve. The bank also recorded a $62,000 reserve for potential repurchases or indemnification related to representations and warranties on loans sold.
- Year-end troubled debt restructurings totaled $3.3 million, including $892,000 in nonaccrual loans. Other assets especially mentioned were approximately $675,000. The company reported $2.1 million in other real estate owned and $31,000 in repossessed property.
- A lawsuit seeking substantial damages against the bank had the plaintiff’s claims dismissed with prejudice in January 2012; the plaintiff’s appeal was dismissed in July 2012 and the case remanded for further proceedings. The bank’s counterclaims remained. Management stated ordinary-course legal matters were not expected to materially affect financial position.
- The independent auditor issued an unqualified opinion on the financial statements. The auditor was not engaged to audit internal control over financial reporting; management concluded disclosure controls were effective.
Most important facts for investors to verify
- How much of FY 2012 earnings growth is sustainable apart from the $2.1 million tax benefit and unusually strong mortgage-loan sale gains?
- Whether rapid growth in commercial, construction, and warehouse lending changes future delinquencies, charge-offs, or required loan-loss reserves.
- Whether indirect home-improvement lending remains dependent on a small number of dealers and whether California expansion stays within the stated portfolio limit.
- The conversion and share-count details: the filing reports 3,240,125 shares issued, but also reports 3,006,836 shares outstanding for certain per-share calculations because of unallocated ESOP shares.
- Cash-flow sustainability, deposit retention and maturities, collateral availability for borrowing facilities, and the ability to fund $109.6 million of commitments.
- Final Basel III requirements and their potential effect on capital, distributions, and lending strategy; also the outcome of the remaining lawsuit counterclaims and the expiration of marine-loan recourse.