FS Bancorp, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with fiscal 2014. FS Bancorp is a Washington bank holding company whose principal operating business is 1st Security Bank of Washington, a community bank serving the Puget Sound region and nearby markets.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets at year-end | $677.6 million | $509.8 million |
| Deposits at year-end | $485.2 million | $420.4 million |
| Net loans at year-end | $502.5 million | $387.2 million |
| Net interest income | $28.0 million | $22.1 million |
| Net income | $8.9 million | $4.5 million |
| Diluted earnings per share | $2.93 | $1.52 |
| Net interest margin | 5.01% | 5.12% |
| Return on average assets | 1.52% | 1.00% |
| Efficiency ratio | 65.0% | 74.3% |
- Net income rose 95.5%. Growth reflected higher net interest income and noninterest income, especially mortgage loan-sale gains, partly offset by higher operating costs, provision expense, interest expense, and taxes.
- Noninterest income increased 75.4% to $17.6 million; gains on loan sales rose 93.6% to $14.7 million, principally from increased mortgage originations and sales. Noninterest expense increased 24.0% to $29.6 million, including $876,000 of branch-acquisition costs.
- Net interest margin declined 11 basis points as the loan mix shifted toward lower-yielding real estate and commercial loans. Average cost of funds rose 3 basis points to 0.83%.
- Year-end gross loans increased 29.7% to $511.3 million. Real estate loans grew to 53.3% of the portfolio from 45.5%; consumer loans fell to 31.0% from 34.7% of gross loans. Construction and development loans were $80.8 million, including $57.5 million of speculative one-to-four-family construction loans.
- Allowance for loan losses was $7.8 million, or 1.52% of gross loans, versus $6.1 million, or 1.54%, in 2014. The 2015 provision was $2.25 million; net charge-offs were $555,000.
- Nonperforming loans rose to $1.02 million from $433,000, or 0.20% of gross loans versus 0.11%. Nonperforming assets were 0.15% of total assets. Classified substandard assets were $3.0 million; no real estate owned was reported at year-end.
- Cash and cash equivalents were $24.5 million. Cash flows were $(7.1) million from operations, $(139.8) million from investing, and $155.7 million from financing, producing an $8.9 million increase in cash. The filing’s cash-flow presentation reflects substantial mortgage originations and sales.
- Borrowings were $98.8 million at year-end, up from $17.0 million, primarily FHLB advances. The company also issued $10.0 million of unsecured subordinated debt at 6.50%, due in 2025; $9.0 million was contributed to the Bank. Stockholders’ equity was $75.3 million, and the Bank’s regulatory capital ratios exceeded well-capitalized thresholds.
Material changes and strategic developments
- Assets grew 32.9%; net loans grew 29.8%, deposits 15.4%, and stockholders’ equity 14.4% year over year.
- Mortgage originations for sale expanded: loans held for sale reached $44.9 million, versus $26.0 million, and loan-sale gains increased substantially. Loans sold during 2015 totaled $551.5 million, versus $263.2 million in 2014.
- The company continued diversifying beyond consumer lending, expanding commercial real estate, construction, commercial business, and residential mortgage activities. The larger real estate and commercial portfolios carry different and potentially higher credit risks than traditional residential lending.
- On January 22, 2016, after year-end, the Bank completed its purchase of four Bank of America branches on Washington’s Olympic Peninsula. The filing reports approximately $186.4 million of deposits. Loan balances are stated inconsistently: approximately $417,000 in some passages and $1.1 million in the acquisition note. The purchase included branch facilities and a 2.5% deposit premium, approximately $4.8 million; preliminary accounting recorded $2.4 million of goodwill and $2.1 million of core-deposit intangible.
Outlook, risks, contingencies, and unusual items
- No quantified earnings, revenue, margin, or credit guidance is provided. Management’s stated priorities are to diversify loan and revenue sources, maintain asset quality and strong capital, grow lower-cost core deposits, and expand customer relationships and markets.
- Management reported that a 100-basis-point rate increase was modeled to raise net interest income 1.99%, while a 100-basis-point decrease was modeled to reduce it 4.72%. These are model estimates, not forecasts; the filing cautions that assumptions, prepayments, deposit behavior, and borrower performance may differ from actual outcomes.
- Key risks include concentration in the Puget Sound region; consumer and indirect home-improvement lending; reliance on four dealers for 53.2% of indirect home-improvement loan volume; construction and speculative real estate exposure; unseasoned commercial portfolios; mortgage production and secondary-market dependence; interest-rate, funding, and liquidity risks; competition; regulatory changes; and technology, cybersecurity, vendor, and operational risks.
- California solar lending adds geographic exposure: the company reported $28.9 million of California-originated solar loans at year-end and a stated concentration limit of 100% of Bank risk-based capital.
- Outstanding commitments to extend credit were $213.5 million. The company maintained a $147,000 reserve for estimated losses on unfunded commitments. It also held a $561,000 reserve for possible repurchases or indemnifications on sold mortgage loans; such exposure can arise from underwriting, documentation, servicing, or representation-and-warranty defects.
- Management said ordinary-course legal matters were not expected to have a material effect and reported no pending material legal actions at year-end. The independent auditor issued an unqualified opinion; management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2015.
Most important facts for investors to verify
- Reconcile the acquired-branch loan amount ($417,000 versus $1.1 million) and confirm final purchase accounting, deposit retention, integration costs, and realized synergies.
- Track credit performance and allowance adequacy as construction, commercial real estate, and commercial business lending expand; review the $2.0 million commercial business downgrade and rising nonperforming loans.
- Assess dependence on mortgage gains and loan-sale volumes, and whether production and servicing economics remain sustainable if rates or housing activity change.
- Monitor funding mix, FHLB borrowing levels, certificate maturities, brokered deposits, and liquidity after the branch acquisition.
- Evaluate sensitivity of net interest margin, mortgage servicing rights, and borrower repayment to interest-rate changes; compare actual results with management’s modeled scenarios.
- Review dealer concentration, indirect-loan underwriting and collateral practices, California solar exposure, and potential mortgage repurchase claims.