FS Bancorp, Inc. — Q3 2014 Form 10-Q
Business context and period. FS Bancorp is the holding company for 1st Security Bank of Washington, a community bank serving the Puget Sound area. The unaudited report covers the quarter and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013. The Bank focuses on consumer, real estate and commercial lending, alongside mortgage banking.
Financial performance and position
- Q3 earnings: Net income was $1.146 million, versus $1.062 million in Q3 2013; diluted EPS was $0.39 versus $0.35. Net interest income rose 16.1% to $5.852 million, while noninterest income increased 10.2% to $2.384 million. Noninterest expense rose 20.6% to $6.076 million.
- Nine-month earnings: Net income fell to $3.007 million from $3.383 million; diluted EPS was $1.00 versus $1.12. Net interest income increased 9.0% to $15.948 million, but noninterest income declined 6.3% to $6.892 million and noninterest expense increased 12.4% to $16.988 million.
- Margins and costs: Net interest margin was 5.28% for Q3 (5.35% prior year) and 5.11% for nine months (5.42% prior year). The efficiency ratio rose to 73.8% for Q3 and 74.4% for nine months, from 70.0% and 68.7%, respectively.
- Balance sheet: Total assets grew 12.5% to $471.6 million; net loans increased 26.1% to $354.6 million. Deposits rose 12.9% to $380.3 million and borrowings increased 35.3% to $22.6 million. Stockholders’ equity was $64.0 million; book value per share was $21.90.
- Cash flow and liquidity: For nine months, operating cash flow was negative $1.280 million, investing cash flow was negative $75.430 million, and financing cash flow was positive $46.556 million. Cash and cash equivalents decreased $30.154 million to $8.305 million. The Bank reported $19.0 million of unused FHLB capacity, a $69.3 million Federal Reserve line and $25.0 million of correspondent Fed Funds lines; neither latter facility had borrowings outstanding.
- Credit and capital: Allowance for loan losses was $5.812 million, or 1.6% of gross loans, versus 1.8% at year-end 2013. Nonperforming loans declined to $409,000, or 0.1% of gross loans; there was no OREO at quarter-end. The Bank was classified as well capitalized, with Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of 11.8%, 13.6% and 14.9%.
Material changes and management commentary
- Loan growth was led by real estate lending: real estate loans rose 46.3% and commercial business loans rose 29.2% from year-end. Consumer loans were 35.8% of the portfolio, down from 42.7% at year-end 2013. Management said the shift toward lower-yielding real estate and business loans is pressuring net interest margin.
- Management attributed higher expenses mainly to hiring for mortgage lending, servicing and operations, and implementation of the equity incentive plan. Management’s stated priorities include portfolio diversification, asset quality, lower-cost core deposits, relationship banking and selective expansion.
- The Bank sold $12.8 million of consumer solar loans during the nine-month period, recording a pretax gain of $507,000, and reclassified $10.2 million of California solar loans to held for sale in Q3. California loans are subject to an internal limit of 20% of the consumer portfolio.
- Deposits included $19.6 million of brokered certificates of deposit. Total loan commitments, including unused lines, were $163.7 million. Commitments to repurchase or indemnify investors for certain sold loans were supported by a $295,000 reserve.
- The company repurchased 129,605 shares at an average $17.15 per share under a program intended to fund restricted stock awards. Nine-month dividends were $523,000. There were no material changes to the risk factors in the prior Form 10-K, according to the filing.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management cautioned that results are affected by economic and regional conditions, credit quality, interest rates and net interest margin, loan demand and secondary-market sales, deposit retention, competition, cost control, regulatory changes and the ability to manage growth. The company identified local Puget Sound concentration and dependence on indirect home-improvement contractor/dealer relationships as relevant exposures; four dealers accounted for 59.1% of Q3 funded indirect home-improvement loan volume. Management said ordinary-course legal matters were not expected to have a material effect. The filing also describes executive severance and change-of-control agreements and routine loan repurchase representations and warranties.
Important facts for investors to verify
- Reconcile the MD&A statement that Q3 net income was “unchanged” with the income statement showing $1.146 million versus $1.062 million, an increase of about 7.9%.
- Track whether continued loan growth and diversification can offset margin compression, higher funding costs and the rising efficiency ratio.
- Review credit performance and allowance adequacy as the portfolio expands, including indirect consumer lending, commercial business loans and California solar exposure.
- Assess deposit composition and maturities, brokered-deposit reliance, borrowing capacity and the $163.7 million of outstanding commitments against available liquidity.
- Monitor ongoing operating expenses, share-based compensation, loan-sale income and potential repurchase or indemnification claims on loans sold.