FS Bancorp, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. FS Bancorp is the holding company for 1st Security Bank of Washington, a community bank serving the Puget Sound area. The bank focuses on consumer, real estate, and commercial business lending. Amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net income | $1.235 | $0.277 |
| Net interest income | $4.665 | $3.650 |
| Net interest margin | 5.45% | 5.35% |
| Noninterest income | $2.263 | $0.723 |
| Noninterest expense | $4.468 | $3.581 |
| Provision for loan losses | $0.600 | $0.515 |
| Income tax expense | $0.625 | — |
| Basic and diluted EPS | $0.41 | Not available |
| Efficiency ratio | 64.5% | 81.9% |
Net income increased substantially year over year, driven chiefly by a $1.552 million gain on loan sales from residential mortgage banking and higher net interest income. Net interest income benefited from loan growth and a lower cost of funds; the average cost of interest-bearing liabilities declined to 0.77% from 1.08%. Expenses rose with staffing and costs for expanded lending operations. The effective tax rate was 33.6% in Q1 2013; the prior-year quarter had no tax provision because of a deferred-tax-asset valuation allowance at that time.
Financial position, liquidity, and capital
- Assets: $371.6 million, up 3.5% from year-end. Loans held for sale rose $11.3 million to $20.2 million; net loans receivable increased 0.6% to $276.5 million.
- Loans: Gross loans were $281.7 million versus $279.9 million at year-end. Real estate loans rose 9.1% to $106.7 million and consumer loans rose 4.9% to $114.0 million; commercial business loans fell 16.9% to $61.1 million, principally reflecting lower warehouse-line usage.
- Deposits and borrowings: Deposits increased 1.7% to $293.8 million. FHLB borrowings nearly doubled to $13.7 million, largely to fund mortgage lending and loans held for sale.
- Cash flow: Operating activities used $9.2 million in Q1 2013, versus $0.2 million provided in Q1 2012, reflecting substantial mortgage-loan originations for sale. Cash and cash equivalents ended at $6.3 million, compared with $16.4 million a year earlier. Balance-sheet cash and interest-bearing deposits totaled $8.9 million; the filing excludes certain longer-maturity certificates from cash equivalents.
- Liquidity access: Unused FHLB capacity was $22.7 million; the bank also reported a $70.3 million Federal Reserve borrowing line and a $6.0 million unsecured overnight line, with no balances drawn on either at quarter-end. Brokered deposits were $13.9 million.
- Equity and regulatory capital: Stockholders’ equity was $60.9 million, up 1.7%; book value per share was $20.22. The bank was “well capitalized,” with Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios of 13.2%, 14.8%, and 16.0%, respectively.
Material changes, credit quality, and risks
- Nonperforming loans declined to $1.8 million from $1.9 million; nonperforming loans were 0.6% of gross loans versus 0.7% at year-end. Nonperforming assets totaled $3.8 million.
- The allowance for loan losses increased to $5.0 million, or 1.8% of gross loans, from $4.7 million, or 1.7%. Q1 net charge-offs were $0.254 million, compared with $0.660 million in Q1 2012.
- Troubled debt restructurings totaled $3.2 million, including $0.827 million on nonaccrual. One commercial business loan totaling $35,000 was newly restructured in the quarter. OREO was $2.0 million after $78,000 in fair-value write-downs and $93,000 in property dispositions.
- Consumer loans were 40.5% of the portfolio; indirect home improvement lending was the largest consumer category. Four contractor/dealer partners generated 61.3% of that channel’s Q1 loan volume. California consumer lending had reached $6.4 million since inception; management set a limit of 20% of the consumer portfolio for California loans.
- Commitments to extend credit were $135.1 million, up from $109.6 million at year-end. Loan-sale repurchase and indemnification exposures include an $83,000 reserve; a separate $67,000 reserve covered recourse on a previously sold consumer portfolio.
- Management cited risks including regional economic and real-estate conditions, credit losses, interest-rate and margin changes, deposit competition, execution of lending and growth plans, regulatory changes, and reliance on key third-party vendors. Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to the annual-report risk factors were reported.
Outlook: No numerical earnings or balance-sheet guidance was provided. Management said it intends to diversify lending by expanding commercial real estate, residential construction, home, and commercial business lending while maintaining the consumer loan portfolio, with retail deposits as a primary funding source. It cautioned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of the earnings increase is repeatable, given the $1.552 million loan-sale gain and $0.168 million securities-sale gain.
- Whether mortgage originations, loans held for sale, and related short-term borrowing remain at elevated levels, and the effect on operating cash flow and liquidity.
- Credit performance and allowance adequacy as construction, consumer, and commercial lending mix changes; monitor nonperformers, charge-offs, TDRs, and OREO.
- Concentration and counterparty exposure in indirect home improvement lending, including contractor/dealer concentration and the growth of California loans.
- Potential effects of tax-asset realization and limits on use of approximately $4.5 million in net operating loss carryforwards, including possible Section 382 restrictions.