FS Bancorp, Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter earnings report. FS Bancorp is the holding company for 1st Security Bank of Washington, a community bank serving the Puget Sound region.
Business context and financial position
The Bank operates seven branches and five loan origination offices. Its lending includes indirect home-improvement and solar consumer loans, commercial real estate and business loans, construction lending, and residential mortgage banking. Management’s strategy is to diversify lending and revenue while maintaining asset quality and growing core deposits.
- Total assets were $509.8 million, up 21.6% from $419.2 million. Net loans were $387.2 million, up 37.7%; deposits were $420.4 million, up 24.8%.
- Loans were increasingly diversified: consumer loans were 34.7% of gross loans, versus 42.7% a year earlier. Commercial real estate, construction, multifamily, and commercial business loans together were 49.4% of gross loans, versus 44.7%.
- Stockholders’ equity was $65.8 million; borrowings were $17.0 million, primarily FHLB advances. The Bank reported a 14.68% total risk-based capital ratio and 11.17% Tier 1 leverage ratio and was categorized as well capitalized.
Results and key metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total interest and dividend income | $24.8 million | $21.7 million |
| Net interest income | $22.1 million | $19.6 million |
| Net interest margin | 5.12% | 5.33% |
| Provision for loan losses | $1.8 million | $2.2 million |
| Noninterest income | $10.0 million | $8.9 million |
| Noninterest expense | $23.9 million | $20.4 million |
| Net income | $4.5 million | $3.9 million |
| Diluted earnings per share | $1.52 | $1.29 |
| Return on average assets / equity | 1.00% / 7.19% | 1.01% / 6.43% |
| Efficiency ratio | 74.3% | 71.5% |
Net interest margin contracted 21 basis points, which management attributed to portfolio diversification into lower-yielding real estate and business loans and increased lower-yielding liquid assets. The average yield on interest-earning assets declined to 5.74% from 5.93%, while the average cost of interest-bearing liabilities rose to 0.80% from 0.77%. Loan-sale gains rose to $7.6 million from $6.4 million, primarily reflecting mortgage banking activity.
Net cash used in operating activities was $4.0 million; investing activities used $99.9 million, while financing activities provided $81.0 million. Cash and cash equivalents ended the year at $15.6 million, down from $38.5 million. Liquidity sources included deposit growth, loan repayments and sales, securities, and borrowing facilities. The Bank had $162.3 million of loan commitments outstanding and $53.7 million of certificates of deposit scheduled to mature within one year.
Material changes and asset quality
- Net income increased 15.8%, although noninterest expense grew 17.4%, driven chiefly by a 29.2% increase in salaries and benefits as staffing expanded to 209 full-time equivalent employees from 158.
- Net charge-offs fell to $802,000 from $1.8 million. Nonperforming loans declined to $433,000 from $1.1 million; nonperforming assets were 0.08% of total assets, down from 0.77%. The Bank had no OREO at year-end.
- The allowance for loan losses increased to $6.1 million from $5.1 million, but declined as a share of gross loans to 1.54% from 1.77% as the portfolio expanded. Management noted that allowance estimates are subjective and may require adjustment.
- Mortgage originations for sale were $277.3 million, of which $263.2 million were sold. Servicing rights were $3.1 million, and the Bank serviced $345.9 million of loans for others.
Outlook, risks, and unusual items
No quantified earnings or revenue guidance is provided. Management plans to continue expanding commercial lending and residential mortgage banking, maintain consumer lending, pursue core deposit growth, and selectively expand home-lending markets. It expected to hire additional mortgage staff in 2015. The filing also describes a planned merger of the Bank’s FHLB with FHLB of Des Moines, targeted for May 31, 2015.
- Key risks include concentration in the Puget Sound economy; consumer and indirect home-improvement lending; dependence on three dealers for 56.1% of indirect home-improvement loan volume; and rapid growth in less-seasoned commercial and construction portfolios.
- Mortgage banking income is sensitive to interest rates, loan volume, secondary-market access, and repurchase or indemnification claims. The Bank recorded a $340,000 reserve for loan-sale representations and warranties.
- Interest-rate, deposit-retention, liquidity, competition, regulatory, fraud, cybersecurity, and third-party service-provider risks are discussed. Management’s interest-rate model projected net interest income down 4.94% under a 100-basis-point rate decline and up 4.99% under a 300-basis-point increase; the model’s assumptions and limitations are disclosed.
- Other notable items: $2.2 million of common-stock repurchases and $704,000 of dividends paid; the annual dividend was $0.22 per share. The 2014 tax provision was $1.9 million, with a 29.8% effective tax rate, and the balance sheet shifted from a net deferred tax asset to a $809,000 net deferred tax liability.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether the fast-growing commercial, construction, and residential portfolios maintain sound underwriting and credit performance as they season.
- Whether dealer concentration and indirect-loan quality remain manageable, particularly in California solar lending.
- Whether mortgage-sale gains and servicing income can offset margin compression and higher operating costs.
- Deposit retention and funding costs, upcoming certificate maturities, available borrowing capacity, and the decline in cash and cash equivalents.
- The adequacy of the loan-loss allowance and the realization of servicing-rights values, both of which depend on estimates and market conditions.