FS Bancorp, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. FS Bancorp is the holding company for 1st Security Bank of Washington, a community bank serving the Puget Sound region and other Western markets. Its two segments are commercial and consumer banking and home lending. This unaudited filing covers the three months ended March 31, 2018; balance sheet comparisons are with December 31, 2017. Amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2018 / March 31, 2018 | Comparable / prior date |
|---|---|---|
| Net income | $4.32; diluted EPS $1.15 | Q1 2017: $2.59; diluted EPS $0.85 |
| Interest income / expense | $12.99 / $1.49 | Q1 2017: $10.03 / $1.06 |
| Net interest income | $11.50 | Q1 2017: $8.98 |
| Net interest margin | 4.76% | Q1 2017: 4.54% |
| Provision for loan losses | $0.35 | Q1 2017: none |
| Noninterest income / expense | $5.02 / $11.04 | Q1 2017: $5.42 / $10.38 |
| Efficiency ratio | 66.8% | Q1 2017: 72.1% |
| Total assets | $1,043.6 | December 31, 2017: $981.8 |
| Loans receivable, net | $805.6 | December 31, 2017: $761.6 |
| Total deposits | $857.5 | December 31, 2017: $829.8 |
| Borrowings | $39.5 | December 31, 2017: $7.5 |
| Stockholders’ equity | $125.4 | December 31, 2017: $122.0 |
| Cash and cash equivalents | $25.6 | December 31, 2017: $18.9 |
| Operating / investing / financing cash flow | $6.8 / $(59.6) / $59.5 | Q1 2017: $19.7 / $(52.9) / $42.8 |
Net loans grew 5.8% from year-end, with commercial business loans up $27.5 million, consumer loans up $10.3 million and real estate loans up $6.5 million. The allowance for loan losses was $11.1 million, or 1.4% of gross loans excluding loans held for sale. Nonperforming loans were $0.72 million, 0.1% of gross loans, versus $1.0 million at year-end; the quarter recorded $34,000 in net recoveries.
The Bank’s regulatory capital ratios at March 31 were 12.6% Tier 1 leverage, 15.0% Tier 1 risk-based, 16.2% total risk-based and 15.0% CET1. It was categorized as well capitalized. The Bank had $195.1 million of unused FHLB borrowing capacity; $39.5 million of FHLB advances and borrowings were outstanding. The parent reported $5.8 million of unrestricted cash.
Material changes versus comparable periods
- Net income rose 66.7% year over year. Management attributed the improvement mainly to a $2.5 million increase in net interest income, reflecting loan growth and higher yields; higher loan-loss provision and operating expenses partly offset the increase.
- Average loans receivable increased $194.7 million year over year. Net interest margin increased 22 basis points, while the average cost of funds rose 11 basis points to 0.69% as deposit and borrowing rates increased.
- Noninterest income declined $0.4 million, including lower loan-sale gains and service charges. Salaries and benefits increased $0.9 million, including $0.8 million of production-related incentives and commissions.
- Deposits increased $27.6 million from year-end, while borrowings rose $32.0 million, primarily to fund shorter-term business loans with similar-duration overnight FHLB borrowings.
- Available-for-sale securities increased to $91.4 million, but their net unrealized loss widened to $2.2 million from $0.6 million at year-end. The quarter’s after-tax other comprehensive loss was $1.2 million.
- The effective tax rate fell to 15.8% from 35.5% in Q1 2017, reflecting the Tax Act tax-rate reduction.
Outlook, risks and unusual items
- No numerical earnings or operating guidance is provided. Management said it expects construction and development lending to remain an important portfolio component, and described continued focus on diversified loan growth, asset quality, lower-cost relationship deposits and market expansion.
- Management cited seasonal purchase activity as a factor in lower one-to-four-family originations compared with the preceding quarter. Home-loan sales margin fell to 2.60% from 2.98% a year earlier.
- Credit, real estate and local economic conditions; interest-rate and funding costs; ability to attract deposits; secondary-market loan sales; mortgage servicing valuations; and execution of growth and branch-expansion plans are among the stated risks. Four contractor/dealers generated 47.9% of Q1 indirect home-improvement loan funding, a notable channel concentration.
- Commitments to extend credit totaled $293.7 million. Reserves included $0.26 million for unfunded commitments and $0.97 million for potential repurchases or indemnification of sold mortgage loans. Management reported no material pending legal actions and considered ordinary-course claims not material.
- The company opened a Silverdale, Washington branch on April 12, 2018, after quarter-end. Management expects adoption of the new expected-credit-loss standard to increase the allowance through a one-time retained-earnings adjustment, but said the amount is not yet known. The filing identifies mortgage servicing rights as sensitive to prepayment assumptions.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether loan growth and improved net interest margin can persist as deposit and wholesale funding costs rise.
- Credit performance in commercial and industrial, construction and development, consumer, and warehouse lending, and the adequacy of the loan-loss allowance.
- The sustainability and margins of home-lending production, secondary-market sales and servicing-rights valuations.
- Deposit mix and reliance on brokered or other non-retail deposits; Q1 brokered deposits were $79.0 million.
- The size and timing of the eventual expected-credit-loss adoption adjustment, and the effect of interest-rate changes on securities and mortgage servicing rights.