FS Bancorp, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Although the request identifies 2017 Q4, this is an annual filing; the figures below are primarily full-year or year-end results, not standalone fourth-quarter results.
Business context
FS Bancorp is the holding company for 1st Security Bank of Washington, a community bank focused on the Puget Sound region, with additional lending activity across the West Coast. Its two reported business segments are commercial and consumer banking and home lending. The bank emphasizes relationship banking and a diversified loan mix, including residential mortgages, construction and commercial real estate, commercial business, and consumer loans.
Financial performance and position
| Metric | FY 2017 / Dec. 31, 2017 | FY 2016 / Dec. 31, 2016 |
|---|---|---|
| Total assets | $981.8 million | $827.9 million |
| Gross loans | $773.4 million | $605.4 million |
| Deposits | $829.8 million | $712.6 million |
| Stockholders’ equity | $122.0 million | $81.0 million |
| Net interest income | $41.2 million | $33.9 million |
| Net income | $14.1 million | $10.5 million |
| Diluted earnings per share | $4.28 | $3.51 |
| Net interest margin | 4.65% | 4.43% |
| Return on assets / return on equity | 1.53% / 14.80% | 1.31% / 13.84% |
| Net charge-offs / allowance for loan losses | $205,000 / $10.8 million | Net recoveries of $26,000 / $10.2 million |
| Cash and cash equivalents | $18.9 million | $36.5 million |
| Borrowings / subordinated note, net | $7.5 million / $9.8 million | $12.7 million / $9.8 million |
Net interest income rose 21.8%, reflecting loan growth and a higher average earning-asset yield. The provision for loan losses declined to $750,000 from $2.4 million. Noninterest income was $24.1 million, including $18.0 million of loan-sale gains and a $1.1 million gain on the sale of mortgage servicing rights (MSRs). Noninterest expense increased 13.0% to $44.0 million, led by a 21.0% rise in salaries and benefits. The efficiency ratio improved slightly to 67.4% from 67.8%.
Cash flows were $15.1 million from operating activities, negative $169.4 million from investing activities, and positive $136.8 million from financing activities; cash and cash equivalents decreased $17.5 million during the year. The bank had $7.5 million of FHLB advances outstanding at year-end, plus a $10.0 million subordinated note due 2025 bearing 6.50% interest. Reported liquidity facilities included $201.0 million of unused FHLB capacity, a $99.1 million Federal Reserve line, and $43.0 million of unsecured Fed Funds lines; none of the latter two facilities was drawn at year-end.
Material changes versus 2016
- Loans receivable, net, increased 28.4% to $761.6 million. Construction and development loans rose to $143.1 million from $94.5 million; gross loans overall grew 27.8%.
- Loan mix continued shifting toward real estate: real estate loans were 56.9% of gross loans, up from 54.8%, while consumer loans were 27.0%, down from 28.9%. Construction and development loans represented 18.5% of gross loans, including $80.0 million in speculative one-to-four-family construction loans.
- Deposits grew 16.5%. Relationship-based transactional accounts increased 40.1%; brokered deposits were $65.8 million, or 7.9% of deposits.
- Equity rose 50.6%, principally from $25.6 million of net proceeds from a third-quarter public offering and $14.1 million of net income. The offering involved 587,234 shares.
- Mortgage originations were $812.1 million and sales to investors were about $718.0 million. The company sold $564.8 million of MSRs during the second quarter, recording a $1.1 million gain; servicing for others ended the year at $778.9 million.
- Nonperforming assets were $1.0 million, or 0.11% of assets, versus $736,000, or 0.09%. The allowance was 1.39% of gross loans versus 1.69%; net charge-offs increased from net recoveries the prior year.
Outlook, risks, and unusual items
Management expected construction and development lending to remain an important portfolio component, while pursuing loan diversification, lower-cost core deposits, relationship growth, and selective market expansion. A Silverdale branch was expected to open in April 2018. The filing provides no quantified earnings or revenue guidance.
The company reported strong regulatory capital: the bank’s total risk-based capital ratio was 16.25%, Tier 1 leverage ratio 12.61%, and CET1 ratio 15.00%; it was categorized as well capitalized. Management identified commercial real estate concentration, rapid construction-loan growth, consumer lending and dealer concentration, mortgage production sensitivity, deposit competition, interest-rate and liquidity risk, and cybersecurity and third-party vendor risks. It noted that construction and land development exposure met the regulatory guidance threshold for a concentration, potentially inviting additional supervisory scrutiny.
The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% effective in 2018. The company recognized a $396,000 tax benefit from revaluing deferred taxes; the FY 2017 effective tax rate was 31.6%, and management estimated a future tax rate of 21.5% including state tax. The company was evaluating the future CECL credit-loss standard, which it expected to increase the allowance through a transition adjustment, but said the amount was not yet known. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether rapid growth in construction and commercial lending, especially speculative construction, remains consistent with underwriting standards and credit performance.
- Loan concentration, collateral values, builder and dealer exposure, and the effect of any weakening in Puget Sound or California markets.
- Deposit mix and retention, brokered funding, deposit repricing, and liquidity capacity as rates and competition change.
- Sustainability of mortgage banking income and MSR valuations following the large MSR sale, including servicing volumes and sale margins.
- Future credit-loss reserves, CECL implementation effects, and changes in nonperforming loans, criticized assets, and charge-offs.
- Effects of the public offering and share issuance on per-share results, capital deployment, and future dividends.