FS Bancorp, Inc. — Q1 2015 Form 10-Q
Business context and period. FS Bancorp is the parent of 1st Security Bank of Washington, a community bank serving the Puget Sound area and, since late 2014, the Tri-Cities. Its lending includes consumer home-improvement, real estate, commercial business and residential mortgage loans. This unaudited report covers the three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014.
Financial performance and condition
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $2.07 million; $0.70 | Q1 2014: $0.875 million; $0.29 |
| Net interest income | $6.27 million | Q1 2014: $4.90 million |
| Net interest margin | 5.07% | Q1 2014: 4.96% |
| Noninterest income | $4.07 million | Q1 2014: $2.04 million |
| Noninterest expense; efficiency ratio | $6.61 million; 64.0% | Q1 2014: $5.19 million; 74.7% |
| Total assets | $541.7 million | December 31, 2014: $509.8 million |
| Net loans receivable; gross loans | $416.1 million; $423.4 million | Year-end net loans: $387.2 million |
| Deposits; borrowings | $436.3 million; $30.4 million | Year-end: $420.4 million; $17.0 million |
| Stockholders’ equity | $68.2 million | Year-end: $65.8 million |
Net income rose 136.7% year over year. Net interest income increased 27.8%, principally with growth in average loans; average yield on interest-earning assets was 5.73%, while average funding cost rose to 0.73% from 0.69%. The provision for loan losses was $600,000, versus $450,000. Income-tax expense was $1.06 million, with a 33.8% effective rate.
Noninterest income nearly doubled, driven largely by mortgage activity: gain on sale of loans was $3.33 million versus $1.51 million, and included $1.8 million of derivative fair-value income. The company originated $131.6 million of one-to-four-family mortgages and sold $111.7 million during the quarter. Compensation and operating costs increased; reported expense included higher loan-production costs and equity-plan compensation.
Net cash used in operating activities was $7.27 million, compared with $0.68 million provided in Q1 2014, reflecting the substantial origination and sale flows for loans held for sale. Investing activities used $28.50 million; financing activities provided $29.09 million. Cash and cash equivalents ended at $8.88 million.
Changes, outlook and risks
- Assets increased 6.3% from year-end, chiefly from net loan growth of 7.5% and a $9.0 million increase in loans held for sale. Construction and development loans rose $12.8 million; one-to-four-family loans rose $8.2 million.
- Funding included $15.9 million of deposit growth and $13.4 million more borrowings. Brokered deposits were $26.7 million. Borrowings included $27.0 million in FHLB advances and $3.4 million in Fed Funds purchased.
- Credit indicators weakened: nonaccrual loans increased to $1.06 million from $433,000, and substandard loans rose to $4.48 million from $2.21 million. Management attributed a material portion of the substandard increase to a commercial business borrower downgrade. Nonperforming loans were 0.3% of gross loans; allowance coverage was 1.5%. There were no OREO properties; $777,000 of TDR loans were performing under modified terms.
- The Bank was categorized as well capitalized. Its March 31 ratios were 11.2% Tier 1 leverage, 12.5% Tier 1 risk-based, 13.7% total risk-based and 12.5% common equity Tier 1.
- Available borrowing capacity included $39.7 million unused at the FHLB, a $71.4 million Federal Reserve line (no amount drawn), and $40.0 million in correspondent Fed Funds lines. Approved loan commitments were $205.4 million; these are not necessarily expected cash outflows.
- Management provided no specific earnings or financial guidance. It described plans to grow and diversify lending, build relationship deposits, and expand mortgage and other lending channels. It cautioned that Q1 results are not necessarily indicative of full-year results.
- Key exposures include local economic and real-estate conditions, credit losses, interest-rate and funding-cost changes, competition, and the ability to sell mortgages and sustain loan growth. Four home-improvement contractors/dealers accounted for 58.1% of the quarter’s funded indirect home-improvement loan volume. California-originated indirect consumer lending is subject to a 20% portfolio limit.
- Off-balance-sheet commitments to extend credit totaled $205.4 million. Reserves were $131,000 for unfunded commitments and $396,000 for potential repurchase or indemnification exposure on sold residential loans. Management said ordinary-course legal matters were not expected to materially affect financial condition.
Important facts for investors to verify
- Whether mortgage origination and sale gains, including derivative-related income, are sustainable and how results perform if volumes or secondary-market conditions change.
- Whether the increase in nonaccrual and substandard loans leads to higher charge-offs, provisions or allowance needs, particularly in commercial business lending.
- How loan growth is funded and the resulting effects of higher borrowing, brokered deposits and deposit pricing on liquidity and net interest margin.
- The drawdown, timing and credit quality of the $205.4 million in commitments, alongside management’s available liquidity and capital buffers.
- Management’s reported effective disclosure controls and its statement that there were no material changes in internal control over financial reporting during the quarter.