FS Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2012. The financial statements are for 1st Security Bank of Washington, not the holding company: the mutual-to-stock conversion was not complete, and FS Bancorp had not issued shares or conducted substantive business. The conversion was expected in the second or third quarter of 2012.
Financial performance and position
Amounts below are in millions of dollars unless noted otherwise.
| Metric | Q1 2012 / Mar. 31, 2012 | Comparable / prior period |
|---|---|---|
| Interest income | $4.299 | $4.195 in Q1 2011 |
| Net interest income | $3.650 | $3.360 in Q1 2011 |
| Net interest margin | 5.35% | 5.21% in Q1 2011 |
| Noninterest income | $0.723 | $0.543 in Q1 2011 |
| Noninterest expense | $3.581 | $2.874 in Q1 2011 |
| Provision for loan losses | $0.515 | $0.465 in Q1 2011 |
| Net income | $0.277 | $0.564 in Q1 2011 |
| Operating cash flow | $0.098 | $1.826 in Q1 2011 |
- Net income fell about 51% year over year. Management attributed the decline mainly to higher operating expenses, partly offset by stronger net interest and noninterest income. No income tax provision was recorded; the effective tax rate was 0%.
- Net interest income rose 8.6%, helped by a 38-basis-point reduction in funding cost and a shift from lower-yielding cash into securities. The efficiency ratio worsened to 81.9% from 73.6%.
- Total assets were $300.8 million, up 6.0% from year-end 2011. Net loans were $232.5 million, up 7.1%; available-for-sale securities were $31.9 million, up from $26.9 million.
- Deposits increased 7.3% to $264.5 million; borrowings, consisting of FHLB advances, declined 12.4% to $7.8 million. Equity was $27.0 million.
- Cash and cash equivalents were $16.4 million, down from $19.3 million at December 31, 2011. Investing activities used $19.9 million, primarily reflecting net loan growth and securities purchases; financing activities provided $17.0 million, mainly from deposit growth.
- The Bank was categorized as well-capitalized: total risk-based capital ratio 11.79%, Tier 1 risk-based ratio 10.53%, and Tier 1 leverage ratio 9.22% at March 31, 2012.
Material changes and credit quality
- Loan growth was concentrated in commercial business loans, up 19.6% to $51.8 million, and real estate loans, up 13.2% to $71.9 million. Consumer loans declined 1.4% to $112.7 million and remained the largest portfolio segment.
- Nonperforming loans decreased to $1.9 million, or 0.8% of loans, from $2.2 million, or 1.0%, at year-end. Nonperforming assets totaled $4.8 million, down from $6.9 million.
- The allowance for loan losses was $4.2 million, 1.8% of gross loans, versus $4.3 million, 2.0%, at year-end. Q1 net charge-offs were $0.660 million. Management cautioned that estimates and future provisions could change and that regulators may require additional reserves.
- Other real estate owned declined to $2.8 million from $4.6 million, following $1.4 million of sales and $0.379 million of fair-value write-downs. Those write-downs, along with increased staffing and platform costs, contributed to higher expenses.
Outlook, risks and contingencies
- Management planned to diversify lending through commercial real estate, commercial business, residential construction and mortgage banking, while maintaining the consumer portfolio. California indirect home-improvement lending was being tested; no such loans had yet been originated there.
- Management expected the conversion to be completed in Q2 or Q3 2012, subject to regulatory and depositor approvals and other conditions. Deferred conversion costs were $1.451 million; they would be charged to expense if the transaction did not close.
- Management maintained a full valuation allowance against deferred tax assets, citing uncertainty about future taxable income. The Bank reported a $7.025 million net operating loss carryforward and noted that an ownership change could limit its use under Section 382.
- Liquidity sources included $18.3 million of unused FHLB capacity and an $81.6 million Federal Reserve borrowing line, with no Federal Reserve advances outstanding. Brokered deposits were $8.2 million. Loan commitments were $69.3 million, and $59.2 million of certificates of deposit were scheduled to mature within nine months.
- Risks cited include regional economic and real-estate conditions, loan delinquencies and losses, interest-rate and margin changes, deposit retention, growth execution, competition, regulation, and valuation estimates. Rate locks for residential loans were offset by “best effort” investor commitments.
- In McClain v. 1st Security Bank, the Bank’s motion for summary judgment was granted and the plaintiff’s claims dismissed; the plaintiff appealed in February 2012. The Bank said it considered material loss on appeal remote, but the appeal’s basis was not yet known. Management stated ordinary-course legal matters were not expected to materially affect financial condition.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the conversion and offering closed as anticipated, the final offering terms, and the resulting holding-company capitalization; the filing states no FS Bancorp shares had been issued.
- Whether the recent loan growth—particularly commercial, construction and warehouse-related lending—was accompanied by sustained credit quality, and whether the allowance remains adequate.
- Whether OREO valuations and sales proceeds support reported carrying values, given the quarter’s $0.379 million write-downs.
- Whether operating costs, efficiency, earnings and operating cash flow improve as the new mortgage and construction lending platforms develop.
- Deposit retention and near-term certificate maturities, available borrowing capacity, and the effect of any increased brokered funding.
- Future realization of deferred tax assets and any Section 382 limits, as well as the status and outcome of the pending appeal.
- The filing’s cover page marks “No” for having filed all required reports during the preceding 12 months; investors should confirm the reporting-history context. The stated outstanding-share count is blank-dated (“June [__], 2012”), so it does not provide a clear value.