FS Bancorp, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. FS Bancorp is the holding company for 1st Security Bank of Washington, a community bank serving the Puget Sound region and operating a home-lending business.
Key financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net interest income | $10.0 million | $8.1 million | $18.9 million | $15.9 million |
| Noninterest income | $7.0 million | $6.6 million | $12.4 million | $10.9 million |
| Noninterest expense | $10.9 million | $9.6 million | $21.3 million | $18.5 million |
| Net income | $4.4 million | $2.8 million | $7.0 million | $4.5 million |
| Diluted EPS | $1.41 | $0.96 | $2.25 | $1.50 |
- Net interest margin was 4.63% for Q2 and 4.59% for the first half, up from 4.34% and 4.26%, respectively. The efficiency ratio improved to 64.7% for Q2 and 68.1% for the first half.
- No loan-loss provision was recorded in either 2017 period, versus $0.6 million in Q2 2016 and $1.2 million in the first half of 2016. The allowance was $10.1 million, or 1.4% of gross loans excluding loans held for sale, at June 30.
- For the first half, net cash from operating activities was $1.7 million versus cash used of $15.1 million in 2016; investing activities used $111.0 million versus providing $89.3 million; financing activities provided $90.6 million versus using $83.8 million. Cash and equivalents ended at $17.8 million, down from $36.5 million at year-end.
Financial condition and material changes
- Total assets grew 12.2% from December 31, 2016, to $928.6 million. Net loans increased 19.5% to $709.1 million, with growth in real estate and commercial business lending. Gross loans were $720.3 million.
- Deposits rose 10.3% to $785.7 million. Borrowings increased to $30.7 million from $12.7 million, primarily to help fund loan growth. The $10.0 million subordinated note remained outstanding; its balance net of issuance costs was $9.8 million.
- Stockholders’ equity was $88.8 million, up from $81.0 million; book value per share was $30.40 versus $28.32. The Bank remained well capitalized: total risk-based capital was 13.23%, Tier 1 risk-based capital 11.97%, and Tier 1 leverage capital 10.12%.
- Nonperforming loans were $754,000, or 0.1% of gross loans; substandard loans increased to $8.5 million. There were no OREO properties and no loans 90 days or more past due and still accruing.
- Liquidity included $185.5 million of unused FHLB borrowing capacity, a $91.5 million Federal Reserve line and $40.0 million in correspondent Fed Funds lines. Total commitments to extend credit were $344.7 million.
Outlook, commentary and risks
- Management described continued focus on loan growth and diversification, asset quality, lower-cost relationship deposits, and market expansion. The filing provides no specific earnings or financial guidance.
- Q2 noninterest income included a $958,000 gain from selling part of the mortgage servicing rights (MSR) portfolio and a $237,000 securities-sale gain. The MSR sale generated proceeds of $4.8 million; the company expected final transfer by September 30, 2017 and recorded a reserve for estimated early payoffs.
- Salary and benefit costs rose 29.1% in Q2, including loan-production incentives and commissions. The reported first-half effective tax rate fell to 30.5%, partly reflecting a $489,000 tax benefit from stock-compensation accounting.
- Management cited sensitivity to credit conditions, interest rates, loan demand and secondary-market conditions, deposit retention, operating costs, and the valuation and prepayment assumptions for servicing rights. Four home-improvement contractors/dealers accounted for 49.5% of Q2 funded loan volume; California-originated consumer loans totaled $40.0 million.
- Loan-sale recourse and repurchase exposure remain relevant: reserves for secondary-market loan guarantees were $1.1 million. The Bank also had a $1.1 million credit-enhancement obligation related to loans sold to the FHLB, with a $121,000 reserve. Management said pending legal matters were not expected to have a material effect and reported no material pending legal actions.
Important facts for investors to verify
- Whether loan growth can be sustained without increased provisions, delinquencies, or classified loans; review commercial business and construction exposures.
- How deposit costs, wholesale funding, and borrowing levels evolve as loan demand continues.
- Whether MSR values, servicing transfer timing, early payoffs, and mortgage-sale margins develop as assumed.
- Whether elevated personnel and production costs are matched by durable revenue growth, and how the one-time MSR and securities gains affect comparisons.
- How much of the $344.7 million in credit commitments is funded, and whether available liquidity and capital remain adequate under stress.