FS Bancorp, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; interim financial statements are unaudited. FS Bancorp operates 1st Security Bank of Washington, a community bank serving the Puget Sound area.
Financial performance and position
- Q2 earnings: Net income was $986,000, down 9% from $1.086 million in Q2 2013. Diluted EPS was $0.33 versus $0.36.
- Six-month earnings: Net income was $1.861 million, down 20% from $2.321 million; diluted EPS was $0.62 versus $0.77.
- Revenue and margins: Q2 net interest income rose 5% to $5.192 million, while noninterest income fell 16% to $2.456 million. Six-month net interest income rose 5% to $10.095 million, while noninterest income fell 13% to $4.508 million. Net interest margin declined to 5.08% for Q2 from 5.47%, and to 5.02% for the six months from 5.46%. The efficiency ratio increased to 74.7% for both periods, from 71.3% and 68.1%, respectively.
- Credit costs and quality: Provision for loan losses was $450,000 in Q2 and $900,000 for the six months, down from $600,000 and $1.2 million. Net charge-offs were $145,000 for Q2 and $444,000 for the six months. Nonperforming loans were $345,000, or 0.1% of gross loans, versus $1.1 million, or 0.4%, at year-end. The allowance was $5.548 million, 1.7% of gross loans.
- Balance sheet: Assets were $436.0 million, up 4.0% from year-end; net loans were $325.5 million, up 15.8%. Deposits rose 4.4% to $351.6 million and borrowings rose to $17.6 million. Stockholders’ equity was $62.8 million; book value per share was $21.53.
- Cash flow and liquidity: Six-month operating cash flow was negative $156,000; investing cash outflow was $45.1 million and financing cash inflow was $13.1 million. Cash and cash equivalents ended at $6.279 million, down $32.180 million during the period. The Bank reported $19.9 million of unused FHLB capacity, additional Federal Reserve and other lines, and $17.6 million of FHLB advances outstanding.
- Capital: The Bank remained “well capitalized,” with Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios of 12.3%, 14.7%, and 16.0%.
Changes and management commentary
- Loan growth was led by commercial business lending, up 31.2% from year-end, and real estate lending, up 20.7%. Consumer loans were 38.7% of the portfolio, down from 42.7% at year-end, reflecting faster growth in real estate lending.
- Management attributed lower earnings mainly to weaker loan-sale and securities-sale gains and higher operating expenses. Loan-sale gains declined amid fewer mortgage refinances; consumer loan sales partly offset the decline in home-loan sale gains.
- Expenses increased with staffing and related costs for mortgage lending, servicing, and operations. Management said the changing asset mix toward lower-yielding real estate and commercial loans pressured net interest margin; lower funding costs partly offset this.
- The company sold $12.8 million of consumer solar loans during the six months, recognizing a $507,000 pretax gain, to remain within its California lending concentration limit. Four contractors/dealers generated 64.8% of Q2 indirect home-improvement loan volume.
- OREO fell to $36,000 from $2.075 million at year-end, mainly following property sales. The company repurchased $2.222 million of common stock and paid $341,000 in dividends during the six months.
Outlook, risks, and contingencies
- The filing provides no specific earnings or financial guidance. Management’s stated priorities include diversified loan growth, asset quality, lower-cost core deposits, customer relationships, and selective franchise expansion.
- Key disclosed risks include credit deterioration, local economic and real estate conditions, interest-rate and margin changes, secondary-market access for loan sales, deposit retention, growth and expense control, competition, and regulatory changes.
- Commitments to extend credit totaled $136.5 million. Brokered deposits were $19.6 million. Management reported a $258,000 reserve for potential repurchases or indemnification on certain loans sold into the secondary market.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. Risk factors were reported as unchanged from the 2013 Form 10-K. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth and the shift toward lower-yielding lending continue to pressure net interest margin and earnings.
- Whether deposit growth, brokered-deposit reliance, and available borrowing capacity adequately support loan commitments and liquidity needs.
- Whether asset-quality improvement persists, including trends in charge-offs, classified loans, and the allowance relative to portfolio growth.
- Whether mortgage and consumer loan-sale income can offset weaker refinance activity and changing secondary-market conditions.
- How contractor concentration, California consumer lending, and interest-rate exposure evolve; the filing does not provide a specific forward earnings forecast.