FS Bancorp, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparative periods ended June 30, 2012, and balance-sheet comparisons to December 31, 2012. FS Bancorp is the holding company for 1st Security Bank of Washington, a seven-branch community bank serving the greater Puget Sound area. Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $4.924 | $3.891 | $9.588 | $7.541 |
| Provision for loan losses | $0.600 | $0.550 | $1.200 | $1.065 |
| Noninterest income | $2.931 | $1.122 | $5.194 | $1.845 |
| Noninterest expense | $5.603 | $3.842 | $10.070 | $7.423 |
| Income before tax | $1.652 | $0.621 | $3.512 | $0.898 |
| Net income | $1.086 | $0.621 | $2.321 | $0.898 |
| Diluted EPS | $0.36 | Not available | $0.77 | Not available |
- Net interest margin was 5.46% for the first half, up from 5.42%. Management attributed the improvement to a shift from lower-yielding cash into loans and securities, lower nonperforming loans, and a 26-basis-point decline in the cost of funds.
- Loan-sale gains were $2.228 million in Q2 and $3.779 million for the first half, versus $0.445 million and $0.551 million, respectively, a year earlier. These gains were primarily tied to expanding residential mortgage lending.
- The efficiency ratio improved to 71.3% for Q2 from 76.6%, and to 68.1% for the first half from 79.1%, primarily reflecting higher noninterest income. Salaries, commissions, and other lending-platform costs also rose substantially.
Financial position, cash flow, and capital
- At June 30, total assets were $378.9 million, up 5.5% from year-end. Net loans were $280.4 million, deposits $300.9 million, borrowings $13.7 million, and stockholders’ equity $61.1 million.
- Net loans grew 2.0% from year-end, with real estate loans up 16.4% and consumer loans up 8.5%; commercial business loans fell 26.5%, partly from lower warehouse-line utilization and runoff of two loan participations. Loans held for sale rose to $13.1 million.
- Deposits increased 4.1%; FHLB advances nearly doubled from $6.8 million to $13.7 million, mainly reflecting longer-term borrowing for interest-rate risk management. Cash and cash equivalents were $13.8 million, compared with $6.8 million at year-end.
- For the first half, operating cash flow was $1.6 million (versus use of $1.4 million in 2012), investing cash flow was negative $13.2 million, and financing cash flow was positive $18.6 million. Cash increased $7.0 million.
- The Bank was “well capitalized” at June 30: Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 13.1%, 15.7%, and 16.9%, respectively. The Company’s corresponding ratios were 16.3%, 19.5%, and 20.7%.
Changes, outlook, and risks
- Profit increased year over year, driven chiefly by residential mortgage loan-sale gains and higher net interest income. Expenses increased as the Company expanded lending channels, added staff, and incurred higher commissions, loan costs, and professional fees.
- Management intends to grow commercial real estate, home, commercial business, and residential construction lending while maintaining the current consumer-loan portfolio; retail deposits are expected to remain a primary funding source. The filing gives no quantified earnings or financial guidance.
- Management cautioned that higher mortgage rates may reduce refinancing activity, mortgage-loan sales, and warehouse-line use. Other stated risks include loan-credit deterioration, real-estate market and valuation changes, interest-rate movements, deposit competition and retention, operating-cost control, regulatory changes, and execution of growth plans.
- Credit indicators: the allowance for loan losses was $5.276 million, or 1.9% of gross loans, versus $4.698 million, or 1.7%, at year-end. Nonaccrual loans rose to $2.294 million from $1.906 million; nonperforming assets totaled $4.167 million. First-half net charge-offs were $0.622 million, down from $1.078 million a year earlier. Troubled debt restructurings totaled $3.167 million.
- Consumer loans were 41.3% of the portfolio, with indirect home-improvement loans representing 79.8% of consumer loans. Four contractor/dealers accounted for 56.3% of that channel’s Q2 funded loan volume. California indirect originations were subject to a management limit of 20% of consumer loans.
- Available liquidity included $24.7 million of unused FHLB capacity, a $74.5 million Federal Reserve borrowing line, and a $6.0 million overnight line; no borrowings were outstanding on the latter two lines. Brokered deposits were $16.9 million. Outstanding loan commitments, including unused lines, were $119.6 million.
- Unrealized losses on available-for-sale securities reduced accumulated other comprehensive income by $1.206 million, net of tax, during the first half. Management attributed the decline in bond values to rising long-term interest rates and stated it intended and was able to hold the securities until recovery.
- The first-half tax provision was $1.191 million, compared with none in 2012. The prior-year period had a full deferred-tax-asset valuation allowance; it was reversed in the second half of 2012. At June 30, no valuation allowance was recorded. Management said ordinary-course legal proceedings were not expected to have a material effect; no material risk-factor changes were reported.
Key facts for investors to verify
- How sustainable mortgage loan-sale gains and the associated lending-volume growth are, particularly if higher rates continue to curb refinancing.
- Whether rising lending and staffing expenses can be absorbed while preserving improved efficiency and profitability.
- Credit performance and reserve adequacy as construction, consumer, and indirect home-improvement lending expand; monitor nonaccrual loans, charge-offs, TDRs, and contractor concentration.
- Funding and liquidity trends, including growth in borrowings and brokered deposits, upcoming time-deposit maturities, and the ability to fund $119.6 million of commitments.
- Interest-rate exposure reflected in securities’ unrealized losses and the effect of tax-asset realization assumptions on future results.