FS Bancorp, Inc. Reports Third Quarter Net Income of $9.0 Million or $1.13 Per Diluted Share and the Forty-Third Consecutive Quarterly Dividend
October 25, 2023 at 04:31 pm
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MOUNTLAKE TERRACE, Wash., Oct. 25, 2023 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (NASDAQ: FSBW) (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank” or “1st Security Bank”) today reported 2023 third quarter net income of $9.0 million, or $1.13 per diluted share, compared to $8.5 million, or $1.08 per diluted share, for the comparable quarter one year ago. For the nine months ended September 30, 2023, net income was $26.3 million, or $3.33 per diluted share, compared to net income of $22.0 million, or $2.73 per diluted share, for the comparable nine-month period in 2022.
“We were honored to be recently named the ‘Number One Best Place to Work’ in the extra-large company category by the Puget Sound Business Journal,” stated Joe Adams, CEO. “We are also pleased that our Board of Directors approved our forty-third consecutive quarterly cash dividend of $0.25 per share, demonstrating our continued commitment to returning value to shareholders. The cash dividend will be paid on November 22, 2023, to shareholders of record as of November 9, 2023,” concluded Adams.
2023 Third Quarter Highlights
Net income was $9.0 million for the third quarter of 2023, compared to $9.1 million in the previous quarter, and $8.5 million for the comparable quarter one year ago;
Net interest margin (“NIM”) compressed to 4.34%, compared to 4.66% for the previous quarter, and 4.54% for the comparable quarter one year ago;
Total deposits increased $89.1 million, or 3.8%, to $2.45 billion at September 30, 2023 compared to $2.37 billion at June 30, 2023 and increased $371.1 million, or 17.8%, from $2.08 billion at September 30, 2022, with noninterest-bearing deposit totals of $670.2 million at September 30, 2023, $675.2 million at June 30, 2023, and $581.6 million at September 30, 2022;
Loans receivable, net increased $33.1 million, or 1.4%, to $2.38 billion at September 30, 2023, compared to $2.34 billion at June 30, 2023, and increased $291.6 million, or 14.0%, from $2.08 billion at September 30, 2022;
Consumer loans, of which 87.9% are home improvement loans, increased $6.2 million, or 1.0%, to $640.1 million at September 30, 2023, compared to $633.9 million in the previous quarter, and increased $121.5 million, or 23.4%, from $518.6 million in the comparable quarter one year ago. During the three months ended September 30, 2023, consumer loan originations included 82.4% of home improvement loans originated with a Fair Isaac and Company, Incorporated (“FICO”) score above 720 and 95.5% of home improvement loans with a UCC-2 security filing;
Segment reporting in the third quarter of 2023 reflected net income of $8.8 million for the Commercial and Consumer Banking segment and $166,000 for the Home Lending segment, compared to net income of $9.1 million and $55,000 in the prior quarter, and net income of $9.3 million and net loss of $794,000 in the third quarter of 2022, respectively;
The ratio of available unencumbered cash and secured borrowing capacity at the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank to uninsured deposits was 216% at September 30, 2023, compared to 209% in the prior quarter. The average deposit size per FDIC-insured account at the Bank was $33,000 for both September 30, 2023 and June 30, 2023; and
Regulatory capital ratios at the Bank were 13.1% for total risk-based capital and 10.3% for Tier 1 leverage capital at September 30, 2023, compared to 12.9% for total risk-based capital and 10.3% for Tier 1 leverage capital at June 30, 2023.
Segment Reporting
The Company reports two segments: Commercial and Consumer Banking and Home Lending. The Commercial and Consumer Banking segment provides diversified financial products and services to our commercial and consumer customers. These products and services include deposit products; residential, consumer, business and commercial real estate lending portfolios and cash management services. This segment is also responsible for the management of the investment portfolio and other assets of the Bank. The Home Lending segment originates one-to-four-family residential mortgage loans primarily for sale in the secondary markets as well as loans held for investment.
The tables below provide a summary of segment reporting at or for the three and nine months ended September 30, 2023 and 2022 (dollars in thousands):
At or For the Three Months Ended September 30, 2023
Condensed income statement:
Commercial and Consumer Banking
Home Lending
Total
Net interest income (1)
$
27,563
$
3,071
$
30,634
Provision for credit losses
(437
)
(111
)
(548
)
Noninterest income (2)
2,680
2,302
4,982
Noninterest expense (3)
(18,539
)
(5,047
)
(23,586
)
Income before provision for income taxes
11,267
215
11,482
Provision for income taxes
(2,480
)
(49
)
(2,529
)
Net income
$
8,787
$
166
$
8,953
Total average assets for period ended
$
2,361,014
$
540,372
$
2,901,386
Full-time employees ("FTEs")
434
128
562
At or For the Three Months Ended September 30, 2022
Condensed income statement:
Commercial and Consumer Banking
Home Lending
Total
Net interest income (1)
$
24,620
$
2,907
$
27,527
(Provision) recovery for credit losses
(1,811
)
93
(1,718
)
Noninterest income (2)
3,314
867
4,181
Noninterest expense (3)
(14,471
)
(4,867
)
(19,338
)
Income (loss) before (provision) benefit for income taxes
11,652
(1,000
)
10,652
(Provision) benefit for income taxes
(2,400
)
206
(2,194
)
Net income (loss)
$
9,252
$
(794
)
$
8,458
Total average assets for period ended
$
2,072,614
$
427,368
$
2,499,982
FTEs
389
140
529
At or For the Nine Months Ended September 30, 2023
Condensed income statement:
Commercial and Consumer Banking
Home Lending
Total
Net interest income (1)
$
83,332
$
9,516
$
92,848
Provision for credit losses
(2,555
)
(817
)
(3,372
)
Noninterest income (2)
7,766
7,268
15,034
Noninterest expense (3)
(56,099
)
(15,215
)
(71,314
)
Income before provision for income taxes
32,444
752
33,196
Provision for income taxes
(6,758
)
(157
)
(6,915
)
Net income
$
25,686
$
595
$
26,281
Total average assets for period ended
$
2,288,996
$
520,513
$
2,809,509
FTEs
434
128
562
At or For the Nine Months Ended September 30, 2022
Condensed income statement:
Commercial and Consumer Banking
Home Lending
Total
Net interest income (1)
$
66,983
$
7,995
$
74,978
Provision for credit losses
(3,727
)
(905
)
(4,632
)
Noninterest income (2)
7,944
6,468
14,412
Noninterest expense (3)
(42,878
)
(14,456
)
(57,334
)
Income (loss) before (provision) benefit for income taxes
28,322
(898
)
27,424
(Provision) benefit for income taxes
(5,583
)
186
(5,397
)
Net income (loss)
$
22,739
$
(712
)
$
22,027
Total average assets for period ended
$
1,972,376
$
403,990
$
2,376,366
FTEs
389
140
529
(1)
Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to the other segment. The cost of liabilities includes interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of assigned liabilities to fund segment assets.
(2)
Noninterest income includes activity from certain residential mortgage loans that were initially originated for sale and measured at fair value, and subsequently transferred to loans held for investment. Gains and losses from changes in fair value for these loans are reported in earnings as a component of noninterest income. For the three and nine months ended September 30, 2023, the Company recorded a net decrease in fair value of $343,000 and $285,000, as compared to a net decrease in fair value of $816,000 and $1.8 million for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023 and 2022, there were $15.2 million and $14.2 million, respectively, in residential mortgage loans recorded at fair value as they were previously transferred from loans held for sale to loans held for investment.
(3)
Noninterest expense includes allocated overhead expense from general corporate activities. Allocation is determined based on a combination of segment assets and FTEs. For the three and nine months ended September 30, 2023 and 2022, the Home Lending segment included allocated overhead expenses of $1.5 million and $4.7 million, respectively.
Asset Summary
Total assets increased $14.5 million, or 0.5%, to $2.92 billion at September 30, 2023, compared to $2.91 billion at June 30, 2023, and increased $267.9 million, or 10.1%, from $2.65 billion at September 30, 2022. The increase in total assets at September 30, 2023, compared to the June 30, 2023, was primarily due to increases in loans receivable, net of $33.1 million and securities available-for-sale of $26.0 million, partially offset by a decrease in total cash and cash equivalents of $51.4 million. The increase in total assets at September 30, 2023, compared to September 30, 2022, was primarily due to increases in loans receivable, net of $291.6 million, primarily due to organic loan growth funded through deposits received from the purchase of seven retail branches from Columbia State Bank completed on February 24, 2023 (“Branch Acquisition”) and assets purchased in the Branch Acquisition. The increase in total assets at September 30, 2023, compared to September 30, 2022, also included securities available-for-sale of $24.0 million, core deposit intangible (“CDI”), net of $14.8 million and interest-earning deposits at other financial institutions of $12.7 million. These increases were partially offset by decreases in total cash and cash equivalents of $79.1 million, FHLB stock of $9.9 million and loans held for sale (“HFS”) of $4.8 million.
LOAN PORTFOLIO
(Dollars in thousands)
September 30, 2023
June 30, 2023
September 30, 2022
Amount
Percent
Amount
Percent
Amount
Percent
REAL ESTATE LOANS
Commercial
$
364,673
15.2
%
$
343,008
14.4
%
$
310,923
14.7
%
Construction and development
289,873
12.0
312,093
13.2
335,177
15.9
Home equity
67,103
2.8
62,304
2.6
53,681
2.6
One-to-four-family (excludes HFS)
540,670
22.5
521,734
22.0
429,196
20.3
Multi-family
243,661
10.1
231,675
9.8
223,712
10.6
Total real estate loans
1,505,980
62.6
1,470,814
62.0
1,352,689
64.1
CONSUMER LOANS
Indirect home improvement
562,650
23.4
557,818
23.5
447,462
21.2
Marine
73,887
3.1
72,484
3.0
68,106
3.2
Other consumer
3,547
0.1
3,606
0.2
2,987
0.2
Total consumer loans
640,084
26.6
633,908
26.7
518,555
24.6
COMMERCIAL BUSINESS LOANS
Commercial and industrial
236,520
9.8
237,403
10.0
211,009
10.0
Warehouse lending
23,489
1.0
30,649
1.3
28,102
1.3
Total commercial business loans
260,009
10.8
268,052
11.3
239,111
11.3
Total loans receivable, gross
2,406,073
100.0
%
2,372,774
100.0
%
2,110,355
100.0
%
Allowance for credit losses on loans
(30,501
)
(30,350
)
(26,426
)
Total loans receivable, net
$
2,375,572
$
2,342,424
$
2,083,929
Loans receivable, net increased $33.1 million to $2.38 billion at September 30, 2023, from $2.34 billion at June 30, 2023, and increased $291.6 million from $2.08 billion at September 30, 2022. The increase in total real estate loans at September 30, 2023, compared to the prior quarter reflects increases in commercial real estate loans of $21.7 million, one-to-four-family loans (excluding loans HFS) of $18.9 million, multi-family loans of $12.0 million, home equity loans of $4.8 million, and consumer loans, primarily indirect home improvement loans of $6.2 million. These increases were partially offset by an $8.0 million decrease in commercial business loans, primarily as a result of a $7.2 million decrease in warehouse lending.
Originations of one-to-four-family loans to purchase and refinance a home for the periods indicated were as follows:
(Dollars in thousands)
For the Three Months Ended
For the Three Months Ended
September 30, 2023
June 30, 2023
Amount
Percent
Amount
Percent
$ Change
% Change
Purchase
$
139,345
92.1
%
$
145,377
91.2
%
$
(6,032
)
(4.1
)%
Refinance
12,001
7.9
14,099
8.8
(2,098
)
(14.8
)
Total
$
151,346
100.0
%
$
159,476
100.0
%
$
(8,130
)
(5.0
)%
(Dollars in thousands)
For the Three Months Ended September 30,
2023
2022
Amount
Percent
Amount
Percent
$ Change
% Change
Purchase
$
139,345
92.1
%
$
172,639
89.1
%
$
(33,294
)
(19.3
)%
Refinance
12,001
7.9
21,096
10.9
(9,095
)
(43.1
)
Total
$
151,346
100.0
%
$
193,735
100.0
%
$
(42,389
)
(21.9
)%
(Dollars in thousands)
For the Nine Months Ended September 30,
2023
2022
Amount
Percent
Amount
Percent
$ Change
% Change
Purchase
$
387,211
91.8
%
$
549,259
78.7
%
$
(162,048
)
(29.5
)%
Refinance
34,635
8.2
148,335
21.3
(113,700
)
(76.7
)
Total
$
421,846
100.0
%
$
697,594
100.0
%
$
(275,748
)
(39.5
)%
The decrease in loan purchase and refinance activity, as well as slower sales activity, compared to the comparable period in 2022 reflects the impact of rising market interest rates and low available housing inventory in our market areas.
During the quarter ended September 30, 2023, the Company sold $117.6 million of one-to-four-family loans compared to $127.0 million during the previous quarter and $142.3 million during the same quarter one year ago. Gross margins on home loan sales increased to 3.08% for the quarter ended September 30, 2023, compared to 3.07% in the previous quarter and increased from 2.85% in the same quarter one year ago. Gross margins are defined as the margin on loans sold (cash sales) without the impact of deferred costs.
Liabilities and Equity Summary
Changes in deposits at the dates indicated were as follows:
(Dollars in thousands)
September 30, 2023
June 30, 2023
Transactional deposits:
Amount
Percent
Amount
Percent
$ Change
% Change
Noninterest-bearing checking
$
643,670
26.2
%
$
658,440
27.9
%
$
(14,770
)
(2.2
)%
Interest-bearing checking (1)
219,468
8.9
183,012
7.7
36,456
19.9
Escrow accounts related to mortgages serviced (2)
26,489
1.1
16,772
0.7
9,717
57.9
Subtotal
889,627
36.2
858,224
36.3
31,403
3.7
Savings
157,901
6.4
169,013
7.2
(11,112
)
(6.6
)
Money market (3)
389,962
15.9
419,308
17.7
(29,346
)
(7.0
)
Subtotal
547,863
22.3
588,321
24.9
(40,458
)
(6.9
)
Certificates of deposit less than $100,000 (4)
527,032
21.5
473,026
20.0
54,006
11.4
Certificates of deposit of $100,000 through $250,000
406,545
16.6
358,238
15.1
48,307
13.5
Certificates of deposit of $250,000 and over
83,377
3.4
87,499
3.7
(4,122
)
(4.7
)
Subtotal
1,016,954
41.5
918,763
38.8
98,191
10.7
Total
$
2,454,444
100.0
%
$
2,365,308
100.0
%
$
89,136
3.8
%
(Dollars in thousands)
September 30, 2023
September 30, 2022
Transactional deposits:
Amount
Percent
Amount
Percent
$ Change
% Change
Noninterest-bearing checking
$
643,670
26.2
%
$
555,753
26.7
%
$
87,917
15.8
%
Interest-bearing checking (1)
219,468
8.9
147,968
7.1
71,500
48.3
Escrow accounts related to mortgages serviced (2)
26,489
1.1
25,859
1.2
630
2.4
Subtotal
889,627
36.2
729,580
35.0
160,047
21.9
Savings
157,901
6.4
143,612
6.9
14,289
9.9
Money market (3)
389,962
15.9
659,861
31.7
(269,899
)
(40.9
)
Subtotal
547,863
22.3
803,473
38.6
(255,610
)
(31.8
)
Certificates of deposit less than $100,000 (4)
527,032
21.5
345,227
16.6
181,805
52.7
Certificates of deposit of $100,000 through $250,000
406,545
16.6
133,429
6.4
273,116
204.7
Certificates of deposit of $250,000 and over
83,377
3.4
71,629
3.4
11,748
16.4
Subtotal
1,016,954
41.5
550,285
26.4
466,669
84.8
Total
$
2,454,444
100.0
%
$
2,083,338
100.0
%
$
371,106
17.8
%
(1)
Includes $50.1 million and $1.2 million of brokered deposits at September 30, 2023, and 2022, respectively, and no brokered deposits as of June 30, 2023.
(2)
Noninterest-bearing accounts.
(3)
Includes $51,000, $51,000 and $66.8 million of brokered deposits at September 30, 2023, June 30, 2023 and September 30, 2022, respectively.
(4)
Includes $323.3 million, $295.7 million and $256.6 million of brokered deposits at September 30, 2023, June 30, 2023 and September 30, 2022, respectively.
At September 30, 2023, CDs, which include retail and nonretail CDs, totaled $1.02 billion, compared to $918.8 million at June 30, 2023 and $550.3 million at September 30, 2022, with nonretail CDs representing 33.2%, 33.7% and 51.7% of total CDs at such dates, respectively. At September 30, 2023, nonretail CDs, which include brokered CDs, online CDs and public funds CDs, increased $27.2 million to $337.2 million, compared to $310.0 million at June 30, 2023, primarily due to an increase of $27.6 million in brokered CDs. Nonretail CDs totaled $337.2 million at September 30, 2023, compared to $284.4 million at September 30, 2022.
At September 30, 2023, the Bank had uninsured deposits of approximately $591.6 million, compared to approximately $587.6 million at June 30, 2023, and $600.4 million at September 30, 2022. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.
At September 30, 2023, borrowings totaled $121.9 million and were comprised of advances from the Federal Reserve Bank's Term Funding Program of $90.0 million, overnight borrowings of $28.0 million, and FHLB fixed-rate advances of $3.9 million. Borrowings decreased $78.0 million to $121.9 million at September 30, 2023, from $199.9 million at June 30, 2023, and decreased $138.9 million at from $260.8 million at September 30, 2022. The decrease was partially attributable to a shift in funding mix to brokered CDs.
Total stockholders’ equity increased $732,000 to $250.7 million at September 30, 2023, from $249.9 million at June 30, 2023, and increased $30.1 million, from $220.5 million at September 30, 2022. The increase in stockholders’ equity at September 30, 2023, compared to June 30, 2023, reflects net income of $9.0 million, partially offset by dividends paid of $1.9 million. In addition, stockholders’ equity was negatively impacted by unrealized net losses in securities available for sale of $9.2 million, net of tax, partially offset by unrealized net gains on fair value and cash flow hedges of $2.3 million, net of tax, reflecting changes in market interest rates during the quarter, resulting in a $7.0 million increase in accumulated other comprehensive loss. Book value per common share was $32.58 at September 30, 2023, compared to $32.71 at June 30, 2023, and $29.07 at September 30, 2022.
The Bank is considered well capitalized under the capital requirements established by the Federal Deposit Insurance Corporation (“FDIC”) with a total risk-based capital ratio of 13.1%, a Tier 1 leverage capital ratio of 10.3%, and a common equity Tier 1 (“CET1”) capital ratio of 11.8% at September 30, 2023.
The Company exceeded all regulatory capital requirements with a total risk-based capital ratio of 13.4%, a Tier 1 leverage capital ratio of 8.9%, and a CET1 ratio of 10.2% at September 30, 2023.
Credit Quality
The allowance for credit losses on loans (“ACLL”) totaled to $30.5 million, or 1.27% of gross loans receivable (excluding loans HFS) at September 30, 2023, compared to $30.4 million, or 1.28% of gross loans receivable (excluding loans HFS), at June 30, 2023, and $26.4 million, or 1.25% of gross loans receivable (excluding loans HFS), at September 30, 2022. The $151,000 increase in the ACLL at September 30, 2023, compared to the prior quarter was primarily due to an increase in loans. The $4.1 million increase in the ACLL at September 30, 2023, compared to the prior year was primarily due to organic loan growth and the addition of loans acquired in the Branch Acquisition. The allowance for credit losses on unfunded loan commitments decreased $149,000 to $1.8 million at September 30, 2023, compared to $1.9 million at June 30, 2023, and decreased $1.3 million from $3.1 million at September 30, 2022. The decreases were attributable to a decline in unfunded construction loan commitments at September 30, 2023.
Nonperforming loans decreased $3.7 million to $5.6 million at September 30, 2023, compared to $9.3 million at June 30, 2023, and decreased $2.6 million from $8.2 million at September 30, 2022. The decrease in nonperforming loans at September 30, 2023, from the prior quarter was primarily due to decreases in nonperforming commercial business loans of $3.5 million and indirect home improvement loans of $165,000. The decrease in nonperforming loans compared to the prior year was primarily due to decreases in commercial business loans of $4.3 million and one-to-four-family loans of $535,000, partially offset by increases in commercial real estate loans of $1.1 million, indirect home improvement loans of $1.0 million, and marine loans of $225,000. The decrease in the nonperforming commercial business loans between the periods was primarily attributable to a $3.5 million loan being upgraded to performing from nonperforming status.
Loans classified as substandard increased $2.8 million to $19.2 million at September 30, 2023, compared to $16.4 million at June 30, 2023, and increased $2.5 million from $16.6 million at September 30, 2022. The increase in substandard loans at September 30, 2023 compared to the prior quarter was primarily attributable to increases of $1.7 million in commercial real estate loans and $956,000 in one-to-four-family loans and compared to the prior year was primarily due to increases of $2.2 million in one-to-four-family loans, $1.0 million in indirect home improvement loans, and $225,000 in marine loans, partially offset by a decrease of $928,000 in commercial business loans. There was one other real estate owned property (“OREO”) in the amount of $570,000 (a closed branch in Centralia, Washington) at both September 30, 2023 and June 30, 2023, compared to one OREO in the amount of $145,000 at September 30, 2022.
Operating Results
Net interest income increased $3.1 million to $30.6 million for the three months ended September 30, 2023, from $27.5 million for the three months ended September 30, 2022, primarily as a result of an increase in interest income on loans. Total interest income for the three months ended September 30, 2023, increased $12.0 million compared to the same period last year, primarily due to an increase of $10.3 million in interest income on loans receivable, including fees, impacted primarily as a result of new loans being originated at higher rates and variable rate loans repricing higher following recent increases in market interest rates. Total interest expense for the three months ended September 30, 2023, increased $8.9 million compared to the same period last year, primarily as a result of higher market interest rates, higher utilization of borrowings and a shift in deposit mix from transactional accounts to higher cost CDs.
For the nine months ended September 30, 2023, net interest income increased $17.9 million to $92.8 million, from $75.0 million for the nine months ended September 30, 2022, for the same reasons described above for the three-month comparison, with an increase in interest income of $39.9 million and an increase in interest expense of $22.0 million.
NIM (annualized) decreased 20 basis points to 4.34% for the three months ended September 30, 2023, from 4.54% for the same period in the prior year and increased 17 basis points to 4.56% for the nine months ended September 30, 2023, from 4.39% for the nine months ended September 30, 2022. The changes in NIM for the three and nine months ended September 30, 2023 compared to the same period in 2022, reflects new loan originations at higher market interest rates and variable rate interest-earning assets repricing higher following recent increases in market interest rates, offset by the rising cost of deposits and borrowings. The benefit from higher rates and interest earning assets were partially offset by rising deposit and borrowing costs. Increases in average balances of higher costing CDs and borrowings placed additional pressure on the NIM, which resulted in a decrease for the three months ended September 30, 2023, compared to the same period in 2022.
The average total cost of funds, including noninterest-bearing checking, increased 124 basis points to 1.92% for the three months ended September 30, 2023, from 0.68% for the three months ended September 30, 2022. This increase was predominantly due to the rise in cost for market rates for deposits. The average cost of funds increased 108 basis points to 1.58% for the nine months ended September 30, 2023, from 0.50% for the nine months ended September 30, 2022, also reflecting increases in market interest rates over last year. Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.
For the three and nine months ended September 30, 2023, the provision for credit losses on loans was $683,000 and $4.1 million, respectively, compared to $2.0 million and $4.5 million for the three and nine months ended September 30, 2022. The provision for credit losses on loans reflects an increase in total loans receivable and net charge-offs in indirect home improvement and marine loans.
During the three months ended September 30, 2023, net charge-offs totaled $531,000, compared to $563,000 for the same period last year, primarily due to decreased net charge-offs of $388,000 in deposit overdrafts and $35,000 in marine loans, partially offset by net increases of $387,000 in indirect home improvement loans and $3,000 in other loans. Net charge-offs totaled $1.6 million during the nine months ended September 30, 2023, compared to $843,000 during the nine months ended September 30, 2022. This increase was primarily due to net charge-off increases of $972,000 in indirect home improvement loans, $164,000 in marine loans, $10,000 in home equity loans, and $2,000 in other loans, partially offset by a net decrease of $400,000 in deposit overdrafts charge-offs. Management attributes the increase in net charge-offs over the year primarily to volatile economic conditions.
Noninterest income increased $801,000 to $5.0 million for the three months ended September 30, 2023, from $4.2 million for the three months ended September 30, 2022. The increase reflects a $1.4 million increase in service charges and fee income, primarily as a result of less amortization of mortgage servicing rights reflecting increased market interest rates and increased servicing fees from non-portfolio serviced loans, and an increase of $473,000 in gain on sale of loans, partially offset by a $1.1 million decrease in other noninterest income. Noninterest income increased $622,000, to $15.0 million, for the nine months ended September 30, 2023, from $14.4 million for the nine months ended September 30, 2022. This increase was primarily the result of a $4.1 million increase in service charges and fee income, partially offset by decreases of $2.0 million in gain on sale of loans and $1.4 million in other noninterest income.
Noninterest expense increased $4.2 million to $23.6 million for the three months ended September 30, 2023, from $19.3 million for the three months ended September 30, 2022. The increase in noninterest expense was primarily a result of a $2.1 million increase in salaries and benefits largely due to the Branch Acquisition and growth in FTEs. Other increases included $829,000 in amortization of CDI, $597,000 in operations expense, $293,000 in data processing, $244,000 in occupancy expense, and $232,000 in marketing and advertising, offset by a decrease of $182,000 in loan costs.
Noninterest expense increased $14.0 million to $71.3 million for the nine months ended September 30, 2023, from $57.3 million for the nine months ended September 30, 2022 primarily for the same reasons stated above. Increases during the nine-month period ended September 30, 2023,as compared to the same period last year included $5.8 million in salaries and benefits, $2.1 million in operations, $2.0 million in amortization of CDI, $1.6 million in acquisition costs, $928,000 in FDIC insurance, $845,000 in occupancy, $729,000 in data processing, and $420,000 in marketing and advertising, offset by a decrease of $386,000 in professional and board fees.
About FS Bancorp
FS Bancorp, Inc., a Washington corporation, is the holding company for 1st Security Bank. The Bank provides loan and deposit services to customers who are predominantly small- and middle-market businesses and individuals in Washington and Oregon through its 27 Bank branches, one headquarters office that produces loans and accepts deposits, and loan production offices in various suburban communities in the greater Puget Sound area, the Kennewick-Pasco-Richland metropolitan area of Washington, also known as the Tri-Cities, and in Vancouver, Washington. The Bank services home mortgage customers throughout the Northwest predominantly in Washington State including the Puget Sound, Tri-Cities and Vancouver home lending markets.
Forward-Looking Statements
When used in this press release and in other documents filed with or furnished to the Securities and Exchange Commission (the “SEC”), in press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially from those currently expected or projected in these forward-looking statements. Factors that could cause the Company’s actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: potential adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels; labor shortages, the effects of inflation, a potential recession or slowed economic growth; changes in the interest rate environment, including the recent increases in the Federal Reserve benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity; the impact of continuing high inflation and the current and future monetary policies of the Federal Reserve in response thereto; the effects of any federal government shutdown; increased competitive pressures, changes in the interest rate environment, adverse changes in the securities markets, the Company’s ability to successfully realize the anticipated benefits of the Branch Acquisition, including customer acquisition and retention; the Company’s ability to execute its plans to grow its residential construction lending, mortgage banking, and warehouse lending operations, and the geographic expansion of its indirect home improvement lending; challenges arising from expanding into new geographic markets, products, or services; secondary market conditions for loans and the Company’s ability to originate loans for sale and sell loans in the secondary market; fluctuations in deposits; liquidity issues, including our ability to borrow funds or raise additional capital, if necessary; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; legislative and regulatory changes, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform critical processing functions for us; the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; and other factors described in the Company’s latest Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and other reports filed with and furnished to the SEC which are available on its website at www.fsbwa.com and on the SEC's website at www.sec.gov. Any of the forward-looking statements that the Company makes in this press release and in the other public statements are based upon management's beliefs and assumptions at the time they are made and may turn out to be incorrect because of the inaccurate assumptions the Company might make, because of the factors illustrated above or because of other factors that cannot be foreseen by the Company. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause the Company’s actual results for 2023 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of the Company and could negatively affect its operating and stock performance.
FS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts) (Unaudited)
Linked
Year
September 30,
June 30,
September 30,
Quarter
Over Year
2023
2023
2022
% Change
% Change
ASSETS
Cash and due from banks
$
18,137
$
17,573
$
11,541
3
57
Interest-bearing deposits at other financial institutions
62,536
114,526
148,256
(45
)
(58
)
Total cash and cash equivalents
80,673
132,099
159,797
(39
)
(50
)
Certificates of deposit at other financial institutions
17,636
14,747
4,960
20
256
Securities available-for-sale, at fair value
251,917
225,869
227,942
12
11
Securities held-to-maturity, net
8,455
8,469
8,469
—
—
Loans held for sale, at fair value
18,636
16,714
23,447
11
(21
)
Loans receivable, net
2,375,572
2,342,424
2,083,929
1
14
Accrued interest receivable
13,925
12,244
10,407
14
34
Premises and equipment, net
30,926
31,293
25,438
(1
)
22
Operating lease right-of-use
7,042
7,458
6,607
(6
)
7
Federal Home Loan Bank stock, at cost
3,696
6,555
13,591
(44
)
(73
)
Other real estate owned
570
570
145
—
293
Deferred tax asset, net
7,424
5,784
6,571
28
13
Bank owned life insurance (“BOLI”), net
37,480
37,247
36,578
1
2
Servicing rights, held at the lower of cost or fair value
17,657
17,627
18,470
—
(4
)
Goodwill
3,592
3,592
2,312
—
55
Core deposit intangible, net
18,323
19,325
3,542
(5
)
417
Other assets
26,548
23,604
19,933
12
33
TOTAL ASSETS
$
2,920,072
$
2,905,621
$
2,652,138
—
10
LIABILITIES
Deposits:
Noninterest-bearing accounts
$
670,158
$
675,211
$
581,612
(1
)
15
Interest-bearing accounts
1,784,286
1,690,097
1,501,726
6
19
Total deposits
2,454,444
2,365,308
2,083,338
4
18
Borrowings
121,895
199,896
260,828
(39
)
(53
)
Subordinated notes:
Principal amount
50,000
50,000
50,000
—
—
Unamortized debt issuance costs
(489
)
(506
)
(556
)
(3
)
(12
)
Total subordinated notes less unamortized debt issuance costs
49,511
49,494
49,444
—
—
Operating lease liability
7,269
7,690
6,836
(5
)
6
Other liabilities
36,288
33,300
31,145
9
17
Total liabilities
2,669,407
2,655,688
2,431,591
1
10
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued or outstanding
—
—
—
—
—
Common stock, $.01 par value; 45,000,000 shares authorized; 7,796,095 shares issued and outstanding at September 30, 2023, 7,753,607 at June 30, 2023, and 7,704,373 at September 30, 2022
78
77
77
1
1
Additional paid-in capital
57,464
56,781
53,769
1
7
Retained earnings
222,532
215,519
195,986
3
14
Accumulated other comprehensive loss, net of tax
(29,409
)
(22,444
)
(29,285
)
31
—
Total stockholders’ equity
250,665
249,933
220,547
—
14
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,920,072
$
2,905,621
$
2,652,138
—
10
FS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited)
Three Months Ended
Qtr
Year
September 30,
June 30,
September 30,
Over Qtr
Over Year
2023
2023
2022
% Change
% Change
INTEREST INCOME
Loans receivable, including fees
$
39,874
$
38,216
$
29,563
4
35
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions
3,396
2,651
1,741
28
95
Total interest and dividend income
43,270
40,867
31,304
6
38
INTEREST EXPENSE
Deposits
10,462
7,610
2,596
37
303
Borrowings
1,689
1,219
696
39
143
Subordinated notes
485
486
485
—
—
Total interest expense
12,636
9,315
3,777
36
235
NET INTEREST INCOME
30,634
31,552
27,527
(3
)
11
PROVISION FOR CREDIT LOSSES
548
716
1,718
(23
)
(68
)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
30,086
30,836
25,809
(2
)
17
NONINTEREST INCOME
Service charges and fee income
2,882
2,862
1,511
1
91
Gain on sale of loans
1,875
1,947
1,402
(4
)
34
Earnings on cash surrender value of BOLI
233
227
221
3
5
Other noninterest income
(8
)
(203
)
1,047
(96
)
(101
)
Total noninterest income
4,982
4,833
4,181
3
19
NONINTEREST EXPENSE
Salaries and benefits
13,503
13,513
11,402
—
18
Operations
3,409
3,643
2,812
(6
)
21
Occupancy
1,588
1,562
1,344
2
18
Data processing
1,841
1,683
1,548
9
19
Loan costs
564
1,043
746
(46
)
(24
)
Professional and board fees
666
657
631
1
6
Federal Deposit Insurance Corporation (“FDIC”) insurance
561
591
462
(5
)
21
Marketing and advertising
452
430
220
5
105
Acquisition costs
—
61
—
NM
—
Amortization of core deposit intangible
1,002
1,023
173
(2
)
479
Recovery of servicing rights
—
(2
)
—
NM
—
Total noninterest expense
23,586
24,204
19,338
(3
)
22
INCOME BEFORE PROVISION FOR INCOME TAXES
11,482
11,465
10,652
—
8
PROVISION FOR INCOME TAXES
2,529
2,349
2,194
8
15
NET INCOME
$
8,953
$
9,116
$
8,458
(2
)
6
Basic earnings per share
$
1.15
$
1.17
$
1.09
(2
)
6
Diluted earnings per share
$
1.13
$
1.16
$
1.08
(3
)
5
FS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited)
Nine Months Ended
Year
September 30,
September 30,
Over Year
2023
2022
% Change
INTEREST INCOME
Loans receivable, including fees
$
114,082
$
77,885
46
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions
8,667
4,990
74
Total interest and dividend income
122,749
82,875
48
INTEREST EXPENSE
Deposits
24,696
5,438
354
Borrowings
3,749
1,003
274
Subordinated note
1,456
1,456
—
Total interest expense
29,901
7,897
279
NET INTEREST INCOME
92,848
74,978
24
PROVISION FOR CREDIT LOSSES
3,372
4,632
(27
)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
89,476
70,346
27
NONINTEREST INCOME
Service charges and fee income
8,352
4,286
95
Gain on sale of loans
5,298
7,325
(28
)
Earnings on cash surrender value of BOLI
681
654
4
Other noninterest income
703
2,147
(67
)
Total noninterest income
15,034
14,412
4
NONINTEREST EXPENSE
Salaries and benefits
40,880
35,110
16
Operations
9,744
7,656
27
Occupancy
4,670
3,825
22
Data processing
5,092
4,363
17
Loan costs
2,077
2,020
3
Professional and board fees
2,001
2,387
(16
)
FDIC insurance
1,732
804
115
Marketing and advertising
1,072
652
64
Acquisition costs
1,562
—
—
Amortization of core deposit intangible
2,484
518
380
Recovery of servicing rights
—
(1
)
NM
Total noninterest expense
71,314
57,334
24
INCOME BEFORE PROVISION FOR INCOME TAXES
33,196
27,424
21
PROVISION FOR INCOME TAXES
6,915
5,397
28
NET INCOME
$
26,281
$
22,027
19
Basic earnings per share
$
3.38
$
2.77
22
Diluted earnings per share
$
3.33
$
2.73
22
KEY FINANCIAL RATIOS AND DATA (Unaudited)
For the Three Months Ended
September 30,
June 30,
September 30,
2023
2023
2022
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average total assets) (1)
1.22
%
1.29
%
1.36
%
Return on equity (ratio of net income to average equity) (1)
13.81
14.82
14.72
Yield on average interest-earning assets (1)
6.13
6.04
5.16
Average total cost of funds (1)
1.92
1.48
0.68
Interest rate spread information – average during period
4.21
4.56
4.48
Net interest margin (1)
4.34
4.66
4.54
Operating expense to average total assets (1)
3.23
3.42
3.10
Average interest-earning assets to average interest-bearing liabilities (1)
145.14
147.90
147.92
Efficiency ratio (2)
66.22
66.52
60.99
For the Nine Months Ended
September 30,
September 30,
2023
2022
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average total assets) (1)
1.25
%
1.25
%
Return on equity (ratio of net income to average equity) (1)
14.13
12.51
Yield on average interest-earning assets (1)
6.03
4.86
Average total cost of funds (1)
1.58
0.50
Interest rate spread information – average during period
4.45
4.36
Net interest margin (1)
4.56
4.39
Operating expense to average total assets (1)
3.39
3.25
Average interest-earning assets to average interest-bearing liabilities
146.23
151.52
Efficiency ratio (2)
66.10
64.14
September 30,
June 30,
September 30,
2023
2023
2022
ASSET QUALITY RATIOS AND DATA:
Nonperforming assets to total assets at end of period (3)
0.21
%
0.34
%
0.32
%
Nonperforming loans to total gross loans (excluding loans held for sale) (4)
0.23
0.39
0.39
Allowance for credit losses – loans to nonperforming loans (4)
493.46
327.75
315.35
Allowance for credit losses – loans to total gross loans (excluding loans held for sale)
1.27
1.28
1.25
At or For the Three Months Ended
September 30,
June 30,
September 30,
2023
2023
2022
PER COMMON SHARE DATA:
Basic earnings per share
$
1.15
$
1.17
$
1.09
Diluted earnings per share
$
1.13
$
1.16
$
1.08
Weighted average basic shares outstanding
7,667,981
7,637,210
7,605,360
Weighted average diluted shares outstanding
7,780,430
7,746,336
7,707,762
Common shares outstanding at end of period
7,693,951
(5)
7,641,342
(6)
7,585,843
(7)
Book value per share using common shares outstanding
$
32.58
$
32.71
$
29.07
Tangible book value per share using common shares outstanding (8)
$
29.73
$
29.71
$
28.30
(1)
Annualized.
(2)
Total noninterest expense as a percentage of net interest income and total noninterest income.
(3)
Nonperforming assets consist of nonperforming loans (which include nonaccruing loans and accruing loans more than 90 days past due), foreclosed real estate and other repossessed assets.
(4)
Nonperforming loans consist of nonaccruing loans and accruing loans 90 days or more past due.
(5)
Common shares were calculated using shares outstanding of 7,796,095 at September 30, 2023, less 102,144 unvested restricted stock shares.
(6)
Common shares were calculated using shares outstanding of 7,753,607 at June 30, 2023, less 112,265 unvested restricted stock shares.
(7)
Common shares were calculated using shares outstanding of 7,704,373 at September 30, 2022, less 118,530 unvested restricted stock shares.
(8)
Represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” below.
(Dollars in thousands)
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
QTR Over QTR
Year Over Year
Average Balances
2023
2022
2023
2022
$ Change
$ Change
Assets
Loans receivable, net (1)
$
2,423,691
$
2,083,561
$
2,362,885
$
1,953,305
$
340,130
$
409,580
Securities available-for-sale, at amortized cost
294,148
277,006
276,835
279,395
17,142
(2,560
)
Securities held-to-maturity
8,500
8,500
8,500
7,943
-
557
Interest-bearing deposits and certificates of deposit at other financial institutions
68,369
29,080
67,163
34,705
39,289
32,458
FHLB stock, at cost
4,626
7,924
5,190
5,716
(3,298
)
(526
)
Total interest-earning assets
2,799,334
2,406,071
2,720,573
2,281,064
393,263
439,509
Noninterest-earning assets
102,052
93,911
88,936
95,302
8,141
(6,366
)
Total assets
$
2,901,386
$
2,499,982
$
2,809,509
$
2,376,366
$
401,404
$
433,143
Liabilities
Interest-bearing accounts
$
1,741,257
$
1,458,047
$
1,703,688
$
1,391,181
$
283,210
$
312,507
Borrowings
138,013
119,150
107,254
64,855
18,863
42,399
Subordinated notes
49,500
49,434
49,484
49,417
66
67
Total interest-bearing liabilities
1,928,770
1,626,631
1,860,426
1,505,453
302,139
354,973
Noninterest-bearing accounts
676,000
588,492
664,319
588,172
87,508
76,147
Other noninterest-bearing liabilities
39,365
32,654
36,095
31,342
6,711
4,753
Total liabilities
$
2,644,135
$
2,247,777
$
2,560,840
$
2,124,967
$
396,358
$
435,873
(1) Includes loans HFS.
Non-GAAP Financial Measures:
In addition to financial results presented in accordance with generally accepted accounting principles utilized in the United States (“GAAP”), this earnings release presents non-GAAP financial measures that include tangible book value per share and tangible common equity ratio. Management believes that providing the Company’s tangible book value per share and tangible common equity ratio is consistent with the capital treatment utilized by the investment community, which excludes intangible assets from the calculation of risk-based capital ratios and facilitates comparison of the quality and composition of the Company's capital over time and in comparison to its competitors. Where applicable, the Company has also presented comparable GAAP information.
These non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. They should not be considered in isolation or as a substitute for total stockholders' equity or operating results determined in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.
Reconciliation of the GAAP book value per share and common equity ratio and the non-GAAP tangible book value per share and tangible common equity ratio is presented below.
(Dollars in thousands, except share and per share amounts)
September 30,
June 30,
September 30,
Tangible Book Value Per Share:
2023
2023
2022
Stockholders' equity (GAAP)
$
250,665
$
249,933
$
220,547
Less: goodwill and core deposit intangible, net
(21,915
)
(22,917
)
(5,854
)
Tangible common stockholders' equity (non-GAAP)
$
228,750
$
227,016
$
214,693
Common shares outstanding at end of period
7,693,951
7,641,342
7,585,843
Book value per share (GAAP)
$
32.58
$
32.71
$
29.07
Tangible book value per share (non-GAAP)
$
29.73
$
29.71
$
28.30
Tangible Common Equity Ratio:
Total assets (GAAP)
$
2,920,072
$
2,905,621
$
2,652,138
Less: goodwill and core deposit intangible assets
(21,915
)
(22,917
)
(5,854
)
Tangible assets (non-GAAP)
$
2,898,157
$
2,882,704
$
2,646,284
Common equity ratio (GAAP)
8.58
%
8.60
%
8.32
%
Tangible common equity ratio (non-GAAP)
7.89
7.88
8.11
Contacts: Joseph C. Adams, Chief Executive Officer Matthew D. Mullet, Chief Financial Officer (425) 771-5299 www.FSBWA.com
FS Bancorp, Inc. is the holding company for 1st Security Bank of Washington (the Bank). The Bank provides loan and deposit services to customers who are predominantly small- and middle-market businesses and individuals in Washington and Oregon. The Bank has two segments: commercial and consumer banking and home lending. The commercial and consumer banking segment provides diversified financial products and services to its commercial and consumer customers through the Bank branches, online banking platforms, mobile banking apps, and telephone banking. These products and services include deposit products, residential, consumer, business and commercial real estate lending portfolios, and cash management services. The home lending segment originates one-to-four-family residential mortgage loans primarily for sale in the secondary markets, as well as loans held for investment. A majority of these mortgage loans are sold to or securitized by FNMA, FHLMC, GNMA or the FHLB of Des Moines.