FS Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022. FS Bancorp is the parent of 1st Security Bank, a community bank operating in the Pacific Northwest and in multiple states through indirect consumer lending and home lending.
Financial performance and condition
| Metric | Q3 2023 / September 30, 2023 | Comparable period / change |
|---|---|---|
| Net income | $9.0 million; diluted EPS $1.13 | $8.5 million and $1.08 diluted EPS in Q3 2022 |
| Net interest income | $30.6 million | $27.5 million in Q3 2022 |
| Net interest margin | 4.34% | 4.54% in Q3 2022 |
| Noninterest income / expense | $5.0 million / $23.6 million | $4.2 million / $19.3 million in Q3 2022 |
| Efficiency ratio | 66.22% | 60.99% in Q3 2022 |
| Net income, nine months | $26.3 million; diluted EPS $3.33 | $22.0 million and $2.73 diluted EPS in 2022 |
| Net interest margin, nine months | 4.56% | 4.39% in 2022 |
| Total assets | $2.92 billion | $2.63 billion at December 31, 2022 |
| Net loans / gross loans | $2.38 billion / $2.41 billion | Net loans were $2.19 billion at December 31, 2022 |
| Deposits / borrowings | $2.45 billion / $121.9 million | $2.13 billion / $186.5 million at December 31, 2022 |
| Cash and cash equivalents | $80.7 million | $41.4 million at December 31, 2022 |
| Stockholders’ equity | $250.7 million; book value per share $32.58 | $231.7 million; $30.42 at December 31, 2022 |
| Operating cash flow, nine months | $65.0 million | $163.9 million in 2022; cash at period-end was $80.7 million versus $159.8 million |
Material changes and notable items
- Net income increased in both the quarter and year-to-date periods. For Q3, higher net interest income, lower credit-loss provision, and higher noninterest income more than offset higher expenses and taxes. For nine months, net interest income rose $17.9 million, while noninterest expense increased $14.0 million.
- The February 2023 purchase of seven Columbia State Bank branches added approximately $425 million of deposits, $63 million of loans at acquisition-date fair value, branch facilities, and a $17.4 million core deposit intangible. Acquisition-related expenses were $1.6 million for the first nine months. Acquired-branch revenue and expenses are not separately available in the filing.
- Loan growth reflected increases in one-to-four-family, commercial real estate, consumer, and commercial business lending, partly offset by lower construction and development and warehouse balances. Gross loans grew to $2.41 billion from $2.22 billion at year-end.
- Q3 interest income benefited from higher loan balances and yields, while deposit and borrowing costs rose sharply. Q3 net interest margin declined 20 basis points year over year; the nine-month margin increased 17 basis points. Management attributed the cost pressure in part to depositors shifting toward higher-cost CDs.
- Home lending volumes were lower: nine-month one-to-four-family originations were $421.8 million, down 39.5%; loan sales were $320.9 million versus $639.0 million. Gross margin on home loan sales improved to 3.07% from 2.85%.
- Credit indicators included $5.6 million of nonaccrual loans, down from $8.7 million at year-end, and nonperforming loans equal to 0.23% of gross loans versus 0.39%. The loan ACL was $30.5 million, or 1.27% of gross loans, compared with $28.0 million, or 1.26%, at year-end. Nine-month net loan charge-offs rose to $1.6 million from $843,000.
- Available-for-sale securities had $52.0 million of gross unrealized losses at September 30; accumulated other comprehensive loss was $29.4 million, versus $25.6 million at year-end. Management said the securities losses were principally market-related, considered temporary, and that it did not intend, nor expect to be required, to sell before recovery or maturity.
- Deposits grew by $326.7 million from year-end, principally reflecting the branch acquisition; money-market and savings balances fell as customers moved funds to CDs and other alternatives. Estimated uninsured deposits were $591.6 million, or 24.1% of deposits. Brokered deposits totaled $373.5 million.
- At September 30, the Bank had $121.9 million in borrowings, including $90 million from the Federal Reserve’s Bank Term Funding Program (BTFP). The filing reports no unused BTFP capacity; it reports $667.7 million of unused FHLB capacity and a $222.3 million Federal Reserve line, as well as $101 million in correspondent federal-funds lines.
- The Bank was classified as well capitalized. Its total risk-based, Tier 1 risk-based, Tier 1 leverage, and CET1 ratios were 13.06%, 11.81%, 10.26%, and 11.81%, respectively.
Outlook, risks, and contingencies
- The filing provides no specific earnings, margin, growth, or credit-loss guidance. Management described its priorities as loan diversification and growth, asset quality, lower-cost core deposits, broader customer relationships, and market expansion. It expects to continue quarterly dividends at the current $0.25 per share, subject to board discretion.
- Management cited risks from persistent inflation, interest rates and funding costs, recession or slower growth, real estate market deterioration, loan delinquencies and charge-offs, deposit competition and outflows, and the ability to realize branch-acquisition benefits and integrate operations. It also highlighted mortgage secondary-market conditions, indirect home-improvement dealer concentration, valuation assumptions, and technology, vendor, regulatory, and other operational risks.
- Five contractor/dealers accounted for 65.5% of funded indirect home-improvement loan volume in Q3; the company funded $39.0 million of these loans during the quarter.
- Outstanding commitments to extend credit were $548.5 million. The company also reported limited-recourse exposure on certain sold loans and a $2.1 million reserve for potential repurchases or indemnification. Management reported no material pending legal actions and stated that ordinary-course legal proceedings were not expected to materially affect the company.
- Management concluded disclosure controls were effective as of September 30, 2023; no significant changes in internal control over financial reporting were reported for the quarter. The filing states there were no material changes to previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether branch integration delivers expected deposit retention, revenue benefits, and expense savings, given higher operating costs and the lack of separately reported acquired-branch results.
- Deposit pricing, CD maturities (including $338.8 million due in the remainder of 2023), brokered and uninsured deposit levels, and reliance on borrowing facilities for liquidity.
- Trends in net interest margin as funding costs reprice, and whether loan yields and volumes can offset deposit and borrowing expense.
- Credit performance and reserve adequacy, particularly indirect home-improvement and marine charge-offs, commercial real estate exposure, and the impact of economic conditions.
- Interest-rate sensitivity and the securities portfolio’s unrealized losses, including the assumptions supporting management’s expectation that losses are temporary.
- Home-lending sales volumes, mortgage-servicing-rights valuation sensitivity, and the concentration of indirect lending among a small number of dealers.