FS Bancorp, Inc. (FSBW) - Q3 2024 10-Q Summary
Business Context and Reporting Period
FS Bancorp, Inc. is the holding company for 1st Security Bank of Washington, a community-based savings bank operating 27 branches in the Puget Sound area, Tri-Cities, Washington, and the Oregon Coast. The company operates two primary segments: Commercial and Consumer Banking, and Home Lending. This report covers the quarterly period ended September 30, 2024.
Key Financial Metrics
| Metric | Q3 2024 (Three Months) | Q3 2023 (Three Months) | YTD 2024 (Nine Months) | YTD 2023 (Nine Months) |
|---|---|---|---|---|
| Net Income | $10.3 million | $9.0 million | $27.6 million | $26.3 million |
| Diluted EPS | $1.29 | $1.13 | $3.45 | $3.33 |
| Net Interest Income | $31.2 million | $30.6 million | $92.0 million | $92.8 million |
| Net Interest Margin (NIM) | 4.35% | 4.34% | 4.30% | 4.56% |
| Provision for Credit Losses | $1.5 million | $0.5 million | $4.0 million | $3.4 million |
| Total Assets | $2.97 billion | $2.90 billion (Avg) | $2.97 billion (End) | $2.81 billion (Avg) |
| Total Deposits | $2.43 billion | $2.52 billion (End 2023) | $2.43 billion (End) | $2.52 billion (End 2023) |
| Stockholders' Equity | $288.9 million | $250.7 million (End 2023) | $288.9 million (End) | $250.7 million (End 2023) |
| Book Value Per Share | $37.45 | $34.36 (End 2023) | $37.45 (End) | $34.36 (End 2023) |
Material Changes vs. Prior Period
- Profitability: Net income increased 14.8% year-over-year for the quarter, driven by a significant tax benefit from the purchase of alternative energy tax credits ($2.3 million gain) and a 19.8% increase in noninterest income.
- Interest Rates: Net interest margin remained stable at 4.35% for the quarter but declined 26 basis points year-to-date to 4.30%. This compression was caused by a 94 basis point increase in the cost of interest-bearing liabilities (to 3.09%) outpacing the 41 basis point increase in yield on earning assets.
- Asset Quality: The provision for credit losses increased to $1.5 million in Q3 (from $0.5 million in Q3 2023) due to elevated net charge-offs, particularly in indirect home improvement loans ($1.0 million increase in net charge-offs). Nonperforming loans decreased slightly to $10.8 million (0.43% of gross loans).
- Balance Sheet: Total deposits decreased $95.0 million from year-end 2023, primarily due to a reduction in brokered deposits ($111.0 million decrease) as the company shifted funding to FHLB borrowings. Conversely, borrowings increased $70.1 million to $163.8 million.
- Noninterest Income: Increased $1.9 million year-to-date, highlighted by an $8.4 million gain on the sale of Mortgage Servicing Rights (MSRs), partially offset by a $7.8 million loss on the sale of investment securities.
Guidance, Outlook, and Risks
- Capital Position: The Bank remains "well capitalized," exceeding all regulatory requirements. Tier 1 leverage capital ratio is 11.18%, and Total Risk-Based Capital ratio is 14.17%.
- Liquidity: The company maintains strong liquidity with $531.6 million in unused FHLB borrowing capacity and $275.4 million in FRB line of credit availability. Cash and cash equivalents totaled $40.3 million.
- Capital Allocation: The company continues to return capital to shareholders. A new $5.0 million stock repurchase program was authorized in July 2024. The quarterly dividend remains at $0.27 per share.
- Risks: Management highlights risks related to economic conditions (inflation, recession), interest rate volatility affecting NIM and MSR valuations, and credit quality in the indirect home improvement loan portfolio. The company notes that a decline in economic conditions could materially increase the allowance for credit losses.
- Unusual Items: The Q3 tax provision was a benefit of $0.4 million (vs. expense of $2.5 million in Q3 2023) due to the purchase of energy tax credits under the Inflation Reduction Act.
Investor Verification Checklist
- Tax Credit Impact: Verify the sustainability of the tax benefit derived from energy credits, as this significantly boosted Q3 net income and reduced the effective tax rate to negative 4.3%.
- Deposit Mix Shift: Monitor the trend of brokered deposit runoff and the associated increase in borrowing costs (FHLB advances) to assess long-term funding stability.
- Consumer Loan Charge-offs: Review the trajectory of net charge-offs in the indirect home improvement portfolio, which drove the increase in the provision for credit losses.
- MSR Valuation: Assess the volatility in Mortgage Servicing Rights (MSRs) valuations, which resulted in a $0.5 million impairment in Q3 and significant gains from sales YTD.
- Stock Repurchase Execution: Track the execution of the new $5.0 million repurchase program authorized in July 2024.