FS Bancorp, Inc. Reports First Quarter Net Income of $8.4 Million or $1.06 Per Diluted Share and Its Board of Directors Declares Forty-Fifth Consecutive Quarterly Dividend

MOUNTLAKE TERRACE, Wash., April 24, 2024 (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 2024 first quarter net income of $8.4 million, or $1.06 per diluted share, compared to $8.2 million, or $1.04 per diluted share, for the comparable quarter one year ago. 

“We are proud to report a $1.83 increase in our tangible book value per share, a stabilization of our net interest margin, and our continued focus on growing our award-winning culture during the first quarter,” stated Joe Adams, CEO. “We are also pleased that our Board of Directors approved our forty-fifth consecutive quarterly cash dividend of $0.26 per share, demonstrating our continued commitment to enhancing shareholder value.  The cash dividend will be paid on May 23, 2024, to shareholders of record as of May 9, 2024,” concluded Adams.

2024 First Quarter Highlights

• Net income was $8.4 million for the first quarter of 2024, compared to $9.8 million in the previous quarter, and $8.2 million for the comparable quarter one year ago;
• As an investment strategy to mitigate realized investment losses noted below, during the first quarter of 2024, the Company sold a portion of its mortgage servicing rights (“MSRs”) resulting in a pre-tax gain of $8.2 million. The MSRs related to mortgages with Fannie Mae and Freddie Mac serviced loans with an aggregate principal balance of approximately $1.29 billion;
• Offsetting the gain noted above, the Company sold longer duration investment securities with amortized cost of $52.0 million in the first quarter of 2024, resulting in an $8.0 million pre-tax loss. The proceeds were utilized to purchase securities and other liquid assets;
• Net interest margin (“NIM”) expanded to 4.26% for the first quarter of 2024, compared to 4.24% in the previous quarter, and compressed from 4.70% for the comparable quarter one year ago;
• Loans receivable, net increased $13.9 million, or 0.6%, to $2.42 billion at March 31, 2024, compared to $2.40 billion at December 31, 2023, and increased $115.7 million, or 5.0%, from $2.30 billion at March 31, 2023;
• Consumer loans, of which 88.0% are home improvement loans, were relatively static in the first quarter of 2024 with a total of $646.1 million at March 31, 2024, compared to $646.8 million in the previous quarter, and increased $39.5 million, or 6.5%, from $606.7 million in the comparable quarter one year ago. Yields on consumer loans improved 0.17% to 7.22% from 7.05% at the end of the fourth quarter 2023. During the three months ended March 31, 2024, consumer loan originations included 74.1% of home improvement loans originated with a Fair Isaac Corporation (“FICO”) score above 720 and 86.4% of home improvement loans with a UCC-2 security filing;
• The allowance for credit losses on loans (“ACLL”) was $31.5 million, or 1.29% of gross loans receivable at March 31, 2024, compared to $31.5 million, or 1.30% at December 31, 2023, and $29.9 million, or 1.29% at March 31, 2023;
• Total deposits decreased $57.0 million, or 2.3%, to $2.47 billion at March 31, 2024 compared to $2.52 billion at December 31, 2023 and increased $22.0 million, or 0.9%, from $2.44 billion at March 31, 2023. Noninterest-bearing deposits were $646.9 million at March 31, 2024, $670.8 million at December 31, 2023, and $746.9 million at March 31, 2023;
• Total deposits, excluding brokered deposits, increased $35.2 million for the three months ended March 31, 2024, compared to $9.8 million of growth in the prior quarter, and $8.2 million of growth in the first quarter of 2023 (less acquired deposits from the acquisition of seven bank branches from Columbia State Bank in the first quarter of 2023). See “Non-GAAP Financial Measures;”
• Segment reporting in the first quarter of 2024 reflected net income of $8.2 million for the Commercial and Consumer Banking segment and $246,000 for the Home Lending segment, compared to net income of $10.0 million and a net loss of $254,000 in the prior quarter, and net income of $7.3 million and $873,000 in the first quarter of 2023, respectively. The gain on sale of MSRs and offsetting loss on sale of investment securities were allocated to the Commercial and Consumer Banking segment;
• The percentage of available unencumbered cash and secured borrowing capacity at the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank to uninsured deposits was 223% at March 31, 2024, compared to 224% in the prior quarter. The average deposit size per FDIC-insured account at the Bank was $33,000 for both March 31, 2024 and December 31, 2023;
• Regulatory capital ratios at the Bank were 13.7% for total risk-based capital and 10.6% for Tier 1 leverage capital at March 31, 2024, compared to 13.4% for total risk-based capital and 10.4% for Tier 1 leverage capital at December 31, 2023; and
• Tangible book value per share increased $1.83 to $33.47 at March 31, 2024, compared to $31.64 at December 31, 2023, and increased $4.92 from $28.55 at March 31, 2023. See, “Non-GAAP Financial Measures.”

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 Company reflected the sale of servicing rights as a gain to the Commercial and Consumer Bank segment to offset the realized loss on investment securities and, over the next 48 months, will allocate the gain as intercompany income from the Commercial and Consumer Banking segment to the Home Lending segment on a straight-line basis.

The tables below provide a summary of segment reporting at or for the three months ended March 31, 2024 and 2023 (dollars in thousands):

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Asset Summary

Total assets were $2.97 billion at both March 31, 2024, and December 31, 2023, and increased $186.9 million, or 6.7%, from $2.78 billion at March 31, 2023.  The changes in total assets at March 31, 2024, compared to December 31, 2023, included increases of $24.3 million in loans HFS, $13.9 million in loans receivable, net, and $3.6 million in other assets, partially offset by decreases of $20.3 million in total cash and cash equivalents, $13.3 million in securities available-for-sale, $8.1 million in MSRs HFS, and $1.9 million in deferred tax asset, net.  The increase in total assets at March 31, 2024, compared to March 31, 2023, was primarily due to increases in loans receivable, net of $115.7 million, securities available-for-sale of $47.3 million, loans HFS of $26.6 million, certificates of deposit at other financial institutions of $18.5 million, and other assets of $6.2 million. These increases were partially offset by decreases in total cash and cash equivalents of $12.8 million, MSRs of $8.6 million, core deposit intangible, net of $3.9 million, premises and equipment of $1.5 million, operating lease right-of-use of $1.2 million and deferred tax asset, net of $1.0 million.

Loans receivable, net increased $13.9 million to $2.42 billion at March 31, 2024, from $2.40 billion at December 31, 2023, and increased $115.7 million from $2.30 billion at March 31, 2023. Total real estate loans increased $5.8 million to $1.54 billion at March 31, 2024, compared to December 31, 2023, reflecting increases in one-to-four-family loans (excluding loans HFS) of $12.3 million and home equity loans of $3.8 million, partially offset by decreases in commercial real estate (“CRE”) loans of $7.3 million, construction and development loans of $1.7 million, and multi-family loans of $1.4 million. Similarly, commercial business loans increased $8.7 million to $264.5 million at March 31, 2024, compared to December 31, 2023, resulting from an increase of $18.1 million in C&I loans and a decrease of $9.5 million in warehouse lending.  Consumer loans decreased $621,000 to $646.1 million at March 31, 2024, compared to December 31, 2023, resulting from a $1.1 million decrease in indirect home improvement loans and $131,000 in other consumer loans, partially offset by an increase of $611,000 in marine loans.

A breakdown of CRE loans at the dates indicated were as follows:

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The following tables includes CRE loans repricing or maturing within the next two years, excluding loans that reprice simultaneously with changes to the prime rate:

A breakdown of construction loans at the dates indicated were as follows:

Originations of one-to-four-family loans to purchase and refinance a home for the periods indicated were as follows:

During the quarter ended March 31, 2024, the Company sold $93.9 million of one-to-four-family loans compared to $87.5 million during the previous quarter and $77.3 million during the same quarter one year ago. Gross margins on home loan sales increased to 3.43% for the quarter ended March 31, 2024, compared to 3.09% in the previous quarter and increased from 3.05% 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:

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At March 31, 2024, certificates of deposit (“CDs”), which include retail and non-retail CDs, totaled $1.11 billion, compared to $1.10 billion at December 31, 2023 and $774.4 million at March 31, 2023, with non-retail CDs representing 31.0%, 34.2% and 37.5% of total CDs at such dates, respectively. At March 31, 2024, non-retail CDs, which include brokered CDs, online CDs and public funds CDs, decreased $30.0 million to $344.5 million, compared to $374.5 million at December 31, 2023, primarily due to a decrease of $30.0 million in brokered CDs. Non-retail CDs totaled $344.5 million at March 31, 2024, compared to $290.4 million at March 31, 2023.

At March 31, 2024, the Bank had uninsured deposits of approximately $614.1 million, compared to approximately $606.5 million at December 31, 2023, and $633.4 million at March 31, 2023.  The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

At March 31, 2024, borrowings totaled $129.9 million and were comprised of advances from the Federal Reserve Bank’s Term Funding Program of $89.9 million, Federal Reserve Bank borrowings of $23.0 million, and FHLB fixed-rate advances of $17.1 million.  Borrowings increased $36.2 million to $129.9 million at March 31, 2024, from $93.7 million at December 31, 2023, and increased $122.4 million from $7.5 million at March 31, 2023.  The increase was partially attributable to the decrease in total deposits.

Total stockholders’ equity increased $13.4 million to $277.9 million at March 31, 2024, from $264.5 million at December 31, 2023, and increased $36.1 million, from $241.8 million at March 31, 2023. The increase in stockholders’ equity at March 31, 2024, compared to December 31, 2023, reflects net income of $8.4 million, partially offset by dividends paid of $2.0 million. In addition, stockholders’ equity was positively impacted by decreases in unrealized net losses on securities available for sale of $4.3 million, net of tax, and unrealized net gains on fair value and cash flow hedges of $2.6 million, net of tax, reflecting sales of investment securities and changes in market interest rates during the quarter, resulting in a $6.9 million improvement in accumulated other comprehensive loss. Book value per common share was $36.06 at March 31, 2024, compared to $34.36 at December 31, 2023, and $31.69 at March 31, 2023.

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 13.7%, a Tier 1 leverage capital ratio of 10.6%, and a common equity Tier 1 (“CET1”) capital ratio of 12.5% at March 31, 2024.

The Company exceeded all regulatory capital requirements with a total risk-based capital ratio of 14.1%, a Tier 1 leverage capital ratio of 9.2%, and a CET1 ratio of 10.9% at March 31, 2024.

Credit Quality

The ACLL was $31.5 million, or 1.29% of gross loans receivable (excluding loans HFS) at March 31, 2024, compared to $31.5 million, or 1.30% of gross loans receivable (excluding loans HFS), at December 31, 2023, and $29.9 million, or 1.29% of gross loans receivable (excluding loans HFS), at March 31, 2023. The $1.5 million increase in the ACLL at March 31, 2024, compared to the prior year was primarily due to organic loan growth and increases in nonperforming loans and net charge-offs. The allowance for credit losses on unfunded loan commitments was $1.5 million at both March 31, 2024 and December 31, 2023, and decreased $800,000 from $2.3 million at March 31, 2023. This decrease was attributable to a decline in unfunded construction loan commitments at March 31, 2024.

Nonperforming loans increased $1.2 million to $12.1 million at March 31, 2024, compared to $11.0 million at December 31, 2023, and increased $3.4 million from $8.7 million at March 31, 2023. The increase in nonperforming loans at March 31, 2024, from the prior quarter was primarily due to increases in nonperforming commercial business loans of $659,000 and indirect home improvement loans of $332,000. The increase in nonperforming loans compared to the prior year was primarily due to increases in construction and development loans of $4.7 million, CRE loans of $1.1 million, and indirect home improvement loans of $922,000, partially offset by decreases in commercial business loans of $3.0 million and one-to-four family loans of $474,000. Classified loans totaled $24.9 million, at March 31, 2024, all of which were classified as substandard, compared to classified loans of $24.9 million at December 31, 2023, of which $24.5 million were classified as substandard and $399,000 were classified as doubtful and classified loans of $19.6 million at March 31, 2023, all of which were substandard loans.  The increase in substandard loans at March 31, 2024 compared to the prior year was primarily due to increases of $4.7 million in construction and development loans and $922,000 in indirect home improvement loans, partially offset by a decrease of $904,000 in CRE loans. There were no other real estate owned (“OREO”) properties at both March 31, 2024 and December 31, 2023, compared to one OREO property (a closed branch in Centralia) in the amount of $570,000 at March 31, 2023.

Operating Results

Net interest income decreased $316,000 to $30.3 million for the three months ended March 31, 2024, from $30.7 million for the three months ended March 31, 2023, due to an increase in interest expense on deposits, partially offset by an increase in interest and dividend income. Total interest income for the three months ended March 31, 2024, increased $6.3 million compared to the same period last year, primarily due to an increase of $5.0 million in interest income on loans receivable, including fees, primarily as a result of new loans being originated at higher rates and variable rate loans repricing higher following increased market interest rates during the first six months of 2023. Total interest expense for the three months ended March 31, 2024, increased $6.6 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.

NIM decreased 44 basis points to 4.26% for the three months ended March 31, 2024, from 4.70% for the same period in the prior year.  The change in NIM for the three months ended March 31, 2024 compared to the same period in 2023, reflects the increased costs of deposits and borrowings, which outpaced the increased yields earned on interest-earning assets. 

The average total cost of funds, including noninterest-bearing checking, increased 89 basis points to 2.21% for the three months ended March 31, 2024, from 1.32% for the three months ended March 31, 2023. This increase was predominantly due to higher market rates for deposits. Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.

For the three months ended March 31, 2024, the provision for credit losses on loans was $1.4 million, compared to $2.4 million for the three months ended March 31, 2023. The provision for credit losses on loans reflects an increase in the loan portfolio, as well as an increase in nonperforming loans and higher net charge-offs during the period.

During the three months ended March 31, 2024, net charge-offs totaled $1.5 million, compared to $410,000 for the same period last year, primarily due to increased net charge-offs of $441,000 in indirect home improvement loans, $408,000 in commercial business loans, and $169,000 in marine loans. Management attributes the increase in net charge-offs over the year primarily to volatile economic conditions.

Noninterest income decreased $108,000 to $5.1 million for the three months ended March 31, 2024, from $5.2 million for the three months ended March 31, 2023. The decrease reflects an $8.0 million loss on sale of investment securities resulting from management’s strategic decision to increase yields earned on and reduce the duration of the securities portfolio, and a $650,000 decrease in other noninterest income primarily due to fair value adjustments in the loan portfolio, partially offset by an $8.2 million increase in gain on sale of MSRs and a $362,000 gain on sale of loans. 

Noninterest expense was $23.5 million for both the three months ended March 31, 2024 and 2023. The variations in noninterest expense were primarily due to the absence of acquisition costs in the current period, in contrast to $1.5 million incurred in the prior year.  Additionally, there was a decrease of $307,000 in salaries and benefits, partially offset by increases of $482,000 in amortization of core deposit intangible, $390,000 in data processing, $316,000 in operations, $245,000 in professional and board fees, $185,000 in occupancy expense, and $115,000 in loan costs. 

About FS Bancorp

FS Bancorp, Inc., a Washington corporation, is the holding company for 1st Security Bank of Washington. 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 past 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 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; volatility in the mortgage industry; 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 or 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 2024 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.

KEY FINANCIAL RATIOS AND DATA (Unaudited)

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(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 total organic deposits, tangible book value per share, and tangible common equity ratio. Management believes that providing total organic deposit growth illustrates the Company’s commitment to expand its unique brand within the communities it serves by excluding brokered deposits and deposits acquired. Management also 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 deposits and the non-GAAP organic deposits with changes between the periods is presented below:

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.

Contacts:
Joseph C. Adams,
Chief Executive Officer
Matthew D. Mullet,
Chief Financial Officer
(425) 771-5299
www.FSBWA.com