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FS Bancorp, Inc. Reports Net Income for the Third Quarter of $8.5 Million or $1.08 Per Diluted Share and the Thirty-Ninth Consecutive Quarterly Dividend
ソース: Nasdaq GlobeNewswire / 26 10 2022 16:00:01 America/Chicago
MOUNTLAKE TERRACE, Wash., Oct. 26, 2022 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (NASDAQ: FSBW) (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2022 third quarter net income of $8.5 million, or $1.08 per diluted share, compared to $8.3 million, or $0.98 per diluted share for the same quarter last year. For the nine months ended September 30, 2022, net income was $22.0 million, or $2.73 per diluted share, compared to net income of $28.8 million, or $3.31 per diluted share, for the comparable nine-month period in 2021.
“Continued loan growth in the third quarter was a result of disciplined credit culture and a focus on hiring employees that understand 1st Security Bank’s commitment to relationships, risk management, and partnering with customers in our communities,” stated Joe Adams, CEO. “We are also pleased that our Board of Directors approved our thirty-ninth consecutive quarterly cash dividend. The quarterly dividend of $0.20 will be paid on November 23, 2022, to shareholders of record as of November 9, 2022.”
“Organic loan growth was partially funded by loan pool sales during the quarter which supplemented deposit growth,” noted Matthew Mullet, CFO. “Net interest margin expansion was a result of loan growth and assets that have repriced faster than deposit liabilities.”
2022 Third Quarter Highlights
- Net income was $8.5 million for the third quarter of 2022, compared to $6.7 million in the previous quarter, and $8.3 million for the comparable quarter one year ago;
- Net interest margin (“NIM”) improved to 4.54%, compared to 4.39% for the previous quarter, and 4.23% for the comparable quarter one year ago;
- Repurchased 74,073 shares of our common stock during the third quarter at an average price of $30.22 per common share;
- Loans receivable, net increased $137.9 million, or 7.1%, to $2.08 billion at September 30, 2022, compared to $1.95 billion at June 30, 2022, and increased $405.9 million, or 24.2% from $1.68 billion at September 30, 2021;
- Consumer loans, of which 86.3% are home improvement loans, increased $33.2 million, or 6.8%, to $518.6 million at September 30, 2022, compared to $485.3 million in the previous quarter and increased $107.5 million, or 26.1% from $411.1 million in the comparable quarter one year ago. During the three months ended September 30, 2022, originations in the consumer portfolio included 80.8% of home improvement loans originated with a Fair Isaac and Company, Incorporated (“FICO”) score above 720 and 87.9% of home improvement loans with a UCC-2 security filing;
- Segment reporting reflected $9.3 million of net income for the Commercial and Consumer Banking segment and $794,000 of net loss for the Home Lending segment in the third quarter of 2022, compared to $4.5 million and $3.8 million of net income in the third quarter of 2021, respectively; and
- Capital levels at the Bank were 13.7% for total risk-based capital and 11.5% for Tier 1 leverage capital at September 30, 2022.
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 are a summary of segment reporting for the three and nine months ended September 30, 2022 and 2021:
At or For the Three Months Ended September 30, 2022 Condensed income statement: Commercial
and Consumer
BankingHome Lending Total Net interest income (1) $ 24,620 $ 2,907 $ 27,527 (Provision) benefit for credit losses (2) (1,811 ) 93 (1,718 ) Noninterest income (3) 3,314 867 4,181 Noninterest expense (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 Full-time employees ("FTEs") 389 140 529 At or For the Three Months Ended September 30, 2021 Condensed income statement: Commercial
and Consumer
BankingHome Lending Total Net interest income (1) $ 20,377 $ 2,278 $ 22,655 (Provision) benefit for loan losses (2) (1,986 ) 1,986 — Noninterest income (3) 1,959 6,439 8,398 Noninterest expense (14,404 ) (5,612 ) (20,016 ) Income before provision for income taxes 5,946 5,091 11,037 Provision for income taxes (1,462 ) (1,244 ) (2,706 ) Net income $ 4,484 $ 3,847 $ 8,331 Total average assets for period ended $ 1,799,890 $ 417,763 $ 2,217,653 FTEs 373 154 527 At or For the Nine Months Ended September 30, 2022 Commercial and Consumer Condensed income statement: Banking Home Lending Total Net interest income (1) $ 66,983 $ 7,995 $ 74,978 Provision for loan losses (2) (3,727 ) (905 ) (4,632 ) Noninterest income (3) 7,944 6,468 14,412 Noninterest expense (42,878 ) (14,456 ) (57,334 ) Income (loss) before provision 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 At or For the Nine Months Ended September 30, 2021 Commercial and Consumer Condensed income statement: Banking Home Lending Total Net interest income (1) $ 57,829 $ 6,146 $ 63,975 (Provision) benefit for loan losses (2) (3,045 ) 1,545 (1,500 ) Noninterest income (3) 6,546 23,072 29,618 Noninterest expense (41,151 ) (14,132 ) (55,283 ) Income before provision for income taxes 20,179 16,631 36,810 Provision for income taxes (4,411 ) (3,636 ) (8,047 ) Net income $ 15,768 $ 12,995 $ 28,763 Total average assets for period ended $ 1,771,216 $ 402,693 $ 2,173,909 FTEs 373 154 527 __________________________
(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) Provision for credit losses as calculated using the Current Expected Credit Loss (“CECL”) method adopted January 1, 2022, and provision for loan losses as calculated using the previous incurred loss method in 2021. The change in methodology reflects shifts in allocation between segments due to various changes, adjustments to qualitative factors, changes in loan balances, and charge-off and recovery activity.
(3) Noninterest income includes activity from certain residential mortgage loans that were initially originated for sale and measured at fair value; after origination, the loans were 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, 2022, the Company recorded net decreases in fair value of $816,000 and $1.8 million, as compared to net decreases in fair value of $19,000 and $55,000 for the three and nine months ended September 30, 2021, respectively. For loans originated as held for sale and transferred into loans held for investment, the fair value is determined based on quoted secondary market prices for similar loans. As of September 30, 2022 and December 31, 2021, there were $14.2 million and $16.1 million, respectively, in residential mortgage loans recorded at fair value as they were previously transferred from held for sale to loans held for investment.Asset Summary
Total assets increased $252.9 million, or 10.5%, to $2.65 billion at September 30, 2022, compared to $2.40 billion at June 30, 2022, and increased $423.4 million, or 19.0%, from $2.23 billion at September 30, 2021. The quarter over linked quarter increase in total assets was primarily due to increases in loans receivable, net of $137.9 million, total cash and cash equivalents of $131.1 million, Federal Home Loan Bank (“FHLB”) stock of $7.3 million, and other assets of $3.6 million, partially offset by decreases in securities available-for-sale of $19.9 million and loans held for sale (“HFS”) of $11.5 million. The year over year increase was primarily due to increases in loans receivable, net of $405.9 million, cash and cash equivalents of $131.5 million, other assets of $8.8 million, FHLB stock of $8.7 million, and deferred tax asset, net of $6.3 million, partially offset by decreases in loans HFS of $94.7 million, securities available-for-sale of $40.9 million, and certificates of deposit (“CDs”) at other financial institutions of $6.8 million.
LOAN PORTFOLIO (Dollars in thousands) September 30, 2022 June 30, 2022 September 30, 2021 Amount Percent Amount Percent Amount Percent REAL ESTATE LOANS Commercial $ 310,923 14.7 % $ 299,181 15.2 % $ 217,568 12.8 % Construction and development 335,177 15.9 304,387 15.4 248,239 14.5 Home equity 53,681 2.6 49,292 2.5 42,554 2.5 One-to-four-family (excludes HFS) 429,196 20.3 390,791 19.8 365,155 21.4 Multi-family 223,712 10.6 204,862 10.4 164,731 9.7 Total real estate loans 1,352,689 64.1 1,248,513 63.3 1,038,247 60.9 CONSUMER LOANS Indirect home improvement 447,462 21.2 396,459 20.1 321,741 18.9 Marine 68,106 3.2 85,806 4.4 86,086 5.0 Other consumer 2,987 0.2 3,062 0.2 3,267 0.2 Total consumer loans 518,555 24.6 485,327 24.7 411,094 24.1 COMMERCIAL BUSINESS LOANS Commercial and industrial 211,009 10.0 203,331 10.3 206,483 12.1 Warehouse lending 28,102 1.3 33,868 1.7 49,144 2.9 Total commercial business loans 239,111 11.3 237,199 12.0 255,627 15.0 Total loans receivable, gross 2,110,355 100.0 % 1,971,039 100.0 % 1,704,968 100.0 % Allowance for credit losses on loans (1) (26,426 ) (24,967 ) (26,925 ) Total loans receivable, net $ 2,083,929 $ 1,946,072 $ 1,678,043 ____________________________
(1) Allowance in 2022 reported using the CECL method, all 2021 and prior periods’ allowance are reported in accordance with previous GAAP using the incurred loss method.
Loans receivable, net increased $137.9 million to $2.08 billion at September 30, 2022, from $1.95 billion at June 30, 2022, and increased $405.9 million from $1.68 billion at September 30, 2021. The quarter over linked quarter increase in total real estate loans was $104.2 million, including increases in one-to-four-family loans of $38.4 million, construction and development loans of $30.8 million, multi-family loans of $18.9 million, commercial real estate loans of $11.7 million and home equity loans of $4.4 million. Consumer loans increased $33.2 million, primarily due to an increase of $51.0 million in indirect home improvement loans, partially offset by a decrease of $17.7 million in marine loans, primarily due to the sale of $25.6 million of these loans (servicing released) in the third quarter. Commercial business loans increased $1.9 million, as a result of an increase of $7.7 million in commercial and industrial lending, partially offset by a decrease of $5.8 million in warehouse lending.Originations of one-to-four-family loans to purchase and to refinance a home for the three months ended September 30, 2022 and June 30, 2022, and for the three and nine months ended September 30, 2022 and 2021 were as follows:
(Dollars in thousands) For the Three Months Ended For the Three Months Ended Quarter Quarter September 30, 2022 June 30, 2022 over Quarter over Quarter Amount Percent Amount Percent $ Change % Change Purchase $ 172,639 89.1 % $ 223,675 86.4 % $ (51,036 ) (22.8 ) Refinance 21,096 10.9 35,074 13.6 (13,978 ) (39.9 ) Total $ 193,735 100.0 % $ 258,749 100.0 % $ (65,014 ) (25.1 ) (Dollars in thousands) For the Three Months Ended For the Three Months Ended Year Year September 30, 2022 September 30, 2021 over Year over Year Amount Percent Amount Percent $ Change % Change Purchase $ 172,639 89.1 % $ 243,721 64.0 % $ (71,082 ) (29.2 ) Refinance 21,096 10.9 136,803 36.0 (115,707 ) (84.6 ) Total $ 193,735 100.0 % $ 380,524 100.0 % $ (186,789 ) (49.1 ) (Dollars in thousands) For the Nine Months Ended For the Nine Months Ended Year Year September 30, 2022 September 30, 2021 over Year over Year Amount Percent Amount Percent $ Change % Change Purchase $ 549,259 78.7 % $ 682,181 56.3 % $ (132,922 ) (19.5 ) Refinance 148,335 21.3 529,705 43.7 (381,370 ) (72.0 ) Total $ 697,594 100.0 % $ 1,211,886 100.0 % $ (514,292 ) (42.4 ) During the quarter ended September 30, 2022, the Company sold $142.3 million of one-to-four-family loans compared to sales of $196.3 million during the previous quarter, and sales of $319.9 million during the same quarter one year ago. The decrease in purchase and refinance activity compared to the prior quarter reflects the impact of rising market interest rates.
The Company also sold $25.6 million of marine loans and $12.9 million of one-to-four-family portfolio loans during the third quarter with gains on sale of $358,000 and $238,000, respectively, to supplement liquidity.
Gross margins on home loan sales decreased to 2.85% for the quarter ended September 30, 2022, compared to 3.10% in the previous quarter and decreased from 3.61% 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 are as follows:
(Dollars in thousands) September 30, 2022 June 30, 2022 Transactional deposits: Amount Percent Amount Percent $ Change % Change Noninterest-bearing checking $ 555,753 26.7 % $ 571,942 28.4 % $ (16,189 ) (2.8 ) Interest-bearing checking (1) 147,968 7.1 158,607 7.8 (10,639 ) (6.7 ) Escrow accounts related to mortgages serviced 25,859 1.2 16,422 0.8 9,437 57.5 Subtotal 729,580 35.0 746,971 37.0 (17,391 ) (2.3 ) Savings 143,612 6.9 156,313 7.8 (12,701 ) (8.1 ) Money market (2) 659,861 31.7 680,246 33.7 (20,385 ) (3.0 ) Subtotal 803,473 38.6 836,559 41.5 (33,086 ) (4.0 ) Certificates of deposit less than $100,000 (3) 345,227 16.6 262,199 13.0 83,028 31.7 Certificates of deposit of $100,000 through $250,000 133,429 6.4 116,559 5.8 16,870 14.5 Certificates of deposit of $250,000 and over 71,629 3.4 53,812 2.7 17,817 33.1 Subtotal 550,285 26.4 432,570 21.5 117,715 27.2 Total $ 2,083,338 100.0 % $ 2,016,100 100.0 % $ 67,238 3.3 (Dollars in thousands) September 30, 2022 September 30, 2021 Transactional deposits: Amount Percent Amount Percent $ Change % Change Noninterest-bearing checking (4) $ 555,753 26.7 % $ 536,952 28.8 % $ 18,801 3.5 Interest-bearing checking (1)(4) 147,968 7.1 194,281 10.4 (46,313 ) (23.8 ) Escrow accounts related to mortgages serviced 25,859 1.2 23,515 1.3 2,344 10.0 Subtotal 729,580 35.0 754,748 40.5 (25,168 ) (3.3 ) Savings 143,612 6.9 191,487 10.3 (47,875 ) (25.0 ) Money market (2) 659,861 31.7 497,571 26.7 162,290 32.6 Subtotal 803,473 38.6 689,058 37.0 114,415 16.6 Certificates of deposit less than $100,000 (3) 345,227 16.6 231,453 12.4 113,774 49.2 Certificates of deposit of $100,000 through $250,000 133,429 6.4 126,095 6.8 7,334 5.8 Certificates of deposit of $250,000 and over 71,629 3.4 62,296 3.3 9,333 15.0 Subtotal 550,285 26.4 419,844 22.5 130,441 31.1 Total $ 2,083,338 100.0 % $ 1,863,650 100.0 % $ 219,688 11.8 _________________________
(1) Includes $1.2 million of brokered deposits at both September 30, 2022 and June 30, 2022, and $60.0 million of brokered deposits at September 30, 2021.
(2) Includes $66.8 million, $78.8 million, and $5.0 million of brokered deposits at September 30, 2022, June 30, 2022, and September 30, 2021, respectively.
(3) Includes $256.6 million, $180.3 million, and $135.5 million of brokered deposits at September 30, 2022, June 30, 2022, and September 30, 2021, respectively.
(4) Prior presentation of interest-bearing checking balances was revised due to the misclassification of certain checking products in previous periods. As a result of the misclassification, interest-bearing checking balances of $113.9 million as of September 30, 2021, were reclassified to noninterest-bearing checking for comparative purposes. Balances as of the dates and average values included herein have been updated to reflect the reclassification.At September 30, 2022, nonretail CDs, which include brokered CDs, online CDs, and public funds CDs, increased $76.6 million to $284.4 million, compared to $207.8 million at June 30, 2022, due to an increase of $76.3 million in brokered CDs. The year over year increase in nonretail CDs of $131.8 million from $152.6 million at September 30, 2021, was primarily the result of a $121.0 million increase in brokered CDs.
At September 30, 2022, borrowings comprised of FHLB advances increased $182.8 million, or 234.3%, to $260.8 million from $78.0 million at June 30, 2022, and increased $218.3 million, or 513.3% from $42.5 million at September 30, 2021.
Total stockholders’ equity decreased $2.1 million, to $220.5 million at September 30, 2022, from $222.6 million at June 30, 2022, and decreased $19.9 million, from $240.5 million at September 30, 2021. The decrease in stockholders’ equity during the current quarter reflects net income of $8.5 million, partially offset by share repurchases totaling $2.2 million, and dividends paid of $1.5 million. In addition, stockholders’ equity was adversely impacted by increased unrealized losses in securities available-for-sale of $11.4 million, net of tax, reflecting increases in market interest rates during the quarter, partially offset by unrealized gains on fair value and cash flow hedges of $3.8 million, net of tax, resulting in a net $7.6 million increase in accumulated other comprehensive loss, net of tax. The Company repurchased 74,073 shares of its common stock at an average price of $30.22 per share. Book value per common share was $29.07 at September 30, 2022, compared to $29.27 at June 30, 2022, and $29.78 at September 30, 2021.
The Bank is well capitalized under the minimum 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 11.5%, and a common equity Tier 1 (“CET1”) capital ratio of 12.5% at September 30, 2022.
The Company exceeded all regulatory capital requirements with a total risk-based capital ratio of 14.0%, a Tier 1 leverage capital ratio of 9.8%, and a CET1 ratio of 10.6% at September 30, 2022.
Credit Quality
The allowance for credit losses on loans (“ACLL”) at September 30, 2022, increased to $26.4 million, or 1.25% of gross loans receivable, excluding loans HFS, compared to $25.0 million, or 1.27% of gross loans receivable, excluding loans HFS at June 30, 2022, and decreased from $26.9 million, or 1.58% of gross loans receivable, excluding loans HFS, at September 30, 2021. The quarter over quarter increase of $1.4 million in the ACLL was primarily due to the increase in loans and increased reserves on individually evaluated nonaccrual commercial business loans. The year over year decrease in the ACLL was primarily due to the one-time cumulative-effect adjustment of $2.9 million as of the CECL adoption date of January 1, 2022, partially offset by an increase of $2.4 million in the ACLL due to the growth in loans. The allowance for credit losses on unfunded loan commitments decreased $305,000 to $3.1 million at September 30, 2022, compared to $3.4 million at June 30, 2022, and increased $2.6 million from $496,000 at September 30, 2021. The year over year increase was primarily due to the one-time cumulative-effect adjustment of $2.4 million as of the CECL adoption date and increases in unfunded loan commitments.
Nonperforming loans increased $1.6 million to $8.2 million at September 30, 2022, from $6.7 million at June 30, 2022, and increased $2.3 million from $5.9 million at September 30, 2021. The increase in nonperforming loans quarter over linked quarter and year over year was primarily due to an increase in nonperforming commercial business loans.
Loans classified as substandard increased $6.0 million to $16.6 million at September 30, 2022, compared to $10.6 million at June 30, 2022, and decreased $900,000 from $17.5 million at September 30, 2021. The quarter over linked quarter increase in substandard loans was attributable to increases of $3.6 million in commercial real estate loans and $2.3 million in commercial and industrial loans. The year over year decrease in substandard loans was primarily due to decreases of $1.8 million in commercial and industrial loans and $1.5 million in one-to-four-family loans, partially offset by an increase of $2.6 million in commercial real estate loans. There was one other real estate owned (“OREO”) property in the amount of $145,000 at September 30, 2022, and at June 30, 2022, compared to none at September 30, 2021.
At September 30, 2022, the Company had two commercial business loans totaling $3.8 million classified as troubled debt restructured (“TDRs”) loans, compared to none at June 30, 2022 and at September 30, 2021. These TDRs were nonaccrual loans at September 30, 2022 and December 31, 2021.
Operating Results
Net interest income increased $4.9 million, to $27.5 million for the three months ended September 30, 2022, from $22.7 million for the three months ended September 30, 2021. This comparable quarter over quarter increase was primarily the result of an improved mix of loans versus other interest-bearing assets and increased balances in higher yielding loans. Interest income increased $6.3 million, primarily due to an increase of $6.0 million in interest income on loans receivable, including fees, impacted primarily by loan growth. Interest expense increased $1.4 million, primarily as a result of higher market interest rates and increased borrowings.
For the nine months ended September 30, 2022, net interest income increased by $11.0 million, to $75.0 million, from $64.0 million for the nine months ended September 30, 2021 for the same reasons as for the three-month comparison described above, with an increase in interest income of $11.3 million and a slight increase in interest expense of $284,000.
NIM increased 31 basis points to 4.54% for the three months ended September 30, 2022, from 4.23% for the same period in the prior year, and increased 28 basis points to 4.39% for the nine months ended September 30, 2022, from 4.11% for the nine months ended September 30, 2021. The increase in NIM between both the three and nine months ended September 30, 2022 and 2021, respectively, reflects new loan originations at higher market interest rates, variable rate interest-earning assets repricing higher following recent increases in market interest rates, and an improved asset mix of higher yielding assets as low yielding excess cash funded higher yielding loans.
The average total cost of funds, including noninterest-bearing checking, increased 20 basis points to 0.68% for the three months ended September 30, 2022, from 0.48% for the three months ended September 30, 2021. This increase was predominantly due to the rise in cost for market rate deposits and an increase in higher cost borrowings. The average cost of funds decreased three basis points to 0.50% for the nine months ended September 30, 2022, from 0.53% for the nine months ended September 30, 2021, partially due to runoff of higher cost retail CDs during the prior period, resulting in less interest expense this period. 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, 2022, the provision for credit losses on loans was $2.0 million and $4.5 million, respectively, compared to none and $1.5 million for the three and nine months ended September 30, 2021, respectively, as calculated under the prior incurred loss methodology. The provision for credit losses on loans reflects the increase in total loans receivable and increased reserves on individually evaluated nonaccrual commercial business loans.
For the three and nine months ended September 30, 2022, the (benefit) provision for credit losses on unfunded commitments was ($305,000) and $180,000, respectively, compared to provisions of $159,000 and $614,000, for the three and nine months ended September 30, 2021, respectively.
During the three months ended September 30, 2022, net charge-offs totaled $563,000, compared to $309,000 for the same period last year. The increase in net charge-offs was primarily due to a net charge-off increase of $373,000 in other consumer loans (which includes deposit overdraft net charge-offs of $396,000), partially offset by reductions in charge-offs of $99,000 in indirect home improvement loans and $19,000 in marine loans. Net charge-offs totaled $843,000 during the nine months ended September 30, 2022, compared to $747,000 during the nine months ended September 30, 2021. This increase was primarily due to a net charge-off increase of $325,000 in other consumer loans (which includes an increase in deposit overdraft net charge-offs of $333,000), partially offset by reductions in net charge-offs of $187,000 in indirect home improvement loans, $38,000 in commercial business loans, and $4,000 in marine loans.
Noninterest income decreased $4.2 million, to $4.2 million, for the three months ended September 30, 2022, from $8.4 million for the three months ended September 30, 2021. The decrease from the same period last year primarily reflects a $5.5 million decrease in gain on sale of loans due to a reduction in origination and sales volume of loans HFS and a reduction in gross margins of sold loans, partially offset by increases of $825,000 in other noninterest income primarily from bank owned life insurance (“BOLI”) death benefits and $438,000 in service charges and fee income as a result of less amortization of mortgage servicing rights reflecting increased market interest rates and increased servicing fees from non-portfolio serviced loans. Noninterest income decreased $15.2 million, to $14.4 million, for the nine months ended September 30, 2022, from $29.6 million for the nine months ended September 30, 2021. This decrease was primarily the result of a $17.6 million decrease in gain on sale of loans, partially offset by increases of $1.3 million in service charges and fee income and $1.2 million in other noninterest income due primarily to the same reasons as for the three-month comparison described above.
Noninterest expense decreased $678,000, to $19.3 million for the three months ended September 30, 2022, from $20.0 million for the three months ended September 30, 2021. The decrease in noninterest expense primarily reflects a reduction of $1.4 million in salaries and benefits, primarily due to a reduction in incentive compensation. Noninterest expense increased $2.1 million, to $57.3 million for the nine months ended September 30, 2022, from $55.3 million for the nine months ended September 30, 2021. The increase as compared to the same period last year was primarily due to a reduction in the recovery of servicing rights to $1,000 from $2.1 million, along with increases of $544,000 in data processing, $313,000 in FDIC insurance, $233,000 in occupancy, and $223,000 in marketing and advertising, partially offset by a decrease of $1.2 million in salaries and benefits, primarily due to a reduction in incentive compensation and employee stock option plan expense.
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 Western Washington through its 21 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 Tri-Cities, and in Vancouver, Washington. The Bank services home mortgage customers throughout Washington State with an emphasis in 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 caused by increasing political instability from acts of war, including Russia’s invasion of Ukraine, as well as increasing oil prices and supply chain disruptions, and any governmental or societal response to the COVID-19 pandemic, including the possibility of new COVID-19 variants, 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; legislative and regulatory changes, including as a result of the COVID-19 pandemic; and other factors described in the Company’s latest Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and other filings with 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 2022 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 2022 2022 2021 % Change % Change ASSETS Cash and due from banks $ 11,541 $ 12,708 $ 11,426 (9 ) 1 Interest-bearing deposits at other financial institutions 148,256 15,951 16,906 829 777 Total cash and cash equivalents 159,797 28,659 28,332 458 464 Certificates of deposit at other financial institutions 4,960 4,960 11,782 — (58 ) Securities available-for-sale, at fair value 227,942 247,832 268,802 (8 ) (15 ) Securities held-to-maturity, net 8,469 8,469 7,500 — 13 Loans held for sale, at fair value 23,447 34,989 118,106 (33 ) (80 ) Loans receivable, net 2,083,929 1,946,072 1,678,043 7 24 Accrued interest receivable 10,407 8,553 7,797 22 33 Premises and equipment, net 25,438 25,740 27,243 (1 ) (7 ) Operating lease right-of-use 6,607 4,850 4,875 36 36 Federal Home Loan Bank (“FHLB”) stock, at cost 13,591 6,295 4,871 116 179 Other real estate owned (“OREO”) 145 145 — — — Deferred tax asset, net 6,571 4,709 303 40 2,069 Bank owned life insurance (“BOLI”), net 36,578 37,106 36,873 (1 ) (1 ) Servicing rights, held at the lower of cost or fair value 18,470 18,516 16,497 — 12 Goodwill 2,312 2,312 2,312 — — Core deposit intangible, net 3,542 3,715 4,220 (5 ) (16 ) Other assets 19,933 16,317 11,138 22 79 TOTAL ASSETS $ 2,652,138 $ 2,399,239 $ 2,228,694 11 19 LIABILITIES Deposits: Noninterest-bearing accounts $ 581,612 $ 588,364 $ 560,467 (1 ) 4 Interest-bearing accounts 1,501,726 1,427,736 1,303,183 5 15 Total deposits 2,083,338 2,016,100 1,863,650 3 12 Borrowings 260,828 78,028 42,528 234 513 Subordinated notes: Principal amount 50,000 50,000 50,000 — — Unamortized debt issuance costs (556 ) (573 ) (623 ) (3 ) (11 ) Total subordinated notes less unamortized debt issuance costs 49,444 49,427 49,377 — — Operating lease liability 6,836 5,081 5,097 35 34 Other liabilities 31,145 27,962 27,589 11 13 Total liabilities 2,431,591 2,176,598 1,988,241 12 22 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; 7,704,373 shares issued and outstanding at September 30, 2022, 7,726,232 at June 30, 2022, and 8,208,045 at September 30, 2021 77 77 82 — (6 ) Additional paid-in capital 53,769 55,129 68,481 (2 ) (21 ) Retained earnings 195,986 189,075 171,786 4 14 Accumulated other comprehensive (loss) income, net of tax (29,285 ) (21,640 ) 198 35 (14,890 ) Unearned shares – Employee Stock Ownership Plan (“ESOP”) — — (94 ) — (100 ) Total stockholders’ equity 220,547 222,641 240,453 (1 ) (8 ) TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,652,138 $ 2,399,239 $ 2,228,694 11 19 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 2022 2022 2021 % Change % Change INTEREST INCOME Loans receivable, including fees $ 29,563 $ 25,275 $ 23,520 17 26 Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions 1,741 1,670 1,487 4 17 Total interest and dividend income 31,304 26,945 25,007 16 25 INTEREST EXPENSE Deposits 2,596 1,557 1,629 67 59 Borrowings 696 174 227 300 207 Subordinated notes 485 485 496 — (2 ) Total interest expense 3,777 2,216 2,352 70 61 NET INTEREST INCOME 27,527 24,729 22,655 11 22 PROVISION FOR CREDIT LOSSES 1,718 1,871 — (8 ) — NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 25,809 22,858 22,655 13 14 NONINTEREST INCOME Service charges and fee income 1,511 1,762 1,073 (14 ) 41 Gain on sale of loans 1,402 2,066 6,885 (32 ) (80 ) Earnings on cash surrender value of BOLI 221 216 218 2 1 Other noninterest income 1,047 311 222 237 372 Total noninterest income 4,181 4,355 8,398 (4 ) (50 ) NONINTEREST EXPENSE Salaries and benefits 11,402 11,736 12,790 (3 ) (11 ) Operations 2,812 2,365 2,628 19 7 Occupancy 1,344 1,258 1,227 7 10 Data processing 1,548 1,455 1,309 6 18 Loan costs 746 751 842 (1 ) (11 ) Professional and board fees 631 763 757 (17 ) (17 ) Federal Deposit Insurance Corporation (“FDIC”) insurance 462 185 120 150 285 Marketing and advertising 220 244 177 (10 ) 24 Amortization of core deposit intangible 173 172 177 1 (2 ) (Recovery) impairment of servicing rights — — (11 ) — NM Total noninterest expense 19,338 18,929 20,016 2 (3 ) INCOME BEFORE PROVISION FOR INCOME TAXES 10,652 8,284 11,037 29 (3 ) PROVISION FOR INCOME TAXES 2,194 1,585 2,706 38 (19 ) NET INCOME $ 8,458 $ 6,699 $ 8,331 26 2 Basic earnings per share (1) $ 1.09 $ 0.84 $ 1.01 30 8 Diluted earnings per share (1) $ 1.08 $ 0.83 $ 0.98 30 10 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 2022 2021 % Change INTEREST INCOME Loans receivable, including fees $ 77,885 $ 67,538 15 Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions 4,990 4,050 23 Total interest and dividend income 82,875 71,588 16 INTEREST EXPENSE Deposits 5,438 5,481 (1 ) Borrowings 1,003 895 12 Subordinated note 1,456 1,237 18 Total interest expense 7,897 7,613 4 NET INTEREST INCOME 74,978 63,975 17 PROVISION FOR CREDIT LOSSES 4,632 1,500 209 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 70,346 62,475 13 NONINTEREST INCOME Service charges and fee income 4,286 3,026 42 Gain on sale of loans 7,325 24,962 (71 ) Earnings on cash surrender value of BOLI 654 647 1 Other noninterest income 2,147 983 118 Total noninterest income 14,412 29,618 (51 ) NONINTEREST EXPENSE Salaries and benefits 35,110 36,331 (3 ) Operations 7,656 7,760 (1 ) Occupancy 3,825 3,592 6 Data processing 4,363 3,819 14 Loss on sale of OREO — 9 NM Loan costs 2,020 2,013 — Professional and board fees 2,387 2,365 1 FDIC insurance 804 491 64 Marketing and advertising 652 429 52 Amortization of core deposit intangible 518 531 (2 ) Recovery of servicing rights (1 ) (2,057 ) (100 ) Total noninterest expense 57,334 55,283 4 INCOME BEFORE PROVISION FOR INCOME TAXES 27,424 36,810 (25 ) PROVISION FOR INCOME TAXES 5,397 8,047 (33 ) NET INCOME $ 22,027 $ 28,763 (23 ) Basic earnings per share (1) $ 2.77 $ 3.43 (19 ) Diluted earnings per share (1) $ 2.73 $ 3.31 (18 ) ____________________________
(1) Prior presentation of earnings per share was revised due to the improper inclusion of certain unvested shares in the denominator of basic and diluted earnings per share. As a result of the inclusion, earnings per share was understated for the three and nine months ended September 30, 2021. Basic earnings per share for those periods was updated to $1.01 and $3.43, respectively, from $0.99 and $3.38 as previously reported. Diluted earnings per share was updated to $0.98 and $3.31, respectively, from $0.97 and $3.30 as previously reported.KEY FINANCIAL RATIOS AND DATA (Unaudited) At or For the Three Months Ended September 30, June 30, September 30, 2022 2022 2021 PERFORMANCE RATIOS: Return on assets (ratio of net income to average total assets) (1) 1.34 % 1.14 % 1.49 % Return on equity (ratio of net income to average equity) (1) 13.31 10.72 13.82 Yield on average interest-earning assets (1) 5.16 4.78 4.67 Average total cost of funds (1) 0.68 0.43 0.48 Interest rate spread information – average during period 4.48 4.35 4.19 Net interest margin (1) 4.54 4.39 4.23 Operating expense to average total assets (1) 3.07 3.22 3.58 Average interest-earning assets to average interest-bearing liabilities (1) 147.92 152.68 151.92 Efficiency ratio (2) 60.99 65.08 64.46 At or For the Nine Months Ended September 30, September 30, 2022 2021 PERFORMANCE RATIOS: Return on assets (ratio of net income to average total assets) (1) 1.24 % 1.77 % Return on equity (ratio of net income to average equity) (1) 11.71 16.33 Yield on average interest-earning assets (1) 4.86 4.59 Average total cost of funds (1) 0.50 0.53 Interest rate spread information – average during period 4.36 4.06 Net interest margin (1) 4.39 4.11 Operating expense to average total assets (1) 3.23 3.40 Average interest-earning assets to average interest-bearing liabilities (1) 151.52 143.81 Efficiency ratio (2) 64.14 59.07 September 30, June 30, September 30, 2022 2022 2021 ASSET QUALITY RATIOS AND DATA: Nonperforming assets to total assets at end of period (3) 0.32 % 0.28 % 0.27 % Nonperforming loans to total gross loans (4) 0.39 0.34 0.35 Allowance for credit losses - loans to nonperforming loans (4) 315.35 374.82 453.59 Allowance for credit losses - loans to gross loans receivable, excluding HFS loans 1.25 1.27 1.58 At or For the Three Months Ended September 30, June 30, September 30, 2022 2022 2021 PER COMMON SHARE DATA: Basic earnings per share $ 1.09 $ 0.84 $ 1.01 Diluted earnings per share $ 1.08 $ 0.83 $ 0.98 Weighted average basic shares outstanding 7,605,360 7,776,939 8,129,524 Weighted average diluted shares outstanding 7,707,762 7,896,210 8,370,074 Common shares outstanding at end of period 7,585,843 (5) 7,605,740 (6) 8,073,412 (7) Book value per share using common shares outstanding $ 29.07 $ 29.27 $ 29.78 Tangible book value per share using common shares outstanding (8) $ 28.30 $ 28.48 $ 28.97 ______________________________
(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 7,704,373 at September 30, 2022, less 118,530 unvested restricted stock shares.
(6) Common shares were calculated using shares outstanding of 7,726,232 at June 30, 2022, less 120,492 unvested restricted stock shares.
(7) Common shares were calculated using shares outstanding of 8,208,045 at September 30, 2021, less 121,672 unvested restricted stock shares, and 12,961 unallocated ESOP shares.
(8) Tangible book value per share using outstanding common shares excludes intangible assets. This ratio represents a non-GAAP financial measure. See also, “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 2022 2021 2022 2021 $ Change $ Change Assets Loans receivable (1) $ 2,083,561 $ 1,776,424 $ 1,953,305 $ 1,745,616 $ 307,137 $ 207,689 Securities available-for-sale, at fair value 277,006 248,179 279,395 216,122 28,827 63,273 Securities held-to-maturity 8,500 7,500 7,943 7,500 1,000 443 Interest-bearing deposits and certificates of deposit at other financial institutions 29,080 87,440 34,705 108,536 (58,360 ) (73,831 ) FHLB stock, at cost 7,924 4,973 5,716 5,783 2,951 (67 ) Total interest-earning assets 2,406,071 2,124,516 2,281,064 2,083,557 281,555 197,507 Noninterest-earning assets 93,911 93,137 95,302 90,352 774 4,950 Total assets $ 2,499,982 $ 2,217,653 $ 2,376,366 $ 2,173,909 $ 282,329 $ 202,457 Liabilities and stockholders’ equity Interest-bearing accounts $ 1,458,047 $ 1,306,546 $ 1,391,181 $ 1,335,012 $ 151,501 $ 56,169 Borrowings 119,150 42,528 64,855 71,452 76,622 (6,597 ) Subordinated notes 49,434 49,367 49,417 42,399 67 7,018 Total interest-bearing liabilities 1,626,631 1,398,441 1,505,453 1,448,863 228,190 56,590 Noninterest-bearing accounts 588,492 550,884 588,172 461,399 37,608 126,773 Other noninterest-bearing liabilities 32,654 29,224 31,342 28,093 3,430 3,249 Stockholders’ equity 252,205 239,104 251,399 235,554 13,101 15,845 Total liabilities and stockholders’ equity $ 2,499,982 $ 2,217,653 $ 2,376,366 $ 2,173,909 $ 282,329 $ 202,457 (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 contains tangible book value per share, a non-GAAP financial measure. Tangible common stockholders’ equity is calculated by excluding intangible assets from stockholders’ equity. For this financial measure, the Company’s intangible assets are goodwill and core deposit intangible. Tangible book value per share is calculated by dividing tangible common shareholders’ equity by the number of common shares outstanding. The Company believes that this non-GAAP measure is consistent with the capital treatment utilized by the investment community, which excludes intangible assets from the calculation of risk-based capital ratios and presents this measure to facilitate comparison of the quality and composition of the Company's capital over time and in comparison to its competitors.
This non-GAAP financial measure has inherent limitations, is not required to be uniformly applied, and is not audited. Further, this non-GAAP financial measure should not be considered in isolation or as a substitute for book value per share or total stockholders' equity determined in accordance with GAAP and may not be comparable to similarly titled measures reported by other companies.
Reconciliation of the GAAP book value per share and non-GAAP tangible book value per share is presented below.
September 30, June 30, September 30, (Dollars in thousands, except share and per share amounts) 2022 2022 2021 Stockholders' equity $ 220,547 $ 222,641 $ 240,453 Goodwill and core deposit intangible, net (5,854 ) (6,027 ) (6,532 ) Tangible common stockholders' equity $ 214,693 $ 216,614 $ 233,921 Common shares outstanding at end of period 7,585,843 7,605,740 8,073,412 Common stockholders' equity (book value) per share (GAAP) $ 29.07 $ 29.27 $ 29.78 Tangible common stockholders' equity (tangible book value) per share (non-GAAP) $ 28.30 $ 28.48 $ 28.97 Contacts: Joseph C. Adams, Chief Executive Officer Matthew D. Mullet, Chief Financial Officer (425) 771-5299 www.FSBWA.com 
