10-Q: FS Bancorp Q2 Earnings Decline Amid Rising Loan Losses

FS Bancorp reported a decrease in net income and earnings per share for the second quarter and first half of 2025, driven by higher credit loss provisions and increased operating expenses, despite growth in net interest income and total assets.

Summary

• Net income for the three months ended June 30, 2025, was $7.7 million, down from $9.0 million in the prior year period.
• Basic earnings per share decreased to $1.00 for the three months ended June 30, 2025, from $1.15 in the same period last year.
• For the six months ended June 30, 2025, net income was $15.7 million, a decrease from $17.4 million in the comparable period of 2024.
• Total assets increased by $146.8 million to $3.18 billion at June 30, 2025, from $3.03 billion at December 31, 2024.
• Loans receivable, net, grew by $80.3 million to $2.58 billion at June 30, 2025.
• Total deposits increased by $214.0 million to $2.55 billion at June 30, 2025, with brokered deposits significantly increasing by $137.7 million.
• Borrowings decreased by $73.5 million to $234.3 million at June 30, 2025, as the company utilized lower-cost brokered deposits.
• The provision for credit losses increased to $2.0 million for the three months ended June 30, 2025, up from $1.1 million in the prior year, primarily due to loan growth and elevated net charge-offs in the consumer loan portfolio.
• Nonaccrual loans rose to $19.0 million at June 30, 2025, from $13.6 million at December 31, 2024, mainly concentrated in construction and development CRE loans and indirect home improvement loans.
• The coverage ratio of the Allowance for Credit Losses (ACL) on loans to nonperforming loans declined to 169.4% at June 30, 2025, from 234.3% at December 31, 2024.
• The efficiency ratio weakened to 68.40% for the three months ended June 30, 2025, compared to 65.78% for the same period in 2024, due to noninterest expense growth outpacing total revenue.
• The Board of Directors approved an additional stock repurchase program of up to $5.0 million on July 9, 2025, adding to existing programs.
• Book value per common share increased to $39.55 at June 30, 2025, from $38.26 at December 31, 2024.

Sentiment

Score: 4

Explanation: While the company demonstrated growth in net interest income, total assets, and deposits, the significant decline in net income and EPS, coupled with rising credit loss provisions and increasing nonperforming loans, indicates a challenging operating environment and deteriorating asset quality. The weakening efficiency ratio also points to operational pressures. The increased stock repurchase authorization is a positive for shareholders but does not fully offset the underlying financial performance concerns.

Positives

• Net interest income increased by $1.7 million to $32.1 million for the three months ended June 30, 2025, and by $2.3 million to $63.1 million for the six months ended June 30, 2025.
• Total assets grew by $146.8 million to $3.18 billion at June 30, 2025.
• Loans receivable, net, increased by $80.3 million to $2.58 billion, reflecting growth in CRE, residential real estate, and commercial business loans.
• Total deposits increased by $214.0 million, with growth across all deposit categories, including a significant increase in brokered CDs.
• Borrowings decreased by $73.5 million, indicating a strategic shift to lower-cost brokered deposits for funding.
• The loan-to-deposit ratio improved to 101.1% at June 30, 2025, from 106.9% at December 31, 2024.
• Book value per common share increased to $39.55 at June 30, 2025.
• The Bank maintained its 'well capitalized' status, exceeding all regulatory capital requirements with strong ratios.
• An additional $5.0 million stock repurchase program was authorized, signaling confidence in valuation and commitment to shareholder returns.

Negatives

• Net income decreased by $1.2 million for the three months ended June 30, 2025, and by $1.6 million for the six months ended June 30, 2025, compared to prior year periods.
• Basic earnings per share declined to $1.00 for the quarter and $2.02 for the six months ended June 30, 2025.
• Provision for credit losses increased significantly by $944,000 for the quarter and $1.1 million for the six months, driven by loan growth and elevated net charge-offs.
• Noninterest income decreased by $698,000 for the quarter and $683,000 for the six months, primarily due to lower gain on sale of loans and service charges.
• Noninterest expense increased by $1.6 million for the quarter and $3.2 million for the six months, mainly due to higher salaries, benefits, operations, and professional fees.
• The efficiency ratio weakened to 68.40% for the quarter and 68.89% for the six months, indicating less efficient operations relative to revenue.
• Loans 90 days or more past due increased to $14.8 million from $11.1 million.
• Nonaccrual loans increased to $19.0 million from $13.6 million, with concentrations in construction and development CRE and indirect home improvement loans.
• The coverage ratio of ACL on loans to nonperforming loans significantly decreased to 169.4% from 234.3%, reflecting increased nonaccrual balances.
• Increased qualitative reserves were recorded to address higher risk of loss, particularly in the consumer and construction portfolios.
• Net loan charge-offs increased in indirect home improvement loans.

Risks

• Adverse impacts to economic conditions in local markets or other lending markets, including effects of employment levels, labor shortages, persistent inflation, recessionary pressures, or slowing economic growth.
• Changes in interest rate levels and the duration of such changes, which could adversely affect revenues, expenses, asset/obligation values, and capital/liquidity costs.
• Impact of inflation and monetary and fiscal policy responses on consumer behavior.
• Geopolitical developments and international conflicts, including tensions in Eastern Europe, the Middle East, and Asia, or new tariffs/trade restrictions.
• Effects of a federal government shutdown, debt ceiling standoff, or other fiscal policy uncertainty.
• Credit risks of lending activities, including loan delinquencies, write-offs, changes in the allowance for credit losses (ACL), and provision for credit losses.
• Secondary market conditions and the ability to originate and sell loans in the secondary market.
• Fluctuations in loan demand, unsold homes, land, and property values.
• Staffing fluctuations in response to product demand or corporate strategies.
• Use of estimates in determining the fair value of assets, which may prove incorrect.
• Increased competitive pressures among financial services companies.
• Ability to execute plans to grow residential construction lending, home lending operations, warehouse lending, and geographic expansion of indirect home improvement lending.
• Ability to attract and retain deposits.
• Ability to successfully integrate any future acquired assets, liabilities, customers, systems, and management personnel.
• Ability to control operating costs and expenses.
• Retention of key members of the senior management team.
• Changes in consumer spending, borrowing, and savings habits.
• Ability to successfully manage growth.
• Bank failures or adverse developments at other banks and related negative press about the banking industry affecting investor and depositor sentiment.
• Ability to adapt to rapid technological changes, including advancements in artificial intelligence, digital banking, and cybersecurity.
• Legislation or regulatory changes, including shifts in capital requirements, banking regulation, tax laws, or consumer protection laws.
• Ability to pay dividends on common stock.
• Quality and composition of the securities portfolio and the impact of adverse changes in the securities markets.
• Changes in accounting policies and practices.
• Costs and effects of litigation, including settlements and judgments.
• Vulnerabilities in information systems or third-party service providers, including disruptions, breaches, or attacks.
• Inability of key third-party service providers to perform their obligations.
• Effects of climate change, severe weather events, natural disasters, pandemics, epidemics, public health crises, acts of war or terrorism, domestic political unrest, and other external events.
• Environmental, social, and governance goals and targets.

Future Outlook

Management expects to continue utilizing borrowing facilities to fund loan originations, deposit withdrawals, satisfy financial commitments, repay maturing debt, and capitalize on investment opportunities. The company projects fixed commitments for operating lease payments for the remainder of 2025. The current practice of paying quarterly cash dividends on common stock is expected to continue, subject to the Board of Directors' discretion. Management believes that a majority of maturing relationship deposits will remain with the Bank.

Management Comments

• Management is committed to establishing varied revenue streams considering credit, interest rate, and concentration risks.
• The company remains focused on managing loan production capacity and maintaining a pipeline consistent with market demand.
• Management increased qualitative reserves to address the higher risk of loss, particularly in the consumer and construction portfolios.
• Management believes, at June 30, 2025, that the Bank met all capital adequacy requirements.
• Our current quarterly common stock dividend rate is $0.28 per share, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank and returning a substantial portion of our cash to our shareholders.

Industry Context

The company operates as a community-based savings bank primarily in the greater Puget Sound area, the Kennewick-Pasco-Richland metropolitan area, Goldendale, Vancouver, and White Salmon, Washington, and Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon. Its indirect consumer lending platform extends throughout the Western United States. The company's performance is influenced by prevailing economic conditions, government monetary and fiscal policies, and competition. The decrease in loan sales reflects a more competitive market environment.

Comparison to Industry Standards

• No specific comparable companies, projects, or results were mentioned in the filing for direct comparison to industry standards.

Legal Proceedings

• The company is occasionally involved in various legal proceedings in the normal course of business.
• Management believes any liability from such proceedings would not have a material adverse effect on the business or financial condition.
• No material pending legal actions were reported at June 30, 2025.

Stakeholder Impact

• Shareholders: Experienced a decrease in net income and EPS, but saw an increase in book value per share and benefit from ongoing dividend payments and potential share repurchases.
• Employees: Benefited from competitive wage adjustments and higher overall benefit costs, and participate in share-based compensation plans.
• Customers: Continue to receive diversified financial products and services, including loan and deposit offerings.
• Creditors: The company's decreased borrowings and increased deposit funding indicate a shift in funding strategy.

Next Steps

• Continue current practice of paying quarterly cash dividends on common stock.
• Potentially execute future stock repurchases under the newly authorized and existing programs.
• Utilize borrowing facilities (FHLB, FRB, correspondent lines) to fund loan originations, deposit withdrawals, satisfy financial commitments, repay maturing debt, and take advantage of investment opportunities.
• Manage loan production capacity and maintain a pipeline consistent with market demand.

Key Dates

Recommendation

The company faces headwinds with declining net income, increasing credit loss provisions, and a rise in nonperforming loans, which are significant concerns for asset quality and profitability. The weakening efficiency ratio also suggests operational challenges. However, the company maintains a strong capital position, has growing net interest income, and is actively managing its funding mix by reducing higher-cost borrowings with increased deposits. The ongoing share repurchase programs could provide some support to the stock price. Given the mixed signals, a 'hold' recommendation is appropriate, advising investors to monitor credit quality trends and operational efficiency improvements before making further investment decisions.

Keywords

Banking, Financial Services, Community Bank, Commercial Real Estate, Residential Real Estate, Consumer Loans, Commercial Lending, Mortgage Banking, Loan Portfolio, Deposits, Credit Quality, SEC Filing, Quarterly Report, Earnings, Capital Adequacy, Stock Repurchase