10-K: FS Bancorp Reports Mixed 2025 Results Amid Loan Growth, Higher Credit Losses

FS Bancorp, Inc. reported a slight decrease in net income for 2025 to $33.3 million, driven by increased credit loss provisions and noninterest expenses, despite growth in net interest income and total assets.

Summary

• Net income decreased to $33.3 million for the year ended December 31, 2025, compared to $35.0 million in 2024.
• Total assets increased by $167.7 million to $3.20 billion at December 31, 2025, from $3.03 billion at December 31, 2024.
• Net interest income increased by $7.3 million (5.9%) to $130.4 million for the year ended December 31, 2025.
• The provision for credit losses significantly increased to $9.5 million in 2025 from $5.5 million in 2024, primarily due to higher net charge-offs in commercial real estate and consumer loan portfolios.
• Total loans receivable, net, grew by $121.2 million to $2.62 billion at December 31, 2025.
• Total deposits increased by $334.2 million (14.29%) to $2.67 billion at December 31, 2025, with brokered deposits increasing by $219.1 million.
• Nonperforming loans increased by $5.1 million to $18.7 million at December 31, 2025, representing 0.71% of total loans, up from 0.54% in 2024.
• The company announced a definitive merger agreement to acquire Pacific West Bancorp for approximately $34.6 million in stock and cash, expected to be completed in the third quarter of 2026.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this as a moderately negative report. While the company achieved growth in assets and net interest income, the significant increase in credit loss provisions, net charge-offs, and nonperforming loans, coupled with a decline in net income, indicates deteriorating asset quality and increased risk exposure. The announced acquisition provides future growth potential but also introduces integration risks.

Positives

• Net interest income increased by $7.3 million (5.9%) to $130.4 million in 2025, driven by higher loan yields and average loan balances.
• Total assets grew by $167.7 million to $3.20 billion at year-end 2025, demonstrating continued expansion.
• Total deposits increased by $334.2 million (14.29%) to $2.67 billion, reducing reliance on higher-cost borrowings and improving the loan-to-deposit ratio to 100.9% from 109.5%.
• The Bank maintained a 'well capitalized' status under FDIC regulations, with strong capital ratios exceeding minimum requirements.
• The efficiency ratio improved slightly to 66.81% in 2025 from 67.45% in 2024, indicating better cost management relative to revenue.
• The company's cybersecurity governance and risk management program is robust, with active Board oversight, annual risk assessments, and independent audits.
• Employee volunteer hours significantly increased to 9,500 hours in 2025 from 6,000 hours in 2024, reflecting strong community engagement.
• Unrealized net gains on securities available-for-sale of $6.0 million, net of tax, positively impacted stockholders' equity.

Negatives

• Net income decreased to $33.3 million in 2025 from $35.0 million in 2024, primarily due to increased credit loss provisions and noninterest expenses.
• Provision for credit losses increased significantly by $4.0 million (73.2%) to $9.5 million in 2025.
• Net charge-offs increased to $8.9 million in 2025 from $5.3 million in 2024, including a $2.3 million partial charge-off on a single commercial construction loan.
• Nonperforming loans increased by $5.1 million to $18.7 million, with the ratio of nonperforming loans to total gross loans rising to 0.71% from 0.54%.
• The ACL on loans as a percentage of nonaccrual loans decreased to 170.59% in 2025 from 234.55% in 2024, indicating reduced coverage for nonperforming assets.
• Consumer loans decreased by $23.2 million, primarily due to declines in indirect home improvement loans and marine loans, possibly reflecting volatile economic conditions.
• Higher deposit costs were incurred due to a shift in the funding mix toward interest-bearing checking (including brokered deposits) and certificates of deposit.
• Noninterest expense increased by $4.4 million (4.6%) to $102.0 million, driven by higher salaries and benefits, professional fees, and FDIC insurance.
• The effective corporate income tax rate increased to 18.9% in 2025 from 15.8% in 2024, partly due to the absence of alternative energy tax credits.
• Unrealized net losses on fair value and cash flow hedges of $4.7 million, net of tax, partially offset gains in accumulated other comprehensive income.

Risks

• Downturns in the national economy and in the company's market areas (Puget Sound, Pacific Northwest) could adversely affect growth, loan repayment, and financial condition.
• Changes in interest rate levels and volatility, including actions by the Federal Reserve, could adversely affect revenues, expenses, asset/obligation values, and the availability and cost of capital and liquidity.
• Credit risks inherent in lending activities, including loan delinquencies, charge-offs, changes in the allowance for credit losses (ACL), and provisions for credit losses.
• The loan portfolio possesses increased risk due to a large percentage of consumer loans, particularly indirect home improvement loans, which are difficult to repossess.
• Reliance on a concentrated group of home improvement contractors and dealers (five dealers accounted for 74.5% of 2025 loan volume) presents a significant risk.
• A significant portion of the business involves commercial real estate lending (36.5% of gross loan portfolio), which is subject to higher credit risk, including balloon payments and longer collateral holding periods in foreclosure.
• Repayment of commercial business loans is often dependent on unpredictable borrower cash flows, and the collateral securing these loans may fluctuate in value.
• Residential construction lending involves a higher degree of credit risk due to reliance on project completion, uncertainty in estimating costs and market values, governmental regulations, builder concentration, and interest reserves.
• The residential mortgage warehouse lending program is subject to various risks, including potential default by mortgage bankers, fraud, changes in market value of mortgage loans, and volatility of originations.
• The ACL on loans may not be sufficient to cover actual loan losses, potentially requiring additional provisions and reducing earnings.
• Credit risk associated with residential property, especially in a downturn, and higher combined loan-to-value ratios, could lead to increased default rates and losses.
• Severe flooding in Western Washington and Oregon in November 2025, and the increasing frequency and severity of other climate-related events, could materially and adversely affect the credit quality of the loan portfolio and the adequacy of the ACL.
• Ineffective liquidity management could adversely affect financial results and condition, especially if funding sources become impaired or a large number of depositors withdraw funds.
• The company's growth or future losses may require raising additional capital, which may not be available when needed or may be exceedingly costly, potentially diluting existing shareholders.
• The company's ability to pay dividends and make subordinated debt payments is subject to the Bank's ability to make capital distributions, which are limited by federal and state laws and regulations.
• Ineffective hedging against interest rate exposure could result in volatility in operating results, including potential losses.
• Future goodwill impairment could reduce earnings, although it would not impact liquidity or regulatory capital.
• Reported financial results depend on management's selection of accounting methods and certain assumptions and estimates, which, if incorrect, could cause unexpected losses.
• The company may become subject to supervisory actions and enhanced regulation that could have a material adverse effect on its business, reputation, operating flexibility, and financial condition.
• Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
• Reliance on numerous external vendors for key business infrastructure components exposes operations to risks associated with vendor performance, disruptions, or failures.
• Security measures may not be sufficient to mitigate the risk of cyber-attacks, leading to compromised information, disrupted operations, litigation, regulatory scrutiny, and financial losses.
• Current and future uses of Artificial Intelligence (AI) and other emerging technologies may create additional risks, including model risk, cybersecurity threats, regulatory compliance concerns, and operational risks.
• Limitations in data management or aggregation capabilities could hinder the ability to manage current and emerging risks.
• An increasing prevalence of fraud and other financial crimes could result in financial losses, increased costs, litigation, or damage to reputation.
• Regulatory changes to diversity, equity, and inclusion (DEI) and environmental, social, and governance (ESG) practices may adversely impact reputation, compliance costs, and business operations.

Future Outlook

The company expects to continue paying quarterly cash dividends on common stock, subject to Board discretion. Fixed commitments for 2026 are projected to include $2.0 million of operating lease payments. Capital expenditures related to headquarters consolidation are anticipated to be largely offset by proceeds from the planned sale of the current headquarters. The merger with Pacific West Bancorp is expected to be completed in the third quarter of 2026.

Management Comments

• Management is committed to establishing varied revenue streams considering credit, interest rate, and concentration risks.
• Management believes that the ACL was adequate as of December 31, 2025, given the comprehensive consideration of various factors and inputs.
• Management continually reviews the adequacy of the ACL on loans and will adjust the provision for credit losses on loans as needed.
• Management believes that 1st Security Bank's level of interest rate risk is acceptable under this approach.
• Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit runoff that may occur in the normal course of business.
• Management believes, at December 31, 2025, that the Bank met all capital adequacy requirements.
• Management's projections show an expectation that cash dividends will continue for the foreseeable future.

Industry Context

StockSavvy.ai notes that the banking industry continues to navigate a complex environment characterized by interest rate volatility, increased credit risk, and evolving regulatory landscapes. FS Bancorp's strategic focus on diversifying lending channels and emphasizing lower-cost core deposits aligns with broader industry efforts to manage net interest margin compression and enhance funding stability. The announced acquisition of Pacific West Bancorp reflects ongoing consolidation trends among regional and community banks seeking to expand market share and achieve economies of scale. The increase in nonperforming loans and credit loss provisions, particularly in commercial real estate and consumer segments, is a trend observed across the sector as economic uncertainties persist. The company's robust cybersecurity framework is critical given the heightened threat landscape faced by financial institutions.

Comparison to Industry Standards

• FS Bancorp's CET1 capital ratio of 12.73% (Bank) and 11.21% (Company) at December 31, 2025, significantly exceeds the 'well capitalized' threshold of 6.50% for banks, indicating a strong capital position compared to regulatory benchmarks.
• The loan-to-deposit ratio of approximately 100.9% at December 31, 2025, while improved from 109.5% in 2024, is higher than many traditional community banks, suggesting a more aggressive lending posture relative to its deposit base.
• The increase in nonperforming loans to 0.71% of total loans in 2025 from 0.54% in 2024, while still relatively low, indicates a potential deterioration in asset quality that warrants close monitoring compared to some top-tier performing banks.
• The efficiency ratio of 66.81% in 2025, while a slight improvement, remains above the ideal sub-60% target often sought by high-performing banks, suggesting room for further operational efficiency.
• The concentration of construction, land development, and other land loans at 103.5% of regulatory capital at December 31, 2025, exceeds the supervisory criterion of 100%, which may trigger enhanced regulatory scrutiny compared to peers with lower concentrations.

Management Changes

Corporate Governance

Legal Proceedings

• The Company is subject to various pending and threatened legal actions which arise in the ordinary course of business.
• Management believes liabilities arising from these claims, if any, will not have a material effect on the Company's financial position.
• No material pending legal actions were reported at December 31, 2025.

Related Party Transactions

• Total loans to directors, executive officers, and their affiliates were $3.459 million at December 31, 2025, down from $3.575 million at December 31, 2024.
• The aggregate maximum loan balance of extended credit to related parties was $3.5 million at December 31, 2025.
• These loans were made in compliance with applicable laws on substantially the same terms as comparable transactions with unrelated third parties and do not involve more than the normal risk of collectability.
• Related party deposits were approximately $5.2 million at December 31, 2025, up from $3.2 million at December 31, 2024.

Stakeholder Impact

• Shareholders: Potential for dilution from future capital raises; continued quarterly cash dividends expected, but subject to Board discretion; stock repurchase programs aim to return value.
• Employees: Commitment to livable wages, comprehensive benefits (health, 401k match, ESPP, paid leave, education reimbursement, paid volunteer hours); focus on fostering a 'Wow' culture; increased employee headcount and volunteerism.
• Customers: Continued focus on relationship banking and diversified financial products; expansion into new markets through branch acquisition; enhanced cybersecurity measures to protect customer information.
• Creditors: Subordinated notes are unsecured and subordinated in right of payment to all existing and future indebtedness, deposits, and other liabilities of the company's current and future subsidiaries.
• Communities: Active participation in community activities and events; satisfactory CRA rating; increased volunteer hours.

Next Steps

• Complete the acquisition of Pacific West Bancorp, expected in Q3 2026, and integrate its operations.
• Manage interest rate risk, particularly as subordinated notes transition to floating rates in February 2026.
• Monitor and manage credit risks associated with commercial real estate and consumer loan portfolios, focusing on indirect home improvement loans.
• Address the concentration of construction, land development, and other land loans relative to regulatory capital thresholds.
• Continue efforts to emphasize lower-cost core deposits to fund loan growth and manage liquidity.
• Ongoing evaluation of cybersecurity threats and enhancement of defenses and incident response capabilities.
• The Board of Directors will continue to review and potentially modify the cash dividend policy based on financial performance and capital requirements.

Key Dates

Recommendation

The filing presents a mixed financial picture for FS Bancorp. While net interest income and total assets grew, the decline in net income, significant increase in credit loss provisions, and rise in nonperforming loans indicate deteriorating asset quality and increased risk, particularly in commercial real estate and consumer lending. The announced acquisition of Pacific West Bancorp offers future growth potential but also introduces integration risks and uncertainties. The strong capital position and improved efficiency ratio are positive, but the elevated credit risks and the concentration in construction loans warrant a cautious approach. A 'hold' recommendation is appropriate as investors should monitor the integration of the acquisition and the company's ability to manage asset quality and credit losses in the current economic environment before making further investment decisions.

Keywords

Banking, Financial Services, Community Bank, Commercial Real Estate, Residential Lending, Consumer Loans, Indirect Home Improvement Loans, Mortgage Servicing Rights, Cybersecurity, Risk Management, Deposits, Loan Portfolio, Net Interest Income, Capital Adequacy, Acquisition, Pacific Northwest, Washington, Oregon, SEC Filing, 10-K