8-K: FS Bancorp Reports Q3 Net Income Decline Amid Rising NPLs

FS Bancorp, Inc. reported a decrease in third-quarter net income to $9.2 million, or $1.18 per diluted share, compared to $10.3 million in the prior year, despite strong deposit growth and expanding net interest margins.

Summary

• Net income for the third quarter of 2025 was $9.2 million, or $1.18 per diluted share, down from $10.3 million, or $1.29 per diluted share, in the comparable quarter of 2024.
• Year-to-date net income for the nine months ended September 30, 2025, was $24.9 million, or $3.18 per diluted share, a decrease from $27.6 million, or $3.45 per diluted share, for the same period in 2024.
• Total deposits increased by $133.1 million (5.2%) to $2.69 billion at September 30, 2025, primarily driven by an increase in brokered certificates of deposit (CDs).
• Borrowings decreased significantly by $105.0 million (44.8%) to $129.3 million at September 30, 2025.
• Loans receivable, net, increased by $17.3 million (0.7%) to $2.60 billion at September 30, 2025, with growth in commercial and speculative construction and development loans and C&I loans.
• The company repurchased 134,413 shares of common stock in Q3 2025 at an average price of $41.15 per share, with $826,000 remaining under the existing plan.
• Book value per share increased to $40.43 at September 30, 2025, up from $37.45 a year ago.
• Net interest income increased by $2.4 million to $33.7 million for Q3 2025, and by $4.8 million to $96.8 million for the nine months ended September 30, 2025.
• Net Interest Margin (NIM) increased two basis points to 4.37% for Q3 2025 and three basis points to 4.33% for the nine months ended September 30, 2025.
• Nonperforming loans increased to $18.375 million at September 30, 2025, from $10.772 million a year prior, partly due to two commercial construction loans and increased consumer/mortgage delinquencies.
• The provision for credit losses on loans increased to $2.3 million for Q3 2025 and $5.9 million for the nine months ended September 30, 2025, reflecting net loan growth and increased net charge-off activity.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the year-over-year decline in net income and diluted EPS, coupled with a significant increase in nonperforming loans and net charge-offs. While there are positives like strong deposit growth, reduced borrowings, and expanding NIM, the deterioration in credit quality metrics and overall profitability decline weigh heavily on the outlook.

Positives

• Net interest income increased by $2.4 million to $33.7 million for the third quarter of 2025, and by $4.8 million to $96.8 million for the nine months ended September 30, 2025, driven by higher interest income on loans.
• Net Interest Margin (NIM) expanded by two basis points to 4.37% in Q3 2025 and by three basis points to 4.33% for the nine months ended September 30, 2025, reflecting effective management of funding costs and asset mix.
• Total deposits grew by $133.1 million (5.2%) quarter-over-quarter to $2.69 billion, and by $259.2 million (10.7%) year-over-year, demonstrating strong funding capabilities.
• Borrowings decreased significantly by $105.0 million (44.8%) quarter-over-quarter to $129.3 million, reducing reliance on higher-cost funding.
• Book value per share increased by $0.88 to $40.43 at September 30, 2025, and tangible book value per share increased by $0.97 to $38.43, indicating growth in shareholder equity.
• The company declared its 51st consecutive quarterly cash dividend of $0.28 per common share, reinforcing commitment to shareholder returns.
• Regulatory capital ratios remain strong, with total risk-based capital at 13.8% and Tier 1 leverage capital at 11.0%, exceeding 'well capitalized' requirements.

Negatives

• Net income decreased to $9.2 million in Q3 2025 from $10.3 million in Q3 2024, representing an 11% decline year-over-year.
• Diluted earnings per share decreased to $1.18 in Q3 2025 from $1.29 in Q3 2024, and to $3.18 for the nine months ended September 30, 2025, from $3.45 in the prior year.
• Nonperforming loans increased significantly to $18.375 million at September 30, 2025, from $10.772 million a year ago, indicating a deterioration in credit quality.
• The ratio of nonperforming assets to total assets increased to 0.57% at September 30, 2025, from 0.36% a year prior.
• The allowance for credit losses (ACL) on loans to nonperforming loans ratio decreased to 163.77% at September 30, 2025, from 290.07% a year ago, suggesting less coverage for nonperforming assets.
• Net charge-offs increased by $2.4 million to $4.0 million in Q3 2025 compared to Q3 2024, primarily due to a $2.3 million partial charge-off on a commercial construction loan.
• Consumer loans decreased by $31.6 million (5.0%) year-over-year to $600.8 million at September 30, 2025.
• Total noninterest income decreased by $373,000 to $5.6 million in Q3 2025 and by $1.1 million to $15.9 million for the nine months ended September 30, 2025, primarily due to lower service charges and gain on sale of MSRs.

Risks

• Adverse impacts to economic conditions in local market areas or other lending relationship markets, including employment levels, labor shortages, inflation, recessionary pressures, or slowing economic growth.
• Changes in interest rates and the duration of such changes, including actions by the Federal Reserve, which could adversely affect revenues, expenses, asset/obligation values, and capital/liquidity costs.
• The impact of inflation and monetary/fiscal policy responses on consumer and business behavior.
• Geopolitical developments and international conflicts (e.g., Eastern Europe, Middle East, Asia) or new tariffs/trade restrictions disrupting financial markets, global supply chains, energy prices, or economic activity.
• Effects of a federal government shutdown, debt ceiling standoff, or other fiscal policy uncertainty.
• Increased competitive pressures, including repricing and competitors' pricing initiatives, impacting market position, loan, and deposit products.
• Challenges in executing plans to grow residential construction lending, mortgage banking, and warehouse lending operations, and geographic expansion of indirect home improvement lending.
• Secondary market conditions for loans and the ability to originate and sell loans in the secondary market.
• Volatility in the mortgage industry and fluctuations in deposits.
• Liquidity issues, including the ability to borrow funds or raise additional capital.
• The impact of bank failures or adverse developments at other banks and related negative press on investor and depositor sentiment.
• The ability to adapt to rapid technological changes, including advancements in artificial intelligence, digital banking, and cybersecurity.
• Legislation or regulatory changes, such as shifts in capital requirements, banking regulation, tax laws, or consumer protection laws.
• Vulnerabilities in information systems or third-party service providers, including disruptions, breaches, or attacks.
• Environmental, social, and governance (ESG) goals and the effects of climate change, severe weather events, natural disasters, pandemics, public health crises, acts of war or terrorism, and domestic political unrest.

Future Outlook

Management expects to continue managing strong net interest margins with expanding yields on earning assets while maintaining a stable mix of funding liabilities. The company also plans to continue its commitment to long-term shareholders through consistent dividend payments. However, the forward-looking statements are subject to various risks including economic conditions, interest rate changes, inflation, geopolitical developments, competitive pressures, and regulatory changes.

Management Comments

• Matthew Mullet, CEO and President of 1st Security Bank, stated: "We continue to manage our strong net interest margins (NIM) with expanding yields on earning assets while maintaining a stable, well positioned mix of funding liabilities."
• Joe Adams, CEO of FS Bancorp, Inc., stated: "Shareholder returns were balanced in the third quarter with share repurchases, a paid special dividend, and the payment of our 50th quarterly dividend."
• Joe Adams also concluded: "We are also pleased to announce that our Board of Directors has approved our 51st consecutive quarterly cash dividend of $0.28 per common share, demonstrating our commitment to long-term shareholders."
• Management attributes the increase in net charge-offs for the current nine-month period to continued volatile economic conditions.

Industry Context

The banking industry is currently navigating a complex environment characterized by fluctuating interest rates, inflationary pressures, and evolving credit quality concerns. FS Bancorp's ability to expand its net interest margin and grow deposits, particularly brokered CDs, indicates effective balance sheet management in a competitive landscape. However, the rise in nonperforming loans and charge-offs, especially in commercial construction, suggests that the broader economic volatility and higher interest rates are beginning to impact credit performance across the sector, aligning with concerns about potential commercial real estate vulnerabilities.

Comparison to Industry Standards

• The increase in nonperforming loans and the decrease in the ACL to nonperforming loans ratio suggest a worsening credit quality trend that could be a leading indicator for other regional banks, particularly those with significant commercial real estate and construction loan portfolios. While specific comparable companies are not named, this trend warrants close monitoring against peers like Columbia Banking System (COLB) or Umpqua Holdings (UMPQ) which operate in similar regional markets and face similar economic headwinds.
• FS Bancorp's Net Interest Margin (NIM) of 4.37% for Q3 2025 is robust and generally compares favorably to many regional banks, which have seen NIM compression due to rising funding costs. For instance, some larger regional banks might report NIMs in the 3.0-3.5% range, indicating FS Bancorp's strong asset yield management.
• The company's regulatory capital ratios (Total risk-based capital 13.8%, Tier 1 leverage capital 11.0%) remain above 'well capitalized' thresholds, which is a positive sign of financial stability compared to industry averages, especially in light of recent banking sector volatility. This positions them well against potential economic downturns or increased regulatory scrutiny.

Stakeholder Impact

• Shareholders: Impacted by lower diluted earnings per share year-over-year, but benefit from continued quarterly cash dividends and ongoing share repurchase program.
• Customers: Benefit from diversified financial products and services, including deposit products and various lending options.
• Employees: Competitive wage adjustments mentioned as a factor in increased salaries and benefits expense.
• Creditors: Strong regulatory capital ratios and reduced borrowings indicate a stable financial position, potentially reassuring creditors.

Next Steps

• Continue managing net interest margins and funding liabilities.
• Monitor and address credit quality, particularly in commercial construction and consumer loan segments.
• Execute remaining share repurchases under the existing plan ($826,000 remaining).
• Pay the 51st consecutive quarterly cash dividend of $0.28 per common share on November 20, 2025.

Key Dates

Recommendation

The company presents a mixed financial picture. While it demonstrates strengths in deposit growth, reduced borrowings, and an expanding net interest margin, the year-over-year decline in net income and diluted EPS, coupled with a significant increase in nonperforming loans and net charge-offs, raises concerns about asset quality and future profitability. The credit quality deterioration, particularly in commercial construction, suggests potential headwinds in a volatile economic environment. Given these offsetting factors, a 'hold' recommendation is appropriate for a seasoned investor, suggesting a wait-and-see approach to observe how credit quality trends evolve and if profitability can rebound consistently.

Keywords

Banking, Financial Services, Community Bank, Net Income, Earnings, Deposits, Loans, Net Interest Margin, Credit Quality, Nonperforming Loans, Share Repurchase, Dividend, Regulatory Capital, Commercial Real Estate, Home Lending, FSBW