MOUNTLAKE TERRACE, Wash., Oct. 26, 2020 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (NASDAQ:FSBW)  (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2020 third quarter net income of $12.7 million, or $2.94 per diluted share, compared to $7.1 million, or $1.58 per diluted share for the same period last year.

“Operating within the backdrop of the global COVID-19 pandemic, we focused on our established community banking business plan to achieve robust loan growth and strong profitability,” stated Joe Adams, CEO. “We are also pleased to announce that our Board of Directors has approved our thirty-first consecutive quarterly cash dividend. The quarterly dividend of $0.21 will be paid on November 19, 2020, to shareholders of record as of November 6, 2020.”

Updated response to the novel coronavirus of 2019 (“COVID-19”) pandemic: 

The Company is following the Federal Housing Finance Agency guidelines for forbearance, foreclosure relief, and late payment reporting for the COVID-19 pandemic on all serviced loans and a modified format for portfolio loans.  For portfolio loans, the primary method of relief is to allow the borrower up to 90-days of interest only payments and/or loan payment deferments, and, on a more limited basis, waived interest, late fees, or interest only loan payments and suspended foreclosure proceedings. As of September 30, 2020, the amount of portfolio loans remaining under payment/relief agreements includes commercial real estate loans of $23.8 million, commercial business loans of $7.6 million, portfolio one-to-four-family loans of $3.3 million, and consumer loans of $280,000. Additional detail is provided below in the “Credit Quality” discussion.

The Company participated in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) through its conclusion on August 8, 2020. For borrowers in the communities we serve, the Company has funded 471 PPP loans totaling $74.1 million as of September 30, 2020.

All of our branches are open and we continue to remain flexible as to branch operations based on the guidance provided for the communities in which we operate. The majority of our employees continue to work remotely, where feasible.

2020 Third Quarter Highlights

  • Net income was $12.7 million for the third quarter of 2020, compared to $10.0 million in the previous quarter, and $7.1 million for the same quarter one year ago;

  • In response to the COVID-19 pandemic and its continued adverse economic impact and due to additional loan growth, the provision for loan losses was $3.1 million this quarter and $4.6 million in the previous quarter, compared to $573,000 for the same quarter one year ago;

  • Total gross loans increased $50.5 million during the quarter to $1.52 billion at September 30, 2020, compared to $1.47 billion at June 30, 2020, and $1.33 billion at September 30, 2019;

  • The allowance for loan and lease losses (“ALLL”) to gross loans receivable (excluding loans held for sale (“HFS”)) for the third quarter of 2020 was 1.63%, up from 1.47% in the previous quarter and 0.96% for the same quarter one year ago. The  adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans, was 1.72% (See “Non-GAAP Financial Measures”);

  • The Company closed a record $589.9 million of one-to-four family loans in the third quarter, an increase of $111.5 million from the second quarter and $301.0 million from the third quarter of 2019;

  • Total deposits increased $6.3 million during the quarter, including an increase of $20.7 million in relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts), partially offset by a reduction of $21.9 million in wholesale deposits; and

  • Our Board of Directors approved a share repurchase plan which includes up to $5.0 million of shares to be repurchased over the next 12 months, depending on market conditions and other factors including the Company’s liquidity requirements. The Company repurchased 11,010 shares of its common stock during the quarter ended September 30, 2020, at an average price per share of $40.61.

Asset Summary

Total assets increased $45.9 million, or 2.3%, to $2.05 billion at September 30, 2020, compared to $2.01 billion at June 30, 2020, and increased $359.6 million, or 21.2%, from $1.69 billion at September 30, 2019.  The quarter over linked quarter increase in total assets was primarily due to increases in loans HFS of $75.7 million, loans receivable, net of $47.1 million, other assets of $6.3 million, securities held-to-maturity of $5.5 million, securities available-for-sale of $4.4 million, and servicing rights of $1.1 million, partially offset by a decrease in total cash and cash equivalents of $90.1 million, certificates of deposit (“CDs”) at other financial institutions of $3.7 million, and Federal Home Loan Bank (“FHLB”) stock of $1.1 million. Year over year increases in total assets included increases in loans receivable, net of $180.2 million, loans HFS of $134.5 million, securities available-for-sale of $67.1 million, other assets of $9.6 million, and securities held-to-maturity of $5.5 million, partially offset by decreases in total cash and cash equivalents of $26.8 million and CDs at other financial institutions of $10.0 million.

(Dollars in thousands) September 30, 2020
 June 30, 2020
 September 30, 2019
 
     Amount Percent
 Amount Percent
 Amount Percent
 
REAL ESTATE LOANS                   
Commercial $227,354  15.0 %$222,265  15.1 %$205,500  15.5 %
Construction and development  191,933  12.6   183,029  12.5   200,720  15.1  
Home equity  40,459  2.6   35,082  2.4   36,607  2.8  
One-to-four-family (excludes HFS)  300,863  19.8   295,220  20.1   253,783  19.1  
Multi-family  130,243  8.6   132,329  9.0   122,375  9.2  
Total real estate loans  890,852  58.6   867,925  59.1   818,985  61.7  
                    
CONSUMER LOANS                   
Indirect home improvement  276,693  18.2   264,781  18.0   245,238  18.5  
Marine  84,650  5.6   76,893  5.2   68,036  5.1  
Other consumer  3,465  0.2   3,647  0.3   4,660  0.4  
Total consumer loans  364,808  24.0   345,321  23.5   317,934  24.0  
                    
COMMERCIAL BUSINESS LOANS                   
Commercial and industrial  224,276  14.8   213,961  14.6   134,104  10.1  
Warehouse lending  39,482  2.6   41,701  2.8   55,172  4.2  
Total commercial business loans  263,758  17.4   255,662  17.4   189,276  14.3  
Total loans receivable, gross  1,519,418  100.0 % 1,468,908  100.0 % 1,326,195  100.0 %
                    
Allowance for loan losses  (24,799)     (21,524)     (12,765)    
Deferred costs and fees, net  (4,240)     (4,231)     (3,137)    
Premiums on purchased loans, net  1,124      1,272      995     
Total loans receivable, net $1,491,503     $1,444,425     $1,311,288     

Loans receivable, net increased $47.1 million to $1.49 billion at September 30, 2020, from $1.44 billion at June 30, 2020, and increased $180.2 million from $1.31 billion at September 30, 2019.  The quarter over linked quarter increase in total real estate loans was $22.9 million, including increases in construction and development loans of $8.9 million, one-to-four-family portfolio loans of $5.6 million, home equity loans of $5.4 million, and commercial real estate loans of $5.1 million, partially offset by decreases in multi-family loans of $2.1 million.  Consumer loans increased $19.5 million, primarily due to an increase of $11.9 million in indirect home improvement loans and $7.8 million in marine loans. Commercial business loans increased $8.1 million, primarily due to an increase in commercial and industrial loans of $10.3 million, partially offset by reductions in warehouse lending of $2.2 million. The increase in commercial and industrial loans was primarily tied to the continued investment in commercial lenders and their related business banking customers.  

Originations of one-to-four-family loans to purchase and to refinance a home for the current quarter and the three months ended June 30, 2020, and for the three and nine months ended September 30, 2020 and 2019 were as follows:

(Dollars in thousands) For the Three Months Ended For the Three Months Ended Quarter Quarter
  September 30, 2020 June 30, 2020 over Quarter over Quarter
  Amount Percent
 Amount Percent
 $ Change % Change
Purchase $243,974  41.4 %$143,060  29.9 %$100,914  70.5 
Refinance  345,919  58.6   335,333  70.1   10,586  3.2 
Total $589,893  100.0 %$478,393  100.0 %$111,500  23.3 


  For the Three Months Ended For the Three Months Ended Year Year
  September 30, 2020 September 30, 2019 over Year over Year   
  Amount Percent
 Amount Percent
 $ Change % Change
Purchase $243,974  41.4 %$163,459  56.6 %$80,515  49.3 
Refinance  345,919  58.6   125,419  43.4   220,500  175.8 
Total $589,893  100.0 %$288,878  100.0 %$301,015  104.2 


  For the Nine Months Ended For the Nine Months Ended Year Year
  September 30, 2020 September 30, 2019 over Year over Year
  Amount Percent Amount Percent $ Change % Change
Purchase $501,686  37.1 %$411,167  64.4 %$90,519  22.0 
Refinance  852,202  62.9   227,547  35.6   624,655  274.5 
Total $1,353,888  100.0 %$638,714  100.0 %$715,174  112.0 

During the quarter ended September 30, 2020, the Company sold $479.6 million of one-to-four-family loans compared to sales of $427.0 million during the previous quarter, and sales of $247.3 million during the same quarter one year ago. During the nine months ended September 30, 2020, the Company sold $1.12 billion of one-to-four-family loans compared to sales of $551.6 million during the same period last year. Refinance activity increased significantly over the last year in response to decreases in market interest rates. Purchase activity in the third quarter of 2020 and year to date 2020 is also up significantly year over year (49% and 22% respectively) demonstrating our focus on purchase originations.

The Bank sold $3.0 million of securities available-for-sale during the third quarter of 2020 realizing a gain of $119,000. The Bank sold these securities to reduce both the effective portfolio duration and amount of lower yielding investments. The proceeds were used to fund loan growth during the quarter.

Liabilities and Equity Summary

Changes in deposits for the periods ending are as follows:

(Dollars in thousands)                   
  September 30, 2020 June 30, 2020     
Relationship-based transactional deposits: Amount Percent
 Amount Percent
 $ Change % Change
Noninterest-bearing checking $338,781  21.0 %$333,588  20.8 %$5,193  1.6 
Interest-bearing checking  229,576  14.2   220,214  13.7   9,362  4.3 
Escrow accounts related to mortgages serviced  18,062  1.1   11,909  0.7   6,153  51.7 
Subtotal  586,419  36.3   565,711  35.2   20,708  3.7 
Savings  144,886  9.0   143,740  8.9   1,146  0.8 
Money market  377,585  23.4   324,253  20.2   53,332  16.4 
Subtotal  522,471  32.4   467,993  29.1   54,478  11.6 
Certificates of deposit less than $100,000  285,650  17.7   321,634  20.0   (35,984) (11.2)
Certificates of deposit of $100,000 through $250,000  150,437  9.3   166,543  10.4   (16,106) (9.7)
Certificates of deposit of $250,000 and over  68,242  4.3   84,991  5.3   (16,749) (19.7)
Subtotal  504,329  31.3   573,168  35.7   (68,839) (12.0)
Total $1,613,219  100.0 %$1,606,872  100.0 %$6,347  0.4 


(Dollars in thousands)                   
  September 30, 2020 September 30, 2019     
Relationship-based transactional deposits: Amount Percent
 Amount Percent
 $ Change % Change
Noninterest-bearing checking $338,781  21.0 %$264,482  19.1 %$74,299  28.1 
Interest-bearing checking  229,576  14.2   196,834  14.2   32,742  16.6 
Escrow accounts related to mortgages serviced  18,062  1.1   16,591  1.2   1,471  8.9 
Subtotal  586,419  36.3   477,907  34.5   108,512  22.7 
Savings  144,886  9.0   114,826  8.3   30,060  26.2 
Money market  377,585  23.4   258,883  18.7   118,702  45.9 
Subtotal  522,471  32.4   373,709  27.0   148,762  39.8 
Certificates of deposit less than $100,000  285,650  17.7   273,982  19.7   11,668  4.3 
Certificates of deposit of $100,000 through $250,000  150,437  9.3   177,075  12.8   (26,638) (15.0)
Certificates of deposit of $250,000 and over  68,242  4.3   83,929  6.0   (15,687) (18.7)
Subtotal  504,329  31.3   534,986  38.5   (30,657) (5.7)
Total $1,613,219  100.0 %$1,386,602  100.0 %$226,617  16.3 

Due to the COVID-19 pandemic and the resulting availability of PPP loan funds and stimulus funds, the tables above reflect quarter over linked quarter and year over year changes in deposits, partially impacted by customers transferring funds from CDs to more liquid interest-bearing accounts, such as money market and interest-bearing checking.   

At September 30, 2020, non-retail CDs, which include brokered CDs, online CDs, and public funds CDs, decreased $21.9 million to $173.3 million, due to brokered deposit maturities, compared to $195.1 million at June 30, 2020. The year over year increase in non-retail CDs of $32.1 million from $141.1 million at September 30, 2019, was the result of a $29.9 million increase in brokered CDs tied to longer term interest rate swap transactions, a $2.0 million increase in online CDs, and a $269,000 increase in public funds CDs.  Management remains focused on increasing its lower cost relationship-based deposits to fund long-term asset growth.

At September 30, 2020, borrowings increased $23.4 million, or 15.6%, to $173.6 million, from $150.3 million at June 30, 2020, and increased $96.8 million, or 125.9% from $76.9 million at September 30, 2019. The increase in borrowings from the linked quarter is primarily due to the addition of Federal Reserve Bank (“FRB”) borrowings of $27.0 million to fund short term HFS growth and advances from the Paycheck Protection Program Liquidity Facility (“PPPLF”) of $11.1 million, partially offset by the pay down of FHLB advances of $14.8 million. Under the PPPLF, the Bank pledged PPP loans at face value as collateral to obtain FRB non-recourse loans. The increase from the prior year is primarily due to the PPPLF and FRB borrowings.

Total stockholders’ equity increased $11.9 million, to $220.6 million at September 30, 2020, from $208.6 million at June 30, 2020, and increased $26.3 million, from $194.3 million at September 30, 2019.  The increase in stockholders’ equity during the current quarter was primarily due to net income of $12.7 million, partially offset by dividends of $882,000 and the common stock repurchases of $448,000. The Company repurchased 11,010 shares of its common stock during the quarter ended September 30, 2020, at an average price of $40.61 per share. Book value per common share was $52.82 at September 30, 2020, compared to $50.08 at June 30, 2020, and $44.61 at September 30, 2019.

The Bank is well capitalized under the minimum capital requirements established by the Federal Deposit Insurance Corporation (“FDIC”) at September 30, 2020 with a Community Bank Leverage Ratio (“CBLR”) of 10.7%, compared to the required CBLR of greater than 9.0% and the regulatory approved CBLR of 8.0% during the COVID-19 pandemic.  The Company’s Tier 1 leverage capital ratio was 10.8% at September 30, 2020.

Credit Quality

The ALLL at September 30, 2020, increased to $24.8 million, or 1.63% of gross loans receivable, excluding loans HFS, compared to $21.5 million, or 1.47% of gross loans receivable, excluding loans HFS at June 30, 2020, and $12.8 million, or 0.96% of gross loans receivable, excluding loans HFS, at September 30, 2019.  The adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans, was 1.72% at September 30, 2020 (See “Non-GAAP Financial Measures”).  Non-performing loans decreased to $7.6 million at September 30, 2020, from $7.9 million at June 30, 2020 and increased from $2.2 million at September 30, 2019.  The decrease in non-performing loans quarter over linked quarter was primarily a result of decreases in nonperforming consumer loans, and the year over year increase was associated with borrowers adversely impacted by the COVID-19 pandemic.

Loans classified as substandard increased $6.1 million to $18.5 million at September 30, 2020, compared to $12.4 million at June 30, 2020, and increased $11.1 million from $7.4 million at September 30, 2019.  The quarter over linked quarter increase in substandard loans was attributable to the downgrade of two one-to-four-family loan relationships with combined principal balances of $6.5 million, primarily due to the COVID-19 pandemic.  The year over year increase in substandard loans was primarily due to these loans and two commercial business loans totaling $4.3 million and two commercial real estate loans totaling $945,000 downgraded in the second quarter of 2020, with the addition of another commercial real estate loan in the amount of $1.1 million downgraded in the fourth quarter of 2019.  There was one other real estate owned (“OREO”) property of $90,000 at both September 30, 2020 and June 30, 2020, compared to two OREO properties totaling $178,000 at September 30, 2019.

Included in the carrying value of gross loans are net discounts on loans purchased in the Anchor Bank acquisition. The remaining net discount on loans acquired was $1.8 million, $2.0 million, and $3.1 million, on $159.2 million, $168.7 million, and $223.7 million of gross loans at September 30, 2020, June 30, 2020, and September 30, 2019, respectively.

Management has identified loans that have either been directly or indirectly impacted by the COVID-19 pandemic and has downgraded the risk classification of these loans as needed. Commercial loans (non homogeneous loans) downgraded as a result of the COVID-19 pandemic and their respective industries at the dates indicated are as follows:

(Dollars in thousands)            
Loan types: September 30, 2020 June 30, 2020 March 31, 2020
Construction $4,335  $4,704  $4,565 
Education/worship  4,796   5,558   5,525 
Food and beverage  14,346   16,199   12,988 
Hospitality  43,903   44,136   15,578 
Manufacturing  18,765   19,777   18,122 
Retail  2,663   11,865   4,058 
Transportation  4,992   4,532   5,111 
Other  23,241   20,040   18,452 
Total $117,041  $126,811  $84,399 

Management recognizes the potential impact of COVID-19 on all of our customers and will continue to prudently reserve for probable losses, including reserves against our homogenous residential and consumer portfolios. 

Operating Results

Net interest income increased $1.2 million, to $18.9 million for the three months ended September 30, 2020, from $17.7 million for the three months ended September 30, 2019.  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 loans funded by lower cost deposits.  Interest expense decreased $1.7 million, including a $1.6 million decrease in interest expense on deposits and a $79,000 decrease in interest expense on borrowings. Interest income decreased $483,000 including decreases of $400,000 in interest income on loans receivable, including fees, impacted primarily by the recent significant reduction in market interest rates on new loan originations and adjustable rate instruments, including PPP loans, and the impact of refinances of higher yielding one-to-four-family portfolio loans, along with an $83,000 decrease in interest and dividends on investment securities, and cash and cash equivalents.   For the nine months ended September 30, 2020, net interest income increased $1.3 million, to $54.3 million, from $53.0 million for the nine months ended September 30, 2019 in a similar manner as for the three month comparison described above, with decreases in interest expense of $2.8 million and interest income of $1.5 million.

The net interest margin (“NIM”) decreased 62 basis points to 3.92% for the three months ended September 30, 2020, from 4.54% for the same period in the prior year, and decreased 58 basis points to 4.03% for the nine months ended September 30, 2020, from 4.61% for the nine months ended September 30, 2019.  The average yield on PPP loans was 1.98 %, including the recognition of the net deferred fees, resulting in a negative impact to the NIM of eight basis points during the quarter ended September 30, 2020. When including the net interest income impacts of the PPPLF, NIM was negatively impacted an additional 10 basis points during the quarter ended September 30, 2020.  Management has included a NIM analysis in this release excluding the impact of PPP loans and PPPLF borrowings (See “Non-GAAP Financial Measures”). The comparable quarter over quarter decrease in NIM was impacted by lower yielding loans, including reduced interest rates on new fixed-rate real estate loan originations and adjustable-rate commercial loans as well as repricing loans from the March 2020 reductions in the targeted federal funds rate in response to COVID-19.  The year over year decrease in NIM was mostly driven by lower interest rates on new loan originations. The average cost of funds, including noninterest-bearing checking, decreased 63 basis points to 0.74% for the three months ended September 30, 2020, from 1.37% for the three months ended September 30, 2019.  This decrease was predominantly due to the decrease in cost for market rate deposits and decreased borrowing costs as well as a strategic shift away from higher cost certificate of deposit funding. The year over year average cost of funds decreased 43 basis points to 0.93% for the nine months ended September 30, 2020, from 1.36% for the nine months ended September 30, 2019, likewise reflecting decreases in market interest rates over last year.  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, 2020, the provision for loan losses was $3.1 million and $11.4 million, compared to $573,000 and $2.2 million for the three and nine months ended September 30, 2019, primarily due to the adverse economic impact of the COVID-19 pandemic and the increase in the loan portfolio due to organic loan growth.  During the three months ended September 30, 2020, net recoveries totaled $175,000 compared to net charge-offs of $147,000 for the same period last year. Net recoveries totaled $135,000 during the nine months ended September 30, 2020, compared to net charge-offs of $1.8 million during the nine months ended September 30, 2019. 

Noninterest income increased $10.8 million, to $17.5 million, for the three months ended September 30, 2020, from $6.7 million for the three months ended September 30, 2019.  The increase during the period primarily reflects an $11.6 million increase in gain on sale of loans, partially offset by a $1.1 million decrease in service charges and fee income primarily due to an increase in mortgage servicing rights amortization of $711,000, resulting from declining interest rates and increased refinancing activity.  Noninterest income increased $23.2 million, to $40.6 million, for the nine months ended September 30, 2020, from $17.4 million for the nine months ended September 30, 2019.  This increase was impacted by a $24.9 million increase in gain on sale of loans and a $1.5 million increase in other noninterest income mostly due to the net gain from a one-time sale of Class B Visa stock shares of $1.5 million, partially offset by a $3.6 million decrease in service charges and fee income, primarily due to an increase in mortgage servicing rights amortization of $3.2 million. 

Noninterest expense increased $2.5 million, to $17.2 million for the three months ended September 30, 2020, from $14.7 million for the three months ended September 30, 2019.  The increase in noninterest expense reflects a $2.4 million increase in salaries and benefits, primarily attributable to increases in incentives and commissions of $5.9 million driven by increased production of HFS loans and compensation of $792,000, partially offset by increases in recognized deferred costs on direct loan origination activities of $4.7 million. Noninterest expense increased $1.4 million, to $48.0 million for the nine months ended September 30, 2020, from $46.6 million for the nine months ended September 30, 2019.  The increase during this period was primarily due to a $2.4 million increase in salaries and benefits, primarily attributable to increases in incentives and commissions of $11.2 million, again driven by increased production of HFS loans, and compensation of $2.0 million, partially offset by increases in recognized deferred costs on direct loan origination activities of $11.9 million, as well as no acquisition costs for the nine months ended September 30, 2020, compared to $1.9 million for the nine months ended September 30, 2019. Other increases between the periods included $1.1 million in the impairment of servicing rights, and $723,000 in operations expense, partially offset by decreases of $738,000 in loan costs and $612,000 in data processing.

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 headquarter office that accepts deposits, and seven loan production offices in various suburban communities in the greater Puget Sound area, and one loan production office in the market area of the Tri-Cities, Washington.  The Bank services home mortgage customers throughout Washington State with an emphasis in the Puget Sound and Tri-Cities 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: the effect of the COVID-19 pandemic, including on the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within 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; 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 2020 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
  2020 2020 2019 % Change % Change
ASSETS          
Cash and due from banks $11,348  $12,214  $15,979  (7) (29)
Interest-bearing deposits at other financial institutions  24,725   113,910   46,915  (78) (47)
Total cash and cash equivalents  36,073   126,124   62,894  (71) (43)
Certificates of deposit at other financial institutions  14,262   17,926   24,296  (20) (41)
Securities available-for-sale, at fair value  173,101   168,709   106,038  3  63 
Securities held-to-maturity  5,500        NM  NM 
Loans held for sale, at fair value  215,123   139,410   80,619  54  167 
Loans receivable, net  1,491,503   1,444,425   1,311,288  3  14 
Accrued interest receivable  6,809   6,303   5,723  8  19 
Premises and equipment, net  27,898   28,340   29,066  (2) (4)
Operating lease right-of-use  5,251   4,730   4,713  11  11 
Federal Home Loan Bank (“FHLB”) stock, at cost  6,553   7,659   7,995  (14) (18)
Other real estate owned (“OREO”)  90   90   178    (49)
Bank owned life insurance (“BOLI”), net  36,006   35,788   35,136  1  2 
Servicing rights, held at the lower of cost or fair value  11,736   10,672   11,193  10  5 
Goodwill  2,312   2,312   2,312     
Core deposit intangible, net  4,928   5,104   5,647  (3) (13)
Other assets  17,481   11,164   7,899  57  121 
TOTAL ASSETS $2,054,626  $2,008,756  $1,694,997  2  21 
LIABILITIES             
Deposits:             
Noninterest-bearing accounts $356,843  $345,497  $281,073  3  27 
Interest-bearing accounts  1,256,376   1,261,375   1,105,529    14 
Total deposits  1,613,219   1,606,872   1,386,602    16 
Borrowings  173,640   150,255   76,864  16  126 
Subordinated note:             
Principal amount  10,000   10,000   10,000     
Unamortized debt issuance costs  (100)  (105)  (120) (5) (17)
Total subordinated note less unamortized debt issuance costs  9,900   9,895   9,880     
Operating lease liability  5,468   4,945   4,881  11  12 
Deferred tax liability, net  2,662   2,675   1,029    159 
Other liabilities  29,187   25,473   21,484  15  36 
Total liabilities  1,834,076   1,800,115   1,500,740  2  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; 4,263,091 shares issued and outstanding at September 30, 2020, 4,245,041 at June 30, 2020, and 4,452,872 at September 30, 2019  43   42   44  2  (2)
Additional paid-in capital  81,676   81,616   88,608    (8)
Retained earnings  135,921   124,090   105,672  10  29 
Accumulated other comprehensive income, net of tax  3,285   3,334   583  (1) 463 
Unearned shares – Employee Stock Ownership Plan (“ESOP”)  (375)  (441)  (650) (15) (42)
Total stockholders’ equity  220,550   208,641   194,257  6  14 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $2,054,626  $2,008,756  $1,694,997  2  21 



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
  2020 2020 2019 % Change % Change
INTEREST INCOME               
Loans receivable, including fees $21,066  $20,564  $21,466  2  (2)
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions  1,162   1,149   1,245  1  (7)
Total interest and dividend income  22,228   21,713   22,711  2  (2)
INTEREST EXPENSE               
Deposits  2,637   3,226   4,223  (18) (38)
Borrowings  503   458   582  10  (14)
Subordinated note  170   169   171  1  (1)
Total interest expense  3,310   3,853   4,976  (14) (33)
NET INTEREST INCOME  18,918   17,860   17,735  6  7 
PROVISION FOR LOAN LOSSES  3,100   4,649   573  (33) 441 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  15,818   13,211   17,162  20  (8)
NONINTEREST INCOME               
Service charges and fee income  546   96   1,619  469  (66)
Gain on sale of loans  16,228   13,365   4,583  21  254 
Gain on sale of investment securities  118   182     (35) 100 
Earnings on cash surrender value of BOLI  219   215   219  2   
Other noninterest income  435   273   323  59  35 
Total noninterest income  17,546   14,131   6,744  24  160 
NONINTEREST EXPENSE               
Salaries and benefits  10,225   7,420   7,865  38  30 
Operations  2,809   2,573   2,360  9  19 
Occupancy  1,167   1,216   1,104  (4) 6 
Data processing  1,127   1,051   1,148  7  (2)
Gain on sale of OREO        (40)   (100)
OREO expenses     2   1  (100) (100)
Loan costs  593   451   903  31  (34)
Professional and board fees  601   668   654  (10) (8)
Federal Deposit Insurance Corporation (“FDIC”) insurance  290   158   (29) 84  (1,100)
Marketing and advertising  109   103   178  6  (39)
Acquisition costs        257    (100)
Amortization of core deposit intangible  176   177   190  (1) (7)
Impairment on servicing rights  82   803   131  (90) (37)
Total noninterest expense  17,179   14,622   14,722  17  17 
INCOME BEFORE PROVISION FOR INCOME TAXES  16,185   12,720   9,184  27  76 
PROVISION FOR INCOME TAXES  3,472   2,700   2,040  29  70 
NET INCOME $12,713  $10,020  $7,144  27  78 
Basic earnings per share $2.99  $2.34  $1.62  28  85 
Diluted earnings per share $2.94  $2.30  $1.58  28  86 


  Nine Months Ended Year
  September 30, September 30, Over Year
  2020 2019 % Change
INTEREST INCOME         
Loans receivable, including fees $62,370  $63,677  (2)
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions  3,520   3,710  (5)
Total interest and dividend income  65,890   67,387  (2)
INTEREST EXPENSE         
Deposits  9,670   11,989  (19)
Borrowings  1,458   1,932  (25)
Subordinated note  511   508  1 
Total interest expense  11,639   14,429  (19)
NET INTEREST INCOME  54,251   52,958  2 
PROVISION FOR LOAN LOSSES  11,435   2,233  412 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  42,816   50,725  (16)
NONINTEREST INCOME         
Service charges and fee income  1,566   5,131  (69)
Gain on sale of loans  35,492   10,556  236 
Gain on sale of investment securities  300   32  838 
Earnings on cash surrender value of BOLI  650   651   
Other noninterest income  2,560   1,012  153 
Total noninterest income  40,568   17,382  133 
NONINTEREST EXPENSE         
Salaries and benefits  27,192   24,757  10 
Operations  7,785   7,062  10 
Occupancy  3,492   3,446  1 
Data processing  3,158   3,770  (16)
Loss (gain) on sale of OREO  2   (125) (102)
OREO expenses  2   12  (83)
Loan costs  1,544   2,282  (32)
Professional and board fees  1,950   1,820  7 
FDIC insurance  574   358  60 
Marketing and advertising  358   505  (29)
Acquisition costs     1,855  (100)
Amortization of core deposit intangible  529   570  (7)
Impairment of servicing rights  1,399   278  403 
Total noninterest expense  47,985   46,590  3 
INCOME BEFORE PROVISION FOR INCOME TAXES  35,399   21,517  65 
PROVISION FOR INCOME TAXES  7,499   4,718  59 
NET INCOME $27,900  $16,799  66 
Basic earnings per share $6.49  $3.80  71 
Diluted earnings per share $6.38  $3.71  72 



           
KEY FINANCIAL RATIOS AND DATA (Unaudited)          
           
  At or For the Three Months Ended 
  September 30,
 June 30,
 September 30,
 
  2020
 2020
 2019
 
PERFORMANCE RATIOS:          
Return on assets (ratio of net income to average total assets) (1) 2.51 %2.08 %1.71 %
Return on equity (ratio of net income to average equity) (1) 24.04  19.77  14.75  
Yield on average interest-earning assets (1) 4.60  4.75  5.81  
Interest incurred on liabilities as a percentage of average noninterest-bearing deposits and interest-bearing liabilities (1) 0.74  0.91  1.37  
Interest rate spread information – average during period 3.86  3.84  4.44  
Net interest margin (1) 3.92  3.91  4.54  
Operating expense to average total assets (1) 3.39  3.03  3.53  
Average interest-earning assets to average interest-bearing liabilities 134.22  132.98  133.59  
Efficiency ratio (2) 47.11  45.71  60.14  


  At or For the Nine Months Ended 
  September 30, 
   September 30, 
 
  2020
   2019
 
PERFORMANCE RATIOS:         
Return on assets (ratio of net income to average total assets) (1) 1.97 %  1.38 %
Return on equity (ratio of net income to average equity) (1) 18.11    11.93  
Yield on average interest-earning assets (1) 4.89    5.87  
Interest incurred on liabilities as a percentage of average noninterest-bearing deposits and interest-bearing liabilities (1) 0.93    1.36  
Interest rate spread information – average during period 3.96    4.51  
Net interest margin (1) 4.03    4.61  
Operating expense to average total assets (1) 3.38    3.82  
Average interest-earning assets to average interest-bearing liabilities 133.27    131.26  
Efficiency ratio (2) 50.61    66.24  


  September 30, 
 June 30, 
 September 30, 
 
  2020
 2020
 2019
 
ASSET QUALITY RATIOS AND DATA:          
Non-performing assets to total assets at end of period (3) 0.37 %0.40 %0.14 %
Non-performing loans to total gross loans (4) 0.50  0.54  0.17  
Allowance for loan losses to non-performing loans (4) 327.94  272.40  582.61  
Allowance for loan losses to gross loans receivable, excluding HFS loans 1.63  1.47  0.96  
           
CAPITAL RATIOS, BANK ONLY:          
Community Bank Leverage Ratio 10.67 %10.85 %11.63 %
           
CAPITAL RATIOS, COMPANY ONLY:          
Tier 1 leverage-based capital 10.84 %10.54 %11.32 %


  At or For the Three Months Ended 
   September 30, 
 June 30, September 30, 
  2020 2020 2019 
PER COMMON SHARE DATA:             
Basic earnings per share $2.99  $2.34  $1.62  
Diluted earnings per share $2.94  $2.30  $1.58  
Weighted average basic shares outstanding  4,224,821   4,232,776   4,401,303  
Weighted average diluted shares outstanding  4,295,334   4,305,249   4,498,380  
Common shares outstanding at end of period  4,175,598 (5) 4,165,944 (6) 4,354,335 (7)
Book value per share using common shares outstanding $52.82  $50.08  $44.61  
Tangible book value per share using common shares outstanding (8) $51.08  $48.30  $42.79  

____________

  1. Annualized.
  2. Total noninterest expense as a percentage of net interest income and total noninterest income.
  3. Non-performing assets consist of non-performing loans (which include non-accruing loans and accruing loans more than 90 days past due), foreclosed real estate and other repossessed assets.
  4. Non-performing loans consist of non-accruing loans and accruing loans 90 days or more past due.
  5. Common shares were calculated using shares outstanding of 4,263,091 at September 30, 2020, less 55,092 unvested restricted stock shares, and 32,401 unallocated ESOP shares.
  6. Common shares were calculated using shares outstanding of 4,245,041 at June 30, 2020, less 40,215 unvested restricted stock shares, and 38,882 unallocated ESOP shares.
  7. Common shares were calculated using shares outstanding of 4,452,872 at September 30, 2019, less 40,215 unvested restricted stock shares, and 58,322 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 2020 2019 2020 2019 $ Change $ Change
Assets                      
Loans receivable, net deferred loan fees (1) $1,648,070  $1,368,962  $1,537,365  $1,352,006  $279,108  $185,359 
Securities available-for-sale, at fair value  165,095   99,813   151,176   99,545   65,282   51,631 
Securities held-to-maturity  2,462   -   826   -   2,462   826 
Interest-bearing deposits and certificates of deposit at other financial institutions  97,473   74,234   100,836   75,425   23,239   25,411 
FHLB stock, at cost  7,219   8,334   8,240   8,482   (1,115)  (242)
Total interest-earning assets  1,920,319   1,551,343   1,798,443   1,535,458   368,976   262,985 
Noninterest-earning assets  94,190   101,873   97,435   96,603   (7,683)  832 
Total assets $2,014,509  $1,653,216  $1,895,878  $1,632,061  $361,293  $263,817 
Liabilities and stockholders’ equity                      
Interest-bearing accounts $1,268,795  $1,068,189  $1,200,796  $1,066,595  $200,606  $134,201 
Borrowings  152,045   83,208   138,749   93,356   68,837   45,393 
Subordinated note  9,897   9,877   9,892   9,872   20   20 
Total interest-bearing liabilities  1,430,737   1,161,274   1,349,437   1,169,823   269,463   179,614 
Noninterest-bearing accounts  344,731   276,689   314,789   253,529   68,042   61,260 
Other noninterest-bearing liabilities  28,698   23,075   25,837   20,457   5,623   5,380 
Stockholders’ equity  210,343   192,178   205,815   188,252   18,165   17,563 
Total liabilities and stockholders’ equity $2,014,509  $1,653,216  $1,895,878  $1,632,061  $361,293  $263,817 
  1. Includes loans held for sale.


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 the tangible book value per share, adjusted NIM excluding PPP loans and PPPLF activity, and adjusted ALLL excluding PPP loans as non-GAAP financial measures. 

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.  The Company believes that presenting NIM excluding the effect of PPP loans and the PPPLF, and the ALLL excluding PPP loans is useful in assessing the impact of these special governmental sponsored programs as both the PPP loan balance and PPPLF borrowings are anticipated to substantially decrease within a short time upon forgiveness by the SBA of the PPP loans.

These non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.  Further, these non-GAAP financial measures should not be considered in isolation or as a substitute for those measures 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) 2020 2020 2019
Stockholders' equity $220,550  $208,641  $194,257 
Goodwill and core deposit intangible, net  (7,240)  (7,416)  (7,959)
Tangible common stockholders' equity $213,310  $201,225  $186,298 
          
Common shares outstanding at end of period  4,175,598   4,165,944   4,354,335 
          
Common stockholders' equity (book value) per share (GAAP) $52.82  $50.08  $44.61 
Tangible common stockholders' equity (tangible book value) per share (non-GAAP) $51.08  $48.30  $42.79 


Reconciliation of the NIM (non-GAAP) which excludes PPP loans and PPPLF borrowings, as compared to NIM (GAAP), for the periods indicated:

  Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, 2020 September 30, 2020
Net interest margin (GAAP)  3.92%  4.03%
       
Net interest income before provision (GAAP) $18,918  $54,251 
Interest income on PPP loans  (187)  (341)
Accreted fees/costs on PPP loans, net  (183)  (346)
Interest expense on PPPLF borrowings  60   104 
Interest income on PPPLF borrowings proceeds (1)  (280)  (519)
Net interest income before provision, excluding interest and accreted fees/costs, net on PPP loans and interest income and expense related to PPPLF borrowings  (non-GAAP) $18,328  $53,149 
       
Average interest-earning assets (GAAP)  1,920,319   1,798,433 
Average proceeds from PPPLF borrowings  (65,628)  (38,496)
Average PPP loan balance  (74,203)  (45,560)
Adjusted average interest earning assets (non-GAAP) $1,780,488  $1,714,377 
       
Days in period  92   274 
       
Days in year  366   366 
       
Net interest margin adjusted for PPP loans and PPPLF (non-GAAP)  4.10%  4.14%
  1. Assumes proceeds from PPPLF borrowings reinvested at the Company's blended yield on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions.


Reconciliation of the ALLL (non-GAAP) which excludes PPP loans, as compared to the ALLL (GAAP) for the periods indicated:

  September 30, June 30, March 31,
(Dollars in thousands) 2020 2020 2020
Total gross loans receivable, excluding loans HFS (GAAP) $1,519,418  $1,468,908  $1,411,874 
PPP Loans  (74,133)  (75,272)   
Gross loans receivable, excluding loans HFS and PPP loans (non-GAAP) $1,445,285  $1,393,636  $1,411,874 
          
ALLL (GAAP) $(24,799) $(21,525) $(16,872)
          
Adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans (non-GAAP)  1.72%  1.54%  1.20%
ALLL to gross loans receivable, excluding loans HFS (GAAP)  1.63%  1.47%  1.20%


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