FS Bancorp, Inc. Reports Net Income for the Second Quarter of $10.0 Million or $2.30 Per Diluted Share, and Thirtieth Consecutive Quarterly Dividend

FS Bancorp, Inc. Reports Net Income for the Second Quarter of $10.0 Million or $2.30 Per Diluted Share, and Thirtieth Consecutive Quarterly Dividend

MOUNTLAKE TERRACE, Wash., July 23, 2020 (GLOBE NEWSWIRE) — FS Bancorp, Inc. (NASDAQ:FSBW) (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2020 second quarter net income of $10.0 million, or $2.30 per diluted share, compared to $4.5 million, or $0.98 per diluted share for the same period last year.

“During the last eight years of significant growth, we focused on maintaining diversified revenue streams through challenging economic environments.  The results of the second quarter reflect our diversified strategy and commitment to long-term shareholder value as we surpassed the $2 billion in assets mark this quarter,” stated Joe Adams, CEO.  “We are also pleased to announce that our Board of Directors has approved our thirtieth consecutive quarterly cash dividend. The quarterly dividend of $0.21 will be paid on August 20, 2020, to shareholders of record as of August 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. During the first and second quarters of 2020, the Company has provided relief to portfolio (held for investment) loans impacted by COVID-19 in the amount of $103.6 million. As of June 30, 2020, the amount of loans remaining under payment/relief agreements includes commercial real estate loans of $53.0 million, commercial business loans of $24.1 million, portfolio one-to-four-family loans of $18.8 million, and consumer loans of $4.0 million. Additional detail is provided below in the “Credit Quality” discussion.

During the second quarter, the Company participated in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”). For borrowers in the communities we serve, the Company has funded 463 PPP loans totaling $75.3 million as of June 30, 2020.

All of our branches are open, with the exception of one branch which is operating through the drive-up window and accepting customer appointments. The majority of our employees continue to work remotely, where feasible.

2020 Second Quarter Highlights

  • Net income was $10.0 million for the second quarter of 2020, compared to $5.2 million in the previous quarter, and $4.5 million for the same quarter one year ago;
  • In response to the COVID-19 pandemic and its continued adverse economic impact, the provision for loan losses increased to $4.6 million, compared to $3.7 million in the previous quarter, and $910,000 for the same quarter one year ago;
  • Total gross loans increased $57.0 million during the quarter to $1.47 billion at June 30, 2020, compared to $1.41 billion at March 31, 2020, and $1.30 billion at June 30, 2019;
  • The allowance for loan and lease losses (“ALLL”) to gross loans receivable (excluding loans held for sale (“HFS”)) for the second quarter of 2020 was 1.47%, up from 1.20% in the previous quarter and 0.95% for the same quarter one year ago. The adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans, was 1.54% (See “Non-GAAP Financial Measures”);
  • Total deposits increased $160.6 million during the quarter, including an increase of $71.2 million in relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts), mostly due to management’s focus on deposit mix and increases in PPP funds;
  • The Company repurchased 87,155 shares of its common stock during the quarter ended June 30, 2020, at an average price per share of $37.62; and
  • The Bank’s Community Bank Leverage Ratio (“CBLR”) was 10.8% at June 30, 2020.

Asset Summary

Total assets increased $161.6 million, or 8.7%, to $2.01 billion at June 30, 2020, compared to $1.85 billion at March 31, 2020, and increased $367.7 million, or 22.4%, from $1.64 billion at June 30, 2019.  The quarter over linked quarter increase in total assets was primarily due to increases in total cash and cash equivalents of $77.2 million, loans receivable, net of $51.4 million, loans HFS of $23.8 million, and securities available-for-sale of $12.2 million, partially offset by a decrease in Federal Home Loan Bank (“FHLB”) stock of $3.3 million. Year over year increases in total assets included increases in loans receivable, net of $162.3 million, loans HFS of $72.9 million, securities available-for-sale of $72.5 million, and total cash and cash equivalents of $66.5 million, partially offset by a decrease in certificates of deposit (“CDs”) at other financial institutions of $6.4 million.

The Bank sold $9.2 million of securities available-for-sale during the second quarter of 2020 realizing a gain of $182,000.  The Bank sold these securities to reduce portfolio duration and sell lower yielding mortgage-backed security investments that had been in a loss position over 12 months.  The proceeds were allocated to term investments including municipal bonds and agency-backed securities.

                                     
(Dollars in thousands)   June 30, 2020     March 31, 2020     June 30, 2019  
    Amount   Percent     Amount   Percent     Amount   Percent  
REAL ESTATE LOANS                                    
Commercial   $ 222,265     15.1 %   $ 220,509     15.6 %   $ 206,834     16.0 %
Construction and development     183,029     12.5       168,658     12.0       214,140     16.5  
Home equity     35,082     2.4       37,503     2.7       36,860     2.8  
One-to-four-family (excludes HFS)     295,220     20.1       305,436     21.6       248,921     19.2  
Multi-family     132,329     9.0       130,570     9.2       103,219     8.0  
Total real estate loans     867,925     59.1       862,676     61.1       809,974     62.5  
                                     
CONSUMER LOANS                                    
Indirect home improvement     264,781     18.0       261,566     18.5       232,844     17.9  
Marine     76,893     5.2       69,473     4.9       66,064     5.1  
Other consumer     3,647     0.3       4,056     0.3       4,875     0.4  
Total consumer loans     345,321     23.5       335,095     23.7       303,783     23.4  
                                     
COMMERCIAL BUSINESS LOANS                                    
Commercial and industrial     213,961     14.6       149,086     10.6       135,336     10.5  
Warehouse lending     41,701     2.8       65,017     4.6       47,028     3.6  
Total commercial business loans     255,662     17.4       214,103     15.2       182,364     14.1  
Total loans receivable, gross     1,468,908     100.0 %     1,411,874     100.0 %     1,296,121     100.0 %
                                     
Allowance for loan losses     (21,524 )           (16,872 )           (12,340 )      
Deferred costs and fees, net     (4,231 )           (3,425 )           (2,940 )      
Premiums on purchased loans, net     1,272             1,493             1,278        
Total loans receivable, net   $ 1,444,425           $ 1,393,070           $ 1,282,119        
                                           

Loans receivable, net increased $51.4 million to $1.44 billion at June 30, 2020, from $1.39 billion at March 31, 2020, and increased $162.3 million from $1.28 billion at June 30, 2019.  The quarter over linked quarter increase in total real estate loans was $5.2 million, including increases in construction and development loans of $14.4 million, multi-family loans and commercial real estate loans both of $1.8 million, partially offset by decreases in one-to-four-family portfolio loans of $10.2 million and home equity loans of $2.4 million.  Consumer loans increased $10.2 million, primarily due to an increase of $7.4 million in marine loans and $3.2 million in indirect home improvement loans. Commercial business loans increased $41.6 million, primarily due to an increase in commercial and industrial loans of $64.9 million, partially offset by reductions in warehouse lending of $23.3 million. The increase in commercial and industrial loans was primarily due to the origination of $75.3 million of PPP loans.

One-to-four-family loans originated through the home lending segment, which includes loans HFS, loans held for investment, fixed rate seconds, and loans brokered to other institutions, were $478.4 million during the quarter ended June 30, 2020, an increase of $192.8 million, or 67.5%, compared to $285.6 million for the preceding quarter. During the quarter ended June 30, 2020, the Company sold $427.0 million of one-to-four-family loans compared to sales of $212.4 million during the previous quarter, and sales of $173.4 million during the same quarter one year ago. During the six months ended June 30, 2020, the Company sold $639.4 million of one-to-four-family loans compared to sales of $304.3 million during the same period last year. Refinance activity increased significantly over the last year in response to decreases in market interest rates.

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

 
(Dollars in thousands)     For the Three Months Ended   For the Three Months Ended   Year   Year
      June 30, 2020   June 30, 2019   over Year   over Year
      Amount   Percent   Amount   Percent     $ Change   % Change
Purchase     $ 143,060   29.9 %   $ 142,115   68.3 %   $ 945   0.7
Refinance       335,333   70.1       65,841   31.7       269,492   409.3
Total     $ 478,393   100.0 %   $ 207,956   100.0 %   $ 270,437   130.0
                                   
    For the Six Months Ended     For the Six Months Ended     Year   Year
    June 30, 2020     June 30, 2019     over Year   over Year
    Amount   Percent     Amount   Percent     $ Change   % Change
Purchase   $ 257,712   33.7 %   $ 247,708   70.4 %   $ 10,004   4.0
Refinance     506,283   66.3       103,996   29.6       402,287   386.8
Total   $ 763,995   100.0 %   $ 351,704   100.0 %   $ 412,291   117.2

Liabilities and Equity Summary

Total deposits increased $160.6 million to $1.61 billion at June 30, 2020, compared to $1.45 billion at March 31, 2020, and increased $272.7 million from $1.33 billion at June 30, 2019.  The quarter over linked quarter increase was partly due to management’s shift in deposit mix away from certificates of deposit and into nonmaturity DDA accounts including disbursements of PPP loan funds into borrowers’ operating accounts, as well as changes in customer spending habits due to the COVID-19 pandemic. Relationship-based transactional deposits increased during the current quarter by $71.2 million, primarily due to a $65.6 million increase in noninterest-bearing checking accounts and an $11.3 million increase in interest-bearing checking accounts, offset partially by a $5.7 million decrease in escrow deposits. The remaining quarter over linked quarter increase of $89.4 million was due to a $47.9 million increase in time deposits including growth of $52.6 million in brokered deposits, partially offset by a reduction of $9.1 million in retail CDs, and a $41.5 million increase in money market and savings accounts.  The year over year increase of $272.7 million included relationship-based transactional deposits of $106.0 million, primarily due to a $65.5 million increase in noninterest-bearing checking accounts, $39.7 million increase in interest-bearing accounts, and an $801,000 increase in escrow deposits.  The remaining $166.7 million in increases included $102.5 million in money market and savings accounts and $64.2 million in time deposits. 

At June 30, 2020, non-retail CDs, which include brokered CDs, online CDs, public deposits CDs, and public funds CDs increased $66.3 million to $195.1 million, compared to $128.8 million at March 31, 2020, primarily due to a $64.6 million increase in brokered CDs and a $1.7 million increase in online CDs. Brokered CDs increased during the quarter to fund asset growth as their cost declined significantly in response to recent reductions in interest rates. The year over year increase in non-retail CDs of $76.2 million from $118.9 million at June 30, 2019, was the result of a $73.5 million increase in brokered CDs tied to longer term swap transactions, $2.0 million increase in online CDs, and a $783,000 increase in public funds CDs.  Management remains focused on increasing our lower cost relationship-based deposits to fund long-term asset growth.

                                     
DEPOSIT BREAKDOWN                                    
(Dollars in thousands)                                    
    June 30, 2020     March 31, 2020     June 30, 2019  
    Amount   Percent     Amount   Percent     Amount   Percent  
Noninterest-bearing checking   $ 333,588   20.8 %   $ 267,966   18.5 %   $ 268,113   20.1 %
Interest-bearing checking     220,214   13.7       208,952   14.5       180,498   13.5  
Savings     143,740   8.9       123,052   8.5       117,687   8.8  
Money market     324,253   20.2       303,405   21.0       247,854   18.6  
Certificates of deposit less than $100,000     321,634   20.0       263,787   18.2       251,280   18.9  
Certificates of deposit of $100,000 through $250,000     166,543   10.4       176,322   12.2       177,718   13.3  
Certificates of deposit of $250,000 and over     84,991   5.3       85,185   5.9       79,959   6.0  
Escrow accounts related to mortgages serviced     11,909   0.7       17,600   1.2       11,108   0.8  
Total   $ 1,606,872   100.0 %   $ 1,446,269   100.0 %   $ 1,334,217   100.0 %

At June 30, 2020, borrowings decreased $8.9 million, or 5.6%, to $150.3 million, from $159.1 million at March 31, 2020, and increased $67.1 million, or 80.6% from $83.2 million at June 30, 2019. The decrease in borrowings from the linked quarter is primarily due to the pay down of FHLB advances of $71.9 million, partially offset by the addition of funds from the Paycheck Protection Program Liquidity Facility (“PPPLF”) of $63.0 million. Under the PPPLF, the Bank pledged PPP loans at face value as collateral to obtain Federal Reserve Bank non-recourse loans. The increase from the prior year is primarily due to the funds from the PPPLF and a $4.1 million increase in FHLB advances.

Total stockholders’ equity increased $7.8 million, to $208.6 million at June 30, 2020, from $200.8 million at March 31, 2020, and increased $19.2 million, from $189.4 million at June 30, 2019.  The increase in stockholders’ equity during the current quarter was primarily due to net income of $10.0 million and $1.5 million of other comprehensive income, net of tax, partially offset by the common stock repurchase of $3.3 million. The Company repurchased 87,155 shares of its common stock during the quarter ended June 30, 2020, at an average price of $37.62 per share.  Book value per common share was $50.08 at June 30, 2020, compared to $47.29 at March 31, 2020, and $43.18 at June 30, 2019.

The Bank is well capitalized under the minimum capital requirements established by the Federal Deposit Insurance Corporation (“FDIC”) at June 30, 2020 with a CBLR of 10.8%, 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 10.5% at June 30, 2020.

Credit Quality

The ALLL at June 30, 2020, increased to $21.5 million, or 1.47% of gross loans receivable, excluding loans HFS, compared to $16.9 million, or 1.20% of gross loans receivable, excluding loans HFS at March 31, 2020, and $12.3 million, or 0.95% of gross loans receivable, excluding loans HFS, at June 30, 2019.  The adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans was 1.54% at June 30, 2020 (See “Non-GAAP Financial Measures”).  Non-performing loans increased to $7.9 million at June 30, 2020, from $3.2 million at March 31, 2020 and from $1.6 million at June 30, 2019.  The increase in non-performing loans quarter over linked quarter was primarily a result of borrowers associated with COVID-19 restrictions on their business activities, and the year over year increase was also associated with the COVID-19 pandemic.

Loans classified as substandard increased $4.8 million to $12.4 million at June 30, 2020, compared to $7.6 million at March 31, 2020, and increased $5.9 million from $6.5 million at June 30, 2019.  The quarter over linked quarter increase in substandard loans was mostly driven by the downgrade of two commercial business loans totaling $4.3 million and two commercial real estate loans totaling $945,000 primarily due to the COVID-19 pandemic.  The year over year increase in substandard loans was primarily due to the downgrade of the two loans mentioned above with the addition of another commercial real estate loan in the amount of $1.1 million downgraded in the fourth quarter of 2019 due to borrower financial difficulties and remains substandard due to state mandates on certain businesses related to the COVID-19 pandemic.  There was one other real estate owned (“OREO”) property totaling $90,000 at both June 30, 2020 and March 31, 2020, compared to three OREO properties totaling $254,000 at June 30, 2019.

Included in the carrying value of gross loans are net discounts on loans purchased in the Anchor Acquisition. The remaining net discount on loans acquired in the Anchor Acquisition was $2.0 million, $2.3 million, and $3.7 million, on $168.7 million, $178.2 million, and $278.4 million of gross loans at June 30, 2020, March 31, 2020, and June 30, 2019, respectively.

Management has identified $126.8 million of loans that are in industries potentially impacted by the COVID-19 pandemic and has downgraded the risk classification of these loans as follows. Total COVID-19 downgrades were $108.5 million to Watch, $11.8 million to Special Mention, and $6.5 million to Substandard for the six months ended June 30, 2020.

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:   At June 30, 2020   At March 31, 2020
Construction   $ 4,704   $ 4,565
Education/worship     5,558     5,525
Food and beverage     16,199     12,988
Hospitality     44,136     15,578
Manufacturing     19,777     18,122
Retail     11,865     4,058
Transportation     4,532     5,111
Other     20,040     18,452
Total   $ 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. 

The Company is offering payment and financial relief programs for borrowers impacted by the COVID-19 pandemic.  For the six months ended June 30, 2020, the Company processed 355 requests for some type of payment relief on portfolio loans (commercial, residential, and consumer) representing $103.6 million in outstanding principal balances.  The primary method of relief is to allow the borrower up to 90-day 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 June 30, 2020, we had modified a total of 548 loans including loans serviced for others aggregated to $161.4 million, as reflected in the following table:

           
    June 30, 2020
    Number of      
    Loans Under      
(Dollars in thousands)   Payment/Relief      
Portfolio loans:   Agreements   Amount
Commercial real estate   33   $ 53,031
One-to-four-family (excluding HFS)   32     18,796
Consumer   253     7,670
Commercial business loans   37     24,124
Total portfolio loans   355     103,621
Serviced loans:          
Loans serviced for others   193     57,787
Total loans provided COVID-19 relief   548   $ 161,408

Operating Results

Net interest income increased $326,000, to $17.9 million for the three months ended June 30, 2020, from $17.5 million for the three months ended June 30, 2019.  This increase was primarily the result of decreases in both interest income and interest expense.  Interest expense decreased $978,000, including an $830,000 decrease in interest expense on deposits and a $148,000 decrease in interest expense on borrowings. Interest income decreased $652,000 including decreases of $538,000 in interest income on loans receivable, including fees, impacted primarily by the recent significant reduction in market interest rates decreasing yields on new loan originations and adjustable instruments and the impact of refinances of higher yielding one-to-four-family portfolio loans, along with a $114,000 decrease in interest and dividends on investment securities, and cash and cash equivalents.  For the six months ended June 30, 2020, net interest income increased modestly by $110,000, to $35.3 million, from $35.2 million for the six months ended June 30, 2019 in a similar manner as for the three month comparison described above, with decreases in interest expense of $1.1 million and in interest income of $1.0 million.

The net interest margin (“NIM”) decreased 69 basis points to 3.91% for the three months ended June 30, 2020, from 4.60% for the same period in the prior year, and decreased 56 basis points to 4.09% for the six months ended June 30, 2020, from 4.65% for the six months ended June 30, 2019.  The average yield on PPP loans was 2.06%, including the recognition of the net deferred fees, resulting in a negative impact to the NIM of six basis points during the quarter ended June 30, 2020. When including the net interest income impacts of the PPPLF, NIM was negatively impacted an additional eight basis points during the quarter ended June 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 quarter over quarter decrease in NIM was impacted by higher balances of lower yielding cash balances and reduced note 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 note rates on new loan originations. The average cost of funds, including noninterest-bearing checking, decreased 46 basis points to 0.91% for the three months ended June 30, 2020, from 1.37% for the three months ended June 30, 2019.  This decrease was predominantly due to the decrease in cost for market rate deposits and decreased borrowing costs reflecting the lower market interest rates. The year over year average cost of funds decreased 31 basis points to 1.04% for the six months ended June 30, 2020, from 1.35% for the six months ended June 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 six months ended June 30, 2020, the provision for loan losses was $4.6 million and $8.3 million, compared to $910,000 and $1.7 million for the three and six months ended June 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 June 30, 2020, net recoveries totaled $3,000 compared to net charge-offs of $415,000 for the same period last year. Net charge-offs totaled $40,000 during the six months ended June 30, 2020, compared to net charge-offs of $1.7 million during the six months ended June 30, 2019. 

Noninterest income increased $8.0 million, to $14.1 million, for the three months ended June 30, 2020, from $6.1 million for the three months ended June 30, 2019.  The increase during the period primarily reflects a $9.8 million increase in gain on sale of loans, partially offset by a $1.8 million decrease in service charges and fee income primarily due to an increase in mortgage servicing rights amortization of $1.5 million, resulting from declining interest rates and increased refinancing activity.  Noninterest income increased $12.4 million, to $23.0 million, for the six months ended June 30, 2020, from $10.6 million for the six months ended June 30, 2019.  This increase was impacted by a $13.3 million increase in gain on sale of loans and a $1.4 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 $2.5 million decrease in service charges and fee income. 

Noninterest expense decreased $2.4 million, to $14.6 million for the three months ended June 30, 2020, from $17.1 million for the three months ended June 30, 2019.  The decrease in noninterest expense includes a $1.2 million decrease in salaries and benefits, primarily attributable to increases in recognized deferred costs on direct loan origination activities of $5.1 million, partially offset by increases in incentives and commissions of $3.7 million due primarily to increased production of HFS loans, partially offset by an increase of $679,000 in the impairment of servicing rights reflecting the reduction in market interest rates. Additionally, there were no acquisition costs this quarter, compared to $1.2 million in acquisition costs in the prior year quarter. Noninterest expense decreased $1.1 million, to $30.8 million for the six months ended June 30, 2020, from $31.9 million for the six months ended June 30, 2019.  The decrease during this period was primarily due to no acquisition costs for the six months ended June 30, 2020, compared to $1.6 million for the six months ended June 30, 2019. Other decreases between the periods included $591,000 in data processing and $428,000 in loan costs, partially offset by increases of $1.2 million in the impairment of servicing rights and $274,000 in operations. Data processing expenses during the six months ended June 30, 2019, included costs associated with the Anchor Bank core system conversion.

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
    June 30,   March 31,   June 30,   Quarter   Over Year
    2020   2020   2019   % Change   % Change
ASSETS                    
Cash and due from banks   $ 12,214     $ 12,928     $ 15,214     (6 )   (20 )
Interest-bearing deposits at other financial institutions     113,910       35,993       44,380     216     157  
Total cash and cash equivalents     126,124       48,921       59,594     158     112  
Certificates of deposit at other financial institutions     17,926       17,926       24,297         (26 )
Securities available-for-sale, at fair value     168,709       156,466       96,252     8     75  
Loans held for sale, at fair value     139,410       115,632       66,508     21     110  
Loans receivable, net     1,444,425       1,393,070       1,282,119     4     13  
Accrued interest receivable     6,303       6,326       5,779         9  
Premises and equipment, net     28,340       28,655       29,517     (1 )   (4 )
Operating lease right-of-use     4,730       4,692       4,582     1     3  
Federal Home Loan Bank (“FHLB”) stock, at cost     7,659       10,921       8,329     (30 )   (8 )
Other real estate owned (“OREO”)     90       90       254         (65 )
Bank owned life insurance (“BOLI”), net     35,788       35,572       34,917     1     2  
Servicing rights, held at the lower of cost or fair value     10,672       10,626       10,849         (2 )
Goodwill     2,312       2,312       2,312          
Core deposit intangible, net     5,104       5,281       5,837     (3 )   (13 )
Other assets     11,164       10,678       9,919     5     13  
TOTAL ASSETS   $ 2,008,756     $ 1,847,168     $ 1,641,065     9     22  
LIABILITIES                          
Deposits:                          
Noninterest-bearing accounts   $ 345,497     $ 285,566     $ 279,221     21     24  
Interest-bearing accounts     1,261,375       1,160,703       1,054,996     9     20  
Total deposits     1,606,872       1,446,269       1,334,217     11     20  
Borrowings     150,255       159,114       83,211     (6 )   81  
Subordinated note:                          
Principal amount     10,000       10,000       10,000          
Unamortized debt issuance costs     (105 )     (110 )     (125 )   (5 )   (16 )
Total subordinated note less unamortized debt issuance costs     9,895       9,890       9,875          
Operating lease liability     4,945       4,898       4,721     1     5  
Deferred tax liability, net     2,675       2,260       1,003     18     167  
Other liabilities     25,473       23,908       18,612     7     37  
Total liabilities     1,800,115       1,646,339       1,451,639     9     24  
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; 4,245,041 shares issued and outstanding at June 30, 2020, 4,332,196 at March 31, 2020, and 4,476,864 at June 30, 2019     42       43       45     (2 )   (7 )
Additional paid-in capital     81,616       84,517       90,418     (3 )   (10 )
Retained earnings     124,090       114,957       99,184     8     25  
Accumulated other comprehensive income, net of tax     3,334       1,819       496     83     572  
Unearned shares – Employee Stock Ownership Plan (“ESOP”)     (441 )     (507 )     (717 )   (13 )   (38 )
Total stockholders’ equity     208,641       200,829       189,426     4     10  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 2,008,756     $ 1,847,168     $ 1,641,065     9     22  
 
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts) (Unaudited)
                           
    Three Months Ended   Qtr   Year
    June 30,   March 31,   June 30,   Over Qtr   Over Year
    2020   2020   2019   % Change   % Change
INTEREST INCOME                          
Loans receivable, including fees   $ 20,564   $ 20,740   $ 21,102   (1 )   (3 )
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions     1,149     1,209     1,263   (5 )   (9 )
Total interest and dividend income     21,713     21,949     22,365   (1 )   (3 )
INTEREST EXPENSE                          
Deposits     3,226     3,807     4,056   (15 )   (20 )
Borrowings     458     497     606   (8 )   (24 )
Subordinated note     169     172     169   (2 )    
Total interest expense     3,853     4,476     4,831   (14 )   (20 )
NET INTEREST INCOME     17,860     17,473     17,534   2     2  
PROVISION FOR LOAN LOSSES     4,649     3,686     910   26     411  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES     13,211     13,787     16,624   (4 )   (21 )
NONINTEREST INCOME                          
Service charges and fee income     96     924     1,854   (90 )   (95 )
Gain on sale of loans     13,365     5,899     3,576   127     274  
Gain on sale of investment securities     182         32   100     469  
Earnings on cash surrender value of BOLI     215     216     217       (1 )
Other noninterest income     273     1,852     404   (85 )   (32 )
Total noninterest income     14,131     8,891     6,083   59     132  
NONINTEREST EXPENSE                          
Salaries and benefits     7,420     9,547     8,649   (22 )   (14 )
Operations     2,573     2,403     2,658   7     (3 )
Occupancy     1,216     1,109     1,230   10     (1 )
Data processing     1,051     980     1,336   7     (21 )
Loss on sale of OREO         2       (100 )    
OREO expenses     2         7   100     (71 )
Loan costs     451     500     707   (10 )   (36 )
Professional and board fees     668     681     616   (2 )   8  
Federal Deposit Insurance Corporation (“FDIC”) insurance     158     126     139   25     (14 )
Marketing and advertising     103     146     191   (29 )   (46 )
Acquisition costs             1,224       (100 )
Amortization of core deposit intangible     177     176     190   1     (7 )
Impairment on servicing rights     803     514     124   56     548  
Total noninterest expense     14,622     16,184     17,071   (10 )   (14 )
INCOME BEFORE PROVISION FOR INCOME TAXES     12,720     6,494     5,636   96     126  
PROVISION FOR INCOME TAXES     2,700     1,327     1,173   103     130  
NET INCOME   $ 10,020   $ 5,167   $ 4,463   94     125  
Basic earnings per share   $ 2.34   $ 1.16   $ 1.00   102     134  
Diluted earnings per share   $ 2.30   $ 1.14   $ 0.98   102     135  
                 
    Six Months Ended   Year
    June 30,   June 30,   Over Year
    2020   2019   % Change
INTEREST INCOME                
Loans receivable, including fees   $ 41,304   $ 42,211     (2 )
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions     2,358     2,465     (4 )
Total interest and dividend income     43,662     44,676     (2 )
INTEREST EXPENSE                
Deposits     7,033     7,766     (9 )
Borrowings     955     1,350     (29 )
Subordinated note     341     337      
Total interest expense     8,329     9,453     (12 )
NET INTEREST INCOME     35,333     35,223      
PROVISION FOR LOAN LOSSES     8,335     1,660     402  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES     26,998     33,563     (20 )
NONINTEREST INCOME                
Service charges and fee income     1,020     3,512     (71 )
Gain on sale of loans     19,264     5,973     223  
Gain on sale of investment securities     182     32     469  
Earnings on cash surrender value of BOLI     431     432      
Other noninterest income     2,125     689     208  
Total noninterest income     23,022     10,638     116  
NONINTEREST EXPENSE                
Salaries and benefits     16,967     16,892      
Operations     4,976     4,702     6  
Occupancy     2,325     2,342     (1 )
Data processing     2,031     2,622     (23 )
Loss (gain) on sale of OREO     2     (85 )   (102 )
OREO expenses     2     11     (82 )
Loan costs     951     1,379     (31 )
Professional and board fees     1,349     1,166     16  
FDIC insurance     284     387     (27 )
Marketing and advertising     249     327     (24 )
Acquisition costs         1,598     (100 )
Amortization of core deposit intangible     353     380     (7 )
Impairment of servicing rights     1,317     147     796  
Total noninterest expense     30,806     31,868     (3 )
INCOME BEFORE PROVISION FOR INCOME TAXES     19,214     12,333     56  
PROVISION FOR INCOME TAXES     4,027     2,678     50  
NET INCOME   $ 15,187   $ 9,655     57  
Basic earnings per share   $ 3.48   $ 2.17     60  
Diluted earnings per share   $ 3.42   $ 2.12     61  
                   
KEY FINANCIAL RATIOS AND DATA (Unaudited)                  
                   
    At or For the Three Months Ended  
    June 30,     March 31,     June 30,  
    2020     2020     2019  
PERFORMANCE RATIOS:                  
Return on assets (ratio of net income to average total assets) (1)   2.08 %   1.20 %   1.10 %
Return on equity (ratio of net income to average equity) (1)   19.77     10.23     9.48  
Yield on average interest-earning assets (1)   4.75     5.40     5.86  
Interest incurred on liabilities as a percentage of average noninterest-bearing deposits and interest-bearing liabilities (1)   0.91     1.19     1.37  
Interest rate spread information – average during period   3.84     4.21     4.49  
Net interest margin (1)   3.91     4.30     4.60  
Operating expense to average total assets (1)   3.03     3.75     4.21  
Average interest-earning assets to average interest-bearing liabilities   132.98     132.50     130.30  
Efficiency ratio (2)   45.71     61.39     72.28  
                   
    At or For the Six Months Ended  
    June 30,            June 30,   
    2020           2019  
PERFORMANCE RATIOS:                  
Return on assets (ratio of net income to average total assets) (1)    1.66          1.20 %
Return on equity (ratio of net income to average equity) (1)    15.01            10.45  
Yield on average interest-earning assets (1)    5.06            5.90  
Interest incurred on liabilities as a percentage of average noninterest-bearing deposits and interest-bearing liabilities (1)    1.04            1.35  
Interest rate spread information – average during period    4.02            4.55  
Net interest margin (1)    4.09            4.65  
Operating expense to average total assets (1)    3.37            3.96  
Average interest-earning assets to average interest-bearing liabilities    132.75            130.08  
Efficiency ratio (2)    52.79            69.49  
                   
    June 30,     March 31,     June 30,  
    2020     2020     2019  
ASSET QUALITY RATIOS AND DATA:                  
Non-performing assets to total assets at end of period (3)   0.40 %   0.18 %   0.11 %
Non-performing loans to total gross loans (4)   0.54     0.23     0.12  
Allowance for loan losses to non-performing loans (4)   272.40     514.08     774.64  
Allowance for loan losses to gross loans receivable, excluding HFS loans   1.47     1.20     0.95  
                   
CAPITAL RATIOS, BANK ONLY:                  
Community Bank Leverage Ratio   10.85 %   11.26 %   11.38 %
                   
CAPITAL RATIOS, COMPANY ONLY:                  
Tier 1 leverage-based capital   10.54 %   11.10 %   11.11 %
                   
  At or For the Three Months Ended  
    June 30,   March 31,   June 30,  
  2020   2020   2019  
PER COMMON SHARE DATA:                  
Basic earnings per share $ 2.34   $ 1.16   $ 1.00  
Diluted earnings per share $ 2.30   $ 1.14   $ 0.98  
Weighted average basic shares outstanding   4,232,776     4,391,499     4,418,397  
Weighted average diluted shares outstanding   4,305,249     4,478,918     4,530,869  
Common shares outstanding at end of period   4,165,944 (5)   4,246,619 (6)   4,387,061 (7)
Book value per share using common shares outstanding $ 50.08   $ 47.29   $ 43.18  
Tangible book value per share using common shares outstanding (8) $ 48.30   $ 45.50   $ 41.32  

(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 4,245,041 at June 30, 2020, less 40,215 unvested restricted stock shares, and 38,882 unallocated ESOP shares.
(6) Common shares were calculated using shares outstanding of 4,332,196 at March 31, 2020, less 40,215 unvested restricted stock shares, and 45,362 unallocated ESOP shares.
(7) Common shares were calculated using shares outstanding of 4,476,864 at June 30, 2019, less 25,000 unvested restricted stock shares, and 64,803 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 June 30,   For the Six Months Ended June 30,   QTR Over
QTR
  Year Over
Year
Average Balances   2020   2019   2020   2019   $ Change   $ Change
Assets                                    
Loans receivable, net deferred loan fees (1)   $ 1,542,581   $ 1,338,411   $ 1,481,404   $ 1,343,387   $ 204,170   $ 138,017
Securities available-for-sale, at fair value     152,021     99,171     144,140     99,409     52,850     44,731
Interest-bearing deposits and certificates of deposit at other financial institutions     135,308     83,805     102,535     76,030     51,503     26,505
FHLB stock, at cost     9,252     8,188     8,756     8,557     1,064     199
Total interest-earning assets     1,839,162     1,529,575     1,736,835     1,527,383     309,587     209,452
Noninterest-earning assets     98,624     98,109     99,075     93,925     515     5,150
Total assets   $ 1,937,786   $ 1,627,684   $ 1,835,910   $ 1,621,308   $ 310,102   $ 214,602
Liabilities and stockholders’ equity                                    
Interest-bearing accounts   $ 1,201,727   $ 1,077,293   $ 1,166,423   $ 1,065,785   $ 124,434   $ 100,638
Borrowings     171,445     86,714     132,028     98,514     84,731     33,514
Subordinated note     9,892     9,872     9,889     9,869     20     20
Total interest-bearing liabilities     1,383,064     1,173,879     1,308,340     1,174,168     209,185     134,172
Noninterest-bearing accounts     325,865     243,893     299,654     241,758     81,972     57,896
Other noninterest-bearing liabilities     24,975     21,146     24,390     19,125     3,829     5,265
Stockholders’ equity     203,882     188,766     203,526     186,257     15,116     17,269
Total liabilities and stockholders’ equity   $ 1,937,786   $ 1,627,684   $ 1,835,910   $ 1,621,308   $ 310,102   $ 214,602
(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 loans that are anticipated to substantially decrease upon forgiveness by the SBA within a short time frame.

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:

                   
    June 30,    March 31,    June 30, 
(Dollars in thousands, except share and per share amounts)   2020    2020    2019 
Stockholders’ equity   $  208,641     $  200,829     $  189,426  
Goodwill and core deposit intangible, net      (7,416 )      (7,593 )      (8,149 )
Tangible common stockholders’ equity   $  201,225     $  193,236     $  181,277  
                   
Common shares outstanding at end of period      4,165,944        4,246,619        4,387,061  
                   
Common stockholders’ equity (book value) per share (GAAP)   $  50.08     $  47.29     $  43.18  
Tangible common stockholders’ equity (tangible book value) per share (non-GAAP)   $  48.30     $  45.50     $  41.32  
                         

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

             
    Three Months Ended   Six Months Ended
(Dollars in thousands)   June 30, 2020   June 30, 2020
Net interest margin (GAAP)     3.91 %     4.09 %
             
Net interest income before provision (GAAP)   $  17,860     $  35,333  
Interest income on PPP loans      (155 )      (155 )
Accreted fees/costs on PPP loans, net      (163 )      (163 )
Interest expense on PPPLF borrowings      43        43  
Interest income on PPPLF borrowings proceeds (1)      (192 )      (192 )
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)   $  17,393     $  34,866  
             
Average interest-earning assets (GAAP)      1,839,162        1,736,835  
Average proceeds from PPPLF borrowings      (49,562 )      (24,781 )
Average PPP loan balance      (62,163 )      (31,081 )
Adjusted average interest earning assets (non-GAAP)   $ 1,727,437     $ 1,680,973  
             
Days in period     91       182  
             
Days in year      366        366  
             
Net interest margin adjusted for PPP loans and PPPLF (non-GAAP)     4.05 %     4.17 %

(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:

                   
    June 30,   March 31,   June 30,
(Dollars in thousands)   2020    2020    2019 
Total gross loans receivable, excluding loans HFS (GAAP)   $ 1,468,908     $ 1,411,874     $ 1,296,121  
PPP Loans     (75,272 )            
Gross loans receivable, excluding loans HFS and PPP loans (non-GAAP)   $ 1,393,636     $ 1,411,874     $ 1,296,121  
                   
ALLL (GAAP)   $ (21,524 )   $ (16,872 )   $ (12,340 )
                   
Adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans (non-GAAP)     1.54 %     1.20 %     0.95 %
ALLL to gross loans receivable, excluding loans HFS (GAAP)     1.47 %     1.20 %     0.95 %
                         

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

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