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FS Bancorp, Inc. Reports Net Income for the Third Quarter of $7.1 Million or $1.58 Per Diluted Share

723 Days ago

MOUNTLAKE TERRACE, Wash., Oct. 24, 2019 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (NASDAQ:FSBW)  (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2019 third quarter net income of $7.1 million, or $1.58 per diluted share, compared to $4.1 million, or $1.07 per diluted share for the same period last year.  

“We continue to be pleased with the integration of the Anchor Bancorp acquisition,” stated CEO Joe Adams. “Our financial results reflect the hard work by our combined employees that went into incorporating the two core operating systems, ongoing employee engagement, and partnerships with the communities we serve.”

CFO Matthew Mullet noted, “The Board of Directors increased the quarterly cash dividend to $0.20 per share from $0.15 per share payable on November 15, 2019, driven by the combined company’s financial results post acquisition.”

2019 Third Quarter Highlights

  • Net income was $7.1 million for the third quarter of 2019, compared to $4.5 million in the previous quarter, and $4.1 million for the comparable quarter one year ago;
  • Net income for the third quarter of 2019 includes $257,000 of acquisition-related expenses, compared to $1.2 million of acquisition-related expenses in the preceding quarter and $443,000 in the third quarter of 2018;
  • Gain on sale of loans increased $1.0 million, or 28.2%, compared to the previous quarter and $765,000, or 20.0%, compared to the third quarter of 2018;
  • The efficiency ratio improved to 60.1%, reflecting increased revenues and decreased acquisition costs from  the merger with Anchor Bancorp (“Anchor Acquisition”), compared to 72.3% in the previous quarter and 67.0% in the third quarter of 2018;
  • Total gross loans increased $30.1 million, or 2.3%, during the quarter, to $1.33 billion at September 30, 2019, compared to $1.30 billion at June 30, 2019, and increased $365.1 million, or 38.0%, from $961.1 million at September 30, 2018, mainly due to the loans acquired from the Anchor Acquisition;
  • Deposits increased $52.4 million, or 3.9%, during the quarter to $1.39 billion at September 30, 2019, compared to $1.33 billion at June 30, 2019, and increased $442.1 million, or 46.8%, from $944.5 million at September 30, 2018, primarily due to the deposits assumed in the Anchor Acquisition;
  • The Company repurchased 46,562 shares of its common stock during the quarter ended September 30, 2019, at an average price per share of $48.88; and
  • Capital levels at the Bank were 14.5% for total risk-based capital and 11.6% for Tier 1 leverage capital at September 30, 2019.

Balance Sheet and Credit Quality

Total assets increased $53.9 million, or 3.3%, to $1.69 billion at September 30, 2019, compared to $1.64 billion at June 30, 2019, and increased $503.7 million, or 42.3%, from $1.19 billion at September 30, 2018.  The quarter over linked quarter increase in total assets was primarily due to increases in loans receivable, net of $29.2 million, loans held for sale (“HFS”) of $14.1 million, securities available-for-sale, at fair value of $9.8 million, and total cash and cash equivalents of $3.3 million, partially offset by a decrease in other assets of $2.0 million. The year over year increase in total assets included increases in loans receivable, net of $363.7 million, total cash and cash equivalents of $47.7 million, loans HFS of $25.8 million, bank owned life insurance (“BOLI”) of $21.6 million, premises and equipment, net of $12.5 million, securities available-for-sale, at fair value of $8.7 million, CDs at other financial institutions of $6.9 million, operating lease right-of-use assets of $4.7 million, core deposit intangible, net of $4.6 million, other assets of $3.3 million, and servicing rights of $2.0 million.  The year over year increases were primarily due to the assets acquired in the Anchor Acquisition, along with organic loan growth. 

                                   
LOAN PORTFOLIO                                  
(Dollars in thousands) September 30, 2019     June 30, 2019     September 30, 2018  
  Amount   Percent     Amount   Percent     Amount   Percent  
REAL ESTATE LOANS                                  
Commercial $ 205,500     15.5 %   $ 206,834     16.0 %   $ 68,694     7.1 %
Construction and development   200,720     15.1       214,140     16.5       191,172     19.9  
Home equity   36,607     2.8       36,860     2.8       26,085     2.7  
One-to-four-family (excludes HFS)   253,783     19.1       248,921     19.2       188,333     19.6  
Multi-family   122,375     9.2       103,219     8.0       48,061     5.0  
Total real estate loans   818,985     61.7       809,974     62.5       522,345     54.3  
                                   
CONSUMER LOANS                                  
Indirect home improvement   200,984     15.2       188,336     14.5       155,870     16.2  
Solar   44,254     3.3       44,508     3.4       42,967     4.5  
Marine   68,036     5.1       66,064     5.1       56,578     5.9  
Other consumer   4,660     0.4       4,875     0.4       2,059     0.2  
Total consumer loans   317,934     24.0       303,783     23.4       257,474     26.8  
                                   
COMMERCIAL BUSINESS LOANS                                  
Commercial and industrial   134,104     10.1       135,336     10.5       113,786     11.9  
Warehouse lending   55,172     4.2       47,028     3.6       67,540     7.0  
Total commercial business loans   189,276     14.3       182,364     14.1       181,326     18.9  
Total loans receivable, gross   1,326,195     100.0 %     1,296,121     100.0 %     961,145     100.0 %
                                   
Allowance for loan losses   (12,765 )           (12,340 )           (12,045 )      
Deferred costs and fees, net   (3,137 )           (2,940 )           (3,195 )      
Premiums on purchased loans, net   995             1,278             1,667        
Total loans receivable, net $ 1,311,288           $ 1,282,119           $ 947,572        

Loans receivable, net increased $29.2 million to $1.31 billion for September 30, 2019, from $1.28 billion at June 30, 2019, and increased $363.7 million from $947.6 million at September 30, 2018.  The quarter over linked quarter increase in total real estate loans was $9.0 million, including increases in multi-family of $19.2 million and one-to-four-family portfolio of $4.9 million, partially offset by decreases in construction and development of $13.4 million, commercial real estate of $1.3 million, and home equity of $253,000. Consumer loans increased $14.2 million, primarily due to increases of $12.6 million in indirect home improvement loans and $2.0 million in marine loans. Commercial business loans increased $6.9 million, primarily due to an increase in warehouse lending of $8.1 million, partially offset by a decrease in commercial and industrial loans of $1.2 million. This $1.2 million decrease primarily reflects the sale of four U.S. Department of Agriculture loans in the amount of $8.4 million, with a gain on sale of $122,000.

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 $288.9 million during the quarter ended September 30, 2019, an increase of $80.9 million, or 38.9%, compared to $208.0 million for the preceding quarter, and an increase of $95.9 million, or 49.7% from $193.0 million, for the comparable quarter one year ago. During the nine months ended September 30, 2019, originations through the home lending segment were $638.7 million, an increase of $83.4 million, or 15.0%, compared to $555.3 million for the nine months ended September 30, 2018.  During the quarter ended September 30, 2019, the Company sold $247.3 million of one-to-four-family loans, compared to sales of $173.4 million during the previous quarter, and sales of $174.9 million during the same quarter one year ago. During the nine months ended September 30, 2019, the Company sold $551.6 million of one-to-four-family loans compared to sales of $490.6 million during the same period last year.

Originations of one-to-four-family loans to purchase and to refinance a home for the three and nine months ended September 30, 2019 and 2018 were as follows:

                                     
(Dollars in thousands)   For the Three Months
Ended
    For the Three Months
Ended
    Year   Year  
    September 30, 2019     September 30, 2018     over Year   over Year  
    Amount   Percent     Amount   Percent     $ Change   % Change  
Purchase   $  163,459   56.6 %   $  162,166   84.4 %   $  1,293   0.8 %
Refinance      125,419   43.4        29,971   15.6        95,448   318.5 %
Total   $  288,878   100.0 %   $  192,137   100.0 %   $  96,741   50.4 %


                                       
    For the Nine Months
Ended
  For the Nine Months
Ended
  Year
  Year
    September 30, 2019
  September 30, 2018
  over Year
  over Year
      Amount   Percent       Amount   Percent     $ Change
  % Change
Purchase   $ 411,167   64.4 %   $ 436,826   78.9 %   $ (25,659 )   (5.9 )%
Refinance     227,547   35.6       116,626   21.1       110,921     95.1 %
Total   $ 638,714   100.0 %   $ 553,452   100.0 %   $ 85,262     15.4 %
                                       

The allowance for loan losses (“ALLL”) at September 30, 2019 increased to $12.8 million, or 0.96% of gross loans receivable, excluding loans HFS, compared to $12.3 million, or 0.95% of gross loans receivable, excluding loans HFS at June 30, 2019, and $12.0 million, or 1.3% of gross loans receivable, excluding loans HFS, at September 30, 2018.  Non-performing loans increased to $2.2 million at September 30, 2019, from $1.6 million at June 30, 2019, and was unchanged from $2.2 million at September 30, 2018.  Substandard loans increased $898,000 to $7.4 million at September 30, 2019, compared to $6.5 million at June 30, 2019, and was unchanged from the prior year.  The quarter over linked quarter increase was primarily due to an increase in non-performing one-to-four-family loans of $512,000. There were two other real estate owned (“OREO”) properties totaling $178,000 at September 30, 2019, and three OREO properties totaling $254,000 at June 30, 2019, compared to no OREO properties at September 30, 2018.

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 $3.1 million and $3.7 million, on $223.7 million and $278.4 million of gross loans at September 30, 2019 and June 30, 2019, respectively.

Total deposits increased to $1.39 billion at September 30, 2019, compared to $1.33 billion at June 30, 2019, and increased $442.1 million from $944.5 million at September 30, 2018.  Relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased $18.2 million from June 30, 2019, primarily due to a $16.3 million increase in interest-bearing checking accounts, and increased $172.6 million from September 30, 2018.  Money market and savings accounts increased $8.2 million from June 30, 2019, and increased $54.3 million from September 30, 2018.  Time deposits increased $26.0 million from June 30, 2019, and increased $215.2 million, from September 30, 2018.  Year over year increases were due to deposits assumed in the Anchor Acquisition and organic deposit growth.

At September 30, 2019, non-retail CDs which include brokered CDs, online CDs, public deposits CDs, and public funds CDs increased $22.2 million to $141.1 million, compared to $118.9 million at June 30, 2019, mainly due to a $21.7 million increase in brokered deposits. The year over year increase in non-retail CDs of $16.7 million from $124.4 million at September 30, 2018, was driven by a $12.8 million increase in brokered deposits and $3.2 million in online CDs. Management remains focused on increasing our lower cost relationship-based deposits to fund long-term asset growth.

                                     
DEPOSIT BREAKDOWN                                    
(Dollars in thousands)                                    
    September 30, 2019     June 30, 2019     September 30, 2018  
    Amount   Percent     Amount   Percent     Amount   Percent  
Noninterest-bearing checking   $ 264,482   19.1 %   $ 268,113   20.1 %   $ 174,712   18.5 %
Interest-bearing checking     196,834   14.2       180,498   13.5       115,059   12.2  
Savings     114,826   8.3       117,687   8.8       78,785   8.3  
Money market     258,883   18.7       247,854   18.6       240,626   25.5  
Certificates of deposit less than $100,000     273,982   19.7       251,280   18.9       188,192   19.9  
Certificates of deposit of $100,000 through $250,000     177,075   12.8       177,718   13.3       89,075   9.4  
Certificates of deposit of $250,000 and over     83,929   6.0       79,959   6.0       42,563   4.5  
Escrow accounts related to mortgages serviced     16,591   1.2       11,108   0.8       15,525   1.7  
Total   $ 1,386,602   100.0 %   $ 1,334,217   100.0 %   $ 944,537   100.0 %

At September 30, 2019, borrowings decreased $6.3 million, or 7.6%, to $76.9 million, from $83.2 million at June 30, 2019, and decreased $9.7 million from $86.5 million at September 30, 2018.  The quarter and year to date decreases in borrowings were primarily related to a reduction in FHLB advances due to the growth in deposits.

Total stockholders’ equity increased $4.8 million, to $194.3 million at September 30, 2019, from $189.4 million at June 30, 2019, and increased $61.1 million, from $133.1 million at September 30, 2018.  The increase in stockholders’ equity from the second quarter was primarily due to net income of $7.1 million, partially offset by common stock repurchases of $2.3 million.  The Company repurchased 46,562 shares of its common stock during the quarter ended September 30, 2019, at an average price of $48.88 per share. At September 30, 2019, 125,816 shares remained available for repurchase pursuant to our January 2019 Share Repurchase Plan.  Book value per common share was $44.61 at September 30, 2019, compared to $43.18 at June 30, 2019, and $37.10 at September 30, 2018.

The Bank is well capitalized under the minimum capital requirements established by the Federal Deposit Insurance Corporation (“FDIC”) with a total risk-based capital ratio of 14.5%, a Tier 1 leverage capital ratio of 11.6%, and a common equity Tier 1 (“CET1”) capital ratio of 13.6% at September 30, 2019. 

The Company exceeded all regulatory capital requirements with a total risk-based capital ratio of 14.2%, a Tier 1 leverage capital ratio of 11.3%, and a CET1 ratio of 13.3% at September 30, 2019.

Operating Results

Net interest income increased $4.9 million, to $17.7 million for the three months ended September 30, 2019, from $12.9 million for the three months ended September 30, 2018.  This increase was primarily a result of a $6.8 million increase in loans receivable interest income, including additional interest from loans acquired in the Anchor Acquisition, partially offset by a $2.4 million increase in deposit interest expense due to assumed deposits and continued organic growth combined with higher market interest rates. Net interest income increased $16.7 million, to $53.0 million for the nine months ended September 30, 2019, from $36.3 million for the nine months ended September 30, 2018, mostly attributable to a $23.7 million increase in interest income on loans receivable, partially offset by a $7.5 million increase in interest expense on deposits.  The increases in interest income and interest expense were primarily impacted by the loans acquired and deposits assumed in the Anchor Acquisition.

The net interest margin (“NIM”) decreased one basis point to 4.54% for the three months ended September 30, 2019, from 4.55% for the same period in the prior year, and decreased one basis point to 4.61% for the nine months ended September 30, 2019, from 4.62% for the nine months ended September 30, 2018.  The quarter over quarter NIM was positively impacted by incremental interest accretion on loans acquired in the Anchor Acquisition of 14 basis points. The year over year NIM was positively impacted from incremental interest accretion on loans acquired in the Anchor Acquisition of 17 basis points. The average cost of funds increased 31 basis points to 1.37% for the three months ended September 30, 2019, from 1.06% for the three months ended September 30, 2018.  This increase was predominantly due to growth in higher market rate deposits, primarily those assumed in the Anchor Acquisition along with overall deposit growth. The year over year average cost of funds increased 47 basis points to 1.36% for the nine months ended September 30, 2019, from 0.89% for the nine months ended September 30, 2018 reflecting the increase in market interest rates over the 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, 2019, the provision for loan losses was $573,000 and $2.2 million, compared to $450,000, and $1.3 million for the three and nine months ended September 30, 2018.  During the three months ended September 30, 2019, net charge-offs totaled $147,000, compared to net recoveries of $24,000 for the same period last year.  Net charge-offs totaled $1.8 million during the nine months ended September 30, 2019, compared to net recoveries of $39,000 during the nine months ended September 30, 2018. The increase in net charge-offs during the nine months ended September 30, 2019, was primarily due to the charge-off of a commercial line of credit of $1.2 million in the first quarter, and one commercial business relationship totaling $431,000 in the second quarter of 2019.

Noninterest income increased $1.9 million, to $6.7 million, for the three months ended September 30, 2019, from $4.8 million for the three months ended September 30, 2018.  The increase primarily reflects a $903,000 increase in service charges and fee income, mainly driven by deposit accounts assumed in the Anchor Acquisition and deposit growth, and a $765,000 increase in gain on sale of loans primarily due to higher sales volume.  Noninterest income increased $1.9 million, to $17.4 million for the nine months ended September 30, 2019, from $15.4 million for the nine months ended September 30, 2018.  The year over year increase included increases in service charges and fee income of $3.1 million, other noninterest income of $455,000, and earnings on cash surrender value of BOLI of $393,000, partially offset by a decrease of $1.9 million in gain on sale of loans.

Noninterest expense increased $2.9 million, to $14.7 million for the three months ended September 30, 2019, from $11.8 million for the three months ended September 30, 2018.  The increase in noninterest expense was primarily as a result of the Anchor Acquisition and growth in our operations with increases of $1.1 million in operations, $826,000 in salaries and benefits, including an increase of $1.1 million in incentives and commissions for the loan production staff associated with strong loan production growth this quarter, $523,000 in data processing, and $360,000 in occupancy expense, partially offset by decreases in acquisition costs of $186,000 and FDIC insurance of $166,000 as a result of a small bank credit awarded by the FDIC recognized during the quarter ended September 30, 2019. The Bank has $174,000 in small bank credits on future assessments remaining at September 30, 2019, which may be recognized in future periods when allowed for by the FDIC upon insurance fund levels being met. Noninterest expense increased $11.6 million to $46.6 million for the nine months ended September 30, 2019, from $35.0 million for the nine months ended September 30, 2018.  The increase during the period was primarily as a result of the Anchor Acquisition and growth in our operations with increases of $3.0 million in salaries and benefits, including an increase of $255,000 in incentives and commissions, $2.9 million in operations, $1.8 million in data processing, $1.4 million in acquisition costs, and $1.3 million in occupancy expense. Acquisition costs were $1.9 million for the nine months ended September 30, 2019, compared to $443,000 for the same period last year, primarily due to the integration of the Anchor Bank core processing platform.  

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, including nine branches from the Anchor Acquisition, one administrative 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 our actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: the expected cost savings, synergies and other financial benefits from our recent acquisition of Anchor might not be realized within the expected time frames or at all; the integration of the combined company, including personnel changes/retention, might not proceed as planned; and the combined company might not perform as well as expected; increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; our ability to execute our plans to grow our residential construction lending, mortgage banking, and warehouse lending operations, and the geographic expansion of our indirect home improvement lending; secondary market conditions for loans and our ability to originate loans for sale and sell loans in the secondary market; legislative and regulatory changes; 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 Securities and Exchange Commission which are available on our website at www.fsbwa.com and on the SEC's website at www.sec.gov.  Any of the forward-looking statements that we make 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 wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Therefore, these factors should be considered in evaluating the forward‑looking statements, and undue reliance should not be placed on such statements. We do not undertake and specifically disclaim 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 our actual results for 2019 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of us and could negatively affect our 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
    2019   2019   2018   % Change   % Change
ASSETS                    
Cash and due from banks   $ 15,979     $ 15,214     $ 4,389     5     264  
Interest-bearing deposits at other financial institutions     46,915       44,380       10,813     6     334  
Total cash and cash equivalents     62,894       59,594       15,202     6     314  
Certificates of deposit at other financial institutions     24,296       24,297       17,362         40  
Securities available-for-sale, at fair value     106,038       96,252       97,374     10     9  
Loans held for sale, at fair value     80,619       66,508       54,784     21     47  
Loans receivable, net     1,311,288       1,282,119       947,572     2     38  
Accrued interest receivable     5,723       5,779       4,453     (1 )   29  
Premises and equipment, net     29,066       29,517       16,527     (2 )   76  
Operating lease right-of-use     4,713       4,582           3     100  
Federal Home Loan Bank (“FHLB”) stock, at cost     7,995       8,329       7,131     (4 )   12  
Other real estate owned (“OREO”)     178       254           (30 )   100  
Deferred tax asset, net                 120         (100 )
Bank owned life insurance (“BOLI”), net     35,136       34,917       13,586     1     159  
Servicing rights, held at the lower of cost or fair value     11,193       10,849       9,190     3     22  
Goodwill     2,312       2,312       2,312          
Core deposit intangible, net     5,647       5,837       1,087     (3 )   420  
Other assets     7,899       9,919       4,631     (20 )   71  
TOTAL ASSETS   $ 1,694,997     $ 1,641,065     $ 1,191,331     3     42  
LIABILITIES                          
Deposits:                          
Noninterest-bearing accounts   $ 281,073     $ 279,221     $ 190,237     1     48  
Interest-bearing accounts     1,105,529       1,054,996       754,300     5     47  
Total deposits     1,386,602       1,334,217       944,537     4     47  
Borrowings     76,864       83,211       86,526     (8 )   (11 )
Subordinated note:                          
Principal amount     10,000       10,000       10,000          
Unamortized debt issuance costs     (120 )     (125 )     (140 )   (4 )   (14 )
Total subordinated note less unamortized debt issuance costs     9,880       9,875       9,860          
Operating lease liability     4,881       4,721           3     100  
Deferred tax liability, net     1,029       1,003           3     100  
Other liabilities     21,484       18,612       17,279     15     24  
Total liabilities     1,500,740       1,451,639       1,058,202     3     42  
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; 4,452,872 shares issued and outstanding at September 30, 2019, 4,476,864 at June 30, 2019, and 3,716,460 at September 30, 2018     44       45       37     (2 )   19  
Additional paid-in capital     88,608       90,418       57,027     (2 )   55  
Retained earnings     105,672       99,184       79,648     7     33  
Accumulated other comprehensive gain (loss), net of tax     583       496       (2,664 )   18     (122 )
Unearned shares – Employee Stock Ownership Plan (“ESOP”)     (650 )     (717 )     (919 )   (9 )   (29 )
Total stockholders’ equity     194,257       189,426       133,129     3     46  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 1,694,997     $ 1,641,065     $ 1,191,331     3     42  


                           
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
    2019    2019   2018   % Change   % Change
INTEREST INCOME                          
Loans receivable, including fees   $  21,466     $  21,102   $  14,624   2     47  
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions      1,245        1,263      959   (1 )   30  
Total interest and dividend income      22,711        22,365      15,583   2     46  
INTEREST EXPENSE                          
Deposits      4,223        4,056      1,850   4     128  
Borrowings      582        606      704   (4 )   (17 )
Subordinated note      171        169      171   1      —  
Total interest expense      4,976        4,831      2,725   3     83  
NET INTEREST INCOME      17,735        17,534      12,858   1     38  
PROVISION FOR LOAN LOSSES      573        910      450   (37 )   27  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES      17,162        16,624      12,408   3     38  
NONINTEREST INCOME                          
Service charges and fee income      1,619        1,854      716   (13 )   126  
Gain on sale of loans      4,583        3,576      3,818   28     20  
Gain on sale of investment securities      —        32      —   (100 )    
Earnings on cash surrender value of BOLI      219        217      88   1     149  
Other noninterest income      323        404      180   (20 )   79  
Total noninterest income      6,744        6,083      4,802   11     40  
NONINTEREST EXPENSE                          
Salaries and benefits      7,865        8,649      7,039   (9 )   12  
Operations      2,360        2,658      1,308   (11 )   80  
Occupancy      1,104        1,230      744   (10 )   48  
Data processing      1,148        1,336      625   (14 )   84  
Gain on sale of OREO      (40 )      —      —   (100 )   (100 )
OREO expenses      1        7      —   (86 )   100  
Loan costs      903        707      850    28     6  
Professional and board fees      654        616      414   6     58  
Federal Deposit Insurance Corporation (“FDIC”) insurance      (29 )      139      137   (121 )   (121 )
Marketing and advertising      178        191      201   (7 )   (11 )
Acquisition costs      257        1,224      443   (79 )   (42 )
Amortization of core deposit intangible      190        190      77    —     147  
Impairment of servicing rights      131        124      —   6     100  
Total noninterest expense      14,722        17,071     11,838    (14 )   24  
INCOME BEFORE PROVISION FOR INCOME TAXES      9,184        5,636      5,372    63     71  
PROVISION FOR INCOME TAXES      2,040        1,173      1,320    74     55  
NET INCOME   $  7,144     $  4,463   $  4,052    60     76  
Basic earnings per share   $  1.62     $  1.00   $  1.12    62     45  
Diluted earnings per share   $  1.58     $  0.98   $  1.07    61     48  


                 
FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts) (Unaudited)
                 
    Nine Months Ended   Year
    September 30,   September 30,   Over Year
    2019   2018   % Change
INTEREST INCOME                
Loans receivable, including fees   $ 63,677     $ 40,015   59  
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions     3,710       2,578   44  
Total interest and dividend income     67,387       42,593   58  
INTEREST EXPENSE                
Deposits     11,989       4,525   165  
Borrowings     1,932       1,280   51  
Subordinated note     508       508    
Total interest expense     14,429       6,313   129  
NET INTEREST INCOME     52,958       36,280   46  
PROVISION FOR LOAN LOSSES     2,233       1,250   79  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES     50,725       35,030   45  
NONINTEREST INCOME                
Service charges and fee income     5,131       2,045   151  
Gain on sale of loans     10,556       12,467   (15 )
Gain on sale of investment securities     32       113   (72 )
Earnings on cash surrender value of BOLI     651       258   152  
Other noninterest income     1,012       557   82  
Total noninterest income     17,382       15,440   13  
NONINTEREST EXPENSE                
Salaries and benefits     24,757       21,759   14  
Operations     7,062       4,209   68  
Occupancy     3,446       2,097   64  
Data processing     3,770       1,944   94  
Gain on sale of OREO     (125 )       (100 )
OREO expenses     12         100  
Loan costs     2,282       2,183   5  
Professional and board fees     1,820       1,321   38  
FDIC insurance     358       268   34  
Marketing and advertising     505       564   (11 )
Acquisition costs     1,855       443   319  
Amortization of core deposit intangible     570       230   148  
Impairment of servicing rights     278         100  
Total noninterest expense     46,590       35,018   33  
INCOME BEFORE PROVISION FOR INCOME TAXES     21,517       15,452   39  
PROVISION FOR INCOME TAXES     4,718       2,822   67  
NET INCOME   $ 16,799     $ 12,630   33  
Basic earnings per share   $ 3.80     $ 3.52   8  
Diluted earnings per share   $ 3.71     $ 3.35   11  


               
KEY FINANCIAL RATIOS AND DATA (Unaudited)              
               
    At or For the Three Months Ended  
    September 30,   June 30,   September 30,  
    2019   2019   2018  
PERFORMANCE RATIOS:              
Return on assets (ratio of net income to average total assets) (1)   1.71 % 1.10 % 1.38 %
Return on equity (ratio of net income to average equity) (1)   14.75   9.48   12.19  
Yield on average interest-earning assets   5.81   5.86   5.52  
Interest incurred on liabilities as a percentage of average noninterest bearing deposits and interest-bearing liabilities   1.37   1.37   1.06  
Interest rate spread information – average during period   4.44   4.49   4.46  
Net interest margin (1)   4.54   4.60   4.55  
Operating expense to average total assets   3.53   4.21   4.04  
Average interest-earning assets to average interest-bearing liabilities   133.59   130.30   134.57  
Efficiency ratio (2)   60.14   72.28   67.03  


    At or For the Nine Months Ended  
    September 30,       September 30,  
    2019       2018  
PERFORMANCE RATIOS:              
Return on assets (ratio of net income to average total assets) (1)   1.38 %     1.55 %
Return on equity (ratio of net income to average equity) (1)   11.93       13.31  
Yield on average interest-earning assets   5.87       5.43  
Interest incurred on liabilities as a percentage of average noninterest bearing deposits and interest-bearing liabilities   1.36       0.89  
Interest rate spread information – average during period   4.51       4.54  
Net interest margin (1)   4.61       4.62  
Operating expense to average total assets   3.82       4.30  
Average interest-earning assets to average interest-bearing liabilities   131.26       136.68  
Efficiency ratio (2)   66.24       67.71  


               
    September 30,   June 30,   September 30,  
    2019   2019   2018  
ASSET QUALITY RATIOS AND DATA:              
Non-performing assets to total assets at end of period (3)   0.14 % 0.11 % 0.18 %
Non-performing loans to total gross loans (4)   0.17   0.12   0.23  
Allowance for loan losses to non-performing loans (4)   582.61   774.64   554.56  
Allowance for loan losses to gross loans receivable, excluding HFS loans   0.96   0.95   1.25  
               
CAPITAL RATIOS, BANK ONLY:              
Tier 1 leverage-based capital   11.63 % 11.38 % 11.73 %
Tier 1 risk-based capital   13.61   13.78   13.95  
Total risk-based capital   14.54   14.73   15.20  
Common equity Tier 1 capital   13.61   13.78   13.95  
               
CAPITAL RATIOS, COMPANY ONLY:              
Tier 1 leverage-based capital   11.32 % 11.11 % 11.43 %
Total risk-based capital   14.19   14.42   14.85  
Common equity Tier 1 capital   13.26   13.48   13.60  


                         
    At or For the Three Months Ended  
      September 30,     June 30,     September 30,  
    2019     2019     2018  
PER COMMON SHARE DATA:                        
Basic earnings per share   $ 1.62     $ 1.00     $ 1.12  
Diluted earnings per share   $ 1.58     $ 0.98     $ 1.07  
Weighted average basic shares outstanding     4,401,303       4,418,397       3,610,731  
Weighted average diluted shares outstanding     4,498,380       4,530,869       3,779,878  
Common shares outstanding at period end     4,354,335 (5)     4,387,061 (6)     3,588,796 (7)
Book value per share using common shares outstanding   $ 44.61     $ 43.18     $ 37.10  
Tangible book value per share using common shares outstanding (8)   $ 42.79     $ 41.32     $ 36.15  

____________________
(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 4,452,872 at September 30, 2019, less 40,215 unvested restricted stock shares, and 58,322 unallocated ESOP shares.
(6) 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.
(7) Common shares were calculated using shares outstanding of 3,716,460 at September 30, 2018, less 43,421 unvested restricted stock shares, and 84,243 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   2019   2018   2019   2018   $ Change   $ Change
Assets                                    
Loans receivable, net deferred loan fees (1)   $ 1,368,962   $ 971,061   $ 1,352,006   $ 905,645   $ 397,901     $ 446,361
Securities available-for-sale, at fair value     99,813     100,502     99,545     96,003     (689 )     3,542
Interest-bearing deposits and certificates of deposit at other financial institutions     74,234     40,261     75,425     40,980     33,973       34,445
FHLB stock, at cost     8,334     8,594     8,482     6,275     (260 )     2,207
Total interest-earning assets     1,551,343     1,120,418     1,535,458     1,048,903     430,925       486,555
Noninterest-earning assets (2)     101,873     41,488     96,603     38,791     60,385       57,812
Total assets   $ 1,653,216   $ 1,161,906   $ 1,632,061   $ 1,087,694   $ 491,310     $ 544,367
Liabilities and stockholders’ equity                                    
Interest-bearing accounts   $ 1,068,189   $ 696,763   $ 1,066,595   $ 674,492   $ 371,426     $ 392,103
Borrowings     83,208     125,945     93,356     83,081     (42,736 )     10,275
Subordinated note     9,877     9,857     9,872     9,852     20       20
Total interest-bearing liabilities     1,161,274     832,565     1,169,823     767,425     328,710       402,398
Noninterest-bearing accounts     276,689     184,187     253,529     181,516     92,502       72,013
Other noninterest-bearing liabilities     23,075     13,322     20,457     11,903     9,752       8,554
Stockholders’ equity     192,178     131,832     188,252     126,850     60,346       61,402
Total liabilities and stockholders’ equity   $ 1,653,216   $ 1,161,906   $ 1,632,061   $ 1,087,694   $ 491,310     $ 544,367

(1) Includes loans held for sale.
(2) Includes fixed assets, operating lease right-of-use asset, BOLI, goodwill, and CDI.

Non-GAAP Financial Measures:

In addition to results presented in accordance with generally accepted accounting principles utilized in the United States (“GAAP”), this earnings release contains certain non-GAAP financial measures: net income and diluted earnings per share, excluding net accretion/amortization on loans, CDs, and borrowings, acquisition costs, and acquisition-related CDI amortization, net of tax; and tangible book value per share. Management believes these non-GAAP financial measures provide useful and comparative information to assess trends reflected in the current quarter’s results and facilitate the comparison of our performance with the performance of our peers. The after-tax impact of acquisition-related costs to net income which we have recorded in connection with the Anchor Acquisition provides meaningful supplemental information that management believes is useful to readers.  Where applicable, the Company has also presented comparable earnings information using 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 measure is consistent with the capital treatment 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. 

These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for total stockholders' equity or operating results determined in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.

Reconciliation of net income, excluding net accretion/amortization on loans, CDs and borrowings, acquisition costs and acquisition-related CDI amortization, net of tax is presented below.

             
    Three
Months
Ended
  Nine
Months
Ended
(Dollars in thousands, except per share amounts)   September
30, 2019
  September
30, 2019
Consolidated results:            
Net interest income after provision for loan losses (GAAP)   $ 17,162     $ 50,725  
Net accretion/amortization on loans, CDs and borrowings     (339 )     (1,241 )
Net interest income after provision for loan losses, excluding net accretion/amortization on loans, CDs and borrowings (non-GAAP)     16,823       49,484  
Noninterest income     6,744       17,382  
Noninterest expense     14,722       46,590  
Acquisition costs     (257 )     (1,855 )
CDI amortization     (131 )     (394 )
Noninterest expense, excluding acquisition costs and acquisition-related CDI amortization (non-GAAP)     14,334       44,341  
             
Income before provision for income taxes, excluding net accretion/amortization on loans, CDs and borrowings, acquisition costs and acquisition-related CDI amortization (non-GAAP)     9,233       22,525  
Provision for income taxes, excluding net accretion/amortization on loans, CDs and borrowings, acquisition costs and acquisition-related CDI amortization, net of related taxes (non-GAAP)     2,050       4,930  
NET INCOME, excluding net accretion/amortization on loans, CDs and borrowings, acquisition costs and acquisition-related CDI amortization, net of tax (non-GAAP)   $ 7,183     $ 17,595  
             
             
Diluted earnings per share (GAAP)   $ 1.58     $ 3.71  
Diluted earnings per share, excluding net accretion/amortization, acquisition costs and acquisition-related CDI amortization, net of tax (non-GAAP)   $ 1.59     $ 3.88  
                 

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)   2019    2019    2018 
Stockholders' equity   $ 194,257     $ 189,426     $ 133,129  
Goodwill and core deposit intangible, net     (7,959 )     (8,149 )     (3,399 )
Tangible common stockholders' equity   $ 186,298     $ 181,277     $ 129,730  
                   
Common shares outstanding at end of period     4,354,335       4,387,061       3,588,796  
                   
Common stockholders' equity (book value) per share (GAAP)   $ 44.61     $ 43.18     $ 37.10  
Tangible common stockholders' equity (tangible book value) per share (non-GAAP)   $ 42.79     $ 41.32     $ 36.15  
                         

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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