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

Company Release - 10/24/2019 4:45 PM ET

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

FS Bancorp logo.jpg

Source: FS Bancorp, Inc.
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