FS Bancorp, Inc. Reports Net Income for the Second Quarter of $6.7 Million or $0.83 Per Diluted Share and the Thirty-Eighth Consecutive Quarterly Dividend

MOUNTLAKE TERRACE, Wash., July 28, 2022 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (NASDAQ: FSBW) (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2022 second quarter net income of $6.7 million, or $0.83 per diluted share, compared to $8.5 million, or $0.98 per diluted share for the same quarter last year. For the six months ended June 30, 2022, net income was $13.6 million, or $1.66 per diluted share, compared to net income of $25.8 million, or $2.35 per diluted share, for the comparable six-month period in 2021.

“We continue to experience success in our Commercial and Consumer Banking segment which has resulted in strong growth and credit performance,” stated Joe Adams, CEO. “We are also pleased that our Board of Directors approved our thirty-eighth consecutive quarterly cash dividend. The quarterly dividend of $0.20 will be paid on August 25, 2022, to shareholders of record as of August 11, 2022.”

“Starting with this quarter, we will be including segment reporting results in our press releases” noted Matthew Mullet, CFO. “This information is also available in our quarterly and annual SEC reports for comparison purposes back to 2017.”

2022 Second Quarter Highlights

• Net income was $6.7 million for the second quarter of 2022, compared to $6.9 million in the previous quarter, and $8.5 million for the comparable quarter one year ago;
• Net interest margin (“NIM”) improved to 4.39%, compared to 4.24% for the previous quarter, and 4.09% for the comparable quarter one year ago;
• Repurchased 361,251 shares of our common stock during the second quarter at an average price of $29.26 per common share;
• Loans receivable, net increased $148.4 million, or 8.3%, to $1.95 billion at June 30, 2022, compared to $1.80 billion at March 31, 2022, and increased $300.4 million, or 18.3% from $1.65 billion at June 30, 2021;
• Consumer loans, of which 81.7% are home improvement loans, increased $40.3 million, or 9.1%, to $485.0 million at June 30, 2022, compared to $445.0 million in the previous quarter and increased $88.9 million, or 22.4% from $396.5 million in the comparable quarter one year ago. Originations in the consumer portfolio included 80.4% of home improvement loans originated with a Fair Isaac and Company, Incorporated (“FICO”) score above 720 and 89.5% of home improvement loans with a UCC2 security filing;
• Loans receivable, net included six Paycheck Protection Program (“PPP”) loans with a total outstanding balance of $3.0 million and $33,000 of unrecognized deferred fees, net at June 30, 2022;
• Segment reporting reflected $7.5 million in net income for the commercial and consumer banking segment and $756,000 of net loss for the home lending segment for the second quarter of 2022, compared to $6.7 million and $1.9 million of net income in the second quarter of 2021, respectively; and
• At June 30, 2022, the Community Bank Leverage Ratio (“CBLR”) was 11.9% for the Bank and the Tier 1 leverage-based ratio was 10.1% for the Company.

Segment Reporting

The Company reports two segments: Commercial and Consumer Banking and Home Lending. The Commercial and Consumer Banking segment provides diversified financial products and services to our commercial and consumer customers. These products and services include deposit products; residential, consumer, business and commercial real estate lending portfolios and cash management services. This segment is also responsible for the management of the investment portfolio and other assets of the Bank. The Home Lending segment originates one-to-four-family residential mortgage loans primarily for sale in the secondary markets as well as loans held for investment.

The tables below are a summary of segment reporting for the three and six months ended June 30, 2022 and 2021:

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Asset Summary

Total assets increased $125.3 million, or 5.5%, to $2.40 billion at June 30, 2022, compared to $2.27 billion at March 31, 2022, and increased $176.6 million, or 7.9%, from $2.22 billion at June 30, 2021. The quarter over linked quarter increase in total assets was primarily due to increases in loans receivable, net of $148.4 million, deferred tax asset of $2.1 million, Federal Home Loan Bank (“FHLB”) stock of $1.6 million, and securities held-to-maturity of $1.0 million, partially offset by decreases in securities available-for-sale of $15.5 million, loans held for sale (“HFS”) of $7.1 million, certificates of deposit (“CDs”) at other financial institutions of $3.2 million, interest-bearing deposits at other financial institutions of $1.6 million, and other assets of $1.2 million. The year over year increase was primarily due to increases in loans receivable, net of $300.4 million, securities available-for-sale of $15.3 million, deferred tax asset, net of $4.5 million, other assets of $4.3 million, servicing rights of $2.2 million, accrued interest receivable of $1.2 million, and FHLB stock of $1.2 million, partially offset by decreases in loans HFS of $86.4 million, total cash and cash equivalents of $57.9 million, CDs at other financial institutions of $6.8 million, and premises and equipment, net of $1.9 million.

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Loans receivable, net increased $148.4 million to $1.95 billion at June 30, 2022, from $1.80 billion at March 31, 2022, and increased $300.4 million from $1.65 billion at June 30, 2021. The quarter over linked quarter increase in total real estate loans was $117.9 million, including increases in construction and development loans of $45.7 million, one-to-four-family loans of $29.7 million, commercial real estate loans of $29.7 million, multi-family loans of $7.9 million and home equity loans of $4.9 million. Consumer loans increased $40.3 million, primarily due to an increase of $37.0 million in indirect home improvement loans and $3.2 million in marine loans. Commercial business loans decreased $8.2 million, as a result of decreases of $4.1 million in both commercial and industrial lending and warehouse lending.

Originations of one-to-four-family loans to purchase and to refinance a home for the three months ended June 30, 2022 and March 31, 2022, and for the three and six months ended June 30, 2022 and 2021 were as follows:

During the quarter ended June 30, 2022, the Company sold $196.3 million of one-to-four-family loans compared to sales of $301.1 million during the previous quarter, and sales of $378.0 million during the same quarter one year ago. The decrease in purchase and refinance activity compared to the prior quarter reflects a limited availability of homes for sale and increased market interest rates.

Gross margins on home loan sales increased to 3.10% for the quarter ended June 30, 2022, compared to 2.94% in the previous quarter and decreased from 3.82% in the same quarter one year ago. Gross margins are defined as the margin on loans sold (cash sales) without the impact of deferred costs.

Liabilities and Equity Summary

Changes in deposits at the dates indicated are as follows:

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At June 30, 2022, nonretail CDs, which include brokered CDs, online CDs, and public funds CDs, increased $63.6 million to $207.8 million, compared to $144.2 million at March 31, 2022, due to an increase of $52.7 million in brokered CDs. The year over year decrease in nonretail CDs of $4.1 million from $211.9 million at June 30, 2021, was primarily the result of a $14.5 million decrease in brokered CDs, offset by an increase of $10.4 million in online CDs.   

At June 30, 2022, borrowings comprised of FHLB advances increased $42.5 million, or 119.6%, to $78.0 million from $35.5 million at March 31, 2022, and increased $35.5 million, or 83.5% from $42.5 million at June 30, 2021.

Total stockholders’ equity decreased $13.3 million, to $222.6 million at June 30, 2022, from $236.0 million at March 31, 2022, and decreased $19.1 million, from $241.8 million at June 30, 2021. The decrease in stockholders’ equity during the current quarter was primarily due to net unrealized losses in securities available-for-sale of $9.0 million, net of tax, reflecting increases in market interest rates during the quarter, share repurchases totaling $10.6 million, and dividends paid of $2.4 million, partially offset by net income of $6.7 million and unrealized gains on fair value and cash flow hedges of $1.3 million, net of tax. The Company repurchased 361,251 shares of its common stock at an average price of $29.26 per share. Book value per common share was $29.27 at June 30, 2022, compared to $29.70 at March 31, 2022, and $29.49 at June 30, 2021.

The Bank is well capitalized under the minimum capital requirements established by the Federal Deposit Insurance Corporation at June 30, 2022, with a CBLR of 11.9%, compared to the normally required CBLR of greater than 9.0%. The Company’s Tier 1 leverage-based ratio was 10.1% at June 30, 2022.

Credit Quality

The allowance for credit losses on loans (“ACLL”) at June 30, 2022, increased to $25.0 million, or 1.27% of gross loans receivable, excluding loans HFS, compared to $23.4 million, or 1.28% of gross loans receivable, excluding loans HFS at March 31, 2022, and decreased from $27.2 million, or 1.63% of gross loans receivable, excluding loans HFS, at June 30, 2021. The quarter over quarter increase of $1.6 million in the ACLL was primarily due to the increase in loans. The year over year decrease in the ACLL was primarily due to the one-time cumulative-effect adjustment of $2.9 million as of the CECL adoption date of January 1, 2022. The allowance for credit losses on unfunded loan commitments increased $295,000 to $3.4 million at June 30, 2022, compared to $3.1 million at March 31, 2022, and increased from $479,000 at June 30, 2021. The year over year increase was primarily due to the one-time cumulative-effect adjustment of $2.4 million as of the CECL adoption date and increases in unfunded loan commitments.

Nonperforming loans decreased $138,000 to $6.7 million at June 30, 2022, from $6.8 million at March 31, 2022, and increased $354,000 from $6.3 million at June 30, 2021. The decrease in nonperforming loans quarter over linked quarter was primarily due to the reduction in nonperforming home equity loans. The year over year increase was primarily due to an increase in nonperforming commercial business loans.

Loans classified as substandard decreased $2.5 million to $10.6 million at June 30, 2022, compared to $13.1 million at March 31, 2022, and decreased $11.7 million from $22.3 million at June 30, 2021. The quarter over linked quarter decrease in substandard loans was attributable to a decrease of $2.5 million in commercial and industrial loans. The year over year decrease in substandard loans was primarily due to decreases of $6.2 million in one-to-four-family loans and $4.1 million in commercial and industrial loans. There was one other real estate owned (“OREO”) property in the amount of $145,000 at June 30, 2022, and none at March 31, 2022 or June 30, 2021.

Operating Results

Net interest income increased $3.5 million, to $24.7 million for the three months ended June 30, 2022, from $21.2 million for the three months ended June 30, 2021. This comparable quarter over quarter increase was primarily the result of an improved mix of loans versus other interest-bearing assets and increased balances in higher yielding loans funded by lower cost deposits.   Interest income increased $3.1 million, primarily due to an increase of $2.8 million in interest income on loans receivable, including fees, impacted primarily by loan growth. Interest expense decreased $361,000, primarily as a result of repricing deposit rates and a reduction in higher cost borrowings. For the three months ended June 30, 2022, the total recognition of net deferred fees on forgiven and amortizing PPP loans was $150,000, as compared to $436,000 for the three months ended June 30, 2021.  

For the six months ended June 30, 2022, net interest income increased by $6.1 million, to $47.5 million, from $41.3 million for the six months ended June 30, 2021 for the same reason as for the three-month comparison described above, with an increase in interest income of $5.0 million and a decrease in interest expense of $1.1 million. For the six months ended June 30, 2022 and 2021, the total recognition of net deferred fees on forgiven and amortizing PPP loans was $415,000 and $1.1 million, respectively.

NIM increased 30 basis points to 4.39% for the three months ended June 30, 2022, from 4.09% for the same period in the prior year and increased 28 basis points to 4.32% for the six months ended June 30, 2022, from 4.04% for the six months ended June 30, 2021. The increase in NIM between both the three and six months ended June 30, 2022 and 2021, respectively, reflects new loan originations at higher interest rates, variable loan repricing following recent increases in market interest rates, an improved asset mix of higher yielding assets as low yielding excess cash funded higher yielding loans and investment securities, and lower deposit and borrowing costs.

The average total cost of funds, including noninterest-bearing checking, decreased 11 basis points to 0.43% for the three months ended June 30, 2022, from 0.54% for the three months ended June 30, 2021. This decrease was predominantly due to the decline in cost for market rate deposits and borrowings as well as a managed runoff of higher cost CD funding. The average cost of funds decreased 15 basis points to 0.41% for the six months ended June 30, 2022, from 0.56% for the six months ended June 30, 2021, also 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, 2022, the provision for credit losses on loans was $1.6 million and $2.5 million, respectively, compared to none and $1.5 million for the three and six months ended June 30, 2021, respectively, as calculated under the prior incurred loss methodology.   The provision for credit losses on loans reflects the increase in total loans receivable partially offset by a reduction in classified loans that were downgraded based on the COVID-19 pandemic and improved economic factors on credit-deterioration used to calculate the ACLL primarily related to the COVID-19 pandemic as compared to the same time last year.

For the three and six months ended June 30, 2022, the provision for credit losses on unfunded commitments was $294,000 and $485,000, respectively, compared to $257,000 and $455,000, for the three and six months ended June 30, 2021, respectively. The increase was attributable to a change in methodology as a result of the adoption of CECL, as well as increases in total unfunded commitments during the period.

During the three months ended June 30, 2022, net charge-offs totaled $16,000, compared to $141,000 for the same period last year. The decrease in net charge-offs was primarily due to decreases in the following loan categories: $98,000 in other consumer loans (which includes deposit net charge-offs of $77,000), and $28,000 in indirect home improvement loans.   Net charge-offs totaled $280,000 during the six months ended June 30, 2022, compared to $439,000 during the six months ended June 30, 2021. This decrease was primarily due to net charge-off decreases of $87,000 in indirect home improvement loans, $48,000 in other consumer loans (which includes deposit net charge-offs of $65,000), and $38,000 in commercial business loans.

Noninterest income decreased $3.8 million, to $4.4 million, for the three months ended June 30, 2022, from $8.2 million for the three months ended June 30, 2021. The decrease during the period primarily reflects a $4.3 million decrease in gain on sale of loans due primarily to a reduction in origination and sales volume of loans HFS and a reduction in gross margins of sold loans, partially offset by a $574,000 increase in service charges and fee income as a result of less amortization of mortgage servicing rights reflecting increased market interest rates and increased servicing fees from non-portfolio loans. Noninterest income decreased $11.0 million, to $10.2 million, for the six months ended June 30, 2022, from $21.2 million for the six months ended June 30, 2021. This decrease was primarily the result of a $12.2 million decrease in gain on sale of loans, partially offset by a $822,000 increase in service charges and fee income.

Noninterest expense was unchanged at $18.9 million for both the three months ended June 30, 2022 and 2021. Noninterest expense increased $2.7 million, to $38.0 million for the six months ended June 30, 2022, from $35.3 million for the six months ended June 30, 2021. The increase as compared to the same period last year was primarily due to a reduction in the recovery of servicing rights to $1,000 from $2.0 million.

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 headquarters office that produces loans and accepts deposits, and loan production offices in various suburban communities in the greater Puget Sound area, the Tri-Cities, and in Vancouver, Washington. The Bank services home mortgage customers throughout Washington State with an emphasis in the Puget Sound, Tri-Cities, and Vancouver 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: potential adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, generally, resulting from the COVID-19 pandemic and any governmental or societal responses thereto; increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions, 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 2022 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
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FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
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FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
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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 tangible book value per share, a non-GAAP financial measure. 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.

This non-GAAP financial measure has inherent limitations, is not required to be uniformly applied, and is not audited. Further, this non-GAAP financial measure should not be considered in isolation or as a substitute for book value per share or total stockholders' equity determined 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.