FS Bancorp, Inc. Reports 2018 Results Including Net Income of $24.3 Million which Includes a Bargain Purchase Gain of $7.4 Million from the Anchor Bancorp Acquisition, New Share Repurchase Plan, and a 7.1% Increase in Its Quarterly Dividend to $0.15 Per Quarter

MOUNTLAKE TERRACE, Wash., Jan. 28, 2019 (GLOBE NEWSWIRE) — FS Bancorp, Inc. (NASDAQ:FSBW) (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2018 fourth quarter net income of $11.7 million, or $2.83 per diluted share, compared to $3.7 million, or $0.98 per diluted share for the fourth quarter ended December 31, 2017.  Net income for the year ended December 31, 2018 was $24.3 million, or $6.29 per diluted share, compared to net income of $14.1 million, or $4.28 per diluted share for last year.  Fourth quarter results include a $7.4 million bargain purchase gain related to our recent acquisition of Anchor Bancorp (“Anchor Acquisition”).

“The cultural fit related to the Anchor Acquisition continues to exceed our expectations as we strive to combine strengths while enhancing our targeted growth objectives,” stated CEO Joe Adams. “We are also pleased to announce that our Board of Directors has approved our twenty-fourth quarterly cash dividend which increased 7.1% to $0.15 per share from $0.14 per share.”  The dividend will be paid on February 20, 2019, to shareholders of record as of February 6, 2019.

CFO Matthew Mullet noted, “The completion of the Anchor Acquisition improved capital levels which allowed management and the Board of Directors to update related pro forma projections and support the Company’s adoption of a share repurchase plan.” The plan provides for the repurchase of up to 225,000 shares or approximately 5% of shares authorized and outstanding at December 31, 2018. The shares may be purchased in the open market or in privately negotiated transactions from time to time depending upon market conditions and other factors, including the Company’s liquidity requirements.

Recent Events

At the close of business on November 15, 2018, the Company completed its acquisition of Anchor Bancorp (“Anchor”) and its wholly-owned subsidiary, Anchor Bank.  At the closing of the transaction, Anchor Bank had nine retail branches and one loan production office located in Southwest Washington. Anchor shareholders received 725,518 shares of Company common stock and $30.8 million in cash in exchange for each share of Anchor common stock, which includes cash in lieu of any fractional shares for total consideration paid of $64.6 million.

The acquisition was accounted for using the acquisition method of accounting.  Accordingly, the purchase price was allocated to the assets (including identifiable intangible assets) and the liabilities of Anchor at their respective estimated fair values as of the acquisition date. The excess of the fair value of the net assets acquired over the purchase price was recorded as a bargain purchase gain.  The fair value on the acquisition date represents management’s best estimates based on available information and facts and circumstances in existence on the acquisition date.  The allocation of the purchase price is subject to adjustment during the measurement period not to exceed one year.  The acquisition provided $443.3 million of assets, $356.3 million of loans, and $356.8 million of deposits adjusted to fair value on the acquisition date, and a bargain purchase gain of $7.4 million to the Company.

2018 Fourth Quarter and Year End Highlights

• Net income was $11.7 million for the fourth quarter of 2018, compared to $4.1 million in the previous quarter, and $3.7 million for the comparable quarter one year ago;
    
• Net income for the fourth quarter adjusted for $946,000 of acquisition related costs (adjusted at a 21% tax rate) and $7.4 million in bargain purchase gain would have been $5.1 million, or $1.23 per diluted share (See non-GAAP Financial Measures);
    
• Our Board of Directors (“Board”) authorized a share repurchase plan of up to 225,000 shares in 2019 depending upon market conditions and other factors including the Company’s liquidity requirements;
    
• Our Board approved a dividend increase of 7.1% to $0.15 per quarter ($0.60 per year) from $0.14 per quarter ($0.56 per year) payable on February 20, 2019;
    
• Total gross loans increased $365.1 million, or 38.0%, during the quarter, to $1.33 billion at December 31, 2018, primarily due to loans acquired in the Anchor Acquisition, compared to $961.1 million at September 30, 2018, and increased $552.8 million, or 71.5%, from $773.4 million at December 31, 2017.  Organic (nonacquisition related) growth was $224.6 million, or 29.0% in 2018;
    
• Net interest income increased $3.0 million during the quarter to $15.8 million at December 31, 2018, compared to $12.9 million in the previous quarter, and $11.3 million for the comparable quarter one year ago;
    
• Deposits increased $329.7 during the quarter to $1.27 billion at December 31, 2018, compared to $944.5 million at September 30, 2018 and $829.8 million at December 31, 2017.  Organic (nonacquisition related) deposits grew $123.3 million to $953.1 million in 2018, from $829.8 million at December 31, 2017; and
    
• Capital levels at the Bank were 13.5% for total risk-based capital and 10.7% for Tier 1 leverage capital at December 31, 2018, compared to 16.3% and 12.6% at December 31, 2017, respectively.

Balance Sheet and Credit Quality

Total assets increased $430.3 million, or 36.1%, to $1.62 billion at December 31, 2018, compared to $1.19 billion at September 30, 2018, and increased $639.9 million, or 65.2%, from $981.8 million at December 31, 2017.  The quarter over linked quarter increase in total assets included increases in loans receivable, net of $364.9 million including loans receivable, net acquired in the Anchor Acquisition of $328.2 million, bank owned life insurance (“BOLI”) of $20.9 million, total cash and cash equivalents of $17.6 million, premises and equipment, net of $12.6 million, core deposits intangible (“CDI”), net of $5.1 million, certificates of deposit at other financial institutions of $4.7 million, partially offset by a decrease in loans held for sale (“HFS”) of $3.6 million.  The year over year increase in total assets included increases in loans receivable, net of $551.0 million, BOLI of $24.2 million, securities available-for-sale of $14.7 million, total cash and cash equivalents of $13.9 million, premises and equipment, net of $13.7 million, Federal Home Loan Bank (“FHLB”) stock of $7.0 million, CDI, net of $4.9 million, servicing rights of $3.6 million, certificates of deposit at other financial institutions of $4.0 million, and accrued interest receivable of $2.2 million, partially offset by decreases in loans HFS of $2.3 million.  These increases in assets year over year were from a combination of organic growth and assets acquired in the Anchor Acquisition and were driven by deposit growth including organic growth and acquired deposits of $321.1 million.

Loans receivable, net increased $364.9 million to $1.31 billion at December 31, 2018, from $947.6 million at September 30, 2018, and increased $551.0 million from $761.6 million at December 31, 2017.  During the fourth quarter, real estate loans increased $324.0 million, including increases in commercial of $136.0 million, one-to-four-family portfolio of $61.1 million, multi-family of $56.6 million, construction and development of $56.1 million, and home equity of $14.2 million. Commercial business loans increased $23.1 million due to an increase in commercial and industrial loans of $24.9 million, partially offset by a decrease in warehouse lending loans of $1.8 million.  Consumer loans increased $18.0 million, primarily due to increases of $11.9 million in indirect home improvement loans, $3.4 million in other consumer, and $1.5 million in solar loans.

The increase of $364.9 million in loans receivable, net in the fourth quarter mentioned above is attributed primarily to the loans acquired in the Anchor Acquisition totaling $328.2 million. These loans included commercial real estate of $131.0 million, one-to-four-family portfolio of $55.9 million, multi-family of $55.5 million, construction and development of $50.2 million, commercial business of $19.0 million, home equity of $13.1 million, and consumer of $3.4 million.

One-to-four-family loans originated through the home lending segment which includes loans HFS, loans held for investment, fixed seconds, and loans brokered to other institutions was $155.5 million during the quarter ended December 31, 2018, a decrease of $37.9 million, or 19.6%, compared to $193.4 million for the preceding quarter, and decreased from $208.6 million for the comparable quarter one year ago. During the quarter ended December 31, 2018, the Company sold $147.1 million of one-to-four-family loans, compared to sales of $174.9 million during the previous quarter, and sales of $206.2 million during the same quarter one year ago.

Originations of one-to-four-family loans (excluding brokered loans) to purchase a home and to refinance for the three months ended and years ended December 31, 2018 and 2017 were as follows:

The allowance for loan losses (“ALLL”) at December 31, 2018 increased to $12.3 million, or 0.9% of gross loans receivable, excluding loans HFS, compared to $12.0 million, or 1.3% of gross loans receivable, excluding loans HFS at September 30, 2018, and $10.8 million, or 1.4% of gross loans receivable, excluding loans HFS, at December 31, 2017.  Included in the recorded value of loans acquired in the Anchor Acquisition are net discounts which as of December 31, 2018 did not reflect an ALLL as they are carried at an amount below the outstanding principal balance.  The recorded value of loans acquired in the Anchor Acquisition was $361.6 million, and the fair value discount was $5.3 million, or 1.5% of the loans acquired. Non-performing loans, consisting solely of non-accruing loans, increased to $4.2 million at December 31, 2018, from $2.2 million at September 30, 2018, primarily from the addition of $1.2 million of non-performing loans acquired in the Anchor Acquisition and a single one-to-four-family loan in the amount of $834,000, and were $1.0 million at December 31, 2017.  Substandard loans increased $845,000 to $8.3 million at December 31, 2018, compared to $7.4 million at September 30, 2018, primarily due to $1.2 million of substandard loans acquired in the Anchor Acquisition, and were $6.5 million at December 31, 2017.  There were two other real estate owned (“OREO”) properties totaling $689,000 at December 31, 2018, which were acquired in the Anchor Acquisition, as compared to no OREO at both September 30, 2018, and at December 31, 2017.

The Company sold $18.9 million of securities available-for-sale during the fourth quarter of 2018 realizing a gain of $57,000.  All of the securities sold were acquired in connection with the Anchor Acquisition. Those sales primarily provided additional funds for paying down borrowings. 

Total deposits were $1.27 billion at December 31, 2018, compared to $944.5 million at September 30, 2018, and $829.8 million at December 31, 2017.  The majority of deposit growth occurred due to the deposits acquired from the Anchor Acquisition that resulted in growth in all categories of deposits.  Relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased $80.3 million, from September 30, 2018, and increased $78.9 million, from December 31, 2017.  Money market and savings accounts increased $85.5 million from September 30, 2018, and $104.1 million from December 31, 2017.  Time deposits increased $163.8 million, from September 30, 2018, and increased $261.4 million, from December 31, 2017. 

At December 31, 2018, non-retail certificates of deposit (“CDs”) which include brokered CDs, online CDs, public deposits CDs, and public funds CDs increased $3.1 million to $127.5 million, compared to $124.4 million at September 30, 2018, primarily due an increase in public non-retail CDs acquired in the Anchor Acquisition. The $61.0 million year over year increase in non-retail CDs from $66.5 million at December 31, 2017 primarily reflects a $57.4 million increase in brokered CDs.  Management remains focused on increasing our lower cost relationship-based deposits to fund long-term asset growth.

At December 31, 2018, borrowings increased $50.6 million, or 58.5%, to $137.2 million, from $86.5 million at September 30, 2018, and increased $129.6 million from $7.5 million at December 31, 2017.  The increase in borrowings during the current quarter was primarily related to FHLB advances assumed in the Anchor Acquisition.

Total stockholders’ equity increased $46.9 million, to $180.0 million at December 31, 2018, from $133.1 million at September 30, 2018, and increased $58.0 million, from $122.0 million at December 31, 2017.  The increase in stockholders’ equity during the current quarter from September 30, 2018 was primarily due to common stock issued in the Anchor Acquisition, resulting in an increase of $34.4 million in additional paid-in capital, and net income of $11.7 million, and a decrease in accumulated other comprehensive loss, net of tax of $1.2 million.  Book value per common share was $41.19 at December 31, 2018, compared to $37.10 at September 30, 2018, and $34.47 at December 31, 2017.

The Bank is well capitalized under the minimum capital requirements established by the FDIC with a total risk-based capital ratio of 13.5%, a Tier 1 leverage capital ratio of 10.7%, and a common equity Tier 1 (“CET1”) capital ratio of 12.6% at December 31, 2018.  At December 31, 2017, the total risk-based capital ratio was 16.3%, the Tier 1 leverage capital ratio was 12.6%, and the CET1 capital ratio was 15.0%.

The Company exceeded all regulatory capital requirements with a total risk-based capital ratio of 13.3%, a Tier 1 leverage capital ratio of 12.1%, and a CET1 ratio of 12.4% at December 31, 2018, compared to 15.7%, 12.1%, and 14.5%, respectively, at December 31, 2017.

Operating Results

Net interest income increased $4.5 million, to $15.8 million for the three months ended December 31, 2018, from $11.3 million for the three months ended December 31, 2017.  This increase was a result of a $6.6 million increase in loans receivable interest income, including additional interest from loans acquired in the Anchor Acquisition, and a $442,000 increase in interest and dividends on investment securities, and cash and cash equivalents, partially offset by a $1.7 million increase in deposit interest expense due to acquired deposits and continued organic growth in interest-bearing deposits with higher market interest rates paid on new interest-bearing deposits, and an $873,000 increase in interest expense on borrowings mostly from the use of FHLB borrowings to support loan growth. Net interest income increased $10.9 million, to $52.1 million for the year ended December 31, 2018, from $41.2 million for the year ended December 31, 2017, mostly due to a $15.2 million increase in interest income on loans receivable and a $986,000 increase in interest and dividends on investment securities, and cash and cash equivalents and CDs at other financial institutions, partially offset by a $3.4 million increase in interest expense on deposits and a $1.9 million increase in interest expense on borrowings.

The net interest margin (“NIM”) decreased 13 basis points to 4.59% for the three months ended December 31, 2018, from 4.72% for the same period in the prior year, and decreased four basis points to 4.61% for the year ended December 31, 2018, from 4.65% for the year ended December 31, 2017.  The decrease in NIM for both periods was driven primarily by the significant growth in assets from the Anchor Acquisition along with higher cost market rate deposits and increased borrowing costs to fund loan growth.  The average cost of funds increased 59 basis points to 1.23% for the three months ended December 31, 2018, from 0.64% for the three months ended December 31, 2017, and increased 39 basis points to 1.00% for the year ended December 31, 2018, from 0.61% for the same period last year.  This increase was predominantly due to growth in time deposits and an increase in short-term overnight FHLB borrowing rates reflecting increases in the targeted federal funds rate.  Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.

For the three months ended December 31, 2018, the provision for loan losses was $290,000, compared to $300,000 for the three months ended December 31, 2017.  During the three months ended December 31, 2018, net recoveries totaled $14,000, compared to net charge-offs of $143,000 for the same period last year.  The provision for loan losses was $1.5 million for the year ended December 31, 2018, compared to $750,000 for the year ended December 31, 2017, due primarily to organic loan growth. During the year ended December 31, 2018, net recoveries totaled $53,000, compared to net charge-offs of $205,000 during the year ended December 31, 2017.

Noninterest income increased $6.1 million, to $11.4 million for the three months ended December 31, 2018, from $5.3 million for the three months ended December 31, 2017.  The increase during the period primarily reflects a $7.4 million bargain purchase gain related to the Anchor Acquisition, and a $383,000 increase in service charges and fee income, partially offset by a $1.8 million reduction in gain on sale of loans.  Noninterest income increased $2.8 million, to $26.9 million for the year ended December 31, 2018, from $24.1 million for the year ended December 31, 2017.  The increase was mainly due to the $7.4 million bargain purchase gain related to the Anchor Acquisition, partially offset by a $3.1 million reduction in gain on sale of loans, no gain on sale of mortgage servicing rights in 2018 compared to $1.1 million in 2017, a $315,000 reduction in service charges and fee income, due in part to the sale of mortgage servicing rights in 2017, and a $209,000 reduction in gain on sale of investment securities. 

Noninterest expense increased $2.7 million, to $13.8 million for the three months ended December 31, 2018, from $11.1 million for the three months ended December 31, 2017.  The increase in noninterest expense was primarily due to the Anchor Acquisition with increases of $946,000 in acquisition costs, $801,000 in operations, $359,000 in salaries and benefits, and $216,000 in data processing expenses. Total salaries and benefits expense also includes a $694,000 decrease in incentives and commissions reflecting lower one-to-four-family loan originations as a result of the impact of rising interest rates in 2018 and a reduction of homes available for sale in the Pacific Northwest.

Noninterest expense increased $4.8 million, to $48.8 million for the year ended December 31, 2018, from $44.0 million for the year ended December 31, 2017.  The increase in noninterest expense was primarily due to increases of $1.9 million in salaries and benefits due to an increase in full-time employees from the growth in our operations and the Anchor Acquisition and also includes a $1.1 million decrease in incentives and commissions, acquisition costs of $1.4 million related to the Anchor Acquisition as well as increases of $504,000 in operations, $370,000 in occupancy expense, and $350,000 in data processing expense.

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)

FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts) (Unaudited)

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(1)  Annualized.
(2)  Total noninterest expense as a percentage of net interest income and total other 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.
(5)  Common shares were calculated using shares outstanding of 4,492,478 at December 31, 2018, less 43,421 restricted stock shares, and 77,763 unallocated ESOP shares.
(6)  Common shares were calculated using shares outstanding of 3,716,460 at September 30, 2018, less 43,421 restricted stock shares, and 84,243 unallocated ESOP shares.
(7)  Common shares were calculated using shares outstanding of 3,680,152 at December 31, 2017, less 36,842 restricted stock shares, and 103,684 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.

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(1)  Includes loans held for sale.
(2)  Includes fixed assets, BOLI, goodwill, and CDI.
(3)  Average balances are daily for October and December of 2018 and a simple average of monthend actuals for November 2018.

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, excluding acquisition costs, net of tax, diluted earnings per share, excluding acquisition costs, and tangible book value per share. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. 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.  Excluding the bargain purchase gain and the after-tax impact of acquisition related costs from net income which we have recorded in connection with the acquisition of Anchor, provides meaningful supplemental information that management believes is useful to readers.

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 our bank regulatory agencies, 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 acquisition costs, net of tax and bargain purchase gain:

Reconciliation of the GAAP book value per share and non-GAAP tangible book value per share is presented below.

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