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

MOUNTLAKE TERRACE, Wash., July 23, 2020 (GLOBE NEWSWIRE) — FS Bancorp, Inc. (NASDAQ:FSBW) (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2020 second quarter net income of $10.0 million, or $2.30 per diluted share, compared to $4.5 million, or $0.98 per diluted share for the same period last year.
“During the last eight years of significant growth, we focused on maintaining diversified revenue streams through challenging economic environments.  The results of the second quarter reflect our diversified strategy and commitment to long-term shareholder value as we surpassed the $2 billion in assets mark this quarter,” stated Joe Adams, CEO.  “We are also pleased to announce that our Board of Directors has approved our thirtieth consecutive quarterly cash dividend. The quarterly dividend of $0.21 will be paid on August 20, 2020, to shareholders of record as of August 6, 2020.”Updated response to the novel coronavirus of 2019 (“COVID-19”) pandemic: The Company is following the Federal Housing Finance Agency guidelines for forbearance, foreclosure relief, and late payment reporting for the COVID-19 pandemic on all serviced loans and a modified format for portfolio loans.  For portfolio loans, the primary method of relief is to allow the borrower up to 90-days of interest only payments and/or loan payment deferments, and, on a more limited basis waived interest, late fees or interest only loan payments and suspended foreclosure proceedings. During the first and second quarters of 2020, the Company has provided relief to portfolio (held for investment) loans impacted by COVID-19 in the amount of $103.6 million. As of June 30, 2020, the amount of loans remaining under payment/relief agreements includes commercial real estate loans of $53.0 million, commercial business loans of $24.1 million, portfolio one-to-four-family loans of $18.8 million, and consumer loans of $4.0 million. Additional detail is provided below in the “Credit Quality” discussion.During the second quarter, the Company participated in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”). For borrowers in the communities we serve, the Company has funded 463 PPP loans totaling $75.3 million as of June 30, 2020.All of our branches are open, with the exception of one branch which is operating through the drive-up window and accepting customer appointments. The majority of our employees continue to work remotely, where feasible.2020 Second Quarter HighlightsNet income was $10.0 million for the second quarter of 2020, compared to $5.2 million in the previous quarter, and $4.5 million for the same quarter one year ago;In response to the COVID-19 pandemic and its continued adverse economic impact, the provision for loan losses increased to $4.6 million, compared to $3.7 million in the previous quarter, and $910,000 for the same quarter one year ago;Total gross loans increased $57.0 million during the quarter to $1.47 billion at June 30, 2020, compared to $1.41 billion at March 31, 2020, and $1.30 billion at June 30, 2019;The allowance for loan and lease losses (“ALLL”) to gross loans receivable (excluding loans held for sale (“HFS”)) for the second quarter of 2020 was 1.47%, up from 1.20% in the previous quarter and 0.95% for the same quarter one year ago. The adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans, was 1.54% (See “Non-GAAP Financial Measures”);Total deposits increased $160.6 million during the quarter, including an increase of $71.2 million in relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts), mostly due to management’s focus on deposit mix and increases in PPP funds;The Company repurchased 87,155 shares of its common stock during the quarter ended June 30, 2020, at an average price per share of $37.62; andThe Bank’s Community Bank Leverage Ratio (“CBLR”) was 10.8% at June 30, 2020.Asset SummaryTotal assets increased $161.6 million, or 8.7%, to $2.01 billion at June 30, 2020, compared to $1.85 billion at March 31, 2020, and increased $367.7 million, or 22.4%, from $1.64 billion at June 30, 2019.  The quarter over linked quarter increase in total assets was primarily due to increases in total cash and cash equivalents of $77.2 million, loans receivable, net of $51.4 million, loans HFS of $23.8 million, and securities available-for-sale of $12.2 million, partially offset by a decrease in Federal Home Loan Bank (“FHLB”) stock of $3.3 million. Year over year increases in total assets included increases in loans receivable, net of $162.3 million, loans HFS of $72.9 million, securities available-for-sale of $72.5 million, and total cash and cash equivalents of $66.5 million, partially offset by a decrease in certificates of deposit (“CDs”) at other financial institutions of $6.4 million.The Bank sold $9.2 million of securities available-for-sale during the second quarter of 2020 realizing a gain of $182,000.  The Bank sold these securities to reduce portfolio duration and sell lower yielding mortgage-backed security investments that had been in a loss position over 12 months.  The proceeds were allocated to term investments including municipal bonds and agency-backed securities.Loans receivable, net increased $51.4 million to $1.44 billion at June 30, 2020, from $1.39 billion at March 31, 2020, and increased $162.3 million from $1.28 billion at June 30, 2019.  The quarter over linked quarter increase in total real estate loans was $5.2 million, including increases in construction and development loans of $14.4 million, multi-family loans and commercial real estate loans both of $1.8 million, partially offset by decreases in one-to-four-family portfolio loans of $10.2 million and home equity loans of $2.4 million.  Consumer loans increased $10.2 million, primarily due to an increase of $7.4 million in marine loans and $3.2 million in indirect home improvement loans. Commercial business loans increased $41.6 million, primarily due to an increase in commercial and industrial loans of $64.9 million, partially offset by reductions in warehouse lending of $23.3 million. The increase in commercial and industrial loans was primarily due to the origination of $75.3 million of PPP loans.One-to-four-family loans originated through the home lending segment, which includes loans HFS, loans held for investment, fixed rate seconds, and loans brokered to other institutions, were $478.4 million during the quarter ended June 30, 2020, an increase of $192.8 million, or 67.5%, compared to $285.6 million for the preceding quarter. During the quarter ended June 30, 2020, the Company sold $427.0 million of one-to-four-family loans compared to sales of $212.4 million during the previous quarter, and sales of $173.4 million during the same quarter one year ago. During the six months ended June 30, 2020, the Company sold $639.4 million of one-to-four-family loans compared to sales of $304.3 million during the same period last year. Refinance activity increased significantly over the last year in response to decreases in market interest rates.Originations of one-to-four-family loans to purchase and to refinance a home for the three and six months ended June 30, 2020 and 2019 were as follows:
Liabilities and Equity SummaryTotal deposits increased $160.6 million to $1.61 billion at June 30, 2020, compared to $1.45 billion at March 31, 2020, and increased $272.7 million from $1.33 billion at June 30, 2019.  The quarter over linked quarter increase was partly due to management’s shift in deposit mix away from certificates of deposit and into nonmaturity DDA accounts including disbursements of PPP loan funds into borrowers’ operating accounts, as well as changes in customer spending habits due to the COVID-19 pandemic. Relationship-based transactional deposits increased during the current quarter by $71.2 million, primarily due to a $65.6 million increase in noninterest-bearing checking accounts and an $11.3 million increase in interest-bearing checking accounts, offset partially by a $5.7 million decrease in escrow deposits. The remaining quarter over linked quarter increase of $89.4 million was due to a $47.9 million increase in time deposits including growth of $52.6 million in brokered deposits, partially offset by a reduction of $9.1 million in retail CDs, and a $41.5 million increase in money market and savings accounts.  The year over year increase of $272.7 million included relationship-based transactional deposits of $106.0 million, primarily due to a $65.5 million increase in noninterest-bearing checking accounts, $39.7 million increase in interest-bearing accounts, and an $801,000 increase in escrow deposits.  The remaining $166.7 million in increases included $102.5 million in money market and savings accounts and $64.2 million in time deposits. At June 30, 2020, non-retail CDs, which include brokered CDs, online CDs, public deposits CDs, and public funds CDs increased $66.3 million to $195.1 million, compared to $128.8 million at March 31, 2020, primarily due to a $64.6 million increase in brokered CDs and a $1.7 million increase in online CDs. Brokered CDs increased during the quarter to fund asset growth as their cost declined significantly in response to recent reductions in interest rates. The year over year increase in non-retail CDs of $76.2 million from $118.9 million at June 30, 2019, was the result of a $73.5 million increase in brokered CDs tied to longer term swap transactions, $2.0 million increase in online CDs, and a $783,000 increase in public funds CDs.  Management remains focused on increasing our lower cost relationship-based deposits to fund long-term asset growth.At June 30, 2020, borrowings decreased $8.9 million, or 5.6%, to $150.3 million, from $159.1 million at March 31, 2020, and increased $67.1 million, or 80.6% from $83.2 million at June 30, 2019. The decrease in borrowings from the linked quarter is primarily due to the pay down of FHLB advances of $71.9 million, partially offset by the addition of funds from the Paycheck Protection Program Liquidity Facility (“PPPLF”) of $63.0 million. Under the PPPLF, the Bank pledged PPP loans at face value as collateral to obtain Federal Reserve Bank non-recourse loans. The increase from the prior year is primarily due to the funds from the PPPLF and a $4.1 million increase in FHLB advances.Total stockholders’ equity increased $7.8 million, to $208.6 million at June 30, 2020, from $200.8 million at March 31, 2020, and increased $19.2 million, from $189.4 million at June 30, 2019.  The increase in stockholders’ equity during the current quarter was primarily due to net income of $10.0 million and $1.5 million of other comprehensive income, net of tax, partially offset by the common stock repurchase of $3.3 million. The Company repurchased 87,155 shares of its common stock during the quarter ended June 30, 2020, at an average price of $37.62 per share.  Book value per common share was $50.08 at June 30, 2020, compared to $47.29 at March 31, 2020, and $43.18 at June 30, 2019.The Bank is well capitalized under the minimum capital requirements established by the Federal Deposit Insurance Corporation (“FDIC”) at June 30, 2020 with a CBLR of 10.8%, compared to the required CBLR of greater than 9.0% and the regulatory approved CBLR of 8.0% during the COVID-19 pandemic.  The Company’s Tier 1 leverage capital ratio was 10.5% at June 30, 2020.Credit QualityThe ALLL at June 30, 2020, increased to $21.5 million, or 1.47% of gross loans receivable, excluding loans HFS, compared to $16.9 million, or 1.20% of gross loans receivable, excluding loans HFS at March 31, 2020, and $12.3 million, or 0.95% of gross loans receivable, excluding loans HFS, at June 30, 2019.  The adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans was 1.54% at June 30, 2020 (See “Non-GAAP Financial Measures”).  Non-performing loans increased to $7.9 million at June 30, 2020, from $3.2 million at March 31, 2020 and from $1.6 million at June 30, 2019.  The increase in non-performing loans quarter over linked quarter was primarily a result of borrowers associated with COVID-19 restrictions on their business activities, and the year over year increase was also associated with the COVID-19 pandemic.Loans classified as substandard increased $4.8 million to $12.4 million at June 30, 2020, compared to $7.6 million at March 31, 2020, and increased $5.9 million from $6.5 million at June 30, 2019.  The quarter over linked quarter increase in substandard loans was mostly driven by the downgrade of two commercial business loans totaling $4.3 million and two commercial real estate loans totaling $945,000 primarily due to the COVID-19 pandemic.  The year over year increase in substandard loans was primarily due to the downgrade of the two loans mentioned above with the addition of another commercial real estate loan in the amount of $1.1 million downgraded in the fourth quarter of 2019 due to borrower financial difficulties and remains substandard due to state mandates on certain businesses related to the COVID-19 pandemic.  There was one other real estate owned (“OREO”) property totaling $90,000 at both June 30, 2020 and March 31, 2020, compared to three OREO properties totaling $254,000 at June 30, 2019.Included in the carrying value of gross loans are net discounts on loans purchased in the Anchor Acquisition. The remaining net discount on loans acquired in the Anchor Acquisition was $2.0 million, $2.3 million, and $3.7 million, on $168.7 million, $178.2 million, and $278.4 million of gross loans at June 30, 2020, March 31, 2020, and June 30, 2019, respectively.Management has identified $126.8 million of loans that are in industries potentially impacted by the COVID-19 pandemic and has downgraded the risk classification of these loans as follows. Total COVID-19 downgrades were $108.5 million to Watch, $11.8 million to Special Mention, and $6.5 million to Substandard for the six months ended June 30, 2020.Loans downgraded as a result of the COVID-19 pandemic and their respective industries at the dates indicated are as follows:Management recognizes the potential impact of COVID-19 on all of our customers and will continue to prudently reserve for probable losses, including reserves against our homogenous residential and consumer portfolios. The Company is offering payment and financial relief programs for borrowers impacted by the COVID-19 pandemic.  For the six months ended June 30, 2020, the Company processed 355 requests for some type of payment relief on portfolio loans (commercial, residential, and consumer) representing $103.6 million in outstanding principal balances.  The primary method of relief is to allow the borrower up to 90-day of interest only payments and/or loan payment deferments, and, on a more limited basis waived interest, late fees or interest only loan payments and suspended foreclosure proceedings. As of June 30, 2020, we had modified a total of 548 loans including loans serviced for others aggregated to $161.4 million, as reflected in the following table:Operating ResultsNet interest income increased $326,000, to $17.9 million for the three months ended June 30, 2020, from $17.5 million for the three months ended June 30, 2019.  This increase was primarily the result of decreases in both interest income and interest expense.  Interest expense decreased $978,000, including an $830,000 decrease in interest expense on deposits and a $148,000 decrease in interest expense on borrowings. Interest income decreased $652,000 including decreases of $538,000 in interest income on loans receivable, including fees, impacted primarily by the recent significant reduction in market interest rates decreasing yields on new loan originations and adjustable instruments and the impact of refinances of higher yielding one-to-four-family portfolio loans, along with a $114,000 decrease in interest and dividends on investment securities, and cash and cash equivalents.  For the six months ended June 30, 2020, net interest income increased modestly by $110,000, to $35.3 million, from $35.2 million for the six months ended June 30, 2019 in a similar manner as for the three month comparison described above, with decreases in interest expense of $1.1 million and in interest income of $1.0 million.The net interest margin (“NIM”) decreased 69 basis points to 3.91% for the three months ended June 30, 2020, from 4.60% for the same period in the prior year, and decreased 56 basis points to 4.09% for the six months ended June 30, 2020, from 4.65% for the six months ended June 30, 2019.  The average yield on PPP loans was 2.06%, including the recognition of the net deferred fees, resulting in a negative impact to the NIM of six basis points during the quarter ended June 30, 2020. When including the net interest income impacts of the PPPLF, NIM was negatively impacted an additional eight basis points during the quarter ended June 30, 2020.  Management has included a NIM analysis in this release excluding the impact of PPP loans and PPPLF borrowings (See “Non-GAAP Financial Measures”). The quarter over quarter decrease in NIM was impacted by higher balances of lower yielding cash balances and reduced note rates on new fixed-rate real estate loan originations and adjustable-rate commercial loans as well as repricing loans from the March 2020 reductions in the targeted federal funds rate in response to COVID-19.  The year over year decrease in NIM was mostly driven by lower note rates on new loan originations. The average cost of funds, including noninterest-bearing checking, decreased 46 basis points to 0.91% for the three months ended June 30, 2020, from 1.37% for the three months ended June 30, 2019.  This decrease was predominantly due to the decrease in cost for market rate deposits and decreased borrowing costs reflecting the lower market interest rates. The year over year average cost of funds decreased 31 basis points to 1.04% for the six months ended June 30, 2020, from 1.35% for the six months ended June 30, 2019, likewise reflecting decreases in market interest rates over last year.  Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate. For the three and six months ended June 30, 2020, the provision for loan losses was $4.6 million and $8.3 million, compared to $910,000 and $1.7 million for the three and six months ended June 30, 2019, primarily due to the adverse economic impact of the COVID-19 pandemic and the increase in the loan portfolio due to organic loan growth.  During the three months ended June 30, 2020, net recoveries totaled $3,000 compared to net charge-offs of $415,000 for the same period last year. Net charge-offs totaled $40,000 during the six months ended June 30, 2020, compared to net charge-offs of $1.7 million during the six months ended June 30, 2019. Noninterest income increased $8.0 million, to $14.1 million, for the three months ended June 30, 2020, from $6.1 million for the three months ended June 30, 2019.  The increase during the period primarily reflects a $9.8 million increase in gain on sale of loans, partially offset by a $1.8 million decrease in service charges and fee income primarily due to an increase in mortgage servicing rights amortization of $1.5 million, resulting from declining interest rates and increased refinancing activity.  Noninterest income increased $12.4 million, to $23.0 million, for the six months ended June 30, 2020, from $10.6 million for the six months ended June 30, 2019.  This increase was impacted by a $13.3 million increase in gain on sale of loans and a $1.4 million increase in other noninterest income mostly due to the net gain from a one-time sale of Class B Visa stock shares of $1.5 million, partially offset by a $2.5 million decrease in service charges and fee income. Noninterest expense decreased $2.4 million, to $14.6 million for the three months ended June 30, 2020, from $17.1 million for the three months ended June 30, 2019.  The decrease in noninterest expense includes a $1.2 million decrease in salaries and benefits, primarily attributable to increases in recognized deferred costs on direct loan origination activities of $5.1 million, partially offset by increases in incentives and commissions of $3.7 million due primarily to increased production of HFS loans, partially offset by an increase of $679,000 in the impairment of servicing rights reflecting the reduction in market interest rates. Additionally, there were no acquisition costs this quarter, compared to $1.2 million in acquisition costs in the prior year quarter. Noninterest expense decreased $1.1 million, to $30.8 million for the six months ended June 30, 2020, from $31.9 million for the six months ended June 30, 2019.  The decrease during this period was primarily due to no acquisition costs for the six months ended June 30, 2020, compared to $1.6 million for the six months ended June 30, 2019. Other decreases between the periods included $591,000 in data processing and $428,000 in loan costs, partially offset by increases of $1.2 million in the impairment of servicing rights and $274,000 in operations. Data processing expenses during the six months ended June 30, 2019, included costs associated with the Anchor Bank core system conversion.About FS BancorpFS Bancorp, Inc., a Washington corporation, is the holding company for 1st Security Bank of Washington.  The Bank provides loan and deposit services to customers who are predominantly small- and middle-market businesses and individuals in Western Washington through its 21 bank branches, one headquarter office that accepts deposits, and seven loan production offices in various suburban communities in the greater Puget Sound area, and one loan production office in the market area of the Tri-Cities, Washington.  The Bank services home mortgage customers throughout Washington State with an emphasis in the Puget Sound and Tri-Cities home lending markets.Forward-Looking Statements
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