FS Bancorp, Inc. Reports Net Income for the First Quarter of $4.3 Million or $1.15 Per Diluted Share and Twenty-First Consecutive Quarterly Dividend

MOUNTLAKE TERRACE, Wash., April 26, 2018 -- FS Bancorp, Inc. (NASDAQ:FSBW) (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2018 first quarter net income of $4.3 million, or $1.15 per diluted share, compared to net income of $2.6 million, or $0.85 per diluted share, for the same period last year, representing a 66.7% increase year over year.

“We continue to be pleased with the growth from our lending channels and growth in profitability year over year,” stated Joe Adams, CEO of FS Bancorp, Inc. “I am also pleased that our Board of Directors has approved our twenty-first quarterly cash dividend of $0.14 per share, an increase of $0.03 per share, or 27.3%, as we previously announced.”  The dividend will be paid on May 14, 2018, to shareholders of record as of April 30, 2018.

2018 First Quarter Highlights

• Net income was $4.3 million for the first quarter of 2018, compared to $3.7 million for the previous quarter, and increased from $2.6 million in the comparable quarter one year ago;
  
  
• Total assets increased $61.8 million to $1.0 billion at March 31, 2018, compared to $981.8 million at December 31, 2017, and were $877.9 million one year ago;
  
  
• Cash dividends to shareholders increased 27.3% to $0.14 per share from $0.11 per share due to strong profitability, a lower federal corporate income tax rate from recent tax reform, and significant capital levels to support a higher dividend level and planned growth initiatives;
  
  
• Total gross loans increased $44.3 million during the quarter, or 5.7%, to $817.7 million at March 31, 2018, compared to $773.4 million at December 31, 2017, and increased $187.8 million, or 29.8%, from $629.9 million at March 31, 2017;
  
  
• Non-performing assets decreased $319,000, or 30.7%, to $720,000 at March 31, 2018, from $1.0 million at December 31, 2017, and were $790,000 at March 31, 2017, with no other real estate owned (“OREO”) at these dates;
  
  
• Relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased $13.5 million, or 4.4%, to $320.3 million at March 31, 2018, from $306.8 million at December 31, 2017, and increased $86.7 million, or 37.1%, from $233.6 million at March 31, 2017;
  
  
• Capital levels at the Bank increased to 16.2% for total risk-based capital and 12.6% for Tier 1 leverage capital at March 31, 2018, compared to 13.8% and 10.4% at March 31, 2017, respectively, and includes the stock issuance of 587,234 shares in the third quarter of 2017 which increased the Bank’s capital by $25.6 million from net proceeds; and
  
  
• We opened our twelfth bank branch in Silverdale, Washington on April 12, 2018. The new branch is our third location in Kitsap County and includes home lending team members. This branch location strengthens our presence in the Silverdale market and provides additional growth opportunities for the Bank through our expanded involvement with the Kitsap community.

Balance Sheet and Credit Quality

Total assets increased $61.8 million, or 6.3%, to $1.0 billion at March 31, 2018, compared to $981.8 million at December 31, 2017, and increased $165.7 million, or 18.9%, from $877.9 million at March 31, 2017.  The quarter over sequential quarter increase of $61.8 million in total assets included increases in loans receivable, net of $44.1 million, securities available-for-sale (“AFS”) of $8.9 million, total cash and cash equivalents of $6.7 million, and bank owned life insurance (“BOLI”) of $3.1 million, partially offset by a decrease in loans held for sale (“HFS”) of $2.1 million, primarily funded by growth in deposits and Federal Home Loan Bank (“FHLB”) borrowings.  The year over year increase of $165.7 million in total assets included increases in loans receivable, net of $187.8 million, loans HFS of $11.3 million, BOLI of $3.3 million, and FHLB stock of $1.2 million, partially offset by a decrease in total cash and cash equivalents of $20.4 million, securities AFS of $15.9 million, and servicing rights of $1.4 million.  These increases in assets year over year were primarily funded by growth in deposits and short-term overnight FHLB borrowings.

Loans receivable, net increased $44.1 million to $805.6 million at March 31, 2018, from $761.6 million at December 31, 2017, and increased $187.8 million from $617.8 million at March 31, 2017.  The increase in loans receivable, net quarter over sequential quarter was primarily a result of increases in commercial business, consumer, and multi-family loans. Total commercial business loans increased $27.5 million, mostly due to an increase in commercial and industrial lending of $21.3 million, including a purchase of $12.0 million in shared national credits, and $4.5 million of guaranteed portions of U.S. Department of Agriculture loans.  Total consumer loans increased $10.3 million, reflecting growth of $6.8 million in indirect home improvement loans and $3.1 million in marine loans.  Total real estate loans increased $6.5 million including increases in multi-family loans of $8.0 million, one-to-four-family portfolio loans of $1.4 million, which is net of a $5.5 million portfolio loan sale, and construction and development loans of $543,000, partially offset by decreases of $1.7 million in both commercial loans and home equity loans. The growth in multi-family loans and the modest increase in construction loans reflects $8.9 million of construction multi-family loans converting to permanent multi-family loans during the quarter.

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 decreased $38.4 million, or 18.4%, to $170.2 million during the quarter ended March 31, 2018, compared to $208.6 million for the preceding quarter, and increased from $142.6 million for the same quarter one year ago. Originations of one-to-four-family loans to purchase a home (purchase production) increased by $13.0 million, or 12.4% with $118.0 million in loan purchase production closing during the quarter ended March 31, 2018, up from $105.0 million for the quarter ended March 31, 2017.  One-to-four-family loan originations for refinance (refinance production) increased $13.6 million, or 36.2% with $51.2 million in refinance production closing during the quarter ended March 31, 2018, up from $37.6 million for the quarter ended March 31, 2017.  During the quarter ended March 31, 2018, the Company sold $155.0 million of one-to-four-family loans HFS, compared to sales of $206.2 million for the preceding quarter, and sales of $136.4 million for the same quarter one year ago.

Purchase production was 69.7% of the total one-to-four-family loan originations versus 30.3% for refinance production during the first quarter of 2018, compared to 73.6% in purchase production versus 26.4% in refinance production during the same period in 2017.  The decrease in purchase production and corresponding increase in refinance production is reflective of the low inventory of homes available for sale in the Pacific Northwest along with competitive rates and significant home value appreciation in our markets.

The allowance for loan losses at March 31, 2018 increased to $11.1 million, or 1.4% of gross loans receivable, excluding loans HFS, compared to $10.8 million, or 1.4% of gross loans receivable, excluding loans HFS at December 31, 2017, and $10.1 million, or 1.6% of gross loans receivable, excluding loans HFS, at March 31, 2017.  Non-performing loans, consisting of non-accrual loans, decreased to $720,000 at March 31, 2018, from $1.0 million at December 31, 2017, and $790,000 at March 31, 2017.  Substandard loans decreased to $6.0 million at March 31, 2018, compared to $6.5 million at December 31, 2017, and decreased from $8.4 million at March 31, 2017.  The $2.4 million decrease in substandard loans from one year ago was primarily due to the sale of a shared national credit of $1.9 million in the third quarter of 2017.  There was no OREO at March 31, 2018, December 31, 2017, or March 31, 2017, respectively.

Total deposits increased $27.6 million, to $857.5 million at March 31, 2018, compared to $829.8 million at December 31, 2017, and increased $99.5 million, from $758.0 million at March 31, 2017.  Relationship-based transactional deposits increased $13.5 million, to $320.3 million at March 31, 2018, from $306.8 million at December 31, 2017, and increased $86.7 million, from $233.6 million at March 31, 2017.  Money market and savings accounts decreased $9.3 million, to $291.5 million at March 31, 2018, from $300.8 million at December 31, 2017, and decreased $34.2 million, from $325.7 million at March 31, 2017, with decreases in money market accounts primarily occurring from increased market interest rate competition and rollovers to the Bank’s promotional certificates of deposits.  Time deposits increased $23.4 million, to $245.7 million at March 31, 2018, from $222.3 million at December 31, 2017, and increased $47.0 million, from $198.7 million at March 31, 2017.  The quarter over sequential quarter increase in time deposits was mostly due to growth in wholesale deposits.

Non-retail certificates of deposit which includes brokered certificates of deposit, online certificates of deposit, and public funds increased $17.7 million to $84.2 million at March 31, 2018, compared to $66.5 million at December 31, 2017, primarily due to an $18.2 million increase in brokered certificates of deposit. The $29.0 million increase from $55.2 million at March 31, 2017 reflects a $35.4 million increase in brokered certificates of deposit, partially offset by a $6.1 million decrease in online certificates of deposit.  Management remains focused on growth in lower cost relationship-based deposits to fund long-term asset growth.

At March 31, 2018, borrowings increased $32.0 million, or 425.0%, to $39.5 million, from $7.5 million at December 31, 2017, and increased $29.3 million, or 284.9%, from $10.3 million at March 31, 2017. The quarter over sequential quarter increase reflects continued growth in shorter term business loans funded with similar duration overnight FHLB borrowings along with deposit growth.

Total stockholders’ equity increased $3.4 million, to $125.4 million at March 31, 2018, from $122.0 million at December 31, 2017, and increased $41.5 million, from $84.0 million at March 31, 2017.  The increase in stockholders’ equity from the fourth quarter of 2017 was primarily due to net income of $4.3 million, partially offset by an increase in accumulated other comprehensive loss, net of tax of $1.2 million. The $41.5 million increase from the first quarter of 2017 was significantly impacted by the issuance and sale of 587,234 shares of common stock, through an underwritten public offering on September 12, 2017, at a price of $47.00 per share in which the Company received $25.6 million in net proceeds. Book value per common share was $35.21 at March 31, 2018, compared to $34.47 at December 31, 2017, and $29.21 at March 31, 2017.

The Bank is well capitalized under the minimum capital requirements established by the FDIC with a total risk-based capital ratio of 16.2%, a Tier 1 leverage capital ratio of 12.6%, and a common equity Tier 1 (“CET1”) capital ratio of 15.0% at March 31, 2018.  At March 31, 2017, the total risk-based capital ratio was 13.8%, the Tier 1 leverage capital ratio was 10.4%, and the CET1 capital ratio was 12.5%.

The Company exceeded all regulatory capital requirements with a total risk-based capital ratio of 15.8%, a Tier 1 leverage capital ratio of 12.2%, and a CET1 ratio of 14.5% at March 31, 2018, compared to 12.9%, 9.7%, and 11.6%, respectively, at March 31, 2017.

Operating Results

Net interest income increased $2.5 million, or 28.1%, to $11.5 million for the three months ended March 31, 2018, from $9.0 million for the three months ended March 31, 2017, primarily attributable to a $2.9 million, or 30.8% increase in loans receivable interest income, partially offset by a $392,000, or 46.0% increase in deposit interest expense due to continued overall growth in interest-bearing deposits with higher market rates paid on new interest-bearing deposits.

The net interest margin (“NIM”) increased 22 basis points to 4.76% for the three months ended March 31, 2018, from 4.54% for the same period in the prior year.  The increased NIM was driven by growth in higher yielding loans, and reductions in lower yielding securities AFS and cash and cash equivalents.  The average cost of funds increased 11 basis points to 0.69% for the three months ended March 31, 2018, from 0.58% for the three months ended March 31, 2017, reflecting growth in time deposits and an increase in short-term overnight FHLB borrowings which are closely tied to wholesale overnight borrowing rates.  Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.

For the three months ended March 31, 2018, the provision for loan losses was $350,000, compared to no provision recorded for the three months ended March 31, 2017 due to continued loan growth. During the three months ended March 31, 2018, net recoveries totaled $34,000 compared to net charge-offs of $64,000 during the three months ended March 31, 2017.

Noninterest income decreased $396,000, or 7.3%, to $5.0 million for the three months ended March 31, 2018, from $5.4 million for the three months ended March 31, 2017.  The decrease during the period reflects a $377,000 reduction in gain on sale of loans associated with increased production of lower margin loans, and a $202,000 reduction in service charges and fee income primarily associated with the sale of servicing assets in the second quarter of 2017, partially offset by a $113,000 increase in gain on sale of investment securities. 

Noninterest expense increased $659,000, or 6.4%, to $11.0 million for the three months ended March 31, 2018, from $10.4 million for the three months ended March 31, 2017.  The increase in noninterest expense was driven by a $930,000 increase in salaries and benefits, which included a $782,000 increase in incentives and commissions associated with continued strong loan production growth, partially offset by decreases of $127,000 in operations expense and $93,000 in FDIC insurance premiums.

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 12 bank branches, including the newly opened Silverdale branch on April 12, 2018, 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: 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; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all; secondary market conditions for loans and our ability to 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 2018 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)

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

(1) Annualized.
(2) Total noninterest expense as a percentage of net interest income and total other noninterest income.
(3) Non-performing assets consists 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 consists of non-accruing loans.
(5) Common shares were calculated using shares outstanding of 3,695,552 at March 31, 2018, less 35,342 restricted stock shares, and 97,204 unallocated ESOP shares.
(6) 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.
(7) Common shares were calculated using shares outstanding of 3,065,266 at March 31, 2017, less 67,263 restricted stock shares, and 123,125 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.

(1) Includes loans held for sale
(2) Includes 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 the 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 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.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Further, this non-GAAP financial measure of tangible book value per share 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 a similarly titled measure reported by other companies.

Reconciliation of the GAAP and non-GAAP financial measure is presented below.

Contacts: 

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