MOUNTLAKE TERRACE, Wash., Oct. 24, 2019 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (NASDAQ:FSBW)  (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2019 third quarter net income of $7.1 million, or $1.58 per diluted share, compared to $4.1 million, or $1.07 per diluted share for the same period last year.  

“We continue to be pleased with the integration of the Anchor Bancorp acquisition,” stated CEO Joe Adams. “Our financial results reflect the hard work by our combined employees that went into incorporating the two core operating systems, ongoing employee engagement, and partnerships with the communities we serve.”

CFO Matthew Mullet noted, “The Board of Directors increased the quarterly cash dividend to $0.20 per share from $0.15 per share payable on November 15, 2019, driven by the combined company’s financial results post acquisition.”

2019 Third Quarter Highlights

• Net income was $7.1 million for the third quarter of 2019, compared to $4.5 million in the previous quarter, and $4.1 million for the comparable quarter one year ago;
• Net income for the third quarter of 2019 includes $257,000 of acquisition-related expenses, compared to $1.2 million of acquisition-related expenses in the preceding quarter and $443,000 in the third quarter of 2018;
• Gain on sale of loans increased $1.0 million, or 28.2%, compared to the previous quarter and $765,000, or 20.0%, compared to the third quarter of 2018;
• The efficiency ratio improved to 60.1%, reflecting increased revenues and decreased acquisition costs from  the merger with Anchor Bancorp (“Anchor Acquisition”), compared to 72.3% in the previous quarter and 67.0% in the third quarter of 2018;
• Total gross loans increased $30.1 million, or 2.3%, during the quarter, to $1.33 billion at September 30, 2019, compared to $1.30 billion at June 30, 2019, and increased $365.1 million, or 38.0%, from $961.1 million at September 30, 2018, mainly due to the loans acquired from the Anchor Acquisition;
• Deposits increased $52.4 million, or 3.9%, during the quarter to $1.39 billion at September 30, 2019, compared to $1.33 billion at June 30, 2019, and increased $442.1 million, or 46.8%, from $944.5 million at September 30, 2018, primarily due to the deposits assumed in the Anchor Acquisition;
• The Company repurchased 46,562 shares of its common stock during the quarter ended September 30, 2019, at an average price per share of $48.88; and
• Capital levels at the Bank were 14.5% for total risk-based capital and 11.6% for Tier 1 leverage capital at September 30, 2019.

Balance Sheet and Credit Quality

Total assets increased $53.9 million, or 3.3%, to $1.69 billion at September 30, 2019, compared to $1.64 billion at June 30, 2019, and increased $503.7 million, or 42.3%, from $1.19 billion at September 30, 2018.  The quarter over linked quarter increase in total assets was primarily due to increases in loans receivable, net of $29.2 million, loans held for sale (“HFS”) of $14.1 million, securities available-for-sale, at fair value of $9.8 million, and total cash and cash equivalents of $3.3 million, partially offset by a decrease in other assets of $2.0 million. The year over year increase in total assets included increases in loans receivable, net of $363.7 million, total cash and cash equivalents of $47.7 million, loans HFS of $25.8 million, bank owned life insurance (“BOLI”) of $21.6 million, premises and equipment, net of $12.5 million, securities available-for-sale, at fair value of $8.7 million, CDs at other financial institutions of $6.9 million, operating lease right-of-use assets of $4.7 million, core deposit intangible, net of $4.6 million, other assets of $3.3 million, and servicing rights of $2.0 million.  The year over year increases were primarily due to the assets acquired in the Anchor Acquisition, along with organic loan growth. 

LOAN PORTFOLIO
(Dollars in thousands)	September 30, 2019							June 30, 2019							September 30, 2018
	Amount				Percent			Amount				Percent			Amount				Percent
REAL ESTATE LOANS
Commercial	$	205,500			15.5	%		$	206,834			16.0	%		$	68,694			7.1	%
Construction and development		200,720			15.1				214,140			16.5				191,172			19.9
Home equity		36,607			2.8				36,860			2.8				26,085			2.7
One-to-four-family (excludes HFS)		253,783			19.1				248,921			19.2				188,333			19.6
Multi-family		122,375			9.2				103,219			8.0				48,061			5.0
Total real estate loans		818,985			61.7				809,974			62.5				522,345			54.3
CONSUMER LOANS
Indirect home improvement		200,984			15.2				188,336			14.5				155,870			16.2
Solar		44,254			3.3				44,508			3.4				42,967			4.5
Marine		68,036			5.1				66,064			5.1				56,578			5.9
Other consumer		4,660			0.4				4,875			0.4				2,059			0.2
Total consumer loans		317,934			24.0				303,783			23.4				257,474			26.8
COMMERCIAL BUSINESS LOANS
Commercial and industrial		134,104			10.1				135,336			10.5				113,786			11.9
Warehouse lending		55,172			4.2				47,028			3.6				67,540			7.0
Total commercial business loans		189,276			14.3				182,364			14.1				181,326			18.9
Total loans receivable, gross		1,326,195			100.0	%			1,296,121			100.0	%			961,145			100.0	%
Allowance for loan losses		(12,765	)						(12,340	)						(12,045	)
Deferred costs and fees, net		(3,137	)						(2,940	)						(3,195	)
Premiums on purchased loans, net		995							1,278							1,667
Total loans receivable, net	$	1,311,288						$	1,282,119						$	947,572

Loans receivable, net increased $29.2 million to $1.31 billion for September 30, 2019, from $1.28 billion at June 30, 2019, and increased $363.7 million from $947.6 million at September 30, 2018.  The quarter over linked quarter increase in total real estate loans was $9.0 million, including increases in multi-family of $19.2 million and one-to-four-family portfolio of $4.9 million, partially offset by decreases in construction and development of $13.4 million, commercial real estate of $1.3 million, and home equity of $253,000. Consumer loans increased $14.2 million, primarily due to increases of $12.6 million in indirect home improvement loans and $2.0 million in marine loans. Commercial business loans increased $6.9 million, primarily due to an increase in warehouse lending of $8.1 million, partially offset by a decrease in commercial and industrial loans of $1.2 million. This $1.2 million decrease primarily reflects the sale of four U.S. Department of Agriculture loans in the amount of $8.4 million, with a gain on sale of $122,000.

One-to-four-family loans originated through the home lending segment, which includes loans HFS, loans held for investment, fixed rate seconds, and loans brokered to other institutions, were $288.9 million during the quarter ended September 30, 2019, an increase of $80.9 million, or 38.9%, compared to $208.0 million for the preceding quarter, and an increase of $95.9 million, or 49.7% from $193.0 million, for the comparable quarter one year ago. During the nine months ended September 30, 2019, originations through the home lending segment were $638.7 million, an increase of $83.4 million, or 15.0%, compared to $555.3 million for the nine months ended September 30, 2018.  During the quarter ended September 30, 2019, the Company sold $247.3 million of one-to-four-family loans, compared to sales of $173.4 million during the previous quarter, and sales of $174.9 million during the same quarter one year ago. During the nine months ended September 30, 2019, the Company sold $551.6 million of one-to-four-family loans compared to sales of $490.6 million during the same period last year.

Originations of one-to-four-family loans to purchase and to refinance a home for the three and nine months ended September 30, 2019 and 2018 were as follows:

(Dollars in thousands)		For the Three Months Ended						For the Three Months Ended						Year			Year
		September 30, 2019						September 30, 2018						over Year			over Year
		Amount			Percent			Amount			Percent			$ Change			% Change
Purchase		$	163,459		56.6	%		$	162,166		84.4	%		$	1,293		0.8	%
Refinance			125,419		43.4				29,971		15.6				95,448		318.5	%
Total		$	288,878		100.0	%		$	192,137		100.0	%		$	96,741		50.4	%

		For the Nine Months Ended						For the Nine Months Ended						Year				Year
		September 30, 2019						September 30, 2018						over Year				over Year
			Amount		Percent				Amount		Percent			$ Change				% Change
Purchase		$	411,167		64.4	%		$	436,826		78.9	%		$	(25,659	)		(5.9	)%
Refinance			227,547		35.6				116,626		21.1				110,921			95.1	%
Total		$	638,714		100.0	%		$	553,452		100.0	%		$	85,262			15.4	%

The allowance for loan losses (“ALLL”) at September 30, 2019 increased to $12.8 million, or 0.96% of gross loans receivable, excluding loans HFS, compared to $12.3 million, or 0.95% of gross loans receivable, excluding loans HFS at June 30, 2019, and $12.0 million, or 1.3% of gross loans receivable, excluding loans HFS, at September 30, 2018.  Non-performing loans increased to $2.2 million at September 30, 2019, from $1.6 million at June 30, 2019, and was unchanged from $2.2 million at September 30, 2018.  Substandard loans increased $898,000 to $7.4 million at September 30, 2019, compared to $6.5 million at June 30, 2019, and was unchanged from the prior year.  The quarter over linked quarter increase was primarily due to an increase in non-performing one-to-four-family loans of $512,000. There were two other real estate owned (“OREO”) properties totaling $178,000 at September 30, 2019, and three OREO properties totaling $254,000 at June 30, 2019, compared to no OREO properties at September 30, 2018.

Included in the carrying value of gross loans are net discounts on loans purchased in the Anchor Acquisition. The remaining net discount on loans acquired in the Anchor Acquisition was $3.1 million and $3.7 million, on $223.7 million and $278.4 million of gross loans at September 30, 2019 and June 30, 2019, respectively.

Total deposits increased to $1.39 billion at September 30, 2019, compared to $1.33 billion at June 30, 2019, and increased $442.1 million from $944.5 million at September 30, 2018.  Relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased $18.2 million from June 30, 2019, primarily due to a $16.3 million increase in interest-bearing checking accounts, and increased $172.6 million from September 30, 2018.  Money market and savings accounts increased $8.2 million from June 30, 2019, and increased $54.3 million from September 30, 2018.  Time deposits increased $26.0 million from June 30, 2019, and increased $215.2 million, from September 30, 2018.  Year over year increases were due to deposits assumed in the Anchor Acquisition and organic deposit growth.

At September 30, 2019, non-retail CDs which include brokered CDs, online CDs, public deposits CDs, and public funds CDs increased $22.2 million to $141.1 million, compared to $118.9 million at June 30, 2019, mainly due to a $21.7 million increase in brokered deposits. The year over year increase in non-retail CDs of $16.7 million from $124.4 million at September 30, 2018, was driven by a $12.8 million increase in brokered deposits and $3.2 million in online CDs. Management remains focused on increasing our lower cost relationship-based deposits to fund long-term asset growth.

DEPOSIT BREAKDOWN
(Dollars in thousands)
		September 30, 2019						June 30, 2019						September 30, 2018
		Amount			Percent			Amount			Percent			Amount			Percent
Noninterest-bearing checking		$	264,482		19.1	%		$	268,113		20.1	%		$	174,712		18.5	%
Interest-bearing checking			196,834		14.2				180,498		13.5				115,059		12.2
Savings			114,826		8.3				117,687		8.8				78,785		8.3
Money market			258,883		18.7				247,854		18.6				240,626		25.5
Certificates of deposit less than $100,000			273,982		19.7				251,280		18.9				188,192		19.9
Certificates of deposit of $100,000 through $250,000			177,075		12.8				177,718		13.3				89,075		9.4
Certificates of deposit of $250,000 and over			83,929		6.0				79,959		6.0				42,563		4.5
Escrow accounts related to mortgages serviced			16,591		1.2				11,108		0.8				15,525		1.7
Total		$	1,386,602		100.0	%		$	1,334,217		100.0	%		$	944,537		100.0	%

At September 30, 2019, borrowings decreased $6.3 million, or 7.6%, to $76.9 million, from $83.2 million at June 30, 2019, and decreased $9.7 million from $86.5 million at September 30, 2018.  The quarter and year to date decreases in borrowings were primarily related to a reduction in FHLB advances due to the growth in deposits.

Total stockholders’ equity increased $4.8 million, to $194.3 million at September 30, 2019, from $189.4 million at June 30, 2019, and increased $61.1 million, from $133.1 million at September 30, 2018.  The increase in stockholders’ equity from the second quarter was primarily due to net income of $7.1 million, partially offset by common stock repurchases of $2.3 million.  The Company repurchased 46,562 shares of its common stock during the quarter ended September 30, 2019, at an average price of $48.88 per share. At September 30, 2019, 125,816 shares remained available for repurchase pursuant to our January 2019 Share Repurchase Plan.  Book value per common share was $44.61 at September 30, 2019, compared to $43.18 at June 30, 2019, and $37.10 at September 30, 2018.

The Bank is well capitalized under the minimum capital requirements established by the Federal Deposit Insurance Corporation (“FDIC”) with a total risk-based capital ratio of 14.5%, a Tier 1 leverage capital ratio of 11.6%, and a common equity Tier 1 (“CET1”) capital ratio of 13.6% at September 30, 2019. 

The Company exceeded all regulatory capital requirements with a total risk-based capital ratio of 14.2%, a Tier 1 leverage capital ratio of 11.3%, and a CET1 ratio of 13.3% at September 30, 2019.

Operating Results

Net interest income increased $4.9 million, to $17.7 million for the three months ended September 30, 2019, from $12.9 million for the three months ended September 30, 2018.  This increase was primarily a result of a $6.8 million increase in loans receivable interest income, including additional interest from loans acquired in the Anchor Acquisition, partially offset by a $2.4 million increase in deposit interest expense due to assumed deposits and continued organic growth combined with higher market interest rates. Net interest income increased $16.7 million, to $53.0 million for the nine months ended September 30, 2019, from $36.3 million for the nine months ended September 30, 2018, mostly attributable to a $23.7 million increase in interest income on loans receivable, partially offset by a $7.5 million increase in interest expense on deposits.  The increases in interest income and interest expense were primarily impacted by the loans acquired and deposits assumed in the Anchor Acquisition.

The net interest margin (“NIM”) decreased one basis point to 4.54% for the three months ended September 30, 2019, from 4.55% for the same period in the prior year, and decreased one basis point to 4.61% for the nine months ended September 30, 2019, from 4.62% for the nine months ended September 30, 2018.  The quarter over quarter NIM was positively impacted by incremental interest accretion on loans acquired in the Anchor Acquisition of 14 basis points. The year over year NIM was positively impacted from incremental interest accretion on loans acquired in the Anchor Acquisition of 17 basis points. The average cost of funds increased 31 basis points to 1.37% for the three months ended September 30, 2019, from 1.06% for the three months ended September 30, 2018.  This increase was predominantly due to growth in higher market rate deposits, primarily those assumed in the Anchor Acquisition along with overall deposit growth. The year over year average cost of funds increased 47 basis points to 1.36% for the nine months ended September 30, 2019, from 0.89% for the nine months ended September 30, 2018 reflecting the increase in market interest rates over the last year.  Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.

For the three and nine months ended September 30, 2019, the provision for loan losses was $573,000 and $2.2 million, compared to $450,000, and $1.3 million for the three and nine months ended September 30, 2018.  During the three months ended September 30, 2019, net charge-offs totaled $147,000, compared to net recoveries of $24,000 for the same period last year.  Net charge-offs totaled $1.8 million during the nine months ended September 30, 2019, compared to net recoveries of $39,000 during the nine months ended September 30, 2018. The increase in net charge-offs during the nine months ended September 30, 2019, was primarily due to the charge-off of a commercial line of credit of $1.2 million in the first quarter, and one commercial business relationship totaling $431,000 in the second quarter of 2019.

Noninterest income increased $1.9 million, to $6.7 million, for the three months ended September 30, 2019, from $4.8 million for the three months ended September 30, 2018.  The increase primarily reflects a $903,000 increase in service charges and fee income, mainly driven by deposit accounts assumed in the Anchor Acquisition and deposit growth, and a $765,000 increase in gain on sale of loans primarily due to higher sales volume.  Noninterest income increased $1.9 million, to $17.4 million for the nine months ended September 30, 2019, from $15.4 million for the nine months ended September 30, 2018.  The year over year increase included increases in service charges and fee income of $3.1 million, other noninterest income of $455,000, and earnings on cash surrender value of BOLI of $393,000, partially offset by a decrease of $1.9 million in gain on sale of loans.

Noninterest expense increased $2.9 million, to $14.7 million for the three months ended September 30, 2019, from $11.8 million for the three months ended September 30, 2018.  The increase in noninterest expense was primarily as a result of the Anchor Acquisition and growth in our operations with increases of $1.1 million in operations, $826,000 in salaries and benefits, including an increase of $1.1 million in incentives and commissions for the loan production staff associated with strong loan production growth this quarter, $523,000 in data processing, and $360,000 in occupancy expense, partially offset by decreases in acquisition costs of $186,000 and FDIC insurance of $166,000 as a result of a small bank credit awarded by the FDIC recognized during the quarter ended September 30, 2019. The Bank has $174,000 in small bank credits on future assessments remaining at September 30, 2019, which may be recognized in future periods when allowed for by the FDIC upon insurance fund levels being met. Noninterest expense increased $11.6 million to $46.6 million for the nine months ended September 30, 2019, from $35.0 million for the nine months ended September 30, 2018.  The increase during the period was primarily as a result of the Anchor Acquisition and growth in our operations with increases of $3.0 million in salaries and benefits, including an increase of $255,000 in incentives and commissions, $2.9 million in operations, $1.8 million in data processing, $1.4 million in acquisition costs, and $1.3 million in occupancy expense. Acquisition costs were $1.9 million for the nine months ended September 30, 2019, compared to $443,000 for the same period last year, primarily due to the integration of the Anchor Bank core processing platform.  

About FS Bancorp

FS Bancorp, Inc., a Washington corporation, is the holding company for 1st Security Bank of Washington.  The Bank provides loan and deposit services to customers who are predominantly small- and middle-market businesses and individuals in Western Washington through its 21 bank branches, including nine branches from the Anchor Acquisition, one administrative office that accepts deposits, and seven loan production offices in various suburban communities in the greater Puget Sound area, and one loan production office in the market area of the Tri-Cities, Washington.  The Bank services home mortgage customers throughout Washington State with an emphasis in the Puget Sound and Tri-Cities home lending markets.

Forward-Looking Statements

When used in this press release and in other documents filed with or furnished to the Securities and Exchange Commission (the “SEC”), in press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward‑looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control.  Actual results may differ, possibly materially from those currently expected or projected in these forward-looking statements. Factors that could cause our actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: the expected cost savings, synergies and other financial benefits from our recent acquisition of Anchor might not be realized within the expected time frames or at all; the integration of the combined company, including personnel changes/retention, might not proceed as planned; and the combined company might not perform as well as expected; increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; our ability to execute our plans to grow our residential construction lending, mortgage banking, and warehouse lending operations, and the geographic expansion of our indirect home improvement lending; secondary market conditions for loans and our ability to originate loans for sale and sell loans in the secondary market; legislative and regulatory changes; and other factors described in the Company’s latest Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and other filings with the Securities and Exchange Commission which are available on our website at www.fsbwa.com and on the SEC's website at www.sec.gov.  Any of the forward-looking statements that we make in this press release and in the other public statements are based upon management's beliefs and assumptions at the time they are made and may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Therefore, these factors should be considered in evaluating the forward‑looking statements, and undue reliance should not be placed on such statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2019 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of us and could negatively affect our operating and stock performance.

FS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts) (Unaudited)
														Linked			Year
		September 30,				June 30,				September 30,				Quarter			Over Year
		2019				2019				2018				% Change			% Change
ASSETS
Cash and due from banks		$	15,979			$	15,214			$	4,389			5			264
Interest-bearing deposits at other financial institutions			46,915				44,380				10,813			6			334
Total cash and cash equivalents			62,894				59,594				15,202			6			314
Certificates of deposit at other financial institutions			24,296				24,297				17,362			—			40
Securities available-for-sale, at fair value			106,038				96,252				97,374			10			9
Loans held for sale, at fair value			80,619				66,508				54,784			21			47
Loans receivable, net			1,311,288				1,282,119				947,572			2			38
Accrued interest receivable			5,723				5,779				4,453			(1	)		29
Premises and equipment, net			29,066				29,517				16,527			(2	)		76
Operating lease right-of-use			4,713				4,582				—			3			100
Federal Home Loan Bank (“FHLB”) stock, at cost			7,995				8,329				7,131			(4	)		12
Other real estate owned (“OREO”)			178				254				—			(30	)		100
Deferred tax asset, net			—				—				120			—			(100	)
Bank owned life insurance (“BOLI”), net			35,136				34,917				13,586			1			159
Servicing rights, held at the lower of cost or fair value			11,193				10,849				9,190			3			22
Goodwill			2,312				2,312				2,312			—			—
Core deposit intangible, net			5,647				5,837				1,087			(3	)		420
Other assets			7,899				9,919				4,631			(20	)		71
TOTAL ASSETS		$	1,694,997			$	1,641,065			$	1,191,331			3			42
LIABILITIES
Deposits:
Noninterest-bearing accounts		$	281,073			$	279,221			$	190,237			1			48
Interest-bearing accounts			1,105,529				1,054,996				754,300			5			47
Total deposits			1,386,602				1,334,217				944,537			4			47
Borrowings			76,864				83,211				86,526			(8	)		(11	)
Subordinated note:
Principal amount			10,000				10,000				10,000			—			—
Unamortized debt issuance costs			(120	)			(125	)			(140	)		(4	)		(14	)
Total subordinated note less unamortized debt issuance costs			9,880				9,875				9,860			—			—
Operating lease liability			4,881				4,721				—			3			100
Deferred tax liability, net			1,029				1,003				—			3			100
Other liabilities			21,484				18,612				17,279			15			24
Total liabilities			1,500,740				1,451,639				1,058,202			3			42
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued or outstanding			—				—				—			—			—
Common stock, $.01 par value; 45,000,000 shares authorized; 4,452,872 shares issued and outstanding at September 30, 2019, 4,476,864 at June 30, 2019, and 3,716,460 at September 30, 2018			44				45				37			(2	)		19
Additional paid-in capital			88,608				90,418				57,027			(2	)		55
Retained earnings			105,672				99,184				79,648			7			33
Accumulated other comprehensive gain (loss), net of tax			583				496				(2,664	)		18			(122	)
Unearned shares – Employee Stock Ownership Plan (“ESOP”)			(650	)			(717	)			(919	)		(9	)		(29	)
Total stockholders’ equity			194,257				189,426				133,129			3			46
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,694,997			$	1,641,065			$	1,191,331			3			42

FS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited)
		Three Months Ended										Qtr			Year
		September 30,				June 30,			September 30,			Over Qtr			Over Year
		2019				2019			2018			% Change			% Change
INTEREST INCOME
Loans receivable, including fees		$	21,466			$	21,102		$	14,624		2			47
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions			1,245				1,263			959		(1	)		30
Total interest and dividend income			22,711				22,365			15,583		2			46
INTEREST EXPENSE
Deposits			4,223				4,056			1,850		4			128
Borrowings			582				606			704		(4	)		(17	)
Subordinated note			171				169			171		1			—
Total interest expense			4,976				4,831			2,725		3			83
NET INTEREST INCOME			17,735				17,534			12,858		1			38
PROVISION FOR LOAN LOSSES			573				910			450		(37	)		27
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			17,162				16,624			12,408		3			38
NONINTEREST INCOME
Service charges and fee income			1,619				1,854			716		(13	)		126
Gain on sale of loans			4,583				3,576			3,818		28			20
Gain on sale of investment securities			—				32			—		(100	)		—
Earnings on cash surrender value of BOLI			219				217			88		1			149
Other noninterest income			323				404			180		(20	)		79
Total noninterest income			6,744				6,083			4,802		11			40
NONINTEREST EXPENSE
Salaries and benefits			7,865				8,649			7,039		(9	)		12
Operations			2,360				2,658			1,308		(11	)		80
Occupancy			1,104				1,230			744		(10	)		48
Data processing			1,148				1,336			625		(14	)		84
Gain on sale of OREO			(40	)			—			—		(100	)		(100	)
OREO expenses			1				7			—		(86	)		100
Loan costs			903				707			850		28			6
Professional and board fees			654				616			414		6			58
Federal Deposit Insurance Corporation (“FDIC”) insurance			(29	)			139			137		(121	)		(121	)
Marketing and advertising			178				191			201		(7	)		(11	)
Acquisition costs			257				1,224			443		(79	)		(42	)
Amortization of core deposit intangible			190				190			77		—			147
Impairment of servicing rights			131				124			—		6			100
Total noninterest expense			14,722				17,071			11,838		(14	)		24
INCOME BEFORE PROVISION FOR INCOME TAXES			9,184				5,636			5,372		63			71
PROVISION FOR INCOME TAXES			2,040				1,173			1,320		74			55
NET INCOME		$	7,144			$	4,463		$	4,052		60			76
Basic earnings per share		$	1.62			$	1.00		$	1.12		62			45
Diluted earnings per share		$	1.58			$	0.98		$	1.07		61			48

FS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited)
		Nine Months Ended								Year
		September 30,				September 30,				Over Year
		2019				2018				% Change
INTEREST INCOME
Loans receivable, including fees		$	63,677			$		40,015		59
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions			3,710					2,578		44
Total interest and dividend income			67,387					42,593		58
INTEREST EXPENSE
Deposits			11,989					4,525		165
Borrowings			1,932					1,280		51
Subordinated note			508					508		—
Total interest expense			14,429					6,313		129
NET INTEREST INCOME			52,958					36,280		46
PROVISION FOR LOAN LOSSES			2,233					1,250		79
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			50,725					35,030		45
NONINTEREST INCOME
Service charges and fee income			5,131					2,045		151
Gain on sale of loans			10,556					12,467		(15	)
Gain on sale of investment securities			32					113		(72	)
Earnings on cash surrender value of BOLI			651					258		152
Other noninterest income			1,012					557		82
Total noninterest income			17,382					15,440		13
NONINTEREST EXPENSE
Salaries and benefits			24,757					21,759		14
Operations			7,062					4,209		68
Occupancy			3,446					2,097		64
Data processing			3,770					1,944		94
Gain on sale of OREO			(125	)				—		(100	)
OREO expenses			12					—		100
Loan costs			2,282					2,183		5
Professional and board fees			1,820					1,321		38
FDIC insurance			358					268		34
Marketing and advertising			505					564		(11	)
Acquisition costs			1,855					443		319
Amortization of core deposit intangible			570					230		148
Impairment of servicing rights			278					—		100
Total noninterest expense			46,590					35,018		33
INCOME BEFORE PROVISION FOR INCOME TAXES			21,517					15,452		39
PROVISION FOR INCOME TAXES			4,718					2,822		67
NET INCOME		$	16,799			$		12,630		33
Basic earnings per share		$	3.80			$		3.52		8
Diluted earnings per share		$	3.71			$		3.35		11

KEY FINANCIAL RATIOS AND DATA (Unaudited)
		At or For the Three Months Ended
		September 30,		June 30,		September 30,
		2019		2019		2018
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average total assets) (1)		1.71	%	1.10	%	1.38	%
Return on equity (ratio of net income to average equity) (1)		14.75		9.48		12.19
Yield on average interest-earning assets		5.81		5.86		5.52
Interest incurred on liabilities as a percentage of average noninterest bearing deposits and interest-bearing liabilities		1.37		1.37		1.06
Interest rate spread information – average during period		4.44		4.49		4.46
Net interest margin (1)		4.54		4.60		4.55
Operating expense to average total assets		3.53		4.21		4.04
Average interest-earning assets to average interest-bearing liabilities		133.59		130.30		134.57
Efficiency ratio (2)		60.14		72.28		67.03

		At or For the Nine Months Ended
		September 30,				September 30,
		2019				2018
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average total assets) (1)		1.38	%			1.55	%
Return on equity (ratio of net income to average equity) (1)		11.93				13.31
Yield on average interest-earning assets		5.87				5.43
Interest incurred on liabilities as a percentage of average noninterest bearing deposits and interest-bearing liabilities		1.36				0.89
Interest rate spread information – average during period		4.51				4.54
Net interest margin (1)		4.61				4.62
Operating expense to average total assets		3.82				4.30
Average interest-earning assets to average interest-bearing liabilities		131.26				136.68
Efficiency ratio (2)		66.24				67.71

		September 30,		June 30,		September 30,
		2019		2019		2018
ASSET QUALITY RATIOS AND DATA:
Non-performing assets to total assets at end of period (3)		0.14	%	0.11	%	0.18	%
Non-performing loans to total gross loans (4)		0.17		0.12		0.23
Allowance for loan losses to non-performing loans (4)		582.61		774.64		554.56
Allowance for loan losses to gross loans receivable, excluding HFS loans		0.96		0.95		1.25
CAPITAL RATIOS, BANK ONLY:
Tier 1 leverage-based capital		11.63	%	11.38	%	11.73	%
Tier 1 risk-based capital		13.61		13.78		13.95
Total risk-based capital		14.54		14.73		15.20
Common equity Tier 1 capital		13.61		13.78		13.95
CAPITAL RATIOS, COMPANY ONLY:
Tier 1 leverage-based capital		11.32	%	11.11	%	11.43	%
Total risk-based capital		14.19		14.42		14.85
Common equity Tier 1 capital		13.26		13.48		13.60

		At or For the Three Months Ended
			September 30,			June 30,				September 30,
		2019				2019				2018
PER COMMON SHARE DATA:
Basic earnings per share		$	1.62			$	1.00			$	1.12
Diluted earnings per share		$	1.58			$	0.98			$	1.07
Weighted average basic shares outstanding			4,401,303				4,418,397				3,610,731
Weighted average diluted shares outstanding			4,498,380				4,530,869				3,779,878
Common shares outstanding at period end			4,354,335	(5)			4,387,061	(6)			3,588,796	(7)
Book value per share using common shares outstanding		$	44.61			$	43.18			$	37.10
Tangible book value per share using common shares outstanding (8)		$	42.79			$	41.32			$	36.15

____________________
(1) Annualized.
(2) Total noninterest expense as a percentage of net interest income and total noninterest income.
(3) Non-performing assets consist of non-performing loans (which include non-accruing loans and accruing loans more than 90 days past due), foreclosed real estate and other repossessed assets.
(4) Non-performing loans consist of non-accruing loans and accruing loans 90 days or more past due.
(5) Common shares were calculated using shares outstanding of 4,452,872 at September 30, 2019, less 40,215 unvested restricted stock shares, and 58,322 unallocated ESOP shares.
(6) Common shares were calculated using shares outstanding of 4,476,864 at June 30, 2019, less 25,000 unvested restricted stock shares, and 64,803 unallocated ESOP shares.
(7) Common shares were calculated using shares outstanding of 3,716,460 at September 30, 2018, less 43,421 unvested restricted stock shares, and 84,243 unallocated ESOP shares.
(8) Tangible book value per share using outstanding common shares excludes intangible assets. This ratio represents a non-GAAP financial measure.  See also, “Non-GAAP Financial Measures” below.

(Dollars in thousands)		For the Three Months Ended September 30,						For the Nine Months Ended September 30,						QTR Over QTR				Year Over Year
Average Balances		2019			2018			2019			2018			$ Change				$ Change
Assets
Loans receivable, net deferred loan fees (1)		$	1,368,962		$	971,061		$	1,352,006		$	905,645		$	397,901			$	446,361
Securities available-for-sale, at fair value			99,813			100,502			99,545			96,003			(689	)			3,542
Interest-bearing deposits and certificates of deposit at other financial institutions			74,234			40,261			75,425			40,980			33,973				34,445
FHLB stock, at cost			8,334			8,594			8,482			6,275			(260	)			2,207
Total interest-earning assets			1,551,343			1,120,418			1,535,458			1,048,903			430,925				486,555
Noninterest-earning assets (2)			101,873			41,488			96,603			38,791			60,385				57,812
Total assets		$	1,653,216		$	1,161,906		$	1,632,061		$	1,087,694		$	491,310			$	544,367
Liabilities and stockholders’ equity
Interest-bearing accounts		$	1,068,189		$	696,763		$	1,066,595		$	674,492		$	371,426			$	392,103
Borrowings			83,208			125,945			93,356			83,081			(42,736	)			10,275
Subordinated note			9,877			9,857			9,872			9,852			20				20
Total interest-bearing liabilities			1,161,274			832,565			1,169,823			767,425			328,710				402,398
Noninterest-bearing accounts			276,689			184,187			253,529			181,516			92,502				72,013
Other noninterest-bearing liabilities			23,075			13,322			20,457			11,903			9,752				8,554
Stockholders’ equity			192,178			131,832			188,252			126,850			60,346				61,402
Total liabilities and stockholders’ equity		$	1,653,216		$	1,161,906		$	1,632,061		$	1,087,694		$	491,310			$	544,367

(1) Includes loans held for sale.
(2) Includes fixed assets, operating lease right-of-use asset, BOLI, goodwill, and CDI.

Non-GAAP Financial Measures:

In addition to results presented in accordance with generally accepted accounting principles utilized in the United States (“GAAP”), this earnings release contains certain non-GAAP financial measures: net income and diluted earnings per share, excluding net accretion/amortization on loans, CDs, and borrowings, acquisition costs, and acquisition-related CDI amortization, net of tax; and tangible book value per share. Management believes these non-GAAP financial measures provide useful and comparative information to assess trends reflected in the current quarter’s results and facilitate the comparison of our performance with the performance of our peers. The after-tax impact of acquisition-related costs to net income which we have recorded in connection with the Anchor Acquisition provides meaningful supplemental information that management believes is useful to readers.  Where applicable, the Company has also presented comparable earnings information using GAAP financial measures.

Tangible common stockholders’ equity is calculated by excluding intangible assets from stockholders’ equity.  For this financial measure, the Company’s intangible assets are goodwill and core deposit intangible. Tangible book value per share is calculated by dividing tangible common shareholders’ equity by the number of common shares outstanding. The Company believes that this measure is consistent with the capital treatment by the investment community, which excludes intangible assets from the calculation of risk-based capital ratios and presents this measure to facilitate comparison of the quality and composition of the Company's capital over time and in comparison to its competitors. 

These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for total stockholders' equity or operating results determined in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.

Reconciliation of net income, excluding net accretion/amortization on loans, CDs and borrowings, acquisition costs and acquisition-related CDI amortization, net of tax is presented below.

		Three Months Ended				Nine Months Ended
(Dollars in thousands, except per share amounts)		September 30, 2019				September 30, 2019
Consolidated results:
Net interest income after provision for loan losses (GAAP)		$	17,162			$	50,725
Net accretion/amortization on loans, CDs and borrowings			(339	)			(1,241	)
Net interest income after provision for loan losses, excluding net accretion/amortization on loans, CDs and borrowings (non-GAAP)			16,823				49,484
Noninterest income			6,744				17,382
Noninterest expense			14,722				46,590
Acquisition costs			(257	)			(1,855	)
CDI amortization			(131	)			(394	)
Noninterest expense, excluding acquisition costs and acquisition-related CDI amortization (non-GAAP)			14,334				44,341
Income before provision for income taxes, excluding net accretion/amortization on loans, CDs and borrowings, acquisition costs and acquisition-related CDI amortization (non-GAAP)			9,233				22,525
Provision for income taxes, excluding net accretion/amortization on loans, CDs and borrowings, acquisition costs and acquisition-related CDI amortization, net of related taxes (non-GAAP)			2,050				4,930
NET INCOME, excluding net accretion/amortization on loans, CDs and borrowings, acquisition costs and acquisition-related CDI amortization, net of tax (non-GAAP)		$	7,183			$	17,595
Diluted earnings per share (GAAP)		$	1.58			$	3.71
Diluted earnings per share, excluding net accretion/amortization, acquisition costs and acquisition-related CDI amortization, net of tax (non-GAAP)		$	1.59			$	3.88

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

		September 30,				June 30,				September 30,
(Dollars in thousands, except share and per share amounts)		2019				2019				2018
Stockholders' equity		$	194,257			$	189,426			$	133,129
Goodwill and core deposit intangible, net			(7,959	)			(8,149	)			(3,399	)
Tangible common stockholders' equity		$	186,298			$	181,277			$	129,730
Common shares outstanding at end of period			4,354,335				4,387,061				3,588,796
Common stockholders' equity (book value) per share (GAAP)		$	44.61			$	43.18			$	37.10
Tangible common stockholders' equity (tangible book value) per share (non-GAAP)		$	42.79			$	41.32			$	36.15

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

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