MOUNTLAKE TERRACE, Wash., Jan. 28, 2020 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (NASDAQ:FSBW)  (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2019 fourth quarter net income of $5.9 million, or $1.30 per diluted share, compared to $11.7 million, or $2.83 per diluted share for the same period last year, which included a bargain purchase gain of $7.4 million from the Anchor Bancorp Acquisition (“Anchor Acquisition”) in November 2018.  Net income for the year ended December 31, 2019 was $22.7 million, or $5.01 per diluted share, compared to net income of $24.3 million, or $6.29 per diluted share for last year.

 “2019 was a transitional year due to the integration of Anchor Bank and the establishment of 1st Security Bank in new communities as a result of the merger,” stated CEO Joe Adams. “We are pleased to announce that our Board of Directors increased and approved our twenty-eighth consecutive quarterly cash dividend. The quarterly dividend will be paid on February 19, 2020, to shareholders of record as of February 5, 2020.”

CFO Matthew Mullet noted, “Our Board of Directors approved another 225,000 annual share repurchase plan as we continue to manage our capital prudently and in a manner which we believe will enhance liquidity and return value for our shareholders.”

2019 Fourth Quarter and Year End Highlights

• Net income was $5.9 million for the fourth quarter of 2019, compared to $7.1 million in the previous quarter, and $11.7 million for the comparable quarter one year ago;
• Our Board of Directors (“Board”) approved a $0.01 increase in the quarterly dividend to $0.21, or $0.84 annually;
• Our Board approved a share repurchase plan which includes up to 225,000 shares to be repurchased over the next 12 months, depending on market conditions and other factors including the Company’s liquidity requirements;
• Net income of $22.7 million for the year ended December 31, 2019, included $1.8 million of acquisition-related expenses, compared to net income of $24.3 million, which included the $7.4 million bargain purchase gain and $1.4 million of acquisition-related expenses for the year ended December 31, 2018;
• Total gross loans increased $25.7 million during the quarter to $1.35 billion at December 31, 2019, compared to $1.33 billion at both September 30, 2019, and December 31, 2018; and
• Capital levels at the Bank were 14.6% for total risk-based capital and 11.6% for Tier 1 leverage capital at December 31, 2019.

Balance Sheet and Credit Quality

Total assets increased $18.1 million, or 1.1%, to $1.71 billion at December 31, 2019, compared to $1.69 billion at September 30, 2019, and increased $91.4 million, or 5.6%, from $1.62 billion at December 31, 2018.  The quarter over linked quarter increase in total assets was primarily due to increases in loans receivable, net of $25.1 million, securities available-for-sale, at fair value of $20.0 million, and other assets of $3.8 million, partially offset by a decrease in total cash and cash equivalents of $17.1 million, loans held for sale (“HFS”) of $10.9 million, and certificates of deposit at other financial institutions of $3.4 million. The year over year increase in total assets included increases in securities available-for-sale, at fair value of $28.9 million, loans receivable, net of $23.8 million, loans HFS of $18.5 million, total cash and cash equivalents of $13.0 million, operating lease right-of-use assets of $5.0 million, other assets of $4.7 million, and servicing rights of $1.1 million, partially offset by decreases in Federal Home Loan Bank (“FHLB”) stock of $1.8 million and certificates of deposit at other financial institutions of $1.2 million.  The year over year increases were primarily due to organic loan and deposit growth. 

(Dollars in thousands)		December 31, 2019						September 30, 2019						December 31, 2018
		Amount				Percent		Amount				Percent		Amount				Percent
REAL ESTATE LOANS
Commercial		$	210,749			15.6	%	$	205,500			15.5	%	$	204,699			15.4	%
Construction and development			179,654			13.3			200,720			15.1			247,306			18.7
Home equity			38,167			2.8			36,607			2.8			40,258			3.0
One-to-four-family (excludes HFS)			261,539			19.3			253,783			19.1			249,397			18.8
Multi-family			133,930			9.9			122,375			9.2			104,663			7.9
Total real estate loans			824,039			60.9			818,985			61.7			846,323			63.8
CONSUMER LOANS
Indirect home improvement			210,653			15.6			200,984			15.2			167,793			12.7
Solar			44,038			3.3			44,254			3.3			44,433			3.3
Marine			67,179			5.0			68,036			5.1			57,822			4.4
Other consumer			4,340			0.3			4,660			0.4			5,425			0.4
Total consumer loans			326,210			24.2			317,934			24.0			275,473			20.8
COMMERCIAL BUSINESS LOANS
Commercial and industrial			140,531			10.4			134,104			10.1			138,686			10.4
Warehouse lending			61,112			4.5			55,172			4.2			65,756			5.0
Total commercial business loans			201,643			14.9			189,276			14.3			204,442			15.4
Total loans receivable, gross			1,351,892			100.0	%		1,326,195			100.0	%		1,326,238			100.0	%
Allowance for loan losses			(13,229	)					(12,765	)					(12,349	)
Deferred costs and fees, net			(3,272	)					(3,137	)					(2,907	)
Premiums on purchased loans, net			955						995						1,537
Total loans receivable, net		$	1,336,346					$	1,311,288					$	1,312,519

Loans receivable, net increased $25.1 million to $1.34 billion at December 31, 2019, from $1.31 billion at September 30, 2019, and increased $23.8 million from $1.31 billion at December 31, 2018.  The quarter over linked quarter increase in total real estate loans was $5.1 million, including increases in multi-family of $11.6 million, one-to-four-family portfolio of $7.8 million, commercial real estate of $5.2 million, and home equity of $1.6 million, partially offset by a planned decrease in construction and development of $21.1 million.  Consumer loans increased $8.3 million, primarily due to an increase of $9.7 million in indirect home improvement loans. Commercial business loans increased $12.4 million, due to increases in commercial and industrial loans of $6.4 million and warehouse lending of $5.9 million.  

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 $252.6 million during the quarter ended December 31, 2019, a decrease of $36.3 million, or 12.6%, compared to $288.9 million for the preceding quarter, and an increase of $100.9 million, or 66.6% from $151.7 million, for the comparable quarter one year ago. During the year ended December 31, 2019, originations through the home lending segment were $891.4 million, an increase of $186.6 million, or 26.5%, compared to $704.8 million for the year ended December 31, 2018.  During the quarter ended December 31, 2019, the Company sold $233.8 million of one-to-four-family loans, compared to sales of $247.3 million during the previous quarter, and sales of $147.1 million during the same quarter one year ago. During the year ended December 31, 2019, the Company sold $785.4 million of one-to-four-family loans compared to sales of $637.7 million during the same period last year.

Originations of one-to-four-family loans to purchase and to refinance a home for the three months ended and years ended December 31, 2019 and 2018 were as follows:

(Dollars in thousands)		For the Three Months Ended							For the Three Months Ended					Year			Year
		December 31, 2019							December 31, 2018					over Year			over Year
		Amount			Percent				Amount			Percent		$ Change			% Change
Purchase		$	143,623		56.8	%			$	121,478		80.1	%	$	22,145		18.2	%
Refinance			109,021		43.2					30,209		19.9			78,812		260.9	%
Total		$	252,644		100.0	%			$	151,687		100.0	%	$	100,957		66.6	%

		For the Year Ended									For the Year Ended					Year				Year
		December 31, 2019									December 31, 2018					over Year				over Year
		Amount				Percent					Amount			Percent		$ Change				% Change
Purchase		$	554,790			62.2		%			$	557,960		79.2	%	$	(3,170	)		(0.6	)	%
Refinance			336,568			37.8						146,835		20.8			189,733			129.2		%
Total		$	891,358			100.0		%			$	704,795		100.0	%	$	186,563			26.5		%

The allowance for loan losses (“ALLL”) at December 31, 2019 increased to $13.2 million, or 0.98% of gross loans receivable, excluding loans HFS, compared to $12.8 million, or 0.96% of gross loans receivable, excluding loans HFS at September 30, 2019, and $12.3 million, or 0.93% of gross loans receivable, excluding loans HFS, at December 31, 2018.  Non-performing loans increased to $3.0 million at December 31, 2019, from $2.2 million at September 30, 2019, and decreased $861,000 from $3.9 million at December 31, 2018.  Substandard loans decreased $696,000 to $6.7 million at December 31, 2019, compared to $7.4 million at September 30, 2019, and decreased $1.3 million from $8.0 million at December 31, 2018.  The year over year decreases in non-performing and substandard loans were 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.  There were two other real estate owned (“OREO”) properties totaling $168,000 at December 31, 2019, compared to two OREO properties totaling $178,000 and $689,000 at September 30, 2019 and December 31, 2018, respectively.

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 $2.7 million, $3.1 million, and $5.3 million, on $198.5 million, $223.7 million, and $361.6 million of gross loans at December 31, 2019, September 30, 2019, and December 31, 2018, respectively.

Total deposits were unchanged at $1.39 billion at both December 31, 2019 and September 30, 2019, and increased $118.2 million from $1.27 billion at December 31, 2018.  Relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts) decreased $26.3 million from September 30, 2019, primarily due to an $18.9 million decrease in interest-bearing checking accounts, and a $4.7 million decrease in noninterest-bearing checking accounts, and increased $65.9 million from December 31, 2018.  Money market and savings accounts increased $15.6 million from September 30, 2019, and decreased $15.6 million from December 31, 2018.  Time deposits increased $16.5 million from September 30, 2019, and increased $67.9 million from December 31, 2018. 

At December 31, 2019, non-retail certificates of deposit (“CDs”) which include brokered CDs, online CDs, and public funds increased $5.1 million to $146.2 million, compared to $141.1 million at September 30, 2019, mainly due to a $5.2 million increase in brokered CDs. The year over year increase in non-retail CDs of $18.7 million from $127.5 million at December 31, 2018, was driven by a $24.7 million increase in brokered CDs and a $3.2 million increase in online CDs, primarily offset by a $9.0 million decrease in public funds.  Management remains focused on increasing our lower cost relationship-based deposits to fund long-term asset growth.

DEPOSIT BREAKDOWN
(Dollars in thousands)
		December 31, 2019					September 30, 2019					December 31, 2018
		Amount			Percent		Amount			Percent		Amount			Percent
Noninterest-bearing checking		$	259,822		18.7	%	$	264,482		19.1	%	$	221,107		17.3	%
Interest-bearing checking			177,972		12.8			196,834		14.2			151,103		11.9
Savings			118,845		8.5			114,826		8.3			122,344		9.6
Money market			270,489		19.4			258,883		18.7			282,595		22.2
Certificates of deposit less than $100,000			277,988		20.0			273,982		19.7			243,193		19.1
Certificates of deposit of $100,000 through $250,000			181,402		13.0			177,075		12.8			154,095		12.1
Certificates of deposit of $250,000 and over			92,110		6.6			83,929		6.0			86,357		6.8
Escrow accounts related to mortgages serviced			13,780		1.0			16,591		1.2			13,425		1.0
Total		$	1,392,408		100.0	%	$	1,386,602		100.0	%	$	1,274,219		100.0	%

At December 31, 2019, borrowings increased $8.0 million, or 10.4%, to $84.9 million, from $76.9 million at September 30, 2019, and decreased $52.3 million, or 38.1% from $137.2 million at December 31, 2018.  The quarter to date increase and year to date decrease in borrowings were primarily related to the use and repayments of FHLB advances in relation to the fluctuating activity in deposits and our liquidity objectives.

Total stockholders’ equity increased $6.0 million, to $200.2 million at December 31, 2019, from $194.3 million at September 30, 2019, and increased $20.2 million, from $180.0 million at December 31, 2018.  The increase in stockholders’ equity from the third quarter was primarily due to net income of $5.9 million.  Book value per common share was $45.85 at December 31, 2019, compared to $44.61 at September 30, 2019, and $41.19 at December 31, 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 14.6%, a Tier 1 leverage capital ratio of 11.6%, and a common equity Tier 1 (“CET1”) capital ratio of 13.7% at December 31, 2019. 

The Company exceeded all regulatory capital requirements with a total risk-based capital ratio of 14.3%, a Tier 1 leverage capital ratio of 11.3%, and a CET1 ratio of 13.4% at December 31, 2019.

Operating Results

Net interest income increased $1.5 million, to $17.4 million for the three months ended December 31, 2019, from $15.8 million for the three months ended December 31, 2018.  This increase was a result of a $2.4 million increase in loans receivable interest income primarily as a result of the Anchor Acquisition, and a $404,000 decrease in borrowing interest expense, partially offset by a $1.4 million increase in deposit interest expense due to deposits assumed in the Anchor Acquisition and continued organic deposit growth combined with higher market interest rates in 2019. Net interest income increased $18.2 million, to $70.3 million for the year ended December 31, 2019, from $52.1 million for the year ended December 31, 2018, mostly attributable to a $26.1 million increase in interest income on loans receivable, partially offset by an $8.8 million increase in interest expense on deposits. 

The net interest margin (“NIM”) decreased 30 basis points to 4.29% for the three months ended December 31, 2019, from 4.59% for the same period in the prior year, and decreased eight basis points to 4.53% for the year ended December 31, 2019, from 4.61% for the year ended December 31, 2018, largely as a result of three 25 basis point decreases in the targeted Fed Funds Rate in the third and fourth quarter of 2019.  The quarter over quarter decrease in NIM was impacted by lower note rates on recent fixed rate real estate loan originations and adjustable rate commercial loans and less recognized fee income due to slower construction loan growth, partially offset by incremental interest accretion on loans acquired in the Anchor Acquisition of 10 basis points. 

The year over year decrease in NIM was primarily due to lower note rates for recently originated real estate loans, including significantly lower construction and development loans that typically carry higher note rates than one-to-four-family loans, partially offset by incremental interest accretion on loans acquired in the Anchor Acquisition of 15 basis points.  The average cost of funds, including noninterest-bearing checking, increased eight basis points to 1.31% for the three months ended December 31, 2019, from 1.23% for the three months ended December 31, 2018.  This increase was predominantly due to growth in higher market rate deposits with overall deposit growth. The year over year average cost of funds, including noninterest-bearing checking, increased 34 basis points to 1.34% for the year ended December 31, 2019, from 1.00% for the year ended December 31, 2018, reflecting the increase in market interest rates over the last year as reductions in deposit costs lag the recent reductions in loan yields, due in part to competitive pressures.  Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.

For the three months ended December 31, 2019, the provision for loan losses was $647,000, compared to $290,000 for the three months ended December 31, 2018, due primarily to the increase in the loan portfolio due to organic loan growth and loans acquired in the Anchor Acquisition, and net charge-offs.  During the three months ended December 31, 2019, net charge-offs totaled $183,000, compared to net recoveries of $14,000 for the same period last year.  The provision for loan losses was $2.9 million for the year ended December 31, 2019, compared to $1.5 million for the year ended December 31, 2018, due primarily to loan growth and $2.0 million in net charge-offs during the year, compared to net recoveries of $53,000 during the year ended December 31, 2018. The increase in net charge-offs during the year ended December 31, 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.

Noninterest income decreased $5.8 million, to $5.7 million, for the three months ended December 31, 2019, from $11.4 million for the three months ended December 31, 2018, which included a $7.4 million bargain purchase gain from the Anchor Acquisition.  Excluding the bargain purchase gain, the quarter over quarter increases included $1.3 million in gain on sale of loans, primarily due to higher sales volume, and $235,000 in service charges and fee income, mainly driven by deposit growth.  Noninterest income decreased $3.8 million, to $23.0 million for the year ended December 31, 2019, from $26.9 million for the year ended December 31, 2018.  Excluding the bargain purchase gain, the year over year increases included $3.3 million in service charges and fee income, driven by the loans acquired in the Anchor Acquisition and organic loan growth, $526,000 in other noninterest income, and $459,000 in earnings on the cash surrender value of BOLI, partially offset by a decrease of $613,000 in gain on sale of loans.

Noninterest expense increased $1.9 million, to $15.7 million for the three months ended December 31, 2019, from $13.8 million for the three months ended December 31, 2018.  The increase in noninterest expense was primarily as a result of growth in our operations with increases of $2.3 million in salaries and benefits, including an increase of $1.6 million in incentives and commissions for the loan production staff associated with strong loan production growth this quarter, $338,000 in loan costs, $276,000 in data processing, $249,000 in occupancy, partially offset by a decrease in acquisition costs of $1.0 million and a $186,000 recovery on servicing rights reflecting changes in market interest rates.  

Noninterest expense increased $13.5 million to $62.3 million for the year ended December 31, 2019, from $48.8 million for the year ended December 31, 2018.  The increase during the period was primarily as a result of the Anchor Acquisition and growth in our operations with increases of $5.3 million in salaries and benefits, including an increase of $1.9 million in incentives and commissions, $3.0 million in operations, $2.1 million in data processing, and $1.6 million in occupancy expense. Acquisition costs were $1.8 million for the year ended December 31, 2019, compared to $1.4 million for 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 SEC 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 2020 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
		December 31,				September 30,				December 31,				Quarter			Over Year
		2019				2019				2018				% Change			% Change
ASSETS
Cash and due from banks		$	13,175			$	15,979			$	9,408			(18	)		40
Interest-bearing deposits at other financial institutions			32,603				46,915				23,371			(31	)		40
Total cash and cash equivalents			45,778				62,894				32,779			(27	)		40
Certificates of deposit at other financial institutions			20,902				24,296				22,074			(14	)		(5	)
Securities available-for-sale, at fair value			126,057				106,038				97,205			19			30
Loans held for sale, at fair value			69,699				80,619				51,195			(14	)		36
Loans receivable, net			1,336,346				1,311,288				1,312,519			2			2
Accrued interest receivable			5,908				5,723				5,761			3			3
Premises and equipment, net			28,770				29,066				29,110			(1	)		(1	)
Operating lease right-of-use			5,016				4,713				—			6			100
Federal Home Loan Bank (“FHLB”) stock, at cost			8,045				7,995				9,887			1			(19	)
Other real estate owned (“OREO”)			168				178				689			(6	)		(76	)
Bank owned life insurance (“BOLI”), net			35,356				35,136				34,485			1			3
Servicing rights, held at the lower of cost or fair value			11,560				11,193				10,429			3			11
Goodwill			2,312				2,312				2,312			—			—
Core deposit intangible, net			5,457				5,647				6,217			(3	)		(12	)
Other assets			11,682				7,899				6,982			48			67
TOTAL ASSETS		$	1,713,056			$	1,694,997			$	1,621,644			1			6
LIABILITIES
Deposits:
Noninterest-bearing accounts		$	273,602			$	281,073			$	234,532			(3	)		17
Interest-bearing accounts			1,118,806				1,105,529				1,039,687			1			8
Total deposits			1,392,408				1,386,602				1,274,219			—			9
Borrowings			84,864				76,864				137,149			10			(38	)
Subordinated note:
Principal amount			10,000				10,000				10,000			—			—
Unamortized debt issuance costs			(115	)			(120	)			(135	)		(4	)		(15	)
Total subordinated note less unamortized debt issuance costs			9,885				9,880				9,865			—			—
Operating lease liability			5,214				4,881				—			7			100
Deferred tax liability, net			1,971				1,029				361			92			446
Other liabilities			18,472				21,484				20,012			(14	)		(8	)
Total liabilities			1,512,814				1,500,740				1,441,606			1			5
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; 4,459,041 shares issued and outstanding at December 31, 2019, 4,452,872 at September 30, 2019, and 4,492,478 at December 31, 2018			44				44				45			—			—
Additional paid-in capital			89,268				88,608				91,466			1			(2	)
Retained earnings			110,715				105,672				90,854			5			22
Accumulated other comprehensive income (loss), net of tax			788				583				(1,479	)		35			(153	)
Unearned shares – Employee Stock Ownership Plan (“ESOP”)			(573	)			(650	)			(848	)		(12	)		(32	)
Total stockholders’ equity			200,242				194,257				180,038			3			11
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,713,056			$	1,694,997			$	1,621,644			1			6

       

FS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited)
		Three Months Ended												Qtr			Year
		December 31,				September 30,				December 31,				Over Qtr			Over Year
		2019				2019				2018				% Change			% Change
INTEREST INCOME
Loans receivable, including fees		$	21,029			$	21,466			$	18,601			(2	)		13
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions			1,209				1,245				1,132			(3	)		7
Total interest and dividend income			22,238				22,711				19,733			(2	)		13
INTEREST EXPENSE
Deposits			4,173				4,223				2,796			(1	)		49
Borrowings			544				582				948			(7	)		(43	)
Subordinated note			171				171				171			—			—
Total interest expense			4,888				4,976				3,915			(2	)		25
NET INTEREST INCOME			17,350				17,735				15,818			(2	)		10
PROVISION FOR LOAN LOSSES			647				573				290			13			123
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			16,703				17,162				15,528			(3	)		8
NONINTEREST INCOME
Service charges and fee income			1,423				1,619				1,188			(12	)		20
Bargain purchase gain			—				—				7,414			—			(100	)
Gain on sale of loans			3,692				4,583				2,394			(19	)		54
Loss on disposed fixed assets			(26	)			—				(71	)		—			(63	)
Gain on sale of investment securities			—				—				57			—			(100	)
Earnings on cash surrender value of BOLI			221				219				155			1			43
Other noninterest income			343				323				273			6			26
Total noninterest income			5,653				6,744				11,410			(16	)		(50	)
NONINTEREST EXPENSE
Salaries and benefits			9,059				7,865				6,780			15			34
Operations			2,660				2,360				2,500			13			6
Occupancy			1,194				1,104				945			8			26
Data processing			1,202				1,148				926			5			30
Gain on sale of OREO			(13	)			(40	)			—			(68	)		100
OREO expenses			1				1				2			—			(50	)
Loan costs			956				903				618			6			55
Professional and board fees			606				654				551			(7	)		10
Federal Deposit Insurance Corporation (“FDIC”) insurance			—				(29	)			249			(100	)		100
Marketing and advertising			173				178				183			(3	)		(5	)
Acquisition costs			(99	)			257				946			(139	)		(110	)
Amortization of core deposit intangible			190				190				121			—			57
(Recovery) impairment on servicing rights			(186	)			131				—			(242	)		100
Total noninterest expense			15,743				14,722				13,821			7			14
INCOME BEFORE PROVISION FOR INCOME TAXES			6,613				9,184				13,117			(28	)		(50	)
PROVISION FOR INCOME TAXES			695				2,040				1,401			(66	)		(50	)
NET INCOME		$	5,918			$	7,144			$	11,716			(17	)		(49	)
Basic earnings per share		$	1.33			$	1.62			$	2.93			(18	)		(55	)
Diluted earnings per share		$	1.30			$	1.58			$	2.83			(18	)		(54	)

FS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited)
		Year Ended								Year
		December 31,				December 31,				Over Year
		2019				2018				% Change
INTEREST INCOME
Loans receivable, including fees		$	84,706			$	58,616			45
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions			4,919				3,710			33
Total interest and dividend income			89,625				62,326			44
INTEREST EXPENSE
Deposits			16,162				7,321			121
Borrowings			2,476				2,228			11
Subordinated note			679				679			—
Total interest expense			19,317				10,228			89
NET INTEREST INCOME			70,308				52,098			35
PROVISION FOR LOAN LOSSES			2,880				1,540			87
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			67,428				50,558			33
NONINTEREST INCOME
Service charges and fee income			6,554				3,233			103
Bargain purchase gain			—				7,414			(100	)
Gain on sale of loans			14,248				14,861			(4	)
Loss on disposed fixed assets			(26	)			(71	)		(63	)
Gain on sale of investment securities			32				171			(81	)
Earnings on cash surrender value of BOLI			872				413			111
Other noninterest income			1,355				829			63
Total noninterest income			23,035				26,850			(14	)
NONINTEREST EXPENSE
Salaries and benefits			33,816				28,538			18
Operations			9,722				6,709			45
Occupancy			4,640				3,042			53
Data processing			4,972				2,870			73
Gain on sale of OREO			(138	)			—			100
OREO expenses			13				2			550
Loan costs			3,238				2,801			16
Professional and board fees			2,426				1,872			30
FDIC insurance			358				517			(31	)
Marketing and advertising			678				747			(9	)
Acquisition costs			1,756				1,389			26
Amortization of core deposit intangible			760				351			117
Impairment of servicing rights			92				—			100
Total noninterest expense			62,333				48,838			28
INCOME BEFORE PROVISION FOR INCOME TAXES			28,130				28,570			(2	)
PROVISION FOR INCOME TAXES			5,413				4,223			28
NET INCOME		$	22,717			$	24,347			(7	)
Basic earnings per share		$	5.13			$	6.58			(22	)
Diluted earnings per share		$	5.01			$	6.29			(20	)

KEY FINANCIAL RATIOS AND DATA (Unaudited)
		At or For the Three Months Ended
		December 31,		September 30,		December 31,
		2019		2019		2018
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average total assets) (1)		1.38	%	1.71	%	3.24	%
Return on equity (ratio of net income to average equity) (1)		11.89		14.75		29.80
Yield on average interest-earning assets		5.50		5.81		5.73
Interest incurred on liabilities as a percentage of average noninterest-bearing deposits and interest-bearing liabilities		1.31		1.37		1.23
Interest rate spread information – average during period		4.19		4.44		4.50
Net interest margin (1)		4.29		4.54		4.59
Operating expense to average total assets		3.66		3.53		3.83
Average interest-earning assets to average interest-bearing liabilities		131.90		133.59		130.15
Efficiency ratio (2)		68.44		60.14		50.77

		At or For the Year Ended
		December 31,				December 31,
		2019				2018
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average total assets)		1.38	%			2.07	%
Return on equity (ratio of net income to average equity)		11.92				18.15
Yield on average interest-earning assets		5.77				5.52
Interest incurred on liabilities as a percentage of average noninterest-bearing deposits and interest-bearing liabilities		1.34				1.00
Interest rate spread information – average during period		4.43				4.52
Net interest margin		4.53				4.61
Operating expense to average total assets		3.78				4.16
Average interest-earning assets to average interest-bearing liabilities		131.42				134.60
Efficiency ratio (2)		66.78				61.86

		December 31,		September 30,		December 31,
		2019		2019		2018
ASSET QUALITY RATIOS AND DATA:
Non-performing assets to total assets at end of period (3)		0.19	%	0.14	%	0.28	%
Non-performing loans to total gross loans (4)		0.22		0.17		0.29
Allowance for loan losses to non-performing loans (4)		436.17		582.61		317.13
Allowance for loan losses to gross loans receivable, excluding HFS loans		0.98		0.96		0.93
CAPITAL RATIOS, BANK ONLY:
Tier 1 leverage-based capital		11.56	%	11.63	%	10.67	%
Tier 1 risk-based capital		13.70		13.61		12.62
Total risk-based capital		14.64		14.54		13.52
Common equity Tier 1 capital		13.70		13.61		12.62
CAPITAL RATIOS, COMPANY ONLY:
Tier 1 leverage-based capital		11.30	%	11.32	%	12.07	%
Total risk-based capital		14.34		14.19		13.32
Common equity Tier 1 capital		13.39		13.26		12.41

		At or For the Three Months Ended
			December 31,		September 30,			December 31,
		2019			2019			2018
PER COMMON SHARE DATA:
Basic earnings per share		$	1.33		$	1.62		$	2.93
Diluted earnings per share		$	1.30		$	1.58		$	2.83
Weighted average basic shares outstanding			4,402,499			4,401,303			4,000,584
Weighted average diluted shares outstanding			4,504,811			4,498,380			4,139,570
Common shares outstanding at end of period			4,366,984	(5)		4,354,335	(6)		4,371,294	(7)
Book value per share using common shares outstanding		$	45.85		$	44.61		$	41.19
Tangible book value per share using common shares outstanding (8)		$	44.08		$	42.79		$	39.24

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 4,459,041 at December 31, 2019, less 40,215 unvested restricted stock shares, and 51,842 unallocated ESOP shares.
6. 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.
7. Common shares were calculated using shares outstanding of 4,492,478 at December 31, 2018, less 43,421 unvested restricted stock shares, and 77,763 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 December 31,						For the Year Ended December 31,						QTR Over QTR				Year Over Year
Average Balances		2019			2018			2019			2018			$ Change				$ Change
Assets
Loans receivable, net deferred loan fees (1)		$	1,390,135		$	1,200,927		$	1,361,616		$	979,958		$	189,208			$	381,658
Securities available-for-sale, at fair value			111,463			107,555			102,549			98,915			3,908				3,634
Interest-bearing deposits and certificates of deposit at other financial institutions			92,579			48,689			79,749			42,923			43,890				36,826
FHLB stock, at cost			8,554			9,720			8,500			7,143			(1,166	)			1,357
Total interest-earning assets			1,602,731			1,366,891			1,552,414			1,128,939			235,840				423,475
Noninterest-earning assets			101,966			66,040			97,955			45,774			35,926				52,181
Total assets		$	1,704,697		$	1,432,931		$	1,650,369		$	1,174,713		$	271,766			$	475,656
Liabilities and stockholders’ equity
Interest-bearing accounts		$	1,111,688		$	898,943		$	1,077,960		$	731,066		$	212,745			$	346,894
Borrowings			93,549			141,431			93,405			97,788			(47,882	)			(4,383	)
Subordinated note			9,882			9,862			9,874			9,855			20				19
Total interest-bearing liabilities			1,215,119			1,050,236			1,181,239			838,709			164,883				342,530
Noninterest-bearing accounts			267,014			209,117			256,928			188,473			57,897				68,455
Other noninterest-bearing liabilities			25,092			17,686			21,626			13,361			7,406				8,265
Stockholders’ equity			197,472			155,892			190,576			134,170			41,580				56,406
Total liabilities and stockholders’ equity		$	1,704,697		$	1,432,931		$	1,650,369		$	1,174,713		$	271,766			$	475,656

(1) Includes loans held for sale.

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 the bargain purchase gain, 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 comparative information to assess trends reflected in the current quarter’s results and facilitate the comparison of our performance with prior periods and the performance of our peers.  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, and bargain purchase gain is presented below.

		Year Ended				Year Ended
(Dollars in thousands, except per share amounts)		December 31, 2019				December 31, 2018
Consolidated results:
Net interest income after provision for loan losses (GAAP)		$	67,428			$	50,558
Net (accretion)/amortization on loans, CDs and borrowings			(1,571	)			10
Net interest income after provision for loan losses, excluding net (accretion)/amortization on loans, CDs and borrowings (non-GAAP)			65,857				50,568
Noninterest income			23,035				26,850
Bargain purchase gain, net of tax			—				(7,414	)
Noninterest income, excluding bargain purchase gain (non-GAAP)			23,035				19,436
Noninterest expense			62,333				48,838
Acquisition costs			(1,756	)			(1,389	)
CDI amortization			(525	)			(44	)
Noninterest expense, excluding acquisition costs and acquisition-related CDI amortization (non-GAAP)			60,052				47,405
Income before provision for income taxes, excluding net (accretion)/amortization on loans, CDs and borrowings, acquisition costs and acquisition-related CDI amortization, and bargain purchase gain (non-GAAP)			28,840				22,599
Provision for income taxes, excluding net (accretion)/amortization on loans, CDs and borrowings, acquisition costs and acquisition-related CDI amortization, net of related taxes, and bargain purchase gain (non-GAAP)			5,562				4,526
Net income, excluding net (accretion)/amortization on loans, CDs and borrowings, acquisition costs and acquisition-related CDI amortization, net of tax, and bargain purchase gain (non-GAAP)		$	23,278			$	18,073
Diluted earnings per share (GAAP)		$	5.01			$	6.29
Diluted earnings per share, excluding net (accretion)/amortization, acquisition costs and acquisition-related CDI amortization, net of tax, and bargain purchase gain (non-GAAP)		$	5.13			$	4.67

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

		December 31,				September 30,				December 31,
(Dollars in thousands, except share and per share amounts)		2019				2019				2018
Stockholders' equity		$	200,242			$	194,257			$	180,038
Goodwill and core deposit intangible, net			(7,769	)			(7,959	)			(8,529	)
Tangible common stockholders' equity		$	192,473			$	186,298			$	171,509
Common shares outstanding at end of period			4,366,984				4,354,335				4,371,294
Common stockholders' equity (book value) per share (GAAP)		$	45.85			$	44.61			$	41.19
Tangible common stockholders' equity (tangible book value) per share (non-GAAP)		$	44.08			$	42.79			$	39.24

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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