FS Bancorp, Inc. Reports Net Income for the First Quarter
FS Bancorp, Inc. Reports Net Income for the Second Quarter

MOUNTLAKE TERRACE, Wash., July 28, 2022 (GLOBE NEWSWIRE) — FS Bancorp, Inc. (NASDAQ: FSBW) (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2022 second quarter net income of $6.7 million, or $0.83 per diluted share, compared to $8.5 million, or $0.98 per diluted share for the same quarter last year. For the six months ended June 30, 2022, net income was $13.6 million, or $1.66 per diluted share, compared to net income of $25.8 million, or $2.35 per diluted share, for the comparable six-month period in 2021.

“We continue to experience success in our Commercial and Consumer Banking segment which has resulted in strong growth and credit performance,” stated Joe Adams, CEO. “We are also pleased that our Board of Directors approved our thirty-eighth consecutive quarterly cash dividend. The quarterly dividend of $0.20 will be paid on August 25, 2022, to shareholders of record as of August 11, 2022.”

“Starting with this quarter, we will be including segment reporting results in our press releases” noted Matthew Mullet, CFO. “This information is also available in our quarterly and annual SEC reports for comparison purposes back to 2017.”

2022 Second Quarter Highlights

  • Net income was $6.7 million for the second quarter of 2022, compared to $6.9 million in the previous quarter, and $8.5 million for the comparable quarter one year ago;
  • Net interest margin (“NIM”) improved to 4.39%, compared to 4.24% for the previous quarter, and 4.09% for the comparable quarter one year ago;
  • Repurchased 361,251 shares of our common stock during the second quarter at an average price of $29.26 per common share;
  • Loans receivable, net increased $148.4 million, or 8.3%, to $1.95 billion at June 30, 2022, compared to $1.80 billion at March 31, 2022, and increased $300.4 million, or 18.3% from $1.65 billion at June 30, 2021;
  • Consumer loans, of which 81.7% are home improvement loans, increased $40.3 million, or 9.1%, to $485.0 million at June 30, 2022, compared to $445.0 million in the previous quarter and increased $88.9 million, or 22.4% from $396.5 million in the comparable quarter one year ago. Originations in the consumer portfolio included 80.4% of home improvement loans originated with a Fair Isaac and Company, Incorporated (“FICO”) score above 720 and 89.5% of home improvement loans with a UCC2 security filing;
  • Loans receivable, net included six Paycheck Protection Program (“PPP”) loans with a total outstanding balance of $3.0 million and $33,000 of unrecognized deferred fees, net at June 30, 2022;
  • Segment reporting reflected $7.5 million in net income for the commercial and consumer banking segment and $756,000 of net loss for the home lending segment for the second quarter of 2022, compared to $6.7 million and $1.9 million of net income in the second quarter of 2021, respectively; and
  • At June 30, 2022, the Community Bank Leverage Ratio (“CBLR”) was 11.9% for the Bank and the Tier 1 leverage-based ratio was 10.1% for the Company.

Segment Reporting

The Company reports two segments: Commercial and Consumer Banking and Home Lending. The Commercial and Consumer Banking segment provides diversified financial products and services to our commercial and consumer customers. These products and services include deposit products; residential, consumer, business and commercial real estate lending portfolios and cash management services. This segment is also responsible for the management of the investment portfolio and other assets of the Bank. The Home Lending segment originates one-to-four-family residential mortgage loans primarily for sale in the secondary markets as well as loans held for investment.

The tables below are a summary of segment reporting for the three and six months ended June 30, 2022 and 2021:

                   
(Dollars in thousands)   At or For the Three Months Ended June 30, 2022
Condensed income statement:   Commercial
and Consumer
Banking
  Home Lending   Total
Net interest income (1)   $ 22,084     $ 2,645     $ 24,729  
Provision for credit losses (2)     (719 )     (1,152 )     (1,871 )
Noninterest income     2,125       2,230       4,355  
Noninterest expense     (14,231 )     (4,698 )     (18,929 )
Income (loss) before (provision) benefit for income taxes     9,259       (975 )     8,284  
(Provision) benefit for income taxes     (1,804 )     219       (1,585 )
Net income (loss)   $ 7,455     $ (756 )   $ 6,699  
Total average assets for period ended   $ 1,957,630     $ 398,690     $ 2,356,320  
Full-time employees (“FTEs”)     364       173       537  
                   
(Dollars in thousands)   At or For the Three Months Ended June 30, 2021
Condensed income statement:   Commercial
and Consumer
Banking
  Home Lending   Total
Net interest income (1)   $ 18,974     $ 2,246     $ 21,220  
Benefit (provision) for loan losses (2)     499       (499 )      
Noninterest income     2,385       5,801       8,186  
Noninterest expense     (13,573 )     (5,389 )     (18,962 )
Income before provision for income taxes     8,285       2,159       10,444  
Provision for income taxes     (1,591 )     (304 )     (1,895 )
Net income   $ 6,694     $ 1,855     $ 8,549  
Total average assets for period ended   $ 1,787,344     $ 385,174     $ 2,172,518  
FTEs     366       156       522  
                   
(Dollars in thousands)   At or For the Six Months Ended June 30, 2022
    Commercial        
    and Consumer        
Condensed income statement:   Banking   Home Lending   Total
Net interest income (1)   $ 42,362     $ 5,089     $ 47,451  
Provision for loan losses (2)     (1,916 )     (998 )     (2,914 )
Noninterest income     4,630       5,601       10,231  
Noninterest expense     (28,407 )     (9,589 )     (37,996 )
Income before provision for income taxes     16,669       103       16,772  
Provision for income taxes     (3,182 )     (21 )     (3,203 )
Net income   $ 13,487     $ 82     $ 13,569  
Total average assets for period ended   $ 1,921,426     $ 392,107     $ 2,313,533  
FTEs     364       173       537  
                   
(Dollars in thousands)   At or For the Six Months Ended June 30, 2021
    Commercial        
    and Consumer        
Condensed income statement:   Banking   Home Lending   Total
Net interest income (1)   $ 37,452     $ 3,868     $ 41,320  
Provision for loan losses (2)     (1,059 )     (441 )     (1,500 )
Noninterest income     4,587       16,633       21,220  
Noninterest expense     (26,747 )     (8,520 )     (35,267 )
Income before provision for income taxes     14,233       11,540       25,773  
Provision for income taxes     (2,950 )     (2,391 )     (5,341 )
Net income   $ 11,283     $ 9,149     $ 20,432  
Total average assets for period ended   $ 1,756,642     $ 395,032     $ 2,151,674  
FTEs     366       156       522  

________________________

(1) Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to the other segment. The cost of liabilities includes interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of assigned liabilities to fund segment assets.
(2) Provision for credit losses as calculated using the recently adopted Current Expected Credit Loss (“CECL”) method in 2022 and provision for loan losses as calculated using the previous incurred loss method in 2021, includes shifts in allocation between segments due to various changes, adjustments to qualitative factors, changes in loan balances, and charge-off and recovery activity.

Asset Summary

Total assets increased $125.3 million, or 5.5%, to $2.40 billion at June 30, 2022, compared to $2.27 billion at March 31, 2022, and increased $176.6 million, or 7.9%, from $2.22 billion at June 30, 2021. The quarter over linked quarter increase in total assets was primarily due to increases in loans receivable, net of $148.4 million, deferred tax asset of $2.1 million, Federal Home Loan Bank (“FHLB”) stock of $1.6 million, and securities held-to-maturity of $1.0 million, partially offset by decreases in securities available-for-sale of $15.5 million, loans held for sale (“HFS”) of $7.1 million, certificates of deposit (“CDs”) at other financial institutions of $3.2 million, interest-bearing deposits at other financial institutions of $1.6 million, and other assets of $1.2 million. The year over year increase was primarily due to increases in loans receivable, net of $300.4 million, securities available-for-sale of $15.3 million, deferred tax asset, net of $4.5 million, other assets of $4.3 million, servicing rights of $2.2 million, accrued interest receivable of $1.2 million, and FHLB stock of $1.2 million, partially offset by decreases in loans HFS of $86.4 million, total cash and cash equivalents of $57.9 million, CDs at other financial institutions of $6.8 million, and premises and equipment, net of $1.9 million.

                                 
LOAN PORTFOLIO                                
(Dollars in thousands)   June 30, 2022   March 31, 2022   June 30, 2021  
    Amount   Percent   Amount   Percent   Amount   Percent  
REAL ESTATE LOANS                                
Commercial   $ 299,181     15.2 % $ 269,517     14.8 % $ 230,743     13.8 %
Construction and development     304,387     15.4     258,680     14.2     240,913     14.4  
Home equity     49,292     2.5     44,394     2.4     41,130     2.5  
One-to-four-family (excludes HFS)     390,791     19.8     361,079     19.9     335,231     20.0  
Multi-family     204,862     10.4     196,924     10.8     133,446     8.0  
Total real estate loans     1,248,513     63.3     1,130,594     62.1     981,463     58.7  
                                 
CONSUMER LOANS                                
Indirect home improvement     396,459     20.1     359,443     19.7     304,702     18.2  
Marine     85,806     4.4     82,560     4.5     88,497     5.3  
Other consumer     3,062     0.2     2,994     0.2     3,255     0.2  
Total consumer loans     485,327     24.7     444,997     24.4     396,454     23.7  
                                 
COMMERCIAL BUSINESS LOANS                                
Commercial and industrial     203,331     10.3     207,480     11.4     240,952     14.4  
Warehouse lending     33,868     1.7     37,957     2.1     54,029     3.2  
Total commercial business loans     237,199     12.0     245,437     13.5     294,981     17.6  
Total loans receivable, gross     1,971,039     100.0 %   1,821,028     100.0 %   1,672,898     100.0 %
                                 
Allowance for credit losses on loans (1)     (24,967 )         (23,365 )         (27,234 )      
Total loans receivable, net   $ 1,946,072         $ 1,797,663         $ 1,645,664        

__________________________

(1) Allowance in 2022 reported using the CECL method, all 2021 and prior periods’ allowance are reported in accordance with previous GAAP using the incurred loss method.

Loans receivable, net increased $148.4 million to $1.95 billion at June 30, 2022, from $1.80 billion at March 31, 2022, and increased $300.4 million from $1.65 billion at June 30, 2021. The quarter over linked quarter increase in total real estate loans was $117.9 million, including increases in construction and development loans of $45.7 million, one-to-four-family loans of $29.7 million, commercial real estate loans of $29.7 million, multi-family loans of $7.9 million and home equity loans of $4.9 million. Consumer loans increased $40.3 million, primarily due to an increase of $37.0 million in indirect home improvement loans and $3.2 million in marine loans. Commercial business loans decreased $8.2 million, as a result of decreases of $4.1 million in both commercial and industrial lending and warehouse lending.

Originations of one-to-four-family loans to purchase and to refinance a home for the three months ended June 30, 2022 and March 31, 2022, and for the three and six months ended June 30, 2022 and 2021 were as follows:

                                       
(Dollars in thousands)   For the Three Months Ended       For the Three Months Ended       Quarter   Quarter
    June 30, 2022       March 31, 2022       over Quarter   over Quarter
    Amount   Percent       Amount   Percent       $ Change   % Change
Purchase   $ 223,675   86.4 %     $ 152,950   62.4 %     $ 70,725     46.2  
Refinance     35,074   13.6         92,164   37.6         (57,090 )   (61.9 )
Total   $ 258,749   100.0 %     $ 245,114   100.0 %     $ 13,635     5.6  
                                       
    For the Three Months Ended       For the Three Months Ended       Year   Year
    June 30, 2022       June 30, 2021       over Year   over Year
    Amount   Percent       Amount   Percent       $ Change   % Change
Purchase   $ 223,675   86.4 %     $ 252,999   63.7 %     $ (29,324 )   (11.6 )
Refinance     35,074   13.6         143,911   36.3         (108,837 )   (75.6 )
Total   $ 258,749   100.0 %     $ 396,910   100.0 %     $ (138,161 )   (34.8 )
                                       
    For the Six Months Ended       For the Six Months Ended       Year   Year
    June 30, 2022       June 30, 2021       over Year   over Year
    Amount   Percent       Amount   Percent       $ Change   % Change
Purchase   $ 376,625   74.7 %     $ 438,460   52.7 %     $ (61,835 )   (14.1 )
Refinance     127,238   25.3         392,903   47.3         (265,665 )   (67.6 )
Total   $ 503,863   100.0 %     $ 831,363   100.0 %     $ (327,500 )   (39.4 )

During the quarter ended June 30, 2022, the Company sold $196.3 million of one-to-four-family loans compared to sales of $301.1 million during the previous quarter, and sales of $378.0 million during the same quarter one year ago. The decrease in purchase and refinance activity compared to the prior quarter reflects a limited availability of homes for sale and increased market interest rates.

Gross margins on home loan sales increased to 3.10% for the quarter ended June 30, 2022, compared to 2.94% in the previous quarter and decreased from 3.82% in the same quarter one year ago. Gross margins are defined as the margin on loans sold (cash sales) without the impact of deferred costs.

Liabilities and Equity Summary

Changes in deposits at the dates indicated are as follows:

                               
(Dollars in thousands)                              
    June 30, 2022   March 31, 2022          
Transactional deposits:   Amount   Percent   Amount   Percent   $ Change   % Change
Noninterest-bearing checking (4)   $ 571,942   28.4 % $ 571,626   29.8 % $ 316     0.1  
Interest-bearing checking (1)(4)     158,607   7.8     207,387   10.8     (48,780 )   (23.5 )
Escrow accounts related to mortgages serviced     16,422   0.8     26,067   1.4     (9,645 )   (37.0 )
Subtotal     746,971   37.0     805,080   42.0     (58,109 )   (7.2 )
Savings     156,313   7.8     198,184   10.3     (41,871 )   (21.1 )
Money market (2)     680,246   33.7     545,442   28.4     134,804     24.7  
Subtotal     836,559   41.5     743,626   38.7     92,933     12.5  
Certificates of deposit less than $100,000 (3)     262,199   13.0     210,984   11.0     51,215     24.3  
Certificates of deposit of $100,000 through $250,000     116,559   5.8     107,429   5.6     9,130     8.5  
Certificates of deposit of $250,000 and over     53,812   2.7     52,669   2.7     1,143     2.2  
Subtotal     432,570   21.5     371,082   19.3     61,488     16.6  
Total   $ 2,016,100   100.0 % $ 1,919,788   100.0 % $ 96,312     5.0  
                               
(Dollars in thousands)                              
    June 30, 2022   June 30, 2021          
Transactional deposits:   Amount   Percent   Amount   Percent   $ Change   % Change
Noninterest-bearing checking (4)   $ 571,942   28.4 % $ 518,372   27.9 % $ 53,570     10.3  
Interest-bearing checking (1)(4)     158,607   7.8     154,582   8.3     4,025     2.6  
Escrow accounts related to mortgages serviced     16,422   0.8     16,469   0.9     (47 )   (0.3 )
Subtotal     746,971   37.0     689,423   37.1     57,548     8.3  
Savings     156,313   7.8     181,505   9.8     (25,192 )   (13.9 )
Money market (2)     680,246   33.7     483,935   26.0     196,311     40.6  
Subtotal     836,559   41.5     665,440   35.8     171,119     25.7  
Certificates of deposit less than $100,000 (3)     262,199   13.0     299,250   16.1     (37,051 )   (12.4 )
Certificates of deposit of $100,000 through $250,000     116,559   5.8     138,559   7.5     (22,000 )   (15.9 )
Certificates of deposit of $250,000 and over     53,812   2.7     65,938   3.5     (12,126 )   (18.4 )
Subtotal     432,570   21.5     503,747   27.1     (71,177 )   (14.1 )
Total   $ 2,016,100   100.0 % $ 1,858,610   100.0 % $ 157,490     8.5  

_______________________

(1) Includes $1.2 million, $60.0 million, and $15.0 million of brokered deposits at June 30, 2022, March 31, 2022, and June 30, 2021, respectively.
(2) Includes $78.8 million, $241,000, and $5.0 million of brokered deposits at June 30, 2022, March 31, 2022, and June 30, 2021, respectively.
(3) Includes $180.3 million, $127.6 million, and $194.8 million of brokered deposits at June 30, 2022, March 31, 2022, and June 30, 2021, respectively.
(4) Prior presentation of interest-bearing checking balances was revised due to the misclassification of certain checking products in previous periods. As a result of the misclassification, interest-bearing checking balances of $122.6 million and $102.6 million as of March 31, 2022, and June 30, 2021, respectively, were reclassified to noninterest-bearing checking for comparative purposes. Balances as of the dates and average values included herein have been updated to reflect the reclassification.

At June 30, 2022, nonretail CDs, which include brokered CDs, online CDs, and public funds CDs, increased $63.6 million to $207.8 million, compared to $144.2 million at March 31, 2022, due to an increase of $52.7 million in brokered CDs. The year over year decrease in nonretail CDs of $4.1 million from $211.9 million at June 30, 2021, was primarily the result of a $14.5 million decrease in brokered CDs, offset by an increase of $10.4 million in online CDs.   

At June 30, 2022, borrowings comprised of FHLB advances increased $42.5 million, or 119.6%, to $78.0 million from $35.5 million at March 31, 2022, and increased $35.5 million, or 83.5% from $42.5 million at June 30, 2021.

Total stockholders’ equity decreased $13.3 million, to $222.6 million at June 30, 2022, from $236.0 million at March 31, 2022, and decreased $19.1 million, from $241.8 million at June 30, 2021. The decrease in stockholders’ equity during the current quarter was primarily due to net unrealized losses in securities available-for-sale of $9.0 million, net of tax, reflecting increases in market interest rates during the quarter, share repurchases totaling $10.6 million, and dividends paid of $2.4 million, partially offset by net income of $6.7 million and unrealized gains on fair value and cash flow hedges of $1.3 million, net of tax. The Company repurchased 361,251 shares of its common stock at an average price of $29.26 per share. Book value per common share was $29.27 at June 30, 2022, compared to $29.70 at March 31, 2022, and $29.49 at June 30, 2021.

The Bank is well capitalized under the minimum capital requirements established by the Federal Deposit Insurance Corporation at June 30, 2022, with a CBLR of 11.9%, compared to the normally required CBLR of greater than 9.0%. The Company’s Tier 1 leverage-based ratio was 10.1% at June 30, 2022.

Credit Quality

The allowance for credit losses on loans (“ACLL”) at June 30, 2022, increased to $25.0 million, or 1.27% of gross loans receivable, excluding loans HFS, compared to $23.4 million, or 1.28% of gross loans receivable, excluding loans HFS at March 31, 2022, and decreased from $27.2 million, or 1.63% of gross loans receivable, excluding loans HFS, at June 30, 2021. The quarter over quarter increase of $1.6 million in the ACLL was primarily due to the increase in loans. The year over year decrease in the ACLL was primarily due to the one-time cumulative-effect adjustment of $2.9 million as of the CECL adoption date of January 1, 2022. The allowance for credit losses on unfunded loan commitments increased $295,000 to $3.4 million at June 30, 2022, compared to $3.1 million at March 31, 2022, and increased from $479,000 at June 30, 2021. The year over year increase was primarily due to the one-time cumulative-effect adjustment of $2.4 million as of the CECL adoption date and increases in unfunded loan commitments.

Nonperforming loans decreased $138,000 to $6.7 million at June 30, 2022, from $6.8 million at March 31, 2022, and increased $354,000 from $6.3 million at June 30, 2021. The decrease in nonperforming loans quarter over linked quarter was primarily due to the reduction in nonperforming home equity loans. The year over year increase was primarily due to an increase in nonperforming commercial business loans.

Loans classified as substandard decreased $2.5 million to $10.6 million at June 30, 2022, compared to $13.1 million at March 31, 2022, and decreased $11.7 million from $22.3 million at June 30, 2021. The quarter over linked quarter decrease in substandard loans was attributable to a decrease of $2.5 million in commercial and industrial loans. The year over year decrease in substandard loans was primarily due to decreases of $6.2 million in one-to-four-family loans and $4.1 million in commercial and industrial loans. There was one other real estate owned (“OREO”) property in the amount of $145,000 at June 30, 2022, and none at March 31, 2022 or June 30, 2021.

Operating Results

Net interest income increased $3.5 million, to $24.7 million for the three months ended June 30, 2022, from $21.2 million for the three months ended June 30, 2021. This comparable quarter over quarter increase was primarily the result of an improved mix of loans versus other interest-bearing assets and increased balances in higher yielding loans funded by lower cost deposits.   Interest income increased $3.1 million, primarily due to an increase of $2.8 million in interest income on loans receivable, including fees, impacted primarily by loan growth. Interest expense decreased $361,000, primarily as a result of repricing deposit rates and a reduction in higher cost borrowings. For the three months ended June 30, 2022, the total recognition of net deferred fees on forgiven and amortizing PPP loans was $150,000, as compared to $436,000 for the three months ended June 30, 2021.  

For the six months ended June 30, 2022, net interest income increased by $6.1 million, to $47.5 million, from $41.3 million for the six months ended June 30, 2021 for the same reason as for the three-month comparison described above, with an increase in interest income of $5.0 million and a decrease in interest expense of $1.1 million. For the six months ended June 30, 2022 and 2021, the total recognition of net deferred fees on forgiven and amortizing PPP loans was $415,000 and $1.1 million, respectively.

NIM increased 30 basis points to 4.39% for the three months ended June 30, 2022, from 4.09% for the same period in the prior year and increased 28 basis points to 4.32% for the six months ended June 30, 2022, from 4.04% for the six months ended June 30, 2021. The increase in NIM between both the three and six months ended June 30, 2022 and 2021, respectively, reflects new loan originations at higher interest rates, variable loan repricing following recent increases in market interest rates, an improved asset mix of higher yielding assets as low yielding excess cash funded higher yielding loans and investment securities, and lower deposit and borrowing costs.

The average total cost of funds, including noninterest-bearing checking, decreased 11 basis points to 0.43% for the three months ended June 30, 2022, from 0.54% for the three months ended June 30, 2021. This decrease was predominantly due to the decline in cost for market rate deposits and borrowings as well as a managed runoff of higher cost CD funding. The average cost of funds decreased 15 basis points to 0.41% for the six months ended June 30, 2022, from 0.56% for the six months ended June 30, 2021, also reflecting decreases in market interest rates over last year. Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.

For the three and six months ended June 30, 2022, the provision for credit losses on loans was $1.6 million and $2.5 million, respectively, compared to none and $1.5 million for the three and six months ended June 30, 2021, respectively, as calculated under the prior incurred loss methodology.   The provision for credit losses on loans reflects the increase in total loans receivable partially offset by a reduction in classified loans that were downgraded based on the COVID-19 pandemic and improved economic factors on credit-deterioration used to calculate the ACLL primarily related to the COVID-19 pandemic as compared to the same time last year.

For the three and six months ended June 30, 2022, the provision for credit losses on unfunded commitments was $294,000 and $485,000, respectively, compared to $257,000 and $455,000, for the three and six months ended June 30, 2021, respectively. The increase was attributable to a change in methodology as a result of the adoption of CECL, as well as increases in total unfunded commitments during the period.

During the three months ended June 30, 2022, net charge-offs totaled $16,000, compared to $141,000 for the same period last year. The decrease in net charge-offs was primarily due to decreases in the following loan categories: $98,000 in other consumer loans (which includes deposit net charge-offs of $77,000), and $28,000 in indirect home improvement loans.   Net charge-offs totaled $280,000 during the six months ended June 30, 2022, compared to $439,000 during the six months ended June 30, 2021. This decrease was primarily due to net charge-off decreases of $87,000 in indirect home improvement loans, $48,000 in other consumer loans (which includes deposit net charge-offs of $65,000), and $38,000 in commercial business loans.

Noninterest income decreased $3.8 million, to $4.4 million, for the three months ended June 30, 2022, from $8.2 million for the three months ended June 30, 2021. The decrease during the period primarily reflects a $4.3 million decrease in gain on sale of loans due primarily to a reduction in origination and sales volume of loans HFS and a reduction in gross margins of sold loans, partially offset by a $574,000 increase in service charges and fee income as a result of less amortization of mortgage servicing rights reflecting increased market interest rates and increased servicing fees from non-portfolio loans. Noninterest income decreased $11.0 million, to $10.2 million, for the six months ended June 30, 2022, from $21.2 million for the six months ended June 30, 2021. This decrease was primarily the result of a $12.2 million decrease in gain on sale of loans, partially offset by a $822,000 increase in service charges and fee income.

Noninterest expense was unchanged at $18.9 million for both the three months ended June 30, 2022 and 2021. Noninterest expense increased $2.7 million, to $38.0 million for the six months ended June 30, 2022, from $35.3 million for the six months ended June 30, 2021. The increase as compared to the same period last year was primarily due to a reduction in the recovery of servicing rights to $1,000 from $2.0 million.

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, one headquarters office that produces loans and accepts deposits, and loan production offices in various suburban communities in the greater Puget Sound area, the Tri-Cities, and in Vancouver, Washington. The Bank services home mortgage customers throughout Washington State with an emphasis in the Puget Sound, Tri-Cities, and Vancouver 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 the Company’s actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: potential adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, generally, resulting from the COVID-19 pandemic and any governmental or societal responses thereto; increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions, the Company’s ability to execute its plans to grow its residential construction lending, mortgage banking, and warehouse lending operations, and the geographic expansion of its indirect home improvement lending; secondary market conditions for loans and the Company’s ability to originate loans for sale and sell loans in the secondary market; legislative and regulatory changes, including as a result of the COVID-19 pandemic; 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 its website at www.fsbwa.com and on the SEC’s website at www.sec.gov. Any of the forward-looking statements that the Company makes 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 incorrect because of the inaccurate assumptions the Company might make, because of the factors illustrated above or because of other factors that cannot be foreseen by the Company. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. The Company does not undertake and specifically disclaims 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 the Company’s actual results for 2022 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of the Company and could negatively affect its operating and stock performance.

FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts) (Unaudited)

                             
                      Linked   Year  
    June 30,   March 31,   June 30,   Quarter   Over Year  
    2022   2022   2021   % Change   % Change  
ASSETS                      
Cash and due from banks   $ 12,708     $ 12,014     $ 12,957     6     (2 )  
Interest-bearing deposits at other financial institutions     15,951       17,592       73,597     (9 )   (78 )  
Total cash and cash equivalents     28,659       29,606       86,554     (3 )   (67 )  
Certificates of deposit at other financial institutions     4,960       8,177       11,782     (39 )   (58 )  
Securities available-for-sale, at fair value     247,832       263,306       232,570     (6 )   7    
Securities held-to-maturity, net     8,469       7,428       7,500     14     13    
Loans held for sale, at fair value     34,989       42,068       121,395     (17 )   (71 )  
Loans receivable, net     1,946,072       1,797,663       1,645,664     8     18    
Accrued interest receivable     8,553       8,436       7,323     1     17    
Premises and equipment, net     25,740       26,116       27,594     (1 )   (7 )  
Operating lease right-of-use     4,850       5,172       5,193     (6 )   (7 )  
Federal Home Loan Bank (“FHLB”) stock, at cost     6,295       4,666       5,065     35     24    
Other real estate owned (“OREO”)     145                 NM     NM    
Deferred tax asset, net     4,709       2,611       216     80     2,080    
Bank owned life insurance (“BOLI”), net     37,106       36,890       36,655     1     1    
Servicing rights, held at the lower of cost or fair value     18,516       18,041       16,356     3     13    
Goodwill     2,312       2,312       2,312            
Core deposit intangible, net     3,715       3,887       4,397     (4 )   (16 )  
Other assets     16,317       17,554       12,037     (7 )   36    
TOTAL ASSETS   $ 2,399,239     $ 2,273,933     $ 2,222,613     6     8    
LIABILITIES                            
Deposits:                            
Noninterest-bearing accounts   $ 588,364     $ 597,693     $ 534,841     (2 )   10    
Interest-bearing accounts     1,427,736       1,322,095       1,323,769     8     8    
Total deposits     2,016,100       1,919,788       1,858,610     5     8    
Borrowings     78,028       35,528       42,528     120     83    
Subordinated notes:                            
Principal amount     50,000       50,000       50,000            
Unamortized debt issuance costs     (573 )     (589 )     (639 )   (3 )   (10 )  
Total subordinated notes less unamortized debt issuance costs     49,427       49,411       49,361            
Operating lease liability     5,081       5,406       5,401     (6 )   (6 )  
Other liabilities     27,962       27,850       24,953         12    
Total liabilities     2,176,598       2,037,983       1,980,853     7     10    
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; 7,726,232 shares issued and outstanding at June 30, 2022, 8,067,211 at March 31, 2022, and 8,333,566 at June 30, 2021     77       81       83     (5 )   (7 )  
Additional paid-in capital     55,129       65,035       75,797     (15 )   (27 )  
Retained earnings     189,075       184,748       164,606     2     15    
Accumulated other comprehensive (loss) income, net of tax     (21,640 )     (13,914 )     1,434     56     (1,609 )  
Unearned shares – Employee Stock Ownership Plan (“ESOP”)                 (160 )       NM    
Total stockholders’ equity     222,641       235,950       241,760     (6 )   (8 )  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 2,399,239     $ 2,273,933     $ 2,222,613     6     8    

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

                           
    Three Months Ended   Qtr   Year
    June 30,   March 31,   June 30,   Over Qtr   Over Year
    2022   2022   2021   % Change   % Change
INTEREST INCOME                          
Loans receivable, including fees   $ 25,275   $ 23,047     $ 22,484   10     12  
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions     1,670     1,579       1,313   6     27  
Total interest and dividend income     26,945     24,626       23,797   9     13  
INTEREST EXPENSE                          
Deposits     1,557     1,285       1,870   21     (17 )
Borrowings     174     133       222   31     (22 )
Subordinated notes     485     486       485        
Total interest expense     2,216     1,904       2,577   16     (14 )
NET INTEREST INCOME     24,729     22,722       21,220   9     17  
PROVISION FOR CREDIT LOSSES     1,871     1,043         79     NM  
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES     22,858     21,679       21,220   5     8  
NONINTEREST INCOME                          
Service charges and fee income     1,762     1,013       1,188   74     48  
Gain on sale of loans     2,066     3,857       6,392   (46 )   (68 )
Earnings on cash surrender value of BOLI     216     217       215        
Other noninterest income     311     789       391   (61 )   (20 )
Total noninterest income     4,355     5,876       8,186   (26 )   (47 )
NONINTEREST EXPENSE                          
Salaries and benefits     11,736     11,972       11,932   (2 )   (2 )
Operations     2,365     2,479       2,709   (5 )   (13 )
Occupancy     1,258     1,223       1,226   3     3  
Data processing     1,455     1,360       1,203   7     21  
Loan costs     751     523       647   44     16  
Professional and board fees     763     993       786   (23 )   (3 )
Federal Deposit Insurance Corporation (“FDIC”) insurance     185     157       123   18     50  
Marketing and advertising     244     188       155   30     57  
Amortization of core deposit intangible     172     173       177   (1 )   (3 )
(Recovery) impairment of servicing rights         (1 )     4   NM     NM  
Total noninterest expense     18,929     19,067       18,962   (1 )    
INCOME BEFORE PROVISION FOR INCOME TAXES     8,284     8,488       10,444   (2 )   (21 )
PROVISION FOR INCOME TAXES     1,585     1,618       1,895   (2 )   (16 )
NET INCOME   $ 6,699   $ 6,870     $ 8,549   (2 )   (22 )
Basic earnings per share (1)   $ 0.84   $ 0.84     $ 1.02       (18 )
Diluted earnings per share (1)   $ 0.83   $ 0.83     $ 0.98       (15 )

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

                 
    Six Months Ended   Year
    June 30,   June 30,   Over Year
    2022   2021   % Change
INTEREST INCOME                
Loans receivable, including fees   $ 48,322     $ 44,018     10  
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions     3,249       2,563     27  
Total interest and dividend income     51,571       46,581     11  
INTEREST EXPENSE                
Deposits     2,842       3,852     (26 )
Borrowings     307       668     (54 )
Subordinated note     971       741     31  
Total interest expense     4,120       5,261     (22 )
NET INTEREST INCOME     47,451       41,320     15  
PROVISION FOR CREDIT LOSSES     2,914       1,500     94  
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES     44,537       39,820     12  
NONINTEREST INCOME                
Service charges and fee income     2,775       1,953     42  
Gain on sale of loans     5,923       18,077     (67 )
Earnings on cash surrender value of BOLI     433       429     1  
Other noninterest income     1,100       761     45  
Total noninterest income     10,231       21,220     (52 )
NONINTEREST EXPENSE                
Salaries and benefits     23,708       23,541     1  
Operations     4,844       5,132     (6 )
Occupancy     2,481       2,365     5  
Data processing     2,815       2,510     12  
Loss on sale of OREO           9     NM
Loan costs     1,274       1,171     9  
Professional and board fees     1,756       1,608     9  
FDIC insurance     342       371     (8 )
Marketing and advertising     432       252     71  
Amortization of core deposit intangible     345       354     (3 )
Recovery of servicing rights     (1 )     (2,046 )   (100 )
Total noninterest expense     37,996       35,267     8  
INCOME BEFORE PROVISION FOR INCOME TAXES     16,772       25,773     (35 )
PROVISION FOR INCOME TAXES     3,203       5,341     (40 )
NET INCOME   $ 13,569     $ 20,432     (34 )
Basic earnings per share (1)   $ 1.68     $ 2.42     (31 )
Diluted earnings per share (1)   $ 1.66     $ 2.35     (29 )

____________________________

(1) Prior presentation of earnings per share were revised due to the improper inclusion of certain unvested shares in the denominator of basic and diluted earnings per share. As a result of the inclusion, earnings per share was understated for the three and six months ended June 30, 2021, and the three months ended March 31, 2022. Basic earnings per share for those periods was updated to $1.02, $2.42, and $0.84, respectively, from $1.00, $2.39, and $0.83 as previously reported. Diluted earnings per share was updated to $0.98, $2.35, and $0.83, respectively, from $0.97, $2.32, and $0.81 as previously reported.
               
KEY FINANCIAL RATIOS AND DATA (Unaudited)              
    At or For the Three Months Ended  
    June 30,   March 31,   June 30,  
    2022   2022   2021  
PERFORMANCE RATIOS:              
Return on assets (ratio of net income to average total assets) (1)   1.14 % 1.23 % 1.58 %
Return on equity (ratio of net income to average equity) (1)   10.72   11.09   14.41  
Yield on average interest-earning assets (1)   4.78   4.60   4.58  
Average total cost of funds (1)   0.43   0.39   0.54  
Interest rate spread information – average during period   4.35   4.21   4.04  
Net interest margin (1)   4.39   4.24   4.09  
Operating expense to average total assets (1)   3.22   3.41   3.49  
Average interest-earning assets to average interest-bearing liabilities (1)   152.68   154.78   145.59  
Efficiency ratio (2)   65.08   66.67   64.33  
               
    At or For the Six Months Ended  
    June 30,       June 30,  
    2022       2021  
PERFORMANCE RATIOS:              
Return on assets (ratio of net income to average total assets) (1)   1.18 %     1.91 %
Return on equity (ratio of net income to average equity) (1)   10.90       17.63  
Yield on average interest-earning assets (1)   4.69       4.55  
Average total cost of funds (1)   0.41       0.56  
Interest rate spread information – average during period   4.28       3.99  
Net interest margin (1)   4.32       4.04  
Operating expense to average total assets (1)   3.31       3.31  
Average interest-earning assets to average interest-bearing liabilities (1)   153.70       141.52  
Efficiency ratio (2)   65.87       56.39  
               
    June 30,   March 31,   June 30,  
    2022   2022   2021  
ASSET QUALITY RATIOS AND DATA:              
Non-performing assets to total assets at end of period (3)   0.28 % 0.30 % 0.28 %
Non-performing loans to total gross loans (4)   0.34   0.37   0.38  
Allowance for credit losses – loans to non-performing loans (4)   374.82   343.65   432.01  
Allowance for credit losses – loans to gross loans receivable, excluding HFS loans   1.27   1.28   1.63  
               
CAPITAL RATIOS, BANK ONLY:              
Community Bank Leverage Ratio   11.94 % 12.20 % 11.87 %
               
CAPITAL RATIOS, COMPANY ONLY:              
Tier 1 leverage-based capital   10.13 % 10.76 % 10.79 %
                     
    At or For the Three Months Ended  
      June 30,   March 31,   June 30,  
    2022   2021   2021  
PER COMMON SHARE DATA:                    
Basic earnings per share   $ 0.84   $ 0.84   $ 1.02  
Diluted earnings per share   $ 0.83   $ 0.83   $ 0.98  
Weighted average basic shares outstanding     7,776,939     8,023,466     8,282,980  
Weighted average diluted shares outstanding     7,896,210     8,173,294     8,550,429  
Common shares outstanding at end of period     7,605,740 (5)   7,945,539 (6)   8,197,461 (7)
Book value per share using common shares outstanding   $ 29.27   $ 29.70   $ 29.49  
Tangible book value per share using common shares outstanding (8)   $ 28.48   $ 28.92   $ 28.67  

____________________________

(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 7,726,232 at June 30, 2022, less 120,492 unvested restricted stock shares.
(6) Common shares were calculated using shares outstanding of 8,067,211 at March 31, 2022, less 121,672 unvested restricted stock shares.
(7) Common shares were calculated using shares outstanding of 8,333,566 at June 30, 2021, less 110,184 unvested restricted stock shares, and 25,921 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 June 30,
  For the Six Months
Ended June 30,
  QTR Over
QTR
  Year Over
Year
Average Balances   2022   2021   2022   2021   $ Change   $ Change
Assets                                    
Loans receivable (1)   $ 1,939,171   $ 1,742,720   $ 1,887,097   $ 1,729,956   $ 196,451     $ 157,141  
Securities available-for-sale, at fair value     282,589     215,759     280,609     199,827     66,830       80,782  
Securities held-to-maturity     7,819     7,500     7,660     7,500     319       160  
Interest-bearing deposits and certificates of deposit at other financial institutions     26,579     111,225     37,565     119,259     (84,646 )     (81,694 )
FHLB stock, at cost     4,881     5,155     4,593     6,196     (274 )     (1,603 )
Total interest-earning assets     2,261,039     2,082,359     2,217,524     2,062,738     178,680       154,786  
Noninterest-earning assets     95,281     90,159     96,009     88,936     5,122       7,073  
Total assets   $ 2,356,320   $ 2,172,518   $ 2,313,533   $ 2,151,674   $ 183,802     $ 161,859  
Liabilities and stockholders’ equity                                    
Interest-bearing accounts   $ 1,388,040   $ 1,338,312   $ 1,356,137   $ 1,332,541   $ 49,728     $ 23,596  
Borrowings     43,440     42,616     37,257     86,153     824       (48,896 )
Subordinated notes     49,417     49,351     49,409     38,858     66       10,551  
Total interest-bearing liabilities     1,480,897     1,430,279     1,442,803     1,457,552     50,618       (14,749 )
Noninterest-bearing accounts     594,761     477,671     589,066     432,855     117,090       156,211  
Other noninterest-bearing liabilities     30,003     26,527     30,675     27,517     3,476       3,158  
Stockholders’ equity     250,659     238,041     250,989     233,750     12,618       17,239  
Total liabilities and stockholders’ equity   $ 2,356,320   $ 2,172,518   $ 2,313,533   $ 2,151,674   $ 183,802     $ 161,859  
(1) Includes loans held for sale.

Non-GAAP Financial Measures:

In addition to financial results presented in accordance with generally accepted accounting principles utilized in the United States (“GAAP”), this earnings release contains 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 non-GAAP measure is consistent with the capital treatment utilized 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.

This non-GAAP financial measure has inherent limitations, is not required to be uniformly applied, and is not audited. Further, this non-GAAP financial measure 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 similarly titled measures reported by other companies.

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

                   
    June 30,   March 31,   June 30,
(Dollars in thousands, except share and per share amounts)   2022   2022   2021
Stockholders’ equity   $ 222,641     $ 235,950     $ 241,760  
Goodwill and core deposit intangible, net     (6,027 )     (6,199 )     (6,709 )
Tangible common stockholders’ equity   $ 216,614     $ 229,751     $ 235,051  
                   
Common shares outstanding at end of period     7,605,740       7,945,539       8,197,461  
                   
Common stockholders’ equity (book value) per share (GAAP)   $ 29.27     $ 29.70     $ 29.49  
Tangible common stockholders’ equity (tangible book value) per share (non-GAAP)   $ 28.48     $ 28.92     $ 28.67  
   
Contacts:  
Joseph C. Adams,  
Chief Executive Officer  
Matthew D. Mullet,  
Chief Financial Officer  
(425) 771-5299  
www.FSBWA.com  

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