FS Bancorp, Inc. Reports Third Quarter Net Income of $2.0 Million or $0.66 Per Diluted Share and Eleventh Consecutive Quarterly Cash Dividend

MOUNTLAKE TERRACE, Wash., Oct. 28, 2015 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (NASDAQ:FSBW) (“FS Bancorp” or “the Company”), the holding company for 1st Security Bank of Washington (“the Bank”) today reported 2015 third quarter net income of $2.0 million, or $0.66 per diluted share, compared to net income of $1.1 million or $0.39 per diluted share, for the same period last year.

“Loan growth continued in the third quarter and with the announced branch acquisition, management is executing our balanced lending and deposit growth strategy. I am also pleased to announce that our Board of Directors has approved our eleventh quarterly cash dividend in the amount of $0.07 per share,” stated Joe Adams, CEO of FS Bancorp. The dividend will be paid on November 25, 2015, to shareholders of record as of November 11, 2015. 

2015 Third Quarter Highlights    

• Announced the proposed acquisition of four retail bank branch offices with aggregate deposits totaling approximately $268.0 million that is scheduled to close in the first quarter of 2016, subject to regulatory approval and other standard closing conditions;
• Net income of $2.0 million for the third quarter of 2015, a decrease of $799,000, as compared to $2.8 million in the second quarter of 2015, and an increase from $1.1 million for the comparable quarter one year ago;
• Earnings per diluted share were $0.66 for the third quarter of 2015, compared to $0.93 for the preceding quarter in 2015, and $0.39 for the third quarter of 2014;
• Total gross loans increased $50.7 million, or 11.5% to $490.7 million at September 30, 2015, compared to $440.0 million at June 30, 2015, and $361.9 million at September 30, 2014;
• Reduction in non-performing assets to $841,000 at September 30, 2015, compared to $1.0 million as of June 30, 2015, and $409,000 as of September 30 2014, with no other real estate owned (“OREO”) at these dates, respectively;
• Relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased $2.7 million, or 2.7% to $103.2 million as of September 30, 2015, from $100.5 million at June 30, 2015, and increased from $75.7 million at September 30, 2014;
• The efficiency ratio was 68.0% at September 30, 2015, higher compared to 59.7% at June 30, 2015, and significantly improved from 73.8% at September 30, 2014;
• Subordinated debt of $10.0 million announced on October 6, 2015 closed on October 15, 2015, at a rate of 6.5% to support future loan growth;
• Capital levels at the Bank were 13.9% for total risk-based capital and 11.4% for Tier 1 leverage capital as of September 30, 2015, compared to 13.6% and 10.9% as of June 30, 2015, respectively.

Balance Sheet and Credit Quality

Total assets increased $73.4 million, or 12.9% during the quarter to $642.0 million at September 30, 2015, compared to $568.6 million at June 30, 2015, and $471.6 million at September 30, 2014. The increase in total assets from June 30, 2015 was primarily due to net loan growth of $50.3 million, and includes the acquisition of $16.1 million in adjustable rate one-to-four-family, non-owner occupied loans secured by properties located in the Puget Sound market. Other assets experiencing increases included loans held for sale of $12.3 million, the purchase of certificates of deposits at other financial institutions of $3.7 million, the purchase of additional securities available-for-sale in the amount of $3.3 million, the purchase of additional bank owned life insurance in the amount of $3.0 million to partially offset the increased costs associated with employee benefits, and the increased balance of Federal Home Loan Bank stock of $1.6 million to support borrowings.  

Loans receivable, net increased $50.3 million, or 11.6%, to $482.6 million at September 30, 2015, from $432.3 million at June 30, 2015, and increased $128.0 million, or 36.1%, from $354.6 million at September 30, 2014. Total real estate loans increased $37.5 million, or 17.5% quarter over quarter, primarily due to a $24.9 million increase in one-to-four-family real estate loans, including the $16.1 million in adjustable rate one-to-four-family, non-owner occupied acquired from another financial institution, and a $14.3 million increase in construction loans, partially offset by a $1.9 million decrease in commercial real estate loans. Quarter over quarter changes in other loan categories also include an $8.2 million increase in commercial business loans and a $5.0 million increase in consumer loans.

One-to-four-family originations of loans held for sale including loans brokered to other institutions decreased $30.1 million, or 15.4%, to $165.4 million during the quarter ended September 30, 2015, compared to $195.5 million for the preceding quarter, and $81.2 million for the same quarter one year ago. The reduction in originations was a result of the seasonal summer slowdown in purchase transactions compared to the prior quarter. The percentage of one-to-four-family mortgage loan originations for home purchases was 79.7% of third quarter volume versus 20.3% of third quarter volume for refinance activity. This compares to 78.8% of second quarter volume to purchase a home versus 21.2% to refinance in the second quarter of 2015. During the quarter ended September 30, 2015, the Company sold $137.5 million of one-to-four-family mortgage loans compared to $185.5 million in sales for the preceding quarter, and sales of $74.4 million for the quarter ended September 30, 2014. 

The allowance for loan losses (“ALLL”) at September 30, 2015 was $7.4 million, or 1.5% of gross loans receivable, compared to $6.9 million, or 1.6% of gross loans receivable as of June 30, 2015, and $5.8 million, or 1.6% of gross loans receivable at September 30, 2014. Non-performing loans, consisting of non-accrual loans, decreased to $841,000 at September 30, 2015, from $1.0 million at June 30, 2015, and increased from $409,000 at September 30, 2014. Substandard loans decreased $1.1 million, or 28.2%, to $2.8 million at September 30, 2015, compared to $3.9 million at June 30, 2015, and increased from $1.3 million at September 30, 2014. The increase from one year ago was primarily associated with the downgrade of one commercial business loan of $2.0 million as a result of the financial performance by the borrower. There was no OREO at September 30, 2015, June 30, 2015, or September 30, 2014. At September 30, 2015, the Company had $736,000 in restructured loans, of which one loan with a balance of $525,000 was placed on nonaccrual status in the third quarter of 2015, and the remaining $211,000 loans were performing in accordance with their modified terms, compared to restructured loans of $737,000 at June 30, 2015, and $791,000 at September 30, 2014.

Total deposits increased $29.4 million, or 6.2%, to $499.9 million at September 30, 2015, from $470.5 million at June 30, 2015, and increased $119.6 million, or 31.4%, from $380.3 million at September 30, 2014. Relationship-based transactional deposits increased $2.7 million, or 2.7% to $103.2 million as of September 30, 2015, from $100.5 million at June 30, 2015, and increased from $75.7 million at September 30, 2014. Money market and savings accounts increased $8.0 million, or 4.3%, to $196.1 million at September 30, 2015, from $188.1 million at June 30, 2015, and increased $52.7 million, or 36.8%, from $143.4 million at September 30, 2014. Time deposits increased $18.6 million, primarily as a result of the summer 30-month CD special, or 10.2%, to $200.5 million at September 30, 2015, from $181.9 million at June 30, 2015, and increased $39.3 million, or 24.4%, from $161.2 million at the same period last year. The announced proposed acquisition of four retail banking branches (two in Jefferson County and two in Clallam County) is expected to provide immediate core deposit liquidity and expand the Bank’s footprint into a contiguous market. The branch acquisition is expected to close in the first quarter of 2016, and will provide liquidity to support lending growth.

Non-retail deposits, which include $30.5 million of brokered certificates of deposits, $21.0 million of online certificates of deposits, and $1.7 million of public funds, remained unchanged at $53.2 million at September 30, 2015, and June 30, 2015, and increased from $40.6 million at September 30, 2014.  Management utilizes the wholesale market deposits to mitigate interest rate risk exposure where appropriate.

Borrowings increased $39.0 million, or 192.4%, to $59.3 million as of September 30, 2015, from $20.3 million at June 30, 2015, and increased $36.7 million, or 162.8%, from $22.6 million at September 30, 2014. The increase from the prior quarter was primarily to fund loan growth during the quarter.  Management anticipates borrowings will remain elevated through the acquisition of the branches scheduled to be consummated in the first quarter of 2016, then will be reduced once the branch acquisition is completed.

Total equity increased $2.3 million, or 3.4%, to $73.2 million at September 30, 2015, from $70.9 million at June 30, 2015, and increased $9.2 million, or 14.4%, from $64.0 million at September 30, 2014. The increase in equity from the second quarter of 2015 was predominantly a result of net income of $2.0 million, and an increase of $258,000 in other comprehensive income for the quarter ended September 30, 2015, as the value of our investment securities portfolio increased, partially offset by dividends paid of $214,000. Book value per common diluted shares outstanding was $24.54 as of September 30, 2015, compared to $23.80 as of June 30, 2015, and $21.90 as of September 30, 2014.

The Bank is well capitalized under the minimum capital requirements established by the FDIC with a total risk-based capital ratio of 13.9%, a Tier 1 leverage capital ratio of 11.4%, and a common equity Tier 1 (“CET1”) capital ratio of 12.6% at September 30, 2015, compared to 13.6%, 10.9%, and 12.3% at June 30, 2015, respectively. The increase in capital ratios at the Bank occurred due to a $5.0 million downstream of capital from FS Bancorp, Inc. in anticipation of the four retail bank branch acquisition closing in the first quarter of 2016. 

The Company exceeds all regulatory capital requirements with a total risk-based capital ratio of 14.7%, Tier 1 leverage capital ratio of 12.2%, and a CET1 capital ratio of 13.5% as of September 30, 2015, compared to 15.6%, 12.6%, and 14.3% at June 30, 2015, respectively.

Operating Results

Net interest income increased $1.3 million, or 22.0%, to $7.1 million for the three months ended September 30, 2015, from $5.8 million for the three months ended September 30, 2014.  Net interest income increased $4.4 million, or 27.3%, to $20.3 million for the nine months ended September 30, 2015, from $15.9 million for the nine months ended September 30, 2014.

The net interest margin (“NIM”) decreased 31 basis points to 4.97% for the three months ended September 30, 2015, from 5.28% for the three months ended September 30, 2014, and decreased five basis points to 5.06% for the nine months ended September 30, 2015, from 5.11% for the same period of the prior year. The decreased NIM reflects an increase in lower yielding loans including the recently acquired one-to-four-family loans. Our strategy to increase the loan portfolio through diversified lending channels has pressured the NIM as the increase in lower yielding real estate and commercial business loans has offset the increase in higher yielding consumer loan products. The average cost of funds decreased five basis points to 0.71% for the three months ended September 30, 2015, from 0.76% for the three months ended September 30, 2014, and was unchanged at 0.72% for the nine months ended September 30, 2015 and 2014 as a result of minimal changes in interest rates year over year. Management is focused on matching deposit duration with the duration of earning assets where appropriate.

The provision for loan losses was $600,000 for the three months ended September 30, 2015, compared to $450,000 for the three months ended September 30, 2014. The provision for loan losses was $1.8 million for the nine months ended September 30, 2015, compared to $1.4 million for the nine months ended September 30, 2014. The increase in the provision for the nine months ended September 30, 2015 was primarily due to loan growth of $96.5 million. Non-performing loans were $841,000, or 0.2% of total loans at September 30, 2015, compared to $409,000 or 0.1% of total loans at September 30, 2014. During the three months ended September 30, 2015, net charge-offs totaled $139,000 compared to $186,000 during the three months ended September 30, 2014. During the nine months ended September 30, 2015, net charge-offs totaled $502,000 compared to $630,000 during the nine months ended September 30, 2014.

Noninterest income increased $2.0 million or 83.6%, to $4.4 million for the three months ended September 30, 2015, from $2.4 million for the three months ended September 30, 2014. The increase during the period was primarily due to the increase in gain on sale of loans of $1.8 million which occurred due to personnel hired to expand our lending operations in the third quarter of 2014. Noninterest income increased $6.8 million, or 99.1%, to $13.7 million for the nine months ended September 30, 2015, from $6.9 million for the nine months ended September 30, 2014. The increase during the period was primarily due to the $6.5 million increase in gain on sale of loans.

Noninterest expense increased $1.7 million, or 28.9%, to $7.8 million for the three months ended September 30, 2015, from $6.1 million for the three months ended September 30, 2014. Changes in noninterest expense included a $738,000, or 20.7% increase in salaries and benefits associated with the continued investment in growing the lending and deposit franchise primarily as a result of the hiring of additional employees in mortgage-related lending, a $432,000, or 100.0% increase in acquisition costs related to our proposed branch acquisition, a $186,000, or 20.0% increase in operations, a $162,000, or 51.1% increase in professional and board fees, a $77,000, or 18.3% increase in occupancy expense, and a $63,000, or 19.9% increase in loan costs this quarter. Noninterest expense increased $4.7 million, or 27.8%, to $21.7 million for the nine months ended September 30, 2015, from $17.0 million for the nine months ended September 30, 2014, primarily as a result of a $2.5 million, or 25.6% increase in salaries and benefits, an $806,000, or 33.5% increase in operations, a $432,000, or 100.0% increase in acquisition costs, a $349,000, or 38.0% increase in professional and board fees, a $214,000, or 23.3% increase in data processing, a $167,000, or 13.7% increase in occupancy expense, a $117,000, or 11.6% increase in loan costs, and an $87,000, or 23.5% increase in marketing and advertising expense.

Management anticipates acquisition costs to continue to occur through the first quarter of 2016.

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 seven branches and four loan production offices in suburban communities in the greater Puget Sound area, and one loan production office in the most recently entered market area of the Tri-Cities. The Bank services home mortgage customers throughout Washington State with an emphasis in the Puget Sound and Tri-Cities home lending markets.

Disclaimer

When used in this press release and in other documents filed with or furnished to the Securities and Exchange Commission (the “SEC”), in press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially from those currently expected or projected in these forward-looking statements. Factors that could cause our actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; our ability to execute our plans to grow our residential construction lending, our mortgage banking operations and our warehouse lending and the geographic expansion of our indirect home improvement lending; secondary market conditions for loans and our ability to sell loans in the secondary market; legislative and regulatory changes; and other factors described in the Company’s latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission-which are available on our website at www.fsbwa.com and on the SEC's website at www.sec.gov.

Any of the forward-looking statements that we make in this press release and in the other public statements are based upon management's beliefs and assumptions at the time they are made and may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2015 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.

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