FS Bancorp, Inc. Reports Net Income for the Third Quarter of 2021 of $8.3 Million or $0.97 Per Diluted Share and a 7% Dividend Increase to $0.15 Per Share for the Thirty-Fifth[...]

FS Bancorp Q3 Earnings
October 28, 2021
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Asset Summary

Total assets increased $6.1 million to $2.23 billion at September 30, 2021, compared to $2.22 billion at June 30, 2021, and increased $174.1 million, or 8.5%, from $2.05 billion at September 30, 2020. The quarter over linked quarter increase in total assets was primarily due to increases in securities available-for-sale of $36.2 million and loans receivable, net of $32.4 million, partially offset by decreases in total cash and cash equivalents of $58.2 million, loans held for sale ("HFS") of $3.3 million and other assets of $899,000. The year over year increase was primarily due to increases in loans receivable, net of $186.5 million, securities available-for-sale of $95.7 million, servicing rights of $4.8 million, and securities held-to-maturity of $2.0 million, partially offset by decreases in loans HFS of $97.0 million, total cash and cash equivalents of $7.7 million, other assets of $6.3 million, certificates of deposit ("CDs") at other financial institutions of $2.5 million, and Federal Home Loan Bank ("FHLB") stock of $1.7 million.

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October 28, 2021
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Loans receivable, net increased $32.4 million to $1.68 billion at September 30, 2021, from $1.65 billion at June 30, 2021, and increased $186.5 million from $1.49 billion at September 30, 2020. The quarter over linked quarter increase in total real estate loans was $56.8 million, including increases in multi-family loans of $31.4 million, one-to-four-family loans of $29.9 million, construction and development loans of $7.4 million, and home equity loans of $1.4 million, offset by a decrease in commercial real estate loans of $13.3 million. Consumer loans increased $14.8 million, primarily due to an increase of $17.2 million in indirect home improvement loans, partially offset by a decrease in marine loans of $2.4 million. Commercial business loans decreased $40.0 million, primarily due to a decrease in commercial and industrial loans of $35.2 million, primarily due to a net decrease in PPP loans of $35.0 million.

Originations of one-to-four-family loans to purchase and to refinance a home for the three months ended September 30, 2021 and June 30, 2021, and for the three and nine months ended September 30, 2021 and 2020 were as follows:

During the quarter ended September 30, 2021, the Company sold $319.9 million of one-to-four-family loans compared to sales of $378.0 million during the previous quarter, and sales of $479.6 million during the same quarter one year ago. During the nine months ended September 30, 2021, the Company sold $1.11 billion of one-to-four-family loans compared to sales of $1.12 billion during the same period last year. The reduction in purchase activity compared to the prior quarter reflects limited available inventory of homes for sale and seasonal changes in housing demand in the Pacific Northwest.

Gross margins on home loan sales decreased to 3.61% for the three months ended September 30, 2021, compared to 3.82% at June 30, 2021, and decreased from 4.44% for the three months ended September 30, 2020. Gross margins are defined as the margin on loans sold (cash sales) without the impact of deferred costs.

FS Bancorp Q3 Earnings
October 28, 2021
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Liabilities and Equity Summary

Changes in deposits at the dates indicated are as follows:

The increase in deposits from September 30, 2020 was primarily driven by organic growth in customer relationships and government stimulus checks deposited directly into customer accounts, and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19.

At September 30, 2021, non-retail CDs, which include brokered CDs, online CDs, and public funds CDs, decreased $59.3 million to $152.6 million, compared to $211.9 million at June 30, 2021, due to a decrease of $59.3 million in brokered CDs. The year over year decrease in non-retail CDs of $20.6 million from $173.3 million at September 30, 2020, was primarily the result of a $30.6 million decrease in brokered CDs, offset by increases of $6.5 million in online CDs, and $3.5 million in public funds CDs. The reduction in non-retail CDs is directly tied to the Company replacing these non-retail CDs with brokered interest-bearing checking deposits of $45.0 million quarter over quarter and $60.0 million year over year. The bulk of the wholesale funding activity has been tied to liability interest rate swap arrangements of $90 million that are funded with 90-day liabilities.

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October 28, 2021
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At September 30, 2021, borrowings, comprised of FHLB advances, were unchanged from $42.5 million at June 30, 2021, and decreased $131.1 million, or 75.5% from $173.6 million at September 30, 2020. The decrease in borrowings from the prior year is primarily due to the repayments of the following: $74.1 million of Paycheck Protection Program Liquidity Facility ("PPPLF") borrowings, due in part to SBA forgiveness of the underlying PPP loans, $30.0 million of FHLB advances, and $27.0 million of Federal Reserve Bank borrowings, utilizing funds primarily from deposit growth.

Total stockholders' equity decreased $1.3 million, to $240.5 million at September 30, 2021, from $241.8 million at June 30, 2021, and increased $19.9 million, from $220.6 million at September 30, 2020. The decrease in stockholders' equity during the current quarter was primarily due to common stock repurchases of $6.8 million, a decrease in other comprehensive income of $1.2 million, and dividends of $1.1 million, partially offset by net income of $8.3 million. The Company repurchased 270,775 shares of its common stock at an average price of $34.42 per share. Book value per common share was $29.78 at September 30, 2021, compared to $29.49 at June 30, 2021, and $26.41 at September 30, 2020.

The Bank is well capitalized under the minimum capital requirements established by the Federal Deposit Insurance Corporation at September 30, 2021, with a CBLR of 11.9%, compared to the normally required CBLR of greater than 9.0% and the regulatory approved reduced CBLR of 8.5% due to the COVID-19 pandemic. The Company's Tier 1 leverage-based ratio was 10.6% at September 30, 2021.

Credit Quality

The allowance for loan and lease losses at September 30, 2021, decreased to $26.9 million, or 1.57% of gross loans receivable, excluding loans HFS, compared to $27.2 million, or 1.62% of gross loans receivable, excluding loans HFS at June 30, 2021, and increased from $24.8 million, or 1.63% of gross loans receivable, excluding loans HFS, at September 30, 2020. Nonperforming loans decreased $368,000 to $5.9 million at September 30, 2021, from $6.3 million at June 30, 2021, and decreased from $7.6 million at September 30, 2020. The year over year decrease was primarily due to the improvement of a commercial real estate loan of $1.1 million to performing status.

Loans classified as substandard decreased $4.8 million to $17.5 million at September 30, 2021, compared to $22.3 million at June 30, 2021, and decreased $936,000 from $18.5 million at September 30, 2020. The quarter over linked quarter decrease in substandard loans was attributable to a $4.7 million decrease in one-to-four-family loans. The year over year decrease in substandard loans was primarily due to decreases of $4.9 million in one-to-four-family loans, $2.0 million in commercial real estate loans, $206,000 in home equity loans, and $171,000 in indirect home improvement loans, partially offset by an increase of $6.3 million in commercial and industrial loans. There was no other real estate owned ("OREO") property at September 30, 2021 or June 30, 2021, compared to one OREO property in the amount of $90,000 at September 30, 2020.

Included in the carrying value of gross loans are net discounts on loans purchased in the Anchor Bank acquisition in November 2018 ("Anchor Acquisition"). The remaining net discount on loans acquired was $868,000, $1.0 million, and $1.8 million, on $90.8 million, $100.2 million, and $159.2 million of gross loans at September 30, 2021, June 30, 2021, and September 30, 2020, respectively.

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Management has identified loans that have either been directly or indirectly impacted by the COVID-19 pandemic and downgraded the risk classification and/or increased the monitoring of these loans. Commercial loans (non homogeneous loans) originally reported at a risk rating below "pass" or receiving elevated risk monitoring as a result of the COVID-19 pandemic and their respective industries at the dates indicated are as follows:

Management recognizes the potential impact of COVID-19 on all of our customers and will continue to prudently reserve for probable loan losses, including reserves against our homogenous residential and consumer portfolios.

Operating Results

Net interest income increased $3.7 million, to $22.7 million for the three months ended September 30, 2021, from $18.9 million for the three months ended September 30, 2020. 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 $2.8 million, primarily due to an increase of $2.5 million in interest income on loans receivable, including fees, impacted primarily by loan growth and net deferred fees recognized upon SBA forgiveness of PPP loans. Interest expense decreased $958,000, primarily as a result of repricing deposit rates and a reduction in higher cost borrowings. For the three months ended September 30, 2021, the total recognition of net deferred fees on forgiven and amortizing PPP loans was $823,000. For the nine months ended September 30, 2021, net interest income increased by $9.7 million, to $64.0 million, from $54.3 million for the nine months ended September 30, 2020, in a similar manner as for the three-month comparison described above, with an increase in interest income of $5.7 million and a decrease in interest expense of $4.0 million. For the nine months ended September 30, 2021, the total recognition of net deferred fees on forgiven and amortizing PPP loans was $1.9 million.

The net interest margin ("NIM") increased 31 basis points to 4.23% for the three months ended September 30, 2021, from 3.92% for the same period in the prior year, and increased eight basis points to 4.11% for the nine months ended September 30, 2021, from 4.03% for the nine months ended September 30, 2020. The comparable quarter over quarter increase in NIM was impacted by an improved mix of interest-bearing assets, including a higher balance of higher yielding portfolio loans and investment securities instead of interest-bearing cash, earning a nominal yield combined with declining deposit and borrowing costs. The slight increase in NIM between the nine months ended September 30, 2021, and 2020 primarily reflects the improved asset mix mentioned above and the reduction in deposit and borrowing costs.

The average total cost of funds, including noninterest-bearing checking, decreased 26 basis points to 0.48% for the three months ended September 30, 2021, from 0.74% for the three months ended September 30, 2020. This

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October 28, 2021
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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 total cost of funds, including noninterest-bearing checking, decreased 40 basis points to 0.53% for the nine months ended September 30, 2021, from 0.93% for the nine months ended September 30, 2020, 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.

There was no provision for loan losses for the three months ended September 30, 2021, and a $1.5 million provision for loan losses for the nine months ended September 30, 2021, compared to $3.1 million and $11.4 million for the three and nine months ended September 30, 2020, respectively. The reduction of the provision for loan losses between both periods primarily reflects improved economic factors on credit-deterioration due to the adverse impact of the COVID-19 pandemic at September 30, 2021, the increase in the loan portfolio due to organic growth, and net loan charge-offs. The reduction of the provision for loan losses also reflects improvements in "watch" classified loans that were downgraded based on the COVID-19 pandemic and which have shown loan-level improvements at September 30, 2021, compared to the same time last year. During the three months ended September 30, 2021, net charge-offs totaled $309,000 compared to net recoveries of $175,000 for the same period last year. The increase in net charge-offs was primarily due to increased consumer loan charge-offs. Net charge-offs totaled $747,000 during the nine months ended September 30, 2021, compared to net recoveries of $135,000 during the nine months ended September 30, 2020, due to the same reason mentioned above.

Noninterest income decreased $9.1 million, to $8.4 million, for the three months ended September 30, 2021, from $17.5 million for the three months ended September 30, 2020. The decrease during the period primarily reflects a $9.3 million decrease in gain on sale of loans due primarily to a reduction in the amount of originated and sold refinance loans, partially offset by a $527,000 increase in service charges and fee income primarily due to less amortization of mortgage servicing rights ("MSR") and increased servicing fees from non-portfolio loans. Noninterest income decreased $11.0 million, to $29.6 million, for the nine months ended September 30, 2021, from $40.6 million for the nine months ended September 30, 2020. This decrease was the result of a $10.5 million decrease in gain on sale of loans and a $1.6 million decrease in other noninterest income due to the one- time sale of Class B Visa stock shares of $1.5 million during the same period last year, partially offset by a $1.5 million increase in service charges and fee income.

Noninterest expense increased $2.8 million, to $20.0 million for the three months ended September 30, 2021, from $17.2 million for the three months ended September 30, 2020. The increase in noninterest expense reflects a $2.6 million increase in salaries and benefits, primarily attributable to a reduction in recognized deferred costs on direct loan origination activities of $4.4 million, an increase in additional staffing costs to support operational growth of $1.4 million, and an increase in medical expense of $827,000, partially offset by a decrease in incentives and commissions of $4.1 million. Noninterest expense increased $7.3 million, to $55.3 million for the nine months ended September 30, 2021, from $48.0 million for the nine months ended September 30, 2020. The increase during this period was primarily due to increases of $9.1 million in salaries and benefits, mostly attributable to a reduction in recognized deferred costs on direct loan origination activities of $5.9 million and increases in compensation of $3.0 million and medical expenses of $1.9 million, partially offset by a decrease in incentives and commissions of $2.7 million. Other increases included $661,000 in data processing, $469,000 in loan costs, and $415,000 in professional and board fees, partially offset by the $3.5 million net change in the value of servicing rights to a $2.1 million recovery of servicing rights in the current quarter. In the comparable period for 2020, we recognized an impairment charge to servicing rights of $1.4 million due to falling interest rates as a result of the interest rate environment due to the government response to the COVID-19 pandemic.

FS Bancorp Q3 Earnings
October 28, 2021
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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 11 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 the Company's actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: the effect of the COVID-19 pandemic, including on the Company's credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets, 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 2021 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 Q3 Earnings
October 28, 2021
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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts) (Unaudited)

Share data has been adjusted for all periods to reflect the two-for-one stock split effective July 14, 2021.

FS Bancorp Q3 Earnings
October 28, 2021
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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts) (Unaudited)

Share data has been adjusted for all periods to reflect the two-for-one stock split effective July 14, 2021.

FS Bancorp Q3 Earnings
October 28, 2021
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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts) (Unaudited)

Share data has been adjusted for all periods to reflect the two-for-one stock split effective July 14, 2021.

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FS Bancorp Q3 Earnings
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Share data has been adjusted for all periods to reflect the two-for-one stock split effective July 14, 2021.

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(1) Includes loans held for sale.

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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 the tangible book value per share, a non-GAAP financial measure. Tangible common stockholders' equity is calculated by excluding intangible assets from stockholders' equity. For this financial measure, the Company's intangible assets are goodwill and core deposit intangible. Tangible book value per share is calculated by dividing tangible common shareholders' equity by the number of common shares outstanding. The Company believes that this 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.