Results

FS Bancorp Inc.

10/28/2021 | Press release | Distributed by Public on 10/28/2021 09:16

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, 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 Consecutive Quarterly Dividend

MOUNTLAKE TERRACE, WA - October 28, 2021 - FS Bancorp, Inc. (NASDAQ: FSBW) (the "Company"), the holding company for 1st Security Bank of Washington (the "Bank") today reported 2021 third quarter net income of $8.3 million, or $0.97 per diluted share, compared to $12.7 million, or $1.47 per diluted share for the same period last year. All share data in this earnings release has been adjusted to reflect the two-for-one stock split, in the form of a 100% stock dividend, effective July 14, 2021.

"Our continued focus on diversified revenue streams funded by core deposits resulted in strong third quarter financial results," stated Joe Adams, CEO. "We are also pleased that our Board of Directors approved our thirty-fifth consecutive quarterly cash dividend which is being increased to $0.15 from $0.14 per share. The quarterly dividend of $0.15 will be paid on November 24, 2021, to shareholders of record as of November 11, 2021."

CFO Matthew Mullet noted, "Strong earnings during the quarter supported $6.8 million in share repurchases and the Board approved an additional $10.0 million in share repurchases based upon our capital position during the quarter."

Updated response to the novel coronavirus of 2019 ("COVID-19") pandemic:

The Company is following the Federal Housing Finance Agency guidelines for forbearance, foreclosure relief, and late payment reporting for the COVID-19 pandemic on all serviced loans and a modified format for portfolio loans. For portfolio loans, the primary method of relief is to allow the borrower up to 90-days of interest only payments and/or loan payment deferments, and, on a more limited basis, waived interest, late fees, or interest only loan payments and suspended foreclosure proceedings. As of September 30, 2021, the amount of portfolio loans under payment/relief agreements, of which all remaining relief loans are modified interest only payments, included commercial real estate loans of $6.9 million and commercial business loans of $5.4 million. Additional detail is provided below in the "Credit Quality" discussion.

As of September 30, 2021, there was a total of 171 Paycheck Protection Program ("PPP") loans with an outstanding balance of $38.3 million. To date balances totaling $88.6 million were submitted for approval and forgiven by the U.S. Small Business Administration ("SBA").

2021 Third Quarter Highlights

Net income was $8.3 million for the third quarter of 2021, compared to $8.5 million in the previous quarter, and $12.7 million for the comparable quarter one year ago;
Net interest income increased to $22.7 million from $21.2 million in the previous quarter, and improved from $18.9 million in the comparable quarter one year ago;
Total loans receivable, net increased $32.4 million, or 2.0%, to $1.68 billion at September 30, 2021, compared to $1.65 billion at June 30, 2021, and increased $186.5 million, or 12.5% from $1.49 billion at September 30, 2020;
PPP loans forgiven by the SBA during the quarter totaled $34.8 million, compared to $15.4 in the previous quarter, and none during the comparable quarter one year ago;

FS Bancorp Q3 Earnings
October 28, 2021
Page 2

Net deferred fees on forgiven and amortizing PPP loans were $823,000 during the quarter, compared to $436,000 during the prior quarter, and $183,000 during the comparable quarter one year ago;
Relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased $65.3 million, or 9.5%, to $754.7 million at September 30, 2021, from $689.4 million at June 30, 2021, and increased $168.3 million, or 28.7%, from $586.4 million at September 30, 2020;
Repurchased 270,775 shares of our common stock during the third quarter; and
At September 30, 2021, the Community Bank Leverage Ratio ("CBLR") was 11.9% for the Bank and the Tier 1 leverage-based ratio was 10.6% for the Company.

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.

LOAN PORTFOLIO

(Dollars in thousands)

September 30, 2021

June 30, 2021

September 30, 2020

Amount

Percent

Amount

Percent

Amount

Percent

REAL ESTATE LOANS

Commercial

$

217,911

12.7

%

$

231,196

13.8

%

$

227,354

15.0

%

Construction and development

250,099

14.6

242,715

14.4

191,933

12.6

Home equity

42,095

2.5

40,718

2.4

40,459

2.6

One-to-four-family (excludes HFS)

365,326

21.4

335,397

20.0

300,863

19.8

Multi-family

165,240

9.7

133,828

8.0

130,243

8.6

Total real estate loans

1,040,671

60.9

983,854

58.6

890,852

58.6

CONSUMER LOANS

Indirect home improvement

325,630

19.0

308,447

18.4

276,693

18.2

Marine

83,827

4.9

86,216

5.1

84,650

5.6

Other consumer

3,188

0.2

3,177

0.2

3,465

0.2

Total consumer loans

412,645

24.1

397,840

23.7

364,808

24.0

COMMERCIAL BUSINESS LOANS

Commercial and industrial (includes PPP loans)

207,064

12.1

242,287

14.5

224,276

14.8

Warehouse lending

49,289

2.9

54,072

3.2

39,482

2.6

Total commercial business loans

256,353

15.0

296,359

17.7

263,758

17.4

Total loans receivable, gross

1,709,669

100.0

%

1,678,053

100.0

%

1,519,418

100.0

%

Allowance for loan losses

(26,925)

(27,234)

(24,799)

Deferred costs and fees, net

(4,978)

(5,514)

(4,240)

Premiums on purchased loans, net

277

359

1,124

Total loans receivable, net

$

1,678,043

$

1,645,664

$

1,491,503

FS Bancorp Q3 Earnings
October 28, 2021
Page 3

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:

(Dollars in thousands)

For the Three Months Ended

For the Three Months Ended

Quarter

Quarter

September 30, 2021

June 30, 2021

over Quarter

over Quarter

Amount

Percent

Amount

Percent

$ Change

% Change

Purchase

$

243,721

64.0

%

$

252,999

63.7

%

$

(9,278)

(3.7)

Refinance

136,803

36.0

143,911

36.3

(7,108)

(4.9)

Total

$

380,524

100.0

%

$

396,910

100.0

%

$

(16,386)

(4.1)

For the Three Months Ended

For the Three Months Ended

Year

Year

September 30, 2021

September 30, 2020

over Year

over Year

Amount

Percent

Amount

Percent

$ Change

% Change

Purchase

$

243,721

64.0

%

$

243,974

41.4

%

$

(253)

(0.1)

Refinance

136,803

36.0

345,919

58.6

(209,116)

(60.5)

Total

$

380,524

100.0

%

$

589,893

100.0

%

$

(209,369)

(35.5)

For the Nine Months Ended

For the Nine Months Ended

Year

Year

September 30, 2021

September 30, 2020

over Year

over Year

Amount

Percent

Amount

Percent

$ Change

% Change

Purchase

$

682,181

56.3

%

$

501,686

37.1

%

$

180,495

36.0

Refinance

529,705

43.7

852,202

62.9

(322,497)

(37.8)

Total

$

1,211,886

100.0

%

$

1,353,888

100.0

%

$

(142,002)

(10.5)

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
Page 4

Liabilities and Equity Summary

Changes in deposits at the dates indicated are as follows:

(Dollars in thousands)

September 30, 2021

June 30, 2021

Relationship-based transactional deposits:

Amount

Percent

Amount

Percent

$ Change

% Change

Noninterest-bearing checking

$

423,091

22.7

%

$

415,748

22.4

%

$

7,343

1.8

Interest-bearing checking

308,142

16.5

257,206

13.8

50,936

19.8

Escrow accounts related to mortgages serviced

23,515

1.3

16,469

0.9

7,046

42.8

Subtotal

754,748

40.5

689,423

37.1

65,325

9.5

Savings

191,487

10.3

181,505

9.8

9,982

5.5

Money market

497,571

26.7

483,935

26.0

13,636

2.8

Subtotal

689,058

37.0

665,440

35.8

23,618

3.5

Certificates of deposit less than $100,000

231,453

12.4

299,250

16.1

(67,797)

(22.7)

Certificates of deposit of $100,000 through $250,000

126,095

6.8

138,559

7.5

(12,464)

(9.0)

Certificates of deposit of $250,000 and over

62,296

3.3

65,938

3.5

(3,642)

(5.5)

Subtotal

419,844

22.5

503,747

27.1

(83,903)

(16.7)

Total

$

1,863,650

100.0

%

$

1,858,610

100.0

%

$

5,040

0.3

(Dollars in thousands)

September 30, 2021

September 30, 2020

Relationship-based transactional deposits:

Amount

Percent

Amount

Percent

$ Change

% Change

Noninterest-bearing checking

$

423,091

22.7

%

$

338,781

21.0

%

$

84,310

24.9

Interest-bearing checking

308,142

16.5

229,576

14.2

78,566

34.2

Escrow accounts related to mortgages serviced

23,515

1.3

18,062

1.1

5,453

30.2

Subtotal

754,748

40.5

586,419

36.3

168,329

28.7

Savings

191,487

10.3

144,886

9.0

46,601

32.2

Money market

497,571

26.7

377,585

23.4

119,986

31.8

Subtotal

689,058

37.0

522,471

32.4

166,587

31.9

Certificates of deposit less than $100,000

231,453

12.4

285,650

17.7

(54,197)

(19.0)

Certificates of deposit of $100,000 through $250,000

126,095

6.8

150,437

9.3

(24,342)

(16.2)

Certificates of deposit of $250,000 and over

62,296

3.3

68,242

4.3

(5,946)

(8.7)

Subtotal

419,844

22.5

504,329

31.3

(84,485)

(16.8)

Total

$

1,863,650

100.0

%

$

1,613,219

100.0

%

$

250,431

15.5

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.

FS Bancorp Q3 Earnings
October 28, 2021
Page 5

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.

FS Bancorp Q3 Earnings
October 28, 2021
Page 6

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:

(Dollars in thousands)

Loan types:

September 30, 2021

June 30, 2021

September 30, 2020

Construction and development

$

2,771

$

2,836

$

4,335

Education/worship

-

227

4,796

Food and beverage

6,600

12,788

14,346

Hospitality

16,188

38,547

43,903

Manufacturing

602

606

18,765

Retail

1,736

1,878

2,663

Transportation

4,487

4,487

4,992

Other

4,454

13,599

23,241

Total

$

36,838

$

74,968

$

117,041

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

FS Bancorp Q3 Earnings
October 28, 2021
Page 7

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
Page 8

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
Page 9

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

Linked

Year

September 30,

June 30,

September 30,

Quarter

Over Year

2021

2021

2020

% Change

% Change

ASSETS

Cash and due from banks

$

11,426

$

12,957

$

11,348

(12)

1

Interest-bearing deposits at other financial institutions

16,906

73,597

24,725

(77)

(32)

Total cash and cash equivalents

28,332

86,554

36,073

(67)

(21)

Certificates of deposit at other financial institutions

11,782

11,782

14,262

-

(17)

Securities available-for-sale, at fair value

268,802

232,570

173,101

16

55

Securities held-to-maturity

7,500

7,500

5,500

-

36

Loans held for sale, at fair value

118,106

121,395

215,123

(3)

(45)

Loans receivable, net

1,678,043

1,645,664

1,491,503

2

13

Accrued interest receivable

7,797

7,323

6,809

6

15

Premises and equipment, net

27,243

27,594

27,898

(1)

(2)

Operating lease right-of-use

4,875

5,193

5,251

(6)

(7)

Federal Home Loan Bank ("FHLB") stock, at cost

4,871

5,065

6,553

(4)

(26)

Other real estate owned ("OREO")

-

-

90

-

NM

Deferred tax asset, net

303

216

-

40

NM

Bank owned life insurance ("BOLI"), net

36,873

36,655

36,006

1

2

Servicing rights, held at the lower of cost or fair value

16,497

16,356

11,736

1

41

Goodwill

2,312

2,312

2,312

-

-

Core deposit intangible, net

4,220

4,397

4,928

(4)

(14)

Other assets

11,138

12,037

17,481

(7)

(36)

TOTAL ASSETS

$

2,228,694

$

2,222,613

$

2,054,626

-

8

LIABILITIES

Deposits:

Noninterest-bearing accounts

$

446,606

$

432,217

$

356,843

3

25

Interest-bearing accounts

1,417,044

1,426,393

1,256,376

(1)

13

Total deposits

1,863,650

1,858,610

1,613,219

-

16

Borrowings

42,528

42,528

173,640

-

(76)

Subordinated notes:

Principal amount

50,000

50,000

10,000

-

400

Unamortized debt issuance costs

(623)

(639)

(100)

(3)

523

Total subordinated notes less unamortized debt issuance costs

49,377

49,361

9,900

-

399

Operating lease liability

5,097

5,401

5,468

(6)

(7)

Deferred tax liability, net

-

-

2,662

-

NM

Other liabilities

27,589

24,953

29,187

11

(5)

Total liabilities

1,988,241

1,980,853

1,834,076

-

8

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; 8,208,045 shares issued and outstanding at September 30, 2021, 8,333,566 at June 30, 2021, and 8,526,182 at September 30, 2020

82

83

85

(1)

(4)

Additional paid-in capital

68,481

75,797

81,634

(10)

(16)

Retained earnings

171,786

164,606

135,921

4

26

Accumulated other comprehensive income, net of tax

198

1,434

3,285

(86)

(94)

Unearned shares - Employee Stock Ownership Plan ("ESOP")

(94)

(160)

(375)

(41)

(75)

Total stockholders' equity

240,453

241,760

220,550

(1)

9

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

2,228,694

$

2,222,613

$

2,054,626

-

8

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
Page 10

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

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

Three Months Ended

Qtr

Year

September 30,

June 30,

September 30,

Over Qtr

Over Year

2021

2021

2020

% Change

% Change

INTEREST INCOME

Loans receivable, including fees

$

23,520

$

22,484

$

21,066

5

12

Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions

1,487

1,313

1,162

13

28

Total interest and dividend income

25,007

23,797

22,228

5

13

INTEREST EXPENSE

Deposits

1,629

1,870

2,637

(13)

(38)

Borrowings

227

222

503

2

(55)

Subordinated notes

496

485

170

2

192

Total interest expense

2,352

2,577

3,310

(9)

(29)

NET INTEREST INCOME

22,655

21,220

18,918

7

20

PROVISION FOR LOAN LOSSES

-

-

3,100

-

NM

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

22,655

21,220

15,818

7

43

NONINTEREST INCOME

Service charges and fee income

1,073

1,188

546

(10)

97

Gain on sale of loans

6,885

6,392

16,228

8

(58)

Gain on sale of investment securities

-

-

118

-

NM

Earnings on cash surrender value of BOLI

218

215

219

1

-

Other noninterest income

222

391

435

(43)

(49)

Total noninterest income

8,398

8,186

17,546

3

(52)

NONINTEREST EXPENSE

Salaries and benefits

12,790

11,932

10,225

7

25

Operations

2,628

2,709

2,809

(3)

(6)

Occupancy

1,227

1,226

1,167

-

5

Data processing

1,309

1,203

1,127

9

16

Loan costs

842

647

593

30

42

Professional and board fees

757

786

601

(4)

26

Federal Deposit Insurance Corporation ("FDIC") insurance

120

123

290

(2)

(59)

Marketing and advertising

177

155

109

14

62

Amortization of core deposit intangible

177

177

176

-

-

(Recovery) impairment of servicing rights

(11)

4

82

(375)

(113)

Total noninterest expense

20,016

18,962

17,179

6

17

INCOME BEFORE PROVISION FOR INCOME TAXES

11,037

10,444

16,185

6

(32)

PROVISION FOR INCOME TAXES

2,706

1,895

3,472

43

(22)

NET INCOME

$

8,331

$

8,549

$

12,713

(3)

(34)

Basic earnings per share

$

0.99

$

1.00

$

1.50

(1)

(34)

Diluted earnings per share

$

0.97

$

0.97

$

1.47

-

(34)

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
Page 11

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

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

Nine Months Ended

Year

September 30,

September 30,

Over Year

2021

2020

% Change

INTEREST INCOME

Loans receivable, including fees

$

67,538

$

62,370

8

Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions

4,050

3,520

15

Total interest and dividend income

71,588

65,890

9

INTEREST EXPENSE

Deposits

5,481

9,670

(43)

Borrowings

895

1,458

(39)

Subordinated note

1,237

511

142

Total interest expense

7,613

11,639

(35)

NET INTEREST INCOME

63,975

54,251

18

PROVISION FOR LOAN LOSSES

1,500

11,435

(87)

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

62,475

42,816

46

NONINTEREST INCOME

Service charges and fee income

3,026

1,566

93

Gain on sale of loans

24,962

35,492

(30)

Gain on sale of investment securities

-

300

NM

Earnings on cash surrender value of BOLI

647

650

-

Other noninterest income

983

2,560

(62)

Total noninterest income

29,618

40,568

(27)

NONINTEREST EXPENSE

Salaries and benefits

36,331

27,192

34

Operations

7,760

7,785

-

Occupancy

3,592

3,492

3

Data processing

3,819

3,158

21

Loss on sale of OREO

9

2

350

OREO expenses

-

2

NM

Loan costs

2,013

1,544

30

Professional and board fees

2,365

1,950

21

FDIC insurance

491

574

(14)

Marketing and advertising

429

358

20

Amortization of core deposit intangible

531

529

-

(Recovery) impairment of servicing rights

(2,057)

1,399

(247)

Total noninterest expense

55,283

47,985

15

INCOME BEFORE PROVISION FOR INCOME TAXES

36,810

35,399

4

PROVISION FOR INCOME TAXES

8,047

7,499

7

NET INCOME

$

28,763

$

27,900

3

Basic earnings per share

$

3.38

$

3.25

4

Diluted earnings per share

$

3.27

$

3.19

3

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
Page 12

KEY FINANCIAL RATIOS AND DATA (Unaudited)

At or For the Three Months Ended

September 30,

June 30,

September 30,

2021

2021

2020

PERFORMANCE RATIOS:

Return on assets (ratio of net income to average total assets) (1)

1.49

%

1.58

%

2.51

%

Return on equity (ratio of net income to average equity) (1)

13.82

14.41

24.04

Yield on average interest-earning assets (1)

4.67

4.58

4.60

Average total cost of funds (1)

0.48

0.54

0.74

Interest rate spread information - average during period

4.19

4.04

3.86

Net interest margin (1)

4.23

4.09

3.92

Operating expense to average total assets (1)

3.58

3.49

3.39

Average interest-earning assets to average interest-bearing liabilities

140.97

139.00

134.22

Efficiency ratio (2)

64.46

64.33

47.11

At or For the Nine Months Ended

September 30,

September 30,

2021

2020

PERFORMANCE RATIOS:

Return on assets (ratio of net income to average total assets) (1)

1.77

%

1.97

%

Return on equity (ratio of net income to average equity) (1)

16.33

18.11

Yield on average interest-earning assets (1)

4.59

4.89

Average total cost of funds (1)

0.53

0.93

Interest rate spread information - average during period (1)

4.06

3.96

Net interest margin (1)

4.11

4.03

Operating expense to average total assets (1)

3.40

3.38

Average interest-earning assets to average interest-bearing liabilities

139.21

133.27

Efficiency ratio (2)

59.07

50.61

September 30,

June 30,

September 30,

2021

2021

2020

ASSET QUALITY RATIOS AND DATA:

Non-performing assets to total assets at end of period (3)

0.27

%

0.28

%

0.37

%

Non-performing loans to total gross loans (4)

0.35

0.38

0.50

Allowance for loan losses to non-performing loans (4)

453.59

432.01

327.94

Allowance for loan losses to gross loans receivable, excluding HFS loans

1.57

1.62

1.63

CAPITAL RATIOS, BANK ONLY:

Community Bank Leverage Ratio

11.93

%

11.87

%

10.67

%

CAPITAL RATIOS, COMPANY ONLY:

Tier 1 leverage-based capital

10.57

%

10.79

%

10.84

%

FS Bancorp Q3 Earnings
October 28, 2021
Page 13

At or For the Three Months Ended

September 30,

June 30,

September 30,

(Post stock split adjusted)

2021

2021

2020

PER COMMON SHARE DATA:

Basic earnings per share

$

0.99

$

1.00

$

1.50

Diluted earnings per share

$

0.97

$

0.97

$

1.47

Weighted average basic shares outstanding

8,240,218

8,393,164

8,449,642

Weighted average diluted shares outstanding

8,480,769

8,660,613

8,590,668

Common shares outstanding at end of period

8,073,412

(5)

8,197,461

(6)

8,351,196

(7)

Book value per share using common shares outstanding

$

29.78

$

29.49

$

26.41

Tangible book value per share using common shares outstanding (8)

$

28.97

$

28.67

$

25.54

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

____________________________

(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 8,208,045 at September 30, 2021, less 121,672 unvested restricted stock shares, and 12,961 unallocated ESOP shares.
(6) 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.
(7) Common shares were calculated using shares outstanding of 8,526,182 at September 30, 2020, less 110,184 unvested restricted stock shares, and 64,802 unallocated ESOP shares.
(8) Tangible book value per share using outstanding common shares excludes intangible assets. This ratio represents a non-GAAP financial measure. See also, "Non-GAAP Financial Measures" below.

(Dollars in thousands)

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

QTR Over QTR

Year Over Year

Average Balances

2021

2020

2021

2020

$ Change

$ Change

Assets

Loans receivable, net of deferred loan fees (1)

$

1,776,424

$

1,648,070

$

1,745,616

$

1,537,365

$

128,354

$

208,251

Securities available-for-sale, at fair value

248,179

165,095

216,122

151,176

83,084

64,946

Securities held-to-maturity

7,500

2,462

7,500

826

5,038

6,674

Interest-bearing deposits and certificates of deposit at other financial institutions

87,440

97,473

108,536

100,836

(10,033)

7,700

FHLB stock, at cost

4,973

7,219

5,783

8,240

(2,246)

(2,457)

Total interest-earning assets

2,124,516

1,920,319

2,083,557

1,798,443

204,197

285,114

Noninterest-earning assets

93,137

94,190

90,352

97,435

(1,053)

(7,083)

Total assets

$

2,217,653

$

2,014,509

$

2,173,909

$

1,895,878

$

203,144

$

278,031

Liabilities and stockholders' equity

Interest-bearing accounts

$

1,415,139

$

1,268,795

$

1,382,860

$

1,200,796

$

146,344

$

182,064

Borrowings

42,528

152,045

71,452

138,749

(109,517)

(67,297)

Subordinated notes

49,367

9,897

42,399

9,892

39,470

32,507

Total interest-bearing liabilities

1,507,034

1,430,737

1,496,711

1,349,437

76,297

147,274

Noninterest-bearing accounts

442,291

344,731

413,551

314,789

97,560

98,762

Other noninterest-bearing liabilities

29,224

28,698

28,093

25,837

526

2,256

Stockholders' equity

239,104

210,343

235,554

205,815

28,761

29,739

Total liabilities and stockholders' equity

$

2,217,653

$

2,014,509

$

2,173,909

$

1,895,878

$

203,144

$

278,031

(1) Includes loans held for sale.

FS Bancorp Q3 Earnings
October 28, 2021
Page 14

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.

September 30,

June 30,

September 30,

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

2021

2021

2020

Stockholders' equity

$

240,453

$

241,760

$

220,550

Goodwill and core deposit intangible, net

(6,532)

(6,709)

(7,240)

Tangible common stockholders' equity

$

233,921

$

235,051

$

213,310

Common shares outstanding at end of period

8,073,412

8,197,461

8,351,196

Common stockholders' equity (book value) per share (GAAP)

$

29.78

$

29.49

$

26.41

Tangible common stockholders' equity (tangible book value) per share (non-GAAP)

$

28.97

$

28.67

$

25.54

Contacts:

Joseph C. Adams,

Chief Executive Officer

Matthew D. Mullet,

Chief Financial Officer

(425) 771-5299

www.FSBWA.com