FS Bancorp, Inc. Reports Net Income for the Third Quarter of $4.1 Million, Loan Growth of 7.5% and Declares Twenty-Third Consecutive Quarterly Dividend

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MOUNTLAKE TERRACE, Wash., Oct. 25, 2018 (GLOBE NEWSWIRE) — FS Bancorp, Inc. (NASDAQ:FSBW) (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2018 third quarter net income of $4.1 million, compared to $3.5 million for the same period last year with $1.07 per diluted earnings per share for both periods.
CEO Joe Adams noted, “We have continued to make progress on the announced merger with Anchor Bancorp (“Anchor”). We have received all required regulatory approvals and Anchor has scheduled a special meeting of its shareholders to vote on the merger on November 13, 2018.  We anticipate closing the transaction shortly after Anchor shareholder approval and other customary closing conditions.”“Quarterly net interest income increased as a result of strong loan growth which helped mitigate margin compression risk from rising funding costs,” stated Matthew Mullet, CFO/COO of the Bank. “We are also pleased to announce that our Board of Directors has approved our twenty-third quarterly cash dividend of $0.14 per share for the third quarter.”  The dividend will be paid on November 21, 2018, to shareholders of record as of November 8, 2018.2018 Third Quarter HighlightsNet income was $4.1 million for the third quarter of 2018, compared to $4.3 million in the previous quarter, and $3.5 million for the comparable quarter one year ago;Net income adjusted for $443,000 of acquisition costs (adjusted at a 21% tax rate) would have been $4.4 million, or $1.16 per diluted share (See non-GAAP Financial Measure);Total gross loans increased $67.4 million, or 7.5%, during the quarter, to $961.1 million at September 30, 2018, compared to $893.8 million at June 30, 2018, and increased $195.6 million, or 25.6%, from $765.6 million at September 30, 2017;Net interest income increased $1.0 million during the quarter, to $12.9 million at September 30, 2018, compared to $11.9 million in the previous quarter, and increased $1.8 million from the comparable quarter one year ago;Net interest margin was 4.55% for the three months ended September 30, 2018, compared to 4.58% for the three months ended June 30, 2018, and 4.62% for the nine months ended September 30, 2018, compared to 4.63% for the nine months ended September 30, 2017;Deposits increased $74.4 million, to $944.5 million at September 30, 2018, from $870.1 million at June 30, 2018, and increased $104.0 million, from $840.6 million at September 30, 2017;Announced a definitive agreement to acquire Anchor on July 17, 2018, and reported receipt of all regulatory approvals on September 26, 2018.  Subject to the conditions noted above, we anticipate closing the transaction shortly after receiving Anchor shareholder approval; andCapital levels at the Bank were 15.2% for total risk-based capital and 11.7% for Tier 1 leverage capital at September 30, 2018, compared to 16.1% and 12.5% at September 30, 2017, respectively.Proposed Acquisition of Anchor BancorpOn July 17, 2018, the Company entered into a definitive agreement (the “Agreement”) with Anchor pursuant to which Anchor will be merged with and into the Company, and immediately thereafter Anchor’s bank subsidiary, Anchor Bank, will be merged with and into the Bank. Under terms of the Agreement, Anchor shareholders will receive 0.2921 shares of FS Bancorp common stock and $12.40 in cash for each share of Anchor common stock. FS Bancorp will pay aggregate consideration of 725,585 shares of FS Bancorp common stock and $30.8 million in cash or approximately $73.3 million in aggregate, including the value of outstanding shares of Anchor restricted stock. We announced the receipt of all regulatory approvals on September 26, 2018.In the event the Agreement is terminated under certain specified circumstances in connection with a competing transaction, Anchor will be required to pay the Company a termination fee of $2.7 million in cash. The proposed transaction is subject to customary closing conditions, including approval of the Agreement by the shareholders of Anchor at a shareholder meeting scheduled on November 13, 2018, and is expected to be completed shortly after receiving Anchor shareholder approval.Balance Sheet and Credit QualityTotal assets increased $58.8 million, or 5.2%, to $1.2 billion at September 30, 2018, compared to $1.1 billion at June 30, 2018, and increased $197.4 million, or 19.9%, from $993.9 million at September 30, 2017.  The quarter over linked quarter increase in total assets included increases in loans receivable, net of $66.4 million, partially offset by a decrease in total cash and cash equivalents of $6.8 million and securities available-for-sale (“AFS”) of $1.1 million.  The year over year increase in total assets included increases in loans receivable, net of $193.7 million, securities AFS of $19.3 million, Federal Home Loan Bank (“FHLB”) stock of $4.1 million, servicing rights of $3.4 million, bank owned life insurance (“BOLI”) of $3.3 million, and accrued interest receivable of $1.2 million, partially offset by decreases in total cash and cash equivalents of $16.1 million, loans held for sale (“HFS”) of $10.3 million, and other assets of $1.3 million.  These increases in assets year over year were primarily funded by growth in deposits and short-term overnight FHLB borrowings.Loans receivable, net increased $66.4 million to $947.6 million at September 30, 2018, from $881.2 million at June 30, 2018, and increased $193.7 million from $753.9 million at September 30, 2017.  During the third quarter, real estate loans increased $46.1 million, including increases in construction and development loans of $30.7 million, one-to-four-family portfolio loans of $10.3 million, commercial loans of $4.1 million, and home equity loans of $625,000. Commercial business loans increased $3.7 million due to an increase in commercial and industrial loans of $2.8 million, and warehouse lending loans of $859,000.  Consumer loans increased $17.6 million, primarily due to increases of $8.8 million in indirect home improvement loans and $8.0 million in marine loans. One-to-four-family loans originated through the home lending segment which includes loans HFS, loans held for investment, fixed seconds, and loans brokered to other institutions increased $814,000, or 0.4%, to $193.0 million during the quarter ended September 30, 2018, compared to $192.2 million for the preceding quarter, and decreased from $244.1 million for the comparable quarter one year ago. During the nine months ended September 30, 2018, originations of one-to-four-family loans to purchase a home (purchase production) decreased by $27.5 million, or 5.9% with $436.8 million in loan purchase production closing, down from $464.3 million for the nine months ended September 30, 2017.  One-to-four-family loan originations for refinance (refinance production) decreased $20.0 million, or 14.6% during the nine months ended September 30, 2018, with $116.6 million in refinance production closing, down from $136.6 million for the nine months ended September 30, 2017.  During the quarter ended September 30, 2018, the Company sold $174.9 million of one-to-four-family loans HFS, compared to sales of $160.6 million for the preceding quarter, and sales of $204.3 million for the same quarter one year ago.Purchase production was 84.4% of the total one-to-four-family loan originations versus 15.6% for refinance production during the third quarter of 2018, compared to 76.1% in purchase production versus 23.9% in refinance production during the same period in 2017.  The strength in purchase production reflects the appreciation in home values in our markets and continued strong home purchase demand in the Pacific Northwest. The decrease in refinance production reflects increasing market interest rates and management’s focus on purchase production.The allowance for loan losses at September 30, 2018 increased to $12.0 million, or 1.3% of gross loans receivable, excluding loans HFS, compared to $11.6 million, or 1.3% of gross loans receivable, excluding loans HFS at June 30, 2018, and $10.6 million, or 1.4% of gross loans receivable, excluding loans HFS, at September 30, 2017.  Non-performing loans, consisting solely of non-accruing loans, increased to $2.2 million at September 30, 2018, primarily from the addition of one commercial and industrial loan of $1.4 million, from $627,000 at June 30, 2018, and from $1.3 million at September 30, 2017.  Substandard loans increased $1.6 million to $7.4 million at September 30, 2018, primarily due to the $1.4 million non-accruing loan previously mentioned, and were $5.8 million at June 30, 2018, and $6.6 million at September 30, 2017.  There was no other real estate owned at September 30, 2018, June 30, 2018, or September 30, 2017, respectively.Total deposits were $944.5 million at September 30, 2018, compared to $870.1 million at June 30, 2018, and $840.6 million at September 30, 2017.  Relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts) decreased $7.1 million, from June 30, 2018, and increased $22.6 million, from September 30, 2017.  Money market and savings accounts increased $31.0 million from June 30, 2018, and $10.4 million from September 30, 2017, primarily occurring from higher rates paid on these deposit accounts.  Time deposits increased $50.5 million, from June 30, 2018, and increased $71.0 million, from September 30, 2017, primarily due to promotional rates offered during the quarter and growth in non-retail certificates of deposit. At September 30, 2018, non-retail certificates of deposit which include brokered certificates of deposit, online certificates of deposit, and public funds certificates of deposit increased $36.8 million to $124.4 million compared to $87.6 million at June 30, 2018, primarily due to an increase in brokered certificates of deposit. The $24.7 million increase from $99.7 million at September 30, 2017 reflects a $31.2 million increase in brokered certificates of deposit, partially offset by a $6.3 million decrease in online certificates of deposit.  Management remains focused on increasing our lower cost relationship-based deposits to fund long-term asset growth.At September 30, 2018, borrowings decreased $20.0 million, or 18.8%, to $86.5 million, from $106.5 million at June 30, 2018, and increased $76.3 million from $10.3 million at September 30, 2017.  Our borrowings fluctuated between periods to supplement the growth in our deposits funding our loan growth and, consistent with our asset/liability objectives were repaid as appropriate, primarily through the utilization of lower cost non-retail certificates of deposit.Total stockholders’ equity increased $3.8 million, to $133.1 million at September 30, 2018, from $129.4 million at June 30, 2018, and increased $14.9 million, from $118.2 million at September 30, 2017.  The increase in stockholders’ equity from the second quarter of 2018 was primarily due to net income of $4.1 million, partially offset by an increase in accumulated other comprehensive loss, net of tax of $537,000.  Book value per common share was $36.84 at September 30, 2018, compared to $35.94 at June 30, 2018, and $33.52 at September 30, 2017.The Bank is well capitalized under the minimum capital requirements established by the FDIC with a total risk-based capital ratio of 15.2%, a Tier 1 leverage capital ratio of 11.7%, and a common equity Tier 1 (“CET1”) capital ratio of 14.0% at September 30, 2018.  At September 30, 2017, the total risk-based capital ratio was 16.1%, the Tier 1 leverage capital ratio was 12.5%, and the CET1 capital ratio was 14.9%.The Company exceeded all regulatory capital requirements with a total risk-based capital ratio of 14.9%, a Tier 1 leverage capital ratio of 11.4%, and a CET1 ratio of 13.6% at September 30, 2018, compared to 15.5%, 11.9%, and 14.2%, respectively, at September 30, 2017.Operating ResultsNet interest income increased $1.8 million, to $12.9 million for the three months ended September 30, 2018, from $11.0 million for the three months ended September 30, 2017, primarily attributable to a $2.9 million increase in loans receivable interest income, moderately offset by an $805,000 increase in deposit interest expense due to continued overall growth in interest-bearing deposits with higher market interest rates paid on new interest-bearing deposits, and a $590,000 increase in interest expense mostly from the use of FHLB borrowings to support loan growth. Net interest income increased $6.3 million, to $36.3 million for the nine months ended September 30, 2018, from $30.0 million for the nine months ended September 30, 2017, mostly due to an $8.5 million increase in interest income on loans receivable and a $544,000 increase in interest and dividends on investment securities, and cash and cash equivalents, partially offset by a $1.7 million increase in interest expense on deposits and a $1.0 million increase in interest expense on borrowings.The net interest margin (“NIM”) decreased 15 basis points to 4.55% for the three months ended September 30, 2018, from 4.70% for the same period in the prior year, and decreased one basis point to 4.62% for the nine months ended September 30, 2018, from 4.63% for the nine months ended September 30, 2017.  The decrease in NIM for both periods was driven primarily by growth in higher cost market rate deposits and increased borrowing costs to fund loan growth.  The average cost of funds increased 44 basis points to 1.06% for the three months ended September 30, 2018, from 0.62% for the three months ended September 30, 2017, and increased 30 basis points to 0.89% for the nine months ended September 30, 2018, from 0.59% for the same period last year.  This increase was predominantly due to growth in time deposits and an increase in short-term overnight FHLB borrowing rates reflecting increases in the targeted federal funds rate.  Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.For the three months ended September 30, 2018 and 2017, the provision for loan losses was $450,000.  During the three months ended September 30, 2018, net recoveries totaled $24,000, compared to $5,000 for the same period last year.  The provision for loan losses was $1.3 million for the nine months ended September 30, 2018, compared to $450,000 for the nine months ended September 30, 2017, due primarily to continued loan growth. During the nine months ended September 30, 2018, net recoveries totaled $39,000, compared to net charge-offs of $63,000 during the nine months ended September 30, 2017.Noninterest income decreased $1.6 million, to $4.8 million for the three months ended September 30, 2018, from $6.4 million for the three months ended September 30, 2017.  The decrease during the period primarily reflects a $1.2 million reduction in gain on sale of loans, a $163,000 reduction in service charges and fee income as a result of the sale of mortgage servicing rights (“MSR”) in the second quarter of 2017, and a $143,000 reduction in gain on sale of investment securities as there were no sales during the current quarter.  Noninterest income decreased $3.4 million, to $15.4 million for the nine months ended September 30, 2018, from $18.8 million for the nine months ended September 30, 2017.  The decrease was mainly due to a $1.4 million reduction in gain on sale of loans, no gain on sale of MSR in 2018 compared to $996,000 in 2017, a $698,000 reduction in service charges and fee income as a result of the previously mentioned MSR sale in 2017, and a $267,000 reduction in gain on sale of investment securities. Noninterest expense increased $249,000, to $11.8 million for the three months ended September 30, 2018, from $11.6 million for the three months ended September 30, 2017.  The increase in noninterest expense was primarily due to acquisition costs related to our pending merger with Anchor of $443,000, and increases of $124,000 in loan costs, including appraisals and credit reports, and $94,000 in occupancy expense, partially offset by decreases of $269,000 in operations expense, and $101,000 in salaries and benefits, which includes a $956,000 increase in salaries reflecting an increase in full-time employees due to asset growth, partially offset by an $803,000 decrease in incentives and commissions reflecting lower one-to-four-family loan originations as a result of the impact of rising interest rates and a reduction of homes available for sale in the Pacific Northwest. Noninterest expense increased $2.1 million, to $35.0 million for the nine months ended September 30, 2018, from $32.9 million for the nine months ended September 30, 2017.  The increase in noninterest expense was primarily due to an increase of $1.6 million in salaries and benefits reflecting an increase in full-time employees and a $422,000 decrease in incentives and commissions, and acquisition costs related to our pending merger with Anchor of $443,000.  Increases of $206,000 in loan costs, $158,000 in occupancy expense, and $133,000 in data processing expense were mostly offset by decreases of $297,000 in operations expense and $160,000 in premiums for Federal Deposit Insurance Corporation (“FDIC”) insurance.About FS BancorpFS 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 12 bank branches, one administrative office that accepts deposits, and seven loan production offices in various suburban communities in the greater Puget Sound area, and one loan production office in the market area of the Tri-Cities, Washington.  The Bank services home mortgage customers throughout Washington State with an emphasis in the Puget Sound and Tri-Cities home lending markets.Forward-Looking Statements

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FS Bancorp, Inc. Reports Net Income for the Third Quarter of $4.1 Million, Loan Growth of 7.5% and Declares Twenty-Third Consecutive Quarterly Dividend

FS Bancorp, Inc. Reports Net Income for the Third Quarter of $4.1 Million, Loan Growth of 7.5% and Declares Twenty-Third Consecutive Quarterly Dividend