FS Bancorp, Inc. Reports Record 2020 Results Including $39.3 Million of Net Income or $8.97 Per Diluted Share, and a 24% Increase in Its Dividend to $0.26 for the Thirty-Second Consecutive Quarterly Dividend

MOUNTLAKE TERRACE, WA / ACCESSWIRE / January 28, 2021 / FS Bancorp, Inc. (NASDAQ:FSBW) (the "Company"), the holding company for 1st Security Bank of Washington (the "Bank") today reported 2020 total net income of $39.3 million, or $8.97 per diluted share, compared to $22.7 million, or $5.01 per diluted share for the same period last year. Fourth quarter net income was $11.4 million, or $2.60 per diluted share, compared to $5.9 million, or $1.30 per diluted share in the comparable quarter one year ago.

"Despite the extraordinary circumstances of the COVID-19 pandemic, FS Bancorp, Inc. has experienced our most productive year of operations since opening our doors. We greatly appreciate our employees who have demonstrated their community commitment by providing banking services and assistance despite the challenges caused by the pandemic," stated Joe Adams, CEO. "We are pleased to announce that our Board of Directors has approved an increase of $0.05 for our thirty-second consecutive quarterly cash dividend to $0.26. The quarterly dividend of $0.26 will be paid on February 25, 2021, to shareholders of record as of February 11, 2021."

CFO Matthew Mullet noted, "We are ready to participate in the second round of the Paycheck Protection Program and remain ready to assist customers that may require COVID-19 related loan assistance. Our asset quality ratios remain relatively low, however, we proactively increased the provision for loan losses to $13.0 million during 2020 in response to the unknown impact of the pandemic on our lending portfolio. We also achieved 20.2% deposit growth and 16.4% loan growth in 2020. Lastly, we repurchased 252,145 shares, paid $3.6 million in dividends, and increased capital by $29.8 million."

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 December 31, 2020, the amount of portfolio loans under payment/relief agreements includes commercial real estate loans of $20.8 million, commercial business loans of $10.6 million, a portfolio one-to-four-family loan of $308,000, and consumer loans of $392,000. Of these loans, $25.4 million (79%) are making interest only payments. Additional detail is provided below in the "Credit Quality" discussion.

During the fourth quarter of 2020, we continued our participation in the U.S. Small Business Administration's ("SBA") initial Paycheck Protection Program ("PPP"). For borrowers in the communities we serve, the Company continues to service 423 PPP loans totaling $62.1 million as of December 31, 2020. During the fourth quarter of 2020, 66 PPP loans totaling $12.0 million were submitted for approval and forgiven by the SBA. Recent legislation reopened the PPP through March 31, 2021, by authorizing $284.5 billion in funding for eligible small businesses and non-profits. In January 2021, the Bank began accepting and processing loan applications under this second PPP program and will continue working with our customers to assist them with accessing other borrowing options, including SBA and other government sponsored lending programs.

All of our branches are open and we continue to remain flexible as to branch operations based on the guidance provided for the communities in which we operate. The majority of our employees continue to work remotely, where feasible.

2020 Fourth Quarter and Year End Highlights

• Net income increased 72.8% to $39.3 million for the year ended 2020, compared to $22.7 million for the same period one year ago. Quarter over linked quarter net income decreased 10.6% to $11.4 million, compared to $12.7 million at September 30, 2020, and quarter over comparable quarter net income increased 92.0% compared to $5.9 million at December 31, 2019;
• In response to the COVID-19 pandemic and its continued adverse economic impact and due to additional loan growth, the provision for loan losses was $1.6 million this quarter and $3.1 million in the previous quarter, compared to $647,000 for the same quarter one year ago;
• Total gross loans increased $54.8 million during the quarter to $1.57 billion at December 31, 2020, compared to $1.52 billion at September 30, 2020, and $1.35 billion at December 31, 2019;
• Purchase home lending closings increased 31.9% year over year to $731.8 million in 2020 from $554.8 million in 2019 while refinances increased 239.1%, to $1.14 billion from $336.6 million during the same time period;
• Noninterest bearing checking increased $9.6 million during the quarter to $348.4 million and $88.3 million for the year ending December 31, 2020, compared to $338.8 million at September 30, 2020, and $260.1 million at December 31, 2019;
• The allowance for loan and lease losses ("ALLL") to gross loans receivable (excluding loans held for sale ("HFS")) for the fourth quarter of 2020 was 1.66%, up from 1.63% in the previous quarter and 0.98% for the same quarter one year ago. The adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans, was 1.73% at December 31, 2020 (See "Non-GAAP Financial Measures");
• FS Bancorp, Inc. redeemed all $10.0 million of its 6.5% subordinated debt on January 4, 2021, at par with excess liquidity created by 2020 earnings; and
• The Bank's Community Bank Leverage Ratio ("CBLR") was 10.9% at December 31, 2020.

Asset Summary

Total assets increased $58.6 million, or 2.9%, to $2.11 billion at December 31, 2020, compared to $2.05 billion at September 30, 2020, and increased $400.2 million, or 23.4%, from $1.71 billion at December 31, 2019. The quarter over linked quarter increase in total assets was primarily due to increases in total cash and cash equivalents of $55.5 million, loans receivable, net of $53.5 million, securities available-for-sale of $4.9 million, and securities held-to-maturity of $2.0 million, partially offset by decreases in loans HFS of $48.7 million, other assets of $7.8 million, and certificates of deposit ("CDs") at other financial institutions of $2.0 million. Year over year increases in total assets included increases in loans receivable, net of $208.6 million, loans HFS of $96.7 million, securities available-for-sale of $52.0 million, total cash and cash equivalents of $45.8 million and securities held-to-maturity of $7.5 million, partially offset by decreases in CDs at other financial institutions of $8.6 million, other assets of $2.0 million, and premises and equipment, net of $1.4 million.

Loans receivable, net increased $53.5 million to $1.54 billion at December 31, 2020, from $1.49 billion at September 30, 2020, and increased $208.6 million from $1.34 billion at December 31, 2019. The quarter over linked quarter increase in total real estate loans was $34.6 million, including increases in construction and development loans of $25.0 million, one-to-four-family portfolio loans of $10.2 million, home equity loans of $2.6 million, and multi-family loans of $1.4 million, partially offset by a decrease in commercial real estate loans of $4.6 million. Consumer loans increased $10.4 million, primarily due to an increase of $9.3 million in indirect home improvement loans and $1.1 million in marine loans. Commercial business loans increased $9.8 million, primarily due to an increase in commercial and industrial loans of $12.2 million, and warehouse lending of $9.6 million, partially offset by PPP loan forgiveness by the SBA of $12.0 million. No PPP loans were originated during the quarter as the initial PPP application deadline was August 8, 2020. The focused increase in commercial and industrial loans is tied to the Bank's investment in our business lending platform, including employees to service business lending customers and cash management teams to support business deposits.

Originations of one-to-four-family loans to purchase and to refinance a home for the three months ended December 31, 2020 and September 30, 2020, and for the three months ended and years ended December 31, 2020, and 2019 were as follows:

During the quarter ended December 31, 2020, the Company sold $522.9 million of one-to-four-family loans compared to sales of $479.6 million during the previous quarter, and sales of $233.8 million during the same quarter one year ago. During the year ended December 31, 2020, the Company sold $1.64 billion of one-to-four-family loans compared to sales of $785.4 million during the same period last year. Refinance activity increased 239.1% over the prior year in response to decreases in market interest rates. Purchase activity increased 31.9% year over year as a result of our focus on purchase originations and a favorable interest rate environment for home purchases.

Gross margins on home loan sales increased to 4.25% in 2020 compared to 3.34% in 2019. Gross margins are defined as the margin on loans sold without the impact of deferred fees and costs.

Liabilities and Equity Summary

Changes in deposits for the periods ending are as follows:

As a result of the COVID-19 pandemic and the resulting availability of PPP loan funds and stimulus funds made available in the prior quarters, the tables above reflect quarter over linked quarter and year over year changes in deposits, partially impacted by customers transferring funds from CDs to more liquid interest-bearing accounts, such as money market and interest-bearing checking.

At December 31, 2020, non-retail CDs, which include brokered CDs, online CDs, and public funds CDs, increased $23.3 million to $196.6 million, compared to $173.3 million at September 30, 2020, due to an increase of $20.3 million in brokered CDs and $3.5 million in public funds CDs, partially offset by a decrease of $449,000 in online CDs. The year over year increase in non-retail CDs of $50.4 million from $146.2 million at December 31, 2019, was primarily the result of a $45.0 million increase in brokered CDs tied to longer term interest rate swap transactions, a $3.9 million increase in public funds CDs, and a $1.5 million increase in online CDs. Management remains focused on increasing its lower cost relationship-based deposits to fund long-term asset growth.

At December 31, 2020, borrowings decreased $7.8 million, or 4.5%, to $165.8 million, from $173.6 million at September 30, 2020, and increased $80.9 million, or 95.4% from $84.9 million at December 31, 2019. The decrease in borrowings from the linked quarter is primarily due to the $10.8 million reduction of Paycheck Protection Program Liquidity Facility ("PPPLF") borrowings. Under the PPPLF, the Bank pledged PPP loans at face value as collateral to obtain Federal Reserve Bank ("FRB") non-recourse loans. The increase from the prior year is primarily due to the PPPLF and Federal Home Loan Bank ("FHLB") borrowings.

Total stockholders' equity increased $9.5 million, to $230.0 million at December 31, 2020, from $220.6 million at September 30, 2020, and increased $29.8 million, from $200.2 million at December 31, 2019. The increase in stockholders' equity during the current quarter was primarily due to net income of $11.4 million, partially offset by the common stock repurchases of $1.1 million, and $752,000 of other comprehensive loss, net of tax. The Company repurchased 25,135 shares of its common stock during the quarter ended December 31, 2020, at an average price of $44.78 per share. Book value per common share was $55.33 at December 31, 2020, compared to $52.82 at September 30, 2020, and $45.85 at December 31, 2019.

The Bank is well capitalized under the minimum capital requirements established by the Federal Deposit Insurance Corporation ("FDIC") at December 31, 2020 with a CBLR of 10.9%, compared to the normally required CBLR of greater than 9.0% and the regulatory approved reduced CBLR of 8.0% due to the COVID-19 pandemic. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year. The Company's Tier 1 leverage capital ratio was 11.1% at December 31, 2020.

Credit Quality

The ALLL at December 31, 2020, increased to $26.2 million, or 1.66% of gross loans receivable, excluding loans HFS, compared to $24.8 million, or 1.63% of gross loans receivable, excluding loans HFS at September 30, 2020, and $13.2 million, or 0.98% of gross loans receivable, excluding loans HFS, at December 31, 2019. The adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans, was 1.73% at December 31, 2020 (See "Non-GAAP Financial Measures"). Non-performing loans increased to $7.8 million at December 31, 2020, from $7.6 million at September 30, 2020 and increased from $3.0 million at December 31, 2019. The increase in non-performing loans quarter over linked quarter was primarily a result of $1.3 million in additional nonperforming commercial business loans, offset by one commercial real estate loan in the amount of $1.1 million returned to active status , and the year over year increase was associated with borrowers adversely impacted by the COVID-19 pandemic, primarily in the commercial business sector.

Loans classified as substandard decreased $809,000 to $17.6 million at December 31, 2020, compared to $18.5 million at September 30, 2020, and increased $10.9 million from $6.7 million at December 31, 2019. The quarter over linked quarter decrease in substandard loans was attributable to a commercial real estate loan of $1.0 million returning to performing status, partially offset by additional consumer loans. The year over year increase in substandard loans was primarily due to one relationship with mortgage loans totaling $4.5 million, one relationship with mortgage, commercial real estate, and commercial business loans totaling $3.3 million, and two commercial business loans totaling $4.4 million. There was one other real estate owned ("OREO") property of $90,000 at both December 31, 2020 and September 30, 2020, compared to two OREO properties totaling $168,000 at December 31, 2019.

Included in the carrying value of gross loans are net discounts on loans purchased in the Anchor Bank acquisition in November 2018. The remaining net discount on loans acquired was $1.5 million, $1.8 million, and $2.7 million, on $132.6 million, $159.2 million, and $198.5 million of gross loans at December 31, 2020, September 30, 2020, and December 31, 2019, respectively.

Management has identified loans that have either been directly or indirectly impacted by the COVID-19 pandemic and has downgraded the risk classification of these loans. Commercial loans (non homogeneous loans) downgraded 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 losses, including reserves against our homogenous residential and consumer portfolios.

Operating Results

Net interest income increased $2.5 million, to $19.9 million for the three months ended December 31, 2020, from $17.4 million for the three months ended December 31, 2019. 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 loans funded by lower cost deposits. Interest expense decreased $1.8 million, including a $1.9 million decrease in interest expense on deposits, offset in part with a $94,000 increase in interest expense on the subordinated note due to accelerated amortization of debt issuance costs upon repayment. Interest income increased $709,000, including an increase of $729,000 in interest income on loans receivable, including fees, impacted primarily by the recent significant reduction in market interest rates on new loan originations and adjustable rate instruments, including low yielding PPP loans, refinances of higher yielding one-to-four-family portfolio loans, and SBA forgiveness of PPP loans, which prompted the recognition of the remaining net deferred fees of the underlying loans. This increase was partially offset by a $20,000 decrease in interest and dividends on investment securities, and cash and cash equivalents. For the year ended December 31, 2020, net interest income increased $3.8 million, to $74.1 million, from $70.3 million for the year ended December 31, 2019, with a greater decrease in interest expense of $4.6 million partially offset by a smaller decrease in interest income of $788,000.

The net interest margin ("NIM") decreased 30 basis points to 3.99% for the three months ended December 31, 2020, from 4.29% for the same period in the prior year, and decreased 51 basis points to 4.02% for the year ended December 31, 2020, from 4.53% for the year ended December 31, 2019. The average yield on PPP loans was 2.72%, including the recognition of the net deferred fees, resulting in a negative impact to the NIM of five basis points during the quarter ended December 31, 2020. When including the net interest income impacts of both PPP loans and the PPPLF, NIM was negatively impacted 16 basis points during the quarter ended December 31, 2020. Management has included a NIM analysis in this release excluding the impact of PPP loans and PPPLF borrowings (See "Non-GAAP Financial Measures"). The comparable quarter over quarter decrease in NIM was impacted by lower yielding loans, including reduced interest rates on new fixed-rate real estate loan originations and adjustable-rate commercial loans as well as repricing loans from the March 2020 reductions in the federal funds rate in response to COVID-19. The Company also recognized the remaining unamortized costs on subordinated debt of $100,000 in the fourth quarter of 2020 based on the prepayment that occurred on January 4, 2021.The year over year decrease in NIM was mostly driven by lower interest rates on new loan originations. The average total cost of funds, including noninterest-bearing checking, decreased 64 basis points to 0.67% for the three months ended December 31, 2020, from 1.31% for the three months ended December 31, 2019. This decrease was predominantly due to the decrease in cost for market rate deposits and decreased borrowing costs as well as a strategic shift away from higher cost certificate of deposit funding. The year over year average cost of funds decreased 48 basis points to 0.86% for the year ended December 31, 2020, from 1.34% for the year ended December 31, 2019, likewise reflecting decreases in market interest rates over last year. The accelerated amortization of subordinated debt cost was $100,000 in 2020 due to the prepayment that occurred on January 4, 2021. Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.

For the three months ended December 31, 2020, the provision for loan losses was $1.6 million, compared to $647,000 for the three months ended December 31, 2019, primarily due to the adverse economic impact of the COVID-19 pandemic and the increase in the loan portfolio due to organic loan growth. During the three months ended December 31, 2020, net charge-offs totaled $229,000 compared to net charge-offs of $183,000 for the same period last year. Net charge-offs totaled $93,000 during the year ended December 31, 2020, compared to net charge-offs of $2.0 million during the year ended December 31, 2019.

Noninterest income increased $9.1 million, to $14.8 million, for the three months ended December 31, 2020, from $5.7 million for the three months ended December 31, 2019. The increase during the period primarily reflects a $9.7 million increase in gain on sale of loans, partially offset by a $616,000 decrease in service charges and fee income primarily due to an increase in mortgage servicing rights amortization of $743,000, resulting from declining interest rates and increased refinancing activity. Noninterest income increased $32.3 million, to $55.4 million, for the year ended December 31, 2020, from $23.0 million for the year ended December 31, 2019. This increase was impacted by a $34.6 million increase in gain on sale of loans and an increase in other noninterest income mostly due to the net gain from a one-time sale of Class B Visa stock shares of $1.5 million, partially offset by a $4.2 million decrease in service charges and fee income, primarily due to an increase in mortgage servicing rights amortization of $4.0 million.

Noninterest expense increased $2.9 million, to $18.6 million for the three months ended December 31, 2020, from $15.7 million for the three months ended December 31, 2019. The increase in noninterest expense reflects a $1.8 million increase in salaries and benefits, primarily attributable to increases in incentives and commissions of $4.8 million driven by increased production of HFS loans and compensation of $923,000, partially offset by increases in recognized deferred costs on direct loan origination activities of $4.2 million. Noninterest expense increased $4.3 million, to $66.6 million for the year ended December 31, 2020, from $62.3 million for the year ended December 31, 2019. The increase during this period was primarily due to a $4.3 million increase in salaries and benefits, primarily attributable to increases in incentives and commissions of $16.0 million, again driven by increased production of HFS loans, and compensation of $2.9 million, partially offset by increases in recognized deferred costs on direct loan origination activities of $16.1 million, as well as no acquisition costs for the year ended December 31, 2020, compared to $1.8 million for the year ended December 31, 2019. Other increases between the periods included $1.9 million in the impairment of servicing rights, and $749,000 in operations expense, partially offset by decreases of $1.2 million in loan costs and $584,000 in data processing.

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 headquarter office that produces loans and accepts deposits, and nine 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, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts) (Unaudited)

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

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 4,237,956 at December 31, 2020, less 55,092 unvested restricted stock shares, and 25,921 unallocated ESOP shares.
6. Common shares were calculated using shares outstanding of 4,263,091 at September 30, 2020, less 55,092 unvested restricted stock shares, and 32,401 unallocated ESOP shares.
7. Common shares were calculated using shares outstanding of 4,459,041 at December 31, 2019, less 40,215 unvested restricted stock shares, and 51,842 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.