FS Bancorp, Inc. Reports Second Quarter Net Income of $9.1 Million or $1.16 Per Diluted Share and the Forty-Second Consecutive Quarterly Dividend

Rhea-AI Summary

FS Bancorp, Inc. (NASDAQ: FSBW) reported a strong 2023 second quarter, with net income of $9.1 million, a 36% increase from the previous year. The company also approved a 42nd consecutive quarterly cash dividend of $0.25 per share. Key highlights include a 20.4% increase in loans receivable, net, and a 4.5% increase in consumer loans, with 88.0% being home improvement loans.

Positive

• Strong 2023 second quarter with a 36% increase in net income compared to the previous year.
• 42nd consecutive quarterly cash dividend approved, indicating financial stability and shareholder value.
• Significant increases in loans receivable, net, and consumer loans, demonstrating growth and market demand.

Negative

• None.

MOUNTLAKE TERRACE, Wash., July 26, 2023 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (NASDAQ: FSBW) (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank” or “1st Security Bank”) today reported 2023 second quarter net income of $9.1 million, or $1.16 per diluted share, compared to $6.7 million, or $0.83 per diluted share, for the comparable quarter one year ago. For the six months ended June 30, 2023, net income was $17.3 million, or $2.19 per diluted share, compared to net income of $13.6 million, or $1.66 per diluted share, for the comparable six-month period in 2022.

“We remain focused on the successful integration of the seven branches acquired in February 2023 and our ability to service these new markets in the 1st Security Bank way,” stated Joe Adams, CEO. “We are also pleased that our Board of Directors approved our forty-second consecutive quarterly cash dividend of $0.25 per share, which will be paid on August 24, 2023, to shareholders of record as of August 10, 2023,” concluded Adams.  

2023 Second Quarter Highlights

• Net income was $9.1 million for the second quarter of 2023, compared to $8.2 million in the previous quarter, and $6.7 million for the comparable quarter one year ago;
• Net interest margin (“NIM”) compressed slightly to 4.66%, compared to 4.70% for the previous quarter, and improved from 4.39% for the comparable quarter one year ago;
• Loans receivable, net increased $42.8 million, or 1.9%, to $2.34 billion at June 30, 2023, compared to $2.30 billion at March 31, 2023, and increased $396.4 million, or 20.4%, from $1.95 billion at June 30, 2022;
• Consumer loans, of which 88.0% are home improvement loans, increased $27.2 million, or 4.5%, to $633.9 million at June 30, 2023, compared to $606.7 million in the previous quarter and increased $148.6 million, or 30.6%, from $485.3 million in the comparable quarter one year ago. During the three months ended June 30, 2023, consumer loan originations included 84.4% of home improvement loans originated with a Fair Isaac and Company, Incorporated (“FICO”) score above 720 and 91.8% of home improvement loans with a UCC-2 security filing;
• Segment reporting in the second quarter of 2023 reflected net income of $9.1 million for the Commercial and Consumer Banking segment and $55,000 for the Home Lending segment, compared to $7.3 million and $873,000 in the prior quarter, respectively, and $7.5 million and ($756,000) in the second quarter of 2022, respectively;
• The ratio of available unencumbered cash and secured borrowing capacity at the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank to uninsured deposits was 209% at June 30, 2023, compared to 183% in the prior quarter. The average deposit size per FDIC-insured account at the Bank was $33,000 for both June 30, 2023 and March 31, 2023; and
• Regulatory capital ratios at the Bank were 12.9% for total risk-based capital and 10.3% for Tier 1 leverage capital at June 30, 2023, compared to 12.7% for total risk-based capital and 10.4% for Tier 1 leverage capital at March 31, 2023.
  

Segment Reporting

The Company reports two segments: Commercial and Consumer Banking and Home Lending. The Commercial and Consumer Banking segment provides diversified financial products and services to our commercial and consumer customers. These products and services include deposit products; residential, consumer, business and commercial real estate lending portfolios and cash management services. This segment is also responsible for the management of the investment portfolio and other assets of the Bank. The Home Lending segment originates one-to-four-family residential mortgage loans primarily for sale in the secondary markets as well as loans held for investment.

The tables below provide a summary of segment reporting at or for the three and six months ended June 30, 2023 and 2022 (dollars in thousands):

	At or For the Three Months Ended June 30, 2023
Condensed income statement:	Commercial and Consumer Banking				Home Lending				Total
Net interest income(1)	$	28,269			$	3,283			$	31,552
Provision for credit losses on loans		(629	)			(87	)			(716	)
Noninterest income(2)		2,706				2,127				4,833
Noninterest expense		(18,950	)			(5,254	)			(24,204	)
Income before provision for income taxes		11,396				69				11,465
Provision for income taxes		(2,335	)			(14	)			(2,349	)
Net income	$	9,061			$	55			$	9,116
Total average assets for period ended	$	2,313,228			$	528,662			$	2,841,890
Full-time employees ("FTEs")		444				137				581

	At or For the Three Months Ended June 30, 2022
Condensed income statement:	Commercial and Consumer Banking				Home Lending				Total
Net interest income (1)	$	22,084			$	2,645			$	24,729
Provision for credit losses on loans		(719	)			(1,152	)			(1,871	)
Noninterest income (2)		2,125				2,230				4,355
Noninterest expense		(14,231	)			(4,698	)			(18,929	)
Income before (provision) benefit for income taxes		9,259				(975	)			8,284
(Provision) benefit for income taxes		(1,804	)			219				(1,585	)
Net income (loss)	$	7,455			$	(756	)		$	6,699
Total average assets for period ended	$	1,957,632			$	398,690			$	2,356,322
FTEs		389				148				537

	At or For the Six Months Ended June 30, 2023
Condensed income statement:	Commercial and Consumer Banking				Home Lending				Total
Net interest income (1)	$	55,769			$	6,445			$	62,214
Provision for credit losses on loans		(2,751	)			(73	)			(2,824	)
Noninterest income (2)		5,086				4,966				10,052
Noninterest expense		(37,560	)			(10,168	)			(47,728	)
Income before provision for income taxes		20,544				1,170				21,714
Provision for income taxes		(4,144	)			(242	)			(4,386	)
Net income	$	16,400			$	928			$	17,328
Total average assets for period ended	$	2,281,815			$	510,419			$	2,792,234
FTEs		444				137				581

	At or For the Six Months Ended June 30, 2022
Condensed income statement:	Commercial and Consumer Banking				Home Lending				Total
Net interest income(1)	$	42,362			$	5,089			$	47,451
Provision for credit losses on loans		(1,916	)			(998	)			(2,914	)
Noninterest income(2)		4,630				5,601				10,231
Noninterest expense		(28,407	)			(9,589	)			(37,996	)
Income before provision for income taxes		16,669				103				16,772
Provision for income taxes		(3,182	)			(21	)			(3,203	)
Net income	$	13,487			$	82			$	13,569
Total average assets for period ended	$	1,921,427			$	392,107			$	2,313,534
FTEs		389				148				537

_______________________

(1)   Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to the other segment. The cost of liabilities includes interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of assigned liabilities to fund segment assets.

(2)   Noninterest income includes activity from certain residential mortgage loans that were initially originated for sale and measured at fair value, and subsequently transferred to loans held for investment. Gains and losses from changes in fair value for these loans are reported in earnings as a component of noninterest income. For the three and six months ended June 30, 2023, the Company recorded a net decrease in fair value of $520,000 and a net increase in fair value of $57,000, respectively, as compared to a net decrease in fair value of $516,000 and $1.0 million for the three and six months ended June 30, 2022, respectively. As of June 30, 2023 and 2022, there were $14.3 million and $14.9 million, respectively, in residential mortgage loans recorded at fair value as they were previously transferred from loans held for sale to loans held for investment.

Asset Summary

Total assets increased $122.8 million, or 4.4%, to $2.91 billion at June 30, 2023, compared to $2.78 billion at March 31, 2023, and increased $506.4 million, or 21.1%, from $2.40 billion at June 30, 2022.  The quarter over linked quarter increase in total assets included increases in total cash and cash equivalents of $73.9 million, loans receivable, net of $42.8 million, certificates of deposit (“CDs”) at other financial institutions of $10.0 million, other assets of $7.9 million, and Federal Home Loan Bank (“FHLB”) stock of $2.7 million, partially offset by decreases in loans held for sale (“HFS”) of $6.6 million, securities available-for-sale of $6.5 million, and core deposit intangible (“CDI”), net of $1.0 million. The increases in cash and cash equivalents and CDs at other financial institutions was the result of management’s decision to maintain excess liquidity as a result of the recent turmoil in the banking industry following the failure of several banks. The $506.4 million increase in total assets at June 30, 2023, compared to June 30, 2022 was primarily due to organic loan growth funded through deposits received from the purchase of seven retail branches from Columbia State Bank completed on February 24, 2023 (“Branch Acquisition”). The year over year increase includes increases in loans receivable, net of $396.4 million, total cash and cash equivalents of $103.4 million, CDI, net of $15.6 million, CDs at other financial institutions of $9.8 million, other assets of $7.3 million, premises and equipment, net of $5.6 million, accrued interest receivable of $3.7 million, operating lease right-of-use of $2.6 million, goodwill of $1.3 million, deferred tax asset, net of $1.1 million, partially offset by decreases in securities available-for-sale of $22.0 million due to declines in fair value, loans HFS of $18.3 million, and servicing rights of $889,000.

LOAN PORTFOLIO
(Dollars in thousands)	June 30, 2023						March 31, 2023						June 30, 2022
	Amount				Percent		Amount				Percent		Amount				Percent
REAL ESTATE LOANS
Commercial	$	343,008			14.4	%	$	339,794			14.6	%	$	299,181			15.2	%
Construction and development		312,093			13.2			337,452			14.5			304,387			15.4
Home equity		62,304			2.6			60,625			2.6			49,292			2.5
One-to-four-family (excludes HFS)		521,734			22.0			501,100			21.5			390,791			19.8
Multi-family		231,675			9.8			232,201			10.0			204,862			10.4
Total real estate loans		1,470,814			62.0			1,471,172			63.2			1,248,513			63.3
CONSUMER LOANS
Indirect home improvement		557,818			23.5			531,632			22.8			396,459			20.1
Marine		72,484			3.0			70,994			3.0			85,806			4.4
Other consumer		3,606			0.2			4,042			0.2			3,062			0.2
Total consumer loans		633,908			26.7			606,668			26.0			485,327			24.7
COMMERCIAL BUSINESS LOANS
Commercial and industrial		237,403			10.0			223,702			9.6			203,331			10.3
Warehouse lending		30,649			1.3			28,044			1.2			33,868			1.7
Total commercial business loans		268,052			11.3			251,746			10.8			237,199			12.0
Total loans receivable, gross		2,372,774			100.0	%		2,329,586			100.0	%		1,971,039			100.0	%
Allowance for credit losses on loans		(30,350	)					(29,937	)					(24,967	)
Total loans receivable, net	$	2,342,424					$	2,299,649					$	1,946,072

Loans receivable, net increased $42.8 million to $2.34 billion at June 30, 2023, from $2.30 billion at March 31, 2023, and increased $396.4 million from $1.95 billion at June 30, 2022. The quarter over linked quarter saw a $27.2 million increase in consumer loans and a $16.3 million increase in commercial business loans, with the largest increases occurring in indirect home improvement loans which increased $26.2 million or 4.9%, and commercial and industrial loans which increased $13.7 million or 6.1%, respectively. Total real estate loans decreased slightly, primarily as a result of a $25.4 million decrease in construction and development loans, partially offset by increases in one-to-four-family loans (excluding loans HFS) of $20.6 million, commercial real estate loans of $3.2 million, and home equity loans of $1.7 million.

Originations of one-to-four-family loans to purchase and to refinance a home for the periods indicated were as follows:

(Dollars in thousands)	For the Three Months Ended						For the Three Months Ended
	June 30, 2023						March 31, 2023
	Amount			Percent			Amount			Percent			$ Change			% Change
Purchase	$	145,377		91.2	%		$	102,489		92.3	%		$	42,888		41.8	%
Refinance		14,099		8.8				8,535		7.7				5,564		65.2
Total	$	159,476		100.0	%		$	111,024		100.0	%		$	48,452		43.6	%

(Dollars in thousands)	For the Three Months Ended June 30,
	2023						2022
	Amount			Percent			Amount			Percent			$ Change				% Change
Purchase	$	145,377		91.2	%		$	223,675		86.4	%		$	(78,298	)		(35.0	)	%
Refinance		14,099		8.8				35,074		13.6				(20,975	)		(59.8	)
Total	$	159,476		100.0	%		$	258,749		100.0	%		$	(99,273	)		(38.4	)	%

(Dollars in thousands)	For the Six Months Ended June 30,
	2023						2022
	Amount			Percent			Amount			Percent			$ Change				% Change
Purchase	$	247,866		91.6	%		$	376,625		74.7	%		$	(128,759	)		(34.2	)	%
Refinance		22,634		8.4				127,238		25.3				(104,604	)		(82.2	)
Total	$	270,500		100.0	%		$	503,863		100.0	%		$	(233,363	)		(46.3	)	%

During the quarter ended June 30, 2023, the Company sold $127.0 million of one-to-four-family loans compared to $77.3 million during the previous quarter and $196.3 million during the same quarter one year ago. The decrease in loan purchase and refinance activity, as well as sales activity, compared to the comparable period in 2022 reflects the impact of rising market interest rates and low available housing inventory in our market areas.

Gross margins on home loan sales increased to 3.07% for the quarter ended June 30, 2023, compared to 3.05% in the previous quarter and decreased from 3.10% in the same quarter one year ago. Gross margins are defined as the margin on loans sold (cash sales) without the impact of deferred costs.

Liabilities and Equity Summary

Changes in deposits at the dates indicated were as follows:

(Dollars in thousands)
	June 30, 2023					March 31, 2023
Transactional deposits:	Amount			Percent		Amount			Percent		$ Change				% Change
Noninterest-bearing checking	$	658,440		27.9	%	$	719,856		29.5	%	$	(61,416	)		(8.5	)	%
Interest-bearing checking(1)		183,012		7.7			183,888		7.5			(876	)		(0.5	)
Escrow accounts related to mortgages serviced(2)		16,772		0.7			27,066		1.1			(10,294	)		(38.0	)
Subtotal		858,224		36.3			930,810		38.1			(72,586	)		(7.8	)
Savings		169,013		7.2			188,510		7.7			(19,497	)		(10.3	)
Money market(3)		419,308		17.7			549,542		22.5			(130,234	)		(23.7	)
Subtotal		588,321		24.9			738,052		30.2			(149,731	)		(20.3	)
Certificates of deposit less than $100,000(4)		473,026		20.0			409,236		16.8			63,790			15.6
Certificates of deposit of $100,000 through $250,000		358,238		15.1			270,476		11.0			87,762			32.4
Certificates of deposit of $250,000 and over		87,499		3.7			94,699		3.9			(7,200	)		(7.6	)
Subtotal		918,763		38.8			774,411		31.7			144,352			18.6
Total	$	2,365,308		100.0	%	$	2,443,273		100.0	%	$	(77,965	)		(3.2	)	%

(Dollars in thousands)
	June 30, 2023					June 30, 2022
Transactional deposits:	Amount			Percent		Amount			Percent		$ Change				% Change
Noninterest-bearing checking	$	658,440		27.9	%	$	571,942		28.4	%	$	86,498			15.1		%
Interest-bearing checking(1)		183,012		7.7			158,607		7.8			24,405			15.4
Escrow accounts related to mortgages serviced(2)		16,772		0.7			16,422		0.8			350			2.1
Subtotal		858,224		36.3			746,971		37.0			111,253			14.9
Savings		169,013		7.2			156,313		7.8			12,700			8.1
Money market(3)		419,308		17.7			680,246		33.7			(260,938	)		(38.4	)
Subtotal		588,321		24.9			836,559		41.5			(248,238	)		(29.7	)
Certificates of deposit less than $100,000(4)		473,026		20.0			262,199		13.0			210,827			80.4
Certificates of deposit of $100,000 through $250,000		358,238		15.1			116,559		5.8			241,679			207.3
Certificates of deposit of $250,000 and over		87,499		3.7			53,812		2.7			33,687			62.6
Subtotal		918,763		38.8			432,570		21.5			486,193			112.4
Total	$	2,365,308		100.0	%	$	2,016,100		100.0	%	$	349,208			17.3		%

_______________________

(1) Includes no brokered deposits at June 30, 2023, and $2.6 million and $1.2 million of brokered deposits at March 31, 2023, and June 30, 2022, respectively.
(2) Noninterest-bearing accounts.
(3) Includes $51,000, $50.3 million, and $78.8 million of brokered deposits at June 30, 2023, March 31, 2023, and June 30, 2022, respectively.
(4) Includes $295.7 million, $266.1 million, and $180.3 million of brokered deposits at June 30, 2023, March 31, 2023, and June 30, 2022, respectively.

At June 30, 2023, CDs, which include retail and nonretail CDs, totaled $918.8 million, compared to $774.4 million at March 31, 2023 and $432.6 million at June 30, 2022, with nonretail CDs representing 33.7%, 37.5% and 48.0% of total CDs at such dates, respectively.   At June 30, 2023, nonretail CDs, which include brokered CDs, online CDs, and public funds CDs, increased $19.6 million to $310.0 million, compared to $290.4 million at March 31, 2023, primarily due to an increase of $29.6 million in brokered CDs. Nonretail CDs totaled $310.0 million at June 30, 2023, compared to $207.8 million at June 30, 2022.

At June 30, 2023, the Bank had uninsured deposits of $587.6 million, compared to $633.4 million at March 31, 2023, and $642.2 million at June 30, 2022.

At June 30, 2023, borrowings comprised of overnight borrowings of $106.0 million, advances from the Federal Reserve Bank’s Term Funding Program of $90.0 million and FHLB fixed-rate advances of $3.9 million, increased $192.4 million to $199.9 million from $7.5 million at March 31, 2023, and increased $121.9 million from $78.0 million at June 30, 2022. The increased borrowings primarily were used to fund loan growth and to provide excess liquidity in accordance with management’s strategic objectives.

Total stockholders’ equity increased $8.1 million, to $249.9 million at June 30, 2023, from $241.8 million at March 31, 2023, and increased $27.3 million, from $222.6 million at June 30, 2022. The increase in stockholders’ equity during the current quarter reflects net income of $9.1 million, partially offset by dividends paid of $1.9 million. In addition, stockholders’ equity was positively impacted by unrealized gains on fair value and cash flow hedges of $3.2 million, net of tax, partially offset by unrealized net losses in securities available-for-sale of $2.9 million, net of tax, reflecting changes in market interest rates during the quarter, resulting in a $279,000 net decrease in accumulated other comprehensive loss, net of tax. Book value per common share was $32.71 at June 30, 2023, compared to $31.69 at March 31, 2023, and $29.27 at June 30, 2022.

The Bank is considered well capitalized under the capital requirements established by the Federal Deposit Insurance Corporation (“FDIC”) with a total risk-based capital ratio of 12.9%, a Tier 1 leverage capital ratio of 10.3%, and a common equity Tier 1 (“CET1”) capital ratio of 11.7% at June 30, 2023.

The Company exceeded all regulatory capital requirements with a total risk-based capital ratio of 13.3%, a Tier 1 leverage capital ratio of 8.8%, and a CET1 ratio of 10.0% at June 30, 2023.

Credit Quality

The allowance for credit losses on loans (“ACLL”) increased to $30.4 million, or 1.28% of gross loans receivable (excluding loans HFS) at June 30, 2023, compared to $29.9 million, or 1.29% of gross loans receivable, (excluding loans HFS) at March 31, 2023, and $25.0 million, or 1.27% of gross loans receivable (excluding loans HFS) at June 30, 2022. The quarter over linked quarter increase of $413,000 in the ACLL was primarily due to an increase in loans. The year over year increase of $5.4 million in the ACLL was primarily due to organic loan growth and the addition of loans acquired in the Branch Acquisition. The allowance for credit losses on unfunded loan commitments decreased $347,000 to $1.9 million at June 30, 2023, compared to $2.3 million at March 31, 2023, and decreased $1.4 million from $3.4 million at June 30, 2022.   The decrease was attributable to a decline in unfunded construction loan commitments over the periods.  

Nonperforming loans increased $566,000 to $9.3 million at June 30, 2023, compared to $8.7 million at March 31, 2023 and increased $2.6 million from $6.7 million at June 30, 2022. The quarter over linked quarter increase was primarily due to increases in nonperforming commercial real estate loans of $1.1 million and indirect home improvement loans of $559,000, partially offset by decreases in commercial business loans of $680,000 and one-to-four-family loans of $438,000. The year over year increase in nonperforming loans was primarily due to increases in indirect home improvement loans of $1.3 million, commercial real estate loans of $1.1 million, commercial business loans of $586,000, and marine loans of $380,000, partially offset by decreases in one-to-four-family loans of $590,000 and home equity loans of $101,000.

Loans classified as substandard decreased $3.2 million to $16.4 million at June 30, 2023, compared to $19.6 million at March 31, 2023, and increased $5.8 million from $10.6 million at June 30, 2022. The quarter over linked quarter decrease in substandard loans was primarily attributable to decreases of $2.9 million in commercial real estate loans, $496,000 in commercial business loans, and $447,000 in one-to-four-family loans, partially offset by an increase of $559,000 in indirect home improvement loans. The year over year increase in substandard loans was primarily due to increases of $1.9 million in commercial real estate loans, $1.3 million in one-to-four-family loans, $1.3 million in indirect home improvement loans, $949,000 in commercial and industrial loans, and $380,000 in marine loans, partially offset by a decrease of $101,000 in home equity loans. There was one other real estate owned property (“OREO”) in the amount of $570,000 (a closed branch in Centralia, WA) at both June 30, 2023 and March 31, 2023, compared to one OREO in the amount of $145,000 at June 30, 2022.

Operating Results

Net interest income increased $6.8 million to $31.6 million for the three months ended June 30, 2023, from $24.7 million for the three months ended June 30, 2022. The increase was primarily the result of an increase in loans and variable rate interest-earning assets repricing higher following recent increases in market interest rates. Interest income for the three months ended June 30, 2023, increased $13.9 million compared to the same period last year, primarily due to an increase of $12.9 million in interest income on loans receivable, including fees, impacted primarily by loan growth and rising interest rates. For the three months ended June 30, 2023, interest expense increased $7.1 million, primarily as a result of higher market interest rates, higher utilization of borrowings and a shift in deposit mix from transactional accounts to higher cost CDs.

For the six months ended June 30, 2023, net interest income increased $14.8 million to $62.2 million, from $47.5 million for the six months ended June 30, 2022 for the same reason as for the three-month comparison described above, with an increase in interest income of $27.9 million and a decrease in interest expense of $13.1 million.

NIM (annualized) increased 27 basis points to 4.66% for the three months ended June 30, 2023, from 4.39% for the same period in the prior year, and increased 36 basis points to 4.68% for the six months ended June 30, 2023, from 4.32% for the six months ended June 30, 2022. The increase in NIM for the three and six months ended June 30, 2023 compared to the same periods in 2022, reflects new loan originations at higher market interest rates and variable rate interest-earning assets repricing higher following recent increases in market interest rates. The benefit from higher rates and interest earning assets were partially offset by rising deposit and borrowing costs. Increases in average balances of higher costing CDs and borrowings placed additional pressure on the NIM.

The average total cost of funds, including noninterest-bearing checking, increased 105 basis points to 1.48% for the three months ended June 30, 2023, from 0.43% for the three months ended June 30, 2022. This increase was predominantly due to the rise in cost for market rate for deposits. The average cost of funds increased 99 basis points to 1.40% for the six months ended June 30, 2023, from 0.41% for the six months ended June 30, 2022, also reflecting increases in market interest rates over last year. Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.

For the three and six months ended June 30, 2023, the provision for credit losses on loans was $1.1 million and $3.4 million, respectively, compared to $1.6 million and $2.5 million for the three and six months ended June 30, 2022. The provision for credit losses on loans reflects an increase in total loans receivable and net charge-offs in indirect home improvement and marine loans.

During the three months ended June 30, 2023, net charge-offs totaled $651,000, compared to $16,000 for the same period last year, primarily due to increased net charge-offs of $476,000 in indirect home improvement loans and $152,000 in marine loans. Net charge-offs totaled $1.1 million during the six months ended June 30, 2023, compared to $280,000 during the six months ended June 30, 2022. This increase was primarily due to net charge-off increases of $585,000 in indirect home improvement loans and $199,000 in marine loans. Net charge-offs have been steadily increasing over the last several years primarily attributable to volatile economic conditions.

Noninterest income increased $478,000, to $4.8 million, for the three months ended June 30, 2023, from $4.4 million for the three months ended June 30, 2022. The increase reflects a $584,000 increase in service charges and fee income, primarily as a result of less amortization of mortgage servicing rights reflecting increased market interest rates and increased servicing fees from non-portfolio serviced loans, partially offset by a $119,000 decrease in the gain on sale of loans. Noninterest income decreased $179,000, to $10.1 million, for the six months ended June 30, 2023, from $10.2 million for the six months ended June 30, 2022. This decrease was primarily the result of a $2.5 million decrease in gain on sale of loans, partially offset by a $1.7 million increase in service charges and fee income and $630,000 increase in other noninterest income.  

Noninterest expense increased $5.3 million to $24.2 million for the three months ended June 30, 2023, from $18.9 million for the three months ended June 30, 2022. The increase in noninterest expense was primarily a result of a $1.8 million increase in salaries and benefits largely due to the Branch Acquisition and growth in FTEs. Other increases included $1.3 million in operations expense, $851,000 in amortization of CDI, $406,000 in FDIC insurance and $304,000 in occupancy expense. Noninterest expense increased $9.7 million to $47.7 million for the six months ended June 30, 2023, from $38.0 million for the six months ended June 30, 2022 primarily for the same reasons stated above. Increases during the six month period ended June 30, 2023 as compared to the same period last year included $3.7 million in salaries and benefits, $1.6 million in acquisition costs, $1.5 million in operations, $1.1 million in amortization of CDI, $829,000 in FDIC insurance, $601,000 in occupancy and $436,000 in data processing.

About FS Bancorp

FS Bancorp, Inc., a Washington corporation, is the holding company for 1st Security Bank. The Bank provides loan and deposit services to customers who are predominantly small- and middle-market businesses and individuals in Washington and Oregon through its 27 Bank branches, one headquarters office that produces loans and accepts deposits, and loan production offices in various suburban communities in the greater Puget Sound area, the Kennewick-Pasco-Richland metropolitan area of Washington, also known as the Tri-Cities, and in Vancouver, Washington. The Bank services home mortgage customers throughout the Northwest predominantly in Washington State including the Puget Sound, Tri-Cities and Vancouver 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: potential adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels; labor shortages, the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war, including Russia’s invasion of Ukraine, as well as supply chain disruptions; increased competitive pressures, changes in the interest rate environment, adverse changes in the securities markets, the Company’s ability to successfully realize the anticipated benefits of the Branch Acquisition, including customer acquisition and retention; 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; challenges arising from expanding into new geographic markets, products, or services; secondary market conditions for loans and the Company’s ability to originate loans for sale and sell loans in the secondary market; fluctuations in deposits; liquidity issues, including our ability to borrow funds or raise additional capital, if necessary; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; legislative and regulatory changes, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules; and other factors described in the Company’s latest Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and other reports filed with and furnished to 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 2023 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)

													Linked			Year
	June 30,				March 31,				June 30,				Quarter			Over Year
	2023				2023				2022				% Change			% Change
ASSETS
Cash and due from banks	$	17,573			$	21,481			$	12,708			(18	)		38
Interest-bearing deposits at other financial institutions		114,526				36,700				15,951			212			618
Total cash and cash equivalents		132,099				58,181				28,659			127			361
Certificates of deposit at other financial institutions		14,747				4,712				4,960			213			197
Securities available-for-sale, at fair value		225,869				232,373				247,832			(3	)		(9	)
Securities held-to-maturity, net		8,469				8,469				8,469			—			—
Loans held for sale, at fair value		16,714				23,310				34,989			(28	)		(52	)
Loans receivable, net		2,342,424				2,299,649				1,946,072			2			20
Accrued interest receivable		12,244				12,336				8,553			(1	)		43
Premises and equipment, net		31,293				31,781				25,740			(2	)		22
Operating lease right-of-use		7,458				7,414				4,850			1			54
Federal Home Loan Bank (“FHLB”) stock, at cost		6,555				3,863				6,295			70			4
Other real estate owned (“OREO”)		570				570				145			—			293
Deferred tax asset, net		5,784				5,860				4,709			(1	)		23
Bank owned life insurance (“BOLI”), net		37,247				37,020				37,106			1			—
Servicing rights, held at the lower of cost or fair value		17,627				17,599				18,516			—			(5	)
Goodwill		3,592				3,592				2,312			—			55
Core deposit intangible, net		19,325				20,348				3,715			(5	)		420
Other assets		23,604				15,731				16,317			50			45
TOTAL ASSETS	$	2,905,621			$	2,782,808			$	2,399,239			4			21
LIABILITIES
Deposits:
Noninterest-bearing accounts	$	675,211			$	746,922			$	588,364			(10	)		15
Interest-bearing accounts		1,690,097				1,696,351				1,427,736			—			18
Total deposits		2,365,308				2,443,273				2,016,100			(3	)		17
Borrowings		199,896				7,528				78,028			2,555			156
Subordinated notes:
Principal amount		50,000				50,000				50,000			—			—
Unamortized debt issuance costs		(506	)			(523	)			(573	)		(3	)		(12	)
Total subordinated notes less unamortized debt issuance costs		49,494				49,477				49,427			—			—
Operating lease liability		7,690				7,651				5,081			1			51
Other liabilities		33,300				33,045				27,962			1			19
Total liabilities		2,655,688				2,540,974				2,176,598			5			22
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; 7,753,607 shares issued and outstanding at June 30, 2023, 7,743,283 at March 31, 2023, and 7,726,232 at June 30, 2022		77				77				77			—			—
Additional paid-in capital		56,781				56,138				55,129			1			3
Retained earnings		215,519				208,342				189,075			3			14
Accumulated other comprehensive loss, net of tax		(22,444	)			(22,723	)			(21,640	)		(1	)		4
Total stockholders’ equity		249,933				241,834				222,641			3			12
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,905,621			$	2,782,808			$	2,399,239			4			21

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

	Three Months Ended											Qtr			Year
	June 30,				March 31,			June 30,				Over Qtr			Over Year
	2023				2023			2022				% Change			% Change
INTEREST INCOME
Loans receivable, including fees	$	38,216			$	35,992		$	25,275			6			51
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions		2,651				2,620			1,670			1			59
Total interest and dividend income		40,867				38,612			26,945			6			52
INTEREST EXPENSE
Deposits		7,610				6,624			1,557			15			389
Borrowings		1,219				841			174			45			601
Subordinated notes		486				485			485			—			—
Total interest expense		9,315				7,950			2,216			17			320
NET INTEREST INCOME		31,552				30,662			24,729			3			28
PROVISION FOR CREDIT LOSSES		716				2,108			1,871			(66	)		(62	)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		30,836				28,554			22,858			8			35
NONINTEREST INCOME
Service charges and fee income		2,862				2,608			2,278			10			26
Gain on sale of loans		1,947				1,476			2,066			32			(6	)
Earnings on cash surrender value of BOLI		227				221			216			3			5
Other noninterest income		(203	)			914			(205	)		(122	)		(1	)
Total noninterest income		4,833				5,219			4,355			(7	)		11
NONINTEREST EXPENSE
Salaries and benefits		13,513				13,864			11,736			(3	)		15
Operations		3,643				2,692			2,365			35			54
Occupancy		1,562				1,520			1,258			3			24
Data processing		1,683				1,568			1,455			7			16
Loan costs		1,043				470			751			122			39
Professional and board fees		657				678			763			(3	)		(14	)
Federal Deposit Insurance Corporation (“FDIC”) insurance		591				580			185			2			219
Marketing and advertising		430				190			244			126			76
Acquisition costs		61				1,501			—			(96	)		—
Amortization of core deposit intangible		1,023				459			172			123			495
(Recovery) impairment of servicing rights		(2	)			2			—			(200	)		—
Total noninterest expense		24,204				23,524			18,929			3			28
INCOME BEFORE PROVISION FOR INCOME TAXES		11,465				10,249			8,284			12			38
PROVISION FOR INCOME TAXES		2,349				2,037			1,585			15			48
NET INCOME	$	9,116			$	8,212		$	6,699			11			36
Basic earnings per share	$	1.17			$	1.06		$	0.84			10			39
Diluted earnings per share	$	1.16			$	1.04		$	0.83			12			40

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

	Six Months Ended							Year
	June 30,			June 30,				Over Year
	2023			2022				% Change
INTEREST INCOME
Loans receivable, including fees	$	74,208		$	48,322			54
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions		5,271			3,249			62
Total interest and dividend income		79,479			51,571			54
INTEREST EXPENSE
Deposits		14,234			2,842			401
Borrowings		2,060			307			571
Subordinated note		971			971			—
Total interest expense		17,265			4,120			319
NET INTEREST INCOME		62,214			47,451			31
PROVISION FOR CREDIT LOSSES		2,824			2,914			(3	)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		59,390			44,537			33
NONINTEREST INCOME
Service charges and fee income		5,470			3,794			44
Gain on sale of loans		3,423			5,923			(42	)
Earnings on cash surrender value of BOLI		448			433			3
Other noninterest income		711			81			778
Total noninterest income		10,052			10,231			(2	)
NONINTEREST EXPENSE
Salaries and benefits		27,377			23,708			15
Operations		6,335			4,844			31
Occupancy		3,082			2,481			24
Data processing		3,251			2,815			15
Loan costs		1,513			1,274			19
Professional and board fees		1,335			1,756			(24	)
FDIC insurance		1,171			342			242
Marketing and advertising		620			432			44
Acquisition costs		1,562			—			—
Amortization of core deposit intangible		1,482			345			330
Recovery of servicing rights		—			(1	)		—
Total noninterest expense		47,728			37,996			26
INCOME BEFORE PROVISION FOR INCOME TAXES		21,714			16,772			29
PROVISION FOR INCOME TAXES		4,386			3,203			37
NET INCOME	$	17,328		$	13,569			28
Basic earnings per share	$	2.23		$	1.68			33
Diluted earnings per share	$	2.19		$	1.66			32

KEY FINANCIAL RATIOS AND DATA(Unaudited)
	For the Three Months Ended
	June 30,		March 31,		June 30,
	2023		2023		2022
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average total assets)(1)	1.29	%	1.21	%	1.14	%
Return on equity (ratio of net income to average equity)(1)	14.82		13.78		11.84
Yield on average interest-earning assets(1)	6.04		5.91		4.78
Average total cost of funds(1)	1.48		1.32		0.43
Interest rate spread information – average during period	4.56		4.59		4.35
Net interest margin(1)	4.66		4.70		4.39
Operating expense to average total assets(1)	3.42		3.48		3.22
Average interest-earning assets to average interest-bearing liabilities(1)	147.90		145.72		152.50
Efficiency ratio(2)	66.52		65.56		65.08

	For the Six Months Ended
	June 30,		June 30,
	2023		2022
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average total assets)(1)	1.25	%	1.18	%
Return on equity (ratio of net income to average equity)(1)	14.30		11.65
Yield on average interest-earning assets(1)	5.98		4.69
Average total cost of funds(1)	1.40		0.41
Interest rate spread information – average during period	4.58		4.28
Net interest margin(1)	4.68		4.32
Operating expense to average total assets(1)	3.45		3.31
Average interest-earning assets to average interest-bearing liabilities	146.82		153.58
Efficiency ratio(2)	66.04		65.87

	June 30,		March 31,		June 30,
	2023		2023		2022
ASSET QUALITY RATIOS AND DATA:
Nonperforming assets to total assets at end of period(3)	0.34	%	0.33	%	0.28	%
Nonperforming loans to total gross loans(4)	0.39		0.37		0.34
Allowance for credit losses – loans to nonperforming loans(4)	327.75		323.26		374.82
Allowance for credit losses – loans to gross loans receivable, excluding HFS loans	1.28		1.29		1.27

	At or For the Three Months Ended
	June 30,			March 31,			June 30,
	2023			2023			2022
PER COMMON SHARE DATA:
Basic earnings per share	$	1.17		$	1.06		$	0.84
Diluted earnings per share	$	1.16		$	1.04		$	0.83
Weighted average basic shares outstanding		7,637,210			7,623,580			7,776,939
Weighted average diluted shares outstanding		7,746,336			7,778,418			7,896,210
Common shares outstanding at end of period		7,641,342	(5)		7,631,018	(6)		7,605,740	(7)
Book value per share using common shares outstanding	$	32.71		$	31.69		$	29.27
Tangible book value per share using common shares outstanding(8)	$	29.71		$	28.55		$	28.48

____________________________

(1) Annualized.
(2) Total noninterest expense as a percentage of net interest income and total noninterest income.
(3) Nonperforming assets consist of nonperforming loans (which include nonaccruing loans and accruing loans more than 90 days past due), foreclosed real estate and other repossessed assets.
(4) Nonperforming loans consist of nonaccruing loans and accruing loans 90 days or more past due.
(5) Common shares were calculated using shares outstanding of 7,753,607 at June 30, 2023, less 112,265 unvested restricted stock shares.
(6) Common shares were calculated using shares outstanding of 7,743,283 at March 31, 2023, less 112,265 unvested restricted stock shares.
(7) Common shares were calculated using shares outstanding of 7,726,232 at June 30, 2022, less 120,492 unvested restricted stock shares.
(8)   Represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” below.

(Dollars in thousands)		For the Three Months Ended June 30,						For the Six Months Ended June 30,						QTR Over QTR				Year Over Year
Average Balances		2023			2022			2023			2022			$ Change				$ Change
Assets
Loans receivable, net(1)		$	2,371,156		$	1,939,171		$	2,331,978		$	1,887,097		$	431,985			$	484,059
Securities available-for-sale, at amortized cost			265,424			282,589			268,036			280,609			(17,165	)			(15,185	)
Securities held-to-maturity, net			8,500			7,819			8,500			7,660			681				840
Interest-bearing deposits and certificates of deposit at other financial institutions			63,470			26,579			66,550			37,565			36,891				25,905
FHLB stock, at cost			4,628			4,881			5,477			4,593			(253	)			35
Total interest-earning assets			2,713,178			2,261,039			2,680,541			2,217,524			452,139				495,654
Noninterest-earning assets			128,712			95,283			111,693			96,010			33,429				32,702
Total assets		$	2,841,890		$	2,356,322		$	2,792,234		$	2,313,534		$	485,568			$	528,356
Liabilities
Interest-bearing accounts		$	1,681,184		$	1,389,750		$	1,684,591		$	1,357,193		$	291,434			$	323,991
Borrowings			103,764			43,440			91,619			37,257			60,324				66,507
Subordinated notes			49,484			49,417			49,475			49,409			67				75
Total interest-bearing liabilities			1,834,432			1,482,607			1,825,685			1,443,859			351,825				390,573
Noninterest-bearing accounts			696,270			593,050			658,381			588,010			103,220				108,260
Other noninterest-bearing liabilities			34,434			30,006			34,436			30,676			4,428				3,758
Total liabilities		$	2,565,136		$	2,105,663		$	2,518,502		$	2,062,545		$	459,473			$	502,591

___________________________
(1) Includes loans HFS.

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 certain non-GAAP financial measures: net income adjusted for acquisition costs, and acquisition-related CDI amortization, net of tax, tangible book value per share, and tangible common equity ratio. Management believes that adjusting net income for acquisition costs and acquisition-related CDI amortization, net of tax, provides useful and comparative information to assess trends reflected in the current quarter’s results and facilitates the comparison of our performance with the performance of our peers. The after-tax impact of acquisition-related costs to net income which we have recorded in connection with the Branch Acquisition provides meaningful supplemental information that management believes is useful to readers.

Further, management believes that providing the Company’s tangible book value per share and tangible common equity ratio is consistent with the capital treatment utilized by the investment community, which excludes intangible assets from the calculation of risk-based capital ratios and facilitates comparison of the quality and composition of the Company's capital over time and in comparison to its competitors. Where applicable, the Company has also presented comparable earnings information using GAAP financial measures.

These non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. They should not be considered in isolation or as a substitute for total stockholders' equity or operating results determined in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.

Reconciliation of net income, acquisition costs and acquisition-related CDI amortization, net of tax is presented below.

	For the Three Months Ended
	June 30,				March 31,
(Dollars in thousands)	2023				2023
Net income (GAAP)	$	9,116			$	8,212
Acquisition costs		61				1,501
CDI amortization attributable to the Branch Acquisition		850				286
Tax effect at 21.5%		(196	)			(384	)
Adjusted net income (non-GAAP)	$	9,831			$	9,615

Reconciliation of the GAAP book value per share and common equity ratio and the non-GAAP tangible book value per share and tangible common equity ratio is presented below.

(Dollars in thousands, except share and per share amounts)	June 30,				March 31,				June 30,
Tangible Book Value Per Share:	2023				2023				2022
Stockholders' equity (GAAP)	$	249,933			$	241,834			$	222,641
Less: goodwill and core deposit intangible, net		(22,917	)			(23,940	)			(6,027	)
Tangible common stockholders' equity (non-GAAP)	$	227,016			$	217,894			$	216,614
Common shares outstanding at end of period		7,641,342				7,631,018				7,605,740
Book value per share (GAAP)	$	32.71			$	31.69			$	29.27
Tangible book value per share (non-GAAP)	$	29.71			$	28.55			$	28.48
Tangible Common Equity Ratio:
Total assets (GAAP)	$	2,905,621			$	2,782,808			$	2,399,239
Less: goodwill and core deposit intangible assets		(22,917	)			(23,940	)			(6,027	)
Tangible assets (non-GAAP)	$	2,882,704			$	2,758,868			$	2,393,212
Common equity ratio (GAAP)		8.60		%		8.69		%		9.28		%
Tangible common equity ratio (non-GAAP)		7.88				7.90				9.05

Contacts:

Joseph C. Adams,

Chief Executive Officer

Matthew D. Mullet,

Chief Financial Officer

(425) 771-5299

www.FSBWA.com

FAQ

What is FS Bancorp, Inc.'s (NASDAQ: FSBW) net income for the 2023 second quarter?

FS Bancorp, Inc. reported a net income of $9.1 million for the 2023 second quarter, a 36% increase from the previous year.

What is the approved cash dividend for FS Bancorp, Inc. (NASDAQ: FSBW) shareholders?

The company approved a 42nd consecutive quarterly cash dividend of $0.25 per share for shareholders.

What was the percentage increase in loans receivable, net for FS Bancorp, Inc. (NASDAQ: FSBW)?

There was a 20.4% increase in loans receivable, net for FS Bancorp, Inc., indicating growth and market demand.