FS Bancorp, Inc. Reports Third Quarter Earnings

MOUNTLAKE TERRACE, Wash., Oct. 26, 2012 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (Nasdaq:FSBW) ("FS Bancorp" or "the Company"), the holding company for 1st Security Bank of Washington ("the Bank") today reported 2012 third quarter net income of $3.3 million or $1.03 per diluted share, which includes a $2.3 million net tax benefit as a result of the reversal of the majority of its deferred tax asset ("DTA") valuation allowance. Results without the deferred tax benefit reflect net income of $1.0 million in the third quarter, up from $621,000 for the second quarter of 2012 and $225,000 for the third quarter ended September 30, 2011. Net income for the first nine months of 2012 was $4.2 million including the $2.3 million net tax benefit. Results without the deferred tax benefit reflect net income of $1.9 million for the first nine months of 2012 compared to net income of $1.2 million for the first nine months of 2011. The Company completed its initial public offering ("IPO") on July 9, 2012 with the issuance of 3,240,125 shares of its common stock, which generated gross proceeds of $32.4 million; therefore, operating results before that date pertain to the Bank only.

"We are extremely pleased with the progress we have made on the successful implementation of our business plan and the recent ability to deploy a portion of the capital raised during our mutual to stock initial public offering" stated Joe Adams, CEO of the Company and the Bank. "The current interest rate environment has benefited our new construction and home lending teams to attract new loans and has helped to complement our commercial and consumer lending teams."

Fiscal Third Quarter 2012 Highlights (at or for the three months ended September 30, 2012, compared to June 30, 2012, or September 30, 2011):

• Net income increased to $3.3 million (including the $2.3 million income tax benefit) compared to $621,000 for the preceding quarter and $225,000 from the comparable quarter one year ago;
• Earnings per diluted common share were $1.03 for the quarter;
• Net interest margin remained unchanged at 5.39% compared to the preceding quarter and increased from 5.27% for the comparable quarter one year ago;
• We originated $14.0 million and $44.2 million of construction and one-to-four family residential loans, respectively, during the quarter;
• Total non-performing assets decreased $2.5 million, or 35.6% to $4.4 million at September 30, 2012 from $6.9 million at December 31, 2011;
• The ratio of non-performing assets to total assets improved to 1.30% at September 30, 2012 from 2.59% compared to the same quarter end one year ago;
• The efficiency ratio (total noninterest expense as a percentage of net interest income and total other noninterest income) improved to 71.6% at September 30, 2012 compared to 76.6% for the preceding quarter and 78.6% for the comparable quarter one year ago; and
• Capital levels at the Bank reflect Total Risk Based Capital of 17.1% and Tier 1 Leverage Capital Ratio of 13.2% as of September 30, 2012 compared to 12.3% and 9.3% as of December 31, 2011 respectively.

Balance Sheet Management

Total assets increased slightly to $341.2 million at September 30, 2012 compared to $340.9 million at June 30, 2012 and $283.8 at December 31, 2011. The increase in total assets from June 30, 2012 was primarily due to a $14.0 million increase in net loans receivable and a $4.4 million increase in loans held for sale offset by a $21.1 million decrease in total cash and cash equivalents quarter over quarter. The increase in assets from December 31, 2011 was primarily due to increases in net loans receivable of $42.0 million, securities of $11.9 million and $8.5 million in loans held for sale. The level of cash reduced during the current quarter compared to the previous quarter as funds being held for the capital raise were converted to capital and/or were returned to investors unable to invest in our IPO transaction. The remaining change in cash was deployed into higher yielding loan assets.

Liquidity as measured by cash and cash equivalents, CDs held for investment and available for sale investments was 14.6% of total assets at September 30, 2012 compared to 20.2% at June 30, 2012 and 16.3% at December 31, 2011. Cash levels in the second quarter of 2012 were temporarily elevated due to the capital raise in that quarter and were deployed throughout the third quarter into loan assets and/or returned to investors.

FS Bancorp's mortgage-backed securities ("MBS") and other investments increased by $930,000 during the quarter to $38.8 million at September 30, 2012 from $37.9 million at June 30, 2012 and $26.9 million at December 31, 2011, primarily due to purchases of MBS which were partially offset by sales of taxable municipal bonds, agency investment calls, MBS prepayments and scheduled amortization.

FS Bancorp's originations of loans held for sale increased 60.4% to $42.8 million during the quarter ended September 30, 2012 compared to $26.7 million for the preceding quarter.  Loans held for sale increased $4.4 million to $8.5 million at September 30, 2012 from $4.1 million at June 30, 2012 and none as of December 31, 2011. FS Bancorp continues to expand its mortgage banking operations and to sell fixed-rate one-to-four family mortgage loans into the secondary market for asset–liability management purposes and to generate noninterest income. During the quarter ended September 30, 2012, we sold $38.3 million of fixed-rate one-to-four family mortgage loans compared to $24.0 million for the preceding quarter and none for the same quarter one year ago.

LOAN PORTFOLIO
($ in thousands)

Net loans receivable increased $14.0 million to $259.2 million at September 30, 2012 from $245.2 million as of June 30, 2012 and increased $42.0 million from $217.1 million at December 31, 2011. Total real estate loans increased $6.0 million quarter over quarter due to increased growth in commercial real estate loans including residential construction lending. Quarter over quarter increases in other loan categories include a $4.5 million increase in commercial business loans including warehouse lending, and a $3.5 million increase in consumer loans. 

The residential construction lending group recorded $14.0 million in residential construction commitments in the third quarter of 2012, down from $16.7 million in the second quarter of 2012 and up from $6.6 million in the fourth quarter of 2011. Balances outstanding for residential construction loans were $20.5 million as of September 30, 2012.

Below is a table of the quarterly production in our consumer lending division:
($ in thousands) 

As illustrated in the table above, the consumer lending division increased loan production by $5.6 million during the quarter ended September 30, 2012 compared to the same quarter one year prior and by $7.8 million compared to the quarter ended December 31, 2011. During the quarter ended September 30, 2012, charge offs decreased $270,000 compared to the same quarter one year prior and by $359,000 from the fourth quarter ended December 31, 2011. Quarter over quarter reflects an increase of $1.1 million in new production volume coupled with slower loan repayments, resulting in an increase in total volume of $3.5 million during the current quarter compared to a net decrease in volume of $4.8 million in the comparable quarter of 2011 and a net decrease in volume of $5.5 million in the quarter ended December 31, 2011.

"Management is pleased with the return to growth in the consumer lending platform in the second and third quarters of 2012" stated CFO Mullet. "This growth allows us to pursue opportunities in consumer lending including packaging and selling pools of loans into the secondary market."

DEPOSIT BREAKDOWN
($ in thousands) 

Total deposits decreased $32.6 million (10.6%) to $274.8 million at September 30, 2012, from $307.4 million at June 30, 2012 primarily as a result of a $41.1 million decrease in savings account balances associated with the capital raise and offset by a $9.9 million increase in transactional noninterest bearing and interest bearing deposits. The decrease in savings account balances had a direct correlation with the funds received during the IPO that were substantially converted to equity capital.

Transactional deposits (noninterest and interest-bearing checking accounts) increased to $56.3 million as of September 30, 2012 from $46.5 million at June 30, 2012 and $39.9 million at December 31, 2011. Management continues to focus deposit growth efforts on relationship deposits with new and existing customers.  

Total equity for the Company increased $31.5 million to $59.4 million at September 30, 2012 from $27.9 million at June 30, 2012. The increase in equity was predominantly a result of the $32.4 million in gross proceeds raised in the IPO and net income year to date. Book value per common share was $18.32 as of September 30, 2012.

Asset Quality and Capital Ratios

FS Bancorp had a provision for loan losses of $630,000 during the quarter ended September 30, 2012 compared to $550,000 in the preceding quarter and $622,000 in the comparable quarter one year ago.

Our allowance for loan losses at September 30, 2012 was $4.4 million, or 1.7% of gross loans receivable, compared to $4.3 million, or 2.0% of gross loans receivable, at December 31, 2011. Non-performing loans, consisting of non-accruing loans, decreased to $2.1 million at September 30, 2012 from $2.2 million at December 31, 2011. At September 30, 2012, our non-performing loans consisted of $877,000 of commercial loans, $394,000 of consumer loans, $360,000 of one-to-four family, $266,000 of commercial business loans and $197,000 of home equity loans. Non-performing loans to total loans decreased to 0.8% at September 30, 2012 from 1.0% at December 31, 2011. Other real estate owned totaled $2.3 million at September 30, 2012, compared to $4.6 million at December 31, 2011. The $2.3 million or 49.4% reduction in other real estate owned reflects the resolution of $2.8 million in other real estate owned and write-downs to fair value of $728,000 during the nine month period. At September 30, 2012, we also had $3.1 million in restructured loans of which $2.1 million were performing in accordance with their modified terms and $990,000 were on non-accrual.

A summary of non-performing assets as of September 30, 2012, June 30, 2012 and December 31, 2011 is as follows:

The Bank is well capitalized with a total risk-based capital ratio of 17.1% and a Tier 1 leverage capital ratio of 13.2% at September 30, 2012. 

Operating Results

FS Bancorp, Inc. reported 2012 third quarter net income of $3.3 million or $1.03 per diluted share which includes a $2.3 million net tax benefit.  Net income is up from $621,000 in the second quarter of 2012 and $225,000 for the quarter ended September 30, 2011. Net income for the first nine months of 2012 was $4.2 million including the $2.3 million in net tax benefit compared to $1.2 million for the first nine months of 2011.

Net interest income increased $925,000, or 27.7%, to $4.3 million for the three months ended September 30, 2012, from $3.3 million for the three months ended September 30, 2011. The increase in net interest income was attributable to a $796,000 increase in interest income resulting from an increase in the average balance of our loan portfolio as well as a shift of funds during the period from lower yielding cash and cash equivalents to higher yielding investment securities, and a $129,000 decrease in interest expense, primarily due to a reduction of our overall cost of funds. Net interest income increased $1.8 million, or 18.3%, to $11.8 million for the nine months ended September 30, 2012, from $10.0 million for the nine months ended September 30, 2011. The increase in net interest income was attributable to a $990,000 increase in interest income from loans, a $345,000 increase in investment income and a $494,000 decrease in interest expense, primarily due to a reduction in our overall cost of funds.

Our net interest margin increased 19 basis points to 5.39% for the nine months ended September 30, 2012, from 5.20% for the same period of the prior year. The increase was primarily due to a shift in funds during the period from lower yielding cash and cash equivalents into higher yielding investment securities and a lower level of non-performing loans, coupled with a 38 basis point decline in our overall cost of funds to 0.98% for the nine months ended September 30, 2012 from 1.36% for the same period of the prior year.

The provision for loan losses was $630,000 for the three months ended September 30, 2012, compared to $622,000 for the three months ended September 30, 2011. The $8,000 increase in the provision primarily relates to the increase in net loans during the three months ended September 30, 2012. Our provision for loan losses remained flat at $1.7 million for the nine months ended September 30, 2012, and the nine months ended September 30, 2011. Non-performing loans were $2.1 million, or 0.8% of total loans at September 30, 2012, compared to $1.8 million, or 0.8% of total loans, at September 30, 2011. During the nine months ended September 30, 2012, net charge-offs totaled $1.7 million compared to $2.7 million during the nine months ended September 30, 2011.

Noninterest income increased $874,000, or 144.5%, to $1.5 million for the three months ended September 30, 2012, from $605,000 for the three months ended September 30, 2011. The increase during the period was primarily due to $915,000 in gains associated with the sale of mortgage loans to the secondary market as part of our home lending initiative.  Noninterest income increased $1.6 million, or 95.0%, to $3.3 million for the nine months ended September 30, 2012, from $1.7 million for the nine months ended September 30, 2011.

Noninterest expense increased $1.0 million, or 32.7%, to $4.1 million for the three months ended September 30, 2012, from $3.1 million for the three months ended September 30, 2011. Changes in noninterest expense included a $697,000, or 47.6%, increase in salaries and benefit costs associated with the addition to staff  in our expanded lending platforms, a $129,000 or 25.7% increase in operation costs due to a $92,000 increase in depreciation expense associated with accelerated depreciation for the remodeling of the administrative office, a $119,000, or 126.6% increase in loan costs associated with increased lending activities, partially offset by a $131,000 decrease in write-downs of our other real estate owned to fair value.

Management determined in the third quarter, based on all available evidence, that it was more likely than not that all the deferred tax asset would be realized and the deferred tax valuation allowance should be reversed during the third quarter of 2012. In accordance with GAAP, Management reversed the deferred tax valuation allowance except for a portion associated with the budgeted income in the fourth quarter of 2012 that will offset the expected income tax expense during the fourth quarter. The net impact on income in the third quarter of 2012 was a reversal of $2.3 million in the deferred tax valuation allowance. 

About FS Bancorp

FS Bancorp, Inc., a Washington corporation, is the holding company for 1st Security Bank of Washington ("the Bank"). The Bank provides loan and deposit services to customers who are predominately small and middle-market businesses and individuals in western Washington through its six branches in suburban communities in the greater Puget Sound area.  

Disclaimer

Certain matters discussed in this press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact and often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated, including, but not limited to: general economic conditions, either nationally or in our market area, that are worse than expected; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market area; increases in premiums for deposit insurance; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments; increased competitive pressures among financial services companies; our ability to execute our plans to grow our residential construction lending, our mortgage banking operations and our warehouse lending and the geographic expansion of our indirect home improvement lending; our ability to attract and retain deposits; our ability to control operating costs and expenses; changes in consumer spending, borrowing and savings habits; our ability to successfully manage our growth; legislative or regulatory changes that adversely affect our business or increase capital requirements, including changes related to Basel III; the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act and implementing regulations, changes in regulation policies and principles, or the interpretation of regulatory capital or other rules; adverse changes in the securities markets; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board; costs and effects of litigation, including settlements and judgments and inability of key third-party vendors to perform their obligations to us.

Any of the forward-looking statements that we make in this press release and in the other public statements we make are based upon management's beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. We caution readers not to place undue reliance on any forward-looking statements. We do not undertake and specifically disclaim 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 our actual results for fiscal 2012 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us, and could negatively affect the Company's operations and stock price performance.

(1) Earnings per share calculation are not meaningful as the Company converted from a mutual to a public company on July 9, 2012.
(2) Annualized.
(3) Total noninterest expense as a percentage of net interest income and total other noninterest income.
(4) Non-performing assets consists 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.
(5) Non-performing loans consists of non-accruing loans and accruing loans more than 90 days past due.