GlobeNewswire Inc | Oct 26, 2020 09:00AM EDT

October 26, 2020

MOUNTLAKE TERRACE, Wash., Oct. 26, 2020 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (NASDAQ:FSBW) (the Company), the holding company for 1st Security Bank of Washington (the Bank) today reported 2020 third quarter net income of $12.7 million, or $2.94 per diluted share, compared to $7.1 million, or $1.58 per diluted share for the same period last year.

Operating within the backdrop of the global COVID-19 pandemic, we focused on our established community banking business plan to achieve robust loan growth and strong profitability, stated Joe Adams, CEO. We are also pleased to announce that our Board of Directors has approved our thirty-first consecutive quarterly cash dividend. The quarterly dividend of $0.21 will be paid on November 19, 2020, to shareholders of record as of November 6, 2020.

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

The Company is following the Federal Housing Finance Agency guidelines for forbearance, foreclosure relief, and late payment reporting for the COVID-19 pandemic on all serviced loans and a modified format for portfolio loans. For portfolio loans, the primary method of relief is to allow the borrower up to 90-days of interest only payments and/or loan payment deferments, and, on a more limited basis, waived interest, late fees, or interest only loan payments and suspended foreclosure proceedings. As of September 30, 2020, the amount of portfolio loans remaining under payment/relief agreements includes commercial real estate loans of $23.8 million, commercial business loans of $7.6 million, portfolio one-to-four-family loans of $3.3 million, and consumer loans of $280,000. Additional detail is provided below in the Credit Quality discussion.

The Company participated in the U.S. Small Business Administrations (SBA) Paycheck Protection Program (PPP) through its conclusion on August 8, 2020. For borrowers in the communities we serve, the Company has funded 471 PPP loans totaling $74.1 million as of September 30, 2020.

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 Third Quarter Highlights

-- Net income was $12.7 million for the third quarter of 2020, compared to $10.0 million in the previous quarter, and $7.1 million for the same quarter one year ago; -- 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 $3.1 million this quarter and $4.6 million in the previous quarter, compared to $573,000 for the same quarter one year ago; -- Total gross loans increased $50.5 million during the quarter to $1.52 billion at September 30, 2020, compared to $1.47 billion at June 30, 2020, and $1.33 billion at September 30, 2019; -- The allowance for loan and lease losses (ALLL) to gross loans receivable (excluding loans held for sale (HFS)) for the third quarter of 2020 was 1.63%, up from 1.47% in the previous quarter and 0.96% for the same quarter one year ago. The adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans, was 1.72% (See Non-GAAP Financial Measures); -- The Company closed a record $589.9 million of one-to-four family loans in the third quarter, an increase of $111.5 million from the second quarter and $301.0 million from the third quarter of 2019; -- Total deposits increased $6.3 million during the quarter, including an increase of $20.7 million in relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts), partially offset by a reduction of $21.9 million in wholesale deposits; and -- Our Board of Directors approved a share repurchase plan which includes up to $5.0 million of shares to be repurchased over the next 12 months, depending on market conditions and other factors including the Companys liquidity requirements. The Company repurchased 11,010 shares of its common stock during the quarter ended September 30, 2020, at an average price per share of $40.61.

Asset Summary

Total assets increased $45.9 million, or 2.3%, to $2.05 billion at September 30, 2020, compared to $2.01 billion at June30, 2020, and increased $359.6 million, or 21.2%, from $1.69 billion at September 30, 2019. The quarter over linked quarter increase in total assets was primarily due to increases in loans HFS of $75.7 million, loans receivable, net of $47.1 million, other assets of $6.3 million, securities held-to-maturity of $5.5 million, securities available-for-sale of $4.4 million, and servicing rights of $1.1 million, partially offset by a decrease in total cash and cash equivalents of $90.1 million, certificates of deposit (CDs) at other financial institutions of $3.7 million, and Federal Home Loan Bank (FHLB) stock of $1.1 million.Year over year increases in total assets included increases in loans receivable, net of $180.2 million, loans HFS of $134.5 million, securities available-for-sale of $67.1 million, other assets of $9.6 million, and securities held-to-maturity of $5.5 million, partially offset by decreases in total cash and cash equivalents of $26.8 million and CDs at other financial institutions of $10.0 million.

(Dollars in September30,2020 June30,2020 September30,2019 thousands) Amount Percent Amount Percent Amount Percent REAL ESTATE LOANS Commercial $ 227,354 15.0 % $ 222,265 15.1 % $ 205,500 15.5 %Construction and 191,933 12.6 183,029 12.5 200,720 15.1 developmentHome equity 40,459 2.6 35,082 2.4 36,607 2.8 One-to-four-family 300,863 19.8 295,220 20.1 253,783 19.1 (excludes HFS)Multi-family 130,243 8.6 132,329 9.0 122,375 9.2 Total real estate 890,852 58.6 867,925 59.1 818,985 61.7 loans CONSUMER LOANS Indirect home 276,693 18.2 264,781 18.0 245,238 18.5 improvementMarine 84,650 5.6 76,893 5.2 68,036 5.1 Other consumer 3,465 0.2 3,647 0.3 4,660 0.4 Total consumer 364,808 24.0 345,321 23.5 317,934 24.0 loans COMMERCIAL BUSINESS LOANSCommercial and 224,276 14.8 213,961 14.6 134,104 10.1 industrialWarehouse lending 39,482 2.6 41,701 2.8 55,172 4.2 Total commercial 263,758 17.4 255,662 17.4 189,276 14.3 business loansTotal loans 1,519,418 100.0 % 1,468,908 100.0 % 1,326,195 100.0 %receivable, gross Allowance for loan (24,799 ) (21,524 ) (12,765 ) lossesDeferred costs and (4,240 ) (4,231 ) (3,137 ) fees, netPremiums onpurchased loans, 1,124 1,272 995 netTotal loans $ 1,491,503 $ 1,444,425 $ 1,311,288 receivable, net

Loans receivable, net increased $47.1 million to $1.49 billion at September 30, 2020, from $1.44 billion at June 30, 2020, and increased $180.2 million from $1.31 billion at September 30, 2019. The quarter over linked quarter increase in total real estate loans was $22.9 million, including increases in construction and development loans of $8.9 million, one-to-four-family portfolio loans of $5.6 million, home equity loans of $5.4 million, and commercial real estate loans of $5.1 million, partially offset by decreases in multi-family loans of $2.1 million. Consumer loans increased $19.5 million, primarily due to an increase of $11.9 million in indirect home improvement loans and $7.8 million in marine loans. Commercial business loans increased $8.1 million, primarily due to an increase in commercial and industrial loans of $10.3 million, partially offset by reductions in warehouse lending of $2.2 million. The increase in commercial and industrial loans was primarily tied to the continued investment in commercial lenders and their related business banking customers.

Originations of one-to-four-family loans to purchase and to refinance a home for the current quarter and the three months ended June 30, 2020, and for the three and nine months ended September 30, 2020 and 2019 were as follows:

(Dollars For the Three Months For the Three Monthsin Ended Ended Quarter Quarterthousands) September30,2020 June 30, 2020 over Quarter over Quarter Amount Percent Amount Percent $ Change % ChangePurchase $ 243,974 41.4 % $ 143,060 29.9 % $ 100,914 70.5 Refinance 345,919 58.6 335,333 70.1 10,586 3.2 Total $ 589,893 100.0 % $ 478,393 100.0 % $ 111,500 23.3

For the Three Months For the Three Months Year Year Ended Ended September30,2020 September30,2019 over Year over Year Amount Percent Amount Percent $ Change % ChangePurchase $ 243,974 41.4 % $ 163,459 56.6 % $ 80,515 49.3 Refinance 345,919 58.6 125,419 43.4 220,500 175.8 Total $ 589,893 100.0 % $ 288,878 100.0 % $ 301,015 104.2

For the Nine Months Ended For the Nine Months Ended Year Year September30,2020 September30,2019 over Year over Year Amount Percent Amount Percent $ Change % ChangePurchase $ 501,686 37.1 % $ 411,167 64.4 % $ 90,519 22.0 Refinance 852,202 62.9 227,547 35.6 624,655 274.5 Total $ 1,353,888 100.0 % $ 638,714 100.0 % $ 715,174 112.0

During the quarter ended September 30, 2020, the Company sold $479.6 million of one-to-four-family loans compared to sales of $427.0 million during the previous quarter, and sales of $247.3 million during the same quarter one year ago. During the nine months ended September 30, 2020, the Company sold $1.12 billion of one-to-four-family loans compared to sales of $551.6 million during the same period last year. Refinance activity increased significantly over the last year in response to decreases in market interest rates. Purchase activity in the third quarter of 2020 and year to date 2020 is also up significantly year over year (49% and 22% respectively) demonstrating our focus on purchase originations.

The Bank sold $3.0 million of securities available-for-sale during the third quarter of 2020 realizing a gain of $119,000. The Bank sold these securities to reduce both the effective portfolio duration and amount of lower yielding investments. The proceeds were used to fund loan growth during the quarter.

Liabilities and Equity Summary

Changes in deposits for the periods ending are as follows:

(Dollars in thousands) September30,2020 June30,2020 Relationship-basedtransactional Amount Percent Amount Percent $Change %Changedeposits:Noninterest-bearing $ 338,781 21.0 % $ 333,588 20.8 % $ 5,193 1.6 checkingInterest-bearing 229,576 14.2 220,214 13.7 9,362 4.3 checkingEscrow accountsrelated to 18,062 1.1 11,909 0.7 6,153 51.7 mortgages servicedSubtotal 586,419 36.3 565,711 35.2 20,708 3.7 Savings 144,886 9.0 143,740 8.9 1,146 0.8 Money market 377,585 23.4 324,253 20.2 53,332 16.4 Subtotal 522,471 32.4 467,993 29.1 54,478 11.6 Certificates ofdeposit less than 285,650 17.7 321,634 20.0 (35,984 ) (11.2 )$100,000Certificates ofdeposit of $100,000 150,437 9.3 166,543 10.4 (16,106 ) (9.7 )through $250,000Certificates ofdeposit of $250,000 68,242 4.3 84,991 5.3 (16,749 ) (19.7 )and overSubtotal 504,329 31.3 573,168 35.7 (68,839 ) (12.0 )Total $ 1,613,219 100.0 % $ 1,606,872 100.0 % $ 6,347 0.4

(Dollars in thousands) September30,2020 September30,2019 Relationship-basedtransactional Amount Percent Amount Percent $Change %Changedeposits:Noninterest-bearing $ 338,781 21.0 % $ 264,482 19.1 % $ 74,299 28.1 checkingInterest-bearing 229,576 14.2 196,834 14.2 32,742 16.6 checkingEscrow accountsrelated to 18,062 1.1 16,591 1.2 1,471 8.9 mortgages servicedSubtotal 586,419 36.3 477,907 34.5 108,512 22.7 Savings 144,886 9.0 114,826 8.3 30,060 26.2 Money market 377,585 23.4 258,883 18.7 118,702 45.9 Subtotal 522,471 32.4 373,709 27.0 148,762 39.8 Certificates ofdeposit less than 285,650 17.7 273,982 19.7 11,668 4.3 $100,000Certificates ofdeposit of $100,000 150,437 9.3 177,075 12.8 (26,638 ) (15.0 )through $250,000Certificates ofdeposit of $250,000 68,242 4.3 83,929 6.0 (15,687 ) (18.7 )and overSubtotal 504,329 31.3 534,986 38.5 (30,657 ) (5.7 )Total $ 1,613,219 100.0 % $ 1,386,602 100.0 % $ 226,617 16.3

Due to the COVID-19 pandemic and the resulting availability of PPP loan funds and stimulus funds, 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 September 30, 2020, non-retail CDs, which include brokered CDs, online CDs, and public funds CDs, decreased $21.9 million to $173.3 million, due to brokered deposit maturities, compared to $195.1 million at June 30, 2020. The year over year increase in non-retail CDs of $32.1 million from $141.1 million at September 30, 2019, was the result of a $29.9 million increase in brokered CDs tied to longer term interest rate swap transactions, a $2.0 million increase in online CDs, and a $269,000 increase in public funds CDs. Management remains focused on increasing its lower cost relationship-based deposits to fund long-term asset growth.

At September 30, 2020, borrowings increased $23.4 million, or 15.6%, to $173.6 million, from $150.3 million at June30, 2020, and increased $96.8 million, or 125.9% from $76.9 million at September 30, 2019. The increase in borrowings from the linked quarter is primarily due to the addition of Federal Reserve Bank (FRB) borrowings of $27.0 million to fund short term HFS growth and advances from the Paycheck Protection Program Liquidity Facility (PPPLF) of $11.1 million, partially offset by the pay down of FHLB advances of $14.8 million. Under the PPPLF, the Bank pledged PPP loans at face value as collateral to obtain FRB non-recourse loans. The increase from the prior year is primarily due to the PPPLF and FRB borrowings.

Total stockholders equity increased $11.9 million, to $220.6 million at September 30, 2020, from $208.6 million at June30, 2020, and increased $26.3 million, from $194.3 million at September 30, 2019. The increase in stockholders equity during the current quarter was primarily due to net income of $12.7 million, partially offset by dividends of $882,000 and the common stock repurchases of $448,000. The Company repurchased 11,010 shares of its common stock during the quarter ended September 30, 2020, at an average price of $40.61 per share. Book value per common share was $52.82 at September 30, 2020, compared to $50.08 at June 30, 2020, and $44.61 at September 30, 2019.

The Bank is well capitalized under the minimum capital requirements established by the Federal Deposit Insurance Corporation (FDIC) at September 30, 2020 with a Community Bank Leverage Ratio (CBLR) of 10.7%, compared to the required CBLR of greater than 9.0% and the regulatory approved CBLR of 8.0% during the COVID-19 pandemic. The Companys Tier 1 leverage capital ratio was 10.8% at September 30, 2020.

Credit Quality

The ALLL at September 30, 2020, increased to $24.8 million, or 1.63% of gross loans receivable, excluding loans HFS, compared to $21.5 million, or 1.47% of gross loans receivable, excluding loans HFS at June 30, 2020, and $12.8 million, or 0.96% of gross loans receivable, excluding loans HFS, at September 30, 2019. The adjusted ALLL to gross loans receivable, excluding loans HFS and PPP loans, was 1.72% at September 30, 2020 (See Non-GAAP Financial Measures). Non-performing loans decreased to $7.6 million at September 30, 2020, from $7.9 million at June 30, 2020 and increased from $2.2 million at September 30, 2019. The decrease in non-performing loans quarter over linked quarter was primarily a result of decreases in nonperforming consumer loans, and the year over year increase was associated with borrowers adversely impacted by the COVID-19 pandemic.

Loans classified as substandard increased $6.1 million to $18.5 million at September 30, 2020, compared to $12.4 million at June 30, 2020, and increased $11.1 million from $7.4 million at September 30, 2019. The quarter over linked quarter increase in substandard loans was attributable to the downgrade of two one-to-four-family loan relationships with combined principal balances of $6.5 million, primarily due to the COVID-19 pandemic. The year over year increase in substandard loans was primarily due to these loans and two commercial business loans totaling $4.3 million and two commercial real estate loans totaling $945,000 downgraded in the second quarter of 2020, with the addition of another commercial real estate loan in the amount of $1.1 million downgraded in the fourth quarter of 2019. There was one other real estate owned (OREO) property of $90,000 at both September 30, 2020 and June 30, 2020, compared to two OREO properties totaling $178,000 at September 30, 2019.

Included in the carrying value of gross loans are net discounts on loans purchased in the Anchor Bank acquisition. The remaining net discount on loans acquired was $1.8 million, $2.0 million, and $3.1 million, on $159.2 million, $168.7 million, and $223.7 million of gross loans at September 30, 2020, June 30, 2020, and September 30, 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 as needed. 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:

(Dollars in thousands)Loan types: September30,2020 June 30, 2020 March 31, 2020Construction $ 4,335 $ 4,704 $ 4,565 Education/worship 4,796 5,558 5,525 Food and beverage 14,346 16,199 12,988 Hospitality 43,903 44,136 15,578 Manufacturing 18,765 19,777 18,122 Retail 2,663 11,865 4,058 Transportation 4,992 4,532 5,111 Other 23,241 20,040 18,452 Total $ 117,041 $ 126,811 $ 84,399

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 $1.2 million, to $18.9 million for the three months ended September 30, 2020, from $17.7 million for the three months ended September 30, 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 $1.7 million, including a $1.6 million decrease in interest expense on deposits and a $79,000 decrease in interest expense on borrowings. Interest income decreased $483,000 including decreases of $400,000 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 PPP loans, and the impact of refinances of higher yielding one-to-four-family portfolio loans, along with an $83,000 decrease in interest and dividends on investment securities, and cash and cash equivalents. For the nine months ended September 30, 2020, net interest income increased $1.3 million, to $54.3 million, from $53.0 million for the nine months ended September 30, 2019 in a similar manner as for the three month comparison described above, with decreases in interest expense of $2.8 million and interest income of $1.5 million.

The net interest margin (NIM) decreased 62 basis points to 3.92% for the three months ended September 30, 2020, from 4.54% for the same period in the prior year, and decreased 58 basis points to 4.03% for the nine months ended September 30, 2020, from 4.61% for the nine months ended September 30, 2019. The average yield on PPP loans was 1.98 %, including the recognition of the net deferred fees, resulting in a negative impact to the NIM of eight basis points during the quarter ended September 30, 2020. When including the net interest income impacts of the PPPLF, NIM was negatively impacted an additional 10 basis points during the quarter ended September 30, 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 targeted federal funds rate in response to COVID-19. The year over year decrease in NIM was mostly driven by lower interest rates on new loan originations. The average cost of funds, including noninterest-bearing checking, decreased 63 basis points to 0.74% for the three months ended September 30, 2020, from 1.37% for the three months ended September 30, 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 43 basis points to 0.93% for the nine months ended September 30, 2020, from 1.36% for the nine months ended September 30, 2019, likewise reflecting decreases in market interest rates over last year. Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.

For the three and nine months ended September 30, 2020, the provision for loan losses was $3.1 million and $11.4 million, compared to $573,000 and $2.2 million for the three and nine months ended September 30, 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 September 30, 2020, net recoveries totaled $175,000 compared to net charge-offs of $147,000 for the same period last year. Net recoveries totaled $135,000 during the nine months ended September 30, 2020, compared to net charge-offs of $1.8 million during the nine months ended September 30, 2019.

Noninterest income increased $10.8 million, to $17.5 million, for the three months ended September 30, 2020, from $6.7 million for the three months ended September 30, 2019. The increase during the period primarily reflects an $11.6 million increase in gain on sale of loans, partially offset by a $1.1 million decrease in service charges and fee income primarily due to an increase in mortgage servicing rights amortization of $711,000, resulting from declining interest rates and increased refinancing activity. Noninterest income increased $23.2 million, to $40.6 million, for the nine months ended September 30, 2020, from $17.4 million for the nine months ended September 30, 2019. This increase was impacted by a $24.9 million increase in gain on sale of loans and a $1.5 million 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 $3.6 million decrease in service charges and fee income, primarily due to an increase in mortgage servicing rights amortization of $3.2 million.

Noninterest expense increased $2.5 million, to $17.2 million for the three months ended September 30, 2020, from $14.7 million for the three months ended September 30, 2019. The increase in noninterest expense reflects a $2.4 million increase in salaries and benefits, primarily attributable to increases in incentives and commissions of $5.9 million driven by increased production of HFS loans and compensation of $792,000, partially offset by increases in recognized deferred costs on direct loan origination activities of $4.7 million. Noninterest expense increased $1.4 million, to $48.0 million for the nine months ended September 30, 2020, from $46.6 million for the nine months ended September 30, 2019. The increase during this period was primarily due to a $2.4 million increase in salaries and benefits, primarily attributable to increases in incentives and commissions of $11.2 million, again driven by increased production of HFS loans, and compensation of $2.0 million, partially offset by increases in recognized deferred costs on direct loan origination activities of $11.9 million, as well as no acquisition costs for the nine months ended September 30, 2020, compared to $1.9 million for the nine months ended September 30, 2019. Other increases between the periods included $1.1 million in the impairment of servicing rights, and $723,000 in operations expense, partially offset by decreases of $738,000 in loan costs and $612,000 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 accepts deposits, and seven loan production offices in various suburban communities in the greater Puget Sound area, and one loan production office in the market area of the Tri-Cities, Washington. The Bank services home mortgage customers throughout Washington State with an emphasis in the Puget Sound and Tri-Cities home lending markets.

Forward-Looking Statements

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. Forwardlooking 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 forwardlooking 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 Companys actual results for 2020 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 SUBSIDIARYCONSOLIDATED BALANCE SHEETS(Dollars in thousands, except share amounts) (Unaudited)

Linked Year September30, June30, September30, Quarter Over Year 2020 2020 2019 % % Change ChangeASSETS Cash and due from $ 11,348 $ 12,214 $ 15,979 (7 ) (29 )banksInterest-bearingdeposits at other 24,725 113,910 46,915 (78 ) (47 )financialinstitutionsTotal cash and cash 36,073 126,124 62,894 (71 ) (43 )equivalentsCertificates ofdeposit at other 14,262 17,926 24,296 (20 ) (41 )financialinstitutionsSecuritiesavailable-for-sale, 173,101 168,709 106,038 3 63 at fair valueSecurities 5,500 ? ? NM NM held-to-maturityLoans held for 215,123 139,410 80,619 54 167 sale, at fair valueLoans receivable, 1,491,503 1,444,425 1,311,288 3 14 netAccrued interest 6,809 6,303 5,723 8 19 receivablePremises and 27,898 28,340 29,066 (2 ) (4 )equipment, netOperating lease 5,251 4,730 4,713 11 11 right-of-useFederal Home LoanBank (?FHLB?) 6,553 7,659 7,995 (14 ) (18 )stock, at costOther real estate 90 90 178 ? (49 )owned (?OREO?)Bank owned lifeinsurance (?BOLI?), 36,006 35,788 35,136 1 2 netServicing rights,held at the lower 11,736 10,672 11,193 10 5 of cost or fairvalueGoodwill 2,312 2,312 2,312 ? ? Core deposit 4,928 5,104 5,647 (3 ) (13 )intangible, netOther assets 17,481 11,164 7,899 57 121 TOTAL ASSETS $ 2,054,626 $ 2,008,756 $ 1,694,997 2 21 LIABILITIES Deposits: Noninterest-bearing $ 356,843 $ 345,497 $ 281,073 3 27 accountsInterest-bearing 1,256,376 1,261,375 1,105,529 ? 14 accountsTotal deposits 1,613,219 1,606,872 1,386,602 ? 16 Borrowings 173,640 150,255 76,864 16 126 Subordinated note: Principal amount 10,000 10,000 10,000 ? ? Unamortized debt (100 ) (105 ) (120 ) (5 ) (17 )issuance costsTotal subordinatednote less 9,900 9,895 9,880 ? ? unamortized debtissuance costsOperating lease 5,468 4,945 4,881 11 12 liabilityDeferred tax 2,662 2,675 1,029 ? 159 liability, netOther liabilities 29,187 25,473 21,484 15 36 Total liabilities 1,834,076 1,800,115 1,500,740 2 22 COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS? EQUITYPreferred stock,$.01 par value;5,000,000 shares ? ? ? ? ? authorized; noneissued oroutstandingCommon stock, $.01par value;45,000,000sharesauthorized;4,263,091sharesissued and 43 42 44 2 (2 )outstanding atSeptember30,2020,4,245,041 atJune30,2020, and4,452,872 atSeptember30,2019Additional paid-in 81,676 81,616 88,608 ? (8 )capitalRetained earnings 135,921 124,090 105,672 10 29 Accumulated othercomprehensive 3,285 3,334 583 (1 ) 463 income, net of taxUnearned shares?Employee Stock (375 ) (441 ) (650 ) (15 ) (42 )Ownership Plan(?ESOP?)Total stockholders? 220,550 208,641 194,257 6 14 equityTOTAL LIABILITIESAND STOCKHOLDERS? $ 2,054,626 $ 2,008,756 $ 1,694,997 2 21 EQUITY

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

Three Months Ended Qtr Year September30, June30, September30, Over Over Qtr Year 2020 2020 2019 % % Change ChangeINTEREST INCOMELoansreceivable, $ 21,066 $ 20,564 $ 21,466 2 (2 )including feesInterest anddividends oninvestmentsecurities,cash and cashequivalents, 1,162 1,149 1,245 1 (7 )andcertificatesof deposit atotherfinancialinstitutionsTotal interestand dividend 22,228 21,713 22,711 2 (2 )incomeINTEREST EXPENSEDeposits 2,637 3,226 4,223 (18 ) (38 )Borrowings 503 458 582 10 (14 )Subordinated 170 169 171 1 (1 )noteTotal interest 3,310 3,853 4,976 (14 ) (33 )expenseNET INTEREST 18,918 17,860 17,735 6 7 INCOMEPROVISION FOR 3,100 4,649 573 (33 ) 441 LOAN LOSSESNET INTERESTINCOME AFTER 15,818 13,211 17,162 20 (8 )PROVISION FORLOAN LOSSESNONINTEREST INCOMEServicecharges and 546 96 1,619 469 (66 )fee incomeGain on sale 16,228 13,365 4,583 21 254 of loansGain on saleof investment 118 182 ? (35 ) 100 securitiesEarnings oncash surrender 219 215 219 2 ? value of BOLIOthernoninterest 435 273 323 59 35 incomeTotalnoninterest 17,546 14,131 6,744 24 160 incomeNONINTEREST EXPENSESalaries and 10,225 7,420 7,865 38 30 benefitsOperations 2,809 2,573 2,360 9 19 Occupancy 1,167 1,216 1,104 (4 ) 6 Data 1,127 1,051 1,148 7 (2 )processingGain on sale ? ? (40 ) ? (100 )of OREOOREO expenses ? 2 1 (100 ) (100 )Loan costs 593 451 903 31 (34 )Professional 601 668 654 (10 ) (8 )and board feesFederalDepositInsurance 290 158 (29 ) 84 (1,100 )Corporation(?FDIC?)insuranceMarketing and 109 103 178 6 (39 )advertisingAcquisition ? ? 257 ? (100 )costsAmortizationof core 176 177 190 (1 ) (7 )depositintangibleImpairment onservicing 82 803 131 (90 ) (37 )rightsTotalnoninterest 17,179 14,622 14,722 17 17 expenseINCOME BEFOREPROVISION FOR 16,185 12,720 9,184 27 76 INCOME TAXESPROVISION FOR 3,472 2,700 2,040 29 70 INCOME TAXESNET INCOME $ 12,713 $ 10,020 $ 7,144 27 78 Basic earnings $ 2.99 $ 2.34 $ 1.62 28 85 per shareDilutedearnings per $ 2.94 $ 2.30 $ 1.58 28 86 share

Nine Months Ended Year September30, September30, Over Year 2020 2019 % ChangeINTEREST INCOME Loans receivable, including fees $ 62,370 $ 63,677 (2 )Interest and dividends on investmentsecurities, cash and cash equivalents, 3,520 3,710 (5 )and certificates of deposit at otherfinancial institutionsTotal interest and dividend income 65,890 67,387 (2 )INTEREST EXPENSE Deposits 9,670 11,989 (19 )Borrowings 1,458 1,932 (25 )Subordinated note 511 508 1 Total interest expense 11,639 14,429 (19 )NET INTEREST INCOME 54,251 52,958 2 PROVISION FOR LOAN LOSSES 11,435 2,233 412 NET INTEREST INCOME AFTER PROVISION 42,816 50,725 (16 )FOR LOAN LOSSESNONINTEREST INCOME Service charges and fee income 1,566 5,131 (69 )Gain on sale of loans 35,492 10,556 236 Gain on sale of investment securities 300 32 838 Earnings on cash surrender value of 650 651 ? BOLIOther noninterest income 2,560 1,012 153 Total noninterest income 40,568 17,382 133 NONINTEREST EXPENSE Salaries and benefits 27,192 24,757 10 Operations 7,785 7,062 10 Occupancy 3,492 3,446 1 Data processing 3,158 3,770 (16 )Loss (gain) on sale of OREO 2 (125 ) (102 )OREO expenses 2 12 (83 )Loan costs 1,544 2,282 (32 )Professional and board fees 1,950 1,820 7 FDIC insurance 574 358 60 Marketing and advertising 358 505 (29 )Acquisition costs ? 1,855 (100 )Amortization of core deposit 529 570 (7 )intangibleImpairment of servicing rights 1,399 278 403 Total noninterest expense 47,985 46,590 3 INCOME BEFORE PROVISION FOR INCOME 35,399 21,517 65 TAXESPROVISION FOR INCOME TAXES 7,499 4,718 59 NET INCOME $ 27,900 $ 16,799 66 Basic earnings per share $ 6.49 $ 3.80 71 Diluted earnings per share $ 6.38 $ 3.71 72

KEY FINANCIAL RATIOS AND DATA (Unaudited) At or For the Three Months Ended September30, June30, September30, 2020 2020 2019 PERFORMANCE RATIOS: Return on assets (ratio of netincome to average total assets)^ 2.51 % 2.08 % 1.71 %(1)Return on equity (ratio of net 24.04 19.77 14.75 income to average equity)^(1)Yield on average interest-earning 4.60 4.75 5.81 assets ^(1)Interest incurred on liabilitiesas a percentage of average 0.74 0.91 1.37 noninterest-bearing deposits andinterest-bearing liabilities ^(1)Interest rate spread information ? 3.86 3.84 4.44 average during periodNet interest margin^(1) 3.92 3.91 4.54 Operating expense to average total 3.39 3.03 3.53 assets^ (1)Average interest-earning assets toaverage interest-bearing 134.22 132.98 133.59 liabilitiesEfficiency ratio^(2) 47.11 45.71 60.14

At or For the Nine Months Ended September30, September30, 2020 2019 PERFORMANCE RATIOS: Return on assets (ratio of net income 1.97 % 1.38 %to average total assets)^(1)Return on equity (ratio of net income 18.11 11.93 to average equity)^(1)Yield on average interest-earning 4.89 5.87 assets ^(1)Interest incurred on liabilities as apercentage of average 0.93 1.36 noninterest-bearing deposits andinterest-bearing liabilities ^(1)Interest rate spread information ? 3.96 4.51 average during periodNet interest margin^(1) 4.03 4.61 Operating expense to average total 3.38 3.82 assets ^(1)Average interest-earning assets to 133.27 131.26 average interest-bearing liabilitiesEfficiency ratio^(2) 50.61 66.24

September30, June30, September30, 2020 2020 2019 ASSET QUALITY RATIOS AND DATA:Non-performing assetsto total assets at 0.37 % 0.40 % 0.14 %end of period^(3)Non-performing loansto total gross 0.50 0.54 0.17 loans^(4)Allowance for loanlosses to 327.94 272.40 582.61 non-performingloans^(4)Allowance for loanlosses to gross loans 1.63 1.47 0.96 receivable, excludingHFS loans CAPITAL RATIOS, BANK ONLY:Community Bank 10.67 % 10.85 % 11.63 %Leverage Ratio CAPITAL RATIOS, COMPANY ONLY:Tier 1 leverage-based 10.84 % 10.54 % 11.32 %capital

At or For the Three Months Ended September30, June30, September30, 2020 2020 2019 PER COMMON SHARE DATA:Basicearnings per $ 2.99 $ 2.34 $ 1.62 shareDilutedearnings per $ 2.94 $ 2.30 $ 1.58 shareWeightedaverage basic 4,224,821 4,232,776 4,401,303 sharesoutstandingWeightedaveragediluted 4,295,334 4,305,249 4,498,380 sharesoutstandingCommon sharesoutstanding 4,175,598 ^ 4,165,944 ^ 4,354,335 ^at end of (5) (6) (7)periodBook valueper shareusing common $ 52.82 $ 50.08 $ 44.61 sharesoutstandingTangible bookvalue pershare using $ 51.08 $ 48.30 $ 42.79 common sharesoutstanding^(8)

____________

-- Annualized. -- Total noninterest expense as a percentage of net interest income and total noninterest income. -- 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. -- Non-performing loans consist of non-accruing loans and accruing loans 90 days or more past due. -- 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. -- Common shares were calculated using shares outstanding of 4,245,041 at June 30, 2020, less 40,215 unvested restricted stock shares, and 38,882 unallocated ESOP shares. -- Common shares were calculated using shares outstanding of 4,452,872 at September 30, 2019, less 40,215 unvested restricted stock shares, and 58,322 unallocated ESOP shares. -- Tangible book value per share using outstanding common shares excludes intangible assets. This ratio represents a non-GAAP financial measure. See also, Non-GAAP Financial Measures below.

(Dollars in For the Three Months Ended For the Nine Months Ended QTR Over Year Overthousands) September30, September30, QTR YearAverage Balances 2020 2019 2020 2019 $ Change $ ChangeAssets Loans receivable,net deferred loan $ 1,648,070 $ 1,368,962 $ 1,537,365 $ 1,352,006 $ 279,108 $ 185,359 fees ^(1)Securitiesavailable-for-sale, 165,095 99,813 151,176 99,545 65,282 51,631 at fair valueSecurities 2,462 - 826 - 2,462 826 held-to-maturityInterest-bearingdeposits andcertificates of 97,473 74,234 100,836 75,425 23,239 25,411 deposit at otherfinancialinstitutionsFHLB stock, at cost 7,219 8,334 8,240 8,482 (1,115 ) (242 )Totalinterest-earning 1,920,319 1,551,343 1,798,443 1,535,458 368,976 262,985 assetsNoninterest-earning 94,190 101,873 97,435 96,603 (7,683 ) 832 assetsTotal assets $ 2,014,509 $ 1,653,216 $ 1,895,878 $ 1,632,061 $ 361,293 $ 263,817 Liabilities andstockholders? equityInterest-bearing $ 1,268,795 $ 1,068,189 $ 1,200,796 $ 1,066,595 $ 200,606 $ 134,201 accountsBorrowings 152,045 83,208 138,749 93,356 68,837 45,393 Subordinated note 9,897 9,877 9,892 9,872 20 20 Totalinterest-bearing 1,430,737 1,161,274 1,349,437 1,169,823 269,463 179,614 liabilitiesNoninterest-bearing 344,731 276,689 314,789 253,529 68,042 61,260 accountsOthernoninterest-bearing 28,698 23,075 25,837 20,457 5,623 5,380 liabilitiesStockholders? 210,343 192,178 205,815 188,252 18,165 17,563 equityTotal liabilitiesand stockholders? $ 2,014,509 $ 1,653,216 $ 1,895,878 $ 1,632,061 $ 361,293 $ 263,817 equity

-- Includes loans held for sale.

Non-GAAP Financial Measures:

In addition to financial results presented in accordance with generally accepted accounting principles utilized in the United States (GAAP), this earnings release contains the tangible book value per share, adjusted NIM excluding PPP loans and PPPLF activity, and adjusted ALLL excluding PPP loans as non-GAAP financial measures.

Tangible common stockholders equity is calculated by excluding intangible assets from stockholders equity. For this financial measure, the Companys intangible assets are goodwill and core deposit intangible. Tangible book value per share is calculated by dividing tangible common shareholders equity by the number of common shares outstanding. The Company believes that this non-GAAP measure is consistent with the capital treatment utilized by the investment community, which excludes intangible assets from the calculation of risk-based capital ratios and presents this measure to facilitate comparison of the quality and composition of the Company's capital over time and in comparison to its competitors. The Company believes that presenting NIM excluding the effect of PPP loans and the PPPLF, and the ALLL excluding PPP loans is useful in assessing the impact of these special governmental sponsored programs as both the PPP loan balance and PPPLF borrowings are anticipated to substantially decrease within a short time upon forgiveness by the SBA of the PPP loans.

These non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Further, these non-GAAP financial measures should not be considered in isolation or as a substitute for those measures in accordance with GAAP and may not be comparable to similarly titled measures reported by other companies.

Reconciliation of the GAAP book value per share and non-GAAP tangible book value per share is presented below:

September30, June30, September30,(Dollars in thousands,except share and per 2020 2020 2019share amounts)Stockholders' equity $ 220,550 $ 208,641 $ 194,257 Goodwill and coredeposit intangible, (7,240 ) (7,416 ) (7,959 )netTangible common $ 213,310 $ 201,225 $ 186,298 stockholders' equity Common sharesoutstanding at end of 4,175,598 4,165,944 4,354,335 period Common stockholders'equity (book value) $ 52.82 $ 50.08 $ 44.61 per share (GAAP)Tangible commonstockholders' equity $ 51.08 $ 48.30 $ 42.79 (tangible book value)per share (non-GAAP)

Reconciliation of the NIM (non-GAAP) which excludes PPP loans and PPPLF borrowings, as compared to NIM (GAAP), for the periods indicated:

Three Months Nine Months Ended Ended(Dollars in thousands) September 30, September 30, 2020 2020Net interest margin (GAAP) 3.92 % 4.03 % Net interest income before provision $ 18,918 $ 54,251 (GAAP)Interest income on PPP loans (187 ) (341 )Accreted fees/costs on PPP loans, net (183 ) (346 )Interest expense on PPPLF borrowings 60 104 Interest income on PPPLF borrowings (280 ) (519 )proceeds ^(1)Net interest income before provision,excluding interest and accreted fees/costs, net on PPP loans and interest $ 18,328 $ 53,149 income and expense related to PPPLFborrowings (non-GAAP) Average interest-earning assets (GAAP) 1,920,319 1,798,433 Average proceeds from PPPLF borrowings (65,628 ) (38,496 )Average PPP loan balance (74,203 ) (45,560 )Adjusted average interest earning assets $ 1,780,488 $ 1,714,377 (non-GAAP) Days in period 92 274 Days in year 366 366 Net interest margin adjusted for PPP 4.10 % 4.14 %loans and PPPLF (non-GAAP)

-- Assumes proceeds from PPPLF borrowings reinvested at the Company's blended yield on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions.

Reconciliation of the ALLL (non-GAAP) which excludes PPP loans, as compared to the ALLL (GAAP) for the periods indicated:

September30, June30, March 31,(Dollars in thousands) 2020 2020 2020Total gross loans receivable, $ 1,519,418 $ 1,468,908 $ 1,411,874 excluding loans HFS (GAAP)PPP Loans (74,133 ) (75,272 ) ? Gross loans receivable,excluding loans HFS and PPP $ 1,445,285 $ 1,393,636 $ 1,411,874 loans (non-GAAP) ALLL (GAAP) $ (24,799 ) $ (21,525 ) $ (16,872 ) Adjusted ALLL to gross loansreceivable, excluding loans HFS 1.72 % 1.54 % 1.20 %and PPP loans (non-GAAP)ALLL to gross loans receivable, 1.63 % 1.47 % 1.20 %excluding loans HFS (GAAP)

Contacts: Joseph C. Adams, Chief Executive Officer Matthew D. Mullet, Chief Financial Officer (425) 771-5299 www.FSBWA.com