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FS Bancorp, Inc. Reports Net Income for the Third Quarter of $7.1 Million or $1.58 Per Diluted Share

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FS Bancorp, Inc. Reports Net Income for the Third Quarter of $7.1 Million or $1.58 Per Diluted Share

MOUNTLAKE TERRACE, Wash., Oct. 24, 2019 (GLOBE NEWSWIRE) -- FS Bancorp, Inc. (FSBW) (the “Company”), the holding company for 1st Security Bank of Washington (the “Bank”) today reported 2019 third quarter net income of $7.1 million, or $1.58 per diluted share, compared to $4.1 million, or $1.07 per diluted share for the same period last year.

“We continue to be pleased with the integration of the Anchor Bancorp acquisition,” stated CEO Joe Adams. “Our financial results reflect the hard work by our combined employees that went into incorporating the two core operating systems, ongoing employee engagement, and partnerships with the communities we serve.”

CFO Matthew Mullet noted, “The Board of Directors increased the quarterly cash dividend to $0.20 per share from $0.15 per share payable on November 15, 2019, driven by the combined company’s financial results post acquisition.”

2019 Third Quarter Highlights

  • Net income was $7.1 million for the third quarter of 2019, compared to $4.5 million in the previous quarter, and $4.1 million for the comparable quarter one year ago;

  • Net income for the third quarter of 2019 includes $257,000 of acquisition-related expenses, compared to $1.2 million of acquisition-related expenses in the preceding quarter and $443,000 in the third quarter of 2018;

  • Gain on sale of loans increased $1.0 million, or 28.2%, compared to the previous quarter and $765,000, or 20.0%, compared to the third quarter of 2018;

  • The efficiency ratio improved to 60.1%, reflecting increased revenues and decreased acquisition costs from the merger with Anchor Bancorp (“Anchor Acquisition”), compared to 72.3% in the previous quarter and 67.0% in the third quarter of 2018;

  • Total gross loans increased $30.1 million, or 2.3%, during the quarter, to $1.33 billion at September 30, 2019, compared to $1.30 billion at June 30, 2019, and increased $365.1 million, or 38.0%, from $961.1 million at September 30, 2018, mainly due to the loans acquired from the Anchor Acquisition;

  • Deposits increased $52.4 million, or 3.9%, during the quarter to $1.39 billion at September 30, 2019, compared to $1.33 billion at June 30, 2019, and increased $442.1 million, or 46.8%, from $944.5 million at September 30, 2018, primarily due to the deposits assumed in the Anchor Acquisition;

  • The Company repurchased 46,562 shares of its common stock during the quarter ended September 30, 2019, at an average price per share of $48.88; and

  • Capital levels at the Bank were 14.5% for total risk-based capital and 11.6% for Tier 1 leverage capital at September 30, 2019.

Balance Sheet and Credit Quality

Total assets increased $53.9 million, or 3.3%, to $1.69 billion at September 30, 2019, compared to $1.64 billion at June 30, 2019, and increased $503.7 million, or 42.3%, from $1.19 billion at September 30, 2018. The quarter over linked quarter increase in total assets was primarily due to increases in loans receivable, net of $29.2 million, loans held for sale (“HFS”) of $14.1 million, securities available-for-sale, at fair value of $9.8 million, and total cash and cash equivalents of $3.3 million, partially offset by a decrease in other assets of $2.0 million. The year over year increase in total assets included increases in loans receivable, net of $363.7 million, total cash and cash equivalents of $47.7 million, loans HFS of $25.8 million, bank owned life insurance (“BOLI”) of $21.6 million, premises and equipment, net of $12.5 million, securities available-for-sale, at fair value of $8.7 million, CDs at other financial institutions of $6.9 million, operating lease right-of-use assets of $4.7 million, core deposit intangible, net of $4.6 million, other assets of $3.3 million, and servicing rights of $2.0 million. The year over year increases were primarily due to the assets acquired in the Anchor Acquisition, along with organic loan growth.

LOAN PORTFOLIO

(Dollars in thousands)

September 30, 2019

June 30, 2019

September 30, 2018

Amount

Percent

Amount

Percent

Amount

Percent

REAL ESTATE LOANS

Commercial

$

205,500

15.5

%

$

206,834

16.0

%

$

68,694

7.1

%

Construction and development

200,720

15.1

214,140

16.5

191,172

19.9

Home equity

36,607

2.8

36,860

2.8

26,085

2.7

One-to-four-family (excludes HFS)

253,783

19.1

248,921

19.2

188,333

19.6

Multi-family

122,375

9.2

103,219

8.0

48,061

5.0

Total real estate loans

818,985

61.7

809,974

62.5

522,345

54.3

CONSUMER LOANS

Indirect home improvement

200,984

15.2

188,336

14.5

155,870

16.2

Solar

44,254

3.3

44,508

3.4

42,967

4.5

Marine

68,036

5.1

66,064

5.1

56,578

5.9

Other consumer

4,660

0.4

4,875

0.4

2,059

0.2

Total consumer loans

317,934

24.0

303,783

23.4

257,474

26.8

COMMERCIAL BUSINESS LOANS

Commercial and industrial

134,104

10.1

135,336

10.5

113,786

11.9

Warehouse lending

55,172

4.2

47,028

3.6

67,540

7.0

Total commercial business loans

189,276

14.3

182,364

14.1

181,326

18.9

Total loans receivable, gross

1,326,195

100.0

%

1,296,121

100.0

%

961,145

100.0

%

Allowance for loan losses

(12,765

)

(12,340

)

(12,045

)

Deferred costs and fees, net

(3,137

)

(2,940

)

(3,195

)

Premiums on purchased loans, net

995

1,278

1,667

Total loans receivable, net

$

1,311,288

$

1,282,119

$

947,572

Loans receivable, net increased $29.2 million to $1.31 billion for September 30, 2019, from $1.28 billion at June 30, 2019, and increased $363.7 million from $947.6 million at September 30, 2018. The quarter over linked quarter increase in total real estate loans was $9.0 million, including increases in multi-family of $19.2 million and one-to-four-family portfolio of $4.9 million, partially offset by decreases in construction and development of $13.4 million, commercial real estate of $1.3 million, and home equity of $253,000. Consumer loans increased $14.2 million, primarily due to increases of $12.6 million in indirect home improvement loans and $2.0 million in marine loans. Commercial business loans increased $6.9 million, primarily due to an increase in warehouse lending of $8.1 million, partially offset by a decrease in commercial and industrial loans of $1.2 million. This $1.2 million decrease primarily reflects the sale of four U.S. Department of Agriculture loans in the amount of $8.4 million, with a gain on sale of $122,000.

One-to-four-family loans originated through the home lending segment, which includes loans HFS, loans held for investment, fixed rate seconds, and loans brokered to other institutions, were $288.9 million during the quarter ended September 30, 2019, an increase of $80.9 million, or 38.9%, compared to $208.0 million for the preceding quarter, and an increase of $95.9 million, or 49.7% from $193.0 million, for the comparable quarter one year ago. During the nine months ended September 30, 2019, originations through the home lending segment were $638.7 million, an increase of $83.4 million, or 15.0%, compared to $555.3 million for the nine months ended September 30, 2018. During the quarter ended September 30, 2019, the Company sold $247.3 million of one-to-four-family loans, compared to sales of $173.4 million during the previous quarter, and sales of $174.9 million during the same quarter one year ago. During the nine months ended September 30, 2019, the Company sold $551.6 million of one-to-four-family loans compared to sales of $490.6 million during the same period last year.

Originations of one-to-four-family loans to purchase and to refinance a home for the three and nine months ended September 30, 2019 and 2018 were as follows:

(Dollars in thousands)

For the Three Months
Ended

For the Three Months
Ended

Year

Year

September 30, 2019

September 30, 2018

over Year

over Year

Amount

Percent

Amount

Percent

$ Change

% Change

Purchase

$

163,459

56.6

%

$

162,166

84.4

%

$

1,293

0.8

%

Refinance

125,419

43.4

29,971

15.6

95,448

318.5

%

Total

$

288,878

100.0

%

$

192,137

100.0

%

$

96,741

50.4

%


For the Nine Months
Ended

For the Nine Months
Ended

Year

Year

September 30, 2019

September 30, 2018

over Year

over Year

Amount

Percent

Amount

Percent

$ Change

% Change

Purchase

$

411,167

64.4

%

$

436,826

78.9

%

$

(25,659

)

(5.9

)%

Refinance

227,547

35.6

116,626

21.1

110,921

95.1

%

Total

$

638,714

100.0

%

$

553,452

100.0

%

$

85,262

15.4

%

The allowance for loan losses (“ALLL”) at September 30, 2019 increased to $12.8 million, or 0.96% of gross loans receivable, excluding loans HFS, compared to $12.3 million, or 0.95% of gross loans receivable, excluding loans HFS at June 30, 2019, and $12.0 million, or 1.3% of gross loans receivable, excluding loans HFS, at September 30, 2018. Non-performing loans increased to $2.2 million at September 30, 2019, from $1.6 million at June 30, 2019, and was unchanged from $2.2 million at September 30, 2018. Substandard loans increased $898,000 to $7.4 million at September 30, 2019, compared to $6.5 million at June 30, 2019, and was unchanged from the prior year. The quarter over linked quarter increase was primarily due to an increase in non-performing one-to-four-family loans of $512,000. There were two other real estate owned (“OREO”) properties totaling $178,000 at September 30, 2019, and three OREO properties totaling $254,000 at June 30, 2019, compared to no OREO properties at September 30, 2018.

Included in the carrying value of gross loans are net discounts on loans purchased in the Anchor Acquisition. The remaining net discount on loans acquired in the Anchor Acquisition was $3.1 million and $3.7 million, on $223.7 million and $278.4 million of gross loans at September 30, 2019 and June 30, 2019, respectively.

Total deposits increased to $1.39 billion at September 30, 2019, compared to $1.33 billion at June 30, 2019, and increased $442.1 million from $944.5 million at September 30, 2018. Relationship-based transactional deposits (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased $18.2 million from June 30, 2019, primarily due to a $16.3 million increase in interest-bearing checking accounts, and increased $172.6 million from September 30, 2018. Money market and savings accounts increased $8.2 million from June 30, 2019, and increased $54.3 million from September 30, 2018. Time deposits increased $26.0 million from June 30, 2019, and increased $215.2 million, from September 30, 2018. Year over year increases were due to deposits assumed in the Anchor Acquisition and organic deposit growth.

At September 30, 2019, non-retail CDs which include brokered CDs, online CDs, public deposits CDs, and public funds CDs increased $22.2 million to $141.1 million, compared to $118.9 million at June 30, 2019, mainly due to a $21.7 million increase in brokered deposits. The year over year increase in non-retail CDs of $16.7 million from $124.4 million at September 30, 2018, was driven by a $12.8 million increase in brokered deposits and $3.2 million in online CDs. Management remains focused on increasing our lower cost relationship-based deposits to fund long-term asset growth.

DEPOSIT BREAKDOWN

(Dollars in thousands)

September 30, 2019

June 30, 2019

September 30, 2018

Amount

Percent

Amount

Percent

Amount

Percent

Noninterest-bearing checking

$

264,482

19.1

%

$

268,113

20.1

%

$

174,712

18.5

%

Interest-bearing checking

196,834

14.2

180,498

13.5

115,059

12.2

Savings

114,826

8.3

117,687

8.8

78,785

8.3

Money market

258,883

18.7

247,854

18.6

240,626

25.5

Certificates of deposit less than $100,000

273,982

19.7

251,280

18.9

188,192

19.9

Certificates of deposit of $100,000 through $250,000

177,075

12.8

177,718

13.3

89,075

9.4

Certificates of deposit of $250,000 and over

83,929

6.0

79,959

6.0

42,563

4.5

Escrow accounts related to mortgages serviced

16,591

1.2

11,108

0.8

15,525

1.7

Total

$

1,386,602

100.0

%

$

1,334,217

100.0

%

$

944,537

100.0

%

At September 30, 2019, borrowings decreased $6.3 million, or 7.6%, to $76.9 million, from $83.2 million at June 30, 2019, and decreased $9.7 million from $86.5 million at September 30, 2018. The quarter and year to date decreases in borrowings were primarily related to a reduction in FHLB advances due to the growth in deposits.

Total stockholders’ equity increased $4.8 million, to $194.3 million at September 30, 2019, from $189.4 million at June 30, 2019, and increased $61.1 million, from $133.1 million at September 30, 2018. The increase in stockholders’ equity from the second quarter was primarily due to net income of $7.1 million, partially offset by common stock repurchases of $2.3 million. The Company repurchased 46,562 shares of its common stock during the quarter ended September 30, 2019, at an average price of $48.88 per share. At September 30, 2019, 125,816 shares remained available for repurchase pursuant to our January 2019 Share Repurchase Plan. Book value per common share was $44.61 at September 30, 2019, compared to $43.18 at June 30, 2019, and $37.10 at September 30, 2018.

The Bank is well capitalized under the minimum capital requirements established by the Federal Deposit Insurance Corporation (“FDIC”) with a total risk-based capital ratio of 14.5%, a Tier 1 leverage capital ratio of 11.6%, and a common equity Tier 1 (“CET1”) capital ratio of 13.6% at September 30, 2019.

The Company exceeded all regulatory capital requirements with a total risk-based capital ratio of 14.2%, a Tier 1 leverage capital ratio of 11.3%, and a CET1 ratio of 13.3% at September 30, 2019.

Operating Results

Net interest income increased $4.9 million, to $17.7 million for the three months ended September 30, 2019, from $12.9 million for the three months ended September 30, 2018. This increase was primarily a result of a $6.8 million increase in loans receivable interest income, including additional interest from loans acquired in the Anchor Acquisition, partially offset by a $2.4 million increase in deposit interest expense due to assumed deposits and continued organic growth combined with higher market interest rates. Net interest income increased $16.7 million, to $53.0 million for the nine months ended September 30, 2019, from $36.3 million for the nine months ended September 30, 2018, mostly attributable to a $23.7 million increase in interest income on loans receivable, partially offset by a $7.5 million increase in interest expense on deposits. The increases in interest income and interest expense were primarily impacted by the loans acquired and deposits assumed in the Anchor Acquisition.

The net interest margin (“NIM”) decreased one basis point to 4.54% for the three months ended September 30, 2019, from 4.55% for the same period in the prior year, and decreased one basis point to 4.61% for the nine months ended September 30, 2019, from 4.62% for the nine months ended September 30, 2018. The quarter over quarter NIM was positively impacted by incremental interest accretion on loans acquired in the Anchor Acquisition of 14 basis points. The year over year NIM was positively impacted from incremental interest accretion on loans acquired in the Anchor Acquisition of 17 basis points. The average cost of funds increased 31 basis points to 1.37% for the three months ended September 30, 2019, from 1.06% for the three months ended September 30, 2018. This increase was predominantly due to growth in higher market rate deposits, primarily those assumed in the Anchor Acquisition along with overall deposit growth. The year over year average cost of funds increased 47 basis points to 1.36% for the nine months ended September 30, 2019, from 0.89% for the nine months ended September 30, 2018 reflecting the increase in market interest rates over the 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, 2019, the provision for loan losses was $573,000 and $2.2 million, compared to $450,000, and $1.3 million for the three and nine months ended September 30, 2018. During the three months ended September 30, 2019, net charge-offs totaled $147,000, compared to net recoveries of $24,000 for the same period last year. Net charge-offs totaled $1.8 million during the nine months ended September 30, 2019, compared to net recoveries of $39,000 during the nine months ended September 30, 2018. The increase in net charge-offs during the nine months ended September 30, 2019, was primarily due to the charge-off of a commercial line of credit of $1.2 million in the first quarter, and one commercial business relationship totaling $431,000 in the second quarter of 2019.

Noninterest income increased $1.9 million, to $6.7 million, for the three months ended September 30, 2019, from $4.8 million for the three months ended September 30, 2018. The increase primarily reflects a $903,000 increase in service charges and fee income, mainly driven by deposit accounts assumed in the Anchor Acquisition and deposit growth, and a $765,000 increase in gain on sale of loans primarily due to higher sales volume. Noninterest income increased $1.9 million, to $17.4 million for the nine months ended September 30, 2019, from $15.4 million for the nine months ended September 30, 2018. The year over year increase included increases in service charges and fee income of $3.1 million, other noninterest income of $455,000, and earnings on cash surrender value of BOLI of $393,000, partially offset by a decrease of $1.9 million in gain on sale of loans.

Noninterest expense increased $2.9 million, to $14.7 million for the three months ended September 30, 2019, from $11.8 million for the three months ended September 30, 2018. The increase in noninterest expense was primarily as a result of the Anchor Acquisition and growth in our operations with increases of $1.1 million in operations, $826,000 in salaries and benefits, including an increase of $1.1 million in incentives and commissions for the loan production staff associated with strong loan production growth this quarter, $523,000 in data processing, and $360,000 in occupancy expense, partially offset by decreases in acquisition costs of $186,000 and FDIC insurance of $166,000 as a result of a small bank credit awarded by the FDIC recognized during the quarter ended September 30, 2019. The Bank has $174,000 in small bank credits on future assessments remaining at September 30, 2019, which may be recognized in future periods when allowed for by the FDIC upon insurance fund levels being met. Noninterest expense increased $11.6 million to $46.6 million for the nine months ended September 30, 2019, from $35.0 million for the nine months ended September 30, 2018. The increase during the period was primarily as a result of the Anchor Acquisition and growth in our operations with increases of $3.0 million in salaries and benefits, including an increase of $255,000 in incentives and commissions, $2.9 million in operations, $1.8 million in data processing, $1.4 million in acquisition costs, and $1.3 million in occupancy expense. Acquisition costs were $1.9 million for the nine months ended September 30, 2019, compared to $443,000 for the same period last year, primarily due to the integration of the Anchor Bank core processing platform.

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, including nine branches from the Anchor Acquisition, one administrative office that accepts deposits, and seven loan production offices in various suburban communities in the greater Puget Sound area, and one loan production office in the market area of the Tri-Cities, Washington. The Bank services home mortgage customers throughout Washington State with an emphasis in the Puget Sound and Tri-Cities home lending markets.

Forward-Looking Statements

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 our actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: the expected cost savings, synergies and other financial benefits from our recent acquisition of Anchor might not be realized within the expected time frames or at all; the integration of the combined company, including personnel changes/retention, might not proceed as planned; and the combined company might not perform as well as expected; increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; our ability to execute our plans to grow our residential construction lending, mortgage banking, and warehouse lending operations, and the geographic expansion of our indirect home improvement lending; secondary market conditions for loans and our ability to originate loans for sale and sell loans in the secondary market; legislative and regulatory changes; and other factors described in the Company’s latest Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and other filings with the Securities and Exchange Commission which are available on our website at www.fsbwa.com and on the SEC's website at www.sec.gov. Any of the forward-looking statements that we make 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 wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Therefore, these factors should be considered in evaluating the forward‑looking statements, and undue reliance should not be placed on such 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 2019 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of us and could negatively affect our operating and stock performance.

FS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts) (Unaudited)

Linked

Year

September 30,

June 30,

September 30,

Quarter

Over Year

2019

2019

2018

% Change

% Change

ASSETS

Cash and due from banks

$

15,979

$

15,214

$

4,389

5

264

Interest-bearing deposits at other financial institutions

46,915

44,380

10,813

6

334

Total cash and cash equivalents

62,894

59,594

15,202

6

314

Certificates of deposit at other financial institutions

24,296

24,297

17,362

40

Securities available-for-sale, at fair value

106,038

96,252

97,374

10

9

Loans held for sale, at fair value

80,619

66,508

54,784

21

47

Loans receivable, net

1,311,288

1,282,119

947,572

2

38

Accrued interest receivable

5,723

5,779

4,453

(1

)

29

Premises and equipment, net

29,066

29,517

16,527

(2

)

76

Operating lease right-of-use

4,713

4,582

3

100

Federal Home Loan Bank (“FHLB”) stock, at cost

7,995

8,329

7,131

(4

)

12

Other real estate owned (“OREO”)

178

254

(30

)

100

Deferred tax asset, net

120

(100

)

Bank owned life insurance (“BOLI”), net

35,136

34,917

13,586

1

159

Servicing rights, held at the lower of cost or fair value

11,193

10,849

9,190

3

22

Goodwill

2,312

2,312

2,312

Core deposit intangible, net

5,647

5,837

1,087

(3

)

420

Other assets

7,899

9,919

4,631

(20

)

71

TOTAL ASSETS

$

1,694,997

$

1,641,065

$

1,191,331

3

42

LIABILITIES

Deposits:

Noninterest-bearing accounts

$

281,073

$

279,221

$

190,237

1

48

Interest-bearing accounts

1,105,529

1,054,996

754,300

5

47

Total deposits

1,386,602

1,334,217

944,537

4

47

Borrowings

76,864

83,211

86,526

(8

)

(11

)

Subordinated note:

Principal amount

10,000

10,000

10,000

Unamortized debt issuance costs

(120

)

(125

)

(140

)

(4

)

(14

)

Total subordinated note less unamortized debt issuance costs

9,880

9,875

9,860

Operating lease liability

4,881

4,721

3

100

Deferred tax liability, net

1,029

1,003

3

100

Other liabilities

21,484

18,612

17,279

15

24

Total liabilities

1,500,740

1,451,639

1,058,202

3

42

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; 4,452,872 shares issued and outstanding at September 30, 2019, 4,476,864 at June 30, 2019, and 3,716,460 at September 30, 2018

44

45

37

(2

)

19

Additional paid-in capital

88,608

90,418

57,027

(2

)

55

Retained earnings

105,672

99,184

79,648

7

33

Accumulated other comprehensive gain (loss), net of tax

583

496

(2,664

)

18

(122

)

Unearned shares – Employee Stock Ownership Plan (“ESOP”)

(650

)

(717

)

(919

)

(9

)

(29

)

Total stockholders’ equity

194,257

189,426

133,129

3

46

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

1,694,997

$

1,641,065

$

1,191,331

3

42


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

Three Months Ended

Qtr

Year

September 30,

June 30,

September 30,

Over Qtr

Over Year

2019

2019

2018

% Change

% Change

INTEREST INCOME

Loans receivable, including fees

$

21,466

$

21,102

$

14,624

2

47

Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions

1,245

1,263

959

(1

)

30

Total interest and dividend income

22,711

22,365

15,583

2

46

INTEREST EXPENSE

Deposits

4,223

4,056

1,850

4

128

Borrowings

582

606