FS Bancorp (FSBW): A Diversified Lender Navigating Evolving Challenges

Published on March 14, 2025 | Ticker: FSBW

Business Overview and History

FS Bancorp, Inc. (NASDAQ: FSBW) is a Washington-based bank holding company that has been serving the Pacific Northwest region since 1907. The company's subsidiary, 1st Security Bank of Washington, operates 27 full-service branches and maintains a strong presence in the Puget Sound area, the Tri-Cities region, and select markets in Oregon. With a focus on building long-term relationships with families and businesses, FS Bancorp has established itself as a diversified lender, specializing in residential mortgages, commercial real estate, consumer loans, and commercial and industrial (C&I) lending.

FS Bancorp was incorporated in September 2011 as the holding company for 1st Security Bank of Washington. The bank's origins trace back to 1907 when its predecessor, Anchor Bank, was first formed. On July 9, 2012, the Bank converted from mutual to stock ownership and became the wholly owned subsidiary of FS Bancorp. The company is relationship-driven, delivering banking and financial services to local families, local and regional businesses, and industry niches in suburban communities in the greater Puget Sound area, the Kennewick-Pasco-Richland metropolitan area of Washington (also known as the Tri-Cities), Goldendale, Vancouver, and White Salmon, Washington, as well as Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon.

FS Bancorp specializes in originating one-to-four-family loans, commercial real estate mortgages, second mortgages, consumer loans, marine lending, and commercial business loans. As of September 30, 2024, the company's loan portfolio included real estate loans, consumer loans, and commercial business loans representing 62.1%, 25.4%, and 12.5% of the portfolio, respectively. The company also maintains its long-standing indirect consumer lending platform, which operates primarily throughout the Western United States.

Over the years, FS Bancorp has faced various challenges, including navigating economic conditions, regulatory changes, and competitive pressures, but has remained focused on its strategic priorities of diversifying revenues, expanding lending channels, and enhancing the banking franchise. The company is actively involved in community activities and events within its market areas, which further strengthens its relationships with customers.

Today, FS Bancorp operates in two main business segments: commercial and consumer banking, and home lending. The commercial and consumer banking division offers a range of deposit products and lending solutions to local businesses and individuals, while the home lending segment originates and sells one-to-four-family residential mortgages, with a portion retained in the bank's portfolio.

Financial Performance and Ratios

For the fiscal year ended December 31, 2023, FS Bancorp reported annual net income of $36.05 million, or $4.56 per diluted share, on total revenue of $141.37 million. The company's return on assets (ROA) and return on equity (ROE) stood at 1.26% and 13.67%, respectively, during this period.

Looking at the balance sheet, FS Bancorp maintained a strong capital position, with a total risk-based capital ratio of 13.37% and a Tier 1 leverage ratio of 10.39% as of December 31, 2023. The company's loan portfolio totaled $2.43 billion at the end of 2023, with a nonperforming asset ratio of just 0.45%.

For the most recent quarter ended September 30, 2024, FS Bancorp reported revenue of $47.04 million, representing a 4.5% increase year-over-year. This growth was primarily attributed to higher interest income on loans receivable. Net income for the quarter stood at $10.29 million. The company's loan portfolio grew to $2.46 billion as of September 30, 2024, an increase of $62.20 million or 2.6% from December 31, 2023.

Liquidity

FS Bancorp's liquidity position remained robust, with a loan-to-deposit ratio of 96.84% and $93.75 million in available borrowing capacity with the Federal Home Loan Bank as of December 31, 2023. As of September 30, 2024, the company reported cash and cash equivalents of $40.34 million. The debt-to-equity ratio stood at 0.57, indicating a relatively conservative capital structure.

The company maintains significant borrowing capacity, including $695.80 million with the Federal Home Loan Bank of Des Moines (of which $531.60 million was unused), a $275.40 million short-term borrowing line with the Federal Reserve Bank, and $101.00 million in written federal funds lines of credit. This diverse range of funding sources provides FS Bancorp with ample liquidity to support its operations and growth initiatives.

Recent Developments and Outlook

In 2023, FS Bancorp completed the acquisition of seven retail bank branches from Columbia State Bank, expanding its presence in the Pacific Northwest. This strategic move added approximately $425.5 million in deposits and $66.1 million in loans to the company's balance sheet.

For the nine months ended September 30, 2024, FS Bancorp reported net income of $27.6 million, or $3.45 per diluted share, on total revenue of $137.86 million. The company's loan portfolio grew to $2.49 billion during this period, while the nonperforming asset ratio improved to 0.43%.

In the home lending segment, FS Bancorp originated $560.25 million in one-to-four-family loans during the first nine months of 2024, including $426.70 million in loans originated for sale, $120.20 million in portfolio loans, and $13.40 million in brokered loans. This represented a 32.8% increase in residential loan originations compared to the same period in 2023, driven by a 28.5% increase in purchase loan volume and an 80.6% increase in refinance activity as interest rates declined slightly. The Bank sold $426.00 million in one-to-four-family loans during this period, compared to $320.90 million in the prior year period. The gross margin on home loan sales decreased slightly to 3.06% from 3.07% year-over-year.

The growth in the loan portfolio was primarily driven by increases in one-to-four-family loans ($23.90 million), multi-family loans ($14.70 million), and home equity loans ($5.60 million), partially offset by decreases in commercial real estate loans ($13.40 million) and construction and development loans ($10.70 million). The allowance for credit losses on loans totaled $31.23 million, or 1.25% of gross loans receivable excluding loans held for sale, at September 30, 2024, compared to $31.53 million, or 1.30%, at December 31, 2023.

Looking ahead, FS Bancorp management has reiterated its focus on growing and diversifying the loan portfolio, maintaining strong asset quality, and emphasizing lower-cost core deposits to fund loan growth. The company has also been actively involved in community activities and events within its markets, which further strengthens its customer relationships.

Risks and Challenges

Like any financial institution, FS Bancorp faces various risks and challenges that could impact its performance. These include:

1. Interest Rate Risk: The company's net interest margin and profitability are susceptible to changes in market interest rates, which could affect the yields on its interest-earning assets and the cost of its interest-bearing liabilities.

2. Credit Risk: FS Bancorp's loan portfolio, particularly in areas like commercial real estate and construction lending, could be vulnerable to economic downturns or changes in the financial health of its borrowers.

3. Regulatory Environment: As a regulated banking entity, FS Bancorp must navigate a complex and evolving regulatory landscape, which could result in increased compliance costs or restrictions on its operations.

4. Competition: The company faces intense competition from other financial institutions, both locally and regionally, which could put pressure on its market share and pricing power.

5. Geographic Concentration: With a significant portion of its operations concentrated in the Pacific Northwest, FS Bancorp is exposed to economic and demographic trends specific to this region.

Despite these challenges, FS Bancorp has demonstrated its ability to navigate a dynamic operating environment and deliver consistent financial performance. The company's diversified business model, strong capital position, and commitment to community banking have been key factors in its success.

Business Segments

FS Bancorp operates through two primary business segments: Commercial and Consumer Banking, and Home Lending.

The Commercial and Consumer Banking segment provides a comprehensive range of financial products and services to commercial and consumer customers through the Bank's branch network, online and mobile banking platforms, and telephone banking. This segment offers deposit products, residential, consumer, and commercial real estate lending, and cash management services. The Bank originates consumer loans, commercial and multi-family real estate loans, construction loans for residential and multi-family development, and commercial business loans. This segment also manages the Bank's investment portfolio and other assets.

The Home Lending segment focuses on originating one-to-four-family residential mortgage loans, primarily for sale in the secondary markets, as well as loans held for investment. The majority of these mortgage loans are sold to or securitized by government-sponsored enterprises like FNMA, FHLMC, and GNMA, with the Bank generally retaining the right to service these loans. The Bank also originates loans under FHA, VA, and USDA programs, which are typically sold servicing-released to correspondent lenders. A small percentage of loans are brokered to other lenders. This segment manages the loan funding and interest rate risk associated with secondary market loan sales and retained mortgage servicing rights.

Conclusion

FS Bancorp is a well-established community bank with a long history of serving the Pacific Northwest region. The company's diversified lending platform, focus on building lasting customer relationships, and strategic expansion efforts have positioned it for continued growth and success. While the company faces various risks and challenges common to the banking industry, its sound financial footing, experienced management team, and commitment to its local communities suggest that FS Bancorp is well-equipped to navigate the evolving landscape and deliver value for its shareholders.

The company's recent financial performance, including growth in its loan portfolio and increased residential loan originations, demonstrates its ability to capitalize on market opportunities. With a strong liquidity position, diverse funding sources, and a focus on maintaining asset quality, FS Bancorp appears well-positioned to continue its growth trajectory in the Pacific Northwest banking market.

U.S. Bancorp (NYSE:USB): A Resilient Financial Giant Navigating the Changing Landscape

U.S. Bancorp, a renowned financial institution with a rich history spanning over a century, has consistently demonstrated its ability to adapt and thrive in the ever-evolving banking landscape. As one of the largest regional banks in the United States, U.S. Bancorp has carved out a formidable position for itself, offering a diverse array of financial services to its extensive customer base.

First Financial Bancorp (FFBC): A Steady Hand Navigating the Financial Landscape

Business Overview and History First Financial Bancorp (FFBC) is a formidable player in the banking and financial services industry, boasting a rich history and a steadfast commitment to serving its clients and communities. Headquartered in Cincinnati, Ohio, this regional bank holding company has carved out a niche for itself, leveraging its expertise and adaptability to navigate the ever-evolving financial landscape.

First Northwest Bancorp (FNWB): Navigating Challenges and Charting a Path Forward

First Northwest Bancorp (NASDAQ: FNWB) is a community-oriented financial institution that has weathered its fair share of storms over the years. With a history dating back to 1923, this bank has seen its fair share of ups and downs, and the last few years have been no exception. However, through it all, First Northwest has demonstrated its resilience and its commitment to serving the communities in which it operates.

FB Financial Corporation (FBK): A Resilient Community Bank Poised for Growth

FB Financial Corporation (FBK) is a Tennessee-based bank holding company that has established itself as a prominent player in the Southeastern United States banking landscape. With a focus on personalized community banking, the company has carved out a unique niche that has allowed it to navigate challenging industry conditions and position itself for continued success.