FS Bancorp, Inc. (NASDAQ:FSBW) is a diversified community bank serving the greater Puget Sound area, the Tri-Cities region of Washington, and select markets in Oregon. With a focus on building long-term relationships, the company has established itself as a trusted financial partner for families and businesses in its communities.
Business Overview
FS Bancorp operates through its wholly-owned subsidiary, 1st Security Bank of Washington, which has 27 full-service branches and loan production offices across its footprint. The bank provides a comprehensive suite of banking and financial services, including commercial and consumer lending, deposit products, and mortgage banking.The company's loan portfolio is well-diversified, with real estate loans accounting for 62.8% of the total, consumer loans at 26.3%, and commercial business loans at 10.9% as of March 31, 2024. A key strength is the bank's fixture-secured consumer lending business, which originates loans through a network of 77 active home improvement contractors and dealers across multiple states. This segment contributed $34.9 million, or 17.0%, of the company's total loan originations in the first quarter of 2024.
The bank's mortgage banking operations are another important driver of its business. In the first quarter of 2024, FS Bancorp originated $151.4 million in one-to-four-family residential loans, of which $93.9 million were sold into the secondary market. The company's gross margin on home loan sales increased to 3.43% in Q1 2024, up from 3.05% in the prior-year period.
Financial Performance
FS Bancorp delivered solid financial results in 2023, reporting annual net income of $36.1 million, annual revenue of $192.0 million, annual operating cash flow of $43.3 million, and annual free cash flow of $41.7 million.For the first quarter of 2024, the company reported net income of $8.4 million, a 2.2% increase from the $8.2 million earned in the same period of 2023. Revenue for Q1 2024 was $35.5 million, a slight decrease of 0.3% year-over-year. The company's net interest margin remained strong at 4.26% in Q1 2024, compared to 4.70% in the prior-year quarter, as the rising interest rate environment impacted both asset yields and funding costs.
Provision for credit losses decreased 33.6% to $1.4 million in Q1 2024, down from $2.1 million in Q1 2023, reflecting the company's disciplined underwriting and risk management practices. Noninterest income increased due to an $8.2 million gain on the sale of mortgage servicing rights, which was partially offset by an $8.0 million loss on the sale of investment securities. Noninterest expense remained relatively flat at $23.5 million in both Q1 2024 and Q1 2023.
Geographic Diversification
FS Bancorp's geographic footprint provides the company with a well-diversified revenue stream. As of March 31, 2024, the bank's loan portfolio was distributed across its markets, with 35.9% of fixture-secured consumer loans originated in Washington, 22.1% in Oregon, 10.1% in California, and the remaining 32.0% spread across several other states.The company's recent acquisition of seven branches from Columbia State Bank in February 2023 expanded its presence into southeastern Washington and Oregon, further strengthening its community banking model and customer relationships in these new markets.
Liquidity
FS Bancorp maintains a strong liquidity position to support its lending and deposit-gathering activities. As of March 31, 2024, the bank had total borrowing capacity of $698.7 million with the Federal Home Loan Bank of Des Moines, with $681.2 million in unused capacity. The company also maintains a short-term borrowing line with the Federal Reserve Bank and federal funds lines of credit, providing additional sources of liquidity.The bank's capital ratios remain well above regulatory requirements, with a Tier 1 leverage ratio of 10.6%, a Tier 1 risk-based capital ratio of 12.5%, and a total risk-based capital ratio of 13.7% as of March 31, 2024. This strong capital position supports the bank's ability to withstand potential economic headwinds and continue investing in growth opportunities.
Risks and Challenges
While FS Bancorp has demonstrated resilience, the company faces several risks and challenges that warrant consideration. These include:1. Interest Rate Risk: The company's net interest margin and profitability are susceptible to changes in market interest rates, which can impact both asset yields and funding costs.
2. Credit Risk: As a lender, FS Bancorp is exposed to the risk of borrower default, particularly in its commercial real estate, construction, and consumer lending portfolios.
3. Regulatory Environment: The banking industry is subject to extensive regulation, and changes in laws, rules, or policies could adversely affect the company's operations and financial performance.
4. Competition: FS Bancorp operates in a highly competitive market, with both larger regional banks and smaller community institutions vying for customers and market share.
5. Reliance on Mortgage Banking: The company's mortgage banking operations, while a significant contributor to revenue, can be volatile and subject to fluctuations in interest rates and housing market conditions.
Outlook
FS Bancorp has demonstrated its ability to navigate a challenging operating environment and deliver consistent financial performance. The company's diversified business model, strong liquidity and capital position, and focus on building long-term customer relationships position it well for continued success.Looking ahead, FS Bancorp remains committed to its strategic priorities of growing and diversifying its loan portfolio, maintaining strong asset quality, and expanding its presence in new and existing markets. The company's recent branch acquisition in Washington and Oregon is expected to contribute to its future growth and profitability.