2023-08-17 16:32:03 ET
Summary
- FS Bancorp is a small bank that has remained relatively stable during the recent banking sector downturn.
- The company has a strong loan portfolio and has seen growth in deposits over the years.
- Shares of FS Bancorp are currently trading at a discount to book value and have a low price to earnings multiple, making it an attractive investment opportunity.
One of the smallest banks that I've decided to look at recently is FS Bancorp ( FSBW ). With a market capitalization of only $238.1 million as of this writing, it definitely is a small prospect for investors to consider. What is interesting about it, however, is that the company did not decline all that much in the grand scheme of things when the bottom fell out of the banking sector earlier this year. In addition, shares are still down most of what they fell, even though the company has fairly little debt and has reported a low amount of its deposits as being uninsured. Add on top of this how cheap the stock is relative to earnings, and I would argue that it makes for a sensible prospect for long-term investors who don't mind a small player in a massive market.
Analyzing FS Bancorp
According to the management team at FS Bancorp, the firm operates as a holding company of 1st Security Bank. This particular institution is a community bank that provides various financial services to local families, local and regional businesses, and a variety of other customers, largely throughout the Puget Sound area. Even though the institution is small, it has a long history, with its roots dating back to 1907. Back then, however, it operated as a credit union known as Washington's Credit Union. But that changed when it became what it is today in July 2012.
In addition to its headquarters office, the company also has 20 full-service bank branches and 10 home loan production offices located around the Puget Sound area. In the Tri-Cities, Washington, and in Vancouver, Washington, it also has loan production offices. Through these locations, the company provides customers with a wide array of services. For instance, it engages in the origination of commercial real estate loans, one to four family and home equity loans, consumer loans, and even business loans. It offers different deposit products as well.
Over the past few years, management has done a great job growing the company's loan portfolio. Loans went from $1.55 billion in 2020 to $2.19 billion in 2022. Even during 2023, with all the mayhem in the banking sector, loans have increased. In the first quarter, loans totaled nearly $2.30 billion. And in the second quarter of this year they came out to $2.34 billion. Of the loans on the company's books, 26% are in the form of indirect home improvement and other consumer loans. 22% by value include one to four family home properties. The next largest category is commercial and industrial at 16%. And this was followed up by 10% dedicated to multifamily properties. Management has not provided more detailed data since the end of 2022, but we do know that, as of the end of last year, 65.6% of the real estate loans that the company has are fixed rate, with the rest being adjustable in nature. This has its benefits, but in theory, fixed rate loans should decline in value in high interest rate environments.
While the loan picture for the company is definitely important, even more important would be the value of deposits over time. From 2020 through 2022, the value of deposits expanded from $1.67 billion to $2.13 billion. Deposits jumped to $2.44 billion in the first quarter of 2022 before pulling back by $78 million to $2.37 billion in the second quarter. Considering how volatile the banking sector has been, the picture definitely could have been worse. One of the reasons why the value of the deposits dropped so little likely stems from the fact that the company has only a small portion of its deposits classified as uninsured. This number totaled 26.3% at the end of 2022. And by the end of the second quarter of this year, that number was even lower at 24.8%.
The company also benefits from the fact that debt on its books is only $249.4 million. Although this is high compared to its market capitalization, it is quite low in the grand scheme of things. Over the years, the book value per share of the business has also managed to increase. Though these increases have been quite small. From 2020 through 2022, book value per share grew from $27.67 to $30.42. By the end of the second quarter of this year, book value per share totaled $32.71. Some of this increase is likely attributable to the company's active share repurchase activities. On August 15th, for instance, management announced a new share buyback program that allows it to allocate up to $5 million to buy back up to 2.5% of the company's outstanding shares. The firm can hit one or the other of these two figures.
The overall growth of the enterprise has empowered it to grow its revenue over the years. Net interest income went from $61.1 million in 2020 to $98.1 million in 2022. For the first half of the 2023 fiscal year, net interest income totaled $59.4 million. That's a solid increase over the $44.5 million the company generated one year earlier. This is not to say that everything has been great. Non-interest income actually declined over the three-year window covered, plummeting from $55.4 million to $18.1 million. But that drop was driven by gains that the company saw as a result of its decision to sell loans. So this should be treated as income that would be one-time in nature. This even shows up when you look at data for the first half of 2023. Non-interest income totaled $10.1 million. That's almost flat compared to the $10.2 million reported one year earlier. As the chart above illustrates, these loan sales did result in overall net profits for the company declining in the three years ending in 2022. But we are seeing an increase for the first half of 2023 relative to the same time last year.
In terms of valuing the company, I would say that shares look rather cheap. With units at $30.73 each, they are currently trading at a discount to the company's book value. In addition to this, using the results from 2022, shares are trading at a price-to-earnings multiple of only 8. It's very likely that this year will be even better for the company than last year was. So that multiple, on a forward basis, is almost certainly lower.
Takeaway
Operationally speaking, FS Bancorp strikes me as a solid business. Yes, it is small and net profits declined in the three years prior to 2023. But when you look at the core operations of the company and see how sturdy it has been during these uncertain times, there are reasons to be bullish. This is especially true when you consider how cheap the stock is, both relative to earnings and relative to book value. Add on top of this the low amount of debt that the bank has, and I would argue that some attractive upside likely exists from here. That is why I find it so surprising that, after the stock dropped 24% in response to the banking crisis if we use February 28th as the starting point, shares are still down 14.5% today.
For further details see:
FS Bancorp: A Small Bank That's Worth Your Attention