FS Bancorp, Inc. (FSBW) stock intrinsic value fair value estimate & owner earnings analysis

FS Bancorp is the holding company for 1st Security Bank of Washington. It runs 27 full-service branches and 13 loan production offices, concentrated in the Puget Sound region of Washington with a smaller presence in Oregon. It earns money two ways: interest on a diversified loan book (commercial real estate, multi-family, construction, home equity, consumer and commercial business loans), and a large home-lending business that originates mortgages and sells most of them (about $555 million sold in 2025). How we measure earnings. Bank cash flow is distorted by the mortgage business, because loans are originated and sold through operating cash flow. We removed the net cash swings from loans held for sale and from other operating assets and liabilities, deducted stock compensation (about $2.3 million in 2025), and deducted capital spending net of an estimate of spending that supports growth. On that basis, earnings per share were about $2.50 in 2016, rose to $7.56 in 2020 at the peak of the pandemic mortgage boom, and were $6.13, $5.85, $6.63, $2.27 and $3.24 in 2021 through 2025. Two things depress the last two years: about $26 million (2024) and $7.6 million (2025) spent buying tax credits, and about $20 million in 2025 to buy and improve a new headquarters building, which the company says is expected to be largely offset by the sale of its current headquarters. We use the median of 2022 to 2025, about $4.55 per share, as the earnings level. That window starts after the mortgage boom and includes the 2023 purchase of seven Columbia State Bank branches. Reported net income has been steady at $33 to $36 million a year over 2023 to 2025 ($33.3 million in 2025), or roughly $4.40 to $4.65 per share, which is consistent with this level. A judgement worth knowing: the provision for credit losses ($9.5 million in 2025) is a non-cash charge that is added back in this method, but it is offset by real losses. Net charge-offs were $8.9 million in 2025. We therefore give no credit for growth, so that no loan growth is assumed without reserves to match, and we treat the credit-loss cost as a main driver of the bear case. Base case: about $76 per share. Earnings stay at about $4.55 per share with no growth, valued at the fixed 6% rate. Last year's earnings grew from $2.27 to $3.24, but that was mostly the swing in tax-credit purchases, so year one of the base case starts flat rather than extending that rise. We credit no growth because the bank's loan growth is funded by retained earnings that are small relative to credit costs (in 2025 it paid out $10.3 million in dividends and used $15.4 million on buybacks of $33.3 million of net income), and we can point to no contracted or long-proven growth. We keep the earnings alive after year 10 because a branch and deposit franchise of this size is a structural feature that does not lapse on a schedule; we assume no expansion. Bear case: about $44 per share. Credit problems that are already visible worsen: nonperforming loans rose to 0.71% of loans from 0.54%, coverage of those loans by the loss reserve fell from about 234% to 171%, and management cites strained consumer borrowers and a construction project with a collateral shortfall. Bear assumes credit costs double for three years, taking earnings to about $1.90 per share, then recovery only to about $2.76 per share, the average of 2024 and 2025, and staying there. Funding is also a risk: brokered deposits were $362.6 million, or 13.6% of deposits. Bull case: about $114 per share. The company completes the headquarters consolidation, the one-time spending drops out and the tax-credit purchases fade, restoring earnings of about $5.85 per share (the level of 2022 and of 2025 excluding the headquarters spending). Earnings then grow 2% a year for ten years from retained earnings and stay at that level afterward. What would make this wrong: a real credit cycle in Washington construction or consumer lending that costs more than the bear case assumes, sharply lower mortgage volumes, or a headquarters project that is not offset by the planned sale of the old building. Nothing could be reconciled against a market recovery or management targets; none is used. Margin-of-safety price: $40 per share, below the bear case, reflecting a leveraged lender whose earnings depend on credit quality and mortgage activity.