FS Bancorp's Strategic Share Repurchase: A Vote of Confidence in Undervalued Value

FS Bancorp, Inc. (NASDAQ: FSBW) recently announced an additional $5.0 million share repurchase program, signaling a bold strategic move to capitalize on what management views as an undervalued stock. This follows an existing $400,000 authorization from April 2025, underscoring the bank's commitment to returning capital to shareholders while maintaining financial flexibility. The decision, rooted in strong deposit growth and a disciplined approach to capital allocation, positions FSBW as a compelling opportunity in an undervalued regional banking sector.

Strategic Capital Allocation: Confidence in Value

The new repurchase program, set to run through July 2026, reflects management's belief that FSBW's shares are trading below intrinsic value. With total deposits surging 11.8% year-over-year to $2.62 billion—driven by brokered deposits—FS Bancorp has ample liquidity to pursue buybacks without compromising growth. This strategy aligns with the company's track record of shareholder-friendly policies, including a 12-year dividend growth streak and a current yield of 2.65%, supported by a conservative payout ratio of 22.9%.

However, the repurchase timing comes amid a slight dip in earnings: Q1 2025 net income fell to $8.0 million from $8.4 million a year earlier, though earnings per share remained resilient at $1.01. The move suggests management prioritizes long-term value over short-term volatility, particularly as regional banks navigate macroeconomic uncertainties.

Undervaluation: Metrics Confirm Discounted Potential

FS Bancorp's valuation metrics highlight its attractiveness relative to peers. Its price-to-book (P/B) ratio of 1.10 is slightly below its historical median of 1.12 and comfortably under the sector median of 1.3-1.8x among regional banks. Meanwhile, its P/E ratio of 9.70 (based on a TTM EPS of $4.37) is well below the sector's 11.9x average, as shown in the data below:

This discount becomes more compelling when considering FSBW's institutional ownership of 63.88%, signaling professional investors' confidence. However, rising short interest (+17.17%) hints at near-term skepticism, likely tied to the modest earnings decline and broader banking sector volatility.

Risks and Considerations

While FSBW's fundamentals are robust, risks persist. The repurchase program's success hinges on management's discretion in timing purchases, which could be disrupted by interest rate hikes or economic slowdowns. Additionally, the slight earnings dip and minimal analyst coverage (no ratings in 90 days) may limit near-term catalysts.

Investment Thesis: A Patient Value Play

For long-term investors, FSBW presents a compelling case. Its undervaluation relative to peers, combined with a sustainable dividend and strong deposit growth, makes it a defensive regional banking pick. The share repurchase program further aligns interests between management and shareholders, reducing dilution and potentially boosting EPS.

However, investors should remain cautious of macroeconomic headwinds and the stock's sensitivity to sector sentiment. A strategic entry point could be $40–$42, below the current price, to capture further undervaluation.

Final Take

FS Bancorp's expanded share repurchase program underscores its confidence in navigating a challenging environment while rewarding shareholders. With valuation metrics signaling undervaluation and a fortress-like balance sheet, FSBW is a prudent pick for investors seeking stability in the regional banking sector.

Investment Rating: Hold with a constructive bias for long-term investors. Consider gradual accumulation below $42.