FS Bancorp's $5M Buyback: A Shrewd Play for Shareholder Value in a Challenging Environment

FS Bancorp, Inc. (NASDAQ: FS Bancorp) has announced a new $5 million stock buyback program, signaling confidence in its valuation and capital position. The initiative, set to run through July 2026, builds on an existing $400,000 repurchase plan, bringing total available capital for buybacks to $5.4 million. This move underscores management's focus on enhancing shareholder returns amid a backdrop of rising interest rates and evolving market conditions. Let's dissect the implications for capital efficiency, valuation, and investor returns.

Capital Efficiency: A Strong Foundation for Buybacks

FS Bancorp's capital ratios remain robust, a critical factor for sustaining buybacks without compromising regulatory requirements. As of March 31, 2025, the Bank's total risk-based capital ratio stood at 14.4%, up from 14.2% in the prior quarter, while its Tier 1 leverage ratio improved to 11.3%. These metrics far exceed the FDIC's “well-capitalized” thresholds (10%, 5%, and 6.5% for total risk-based, Tier 1 leverage, and CET1 ratios, respectively).

This strength allows the bank to repurchase shares without diluting its capital buffer. The $5 million buyback represents roughly 1.6% of its $321.9 million market cap, a manageable scale that avoids overexposure. Meanwhile, the flexibility to pause or adjust the program if needed aligns with prudent risk management.

Shareholder Returns: Dividends and Buybacks in Tandem

FS Bancorp has historically prioritized steady dividends, recently maintaining its $0.28 per share quarterly payout. Combined with the buyback, shareholders benefit from a dual strategy: dividends provide income, while repurchases aim to boost per-share metrics like EPS and book value.

Using Q1 2025 data:
- EPS was $1.01, down slightly from $1.06 a year earlier due to margin pressures.
- Book value per share rose to $39.12, a 2.3% increase from December 2024.

The buyback could accelerate this trend. Assuming shares trade near the current $42.14 price (based on a $321.9M market cap and ~7.64 million shares outstanding), the $5M program could retire ~118,000 shares, reducing the float by ~1.5%. Over time, this could lift metrics like EPS and book value, creating a compounding effect for long-term investors.

Valuation: Attractive on Key Metrics, but Risks Linger

FS Bancorp's valuation appears mixed. Its P/E ratio of 40x (based on $8M annualized net income) is elevated compared to peers, but its price-to-book (P/B) ratio of 1.08 sits near fair value. The buyback's impact on book value could further justify the premium.

However, risks persist. The bank's reliance on $196.8 million in higher-cost brokered deposits highlights liquidity risks in a rising rate environment. Additionally, net interest margin pressures—common across banks—could constrain earnings growth. Management must balance buybacks with maintaining sufficient capital to weather potential loan losses or regulatory shifts.

Institutional Activity: A Mixed Signal, but Bullish Bias

Institutional investors sent conflicting signals in Q1 2025. While 46 institutions reduced holdings—including Hotchkis & Wiley's sale of 58,410 shares—30 firms increased stakes, such as Jones Financial's addition of 240,899 shares. This suggests a bifurcated view: some see value in FS Bancorp's dividend and buyback discipline, while others worry about macroeconomic headwinds.

Investment Thesis: Buy the Dip, but Monitor Capital Trends

For investors, FS Bancorp offers a compelling mix of stability and shareholder-friendly policies. Key positives:
- Strong capital ratios allow the buyback without sacrificing safety.
- Consistent dividends provide income amid volatile markets.
- Undemanding repurchase scale reduces execution risk.

Risks include:
- Margin pressure from high rates.
- Deposit volatility if brokered CDs become costly.
- Economic slowdown impacting loan demand.

Recommendation: Investors seeking stable, dividend-paying regional banks should consider adding FS Bancorp on dips below $40, provided capital ratios remain robust. The buyback's modest size and flexible terms make it a low-risk strategy to enhance shareholder value. However, close monitoring of NIM trends and deposit costs will be critical in the quarters ahead.

In a sector where capital management is key, FS Bancorp's disciplined approach positions it as a contender for those willing to navigate near-term challenges for long-term gains.