FS Bancorp, Inc. A Buy After Its Post-IPO Total Makeover

May.16.13 | About: FS Bancorp (FSBW)

FS Bancorp (NASDAQ:FSBW) is a 360 million dollar (assets) thrift located in Mountlake Terrace, WA. The thrift was the former credit union for Microsoft and went public on 7/9/2012. There are several reasons why I own the stock and why I believe that it will be an outstanding performer over the next two to three years.

Leadership always matters and FSBW has excellent leadership in Joe Adams. Joe joined the bank in 2003 as its CFO. He is a lawyer and has worked at Deloitte as a Tax Consultant, K&L Gates as a Lawyer and then at Univar USA as a Lawyer and Director of Regulatory Affairs. Mr. Adams also received a Master's Degree equivalent from the Pacific Coast Banking School. In July of 2004 Joe became the CEO and has made numerous improvements that have transformed the thrift into a profitable, well capitalized institution, which is currently trading at 80% of its tangible book value.

Since its IPO, FSBW has closed several branches, hired a team from Sterling, and sold a group of Marine loans (boats) for a premium. FSBW has formed profitable alliances with the best builders in the area where new construction homes in the Seattle market are currently selling in approximately 10 days after they are listed. The bank hired a 25-year veteran CFO Matthew Mullet, to expand the construction portfolio but only with solid builders that are bank deposit customers and only at acceptable loan-to-value ratios.

Since 2009 the non-performing assets have gone from a high of 13 million to 6.5 million and the Texas ratio has gone from 42 to 10 in that same period. The loan loss reserves are now over 100% of all non-performing assets.

The capital ratios are also extremely high and with the stock being below tangible book, will be best used to buy back stock when it is allowed to. The bank must ask permission to buy back stock until July of 2015, however, management is communicating regularly with regulators during the permission period.

On 4/30/2013 the stock paid its first dividend of .05 per share. The board has been paid in cash for its services so far, but will likely be paid in both cash and stock now that FSBW has stock to be able to do so, once shareholder approval has been obtained.

So to sum up, the opportunity I see is a well-run thrift (efficiency has improved from an 89% to its current 69%) with much improved capital and staff in an excellent market.

The end game of an institution like FSBW will likely be a takeover, but the thrift can't be sold under current regulations until 7/10/2016.

What would a takeout price be? Well, Wheatland Bankshares, which is in Wheatland, WY., ($280 million in assets) was recently purchased by Glacier Bank for 146% of tangible book. If the tangible book of FSBW stayed the same for three years and was sold for 146% of tangible book (currently $18.81) the stock price would be $27.46, but it is likely that FSBW will grow its book over the next two and a half years. At the end of last quarter the tangible book was only $18.49. The stock is thinly traded and difficult to buy without pushing up the price, but if you can find shares at the current levels I think it is a solid purchase.

Disclosure: I am long FSBW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.