Kroll Bond Rating Agency (KBRA) assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 for Mountlake Terrace, Washington-based FS Bancorp, Inc. (NASDAQ: FSBW) ("the company"). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for the subsidiary bank, 1st Security Bank of Washington. The Outlook for all long-term ratings is Stable.
The ratings are supported by the company’s strong earnings performance in recent years, benefitting from its above-average margins and noninterest income contribution. With a meaningful boost from higher-yielding consumer loans, FSBW’s average loan yields (5.14% for 4Q20, and over 6% for 2019) have trended well above peer averages, largely offsetting the company’s comparatively higher funding costs. While high average loan yields portend a potentially higher risk loan portfolio, FSBW has reflected a favorable asset quality history and manageable credit costs, demonstrating capable underwriting (particularly on a risk adjusted basis). Nonetheless, with loans comprising over 85% of AEA and the noted +20% of consumer, KBRA considers the potential risk associated with FSBW’s balance sheet to be greater than that of higher rated peers. Positively, the company has historically maintained solid core capital levels - +10% TCE and +12% CET1 – which remains an important element of a stable creditor profile. Having operated as a credit union for the bulk of its history, FSBW’s funding includes an elevated level of higher cost time deposits (30% of total balances at 4Q20), resulting in above average deposit costs (estimated 0.78% for 2020, down from 1.21% in 2019). Noninterest income has historically represented firmly more than 20% of company core revenues, having increased to over 40% in 2020, because of a very favorable mortgage banking environment. Outside of large but variable gain on sale revenues, net MSR and service fees remain modest.
The ratings are based on KBRA’s Bank and Bank Holding Company Global Rating Methodology published on October 16, 2019.
Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority pursuant to the Temporary Registration Regime. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.
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