KBRA Affirms Ratings for FS Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Mountlake Terrace, Washington-based FS Bancorp, Inc. (NASDAQ: FSBW) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the 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.

Key Credit Considerations

The ratings are supported by the company’s comparatively durable core earnings profile, anchored by a resilient margin that has historically tracked above 4.00% across multiple interest rate cycles. FSBW’s earnings continue to benefit from a balance sheet more levered towards loans, with loan-to-earning-asset and loan-to-deposit ratios that have generally exceeded peer averages. In addition, the loan portfolio’s higher concentration in higher-yielding categories, including indirect consumer and construction lending, has supported strong loan yields, which have tracked approximately 65 bps above peer averages through 2025. While fee income remains a meaningful contributor, it has been less supportive than during prior peak mortgage banking periods, representing approximately 15% of total revenue in FY25. Prospectively, management expects NIM to remain relatively stable as further deposit repricing benefits offset asset yield pressure in a declining rate environment, while mid-to high-single-digit loan growth and a gradual improvement in mortgage banking activity should further support revenue generation.

KBRA also recognizes the company’s solid current credit performance despite a comparatively higher-risk loan mix. While credit quality metrics have trended upward through 2025, this primarily reflects normalization within the indirect consumer portfolio and an isolated commercial construction relationship, rather than broad-based credit deterioration. The indirect consumer portfolio is largely comprised of borrowers with FICO scores above 720 (85%), with the majority of problem credits concentrated among lower-FICO borrowers, to which the company has relatively limited exposure. Construction lending exposure is comparatively elevated at 100% of risk-based capital; however, the portfolio is predominantly focused on residential construction within core markets and is supported by conservative underwriting standards. Early indicators of stress remain well contained, with classified loans at 1.04% of total loans and past-due consumer loans declining to 1.07%. Capital metrics remain adequate relative to the company’s risk profile, with a consolidated CET1 ratio of 11.2% at YE25. We expect management to continue balancing organic growth objectives with disciplined capital management, maintaining capital levels near current levels given the company’s above-peer exposure to indirect consumer and construction-related lending.

Rating Sensitivities

The Stable Outlook reflects KBRA’s view that positive rating action is unlikely over the medium term. However, upward rating momentum could occur if the company materially strengthens its funding profile while maintaining capital at or above peer levels for a sustained period and continues to demonstrate solid asset quality. Conversely, growth that exceeds internal capital generation—resulting in deterioration of capital or funding metrics—and/or material credit underperformance relative to peers could exert downward pressure on the ratings.

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