In this piece, I have compared the fundamentals of PacWest Bancorp (PACW) and FS Bancorp, Inc. (FSBW) and found that FSBW holds better upside potential. Before discussing why I am bullish on FSBW, let’s discuss what’s happening in the banking space.

The banking sector has faced several headwinds since March, leading to the failure of three large banks. The lack of investors’ confidence in banking stocks following the bank failures led to a broad-based selloff in the regional banking industry. Despite assurances by the financial regulators, concerns over the banking system’s stability remained due to rising interest rates, deposit flight, and exposure to commercial real estate.

According to the Federal Deposit Insurance Corporation (FDIC), U.S. banks lost $472 billion in deposits during the first quarter. The deposit decline was the largest since FDIC began collecting quarterly industry data in 1984. However, Deutsche Bank analysts, in a client note, said, “Our baseline does not anticipate a further intensification of banking stresses.”

PACW and FSBW surpassed the consensus EPS and revenue estimates during the first quarter. PACW’s EPS came 15.8% above the consensus estimate, while its revenue beat analyst estimates by 2%. Similarly, FSBW’s EPS was 10.6% above the analyst estimates, while its revenue came 4.3% above the consensus estimate.

Toward the end of last month, PACW said it had agreed to sell a portfolio of 74 real estate construction loans with an aggregate principal outstanding balance of around $2.6 billion to a unit of Kennedy-Wilson Holdings.

It will also sell six additional real estate construction loans with an aggregate principal balance of around $363 million to Kennedy-Wilson. Earlier this month, Canadian insurer Fairfax Financial Partners agreed to buy 63 real estate construction loans from Kennedy-Wilson for $2.1 billion.

On February 27, 2023, FSBW announced that the 1st Security Bank completed purchasing and assuming seven branch locations, two in Washington and five in Oregon, from Columbia State Bank. 1st Security Bank assumed approximately $382.10 million in deposits as of March 31, 2023.

Joe Adams, CEO of FSBW and 1st Security Bank, said, “The completion of this transaction serves to expand our retail footprint into Oregon and further expands our Washington operations while providing us with a great opportunity to extend our unique brand of community banking into those communities.”

When it comes to price performance, FSBW is the clear winner. FSBW’s stock has gained 4.6% in price over the past nine months compared to PACW’s 68.5% decline. In addition, FSBW’s stock has gained 3.3% over the past year, compared to PACW’s 70.3% decline.

Here are the reasons I think FSBW could perform better in the near term:

Recent Financial Results

PACW’s adjusted earnings for the first quarter ended March 31, 2023, declined 25.5% year-over-year to $89.44 million. Its adjusted EPS came in at $0.66, representing a decline of 34.7% year-over-year. The company’s adjusted return on average assets came in at 0.85%, compared to 1.22% in the prior-year quarter.

Its net interest income after provision for credit losses declined 10.5% year-over-year to $276.27 million. In addition, its total nonperforming assets increased 33.5% year-over-year to $89.26 million.

For the fiscal first quarter ended March 31, 2023, FSBW’s net interest income after provision for credit losses increased 31.7% year-over-year to $28.55 million. Its net interest margin came in at 4.70%, compared to 4.24% in the year-ago quarter. The company’s adjusted net income rose 40% year-over-year to $9.62 million.

Also, its total cash and cash equivalents increased 96.5% year-over-year to $58.18 million. In addition, its EPS came in at $1.04, representing an increase of 25.3% year-over-year.

Expected Financial Performance

Analysts expect PACW’s EPS and revenue for fiscal 2023 to decline 62.9% and 27.4% year-over-year to $1.48 and $1.03 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to increase 13.7% and 1.4% year-over-year to $1.68 and $1.05 billion, respectively.

FSBW’s EPS for fiscal 2023 and 2024 is expected to increase 25.1% and 5.5% year-over-year to $4.63 and $4.89. Its fiscal 2023 and 2024 revenues are expected to increase 18.7% and 2.9% year-over-year to $145.30 million and $149.45 million, respectively. Its EPS and revenue for the quarter ended June 30, 2023, are expected to increase 46.6% and 26.2% year-over-year to $1.22 and $36.70 million, respectively.

Profitability

PACW’s trailing-12-month revenue is 10.8 times what FSBW generates. However, FSBW is more profitable, with a net income margin and return on equity of 25.32% and 12.97%, compared to PACW’s negative 67.36% and 27.78%, respectively. Also, FSBW’s return on assets of 2.06% compares to PACW’s 1.50%.

Valuation

In terms of trailing-12-month non-GAAP P/E, PACW is currently trading at 2.41x, 66.7% lower than FSBW’s 7.24x. PACW’s trailing-12-month Price/Sales ratio of 0.76x is 60.2% lower than FSBW’s 1.91x.

Thus, PACW is relatively more affordable.

POWR Ratings

PACW has an overall rating of F, which equates to a Strong Sell in our proprietary POWR Ratings system. On the other hand, FSBW has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. FSBW has a B grade for Stability, in sync with its 1.02 beta. PACW’s 1.36 justifies its D grade for Stability.

FSBW has a B grade for Sentiment, consistent with its favorable analyst estimates. On the other hand, PACW has an F grade for Sentiment, in sync with the company’s unfavorable analyst estimates.

Of the 44 stocks in the Pacific Regional Banks industry, FSBW is ranked first, while PACW is ranked #41 in the same industry.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Quality. Click here to view FSBW’s ratings. Get all the ratings of PACW here.

The Winner

The bank failures amplified the outflow of deposits from the banking system in the first quarter. However, deposit outflows have moderated since the end of the first quarter as confidence in the banking system has slightly returned.

PACW was one of the worst-hit regional banks since the banking crisis. It witnessed significant deposit outflows, and the bank had to sell its real-estate construction loans portfolio to improve its capital positions. Although these were steps in the right direction, the bank is not out of the doldrums yet.

On the other hand, FSBW reported solid growth in its net interest income, and the acquisition of seven branches of Columbia State Bank will enable it to expand its footprint in Oregon and Washington and grow its business.

Considering these factors, FSBW could be a better investment choice now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Pacific Regional Banks industry here.

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PACW shares rose $0.11 (+1.28%) in premarket trading Tuesday. Year-to-date, PACW has declined -61.49%, versus a 14.30% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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