FS Bancorp, Inc.: Form 10-Q for the period ended Mar 31, 2025

Forward–Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions. Forward-looking statements include, but are not limited to:

• statements of our goals, intentions, and expectations;
• statements regarding our business plans, prospects, growth, and operating strategies;
• statements regarding the quality of our loan and investment portfolios; and
• estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

• adverse impacts to economic conditions in our local markets or other markets where we have lending relationships, or other aspects of the Company's business operations;
• effects of employment levels, labor shortages, inflation, a recession or slowed economic growth;
• changes in the interest rate environment, including the increases and decreases in the Board of Governors of the Federal Reserve System (“Federal Reserve”) benchmark rate and duration of such interest rate levels, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;
• the impact of inflation and the Federal Reserve monetary policies;
• the effects of any government shutdown;
• credit risks of lending activities, including loan delinquencies, write-offs, changes in our allowance for credit losses (“ACL”), and provision for credit losses;
• secondary market conditions and our ability to originate loans for sale and sell loans in the secondary market;
• fluctuations in loan demand, unsold homes, and land and in property values;
• staffing fluctuations in response to product demand or corporate implementation strategies;
• use of estimates in determining the fair value of assets, which may prove incorrect;
• increased competitive pressures among financial services companies;
• our ability to execute our plans to grow our residential construction lending, our home lending operations, our warehouse lending, and the geographic expansion of our indirect home improvement lending;
• our ability to attract and retain deposits;
• our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
• our ability to control operating costs and expenses;
• expectations regarding key growth initiatives and strategic priorities;
• retention of key members of our senior management team;
• changes in consumer spending, borrowing, and savings habits;
• our ability to successfully manage our growth;
• bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;
• legislative or regulatory changes including changes in banking, securities and tax law, and in regulatory policies and principles, or the interpretation of regulatory capital or other rules;

47

• our ability to pay dividends on our common stock;
• quality and composition of our securities portfolio and the impact of adverse changes in the securities markets;
• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board (“FASB”);
• costs and effects of litigation, including settlements and judgments;
• disruptions or security breaches, or other adverse events, failures, or interruptions in, or attacks on, our information technology systems or on the third-party vendors;
• inability of key third-party vendors to perform their obligations to us;
• effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, civil unrest, and other external events;
• the potential for new or increased tariffs, trade restrictions or geopolitical tensions that could affect economic activity or specific industry sectors;
• environmental, social and governance goals and targets;
• other economic, competitive, governmental, bank regulatory, consumer and technical factors affecting our operations, pricing, products and services, and
• other risks described elsewhere in this Form 10‑Q and our other reports filed with or furnished to SEC, including our Annual Report on Form 10-K for the year ended December 31, 2024 (the “2024 Form 10-K”).

Any of the forward-looking statements made in this Form 10‑Q and in other public statements may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. The Company undertakes no obligation to update or revise any forward-looking statement included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.

Overview

1st Security Bank has been serving the Puget Sound area since 1907, which includes when the predecessor to Anchor Bank, one of its banking acquisitions, was formed. On July 9, 2012, the Bank converted from mutual to stock ownership and became the wholly owned subsidiary of FS Bancorp.

The Company is relationship-driven, delivering banking and financial services to local families, local and regional businesses and industry niches in suburban communities in the greater Puget Sound area, the Kennewick-Pasco-Richland metropolitan area of Washington, also known as the Tri-Cities, Goldendale, Vancouver, and White Salmon, Washington and Manzanita, Newport, Ontario, Tillamook and Waldport, Oregon.

The Company also maintains its long-standing indirect consumer lending platform which operates primarily throughout the Western United States. The Company emphasizes long-term relationships with families and businesses within the communities served, working with them to meet their financial needs. The Company is also actively involved in community activities and events within these market areas, which further strengthens our relationships within those markets.

The Company's strategic focus involves diversifying revenues, expanding lending channels, and enhancing the banking franchise. Management is committed to establishing varied revenue streams considering credit, interest rate, and concentration risks. The business plan includes:

• Growing and diversifying our loan portfolio;
• Maintaining strong asset quality;
• Emphasizing lower cost core deposits to reduce the costs of funding our loan growth;
• Capturing customers’ complete relationships through a broad array of products and services, leveraging community involvement, and selectively emphasizing offerings aligned with customers’ banking needs; and
• Expanding into new markets.

48

As a diversified lender, the Company specializes in originating one-to-four-family loans, commercial real estate (“CRE”) mortgages, second mortgages, consumer loans, marine lending, and commercial business loans.

At March 31, 2025, the Company's loan portfolio included commercial real estate loans, residential real estate loans, consumer loans, and commercial business loans representing 34.5%, 30.0%, 24.0%, and 11.5% of the portfolio, respectively.

Fixture secured loans to finance window, gutter, siding replacement, solar panels, spas, and other improvement renovations are a large segment of the consumer loan portfolio. These fixture-secured consumer loans are dependent on the Company’s contractor/dealer network of 33 currently active fixture dealerships located throughout Washington, Oregon, California, Idaho, Colorado, Nevada, Arizona, Minnesota, Texas, Utah, Massachusetts, Montana, and New Hampshire. Five of these contractor/dealers were responsible for 79.8% of the dollar volume of funded loans for the three months ended March 31, 2025. The Company funded $26.9 million, consisting of 1,232 loans in the fixture-secured consumer loan category during the quarter ended March 31, 2025.

The following table details fixture secured loan originations by state for the periods indicated:

(Dollars in thousands)

The Company originates one-to-four-family residential mortgage loans through referrals from real estate agents, financial planners, builders, and from existing customers. Retail banking customers are also an important source of the Company’s loan originations. The Company originated $141.4 million of one-to-four-family loans (which included loans held for sale, loans held for investment and fixed seconds) in addition to $4.0 million of loans brokered to other institutions through the home lending segment during the three months ended March 31, 2025, of which $91.9 million were sold to investors. Of the loans sold to investors, $31.8 million were sold to the FNMA, FHLMC, FHLB, and/or GNMA with servicing rights retained for the purpose of further developing these customer relationships. At March 31, 2025, one-to-four-family residential mortgage loans held for investment totaled $637.3 million, or 25.2%, of the total gross loan portfolio, while loans held for sale totaled $31.0 million and residential home equity loans totaled $73.8 million at that date.

For the three months ended March 31, 2025, one-to-four-family loan originations and refinancing activity decreased compared to the prior quarter as a result of economic volatility in the markets. Residential construction and development lending, while not as common as other loan origination options like one-to-four-family loans, continues to be an important element in our total loan portfolio, and we continue to take a disciplined approach by concentrating our efforts on loans to builders and developers in our market areas known to us. These short-term loans typically have a maturity period of six to 18 months, with disbursements not fully realized at origination, leading to a short-term reduction in net loans receivable.

The Company is significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs. Deposit flows are influenced by a number of factors, including interest rates paid on time deposits, other investments, account maturities, and the overall level of personal income and savings. Lending activities are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles. Sources of funds for lending activities include primarily deposits, including brokered deposits, borrowings, payments on loans, and income provided from operations.

The Company’s earnings are primarily dependent upon net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on these loans and investments. Interest expense is a function of the amount of deposits and borrowings outstanding during the same period and interest rates paid on these deposits and borrowings.

The Company’s earnings are also affected by fee income from mortgage banking activities, the provision for (reversal of) credit losses, service charges and fees, gains from sales of assets, operating expenses and income taxes.

Critical Accounting Estimates

There have been no material changes to the Company’s critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.

Comparison of Financial Condition at March 31, 2025 and December 31, 2024

Assets. Total assets increased $36.9 million to $3.07 billion at March 31, 2025, from $3.03 billion at December 31, 2024, primarily due to increases of $31.1 million in total cash and cash equivalents, $10.0 million in securities available-for-sale, $3.4 million in other assets, $3.2 million in loans held for sale, and $2.0 million in securities held-to-maturity. These increases were partially offset by decreases of $10.4 million in FHLB stock, $834,000 in loans receivable, net, and $831,000 in core deposits intangible, net. The net increase in total assets was primarily funded by brokered deposits during the three months ended March 31, 2025.

Loans receivable, net was virtually unchanged at $2.50 billion at both March 31, 2025, and December 31, 2024. The changes in CRE loans at March 31, 2025, compared to December 31, 2024, reflect an increase in construction and development loans of $8.2 million, partially offset by a decrease in CRE owner occupied loans of $5.5 million, and in CRE non-owner occupied loans of $733,000. The changes in residential real estate loans for the same time periods was driven by an increase in one-to-four-family loans (excluding loans held for sale) of $20.0 million. The home equity and residential custom construction loans saw minor declines, though these changes were not significant. Total undisbursed construction and development loan commitments increased $11.3 million to $185.4 million at March 31, 2025, as compared to $174.1 million at December 31, 2024. Commercial business loans decreased $9.0 million at March 31, 2025, compared to December 31, 2024, primarily as a result of a decrease in C&I loans of $12.1 million, slightly offset by an increase in warehouse lending of $3.0 million. Consumer loans decreased $11.3 million at March 31, 2025, compared to December 31, 2024, primarily due to decreases of $9.9 million in indirect home improvement loans and $1.2 million in marine loans.

Loans held for sale, consisting of one-to-four-family loans, increased $3.2 million to $31.0 million at March 31, 2025, from $27.8 million at December 31, 2024. The Company continues to invest in its home lending operations and strategically manage production capacity in the markets we serve.

One-to-four-family loan originations for the three months ended March 31, 2025, included $84.7 million of loans originated for sale, $56.8 million of portfolio loans including first and second liens, and $4.0 million of loans brokered to other institutions.

Originations of one-to-four-family loans for the periods indicated were as follows:

(Dollars in thousands)

During the three months ended March 31, 2025, the Company sold $91.9 million of one-to-four-family loans, compared to $93.9 million for the same period one year ago. This slight decrease in loan sales reflects a more competitive market environment, where interest rate fluctuations and broader economic conditions may have contributed to a reduction in origination volume. Despite this modest dip in sales, the Company remains focused on strategically managing its loan production and maintaining a robust pipeline of loans for sale, in line with market demand. Gross margin on home loan sales decreased to 3.26% for the three months ended March 31, 2025, compared to 3.43% for the three months ended March 31, 2024. Gross margin is defined as the margin on loans sold without the impact of deferred loan costs.

The ACL on loans was $31.7 million or 1.25% of gross loans receivable (excluding loans held for sale) at March 31, 2025, compared to $31.9 million or 1.26% of gross loans receivable (excluding loans held for sale) at December 31, 2024. The ACL on unfunded loan commitments increased $66,000 to $1.5 million at March 31, 2025, from $1.4 million at December 31, 2024.

Classified loans, all of which were classified as substandard, totaled $23.5 million at March 31, 2025, compared to $22.9 million at December 31, 2024. Nonperforming loans, consisting solely of nonaccrual loans, increased $870,000 to $14.5 million at March 31, 2025, from $13.6 million at December 31, 2024, primarily due to increases in nonperforming commercial and speculative construction and development loans of $1.5 million, nonperforming indirect home improvement loans of $1.1 million, and nonperforming one-to-four-family loans of $970,000, partially offset by decreases in nonperforming CRE owner occupied loans of $1.6 million and nonperforming commercial business loans of $1.5 million. The ratio of nonperforming loans to total gross loans was 0.57% at March 31, 2025, compared to 0.54% at December 31, 2024.

Liabilities. Total liabilities increased $33.8 million to $2.77 billion at March 31, 2025, from $2.73 billion at December 31, 2024, primarily due to an increase of $275.7 million in deposits, offset by a decrease of $239.0 million in borrowings.

Total deposits increased $275.7 million to $2.62 billion at March 31, 2025, from $2.34 billion at December 31, 2024, reflecting increases in all deposit categories. Transactional accounts (noninterest-bearing checking, interest-bearing checking and escrow accounts) increased $63.5 million to $878.2 million at March 31, 2025, from $814.7 million at December 31, 2024, due to increases of $24.9 million in interest-bearing checking, $31.7 million in noninterest-bearing checking and $6.8 million in escrow accounts related to mortgages serviced. Money market and savings accounts increased $7.9 million to $503.7 million at March 31, 2025, from $495.8 million at December 31, 2024.

CDs, which include both retail and non-retail CDs, increased $204.4 million to $1.23 billion at March 31, 2025, from $1.03 billion at December 31, 2024. Retail CDs increased $7.5 million to $881.6 million at March 31, 2025, from $874.1 million at December 31, 2024, while non-retail CDs, which include brokered CDs, online CDs and public funds CDs increased $196.9 million to $351.7 million, compared to $154.8 million at December 31, 2024. The increase in non-retail CDs was primarily due to an increase of $196.8 million in brokered CDs. Non-retail CDs represented 28.5% and 15.0% of total CDs at March 31, 2025 and December 31, 2024, respectively. The increase in non-retail CDs was due to the Company's strategy to manage interest rate risk and liquidity by accessing larger funding sources at competitive rates, which were only slightly higher than local market rates, and to pay down higher cost borrowings.

Deposits are summarized as follows at the dates indicated:

(Dollars in thousands)

(1) Includes $30.1 million of brokered deposits at March 31, 2025 and none at December 31, 2024.

(2) Includes $251,000 and $279,000 of brokered deposits at March 31, 2025 and December 31, 2024, respectively.

(3) Includes $339.9 million and $143.1 million of brokered CDs at March 31, 2025 and December 31, 2024, respectively.

(4) CDs that meet or exceed the FDIC insurance limit.

(5) Noninterest-bearing checking.

The Bank had uninsured deposits of approximately $679.4 million or 26.0% of total deposits, at March 31, 2025, compared to approximately $652.7 million or 27.9% of total deposits at December 31, 2024. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

Borrowings decreased $239.0 million to $68.8 million at March 31, 2025, from $307.8 million at December 31, 2024. The decreased borrowings reflect the paydown of these higher cost funds utilizing lower cost brokered deposits. At March 31, 2025, borrowings were comprised solely of FHLB advances.

Stockholders’ Equity. Total stockholders’ equity increased $3.1 million to $298.8 million at March 31, 2025, from $295.8 million at December 31, 2024. The increase in stockholders' equity reflects net income of $8.0 million and $512,000 in equity award compensation, partially offset by share repurchases of $3.8 million and cash dividends paid totaling $2.2 million. Additionally, the issuance of common stock under the employee stock purchase plan added $336,000, due to the issuance of 8,210 shares of Company common stock. Stockholders' equity was also impacted by decreases in unrealized net losses in securities available-for-sale of $2.7 million, net of tax, and decreases in unrealized net gains on fair value and cash flow hedges of $2.6 million, net of tax, reflecting changes in market interest rates during the quarter, resulting in a $152,000 increase in other comprehensive income, net of tax.

Book value per common share was $39.12 at March 31, 2025, compared to $38.26 at December 31, 2024. The calculation of book value per share at March 31, 2025, was based on 7,639,844 common shares, derived by subtracting the 103,063 unvested restricted stock shares from the 7,742,907 reported common shares outstanding as of that date. Similarly, the book value per share at December 31, 2024, was calculated based on 7,729,951 common shares, obtained by subtracting the 103,063 unvested restricted stock shares from the 7,833,014 reported common shares outstanding as of that date.

Comparison of Results of Operations for the Three Months Ended March 31, 2025 and 2024

General. Net income was $8.0 million for the three months ended March 31, 2025, compared to $8.4 million for the three months ended March 31, 2024. The decrease was primarily due to a $1.5 million, or 6.5%, increase in noninterest expense and a $193,000, or 13.8%, increase in provision for loan losses, partially offset by a $692,000, or 32.5%, reduction in provision for income tax expense and a $636,000, or 2.1%, increase in net interest income.

Average Balances, Interest and Average Yields/Cost

The following table sets forth for the periods indicated, information regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at for the periods presented. Average balances are daily average balances. The yields on tax-exempt municipal bonds have not been computed on a tax equivalent basis.

(Dollars in thousands)

(1) The average loans receivable, net balances include nonaccrual loans carrying a zero yield.

(2) Includes net deferred fee recognition of $1.2 million and $1.3 million for the three months ended March 31, 2025 and 2024, respectively.

(3) Shown at amortized cost.

(4) Includes income from fair value hedges of $297,000 and $418,000 for the three months ended March 31, 2025 and 2024, respectively.

53

Net Interest Income. Net interest income increased $636,000 to $31.0 million for the three months ended March 31, 2025, from $30.3 million for the three months ended March 31, 2024, primarily due to an increase in interest income of $1.9 million, partially offset by an increase in interest expense of $1.3 million. The $1.9 million increase in interest income was primarily due to an increase of $2.3 million in interest income on loans receivable, including fees, driven primarily by a 17-basis point increase in the average yield earned on loans receivable as new loans were originated at higher rates and variable-rate loans repriced higher, and a higher average balance of loans outstanding. The $1.3 million increase in total interest expense was primarily the result of higher market interest rates and a shift in deposit mix from transactional accounts to higher cost brokered CDs.

Net interest margin (“NIM”) (annualized) increased six basis point to 4.32% for the three months ended March 31, 2025, from 4.26% for the same period the prior year. The change in NIM reflects the increase in yields earned on interest-earning assets, along with higher average capital relative to the prior period.

Interest Income. Interest income for the three months ended March 31, 2025, increased $1.9 million to $46.8 million, from $44.9 million for the three months ended March 31, 2024. The $1.9 million increase in total interest income was primarily due to an increase of $2.3 million in interest income on loans receivable, including fees, primarily as a result of net loan growth and variable rate loans repricing higher.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended March 31, 2025 and 2024:

(Dollars in thousands)

(1) The average loans receivable, net balances include nonaccrual loans carrying a zero yield.

(2) Includes net deferred fee recognition of $1.2 million and $1.3 million for the three months ended March 31, 2025 and 2024, respectively.

(3) Shown at amortized cost.

(4) Includes income from fair value hedges of $297,000 and $418,000 for the three months ended March 31, 2025 and 2024, respectively.

Interest Expense. Interest expense increased $1.3 million to $15.8 million for the three months ended March 31, 2025, from $14.5 million for the comparable quarter in 2024, primarily due to an increase of interest expense on borrowings of $1.1 million. The higher borrowing costs were a result of an increase in the average balance of borrowings, partially offset by a decrease in the average interest paid.

The average cost of total interest-bearing deposits increased 17 basis points to 3.00%, for the three months ended March 31, 2025, compared to 2.83%, for the three months ended March 31, 2024. The average balance of total interest-bearing deposits decreased $67.2 million to $1.77 billion for the three months ended March 31, 2025 and 2024, compared to $1.83 billion for the three months ended March 31, 2024.

The average cost of total interest-bearing liabilities increased 20 basis points to 3.15% for the three months ended March 31, 2025, from 2.95% for the three months ended March 31, 2024. The average cost of funds, which includes noninterest-bearing checking, increased 17 basis points to 2.38% for the three months ended March 31, 2025, from 2.21% for the three months ended March 31, 2024.

The following table details average balances of interest-bearing liabilities, associated rates, and resulting change in interest expense for the three months ended March 31, 2025 and 2024:

(Dollars in thousands)

Provision for Credit Losses. For the three months ended March 31, 2025, the provision for credit losses was $1.6 million, consisting of a $1.5 million provision for credit losses on loans, and a $66,0000 provision for credit losses on unfunded loan commitments, compared to $1.4 million provision for credit losses for the three months ended March 31, 2024, consisting of a $1.4 million provision for credit losses on loans and a $22,000 reversal of the ACL on unfunded loan commitments. The provision for credit losses on loans reflects the increase in the loan portfolio, as well as an increase in nonperforming loans and higher net charge-offs.

During the three months ended March 31, 2025, net loan charge-offs totaled $1.7 million, compared to $1.5 million during the three months ended March 31, 2024. This increase was the result of increased net charge-offs of $487,000 in indirect home improvement loans and $25,000 in commercial business loans, partially offset by a reduction of net charge-offs of $213,000 in marine loans and $46,000 in other consumer loans. A decline in national and local economic conditions, as a result the effects of inflation, a recession or slowed economic growth, among other economic factors, could result in a material increase in the ACL on loans and may adversely affect the Company’s financial condition and result of operations.

Noninterest Income. Noninterest income was unchanged at $5.1 million for the three months ended March 31, 2025 and 2024. Changes in noninterest income during the three months ended March 31, 2025, compared to the same period in 2024, included a reduction in service charges and fee income due to the sale of mortgage servicing rights in the first quarter of 2024, and an increase other noninterest income attributable to increased unrealized gains on portfolio loans recorded under the fair value option. The three months ended March 31, 2024, additionally included gain on sale of mortgage servicing rights and losses on sale of investment securities which mostly offset.

Noninterest Expense. Noninterest expense increased $1.5 million to $25.1 million for the three months ended March 31, 2025, from $23.5 million for the three months ended March 31, 2024. The increase was primarily due to increases of $976,000 in salaries and benefits due to competitive wage adjustments, additional staffing to support growth, and higher overall benefit costs, and $437,000 in operations.

The efficiency ratio, which is calculated by dividing noninterest expense by total net interest income and noninterest income, weakened to 69.39% for the three months ended March 31, 2025, compared to 66.36% for the three months ended March 31, 2024, due to an increase in noninterest expense that outpaced total revenue growth.

Provision for Income Taxes. For the three months ended March 31, 2025, the Company recorded a provision for income taxes of $1.4 million, compared to $2.1 million for the three months ended March 31, 2024. The decrease in the income taxes provision was primarily due to a $1.1 million decrease in pre-tax income during the three months ended March 31, 2025, as compared to the same quarter last year. The effective corporate income tax rates for the three months ended March 31, 2025 and 2024, were 15.2% and 20.2%, respectively. The decline in tax rate between the quarters was primarily attributable to the tax benefits recognized from the $660,000 gain of related tax credits purchased versus the utilization of the credit. Excluding the tax benefit related to the $660,000 gain, the effective corporate income tax rate for the three months ended March 31, 2025 would have been 22.2%.

Liquidity

Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit runoff that may occur in the normal course of business. The Company relies on several different sources to meet potential liquidity demands. The primary sources are increases in deposit accounts, FHLB borrowings, purchases of federal funds, sale of securities available-for-sale, cash flows from loan payments, sales of one-to-four-family loans held for sale, and maturing securities. While the maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund its operations. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At March 31, 2025, the Bank’s total borrowing capacity was $639.2 million with the FHLB of Des Moines, with unused borrowing capacity of $570.0 million. The FHLB borrowing limit is based on certain categories of loans, primarily real estate loans that qualify as collateral for FHLB borrowings. At March 31, 2025, the Bank held approximately $1.08 billion in loans that qualify as collateral for FHLB borrowings.

In addition to the availability of liquidity from the FHLB of Des Moines, the Bank maintains a short-term borrowing line with the FRB with a limit of $270.6 million and a combined credit limit of $101.0 million in written federal funds lines of credit through correspondent banking relationships at March 31, 2025. The FRB borrowing limit is based on certain categories of loans, primarily consumer loans that qualify as collateral for FRB line of credit. At March 31, 2025, the Bank held approximately $597.4 million in loans that qualify as collateral for the FRB line of credit. There were no outstanding borrowings with the FRB or correspondent banks as of March 31, 2025 and December 31, 2024. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

The Bank’s Asset and Liability Management Policy permits management to utilize brokered deposits up to 20% of deposits or $524.3 million at March 31, 2025. Total brokered deposits at March 31, 2025 were $370.2 million. Management utilizes brokered deposits to mitigate interest rate risk and to enhance liquidity when appropriate.

Liquidity management is both a daily and long-term function of the Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S. Government obligations and U.S. agency securities. The Company uses sources of funds primarily to meet ongoing commitments, pay maturing deposits, fund withdrawals, and to fund loan commitments. At March 31, 2025, outstanding loan commitments, including unused lines of credit totaled $583.4 million. The Company purchased $15.0 million in securities during the three months ended March 31, 2025. The Company purchased $38.0 million in securities during the three months ended March 31, 2024. Proceeds from securities repayments, maturities and sales were $6.3 million and $48.3 million during the three months ended March 31, 2025 and 2024, respectively.

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the three months ended March 31, 2025 and 2024, the Bank sold $91.9 million and $93.9 million in loans, respectively.

Total deposits increased $275.7 million during the three months ended March 31, 2025, primarily driven by a net increase in brokered deposits of $226.9 million. CDs scheduled to mature in three months or less at March 31, 2025, totaled $516.7 million. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this strategy, management believes that a majority of maturing relationship deposits will remain with the Bank.

For the remainder of 2025, we project that fixed commitments will include $1.2 million of operating lease payments. For information regarding our operating leases, see “Note 6 – Leases” of the Notes to Consolidated Financial Statements included in this report. FHLB borrowings of $16.0 million are scheduled to mature within the next twelve months.

As a separate legal entity from the Bank, FS Bancorp, Inc. must provide for its own liquidity. In addition to its own operating expenses (many of which are paid to the Bank), FS Bancorp is responsible for paying for any stock repurchases, dividends declared to its stockholders, interest and principal on outstanding debt, and other general corporate expenses. Sources of capital and liquidity for FS Bancorp include distributions from the Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Bank to make distributions.

Dividends and other capital distributions from the Bank are subject to regulatory notice and certain restrictions. The unrestricted cash of FS Bancorp held at the Bank on an unconsolidated basis totaled $6.3 million at March 31, 2025. The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.28 per share, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2025 at this rate of $0.28 per share, our total dividends paid each quarter would be approximately $2.2 million based on the number of the current outstanding shares as of March 31, 2025.

Under FS Bancorp’s existing stock repurchase program, approximately $873,000 remained available for future repurchases as of March 31, 2025. See “Unregistered Sales of Equity Securities and Use of Proceeds” in Item 2, Part II of this Form 10-Q for additional information relating to stock repurchases.

Capital Resources

The Bank is subject to minimum capital requirements imposed by the FDIC. Based on its capital levels at March 31, 2025, the Bank exceeded these requirements as of that date. Consistent with our goals to operate a sound and profitable organization, our policy is for the Bank to maintain a well-capitalized status under the capital categories of the FDIC. Based on capital levels at March 31, 2025, the Bank was considered to be “well capitalized”. At March 31, 2025, the Bank exceeded all regulatory capital requirements with Tier 1 leverage-based capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 capital ratios of 11.3%, 13.2%, 14.4%, and 13.2%, respectively.

As a bank holding company registered with the Federal Reserve, the Company is subject to the capital adequacy requirements of the Federal Reserve. Bank holding companies with $3.0 billion or more in assets are subject to compliance with the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to the Bank. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to the holding company’s subsidiary bank and the Federal Reserve expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations. FS Bancorp is subject to regulatory capital guidelines for bank holding companies with $3.0 billion or more in assets at March 31, 2025, and has exceeded all applicable regulatory capital requirements. The regulatory capital ratios calculated for FS Bancorp at March 31, 2025 were 9.9% for Tier 1 leverage-based capital, 11.5% for Tier 1 risk-based capital, 14.7% for total risk-based capital, and 11.5% for CET 1 capital ratio. For additional information regarding regulatory capital compliance, see the discussion included in “Note 12 – Regulatory Capital” to the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

(a) Evaluation of Disclosure Controls and Procedures

An evaluation of the disclosure controls and procedures as defined in Rule 13a‑15(e) of the Exchange Act was carried out as of March 31, 2025, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) and several other members of the Company’s senior management. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon the foregoing evaluation, the Company’s CEO and CFO concluded that as of March 31, 2025, the Company’s disclosure controls and procedures were effective in ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to FS Bancorp management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC’s rules and forms.

(b) Changes in Internal Controls

There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2025, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.