FS Bancorp, Inc.: Form 10-Q for the period ended Jun 30, 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, persistent inflation, recessionary pressures or slowing economic growth;
• changes in interest rate levels and the duration of such changes, including action by the Board of Governors of the Federal Reserve System (“Federal Reserve”), 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 monetary and fiscal policy response thereto, and their impact on consumer behavior;
• geopolitical developments and international conflicts, including but not limited to tensions or instability in Eastern Europe, the Middle East, and Asia, or the imposition of new or increased tariffs and trade restrictions, which may disrupt financial markets, global supply chains, energy prices, or economic activity in specific industry sectors;
• the effects of a federal government shutdown, debt ceiling standoff, or other fiscal policy uncertainty;
• 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;
• the ability to adapt to rapid technological changes, including advancement in artificial intelligence, digital banking, and cybersecurity;
• legislation or regulatory changes including, but not limited to shifts in capital requirements, banking regulation, tax laws, or consumer protection laws;

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• 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;
• vulnerabilities in information systems or third-party service providers, including disruptions, breaches, or attacks;
• inability of key third-party service providers 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, domestic political 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.

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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 June 30, 2025, the Company's loan portfolio included commercial real estate loans, residential real estate loans, consumer loans, and commercial business loans representing 35.0%, 29.8%, 23.2%, and 12.0% 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 34 currently active fixture dealerships located throughout Washington, Oregon, California, Idaho, Colorado, Nevada, Arizona, Minnesota, Texas, Utah, Massachusetts, Montana, and New Hampshire. During the three months ended June 30, 2025, the Company originated 1,620 fixture-secured consumer loans with an aggregate total of $37.6 million. Five contractor/dealers accounted for 81.9% of the dollar volume funded in this category. In addition, four states represented nearly three-quarters of the loan originations: Washington, Oregon, California, and Idaho with 37.5%, 17.9%, 12.1%, and 7.1% of total loan volume, respectively.

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 $193.3 million of one-to-four-family loans (which included loans held for sale, loans held for investment and fixed seconds) in addition to $6.0 million of loans brokered to other institutions through the home lending segment during the three months ended June 30, 2025, of which $127.1 million were sold to investors. Of the loans sold to investors, $40.9 million were sold to the FNMA, FHLMC, FHLB, and/or GNMA with servicing rights retained for the purpose of further developing these customer relationships.

For the three months ended June 30, 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 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 June 30, 2025 and December 31, 2024

Assets. Total assets increased $146.8 million to $3.18 billion at June 30, 2025, from $3.03 billion at December 31, 2024, primarily due to increases of $80.3 million in loans receivable, net, $25.8 million in loans held for sale, $23.1 million in securities held-to-maturity, and $21.5 million in securities available-for-sale, partially offset by a decrease of $4.0 million in FHLB stock funded by a combination of on-balance sheet liquidity and borrowings.

Loans receivable, net increased $80.3 million to $2.58 billion at June 30, 2025, compared to $2.50 billion at December 31, 2024. CRE loans increased $44.8 million at June 30, 2025, compared to December 31, 2024, and reflects increases of $19.9 million in commercial and speculative construction and development loans, $18.0 million in multi-family loans, and $9.9 million in CRE owner occupied loans, partially offset by a decrease of $2.9 million in CRE non-owner occupied loans. Residential real estate loans increased $37.1 million for the same time periods, driven by increases in one-to-four-family loans (excluding loans held for sale) of $22.6 million, home equity of $10.5 million, and residential custom construction of $4.1 million. Total undisbursed construction and development loan commitments increased $30.8 million to $204.9 million at June 30, 2025, as compared to $174.1 million at December 31, 2024. Commercial business loans increased $12.6 million at June 30, 2025, compared to December 31, 2024, due to increases in C&I loans of $7.5 million and $5.0 million in warehouse lending. Consumer loans decreased $13.9 million at June 30, 2025, compared to December 31, 2024, primarily due to decreases of $11.6 million in indirect home improvement loans and $2.2 million in marine loans. Loan growth was concentrated in construction and development, residential real estate, and multi-family loan segments, reflecting sustained demands in those markets, while consumer balances, primarily in indirect home improvement loans declined during the period as the Company continued to manage indirect exposures.

Loans held for sale, consisting of one-to-four-family loans, increased $25.8 million to $53.6 million at June 30, 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 six months ended June 30, 2025, included $204.6 million of loans originated for sale, $109.7 million of portfolio loans including first and second liens, and $10.0 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 six months ended June 30, 2025, the Company sold $219.0 million of one-to-four-family loans, compared to $258.4 million for the same period one year ago. The decrease in loan sales reflects a more competitive market environment and lower purchase volume, partially offset by higher refinance activity. The Company remains focused on managing loan production capacity and maintaining a pipeline consistent with market demand. Gross margin on home loan sales was 3.14% for both the six months ended June 30, 2025 and 2024. Gross margin is defined as the margin on loans sold without the impact of deferred loan costs.

The ACL on loans totaled $32.2 million, or 1.23% of gross loans receivable (excluding loans held for sale), at June 30, 2025, compared to $31.9 million, or 1.26% at December 31, 2024. The ACL on unfunded loan commitments increased $217,000 to $1.6 million at June 30, 2025, from $1.4 million at December 31, 2024. The most significant qualitative factor change was an increase in qualitative reserves, driven by higher levels of nonaccrual loans and shifts in delinquency trends. Total loans 30 days or more past due were $20.7 million, or 0.79% of total loans, at June 30, 2025, compared to $22.2 million, or 0.88%, at December 31, 2024. Although total past due loans declined slightly, loans 90 days or more past due increased to $14.8 million from $11.1 million, primarily due to the migration of certain construction and development CRE loans into later-stage delinquency. Nonaccrual loans rose to $19.0 million from $13.6 million over the same period. The increase was primarily concentrated in construction and development CRE loans, which increased to $9.1 million from $5.0 million, and in the consumer portfolio, where nonaccrual loans increased to $3.9 million from $2.0 million, led by indirect home improvement loans. Loan growth of 3.2% during the period also contributed to a higher required allowance under CECL. As a result, management increased qualitative reserves to address the higher risk of loss, particularly in the consumer and construction portfolios. The coverage ratio of the ACL on loans to nonperforming loans was 169.4% at June 30, 2025, compared to 234.3%, at December 31, 2024, reflecting the increase in nonaccrual balances discussed above.

Classified loans, all of which were classified as substandard, totaled $24.9 million at June 30, 2025, compared to $22.9 million at December 31, 2024. Nonperforming loans, consisting solely of nonaccrual loans, increased $5.4 million to $19.0 million at June 30, 2025, from $13.6 million at December 31, 2024, primarily due to increases in nonperforming commercial and speculative construction and development loans of $4.1 million, nonperforming indirect home improvement loans of $1.7 million, and nonperforming one-to-four-family loans of $1.6 million, partially offset by decreases in nonperforming commercial business loans of $1.6 million and nonperforming commercial real estate loans of $725,000. The ratio of nonperforming loans to total gross loans was 0.73% at June 30, 2025, compared to 0.54% at December 31, 2024. Management increased qualitative reserves during the period to address migration of certain credits to later-state delinquency categories and higher nonaccrual balances, as discussed above.

Liabilities. Total liabilities increased $145.4 million to $2.88 billion at June 30, 2025, from $2.73 billion at December 31, 2024, primarily due to an increase of $214.0 million in deposits, offset by a decrease of $73.5 million in borrowings. The loan-to-deposit ratio was approximately 101.1% at June 30, 2025, compared to approximately 106.9% at December 31, 2024, reflecting the mix shift toward deposits, particularly brokered CDs, to fund asset growth and reduce wholesale borrowings.

Total deposits increased $214.0 million to $2.55 billion at June 30, 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 $50.6 million to $865.3 million at June 30, 2025, from $814.7 million at December 31, 2024, due to increases of $34.7 million in interest-bearing checking, $15.9 million in noninterest-bearing checking and $17,000 in escrow accounts related to mortgages serviced. Money market and savings accounts increased $14.6 million to $510.4 million at June 30, 2025, from $495.8 million at December 31, 2024.

CDs, which include both retail and non-retail CDs, increased $148.8 million to $1.18 billion at June 30, 2025, from $1.03 billion at December 31, 2024. Retail CDs increased $17.2 million to $891.4 million at June 30, 2025, from $874.1 million at December 31, 2024, while non-retail CDs, which include brokered CDs, online CDs and public funds CDs increased $131.5 million to $286.3 million, compared to $154.8 million at December 31, 2024. The increase in non-retail CDs was primarily due to an increase of $137.7 million in brokered CDs. Non-retail CDs represented 24.3% and 15.0% of total CDs at June 30, 2025 and December 31, 2024, respectively. The increase in non-retail CDs aligns with the Company's strategy to manage interest rate risk and liquidity by accessing larger, diversified 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 $30.0 million of brokered deposits at June 30, 2025 and none at December 31, 2024.

(2) Includes $251,000 and $279,000 of brokered deposits at June 30, 2025 and December 31, 2024, respectively.

(3) Includes $280.8 million and $143.1 million of brokered CDs at June 30, 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 $677.2 million or 26.5% of total deposits, at June 30, 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 $73.5 million to $234.3 million at June 30, 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 June 30, 2025, borrowings were comprised of $209.3 million of FHLB advances and $25.0 million of FRB borrowings.

Stockholders’ Equity. Total stockholders’ equity increased $1.4 million to $297.2 million at June 30, 2025, from $295.8 million at December 31, 2024. The increase primarily reflects net income of $15.7 million, partially offset by share repurchases of $9.0 million, cash dividends paid totaling $4.3 million, and $1.0 million in equity award compensation. Additionally, the issuance of common stock under the employee stock purchase plan contributed $650,000, reflecting the issuance of 16,128 shares of Company common stock. Stockholders' equity was also impacted by the increase in accumulated other comprehensive loss, net of tax of $2.7 million, primarily due to decreases in unrealized net gains on fair value and cash flow hedges of $4.2 million, net of tax, reflecting changes in market interest rates during the quarter, partially offset by an improvement in unrealized net losses on securities available-for-sale of $1.5 million, net of tax.

Book value per common share was $39.55 at June 30, 2025, compared to $38.26 at December 31, 2024. The calculation of book value per share at June 30, 2025, was based on 7,515,480 common shares, derived by subtracting the 103,063 unvested restricted stock shares from the 7,618,543 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, after deducting 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 June 30, 2025 and 2024

General. Net income was $7.7 million for the three months ended June 30, 2025, compared to $9.0 million for the three months ended June 30, 2024. The decrease was primarily due to a $1.6 million, or 6.9%, increase in noninterest expense, a $944,000, or 87.7%, increase in provision for loan losses, and a $698,000 decrease in total noninterest income, partially offset by a $1.7 million, or 5.6% increase in net interest income and a $345,000, or 14.5%, reduction in provision for income tax expense.

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 $1.5 million and $2.1 million for the three months ended June 30, 2025 and 2024, respectively.

(3) Shown at amortized cost.

(4) Includes income from fair value hedges of $245,000 and $422,000 for the three months ended June 30, 2025 and 2024, respectively.

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Net Interest Income. Net interest income increased $1.7 million to $32.1 million for the three months ended June 30, 2025, from $30.4 million for the three months ended June 30, 2024, primarily due to an increase in total interest income of $2.8 million, partially offset by an increase in total interest expense of $1.1 million. The $2.8 million increase in total interest income was primarily due to an increase of $2.6 million in interest income on loans receivable, including fees, driven primarily by a 12-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 $1.1 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 one basis point to 4.30% for the three months ended June 30, 2025, from 4.29% for the same period the prior year. The change in NIM reflects the increase in yields earned on interest-earning assets, along with a slight improvement in funding cost.

Interest Income. Total interest income for the three months ended June 30, 2025, increased $2.8 million to $48.7 million, from $45.9 million for the three months ended June 30, 2024. The $2.8 million increase in total interest income was primarily due to an increase of $2.6 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 June 30, 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 $1.5 million and $2.1 million for the three months ended June 30, 2025 and 2024, respectively.

(3) Shown at amortized cost.

(4) Includes income from fair value hedges of $245,000 and $422,000 for the three months ended June 30, 2025 and 2024, respectively.

Interest Expense. Total interest expense increased $1.1 million to $16.6 million for the three months ended June 30, 2025, from $15.5 million for the comparable quarter in 2024, primarily due to an increase of interest expense on deposits of $1.3 million. The higher deposit costs were a result of an increase in the average balance of deposits, partially offset by a decrease in the average interest paid. The increase in interest expense also reflects a strategic shift in deposit mix, with a higher proportion of CDs and interest-bearing checking accounts that carry higher interest rates in the current market.

The average cost of total interest-bearing deposits increased six basis points to 3.03%, for the three months ended June 30, 2025, compared to 2.97%, for the three months ended June 30, 2024. The average balance of total interest-bearing deposits increased $129.6 million to $1.92 billion for the three months ended June 30, 2025 and 2024, compared to $1.79 billion for the three months ended June 30, 2024. The increase in cost was primarily attributable due to a shift in deposit mix to higher cost certificates of deposits and increases in deposit cost for interest-bearing checking, savings and money markets accounts.

The average cost of total interest-bearing liabilities decreased two basis points to 3.13% for the three months ended June 30, 2025, from 3.15% for the three months ended June 30, 2024. The average cost of funds, which includes noninterest-bearing checking, increased one basis points to 2.39% for the three months ended June 30, 2025, from 2.38% for the three months ended June 30, 2024.

The following table details average balances of interest-bearing liabilities, associated rates, and resulting change in interest expense for the three months ended June 30, 2025 and 2024:

(Dollars in thousands)

Provision for Credit Losses. For the three months ended June 30, 2025, the provision for credit losses was $2.0 million, consisting of a $1.7 million provision for credit losses on loans, a $154,000 provision for held-to-maturity securities, and a $151,000 provision for credit losses on unfunded loan commitments, compared to $1.1 million provision for credit losses for the three months ended June 30, 2024, consisting of a $1.0 million provision for credit losses on loans and a $77,000 provision 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 June 30, 2025 and 2024, net loan charge-offs totaled $1.2 million. The predominate changes in net charge-offs were a $718,000 decrease in commercial business loans, offset by a $707,000 increase in indirect home improvement 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 decreased $698,000 to $5.2 million for the three months ended June 30, 2025, from $5.9 million for the three months ended June 30, 2024. The decrease primarily reflects a $491,000 decrease in gain on sale of loans, resulting from a decrease of loans available for sale, as well as a $156,000 decrease in service charges and fee income, largely attributable to lower transaction volumes. Additionally, the current quarter recorded no gain on sale of investment securities, compared to a gain of $151,000 in the prior-year period, reflecting no securities sales activity during the current quarter. These declines were partially offset by modest increases in earnings on cash surrender value of bank-owned life insurance and other noninterest income.

Noninterest Expense. Noninterest expense was $25.5 million for the three months ended June 30, 2025, compared to $23.9 million for the three months ended June 30, 2024. The $1.6 million increase was primarily due to increases of $710,000 in salaries and benefits due to competitive wage adjustments and higher overall benefit costs, $305,000 in operations expense, and $267,000 in professional and board fees. Other contributors to the increase included higher FDIC insurance premiums and marketing expenses.

The efficiency ratio, which is calculated by dividing noninterest expense by total net interest income and noninterest income, weakened to 68.40% for the three months ended June 30, 2025, compared to 65.78% for the three months ended June 30, 2024, due to an increase in noninterest expense that outpaced total revenue growth.

Provision for Income Taxes. For the three months ended June 30, 2025, the Company recorded a provision for income taxes of $2.0 million, compared to $2.4 million for the three months ended June 30, 2024. The decrease in the income taxes provision was primarily due to a $1.6 million decrease in pre-tax income during the three months ended June 30, 2025, as compared to the same quarter last year. The effective corporate income tax rates for the three months ended June 30, 2025 and 2024, were 20.8% and 21.0%, respectively.

Comparison of Results of Operations for the Six Months Ended June 30, 2025 and 2024

General. Net income was $15.7 million for the six months ended June 30, 2025, compared to $17.4 million for the six months ended June 30, 2024. The decrease was primarily due to a $3.2 million, or 6.7%, increase in noninterest expense and a $1.1 million, or 45.9%, increase in provision for credit losses, partially offset by a $2.3 million, or 3.9%, increase in net interest income and a $1.0 million, or 23.0%, reduction in provision for income tax expense.

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 $2.7 million and $4.0 million for the six months ended June 30, 2025 and 2024, respectively.

(3) Shown at amortized cost.

(4) Includes income from fair value hedges of $542,000 and $839,000 for the six months ended June 30, 2025 and 2024, respectively.

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Net Interest Income. Net interest income increased $2.3 million to $63.1 million for the six months ended June 30, 2025, from $60.7 million for the six months ended June 30, 2024, primarily due to an increase in total interest income of $4.7 million, partially offset by an increase in total interest expense of $2.3 million. The $4.7 million increase in total interest income was primarily due to an increase of $4.9 million in interest income on loans receivable, including fees, driven primarily by a 15-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 $2.3 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 four basis point to 4.31% for the six months ended June 30, 2025, from 4.27% 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. Total interest income for the six months ended June 30, 2025, increased $4.7 million to $95.5 million, from $90.8 million for the six months ended June 30, 2024. This increase was primarily due to an increase of $4.9 million in interest income on loans receivable, including fees, reflecting both net loan growth and the impact of variable-rate loans repricing higher.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the six months ended June 30, 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 $2.7 million and $4.0 million for the six months ended June 30, 2025 and 2024, respectively.

(3) Shown at amortized cost.

(4) Includes income from fair value hedges of $542,000 and $839,000 for the six months ended June 30, 2025 and 2024, respectively.

Interest Expense. Total interest expense increased $2.3 million to $32.4 million for the six months ended June 30, 2025, compared to $30.1 million for the same period in 2024, primarily due to an increase of interest expense on deposits of $1.4 million. The higher deposit costs were a result of both higher overall average balances and increased rates on deposit accounts. The average cost of total interest-bearing deposits increased 11 basis points to 3.01%, for the six months ended June 30, 2025, compared to 2.90%, for the six months ended June 30, 2024. The average balance of total interest-bearing deposits increased $31.7 million to $1.85 billion for the six months ended June 30, 2025 and 2024, compared to $1.81 billion for the six months ended June 30, 2024.

Interest expense on borrowings increased by $880,000, primarily due to higher average balances, partially offset by a decline in borrowing rates.

The average cost of total interest-bearing liabilities increased nine basis points to 3.14% for the six months ended June 30, 2025, compared to 3.05% for the six months ended June 30, 2024. The average cost of funds, which includes noninterest-bearing checking, increased eight basis points to 2.38% for the six months ended June 30, 2025, from 2.30% for the six months ended June 30, 2024.

The following table details average balances of interest-bearing liabilities, associated rates, and resulting change in interest expense for the six months ended June 30, 2025 and 2024:

(Dollars in thousands)

Provision for Credit Losses. For the six months ended June 30, 2025, the provision for credit losses was $3.6 million, consisting of a $3.2 million provision for credit losses on loans, a $217,000 provision for credit losses on unfunded loan commitments, and a $175,000 provision for losses on held to maturity investments, compared to $2.5 million provision for credit losses for the six months ended June 30, 2024, consisting of a $2.4 million provision for credit losses on loans and a $54,000 provision for credit losses 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 six months ended June 30, 2025, net loan charge-offs totaled $2.9 million, compared to $2.7 million during the six months ended June 30, 2024. This increase was the result of increased net charge-offs of $1.2 million in indirect home improvement loans, primarily offset by net charge-off decreases of $693,000 in commercial business loans and $271,000 in marine loans. A decline in national and local economic conditions, as a result the effects of tariffs 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 decreased $683,000 to $10.3 million for the six months ended June 30, 2025, compared to $11.0 million for the same period in 2024. The decrease was primarily the result of a $629,000 decrease in gain on sale of loans, reflecting lower sales activity, a $464,000 decrease in service charges and fee income, primarily due to reduced transaction volumes, and a net $368,000 decrease from the absence of gain on sale of MSRs and losses on the sale of investment securities in 2025, compared to an $8.2 million net gain on sale of MSRs partially offset by a $7.8 million loss on sale of investment securities in the first half of 2024. These decreases were partially offset by a $755,000 increase in other noninterest income including a $312,000 gain from sales of nonmarketable equity securities, $195,000 in bank owned life insurance proceeds, and a $101,000 increase in brokered loan fees.

Noninterest Expense. Noninterest expense increased $3.2 million to $50.6 million for the six months ended June 30, 2025, from $47.4 million for the six months ended June 30, 2024. The increase was primarily due to increases of $1.7 million in salaries and benefits due to competitive wage adjustments and higher overall benefit costs, $742,000 in operations, and $531,000 in professional and board fees.

The efficiency ratio, which is calculated by dividing noninterest expense by total net interest income and noninterest income, weakened to 68.89% for the six months ended June 30, 2025, compared to 66.07% for the six months ended June 30, 2024, due to an increase in noninterest expense that outpaced total revenue growth.

Provision for Income Taxes. For the six months ended June 30, 2025, the Company recorded a provision for income taxes of $3.5 million, compared to $4.5 million for the six months ended June 30, 2024. The decrease in the income taxes provision was primarily due to a $2.6 million decrease in pre-tax income during the six months ended June 30, 2025, as compared to the same period last year. The effective corporate income tax rates for the six months ended June 30, 2025 and 2024, were 18.1% and 20.6%, 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 six months ended June 30, 2025 would have been approximately 340 basis points higher.

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 June 30, 2025, the Bank’s total borrowing capacity was $650.9 million with the FHLB of Des Moines, with unused borrowing capacity of $438.2 million. The FHLB borrowing limit is based on certain categories of loans, primarily real estate loans that qualify as collateral for FHLB borrowings. At June 30, 2025, the Bank held approximately $1.09 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 $262.8 million and a combined credit limit of $101.0 million in written federal funds lines of credit through correspondent banking relationships at June 30, 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 June 30, 2025, the Bank held approximately $591.0 million in loans that qualify as collateral for the FRB line of credit. There were $25.0 million of outstanding borrowings with the FRB or correspondent banks as of June 30, 2025, and none at 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 $511.2 million at June 30, 2025. Total brokered deposits at June 30, 2025 were $311.0 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 June 30, 2025, outstanding loan commitments, including unused lines of credit totaled $583.3 million. The Company purchased $69.8 million in securities during the six months ended June 30, 2025. The Company purchased $38.0 million in securities during the six months ended June 30, 2024. Proceeds from securities repayments, maturities and sales were $26.2 million and $107.5 million during the six months ended June 30, 2025 and 2024, respectively.

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the six months ended June 30, 2025 and 2024, the Bank sold $219.0 million and $258.4 million in loans, respectively.

Total deposits increased $214.0 million during the six months ended June 30, 2025, primarily driven by a net increase in brokered deposits of $167.7 million. CDs scheduled to mature in three months or less at June 30, 2025, totaled $502.7 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 $1.1 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 $128.8 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 $2.6 million at June 30, 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 June 30, 2025.

Under FS Bancorp’s existing stock repurchase program, approximately $725,000 remained available for future repurchases as of June 30, 2025. On July 9, 2025, subsequent to quarter-end, the Company publicly announced that its Board of Directors approved an additional stock repurchase program, authorizing the repurchase of up to $5.0 million of Company common stock, in addition to the amount remaining under the existing stock repurchase program. 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 June 30, 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 June 30, 2025, the Bank was considered to be “well capitalized”. At June 30, 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 11.2%, 12.8%, 14.1%, and 12.8%, 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 June 30, 2025, and has exceeded all applicable regulatory capital requirements. The regulatory capital ratios calculated for FS Bancorp at June 30, 2025 were 9.7% for Tier 1 leverage-based capital, 11.1% for Tier 1 risk-based capital, 14.2% for total risk-based capital, and 11.1% 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 June 30, 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 June 30, 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 June 30, 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.