FS Bancorp, Inc.: Form 10-Q for the period ended Jun 30, 2026

Forward–Looking Statements

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

• statements regarding 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 other things, the following factors:

• adverse impacts on economic conditions in our local markets or other markets where we have lending relationships; or to other aspects of the Company's business operations;
• effects of employment levels, labor shortages, persistent inflation, recessionary pressures or slowed economic growth;
• changes in interest rate levels and volatility, and the timing and pace of such changes, including actions 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 related monetary and fiscal policy responses thereto, and their impact on consumer and business behavior;
• geopolitical developments and international conflicts, or the imposition of new or increased tariffs and trade restrictions that may disrupt financial markets, global supply chains, commodity prices, or economic activity in specific industry sectors;
• the effects of any government shutdown, debt ceiling standoff, or other fiscal policy uncertainty;
• credit risks inherent in lending activities, including loan delinquencies, charge-offs, changes in our allowance for credit losses (“ACL”), and provisions 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 arising from product demand or corporate 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 acquire in the future into our operations, to realize related revenue synergies and cost savings within expected time frames, and the potential for goodwill impairments;
• 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 publicity about the banking industry in general on investor and depositor sentiment;
• the ability to adapt to rapid technological changes, including advancements related to artificial intelligence (“AI”), the use of AI models in credit decisioning, customer service, and operations, including risks of model error, bias, regulatory scrutiny under fair lending laws, and third-party AI dependencies, digital banking platforms, and cybersecurity;
• risk associated with the evolving regulatory and market environment for digital assets and cryptocurrency, including potential impacts on customer behavior, deposit flows, and our ability to offer or support related products or services;
• 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 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 our information systems or those of third-party service providers, including disruptions, breaches, or cyberattacks;
• 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, 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 the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2025 (the “2025 Form 10-K”).

Further, statements about the potential effects of the Company’s proposed merger with Pacific West Bancorp, headquartered in West Linn, Oregon (“Pacific West”) on the Company’s business, financial results, and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in the forward-looking statements due to factors and future developments which are uncertain, unpredictable, and in many cases, beyond the Company’s control, including the following:

• the expected cost savings, synergies and other financial benefits from the merger might not be realized within the expected time frames or at all;
• governmental approval of the merger may not be obtained, or adverse regulatory conditions may be imposed in connection with governmental approvals of the merger;
• conditions to the closing of the merger may not be satisfied; the shareholders of Pacific West may fail to approve the consummation of the merger;
• the integration of the combined company, including personnel changes/retention, might not proceed as planned; and
• the combined company might not perform as well as expected.

Any forward-looking statements in this Form 10‑Q and in other public statements may prove to be inaccurate because of incorrect assumptions, the factors described above, or other factors that we cannot foresee. Forward-looking statements are based on management’s beliefs and assumptions as of 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 in this report might not occur and you should not place undue reliance on any forward-looking statements.

Overview

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

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

In addition to its community banking presence, the Company maintains a long-standing indirect consumer lending platform operating primarily throughout the Western United States. Through active community involvement and a broad array of products and services, the Company emphasizes long-term relationships with the families and businesses it serves, working alongside them to meet their evolving financial needs.

The Company's strategic focus involves diversifying revenues, expanding lending channels, and enhancing the banking franchise. Management is committed to building varied revenue streams while thoughtfully managing credit, interest rate, and concentration risks. This commitment is reflected in the following priorities:

• Growing and diversifying the loan portfolio;
• Maintaining strong asset quality;
• Emphasizing lower cost core deposits to reduce funding costs and support 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.

As a diversified lender, the Company specializes in originating one-to-four-family residential loans, CRE mortgages, second mortgages, consumer loans, marine lending, and commercial business loans.

At June 30, 2026, the Company's loan portfolio consisted of the following major categories: CRE loans, residential real estate loans, consumer loans, and commercial business loans representing 37.8%, 29.8%, 21.5%, and 10.9% of the portfolio, respectively.

Indirect home improvement loans to finance window, gutter, siding replacement, solar panels, spas, and other improvement renovations represent a large segment of the consumer loan portfolio. These loans are sourced through a contractor/dealer network of 27 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, 2026, the Company originated 1,221 indirect home improvement loans with an aggregate total of $28.9 million. Five contractor/dealers accounted for 72.9% of the dollar volume funded in this category, and three states – Washington, Oregon, and California – represented nearly three-quarters of total loan originations at 33.9%, 25.3%, and 14.6%, respectively.

The Company originates one-to-four-family residential mortgage loans through referrals from real estate agents, financial planners, builders, and existing customers, with retail banking customers also serving as an important source of loan originations. During the three months ended June 30, 2026, the Company originated $202.7 million of one-to-four-family loans (including loans held for sale, loans held for investment, and fixed seconds). In addition, $2.6 million of loans were brokered to other institutions through the home lending segment. Of the loans originated, $156.1 million were sold to investors, of which $72.7 million were sold to the FNMA and FHLMC with servicing rights retained to maintain and further develop these customer relationships.

For the three months ended June 30, 2026, one-to-four-family loan originations and refinancing activity increased compared to the prior period, driven by changes in interest rates and economic conditions. Residential construction and development lending, while less common than other origination options, remains an important element of the total loan portfolio. The Company continues to take a disciplined approach concentrating its efforts on loans to builders and developers in its known market areas. These short-term loans typically carry a maturity of six to 18 months, with disbursements not fully realized at origination, resulting in 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, 2025.

Comparison of Financial Condition at June 30, 2026 and December 31, 2025

Assets. Total assets decreased $17.8 million to $3.18 billion at June 30, 2026, compared to $3.20 billion at December 31, 2025, primarily due to decreases of $19.2 million in securities available-for-sale, $13.2 million in loans held for sale, and $1.5 million in core deposit intangible, partially offset by increases of $6.4 million in FHLB stock, $5.8 million in loans receivable, net, $1.6 million in securities held-to-maturity, $1.5 million in total cash and cash equivalents, and $866,000 in operating lease right-of-use assets. Loan growth was funded primarily by borrowings, which also replaced a decline in deposit funding during the period.

Loans receivable, net increased $5.8 million to $2.63 billion at June 30, 2026, compared to $2.62 billion at December 31, 2025:

• Commercial real estate (“CRE”) loans increased $35.5 million, primarily reflecting:
• $16.3 million in commercial and speculative construction and development loans,
• $11.1 million in CRE non-owner occupied loans, and
• $8.1 million in CRE owner occupied loans.
• Residential real estate loans increased $34.1 million, driven by:
• $31.8 million in one-to-four-family loans (excluding loans held for sale), and
• $2.4 million in residential custom construction loans.
• Commercial business loans decreased $40.8 million, reflecting a decrease of $20.9 million in warehouse lending and $19.9 million in commercial and industrial (“C&I”) loans.
• Consumer loans decreased $23.8 million, primarily due to the decline of $23.7 million in indirect home improvement loans.

In summary, loan growth was concentrated in CRE and one-to-four-family residential lending, while consumer balances declined, driven primarily by a reduction in indirect home improvement loans, reflecting the impact of current economic conditions on consumer demand.

Total undisbursed construction and development loan commitments decreased $19.9 million to $215.5 million at June 30, 2026, from $235.4 million at December 31, 2025.

Loans held for sale, consisting of one-to-four-family loans, decreased $13.2 million to $30.5 million at June 30, 2026, from $43.7 million at December 31, 2025.

For the six months ended June 30, 2026, one-to-four-family loan originations and refinancing activity increased, compared to the six months ended June 30, 2025, driven by improved mortgage rates. Refinance volume increased $56.6 million or 104.9%, and purchase originations increased $12.0 million or 4.1%, reflecting continued demand in the Company’s market areas.

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

(Dollars in thousands)

During the six months ended June 30, 2026, the Company sold $310.8 million of one-to-four-family loans, compared to $219.0 million for the same period in 2025, reflecting higher refinance activity driven by more favorable interest rates. The Company continues to manage loan production capacity in an effort to maintain a pipeline consistent with market demand. Gross margin on home loan sales (defined as the margin on loans sold, excluding the impact of deferred loan costs) was 3.01% for the six months ended June 30, 2026, compared to 3.14% for the six months ended June 30, 2025. The compression in gross margin reflects competitive pricing pressure in the current mortgage market as the Company maintained production volume consistent with market demand.

The ACL on loans totaled $31.2 million, or 1.17%, of gross loans receivable (excluding loans held for sale), at June 30, 2026, compared to $31.9 million, or 1.20%, at December 31, 2025. The ACL on unfunded loan commitments decreased $39,000 to $1.7 million at June 30, 2026, from $1.8 million at December 31, 2025. Total loans 30 days or more past due decreased to $16.6 million, or 0.62% of total loans, from $22.2 million, or 0.84%, at December 31, 2025, reflecting improved credit performance across the broader loan portfolio as the markets respond to current economic conditions and their impact on borrower cash flows.

Nonperforming loans, consisting solely of nonaccrual loans, decreased $3.1 million to $15.6 million at June 30, 2026, from $18.7 million at December 31, 2025. The decrease was primarily attributable to a $2.3 million charge-off on a nonperforming commercial construction loan, and a decrease of $1.4 million in nonperforming CRE owner occupied loans, primarily due to loan payoffs, partially offset by an increase of $500,000 in nonperforming indirect home improvement loans. The ratio of nonperforming loans to total gross loans reduced to 0.59% at June 30, 2026, from 0.71% at December 31, 2025.

Classified loans totaled $25.0 million at June 30, 2026, compared to $27.3 million at December 31, 2025. The coverage ratio of the ACL on loans to nonperforming loans was 199.2% at June 30, 2026, compared to 170.6% at December 31, 2025. The increase in the coverage ratio primarily reflects the decline in nonperforming loans relative to the ACL on loans.

Overall, asset quality trends reflected improved delinquency and nonperforming loan metrics, continued growth in construction, CRE, and residential loan portfolios, ongoing elevated losses in certain consumer loan portfolios, and continued risk management and monitoring of nonperforming and substandard exposures.

Liabilities. Total liabilities decreased $29.0 million to $2.86 billion at June 30, 2026, from $2.89 billion at December 31, 2025. The loan-to-deposit ratio was approximately 108.6% at June 30, 2026, compared to approximately 100.9% at December 31, 2025.

Total deposits decreased $224.8 million to $2.45 billion at June 30, 2026, from $2.67 billion at December 31, 2025, reflecting decreases in most of the deposit categories. Transactional accounts (noninterest-bearing checking, interest-bearing checking and escrow accounts) decreased $54.7 million to $938.8 million at June 30, 2026, from $993.6 million at December 31, 2025, primarily due to decreases of $38.5 million in interest-bearing checking, $17.4 million in noninterest-bearing checking, and an offsetting increase of $1.1 million in escrow accounts related to mortgages serviced, reflecting higher customer balances associated with mortgage servicing activities. Money market and savings accounts increased $3.3 million to $553.0 million at June 30, 2026, from $549.7 million at December 31, 2025, primarily reflecting a $9.0 million increase in savings account balances, partially offset by a $5.8 million decrease in money market account balances.

Certificates of deposit (“CDs”), which include both retail and non-retail CDs, decreased $173.3 million to $957.1 million at June 30, 2026, from $1.13 billion at December 31, 2025. Retail CDs decreased $4.3 million to $917.4 million at June 30, 2026, from $921.7 million at December 31, 2025. Non-retail CDs, which include brokered CDs, online CDs and public funds CDs decreased $169.0 million to $39.7 million, compared to $208.7 million at December 31, 2025, primarily due to a decrease of $167.0 million in brokered CDs. Non-retail CDs represented 4.2% and 18.5% of total CDs at June 30, 2026 and December 31, 2025, respectively. The decrease in non-retail CDs reflects the Company’s funding strategy of replacing certain brokered deposits with lower-cost FHLB and FRB borrowings, while continuing to manage liquidity and interest rate risk.

Deposits are summarized as follows at the dates indicated:

(Dollars in thousands)

(1) Includes $87.3 million and $140.2 million of brokered deposits at June 30, 2026 and December 31, 2025, respectively.

(2) Includes $4.0 million and $20.3 million of brokered deposits at June 30, 2026 and December 31, 2025, respectively.

(3) Includes $35.1 million and $202.1 million of brokered deposits at June 30, 2026 and December 31, 2025, respectively.

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

(5) Noninterest-bearing checking.

The Bank had uninsured deposits of approximately $719.5 million or 29.4% of total deposits, at June 30, 2026, compared to approximately $718.1 million or 26.9% of total deposits at December 31, 2025. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

Borrowings increased $195.2 million to $324.5 million at June 30, 2026, from $129.3 million at December 31, 2025. The increase reflects a shift toward FHLB and FRB borrowings, which offered more competitive rates than brokered deposits during the period, consistent with the Company's funding strategy. At June 30, 2026, borrowings were comprised of FHLB and FRB advances.

Stockholders’ Equity. Total stockholders’ equity increased $11.3 million to $319.0 million at June 30, 2026, from $307.7 million at December 31, 2025. The increase primarily reflects net income of $15.8 million. Declines in the fair value of available-for-sale securities recorded in accumulated other comprehensive income (“AOCI”) were largely offset by improvements in the fair value of interest rate swap cash flow hedges, resulting in a net improvement of $4.1 million, net of tax. Gains and losses in fair value reflect changes in market interest rates during the periods. The increase in shareholders’ equity was partially offset by cash dividends paid totaling $4.3 million, and share repurchases of $4.3 million.

Book value per common share was $43.57 at June 30, 2026, compared to $41.55 at December 31, 2025. The calculation of book value per share at June 30, 2026, was based on 7,320,801 common shares, derived by subtracting 102,971 of unvested restricted stock shares from the 7,423,772 reported common shares outstanding as of that date. Similarly, the book value per share at December 31, 2025, was calculated based on 7,404,548 common shares, after deducting 102,971 of unvested restricted stock shares from the 7,507,519 reported common shares outstanding as of that date.

Comparison of Results of Operations for the Three Months Ended June 30, 2026 and 2025

General. Net income was $7.9 million for the three months ended June 30, 2026, compared to $7.7 million for the three months ended June 30, 2025. The increase was primarily due to a $980,000, or 19.0%, increase in total noninterest income and a $536,000 increase in net interest income, partially offset by a $620,000 increase in provision for credit losses, a $602,000, or 2.4%, increase in total noninterest expense and an $86,000 increase in provision for income taxes.

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 $1.5 million for the three months ended June 30, 2026 and 2025, respectively.

(3) Shown at amortized cost.

(4) Includes income from fair value hedges of $163,000 and $245,000 for the three months ended June 30, 2026 and 2025, respectively.

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Net Interest Income. Net interest income increased $536,000 to $32.6 million for the three months ended June 30, 2026, from $32.1 million for the three months ended June 30, 2025, primarily due to an increase in total interest income of $959,000, partially offset by an increase in total interest expense of $423,000. The $959,000 increase in total interest income was primarily due to an increase of $1.2 million in interest income on loans receivable, including fees, resulting from net loan growth. The $423,000 increase in total interest expense reflected a $612,000 increase in interest expense on borrowings resulting from higher average borrowing balances and a $423,000 increase in interest expense on the subordinated note following its repricing to a higher interest rate in 2026, partially offset by a $612,000 decrease in interest expense on deposits.

Net interest margin (“NIM”) (annualized) was unchanged at 4.30% for the three months ended June 30, 2026, compared to the same period in the prior year. NIM remained relatively stable during the periods.

Interest Income. Total interest income for the three months ended June 30, 2026, increased $959,000 to $49.7 million, from $48.7 million for the three months ended June 30, 2025. The increase was primarily due to a $1.2 million increase in interest income on loans receivable, including fees, as a result of higher average loan balances, partially offset by a lower average yield. Offsetting this growth were decreases in interest income on investment securities and interest-bearing deposits at other financial institutions, collectively totaling $266,000, primarily reflecting lower average balances and lower yields on interest-bearing deposits at other financial institutions.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended June 30, 2026 and 2025:

(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 $1.5 million for the three months ended June 30, 2026 and 2025, respectively.

(3) Shown at amortized cost.

(4) Includes income from fair value hedges of $163,000 and $245,000 for the three months ended June 30, 2026 and 2025, respectively.

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Interest Expense. Total interest expense increased $423,000 to $17.0 million for the three months ended June 30, 2026, from $16.6 million for the comparable quarter in 2025, due to an increase of $612,000 in interest expense on borrowings resulting from higher average borrowing balances, which was fully offset by a decrease in interest expense on deposits for the same amount, reflecting primarily a shift from brokered deposits to borrowings, and a $423,000 increase in interest expense on the subordinated note following its repricing to a higher interest rate in 2026.

The average cost of total interest-bearing deposits decreased 11-basis points to 2.92% for the three months ended June 30, 2026, compared to 3.03% for the three months ended June 30, 2025, primarily reflecting lower rates paid on CDs, which more than offset higher rates on interest-bearing checking and savings and money market accounts. The average balance of total interest-bearing deposits decreased $13.5 million to $1.91 billion for the three months ended June 30, 2026, compared to $1.92 billion for the three months ended June 30, 2025, driven primarily by a decrease in CDs, partially offset by increases in interest-bearing checking and savings and money market accounts.

The average cost of total interest-bearing liabilities decreased one-basis point to 3.12%, reflecting the benefit of the lower CD cost, partially offset by the higher cost of the subordinated note following its repricing. The average cost of funds, which includes noninterest-bearing checking, increased two- basis points to 2.41%, from 2.39% for the three months ended June 30, 2025, primarily attributable to the repricing of the subordinated note to a higher interest rate.

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, 2026 and 2025:

(Dollars in thousands)

Provision for Credit Losses. For the three months ended June 30, 2026, the provision for credit losses was $2.6 million, consisting of a $2.6 million provision for credit losses on loans and an $82,000 provision on credit losses on unfunded loan commitments. This compares to a $2.0 million provision for credit losses for the three months ended June 30, 2025, which consisted 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. The increase in the provision for credit losses on loans primarily reflects higher net charge‑offs during the period.

Net loan charge-offs totaled $3.8 million for the three months ended June 30, 2026, compared to $1.2 million during the three months ended June 30, 2025. The increase was primarily attributable to a further charge-off on an existing commercial construction loan relationship that was previously partially charged off in 2024, as well as higher net charge-offs within the indirect home improvement portfolio. The additional charge-off reflects leasing uncertainty and updated appraised values for the underlying property, as well as continued pressure on commercial real estate values in the surrounding market. Management expects final resolution of the relationship during the second half of 2026. The increase in indirect home improvement loan net charge-offs primarily reflects elevated delinquency levels within portions of the portfolio.

Noninterest Income. Noninterest income increased $980,000 to $6.2 million for the three months ended June 30, 2026, from $5.2 million for the three months ended June 30, 2025. The increase primarily reflects a $609,000 increase in gain on sale of loans and a $404,000 increase in other noninterest income.

Noninterest Expense. Noninterest expense increased $602,000 to $26.1 million for the three months ended June 30, 2026, compared to $25.5 million for the three months ended June 30, 2025. The $602,000 increase was primarily attributable to a $1.5 million increase in salaries and benefits expense resulting from annual compensation adjustments implemented during the second quarter as part of the Company's annual compensation review process, as well as higher benefit costs. In addition, the Company recorded $417,000 in acquisition-related costs associated with the previously announced merger with Pacific West. These increases were partially offset by a $1.1 million reduction in operations expense, primarily due to an $800,000 decrease in the mortgage purchase reserve for estimated losses to mortgage loan repurchase obligations. The reduction reflects the seasoning of loans originated during the high-volume production years of 2020 and 2021, which has reduced the expected level of future repurchase-related losses.

The efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income and noninterest income, improved to 67.28% for the three months ended June 30, 2026, compared to 68.40% for the three months ended June 30, 2025, due to revenue growth outpacing noninterest expense.

Provision for Income Taxes. For the three months ended June 30, 2026, the Company recorded a provision for income taxes of $2.1 million, compared to $2.0 million for the three months ended June 30, 2025. The effective corporate income tax rates for the three months ended June 30, 2026 and 2025, were 21.1% and 20.8%, respectively. The increase in both the provision and effective tax rate was primarily attributable to the absence of alternative energy tax credits under the Inflation Reduction Act of 2022, which benefited the comparable prior year period.

Comparison of Results of Operations for the Six Months Ended June 30, 2026 and 2025

General. Net income was $15.8 million for the six months ended June 30, 2026, compared to $15.7 million for the six months ended June 30, 2025. The increase was primarily due to a $2.1 million, or 3.3%, increase in net interest income and a $1.3 million, or 12.2%, increase in total noninterest income, partially offset by a $1.6 million, or 43.1%, increase in provision for credit losses, and a $1.1 million, or 2.1%, increase in total noninterest 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 are the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread 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 $3.1 million and $2.7 million for the six months ended June 30, 2026 and 2025, respectively.

(3) Shown at amortized cost.

(4) Includes income from fair value hedges of $327,000 and $542,000 for the six months ended June 30, 2026 and 2025, respectively.

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Net Interest Income. Net interest income increased $2.1 million to $65.2 million for the six months ended June 30, 2026, from $63.1 million for the six months ended June 30, 2025, primarily due to an increase in total interest income of $3.5 million, partially offset by an increase in total interest expense of $1.4 million. The increase in total interest income was primarily due to a higher average balance of loans outstanding. The increase in total interest expense was primarily the result of a $1.0 million increase in deposit interest expense, reflecting significantly higher average balances in interest-bearing checking accounts, including brokered deposits, and a 95- basis point increase in the rate paid on those accounts. Additionally, the repricing of the Company's subordinated notes to a floating rate on February 15, 2026, contributed $629,000 of incremental interest expense as the applicable interest rate increased following the repricing date. These increases were partially offset by a $267,000 decrease in borrowing costs, as the Company reduced average borrowings by $5.9 million in accordance with its funding and liquidity strategy.

NIM (annualized) decreased one- basis point to 4.30% for the six months ended June 30, 2026, from 4.31% for the same period the prior year. The change in NIM primarily reflects the repricing of the Company's subordinated notes to a floating rate on February 15, 2026, which resulted in an estimated one-basis point decline in NIM for the period, and higher costs associated with growth in interest-bearing checking balances, including brokered deposits. These increases were substantially offset by lower costs on CDs and borrowings.

Interest Income. Total interest income for the six months ended June 30, 2026, increased $3.5 million to $99.0 million, from $95.5 million for the six months ended June 30, 2025. The increase was primarily due to a $3.9 million increase in interest income on loans receivable, including fees, as a result of higher average loan balances. Offsetting this growth were decreases in interest income on taxable investment securities, FHLB stock, and interest-bearing deposits at other financial institutions, collectively totaling $370,000. The decrease in interest income on taxable investment securities and FHLB stock primarily reflects lower average balances and lower yields, while the decrease in interest income on interest-bearing deposits at other financial institutions primarily reflects lower yields, partially offset by higher average balances.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the six months ended June 30, 2026 and 2025:

(Dollars in thousands)

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

(2) Includes net deferred fee recognition of $3.1 million and $2.7 million for the six months ended June 30, 2026 and 2025, respectively.

(3) Shown at amortized cost.

(4) Includes income from fair value hedges of $327,000 and $542,000 for the six months ended June 30, 2026 and 2025, respectively.

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Interest Expense. Total interest expense increased $1.4 million to $33.8 million for the six months ended June 30, 2026, from $32.4 million for the comparable period in 2025, primarily due to an increase in interest expense on deposits and subordinated notes, partially offset by a decrease in interest expense on borrowings. The higher deposit costs were the result of an increase in interest-bearing checking balances, including brokered deposits, combined with a 95-basis point increase in the average rate paid on interest-bearing checking accounts. These increases were partially offset by a $2.4 million decrease in interest expense on CDs due to lower average CD balances and a 16-basis point decline in CD rates. The increase in subordinated note expense resulted from the repricing of the Company's subordinated notes to a floating rate on February 15, 2026.

The average cost of total interest-bearing deposits decreased seven-basis points to 2.94% for the six months ended June 30, 2026, compared to 3.01% for the six months ended June 30, 2025, primarily reflecting lower rates paid on CDs, partially offset by higher rates paid on savings, money market, and interest-bearing checking accounts. The average balance of total interest-bearing deposits increased $114.3 million to $1.96 billion primarily due to growth in interest-bearing checking balances, including brokered deposits, and higher average savings and money market balances. These increases were partially offset by a decrease in average CD balances.

The average cost of total interest-bearing liabilities similarly decreased two basis points to 3.12%, reflecting the benefit of lower borrowing costs resulting from both a decrease in average borrowings of $5.9 million, and a decline in the average borrowing rate. The average cost of funds, which includes noninterest-bearing checking, increased two-basis points to 2.40%, from 2.38% for the six months ended June 30, 2025, primarily reflecting a lower proportion of noninterest-bearing deposits in the overall funding mix.

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, 2026 and 2025:

(Dollars in thousands)

Provision for Credit Losses. For the six months ended June 30, 2026, the provision for credit losses was $5.2 million, consisting of a $5.2 million provision for credit losses on loans and a $39,000 recovery of credit losses on unfunded loan commitments. This compares to a $3.6 million provision for credit losses for the six months ended June 30, 2025. which consisted 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 credit losses on held-to-maturity investments. The increase in the provision for credit losses on loans primarily reflects an increase in nonperforming loans and higher net charge‑offs during the period.

Net loan charge-offs totaled $6.0 million for the six months ended June 30, 2026, compared to $2.9 million during the six months ended June 30, 2025. The increase was primarily due to a $2.3 million increase in commercial construction loan net charge-offs and an $882,000 increase in indirect home improvement loan net charge-offs, partially offset by a $172,000 decrease in commercial business loan net charge-offs, with the remainder attributable to slightly higher net charge-offs in marine and consumer loans. The rise in indirect home improvement and consumer loan net charge-offs reflects continued credit stress in those portfolios amid a challenging economic environment that could result in a material increase in the ACL on loans and adversely affect the Company’s financial condition and results of operations.

Noninterest Income. Noninterest income increased $1.3 million to $11.6 million for the six months ended June 30, 2026, from $10.3 million for the six months ended June 30, 2025. The increase was primarily due to a $1.3 million increase in gain on sale of loans.

Noninterest Expense. Noninterest expense increased $1.1 million to $51.6 million for the six months ended June 30, 2026, compared to $50.6 million for the six months ended June 30, 2025. The increase was primarily due to a $1.8 million increase in salaries and benefits, including a $1.5 million increase resulting from annual compensation adjustments implemented during the second quarter as part of the Company’s annual compensation review process, as well as higher benefit costs. In addition, the Company recorded $712,000 in acquisition related costs associated with the previously announced merger with Pacific West, and a $515,000 increase in loan costs, partially offset by decreases of $1.2 million in operations expense, primarily due to a reduction in the mortgage repurchasing reserve previously mentioned and $762,000 in data processing expense.

The efficiency ratio improved to 67.27% for the six months ended June 30, 2026, compared to 68.89% for the six months ended June 30, 2025, due to revenue growth outpacing noninterest expense.

Provision for Income Taxes. For the six months ended June 30, 2026, the Company recorded a provision for income taxes of $4.2 million, compared to $3.5 million for the six months ended June 30, 2025. The effective corporate income tax rates for the six months ended June 30, 2026 and 2025, were 21.0% and 18.1%, respectively. The increase in both the provision and effective tax rate was primarily attributable to the absence of alternative energy tax credits under the Inflation Reduction Act of 2022, which benefited the comparable period in the prior year.

Liquidity

Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit fluctuations 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 deposits, 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, 2026, the Bank’s total borrowing capacity was $751.4 million with the FHLB of Des Moines, with unused borrowing capacity of $474.8 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, 2026, the Bank held approximately $1.10 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 $259.7 million and a combined credit limit of $101.0 million in written federal funds lines of credit through correspondent banking relationships at June 30, 2026. 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, 2026, the Bank held approximately $559.0 million in loans that qualify as collateral for the FRB line of credit. There were $54.0 million of outstanding borrowings with the FRB and no outstanding borrowings with correspondent banks as of June 30, 2026, compared to no outstanding borrowings with either source as of December 31, 2025. 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 $491.0 million at June 30, 2026. Total brokered deposits at June 30, 2026 were $126.4 million. Brokered deposits decreased during the six months ended June 30, 2026 as the Company utilized FHLB borrowings as an alternative source of liquidity. 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, the Company maintains a strategy 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, 2026, outstanding loan commitments, including unused lines of credit totaled $683.7 million. The Company purchased $22.0 million in securities during the six months ended June 30, 2026. The Company purchased $69.8 million in securities during the six months ended June 30, 2025. Proceeds from securities repayments, maturities and sales were $38.6 million and $26.2 million during the six months ended June 30, 2026 and 2025, 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, 2026 and 2025, the Bank sold $310.8 million and $219.0 million in loans, respectively.

Total deposits decreased $224.8 million during the six months ended June 30, 2026, primarily driven by a net decrease in brokered deposits of $169.0 million. CDs scheduled to mature in three months or less at June 30, 2026, totaled $393.0 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 2026, we project that fixed commitments will include $726,000 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 $253.0 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, 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 that limit the Bank’s ability to make such distributions.

Dividends and other capital distributions from the Bank are subject to regulatory notice and certain restrictions. Unrestricted cash held by FS Bancorp on an unconsolidated basis totaled $6.1 million at June 30, 2026. The Company currently expects to continue 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. The current quarterly common stock dividend rate is $0.29 per share, which the Board of Directors believes balances its objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders. Assuming continued payment during 2026 at this rate of $0.29 per share, the Company’ total dividends paid each quarter would be approximately $2.2 million based on the number of shares outstanding as of June 30, 2026.

Under FS Bancorp’s existing stock repurchase program, no amounts remained available for future repurchases as of June 30, 2026. 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, 2026, 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, 2026, the Bank was considered to be “well capitalized”. At June 30, 2026, 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 11.43%, 12.84%, 14.01%, and 12.84%, respectively.

As a bank holding company registered with the Federal Reserve, FS Bancorp is subject to the capital adequacy requirements of the Federal Reserve. Bank holding companies with $3.0 billion or more in total assets are required to comply with the Federal Reserve’s capital regulations, which are generally consistent with the capital regulations applicable to the Bank. Under these regulations, the Federal Reserve expects the holding company to serve as a source of financial and managerial strength to its subsidiary bank and expects the subsidiary bank to be well capitalized under prompt corrective action regulations.

FS Bancorp is subject to these regulatory capital guidelines as of June 30, 2026, and has exceeded all applicable minimum capital requirements. The regulatory capital ratios calculated for FS Bancorp at June 30, 2026, were as follows: Tier 1 leverage-based capital ratio, 10.05%; Tier 1 risk-based capital ratio, 11.29%; total risk-based capital ratio, 13.87%; and CET 1 capital ratio, 11.29%. For additional information regarding regulatory capital compliance and regulatory minimums, see “Note 12 – Regulatory Capital” of 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, as amended (the “Exchange Act”), was carried out as of June 30, 2026, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) and 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 applied 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, 2026, the Company’s disclosure controls and procedures were effective in ensuring that information the Company was required to disclose in the reports it files or submits 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 the Company’s 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, 2026, that have materially affected or are reasonably likely to materially affect its 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 errors and 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 cost-effective control procedures, misstatements due to error or fraud may occur and remain undetected.