FS Bancorp, Inc. FSBW Form 10-Q filing Q2 FY2026

• Page Number
• PART I FINANCIAL INFORMATION
• Item 1. Financial Statements
• Consolidated Balance Sheets at June 30, 2026 (Unaudited) and December 31, 2025 4
• Consolidated Statements of Income for the Three and Six Months Ended June 30, 2026 and 2025 (Unaudited) 5
• Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2026 and 2025 (Unaudited) 6
• Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2026 and 2025 (Unaudited) 7
• Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2026 and 2025 (Unaudited) 9 - 10
• Notes to Consolidated Financial Statements 11 - 50
• Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 52 - 66
• Item 3. Quantitative and Qualitative Disclosures About Market Risk 67
• Item 4. Controls and Procedures 67
• PART II OTHER INFORMATION 67
• Item 1. Legal Proceedings 67
• Item 1A. Risk Factors 67
• Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 68
• Item 3. Defaults Upon Senior Securities 68
• Item 4. Mine Safety Disclosures 68
• Item 5. Other Information 68
• Item 6. Exhibits 69
• SIGNATURES 70

When we refer to “FS Bancorp” in this report, we are referring to FS Bancorp, Inc. When we refer to “Bank” or “1st Security Bank” in this report, we are referring to 1st Security Bank of Washington, the wholly owned subsidiary of FS Bancorp. As used in this report, the terms “we,” “our,” “us,” and “Company” refer to FS Bancorp, Inc. and its consolidated subsidiary, 1st Security Bank of Washington, unless the context indicates otherwise.

#****Item 1. Financial Statements

See accompanying notes to these consolidated financial statements.

See accompanying notes to these consolidated financial statements.

See accompanying notes to these consolidated financial statements.

#****FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share amounts) (Unaudited)

Three Months Ended June 30, 2026 and 2025

Six Months Ended June 30, 2026 and 2025

See accompanying notes to these consolidated financial statements.

See accompanying notes to these consolidated financial statements.

#****FS BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Table Dollar Amounts in Thousands, Except Per Share Amounts)

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – FS Bancorp, Inc. (the “Company”) was incorporated in September 2011 as the holding company for 1st Security Bank of Washington (the “Bank” or “1st Security Bank”) in connection with the Bank’s conversion from the mutual to stock form of ownership which was completed on July 9, 2012. The Bank is a community-based savings bank with 29 full-service bank branches, a headquarters that also originates loans and accepts deposits, and loan production offices 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 Bank provides loan and deposit services to customers who are predominantly small- and middle-market businesses and individuals. The Company and its subsidiary are subject to regulation by certain federal and state agencies and undergo periodic examination by these regulatory agencies.

Financial Statement Presentation – The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10‑Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10‑K which includes all the audited financial statements and footnotes required by U.S. GAAP for complete financial statements for the year ended December 31, 2025. In the opinion of management, all normal adjustments and recurring accruals considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain prior-period amounts have been reclassified to conform to the current period presentation. These matters did not have an impact on net income or earnings per share for the periods presented.

On February 25, 2026, FS Bancorp, Inc. announced the signing of a definitive merger agreement whereby the Company will acquire Pacific West Bancorp (“Pacific West”) in a stock and cash transaction valued at approximately $34.6 million. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the agreement by the shareholders of Pacific West. See “Note 15 – Definitive Agreement.”

The results for the three and six months ended June 30, 2026, are not necessarily indicative of the results that may be expected for the year ending December 31, 2026, or any other future period. The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses (“ACL”).

Amounts presented in the consolidated financial statements and footnote tables are rounded to the nearest thousand dollars, except for per share amounts. Amounts above $1.0 million are rounded to one decimal place, and amounts above $1.0 billion are rounded to two decimal places.

Principles of Consolidation – The consolidated financial statements include the accounts of FS Bancorp and its wholly owned subsidiary, 1st Security Bank. All material intercompany accounts have been eliminated in consolidation.

Segment Reporting – The Company operates in two business segments through the Bank: commercial and consumer banking and home lending. The Company’s business segments are determined based on the products and services provided, as well as the nature of the related business activities, and they reflect the way financial information is regularly reviewed for the purpose of allocating resources and evaluating performance of the Company’s businesses. The results for these business segments are based on management’s accounting process, which assigns income statement items and assets to each responsible operating segment. This process is dynamic and is based on management’s view of the Company’s operations. See “Note 13 – Business Segments.”

Subsequent Events – The Company has evaluated events and transactions after June 30, 2026, for potential recognition or disclosure.

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RECENT ACCOUNTING PRONOUNCEMENTS

In October 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The amendments incorporate into the Accounting Standards Codification certain disclosure and presentation requirements currently included in SEC regulations. Each amendment will become effective prospectively upon the SEC’s removal of the related disclosure requirement from its rules. The Company is currently evaluating the impact of ASU 2023-06 and does not expect its adoption to have a material effect on its consolidated financial statements.

In January 2025, the FASB issued guidance within ASU 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. The amendment amends the effective date of ASU 2024-03 to clarify that all public business entities are required to adopt the guidance in annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027. Early adoption of ASU 2024-03 is permitted. The Company is currently evaluating the impact of ASU 2024-03, as amended by ASU 2025-01, but does not expect it to have a material effect on its consolidated financial statements.

In December 2025, the FASB issued guidance within ASU 2025-11, Interim Reporting. The ASU is intended to improve the navigability of the guidance in ASC 270 and clarify when it applies. Under the amendments, an entity is subject to ASC 270 if it provides “interim financial statements and notes in accordance with GAAP.” The ASU is effective for interim periods in fiscal years beginning after December 15, 2027 for public business entities, with a one-year deferral for all other entities. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this ASU but does not expect it to have a material effect on its consolidated financial statements.

Application of New Accounting Guidance Adopted in 2026

In November 2025, the FASB issued ASU 2025‑08, Financial Instruments—Credit Losses (Topic 326): Purchased Loans, which expands and clarifies acquisition‑date accounting for certain purchased loans under the Current Expected Credit Loss ("CECL") model, including the use of a gross‑up approach for specified acquired loans. Although the ASU is effective for annual reporting periods beginning after December 15, 2026, and interim periods within those fiscal years, the Company early adopted the guidance effective January 1, 2026. Adoption of the ASU did not have a material impact on the Company’s consolidated financial statements or related disclosures.

NOTE 2 – INVESTMENTS

The following tables present the amortized costs, unrealized gains, unrealized losses, estimated fair values of securities available-for-sale and held-to-maturity, and the ACL on securities available-for-sale and held-to-maturity at June 30, 2026 and December 31, 2025:

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The following table presents the activity in the ACL on securities held-to-maturity by major security type for the three and six months ended June 30, 2026 and 2025:

Management measures expected credit losses on held-to-maturity debt securities on an individual basis. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. There were no changes in credit loss reserves during the period, as there were no changes to the credit loss model and securities balances remained relatively flat. Accrued interest receivable totaled $672,000 and $271,000 on held-to-maturity debt securities and $1.1 million and $1.2 million on available-for-sale debt securities as of June 30, 2026 and December 31, 2025, respectively. Accrued interest receivable on securities is reported in “Accrued interest receivable” on the Consolidated Balance Sheets and is excluded from the calculation of the ACL.

The Company monitors the credit quality of debt securities held-to-maturity quarterly using credit rating, material event notices, and changes in market value. The following table summarizes the amortized cost of debt securities held-to-maturity at the dates indicated, aggregated by credit quality indicator:

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At June 30, 2026 and December 31, 2025, there were no debt securities held-to-maturity that were classified as either nonaccrual or 90 days or more past due and still accruing interest.

The following table presents, as of June 30, 2026, investment securities which were pledged to secure borrowings, public deposits, or other obligations as permitted or required by law:

Investment securities that were in an unrealized loss position at the dates indicated are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position.

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The unrealized losses associated with our investment securities are believed to be caused by changing market conditions and considered to be temporary, and the Company does not intend and is not likely to be required to sell these securities prior to maturity. Management monitors the published credit ratings of the issuers of the debt securities for material ratings or outlook changes. Substantially all the Company’s municipal bond portfolio is comprised of obligations of states and political subdivisions located within the Company’s geographic footprint that are monitored through quarterly or annual financial review utilizing published credit ratings. All the municipal bond securities are investment grade.

All of the available-for-sale mortgage-backed securities and asset-backed securities in an unrealized loss position are issued or guaranteed by government-sponsored enterprises, and the available-for-sale corporate securities are all investment grade and monitored for rating or outlook changes. Based on the Company’s evaluation of these securities, no credit impairment was recorded for the three and six months ended June 30, 2026 and 2025.

The contractual maturities of securities available-for-sale and held-to-maturity at the dates indicated are listed below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations; therefore, these securities are classified separately with no specific maturity date.

There were no sales of securities available-for-sale for the three and six months ended June 30, 2026 and 2025.

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NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES – LOANS

The composition of the loan portfolio was as follows at the dates indicated:

Loan amounts are net of unearned loan fees in excess of unamortized costs, unamortized net discounts on acquired loans, and premiums on purchased loans of $7.0 million as of June 30, 2026, and $8.6 million as of December 31, 2025. Net loans do not include accrued interest receivable.

Most of the Company’s CRE and multi-family real estate, construction, residential, and commercial business lending activities are with customers located in Western Washington, the Oregon Coast, or near our loan production offices in Vancouver and the Tri-Cities, Washington. While the Company primarily originates real estate, consumer, and commercial business loans in these market areas, it also originates indirect home improvement loans, including solar-related home improvement loans, through a network of home improvement contractors and dealers located throughout Washington, Oregon, California, Idaho, Colorado, Arizona, Minnesota, Nevada, Texas, Utah, Massachusetts, Montana, and New Hampshire. Depending on underwriting guidelines, these indirect home improvement loans may be secured by collateral, with legal documentation that establishes the Company's rights to the collateral, where practicable. Local economic conditions may affect borrowers’ ability to meet the stated repayment terms.

At June 30, 2026, the Company held approximately $1.10 billion in loans that are pledged as collateral for FHLB borrowings, compared to approximately $1.08 billion at December 31, 2025. The Company held approximately $559.0 million in loans that are pledged as collateral for the Federal Reserve Bank of San Francisco (the “FRB”) line of credit at June 30, 2026, compared to approximately $580.9 million at December 31, 2025.

The Company has defined its loan portfolio into four segments that reflect the structure of the lending function, the Company’s strategic plan and the way management monitors performance and credit quality. The four loan portfolio segments are: (a) CRE, (b) residential real estate, (c) consumer, and (d) commercial business. Each segment is further disaggregated into classes based on the risk characteristics of the borrower and/or the collateral securing the loan. The following is a summary of the Company’s loan portfolio segments and classes:

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CRE Loans

Multi-Family Lending. Apartment term lending (five or more units) and community reinvestment loans for low to moderate income borrowers in the Company’s footprint.

CRE Lending. Loans originated by the Company primarily secured by income-producing properties, including retail centers, warehouses, and office buildings located in its market areas.

Commercial and Speculative Construction and Development Lending. Loans originated for the construction of, and secured by, commercial real estate, one-to-four-family, and multi-family properties and tracts of land for development that are not pre-sold. Custom one-to-four-family construction loans to the intended occupant of the residence are included under residential custom construction lending described below.

Residential Real Estate Loans

One-to-Four-Family Real Estate Lending. One-to-four-family residential loans include both owner occupied properties (including second homes), and non-owner occupied properties with up to four units. These loans, which are originated by the Company or periodically purchased from other banks, are secured by first mortgages on one-to-four-family residences in our market areas and are intended to be held in the Company's portfolio (excludes loans held for sale).

Home Equity Lending. Loans originated by the Company secured by second mortgages on one-to-four-family residences, including home equity lines of credit within the Company's market areas.

Residential Custom Construction Lending. Custom construction loans to intended occupants of one-to-four family residences.

Consumer Loans

Indirect Home Improvement. Fixture secured loans for home improvement are originated by the Company through its network of home improvement contractors and dealers. These loans are secured by the personal property installed in, on, or at the borrower’s real property, and may be perfected with a UCC‑2 financing statement filed in the county of the borrower’s residence. These indirect home improvement loans include replacement windows, siding, roofing, spas, and other home fixture installations, including solar related home improvement projects.

Marine. Loans originated by the Company, secured by boats, to borrowers primarily located in states where the Company originates consumer loans.

Other Consumer. Loans originated by the Company to consumers in our retail branch footprint, including automobiles, direct home improvement loans, loans on deposits, and other consumer loans, primarily consisting of personal lines of credit and credit cards.

Commercial Business Loans

C&I Lending. C&I loans originated by the Company to local small- and mid-sized businesses in its market area are secured primarily by accounts receivable, inventory, and personal property, plant and equipment. Some C&I loans purchased by the Company are outside of its market area. C&I loans are made based on the borrower’s ability to repay from the cash flow of the borrower’s business. At June 30, 2026 and December 31, 2025, C&I loans included Small Business Administration and United States Department of Agriculture guaranteed certificates of $38.3 million and $44.8 million, respectively.

Warehouse Lending. Loans originated to non-depository financial institutions and secured by notes originated by the non-depository financial institution. The Company has two distinct warehouse lending divisions: commercial warehouse re-lending secured by notes on construction loans and mortgage warehouse re-lending secured by notes related to one-to-four-family loans. The Company’s commercial construction warehouse lines are secured by notes related to construction loans and are typically guaranteed by principals with experience in construction lending. Mortgage warehouse lines are funded through third-party residential mortgage bankers. Under this program, the Company provides short-term funding to mortgage banking companies for the purpose of originating residential mortgage loans for sale into the secondary market.

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Allowance for Credit Losses

The following tables detail activity in the ACL on loans by loan categories at or for the three and six months ended June 30, 2026 and 2025:

The increase in the provision for credit losses on loans for the three and six months ended June 30, 2026, was primarily attributable to higher charge-offs in the consumer portfolio, as well as a $2.3 million charge-off on a commercial construction loan.

Loan Modifications to Borrowers Experiencing Financial Difficulty

The Company may modify the contractual terms of a loan to a borrower experiencing financial difficulty as a part of ongoing loss mitigation strategies. These modifications may result in an interest rate reduction, term extension, an other-than-insignificant payment delay, or a combination thereof. The Company typically does not offer principal forgiveness. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the ACL on loans because of the measurement methodologies used to estimate the allowance.

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The following tables present the amortized cost basis of loans that were both experiencing financial difficulty and modified during the three months and six months ended June 30, 2026 and 2025, by class and by type of modification. The tables also present the percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty relative to the total amortized cost basis of each class of financing receivable, as well as the financial effect of the modification.

As of June 30, 2026, there were no commitments to lend additional funds to borrowers experiencing financial difficulty whose terms had been modified during the six months ended June 30, 2026. As of December 31, 2025, there were no commitments to lend additional funds to borrowers experiencing financial difficulty whose terms had been modified during the year ended December 31, 2025.

The Company closely monitors the performance of loans modified to borrowers experiencing financial difficulty to evaluate the effectiveness of its modification efforts. There were no loans modified within the prior 12 months that were delinquent as of June 30, 2026. The following table presents the performance of such loans that were modified within the prior 12 months as of June 30, 2025:

There were no loans to borrowers experiencing financial difficulty that had a payment default during the three and six months ended June 30, 2026 and 2025, and were modified in the 12 months prior to that default.

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Nonaccrual and Past Due Loans

The following tables provide information pertaining to the aging analysis of contractually past due loans and nonaccrual loans at June 30, 2026 and December 31, 2025:

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(1) Includes loans less than 90 days past due, as applicable.

There were no loans 90 days or more past due and still accruing interest at both June 30, 2026 and December 31, 2025.

There were $776,000 and $156,000 in residential real estate loans in the process of foreclosure at June 30, 2026 and December 31, 2025, respectively.

Credit Quality Indicators

As part of the Company’s ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grading of loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans, and (v) the general economic conditions in the Company’s markets.

The Company utilizes a risk grading matrix to assign a risk grade to its real estate and commercial business loans. Loans are graded on a scale of 1 to 10, with loans in risk grades 1 to 6 reported as “Pass” and loans in risk grades 7 to 10 reported as classified loans in the Company’s ACL analysis.

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A description of the 10 risk grades is as follows:

• Grades 1 and 2 - These grades include loans to very high-quality borrowers with excellent or desirable business credit.
• Grade 3 - This grade includes loans to borrowers of good business credit with moderate risk.
• Grades 4 and 5 - These grades include “Pass” grade loans to borrowers of average credit quality and risk.
• Grade 6 - This grade includes loans on management’s “Watch” list and is intended to be utilized on a temporary basis for “Pass” grade borrowers where frequent and thorough monitoring is required due to credit weaknesses and where significant risk-modifying action is anticipated in the near term.
• Grade 7 - This grade is for “Other Assets Especially Mentioned” (“OAEM”) or “Special Mention” loans in accordance with regulatory guidelines and includes borrowers where performance is poor or significantly less than expected.
• Grade 8 - This grade includes “Substandard” loans in accordance with regulatory guidelines which represent an unacceptable business credit where a loss is possible if loan weakness is not corrected.
• Grade 9 - This grade includes “Doubtful” loans in accordance with regulatory guidelines where a loss is highly probable.
• Grade 10 - This grade includes “Loss” loans in accordance with regulatory guidelines for which total loss is expected and when identified are charged off.

Homogeneous loans are risk rated based upon the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy. Loans classified under this policy at the Company are consumer loans which include indirect home improvement, solar, marine, other consumer, and one-to-four-family first and second liens. Under the Uniform Retail Credit Classification and Account Management Policy, loans that are current or less than 90 days past due are graded “Pass” and risk rated “4” or “5” internally. Loans that are past due more than 90 days are classified “Substandard” and risk graded “8” internally until the loan has demonstrated consistent performance, typically six months of contractual payments. Closed-end loans that are 120 days past due and open-end loans that are 180 days past due are charged off based on the value of the collateral less cost to sell. Management may choose to conservatively risk rate credits even if they are paying in accordance with the loan’s terms.

CRE (owner occupied, non-owner occupied, commercial construction and development, and multi-family) and commercial business loans are evaluated individually for their risk classification and may be classified as “Substandard” even if current on their loan payment obligations. The Company regularly reviews credits for accuracy of risk grades whenever we receive new information. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk, and complexity. In addition, non-owner-occupied CRE borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.

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The following tables summarize risk rated loan balances and total current period gross charge-offs by category, as of the dates indicated. Term loans that were renewed or extended for periods longer than 90 days are presented as new originations in the year of the most recent renewal or extension.

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The following table presents the amortized cost basis of loans on nonaccrual status as of the dates indicated:

The Company recognized interest income on a cash basis for nonaccrual loans of $142,000 and $140,000 during the three months ended June 30, 2026 and 2025, and $274,000 and $245,000 during the six months ended June 30, 2026 and 2025, respectively.

The following table presents the amortized cost basis of collateral dependent loans by class of loans as of the dates indicated:

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NOTE 4 – MORTGAGE SERVICING RIGHTS

Loans serviced for others are not included on the Consolidated Balance Sheets. The unpaid principal balance of residential mortgage loans serviced for others was $1.71 billion and $1.67 billion at June 30, 2026 and December 31, 2025, respectively. Custodial escrow balances maintained in connection with loans serviced for others were $12.1 million and $10.9 million at June 30, 2026 and December 31, 2025, respectively.

The following table summarizes MSRs activity at or for the dates indicated:

The fair value of the MSRs assets was $23.2 million and $21.8 million at June 30, 2026 and December 31, 2025, respectively. Fair value adjustments to MSRs are mainly due to market-based assumptions associated with discounted cash flows, loan prepayment speeds, and changes in interest rates. A significant change in prepayments of the loans in the MSRs portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of MSRs.

Key economic assumptions used in estimating the current fair value of single-family MSRs are presented in the table below. The table also presents the sensitivity of the fair value of the MSR portfolio to adverse changes in key valuation assumptions. Two sets of sensitivities are provided: (i) prepayment sensitivity, reflecting the impact of 10% and 20% adverse changes in prepayment speeds while holding the discount rate constant; and (ii) discount rate sensitivity, reflecting the impact of 10% and 20% adverse changes in the discount rate while holding the prepayment assumption constant.

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These sensitivities are hypothetical and should be used with caution, as the table above demonstrates that the estimated fair value of MSRs is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on the fair value of MSRs. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in this table, the effects of a variation in a particular assumption on the fair value of MSRs are calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance, however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of the fair value of MSRs is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different time.

The Company recorded $1.1 million for gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of loans for both the three months ended June 30, 2026 and 2025, and $2.3 million and $2.2 million for the six months ended June 30, 2026 and 2025, respectively. The related income, net of amortization of MSRs, is reported in “Service charges and fee income” on the Consolidated Statements of Income.

NOTE 5 – DERIVATIVES

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which is affected by changes in interest rates.

The Company’s predominant derivative and hedging activities involve interest rate swaps related to certain borrowings, brokered deposits, investment securities, forward sales contracts, and commitments to extend credit associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors.

Mortgage Banking Derivatives Not Designated as Hedges

The Company regularly enters into commitments to originate and sell loans held for sale. The Company has exposure to movements in interest rates associated with written interest rate lock commitments with potential borrowers to originate one-to-four-family loans that are intended to be sold and closed one-to-four-family mortgage loans held for sale for which the fair value option has been elected and that are awaiting sale and delivery into the secondary market. The Company economically hedges the risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell one-to-four-family mortgage loans or into contracts to sell forward To-Be-Announced (“TBA”) mortgage-backed securities. These commitments and contracts are considered derivatives but have not been designated as hedging instruments for reporting purposes under U.S. GAAP. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in noninterest income or noninterest expense. The Bank recognizes all derivative instruments as either “Other assets” or “Other liabilities” on the Consolidated Balance Sheets and measures those instruments at fair value.

Customer Swaps Not Designated as Hedges

The Company also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of clients desiring to manage interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. To economically hedge the interest rate risk associated with offering this product, the Company simultaneously enters into derivative contracts with third parties to offset the customer contracts such that the Company minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts reduce over time to generally match the expected amortization of the underlying loans. These derivatives are not speculative and arise from a service provided to clients.

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Cash Flow Hedges

The Company has entered into interest rate swaps to reduce its exposure to variability in interest-related cash outflows attributable to changes in forecasted Secured Overnight Financing Rate (“SOFR”) based brokered deposits. These derivative instruments are designated as cash flow hedges. The hedged item is the SOFR portion of a series of future adjustable-rate borrowings and deposits over the term of the interest rate swap. The Company tests for hedging effectiveness on a quarterly basis. The accumulated other comprehensive income or loss is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company has not recorded any hedge ineffectiveness since the inception of the hedges.

The Company expects that approximately $982,000 will be reclassified from accumulated other comprehensive loss as a decrease to interest expense over the next 12 months related to these cash flow hedges.

Fair Value Hedges

The Company is exposed to changes in the fair value of certain pools of prepayable fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, SOFR. Interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives that are designated as and that qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

The following amounts were recorded on the balance sheet related to cumulative-basis adjustment for fair value hedges for the dates indicated:

(1) These amounts include the amortized cost basis of closed portfolios used in designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At June 30, 2026, the amortized cost basis of the closed portfolios used in these hedging relationships was $175.9 million; the cumulative basis adjustments associated with these hedging relationships was $3.0 million; and the amount of the designated hedged items was $60.0 million. At December 31, 2025, the amortized cost basis of the closed portfolios used in these hedging relationships was $179.4 million; the cumulative basis adjustment associated with these hedging relationships was a loss of $2.1 million; and the amount of the designated hedged items was $60.0 million.

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The following tables summarize the Company’s derivative instruments at the dates indicated. The Company recognizes derivative assets and liabilities in “Other assets” and “Other liabilities,” respectively, on the Consolidated Balance Sheets, as follows:

The following table summarizes the effect of fair value and cash flow hedge accounting on the Consolidated Statements of Income for the three and six months ended June 30, 2026 and 2025:

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Changes in the fair value of non-hedging derivatives were recorded in “Gain on sale of loans” on the Consolidated Statements of Income as net losses of $63,000 and net gains of $197,000 for the three months ended June 30, 2026 and 2025, and net gains of $356,000 and $269,000 for the six months ended June 30, 2026 and 2025, respectively.

The following tables present a summary of amounts outstanding in derivative financial instruments, including those entered into in connection with the same counterparty under master netting agreements at the dates indicated. While these agreements are typically over-collateralized, GAAP requires disclosures in these tables to limit the amount of such collateral recognized for disclosure purposes to the amount of the related asset or liability for each counterparty.

Credit Risk–Related Contingent Features

The Company has derivative contracts with its derivative counterparties that contain a provision to post collateral to the counterparties when these contracts are in a net liability position. At June 30, 2026, the Company had no collateral posted due to this provision. Receivables related to cash collateral that has been paid to counterparties are included in “Cash and cash equivalents” on the Consolidated Balance Sheets. In certain cases, the Company will have posted excess collateral compared to total exposure due to initial margin requirements or day-to-day rate volatility.

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NOTE 6 – LEASES

The Company has operating leases for retail bank and home lending branches, loan production offices, and certain equipment. At June 30, 2026, these leases have remaining terms ranging from three months to nine years and one month, with some including options to extend for up to five years.

The components of lease cost (included in occupancy expense on the Consolidated Statements of Income) for the three and six months ended June 30, 2026 and 2025 are as follows:

The following table provides supplemental information related to operating leases at or for the three and six months ended June 30, 2026 and 2025:

The Company’s leases typically do not contain a discount rate implicit in the lease contract. As an alternative, the discount rate used in determining the lease liability for each individual lease was the FHLB of Des Moines’ fixed advance rate.

Maturities of operating lease liabilities at June 30, 2026 for future periods are as follows:

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NOTE 7 – DEPOSITS

Deposits are summarized as follows at the dates indicated:

(1) Includes $87.2 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) Noninterest-bearing accounts.

Scheduled maturities of time deposits at June 30, 2026, for future periods ending are as follows:

Interest expense by deposit category for the periods indicated is as follows:

NOTE 8 – COMMITMENTS AND CONTINGENCIES

Commitments – The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the Consolidated Balance Sheets.

The Company’s exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

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The following table provides a summary of the Company’s commitments at the dates indicated:

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the amount of the total commitments does not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements represent potential future extensions of credit to existing customers. These commitments generally do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. The Company maintains an ACL – unfunded loan commitments for all arrangements that are not unconditionally cancellable, consistent with the Company's CECL methodology. The ACL on unfunded loan commitments is recorded within “Other liabilities” on the Consolidated Balance Sheets. The Company's ACL on unfunded loan commitments at June 30, 2026 and December 31, 2025, was $1.7 million and $1.8 million, respectively. The Company recorded a provision for credit losses – unfunded loan commitments of $82,000 and a recovery of $39,000 for the three and six months ended June 30, 2026, respectively, as compared to provisions of $151,000 and $217,000 for the three and six months ended June 30, 2025. The decrease in provision for the three and six months ended June 30, 2026, was primarily attributable to a decrease in commercial and speculative construction and development loan commitments.

A portion of the one-to-four-family commitments included in the table above is accounted for as fair value derivatives and do not carry an associated reserve. The Company's derivative positions are presented with the discussion in “Note 5 – Derivatives.”

The Company also sells one-to-four-family loans to the FHLB of Des Moines under agreements that require a limited level of recourse in the event of borrower default. Under the recourse structure, losses on defaulted loans are first absorbed by a first loss account (“FLA”) established by the FHLB of Des Moines, and thereafter by a credit enhancement (“CE”) obligation required of the Bank. The FLA and CE obligation function as sequential layers of credit protection for the FHLB of Des Moines on the sold loan portfolio. As of June 30, 2026, the outstanding unpaid principal balance of loans sold to the FHLB of Des Moines was $8.1 million. The FLA balance was $581,000 and the CE obligation balance was $302,000 at that date. Management has established a loss reserve holdback equal to 10% of the outstanding CE obligation, or $30,000, based on management's analysis of historical loss experience and additional market factors. This holdback is included in the Company’s broader reserve for off-balance sheet credit exposures related to loans sold. At both June 30, 2026 and December 31, 2025, there were no loans sold to the FHLB of Des Moines with contractual payments greater than 30 days past due.

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Contingent liabilities for loans held for sale – In the ordinary course of business, loans are sold with limited recourse against the Company and may have to subsequently be repurchased due to defects that occurred during the origination of the loan. The defects are categorized as documentation errors, underwriting errors, early payoff, early payment defaults, breach of representation or warranty, servicing errors, and/or fraud. When a loan sold to an investor with limited recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred. If a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no such defects, the Company has no commitment to repurchase the loan. The Company has recorded a holdback reserve of $599,000 and $1.8 million to cover loss exposure related to these guarantees for one-to-four-family loans sold into the secondary market at June 30, 2026 and December 31, 2025, respectively, which is included in “Other liabilities” on the Consolidated Balance Sheets.

The Company has entered into change of control agreements with its executives and select key personnel. The change of control agreements, subject to certain requirements, generally remain in effect until canceled by either party upon at least 24 months prior written notice. Under the change of control agreements, the executive generally will be entitled to a change of control payment from the Company if the executive is involuntarily terminated within six months preceding or 12 months after a change in control (as defined in the change of control agreements). In such an event, the executives would each be entitled to receive a cash payment in an amount equal to 12 months of their then current salary, subject to certain requirements in the change of control agreements.

As a result of the nature of our activities, the Company is subject to various pending and threatened legal actions, which arise in the ordinary course of business. From time to time, subordination liens may create litigation that requires the Company to defend its lien rights. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the Company's financial position. The Company had no material pending legal actions at June 30, 2026.

NOTE 9 – FAIR VALUE MEASUREMENTS

The Company determines fair value based on the requirements established in ASC Topic 820, Fair Value Measurements, which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Topic 820 defines fair value as the exit price, or the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.

The following definitions describe the levels of inputs that may be used to measure fair value:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following methods were used to estimate the fair value of certain assets and liabilities on a recurring and nonrecurring basis:

Securities – The fair value of securities available-for-sale is recorded on a recurring basis. The fair value of investments and mortgage-backed securities is provided by a third-party pricing service. These valuations are based on market data using pricing models that vary by asset class and incorporate available current trade, bid, and other market information, and for structured securities, cash flow, and loan performance data. The pricing processes utilize benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. Option adjusted spread models are also used to assess the impact of changes in interest rates and to develop prepayment scenarios (Level 2). Transfers between the fair value hierarchy are determined by the third-party service provider, which, from time to time, will transfer securities between levels based on market conditions. All models and processes used consider market convention.

Mortgage Loans Held for Sale – The fair value of loans held for sale reflects the value of commitments with investors and/or the relative price as delivered into a TBA mortgage-backed security (Level 2).

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Loans Receivable – Certain residential mortgage loans were initially originated for sale with the fair value option elected; after origination, these loans were transferred to loans held for investment. As of both June 30, 2026 and December 31, 2025, there were $13.2 million in residential mortgage loans recorded at fair value as they were previously transferred from held for sale, at fair value to loans held for investment. The aggregate unpaid principal balance of these loans was $13.8 million as of both June 30, 2026 and December 31, 2025. Gains and losses from changes in fair value for these loans are reported in earnings as a component of “Other noninterest income” on the Consolidated Statements of Income. For the three months ended June 30, 2026, the Company recorded a net increase in fair value of $45,000, as compared to a net increase in fair value of $3,000, for the three months ended June 30, 2025. For the six months ended June 30, 2026 and 2025, the Company recorded a net decrease in fair value of $56,000 and net increase of $266,000, respectively. For loans originated as held for sale and transferred into loans held for investment, the fair value is determined based on quoted secondary market prices for similar loans (Level 2).

Derivative Instruments – Fair values for derivative assets and liabilities are measured on a recurring basis. The primary use of derivative instruments is related to the mortgage banking activities of the Company. The fair value of the interest rate lock commitments and forward sales commitments is estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-though rate assumptions based on historical information, where appropriate. TBA mortgage-backed securities are fair valued based on similar contracts in active markets (Level 2), while locks and forwards with customers and investors are fair valued using similar contracts in the market and changes in market interest rates (Level 2 and Level 3). Derivative instruments not related to mortgage banking activities include interest rate swap agreements. The fair values of interest rate swap agreements are based on valuation models using observable market data as of the measurement date (Level 2). The Company’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices, and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including market transactions and third-party pricing services. The fair values of all interest rate swaps are determined from third-party pricing services without adjustment.

Collateral-Dependent Loans – Expected credit losses on collateral dependent loans are measured based on the fair value of collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will recognize an allowance equal to the difference between the fair value of the collateral, less costs to sell (if applicable), and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis is limited to the amount previously charged off. Subsequent changes in expected credit losses on collateral-dependent loans are included within the provision for credit losses, either as an additional provision or as a reduction of the provision that would otherwise be reported (Level 3).

Mortgage Servicing Rights – The fair value of MSRs is estimated using net present value of expected cash flows from a third-party model that incorporates assumptions used in the industry to value such rights, adjusted for factors such as weighted average prepayment speeds based on historical information where appropriate (Level 3).

The following tables present securities available-for-sale, mortgage loans held for sale, loans receivable, at fair value, and derivative assets and liabilities measured at fair value on a recurring basis at the dates indicated:

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The following tables present financial assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy at June 30, 2026 and December 31, 2025. Level 3 assets recorded at fair value on a nonrecurring basis included loans for which a partial charge-off was recorded based on the estimated fair value of the underlying collateral.

Quantitative Information about Level 3 Fair Value Measurements – Shown in the table below is the fair value of financial instruments measured under a Level 3 unobservable input on a recurring and nonrecurring basis at the dates indicated:

The pull-through expectation is based on historical loan closing rates for similar interest rate lock commitments. An increase or decrease in the pull-through expectation would have a corresponding positive or negative fair value adjustment.

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The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the dates indicated:

(1) Relating to items held at end of period included in income.

(2) Relating to items held at end of period included in other comprehensive income.

Gains on interest rate lock commitments and on forward sale commitments with investors carried at fair value are recorded in “Gain on sale of loans held for sale” on the Consolidated Statements of Income.

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The following table provides estimated fair values of the Company’s financial instruments at the dates indicated, whether recognized at fair value or not on the Consolidated Balance Sheets:

NOTE 10 – EARNINGS PER SHARE

The Company computes earnings per share using the two-class method, which is an earnings allocation method for computing earnings per share that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Unvested share-based awards containing non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Company.

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The following table presents a reconciliation of the components used to compute basic and diluted earnings per share at or for the dates indicated:

NOTE 11 – STOCK-BASED COMPENSATION

Stock Options and Restricted Stock

On May 21, 2026, the shareholders of FS Bancorp approved the FS Bancorp, Inc. 2026 Equity Incentive Plan (the “2026 Plan”) which authorized the issuance of up to 315,000 shares of the Company's common stock. The 2026 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards (“RSAs”), and restricted stock units to directors, officers, employees, and other eligible service providers of the Company. At June 30, 2026, no awards had been granted under the 2026 Plan and 315,000 shares remained available for future grants.

On May 17, 2018, the shareholders of FS Bancorp approved the FS Bancorp 2018 Equity Incentive Plan (the “2018 Plan”) which authorized 1.3 million shares of the Company’s common stock to be awarded. The 2018 Plan provides for the grant of incentive stock options, nonqualified stock options, and up to 326,000 shares as RSAs to directors, emeritus directors, officers, employees and advisory directors of the Company. At June 30, 2026, there were 52,060 stock option awards and 500 RSAs available for future grants under the 2018 Plan.

Total share-based compensation expense was $643,000 and $1.3 million for the three and six months ended June 30, 2026, and $526,000 and $1.0 million for the three and six months ended June 30, 2025, respectively.

Stock-based compensation awards are settled by issuing new shares from the Company's pool of authorized but unissued common stock, rather than previously repurchased treasury shares.

Stock Options

The 2026 Plan and 2018 Plan provide for the grant of stock option awards that may be designated as either incentive stock options or nonqualified stock options. Stock option awards generally vest over a one-year period for non-employee directors and over a four- or five-year period for employees and officers, with annual vesting in equal installments on the anniversary date of each grant date, provided the award recipient remains in continuous service with the Company. Options become exercisable after vesting and remain exercisable for the remaining term of the original grant, subject to a maximum term of 10 years. Any unexercised stock options expire 10 years after the grant date, or earlier upon the termination of the recipient's service with the Company or the Bank.

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The fair value of each stock option award is estimated on the grant date using a Black-Scholes option pricing model, which incorporates the following assumptions. The dividend yield is based on the current quarterly dividend in effect at the time of the grant. The historical volatility of the Company's stock price over a specified period of time is used for the expected volatility. The Company bases the risk-free interest rate on the comparable U.S. Treasury rate in effect on the grant date for the expected term of the option. The Company elected to use the simplified expected term calculation method permitted by Staff Accounting Bulletin No. 107 for “Share-Based Payments” to calculate the expected term. This method uses the vesting term of an option along with the contractual term, setting the expected life at 5.5 years for one-year vesting, 6.25 years for four-year vesting, and 6.5 years for five-year vesting.

The following table presents a summary of the Company’s stock option awards during the dates indicated (shown as actual):

(1) Forfeiture rate has been calculated and estimated, based on historical employment data, to assume a forfeiture of 3.1% of the options over 10 years.

At June 30, 2026, there was $2.2 million of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 2.8 years.

Restricted Stock Awards

The fair value of RSAs is equal to the market price of FS Bancorp’s common stock on the grant date. Compensation expense is recognized over the vesting period of the awards based on the fair value of the restricted stock. Shares granted under the 2026 Plan and the 2018 Plan generally vest over a four- or five-year period for employees and officers, beginning on the grant date, and over a one-year period for non-employee directors, with vesting occurring at the end of the one-year period. Any nonvested RSAs are forfeited upon the award recipient’s termination of service with the Company or the Bank.

The following table presents a summary of the Company’s nonvested awards during the dates indicated (shown as actual):

At June 30, 2026, there was $2.6 million of total unrecognized compensation cost related to nonvested shares granted under the 2018 Plan as RSAs. The cost is expected to be recognized over the remaining weighted-average vesting period of 2.8 years.

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NOTE 12 – REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by the Federal Reserve and the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines of the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Under capital adequacy guidelines of the regulatory framework for prompt corrective action, quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital (as defined in the regulations) to total average assets (as defined in the regulations), and minimum ratios of Tier 1 total capital (as defined in the regulations) and common equity Tier 1 (“CET1”) capital to risk-weighted assets (as defined).

The Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and CET1 capital ratios as set forth in the table below to be categorized as “well capitalized”. At June 30, 2026, the Bank was categorized as “well capitalized” under applicable regulatory requirements. There were no conditions or events since that date that management believes have changed the Bank’s category. Management believes, at June 30, 2026, that the Bank met all capital adequacy requirements.

The following tables compare the Bank’s actual capital amounts and ratios to their minimum regulatory capital requirements and well capitalized regulatory capital at the dates indicated:

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In addition to the minimum CET1, Tier 1, total capital and leverage ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital equal to at least 2.5% of risk-weighted assets above the required minimum capital levels. Failure to maintain the required buffer could result in limitations on the Bank's ability to pay dividends, repurchase shares, and pay discretionary bonuses, based on specified percentages of eligible retained income. At June 30, 2026, the Bank’s capital exceeded the conservation buffer.

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 must comply 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 requiring a bank holding company 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.

NOTE 13 – BUSINESS SEGMENTS

The Company’s reportable segments are determined by the Chief Financial Officer (“CFO”), who is the designated chief operating decision maker, or CODM, based upon information provided about the Company's products and services offered, and are primarily distinguished between commercial and consumer banking and home lending. They are also distinguished by the level of information provided to the CFO, who uses such information to review the performance of various components of the business for each branch and home lending office, which are aggregated if operating performance, products/services, and customers are similar. The CFO evaluates the financial performance of the Company's business components by evaluating revenue streams, significant expenses, and budget to actual results in assessing the performance of the Company's segments and in the determination of allocating resources. The CFO uses revenue streams to evaluate product pricing and significant expenses to assess performance of each segment to evaluate compensation of certain employees. Segment pretax profit or loss is used to assess the performance of the banking segment by monitoring the margin between interest revenue and interest expense. Segment pretax profit or loss is used to assess the performance of the home lending segment by monitoring the premium received on loans sales. Loans, investments, and deposits provide the primary sources of revenue in the commercial and consumer banking operations, and servicing fees and loan sales provide the primary sources of revenue in home lending. Interest expense, provisions for credit losses, and payroll provide the significant expenses in commercial and consumer banking, and cost of loan sales and payroll provide the significant expenses in the home lending segment. All operations are domestic and the Company has no major customers providing greater than 10% of total segment revenue. The Company does not have any material intra-entity sales or transfers, aside from certain allocations of interest expense and loan servicing costs from the commercial and consumer banking segment to the home lending segment.

The Company uses various management accounting methodologies to assign certain income statement items to the responsible operating segment, including:

• a funds transfer pricing (“FTP”) system, which allocates interest income credits and funding charges between the segments, assigning to each segment a funding credit for its liabilities, such as deposits, and a funding charge for its assets;
• a cost per loan serviced allocation based on the number of loans being serviced on the balance sheet and the number of loans serviced for third parties;
• an allocation based upon the approximate square footage utilized by the home lending segment in Company owned locations;
• an allocation of charges for services rendered to the segments by centralized functions, such as corporate overhead, which are generally based on the number of full-time employees (“FTEs”) in each segment; and
• an allocation of the Company’s consolidated income taxes which is based on the effective tax rate applied to the segment’s pretax income or loss.

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Segment assets are primarily allocated based on loan origination channel. The home lending segment is limited to residential mortgage and home equity loans originated through the home lending platform. The home lending segment additionally includes related accrued interest receivable and the Company's MSR assets. The commercial and consumer banking segment includes the remainder of the loan portfolio, the assets of the retail branch network and administrative buildings, as well as the investment portfolio and other assets of the Bank. A description of the Company’s business segments and the products and services they provide is as follows:

Commercial and Consumer Banking Segment

The commercial and consumer banking segment provides diversified financial products and services to our commercial and consumer customers through Bank branches, online banking platforms, mobile banking apps, and telephone banking. These products and services include deposit products; residential, consumer, business and commercial real estate lending portfolios; and cash management services. The Company originates consumer loans, commercial and multi-family real estate loans, construction loans for residential and multi-family construction, and commercial business loans. At June 30, 2026, the Company’s retail deposit branch network consisted of 28 branches in the Pacific Northwest. This segment is also responsible for the management of the investment portfolio and other assets of the Bank.

Home Lending Segment

The home lending segment originates one-to-four-family residential mortgage loans primarily for sale in the secondary market, as well as loans held for investment. A majority of these mortgage loans are sold to or securitized by FNMA, FHLMC, GNMA, or the FHLB of Des Moines, while the Company generally retains the right to service these loans. Loans originated under the guidelines of the Federal Housing Administration (“FHA”), US Department of Veterans Affairs (“VA”), and United States Department of Agriculture (“USDA”) are generally sold servicing released to a correspondent bank or mortgage company. The Company has the option to sell loans on a servicing-released or servicing-retained basis to securitizers and correspondent lenders. A small percentage of its loans are brokered to other lenders. On occasion, the Company may sell a portion of its MSRs portfolio and may sell small pools of loans initially originated to be held in the loan portfolio. The Company manages the loan funding and the interest rate risk associated with secondary market loan sales and the retained one-to-four-family MSRs within this business segment. One-to-four-family loans originated for investment and held in this segment are allocated to the home lending segment with a corresponding provision expense and FTP charge for cost of funds. Noninterest expense includes allocated overhead expense from general corporate activities. Allocation is determined based on a combination of segment assets and FTEs.

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Segment Financial Results

Accounting policies for segments are consistent with those described in “Note 1 – Basis of Presentation and Summary of Significant Accounting Policies.” Segment performance is evaluated using pretax profit or loss. Indirect expenses are allocated based on segment assets and FTEs. Transactions among segments are made at fair value. Information reported internally for performance assessment by the CFO follows, inclusive of reconciliations of significant segment totals to the financial statements at or for the three and six months ended June 30, 2026 and 2025:

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(1) Other segment items include operations, occupancy, data processing, loan costs, professional and board fees, marketing and advertising, and (recovery) impairment of MSRs.

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#****NOTE 14 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and certain other intangibles generally arise from business combinations accounted for under the acquisition method of accounting. Goodwill totaled $3.6 million at both June 30, 2026, and December 31, 2025, and represents the excess of the total consideration transferred over the net identifiable assets acquired in the branch purchase on February 24, 2023 (“Branch Acquisition”), and the purchase of four retail bank branches from Bank of America on January 22, 2016. Goodwill is not amortized but is evaluated for impairment on an annual basis at December 31 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. During the last annual evaluation, the Company elected to perform a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. In performing this assessment, management considered qualitative factors including macroeconomic conditions, industry and market trends, financial performance, and changes in the Company's stock price and market capitalization. Based on this assessment, management concluded that it was more likely than not the fair value of the reporting unit exceeded its carrying value, and therefore no impairment of goodwill was indicated.

Core deposit intangible (“CDI”) is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life. As of June 30, 2026, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI.

The following table summarizes the changes in the Company’s other intangible assets comprised solely of CDI for the year ended December 31, 2025, and the six months ended June 30, 2026.

The CDI represents the fair value assigned to the intangible core deposit base acquired in business combinations. The CDI from the Branch Acquisition is being amortized on an accelerated basis over 10 years, while the CDI from the Anchor Bank acquisition (completed in November 2018) is being amortized on a straight-line basis over 10 years. Amortization expense was $722,000 and $1.5 million for the three and six months ended June 30, 2026, compared to $809,000 and $1.6 million for the same periods in 2025, respectively.

Amortization expense for CDI is expected to be as follows at June 30, 2026:

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NOTE 15– DEFINITIVE AGREEMENT

On February 25, 2026, the Company entered into a definitive agreement (the “Agreement”) with Pacific West, headquartered in West Linn, Oregon, pursuant to which Pacific West will be merged with and into the Company, and immediately thereafter Pacific West’s bank subsidiary, Pacific West Bank, will be merged with and into 1st Security Bank of Washington. Pacific West Bank primarily serves the Greater Portland, Oregon metropolitan area with four branch locations in Portland, Vancouver, West Linn, and Lake Oswego.

Under the terms of the Agreement, the aggregate consideration will consist of 430,176 shares of FS Bancorp common stock and $16,832,742 in cash. Pacific West shareholders will have the right to elect shares of FS Bancorp common stock or cash, subject to proration as provided in the Agreement. Based on the closing price of FS Bancorp common stock of $41.26 on February 25, 2026, the consideration value for Pacific West was $34.6 million, or approximately $12.52 per share. Upon completion of the merger, Pacific West shareholders would hold, in aggregate, approximately 5.4% of FS Bancorp’s outstanding common stock.

All of the directors of Pacific West have agreed to vote their shares of Pacific West common stock in favor of approval of the Agreement. The proposed transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the Agreement by the shareholders of Pacific West, and is expected to be completed in the third quarter of 2026.

At December 31, 2025, Pacific West reported total assets of $386.0 million, total loans of $276.6 million and total deposits of $342.2 million.

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#**FILINGSOURCEITEMBOUNDARYBEGIN Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 52 - FILINGSOURCEITEMBOUNDARYEND**Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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:

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:

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.

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:

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:

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.

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:

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:

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.

#****Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the market risk disclosures contained in FS Bancorp’s 2025 Form 10-K.

#****Item 4. Controls and Procedures

(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.

#****PART II. OTHER INFORMATION

#****Item 1. Legal Proceedings

In the normal course of business, the Company occasionally becomes involved in various legal proceedings. In the opinion of management, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.

#****Item 1A. Risk Factors

There have been no material changes in the Risk Factors previously disclosed in FS Bancorp’s 2025 Form 10-K.

#****Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

(c) The following table summarizes common stock repurchases during the three months ended June 30, 2026:

(1) Includes shares repurchased by the Company in connection with the exercise of employee stock options, whereby a portion of the shares issued upon exercise was surrendered to the Company and retired in lieu of a cash payment of the exercise price and applicable withholding taxes. These transactions were not made pursuant to the Company's stock repurchase program.

On October 27, 2025, the Company publicly announced a stock repurchase program, authorizing the repurchase of up to $5.0 million of Company common stock, in addition to any amounts remaining under the prior program. Repurchases under this program may occur from time to time in the open market, through privately negotiated transactions, or by withholding shares upon the exercise of equity awards, over a 12-month period ending October 27, 2026. The publicly announced repurchase program was completed on April 28, 2026

The actual timing, price, and number of shares repurchased under the program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, price, general business and market conditions, and alternative investment opportunities. The share repurchase program does not obligate the Company to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time.

#****Item 3. Defaults Upon Senior Securities

Not applicable.

#****Item 4. Mine Safety Disclosures

Not applicable.

#****Item 5. Other Information

(a) None.

(b) None.

(c) Trading Plans. During the three months ended June 30, 2026, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

#****Item 6. Exhibits

#****SIGNATURES

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