FS Bancorp, Inc. (FSBW) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto that appear in Item 8. of this Form 10–K. The information contained in this section should be read in conjunction with these Consolidated Financial Statements and footnotes and the business and financial information provided in this Form 10–K.

Overview

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

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

On February 24, 2023, the Company completed its purchase of seven retail bank branches from Columbia State Bank (the “Branch Acquisition”) and acquired approximately $425.5 million in deposits and $66.1 million in loans. The seven acquired branches are in the communities of Goldendale and White Salmon, Washington, and Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon. The Branch Acquisition expanded our Puget Sound-focused retail footprint into southeast Washington and the state of Oregon as well as providing an opportunity to extend our unique brand of community banking into those communities.

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

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

As a diversified lender, the Company specializes in originating various types of loans, including CRE, multi-family, construction, one-to-four-family, and home equity loans, as well as, consumer loans, such as fixture secured loans, and marine loans, along with commercial business loans.  The Company's lending strategies aim to capitalize on new lending opportunities, arising from recent market consolidation, and focus on relationship lending.

At December 31, 2024, the Company's loan portfolio included real estate loans, consumer loans, and commercial business loans representing 63.7%, 24.5%, and 11.8% of the total loan portfolio, respectively.

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A significant portion of our consumer loan portfolio consists of fixture secured loans, which are used to finance home improvement projects such as window and gutter replacements, siding upgrades, solar panel installations, and spas. These loans rely heavily on our network of 46 active contractors and dealers across Washington, Oregon, California, Idaho, Colorado, Nevada, Arizona, Minnesota, Texas, Utah, Massachusetts, Montana, and New Hampshire.  Five of these contractor/dealers were responsible for 74.1% of the dollar volume of funded loans for the year ended December 31, 2024. The Company funded $121.3 million, consisting of 5,444 loans in the fixture-secured consumer loan category during the year ended December 31, 2024.

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

The Company originates one-to-four-family residential mortgage loans through referrals from real estate agents, financial planners, builders, and from existing customers. Retail banking customers are also an important source of the Company’s loan originations. The Company originated $695.2 million of one-to-four-family loans (which included loans held for sale, loans held for investment and fixed seconds) in addition to $20.5 million of loans brokered to other institutions through the home lending segment during the year ended December 31, 2024, of which $564.8 million were sold to investors. Of the loans sold to investors, $233.9 million were sold to the FNMA, FHLMC, FHLB, and GNMA with servicing rights retained for the purpose of further developing these customer relationships. At December 31, 2024, one-to-four-family residential mortgage loans held for investment totaled $617.3 million, or 24.4% of the total gross loan portfolio, while loans held for sale totaled $27.8 million and residential home equity loans totaled $75.1 million at that date.

For the year ended December 31, 2024, one-to-four-family loan originations and refinancing activity increased compared to the prior period as a result of slightly decreased market interest rates and slightly more housing inventory. Residential construction and development lending, while not as common as other loan origination options like one-to-four-family loans, continues to be an important element in our total loan portfolio, and we continue to take a disciplined approach by concentrating our efforts on loans to builders and developers in our market areas known to us. These short-term loans typically have a maturity period of six to 18 months, with disbursements not fully realized at origination, leading to a short-term reduction in net loans receivable.

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

The Company’s earnings are primarily dependent upon net interest income, the difference between interest income and interest expense.  Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on these loans and investments.  Interest expense is a function of the amount of deposits and borrowings outstanding during the same period and the 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 (recovery of) credit losses, service charges and fees, gains from sales of assets, operating expenses and income taxes.

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Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.  See “Note 1 – Basis of Presentation and Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K for a summary of significant accounting policies and the effect on our financial statements.

ACL on Held-to-Maturity Securities. Management measures expected credit losses on held-to-maturity securities by individual security. Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers credit ratings and historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

The held-to-maturity portfolio consists entirely of corporate securities. Securities are generally rated investment grade. Securities are analyzed individually to establish a reserve.

ACL on Available-for-Sale Securities. For available-for-sale securities in an unrealized loss position, management first assesses whether it intends to sell or is more likely than not to be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded, limited by the amount that the fair value is less than the amortized cost basis.

Changes in the ACL are recorded as a provision for (recapture of) credit losses. Losses are charged against the ACL when management believes the uncollectability of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities is not included in the estimate of credit losses.

ACL on Loans. The ACL on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL when management believes the uncollectability of a loan balance is confirmed and recaptures are credited to the ACL when received. In the case of recaptures, amounts may not exceed the aggregate of amounts previously charged off.

Management utilizes relevant available information, from internal and external sources, relating to past events, current conditions, historical loss experience, and reasonable and supportable forecasts. The lookback period in the analysis includes historical data from 2009 to present. Adjustments to historical loss information are made when management determines historical data is not likely reflective of the current portfolio such as limited data sets or lack of default or loss history. Management may selectively apply external market data to subjectively adjust the Company’s own loss history including index or peer data. Accrued interest receivable is excluded from the estimate of credit losses on loans.

The ACL on loans is measured on a collective cohort basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by call report code and then risk-grade grouping. Risk grade is grouped within each call report code by pass, watch, special mention, substandard, and doubtful. Other loan types are separated into their own cohorts due to specific risk characteristics for that pool of loans.

The Company has elected a non-discounted cash flow methodology with probability of default (“PD”) and loss given default (“LGD”) for all call report code cohorts (“cohorts”), except for the indirect and marine portfolios which are evaluated under a vintage methodology. The vintage methodology measures the expected loss calculation for future periods based on historical performance by the origination period of loans with similar life cycles and risk characteristics. Guaranteed portions of loans are measured with zero risk due to cash collateral and full government agency guaranty.

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The PD calculation looks at the historical loan portfolio at points in time (each month during the lookback period) to determine the probability that loans in a certain cohort will default over the next 12-month period. A default is defined as a loan that has moved to past due 90 days and greater, nonaccrual status, or experienced a charge-off during the period. In cohorts where the Company’s historical data is insufficient due to a minimal amount of default activity or zero defaults, management uses index PDs comprised of rates derived from the PD experience of other community banks in place of the Company’s historical PDs. Additionally, management reviews all other cohorts to determine if index PDs should be used outside of these criteria.

The LGD calculation looks at actual losses (net charge-offs) experienced over the entire lookback period for each cohort of loans. The aggregate loss amount is divided by the exposure at default to determine an LGD rate. All loan defaults (non-accrual, charge-off, or greater than 90 days past due) occurring during the lookback period are included in the denominator, whether a loss occurred or not and exposure at default is determined by the loan balance immediately preceding the default event (i.e., nonaccrual or charge-off). Due to limited charge-off history, management uses index LGDs comprised of rates derived from the LGD experience of other community banks in place of the Company’s historical LGDs.

The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans. The calculation includes a 12-month PD forecast based on the Company’s regression model comparing peer nonperforming loan ratios to the national unemployment rate. After the forecast period, PD rates revert on a straight-line basis back to long-term historical average rates over a 12-month period. Due to limited default history, management uses index PDs comprised of rates derived from the PD experience of other community banks in place of the Company’s historical PDs.

The Company recognizes that all significant factors that affect the collectability of the loan portfolio must be considered to determine the estimated credit losses as of the evaluation date. Furthermore, the methodology, in and of itself and even when selectively adjusted by comparison to market and peer data, does not provide a sufficient basis to determine the estimated credit losses. The Company adjusts the modeled historical losses by qualitative and environmental adjustments to incorporate all significant risks to form a sufficient basis to estimate the credit losses.

Loans classified as nonaccrual, are reviewed quarterly for potential individual assessment. Any loan classified as a nonaccrual that is not determined to need individual assessment is evaluated collectively within its respective cohort.

Where the primary and/or expected source of repayment of a specific loan is believed to be the future liquidation of available collateral, impairment will generally be measured based upon expected future collateral proceeds, net of disposition expenses including sales commissions as well as other costs potentially necessary to sell the asset(s) (i.e., past due taxes, liens, etc.). Estimates of future collateral proceeds will be based upon available appraisals, reference to recent valuations of comparable properties, use of consultants or other professionals with relevant market and/or property-specific knowledge, and any other sources of information believed appropriate by management under the specific circumstances. When appraisals are ordered to support the impairment analysis of an individually evaluated loan, the appraisal is reviewed by the Company’s internal appraisal reviewer.

Where the primary and/or expected source of repayment of a specific loan is believed to be the receipt of principal and interest payments from the borrower and/or the refinancing of the loan by another creditor, impairment will generally be measured based upon the present value of expected proceeds discounted at the contractual interest rate. Expected refinancing proceeds may be estimated from review of term sheets received by the borrower from other creditors and/or from the Company’s knowledge of terms generally available from other banks.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications. Prepayment assumptions will be determined by analysis of historical behavior by loan cohort.

ACL on Unfunded Commitments. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The ACL on unfunded commitments is adjusted through a provision for (recovery of) credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate utilizes the same factors and assumptions as the ACL on loans and is applied at the same collective cohort level.

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Our Business and Operating Strategy and Goals

The Company’s primary objective is to operate 1st Security Bank as a well-capitalized, profitable, independent, community-oriented financial institution, serving customers in its primary market area defined generally as the greater Puget Sound market area. The Company’s strategy is to provide innovative products and superior customer service to small businesses, industry and geographic niches, and individuals located in its primary market area. Services are currently provided to communities through the main office, 27 full-service bank branches and 13 loan production offices (seven of which are stand-alone), which are supported with 24/7 access to on-line banking and participation in a worldwide ATM network.

The Company focuses on diversifying revenues, expanding lending channels, and growing the banking franchise. Management remains focused on building diversified revenue streams based upon credit, interest rate, and concentration risks. The Board of Directors seeks to accomplish the Company’s objectives through the adoption of a strategy designed to improve profitability and maintain a strong capital position and high asset quality. This strategy primarily involves:

Growing and diversifying the loan portfolio and revenue streams. The Company is a diversified lender that seeks to grow and maintain the current level of diversification in its portfolio. At December 31, 2024, the Company's loan portfolio included real estate loans, consumer loans, and commercial business loans representing 63.7%, 24.5%, and 11.8% of the total loan portfolio, respectively.

Maintaining strong asset quality. The Company believes that strong asset quality is a key to long-term financial success. The percentage of nonperforming loans to total gross loans were 0.54% and 0.45% at December 31, 2024 and 2023, respectively. The percentage of nonperforming assets to total assets were 0.45% and 0.37% at December 31, 2024 and 2023, respectively. Management actively addresses delinquent loans and nonperforming assets by pursuing aggressive collection efforts for consumer debts, marketing saleable foreclosed or repossessed properties, working on classified assets' resolutions and implementing loan charge-offs. In recent years, the Company focused on originating consumer loans for borrowers with higher credit scores, generally, over 720 while maintaining flexibility with its policy.  While the Company plans to emphasize specific lending products, including commercial and multi-family real estate loans, construction and development loans (including speculative residential construction loans), and commercial business loans, it remains committed to expanding the size of its one-to-four-family residential mortgage loans and consumer loan portfolios.  Throughout these initiatives, the Company maintains a conservative approach to lending and manages credit exposures by leveraging the expertise of experienced bankers.

Emphasizing lower cost core deposits to reduce the costs of funding loan growth. The Company provides a range of financial products, including personal and business checking accounts, NOW accounts, and savings and money market accounts.  These accounts serve as lower-cost funding sources compared to certificates of deposit and are less sensitive to interest rate fluctuations. The Company employs several strategies to build a core deposit base. First, it actively encourages commercial loan customers to establish and maintain deposit relationships typically through business checking accounts. Second, periodic interest rate promotions are offered on savings and checking accounts to stimulate deposit growth. Third, the Company hires experienced personnel with established community relationships in the areas it serves to further enhance its deposit-building efforts.

Capturing customers’ full relationship. The Company offers a wide range of products and services that provide diversification of revenue sources and solidify the relationship with the Bank’s customers. The Company focuses on core retail and business deposits, including savings and checking accounts, that lead to long-term customer retention. As part of the commercial lending process, cross-selling the entire business banking relationship, including deposit relationships and business banking products, such as online cash management, treasury management, wires, direct deposit, payment processing and remote deposit capture. The Company’s mortgage banking program also provides opportunities to cross-sell products to new customers.

Expanding the Company’s markets. In addition to deepening relationships with existing customers, the Company intends to broaden its customer base by leveraging the Company’s well-established community involvement.  This strategy involves selectively emphasizing products and services tailored to meet the specific banking needs of new customers.  Additionally, the Company plans to extend its presence into other market areas through targeted expansion of its home lending network.

Comparison of Financial Condition at December 31, 2024 and December 31, 2023

Assets. Total assets increased $56.5 million to $3.03 billion at December 31, 2024, from $2.97 billion at December 31, 2023. The increase was primarily due to increases in loans receivable, net of $100.5 million, other assets of $21.3 million and FHLB stock of $13.5 million. These increases were partially offset by decreases in interest-bearing deposits at other financial institutions of $36.3 million, CDs at other financial institutions of $22.4 million, securities available-for-sale of $11.8 million, MSRs held for sale of $8.1 million and core deposit intangible of $3.6 million. The net increase in total assets was primarily funded by borrowings during the year ended December 31, 2024.

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Loans receivable, net, increased $100.5 million, to $2.50 billion at December 31, 2024, from $2.40 billion at December 31, 2023. Total real estate loans increased $83.3 million to $1.61 billion at December 31, 2024, compared to December 31, 2023, reflecting increases in one-to-four-family portfolio loans of $49.6 million, construction and development loans of $27.6 million, multi-family loans of $21.5 million, and home equity loans of $5.7 million, offset by a decrease in CRE loans of $21.0 million. Undisbursed construction and development loan commitments increased $19.5 million, or 12.6%, to $174.1 million at December 31, 2024, as compared to $154.6 million at December 31, 2023. Commercial business loans increased $44.1 million to $299.9 million at December 31, 2024, compared to December 31, 2023, as a result of increases in C&I loans of $48.7 million, offset by a decrease in warehouse lending of $4.7 million.  Consumer loans decreased $26.6 million to $620.2 million at December 31, 2024, compared to December 31, 2023, primarily due to decreases of $28.0 million in indirect home improvement loans, offset by an increase of $1.6 million in marine loans.

Loans held for sale, consisting of one-to-four-family loans, increased $2.2 million to $27.8 million at December 31, 2024, from $25.7 million at December 31, 2023.  The Company continues to invest in its home lending operations and strategically manage production capacity in the markets we serve.

One-to-four-family loan originations for the year ended December 31, 2024, included $535.6 million of loans originated for sale, $159.5 million of portfolio loans including first and second liens, and $20.5 million of loans brokered to other institutions.

Originations of one-to-four-family loans to purchase and to refinance a home for the periods indicated were as follows:

During the year ended December 31, 2024, the Company sold $564.8 million of one-to-four-family loans, compared to $408.0 million one year ago. Gross margin on home loans sales increased to 3.08% for the year ended December 31, 2024, compared to 3.07% for the year ended December 31, 2023. Gross margin is defined as the margin on loans sold without the impact of deferred loan costs.

The ACL on loans was $31.9 million, or 1.26% of gross loans receivable (excluding loans held for sale), at December 31, 2024, compared to $31.5 million, or 1.30% of gross loans receivable (excluding loans held for sale), at December 31, 2023. The ACL on unfunded loan commitments decreased $123,000 to $1.4 million at December 31, 2024, from $1.5 million at December 31, 2023.

Classified loans totaled $22.9 million at December 31, 2024, all of which were classified as substandard, compared to $24.9 million at December 31, 2023, consisting of $24.5 million classified as substandard and $399,000 as doubtful. The $1.6 million decrease in substandard loans was primarily due to decreases of $1.3 million in commercial and industrial loans, $318,000 in commercial real estate loans, and $186,000 in indirect home improvement loans, partially offset by an increase of $281,000 in construction and development loans.

Nonperforming loans, consisting solely of nonaccrual loans, increased $2.6 million to $13.6 million at December 31, 2024, from $11.0 million at December 31, 2023, primarily due to increases in CRE loans of $1.7 million, commercial business loans of $763,000, construction and development loans of $280,000, partially offset by decreases in indirect home improvement loans of $186,000 and marine loans of $53,000.  At December 31, 2024, nonperforming loans consisted of $5.0 million in construction and development loans, $3.4 million in commercial business loans, $2.8 million in CRE loans, $1.7 million in indirect home improvement loans, $289,000 in marine loans, $261,000 of home equity loans, $164,000 in one-to-four-family loans, and $14,000 in other consumer loans. The ratio of nonperforming loans to total gross loans was 0.54% at December 31, 2024, compared to 0.45% at December 31, 2023. We had no OREO at December 31, 2024 and 2023.  See “Item 1. Business – Lending Activities – Asset Quality” of this Form 10–K for additional information regarding the Company’s nonperforming loans.

Liabilities. Total liabilities increased $25.2 million to $2.73 billion at December 31, 2024, from $2.71 billion at December 31, 2023, primarily due to an increase of $214.1 million in borrowings, offset by a $182.9 million decrease in deposits.

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Total deposits decreased $182.9 million to $2.34 billion at December 31, 2024, from $2.52 billion at December 31, 2023, reflecting a decrease in brokered CDs. Transactional accounts (noninterest-bearing checking, interest-bearing checking, and escrow accounts) decreased $100.1 million to $814.7 million at December 31, 2024, from $914.9 million at December 31, 2023, due to decreases of $67.5 million in interest-bearing checking ($70.2 million of which was brokered deposits), $26.4 million in noninterest-bearing checking and $6.3 million in escrow accounts (also noninterest bearing) related to mortgages serviced. Money market and savings accounts decreased $14.9 million to $495.8 million at December 31, 2024, from $510.7 million at December 31, 2023 as depositors shifted to higher yielding CDs and other investment alternatives.

CDs, which include both retail and non-retail CDs, decreased $67.9 million to $1.03 billion at December 31, 2024, from December 31, 2023, primarily due to a reduction in non-retail CDs.  Retail CDs increased $151.8 million to $874.1 million at December 31, 2024, from $722.3 million at December 31, 2023, while non-retail CDs, which include brokered CDs, online CDs and public funds CDs decreased $219.7 million to $154.8 million, compared to $374.5 million at December 31, 2023. The decrease in non-retail CDs was primarily due to a decrease of $218.3 million in brokered CDs, as management shifted its funding source to FHLB advances for more favorable rates. Non-retail CDs represented 15.0% and 33.7% of total CDs at December 31, 2024 and December 31, 2023, respectively.

Deposits are summarized as follows at the years indicated:

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The Bank had uninsured deposits of approximately $652.7 million or 27.9% of total deposits, at December 31, 2024, compared to approximately $606.5 million or 24.0% of total deposits at December 31, 2023. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

Borrowings increased $214.1 million to $307.8 million at December 31, 2024, from $93.7 million at December 31, 2023.  The increased borrowings were primarily attributable to the decrease in total deposits, more specifically, brokered CDs, as management shifted its funding source to FHLB advances for more favorable rates.  At December 31, 2024, borrowings were comprised of FHLB advances of $258.8 million, overnight borrowings of $41.0 million, and FRB borrowings of $8.0 million.

Stockholders’ Equity. Total stockholders’ equity increased $31.3 million to $295.8 million at December 31, 2024, from $264.5 million at December 31, 2023. The increase in stockholders’ equity reflects net income of $35.0 million, partially offset by cash dividends totaling $8.3 million and stock repurchases totaling $2.9 million, which included $386,000 of shares repurchased in connection with withholding taxes paid on the vesting of restricted stock awards, and net exercise of stock options during the year 2024.  Stockholders' equity was also impacted by decreases in unrealized net losses in securities available-for-sale of $5.2 million, net of tax, and by increases in unrealized net gains on fair value and cash flow hedges of $934,000, net of tax, reflecting sales of investment securities in unrealized loss positions and changes in market interest rates benefiting hedges during the period, resulting in a $6.2 million net decline in accumulated other comprehensive loss, net of tax.

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Book value per common share was $38.26 at December 31, 2024, compared to $34.36 at December 31, 2023.  The calculation of book value per share at December 31, 2024, was based on 7,729,951 common shares, derived by subtracting the 103,063 unvested restricted stock shares from the 7,833,014 reported common shares outstanding as of that date. Similarly, the book value per share at December 31, 2023, was calculated based on 7,698,401 common shares, obtained by subtracting the 102,144 unvested restricted stock shares from the 7,800,545 reported common shares outstanding as of that date.

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 December 31, 2024. Income and all average balances are monthly average balances. Nonaccrual loans have been included in the table as loans carrying a zero yield. The yields on tax-exempt municipal bonds have not been computed on a tax equivalent basis.

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Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the periods indicated. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

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Comparison of Results of Operations for the Years Ended December 31, 2024 and 2023

General. Net income was $35.0 million for the year ended December 31, 2024, compared to $36.1 million for the year ended December 31, 2023, representing a $1.0 million or 2.9% decrease.  The decrease was due to a $198,000, or 0.2%, decrease in net interest income, a $3.8 million, or 4.1%, increase in noninterest expense and a $737,000, or 15.4%, increase in the provision for credit losses, partially offset by a $1.1 million, or 5.2%, increase in noninterest income and $2.7 million, or 28.9%, decrease in the provision for income taxes.

Net Interest Income. Net interest income decreased $198,000 to $123.1 million for the year ended December 31, 2024, from $123.3 million for the year ended December 31, 2023, as a $17.6 million increase in interest income was more than offset by a $17.8 million increase in interest expense. The increase in interest income was primarily driven by higher interest income on loans, reflecting both an increase in average loan balances and improved loan yields, while the greater increase in interest expense was due to higher deposit rates, particularly from increased interest on CDs.

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The net interest margin (“NIM”) decreased 18 basis points to 4.30% for the year ended December 31, 2024, from 4.48% for the prior year. The decrease in NIM reflects rising deposit and borrowing costs, which outpaced the yields on interest-earning assets.

Interest Income. Interest income for the year ended December 31, 2024, increased $17.6 million, to $184.8 million, from $167.2 million for the year ended December 31, 2023. The increase was attributable to a $108.0 million increase in the average balance of total interest-earning assets, primarily loans, and a 39-basis point increase in the average yield on total interest-earning assets. Interest income on loans receivable, including fees, increased $15.9 million, 10.3%, for the year ended December 31, 2024, compared to the prior year due to an increase in the average balance of loans outstanding during the period and to new loans being originated at higher rates, and variable-rate loans repricing higher following increases in market interest rates.

The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the years ended December 31, 2024 and 2023:

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Interest Expense. Interest expense increased $17.8 million to $61.7 million for the year ended December 31, 2024, from $43.9 million for the prior year.  The increase was primarily due to a $16.4 million increase in interest expense on deposits, mostly higher costing CDs, and a $1.4 million increase in borrowing costs. The average cost of funds for total interest-bearing liabilities increased 79 basis points to 3.11% for the year ended December 31, 2024, from 2.32% for the year ended December 31, 2023. The increase in interest expense was predominantly due to the increase in market rate for deposits and borrowings, and a shift in deposits to higher costing CDs.

The average cost of total interest-bearing deposits increased 86 basis points to 2.98% for the year ended December 31, 2024, compared to 2.12% for the year ended December 31, 2023. The average cost of funds, including noninterest-bearing checking, increased 63 basis points to 2.34% for the year ended December 31, 2024, from 1.71% for the year ended December 31, 2023.  The average balance of noninterest-bearing deposits, which include noninterest-bearing checking and escrow accounts, totaled $649.4 million and $672.2 million for the years ended December 31, 2024 and 2023, respectively.

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The following table details average balances of interest-bearing liabilities, associated rates and resulting change in interest expense for the years ended December 31, 2024 and 2023:

Provision for Credit Losses. For the year ended December 31, 2024, the provision for credit losses was $5.5 million consisting of a $5.6 million provision for credit losses on loans partially offset by a $123,000 reversal of the ACL on unfunded loan commitments, compared to a $4.8 million provision for credit losses, consisting of a $5.8 million provision for credit losses on loans partially offset by a $1.0 million reversal of the ACL on unfunded loan commitments for the year ended December 31, 2023. The main reason for the 2024 provision for credit losses on loans was elevated net charge-offs.  Additionally, the increase in the ACL on loans reflected organic loan growth, shifts in credit quality (including changes in classified, past due, and nonperforming loans), and adjustments to qualitative factors.  The most significant qualitative factor change was an increase in qualitative reserves attributable to higher levels of past due, nonperforming, and net charge-offs on consumer loans relative to prior periods.  The reversals of the allowance for credit losses on unfunded loan commitments for the years indicated above were a result of decreases in total unfunded loan commitments during those periods.

During the year ended December 31, 2024, net charge-offs totaled $5.3 million, compared to $2.2 million during the year ended December 31, 2023. The increase was primarily due to increases in net charge-offs of $1.8 million in indirect home improvement loans, $905,000 in C&I loans, $313,000 in marine loans, and $71,000 in other consumer loans.  A further decline in national and local economic conditions, as a result of the effects of inflation, a recession or slowed economic growth, among other factors, could result in a material increase in the ACL on loans and may adversely affect the Company’s financial condition and result of operations.

The following table details activity and information related to the ACL on loans for the years ended December 31, 2024 and 2023:

Management considers the ACL on loans at December 31, 2024, to be adequate to cover forecasted losses in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes that the estimates and assumptions used in its determination of the adequacy of the ACL on loans are reasonable, it is important to acknowledge the inherent uncertainties.  There is no assurance that these estimates and assumptions will not be proven incorrect in the future.  Additionally, there is the possibility that the actual amount of future provisions may exceed past provisions, and any potential increased provisions could adversely impact the Company's financial condition and results of operations. Furthermore, the determination of the amount of the Company's ACL on loans is subject to review by bank regulators as part of the routine examination process.  The regulators may adjust the ACL based on their judgment and the information available to them at the time of their examination.  This regulatory scrutiny adds an additional layer of evaluation and potential adjustment to the Company's credit loss provisions.

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Noninterest Income. Noninterest income increased $1.1 million to $21.6 million for the year ended December 31, 2024, from $20.5 million for the year ended December 31, 2023. The following table provides a detailed analysis of the changes in the components of noninterest income:

The year over year increase was primarily the result of an $8.4 million gain on sale of MSRs with no similar transaction occurring in the same period in 2023, and a $1.8 million increase in gain on sale of loans, partially offset by a $7.8 million loss on sale of investment securities resulting from management's strategic decision to increase the yields and reduce the duration of the securities portfolio, and a $1.1 million decrease in service charges and fee income due to a reduction in loan servicing fees due to the sale of MSRs in the first quarter of 2024. Gross margins on home loan sales slightly increased to 3.08% for the year ended December 31, 2024, from 3.07% for the year ended December 31, 2023.

Noninterest Expense. Noninterest expense increased $3.8 million to $97.6 million for the year ended December 31, 2024, from $93.7 million for the year ended December 31, 2023. The following table provides an analysis of the changes in the components of noninterest expense:

The increase in noninterest expense was primarily a result of increases in data processing expenses of $1.6 million, professional (consulting) and board fees of $1.5 million, and salaries and benefits of $1.5 million, largely due to a decline in consumer loan originations and related loan origination cost offsets to salaries and benefits.  These increases were partially offset by a $1.6 million decrease in acquisition costs, as no acquisitions occurred in 2024.

The efficiency ratio, which is noninterest expense as a percentage of net interest income and noninterest income, improved slightly to 67.45% for the year ended December 31, 2024, compared to 62.47% for the year ended December 31, 2023, primarily due to the growth in revenues outpacing the increase in noninterest expenses.

Provision for Income Taxes. For the year ended December 31, 2024, the Company recorded a provision for income taxes of $6.6 million on pre-tax income of $41.6 million, compared to a $9.2 million provision on pre-tax income of $45.3 million in 2023. The $2.7 million decrease in the provision was primarily due to the purchase of alternative energy tax credits in 2024, which resulted in a gain of $2.3 million. There was a net deferred tax asset of $7.1 million and $6.7 million at December 31, 2024 and 2023, respectively. Excluding the effects of tax credits, the effective corporate income tax rates for the years ended December 31, 2024 and 2023 were 21.2% and 20.4%, respectively. For additional information regarding income taxes, see “Note 12 – Income Taxes” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.

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Comparison of Results of Operations for the Years Ended December 31, 2023 and 2022

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10–K for the year ended December 31, 2023 filed with the SEC.

Asset and Liability Management and Market Risk

Risk When Interest Rates Change. The Company's interest rates on assets and liabilities are generally contractually established for a set period. However, market rates fluctuate over time, impacting financial performance. Like other financial institutions, the Company’s results of operations are affected by changes in interest rates and sensitivity of its assets and liabilities to these changes. The risk associated with fluctuating interest rates and the Company’s ability to adapt is known as interest rate risk, which represents its most significant market risk.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, the fair value of the Company’s consolidated financial instruments will change when interest rate levels change, and that change may either be favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed interest rate obligations are less likely to prepay in a rising interest rate environment and more likely to prepay in a falling interest rate environment. Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors interest rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans, and deposits, and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

How The Company Measures Risk of Interest Rate Changes. As part of an attempt to manage exposure to changes in interest rates and comply with applicable regulations, the Company monitors interest rate risk. In doing so, the Company analyzes and manages assets and liabilities based on their interest rates and payment streams, timing of maturities, repricing opportunities, and sensitivity to actual or potential changes in market interest rates.

The Company is subject to interest rate risk to the extent that its interest-bearing liabilities, primarily deposits, subordinated notes, and FHLB advances, reprice more rapidly or at different rates than the interest-earning assets. In order to minimize the potential for adverse effects of material prolonged increases or decreases in interest rates on the Company’s results of operations, the Company has adopted an Asset and Liability Management Policy. The Board of Directors sets the Asset and Liability Management Policy for the Bank, which is implemented by the Asset/Liability Committee (“ALCO”), an internal management committee. The board-level oversight of the ALCO is performed by the Audit Committee of the Board of Directors.

The purpose of the ALCO is to communicate, coordinate, and control asset/liability management consistent with the business plan and board-approved policies. The committee establishes and monitors the volume and mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk, and profitability goals.

The ALCO generally meets monthly to, among other things, protect capital through earnings stability over the interest rate cycle; maintain the Bank’s "well capitalized" status; and provide a reasonable return on investment. The committee recommends appropriate strategy changes based on this review. Additionally, the ALCO is responsible for reviewing and reporting the effects of the policy implementations and strategies to the Board of Directors at least quarterly. The Chief Financial Officer oversees this process on a regular basis.

A key element of the Bank’s asset/liability management plan is to protect net earnings by managing the maturity or repricing mismatch between interest-earning assets and rate-sensitive liabilities. The Company seeks to accomplish this by extending funding maturities through wholesale funding sources, including the use of FHLB advances and brokered certificates of deposit, and through asset management, including the use of adjustable-rate loans and selling certain fixed-rate loans in the secondary market. Management is also focused on matching deposit duration with the duration of earning assets as appropriate.

As part of the efforts to monitor and manage interest rate risk, a number of indicators are used to monitor overall risk. Among the measurements are:

Market Risk. Market risk is the potential change in the value of investment securities if interest rates change. This change in value impacts the value of the Company and the liquidity of the securities. Market risk is controlled by setting a maximum average maturity/average life of the securities portfolio to 10 years.

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Economic Risk. Economic risk is the risk that the underlying value of a bank will change when rates change. This can be caused by a change in value of the existing assets and liabilities (this is called Economic Value of Equity or EVE), or a change in the earnings stream (this is caused by interest rate risk). The Company takes economic risk primarily when fixed rate loans are made, or purchase fixed-rate investments, or issue long term certificates of deposit or take fixed-rate FHLB advances. It is the risk that interest rates will change and these fixed-rate assets and liabilities will change in value. This change in value usually is not recognized in the earnings, or equity (other than marking to market securities available-for-sale or fair value adjustments on loans held for sale). The change is recognized only when the assets and liabilities are liquidated. Although the change in market value is usually not recognized in earnings or in capital, the impact is real to the long-term value of the Company. Therefore, the Company will control the level of economic risk by limiting the amount of long-term, fixed-rate assets it will have and by setting a limit on concentrations and maturities of securities.

Interest Rate Risk. The table presented below, as of December 31, 2024, is an analysis prepared for the Company by a third-party consultant.  The analysis employs various market and actual experience-based assumptions and depicts a static shock. to net interest income through instantaneous and sustained shifts in the yield curve, with adjustments in 100 basis point increments, both up and down by 300 basis points. The results present a projected income statement with minimal exposure to immediate changes in interest rates. These simulations take into account repricing, maturity, competitive factors, expected life of non-maturity deposits, and prepayment characteristics of individual products. These assumptions are based upon our experience, business plans and published industry experience. Because these assumptions are inherently uncertain, actual results may differ from simulated results. The ALCO reviews simulation results to determine whether exposure resulting from changes in market interest rates remains within established tolerance levels over a twelve-month horizon, and develops appropriate strategies to manage this exposure. The table illustrates the estimated change in net interest income over the next 12 months, starting from December 31, 2024.

As indicated by the table above, the Company's net interest income remains relatively stable across interest rate changes, indicating minimal exposure to immediate rate fluctuations.  In a rising rate environment, net interest income declines modestly, with a 1.48% decrease at +300 basis points.  In a declining rate environment, net interest income increases, with a 3.48% rise at -300 basis points.

In managing the assets/liability mix the Company typically places an equal emphasis on maximizing net interest margin and matching the interest rate sensitivity of the assets and liabilities. From time to time, however, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, the Company may place somewhat greater emphasis on maximizing net interest margin than on strict dollar for dollar categories matching the interest rate sensitivity of the assets and liabilities. Management also believes that the increased net income which may result from a prepayment assumption mismatch in the actual maturity or repricing of the asset and liability portfolios can, during periods of changing interest rates, provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. Management believes that 1st Security Bank’s level of interest rate risk is acceptable under this approach.

In evaluating the Company’s exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk.

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The Company also uses interest-rate sensitivity "gap" analysis to provide a more general overview of its interest-rate risk profile. The interest-rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. The table below shows the Company's interest-rate sensitivity gap position as of December 31, 2024.

Liquidity and Capital Resources

Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit runoff that may occur in the normal course of business. The Company relies on a number of different sources in order to meet potential liquidity demands. The primary sources are increases in deposit accounts, FHLB advances, 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 December 31, 2024, the Bank’s total borrowing capacity was $649.7 million with the FHLB of Des Moines, with unused borrowing capacity of $349.5 million. The FHLB borrowing limit is based on certain categories of loans, primarily real estate loans, that qualify as collateral for FHLB advances. At December 31, 2024, the Bank held approximately $1.11 billion in loans that qualify as collateral for FHLB advances.

In addition to the availability of liquidity from the FHLB of Des Moines, the Bank maintained a short-term borrowing line of credit with the FRB, with a current limit of $270.4 million, and a combined credit limit of $101.0 million in written federal funds lines of credit through correspondent banking relationships at December 31, 2024. The FRB borrowing limit is based on certain categories of loans, primarily consumer loans, that qualify as collateral for FRB line of credit. At December 31, 2024, the Bank held approximately $606.5 million in loans that qualify as collateral for the FRB line of credit. 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 total deposits or $469.7 million at December 31, 2024. Total brokered deposits at December 31, 2024 were $143.4 million. Management utilizes brokered deposits to mitigate interest rate risk and to enhance liquidity when appropriate.

Liquidity management is both a daily and long-term function of the Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S. Government obligations and U.S. agency securities. The Company uses sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At December 31, 2024, the outstanding loan commitments totaled $558.5 million, which included $174.1 million of undisbursed construction and development loan commitments. For information regarding our commitments and off-balance sheet arrangements, see “Note 13 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K. Securities purchased during the years ended December 31, 2024 and 2023 totaled $110.3 million and $76.0 million, respectively, and all are classified as available-for-sale.  Securities repayments, maturities and sales in those periods were $119.6 million and $17.3 million, respectively.

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The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the years ended December 31, 2024 and 2023, the Bank sold $564.8 million and $405.0 million in loans, respectively. During the years ended December 31, 2024 and 2023, the Bank received $700.0 million and $652.7 million in principal repayments on loans, respectively.

The Bank’s liquidity has been impacted by changes in deposit levels, with deposit outflows of $182.9 million in 2024 following deposit inflows of $394.6 million in 2023. The year to date changes in deposits included a $288.2 million decrease and a $37.7 million increase in brokered deposit for the years ended December 31, 2024, respectively.   While the Bank's liquidity position remains strong, the shift directly affected the Bank's liquid assets in the form of cash and cash equivalents, CDs at other financial institutions and investment securities, which decreased to $323.0 million at December 31, 2024 from $391.2 million at December 31, 2023. CDs scheduled to mature in one year or less at December 31, 2024, totaled $869.3 million. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, the Bank believes that a majority of maturing relationship deposits will remain with the Bank.

We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises and equipment during the year ending December 31, 2025 that would materially impact liquidity. We also have purchase obligations, with remaining terms generally less than three years and contracts with various vendors to provide services, including information processing.  These contracts typically extend for periods ranging from one to five years, and our financial obligations are contingent upon satisfactory performance by the vendor.

For the year ending December 31, 2025, we project that fixed commitments will include $1.7 million of operating lease payments and $259.0 million of scheduled payments and maturities of FHLB advances and FRB borrowings. For information regarding our operating leases and borrowings, see “Note 7 – Leases” and “Note 11 – Debt”, respectively, of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.

The Bank's management believes that the Company's liquid assets combined with its available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months.

As a separate legal entity from the Bank, FS Bancorp must provide for its own liquidity. Sources of capital and liquidity for FS Bancorp include distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory notice. At December 31, 2024, FS Bancorp, Inc. had $9.2 million in unrestricted cash to meet liquidity needs.

The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.28 per share, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank and returning a substantial portion of our cash to our shareholders. Assuming continued cash dividend payment during 2025 at this rate of $0.28 per share, our average total dividend paid each quarter would be approximately $2.2 million based on the number of our current outstanding shares as of December 31, 2024.

The Bank is subject to minimum capital requirements imposed by the FDIC. Based on its capital levels at December 31, 2024, 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 December 31, 2024, the Bank was considered to be "well capitalized". At December 31, 2024, the Bank exceeded all regulatory capital requirements with Tier 1 leverage-based capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 capital ratios of 11.2%, 12.9%, 14.2%, and 12.9%, respectively.

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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 less than $3.0 billion in assets are generally not subject to compliance with the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to the Bank. A bank holding company that crosses the $3.0 billion total consolidated assets threshold as of June 30 of a particular year is no longer permitted to file reports as a small holding company beginning the following March. As the Company was under $3.0 billion in assets as of June 30, 2024, the Company was still considered a small holding company as of December 31, 2024. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to the holding company’s subsidiary bank and the Federal Reserve expects the holding company’s subsidiary bank to be "well capitalized" under the prompt corrective action regulations. If FS Bancorp were subject to regulatory capital guidelines for bank holding companies with $3.0 billion or more in assets at December 31, 2024, FS Bancorp would have exceeded all regulatory capital requirements. For informational purposes, the regulatory capital ratios calculated for FS Bancorp at December 31, 2024 were 9.9% for Tier 1 leverage-based capital, 11.4% for Tier 1 risk-based capital, 14.5% for total risk-based capital, and 11.4% for CET 1 capital ratio. For additional information regarding regulatory capital compliance, see the discussion included in “Note 15 – Regulatory Capital” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.

Recent Accounting Pronouncements

For a discussion of recent accounting standards, please see “Note 1 – Basis of Presentation and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.