Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-35589 FS BANCORP, INC. (Exact name of registrant as specified in its charter) ( j Washington p 45-4585178 ...

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (Exact name of registrant as specified in its charter) ( j Washington p 45-4585178 organization) (IRS Employer Identification No.) 6920 22 ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to (Mark One) Commission File Number: 001-35589 FS BANCORP, INC. (Exact name of registrant as specified in its charter) Washington 45-4585178 organizat ...

PART I [Item 1. Business](index=5&type=section&id=Item%201.%20Business) FS Bancorp, Inc. operates as a holding company for 1st Security Bank of Washington, a community bank with diversified lending and significant COVID-19 response efforts - **Company Consolidated Financials (December 31, 2020):** | Metric | Amount (in billions) | | :----- | :------------------- | | Total Assets | $2.11 | | Total Deposits | $1.67 | | Stockholders' Equity | $0.23 | - The Company's lending strategy has shifted from indirect consumer lending to an increased emphasis on real estate and commercial business loans[26](index=26&type=chunk)[43](index=43&type=chunk) - The Bank participated in the SBA Paycheck Protection Program, funding **$75.8 million** in loans in 2020, with **$62.1 million** outstanding, and offered payment relief to borrowers[28](index=28&type=chunk)[29](index=29&type=chunk) [General](index=5&type=section&id=General) Provides an overview of FS Bancorp, Inc. and its subsidiary, 1st Security Bank of Washington [Market Area](index=7&type=section&id=Market%20Area) Describes the geographic regions where the Bank primarily conducts its operations [Lending Activities](index=9&type=section&id=Lending%20Activities) Details the various types of loans offered and the Bank's lending strategies [General](index=9&type=section&id=General_Lending) Outlines the general principles and objectives of the Bank's lending operations [Loan Portfolio Analysis](index=10&type=section&id=Loan%20Portfolio%20Analysis) Presents a breakdown and analysis of the Bank's loan portfolio composition [Loan Maturity and Repricing](index=12&type=section&id=Loan%20Maturity%20and%20Repricing) Discusses the maturity distribution and interest rate repricing characteristics of the loan portfolio [Lending Authority](index=13&type=section&id=Lending%20Authority) Defines the internal limits and approval processes for loan originations [Commercial Real Estate Lending](index=13&type=section&id=Commercial%20Real%20Estate%20Lending) Focuses on the Bank's activities in commercial real estate loans [Construction and Development Lending](index=14&type=section&id=Construction%20and%20Development%20Lending) Describes the Bank's involvement in financing construction and development projects [Home Equity Lending](index=15&type=section&id=Home%20Equity%20Lending) Details the Bank's home equity loan and line of credit programs [Residential](index=16&type=section&id=Residential) Covers the Bank's residential mortgage lending activities [Consumer Lending](index=16&type=section&id=Consumer%20Lending) Explains the Bank's offerings in various consumer loan products [Commercial Business Lending](index=17&type=section&id=Commercial%20Business%20Lending) Describes the Bank's lending to commercial businesses [Loan Originations, Servicing, Purchases and Sales](index=19&type=section&id=Loan%20Originations%2C%20Servicing%2C%20Purchases%20and%20Sales) Discusses the processes for originating, servicing, and trading loans [Asset Quality](index=22&type=section&id=Asset%20Quality) Reviews the quality of the Bank's assets and related risk management [General](index=22&type=section&id=General_AssetQuality) Provides an overview of the Bank's asset quality management framework [Nonperforming Assets](index=24&type=section&id=Nonperforming%20Assets) Details the Bank's nonperforming loans and other nonperforming assets [Other Real Estate Owned](index=24&type=section&id=Other%20Real%20Estate%20Owned) Describes properties acquired through foreclosure or deed in lieu of foreclosure [Restructured Loans](index=24&type=section&id=Restructured%20Loans) Covers loans whose terms have been modified due to borrower financial difficulties [Other Assets Especially Mentioned](index=24&type=section&id=Other%20Assets%20Especially%20Mentioned) Identifies assets requiring special attention due to potential credit weaknesses [Classified Assets](index=25&type=section&id=Classified%20Assets) Discusses assets categorized by regulators as having credit deficiencies [Allowance for Loan Losses](index=25&type=section&id=Allowance%20for%20Loan%20Losses) Explains the methodology and adequacy of the allowance for loan losses [Investment Activities](index=29&type=section&id=Investment%20Activities) Describes the Bank's strategies and holdings in investment securities [General](index=29&type=section&id=General_InvestmentActivities) Outlines the general approach to managing the Bank's investment portfolio [Securities Portfolio](index=29&type=section&id=Securities%20Portfolio) Provides details on the composition and characteristics of the Bank's securities holdings [Deposit Activities and Other Sources of Funds](index=31&type=section&id=Deposit%20Activities%20and%20Other%20Sources%20of%20Funds) Details the Bank's deposit gathering and other funding strategies [General](index=31&type=section&id=General_DepositActivities) Provides an overview of the Bank's funding sources and deposit strategies [Deposits](index=31&type=section&id=Deposits) Details the types and characteristics of the Bank's deposit accounts [Debt](index=33&type=section&id=Debt) Describes the Bank's various debt obligations and borrowing activities [Subsidiary and Other Activities](index=35&type=section&id=Subsidiary%20and%20Other%20Activities) Covers operations of the Bank's subsidiaries and other non-lending activities [Competition](index=35&type=section&id=Competition) Analyzes the competitive landscape in which the Bank operates [Employees](index=36&type=section&id=Employees) Provides information on the Company's workforce, compensation, and human capital initiatives [Executive Officers](index=36&type=section&id=Executive%20Of%20icers) Lists and describes the Company's key executive management personnel [Human Capital](index=38&type=section&id=Human%20Capital) Discusses the Company's approach to managing and developing its human resources [Employee Compensation and Benefits](index=38&type=section&id=Employee%20Compensation%20and%20Benefits) Details the compensation and benefits programs offered to employees [Diversity and Inclusion](index=38&type=section&id=Diversity%20and%20Inclusion) Outlines the Company's initiatives and commitment to diversity and inclusion [Talent Acquisition](index=39&type=section&id=Talent%20Acquisition) Describes the Company's strategies for recruiting and hiring new employees [Operation Safe and Secure 2020](index=39&type=section&id=Operation%20Safe%20and%20Secure%202020) Highlights specific initiatives related to employee safety and security in 2020 [Volunteerism](index=39&type=section&id=Volunteerism) Discusses employee involvement in community service and volunteer activities [Human Capital Metrics](index=39&type=section&id=Human%20Capital%20Metrics) Presents key data and statistics related to the Company's workforce [How We Are Regulated](index=40&type=section&id=How%20We%20Are%20Regulated) Explains the regulatory framework governing the Company and its Bank subsidiary [Regulation of 1st Security Bank of Washington](index=40&type=section&id=Regulation%20of%201st%20Security%20Bank%20of%20Washington) Details the specific regulations applicable to 1st Security Bank of Washington [Regulation and Supervision of FS Bancorp](index=45&type=section&id=Regulation%20and%20Supervision%20of%20FS%20Bancorp) Describes the regulatory oversight of FS Bancorp as a holding company [Recent Regulatory Reform](index=47&type=section&id=Recent%20Regulatory%20Reform) Discusses recent changes in banking regulations affecting the Company [Taxation](index=48&type=section&id=Taxation) Provides an overview of the tax considerations for the Company [Federal Taxation](index=48&type=section&id=Federal%20Taxation) Details the federal income tax implications for the Company [Washington Taxation](index=49&type=section&id=Washington%20Taxation) Describes the state-level tax obligations in Washington [Item 1A. Risk Factors](index=49&type=section&id=Item%201A.%20Risk%20Factors) The Company faces significant risks from macroeconomic conditions, lending activities, interest rate changes, accounting matters, regulatory scrutiny, and operational vulnerabilities - The COVID-19 pandemic has caused major economic disruption, impacting loan demand, net interest income, and increasing potential for loan defaults and goodwill impairment[267](index=267&type=chunk)[271](index=271&type=chunk)[274](index=274&type=chunk) - The loan portfolio carries increased risk due to a large percentage of consumer loans (**23.8% of gross loans**) and higher risks associated with commercial real estate and construction lending[282](index=282&type=chunk)[283](index=283&type=chunk)[289](index=289&type=chunk)[295](index=295&type=chunk) - Earnings are highly sensitive to interest rate changes, which can reduce net interest income, impact mortgage banking revenues, and affect the fair value of MSRs and securities[308](index=308&type=chunk)[313](index=313&type=chunk)[315](index=315&type=chunk)[318](index=318&type=chunk) - Regulatory scrutiny over commercial real estate loan concentrations (construction, land development, and land loans at **89.6% of regulatory capital**; all CRE loans at **253.6% of regulatory capital**) could require additional risk management and capital levels[226](index=226&type=chunk)[328](index=328&type=chunk) - Reliance on external vendors, cybersecurity threats, and LIBOR transition uncertainty (affecting **$90.0 million** in notional interest rate swaps) pose significant operational and financial risks[332](index=332&type=chunk)[334](index=334&type=chunk)[342](index=342&type=chunk)[702](index=702&type=chunk) [Risks Related to Macroeconomic Conditions](index=49&type=section&id=Risks%20Related%20to%20Macroeconomic%20Conditions) Discusses potential impacts of broader economic trends on the Company's financial performance [Risks Related to our Lending Activities](index=51&type=section&id=Risks%20Related%20to%20our%20Lending%20Activities) Highlights specific risks inherent in the Company's various loan portfolios [Risk Related to Changes in Market Interest Rates](index=56&type=section&id=Risk%20Related%20to%20Changes%20in%20Market%20Interest%20Rates) Examines the Company's exposure to fluctuations in market interest rates [Risks Related to Accounting Matters](index=59&type=section&id=Risks%20Related%20to%20Accounting%20Matters) Addresses potential risks associated with critical accounting policies and estimates [Risk Related to Regulatory and Compliance Matters](index=60&type=section&id=Risk%20Related%20to%20Regulatory%20and%20Compliance%20Matters) Covers risks arising from regulatory oversight and compliance requirements [Risks Related to Cybersecurity, Third Parties and Technology](index=60&type=section&id=Risks%20Related%20to%20Cybersecurity%2C%20Third%20Parties%20and%20Technology) Details operational risks stemming from technology, cybersecurity, and vendor reliance [Risks Related to Our Business and Industry Generally](index=62&type=section&id=Risks%20Related%20to%20Our%20Business%20and%20Industry%20Generally) Outlines broader business and industry-specific risks affecting the Company [Item 1B. Unresolved Staff Comments](index=64&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments to report for the Company - No unresolved staff comments[351](index=351&type=chunk) [Item 2. Properties](index=64&type=section&id=Item%202.%20Properties) As of December 31, 2020, the Company owned headquarters and administrative offices, operated 21 branches (13 owned, 8 leased) and five leased loan production offices, with an aggregate net book value of **$27.3 million** - At December 31, 2020, the Company owned one headquarters office and one administrative office, operating 21 full-service bank branches (13 owned, 8 leased) and five stand-alone loan production offices (leased)[352](index=352&type=chunk) - The aggregate net book value of properties was **$27.3 million** at December 31, 2020[352](index=352&type=chunk) - The book value of data processing and computer equipment was **$1.2 million** at December 31, 2020, with a business continuity plan in place[353](index=353&type=chunk) [Item 3. Legal Proceedings](index=64&type=section&id=Item%203.%20Legal%20Proceedings) The Company is involved in various ordinary course legal actions, with management believing any liabilities will not materially affect its financial position - The Company is subject to various pending and threatened legal actions in the ordinary course of business, including those related to subordination liens[354](index=354&type=chunk) - Management believes that liabilities arising from these claims will not have a material effect on the Company's financial position[354](index=354&type=chunk) [Item 4. Mine Safety Disclosures](index=64&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the Company - Not applicable[355](index=355&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=64&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) FS Bancorp's common stock trades on NASDAQ under 'FSBW', with **4,237,956 shares** outstanding and a **$5.0 million** share repurchase program authorized in September 2020, demonstrating strong shareholder return performance - Common stock trades on The NASDAQ Stock Market LLC under the symbol 'FSBW'[358](index=358&type=chunk) - As of December 31, 2020, there were **4,237,956 shares** of common stock outstanding and approximately 227 shareholders of record[358](index=358&type=chunk) - The Board authorized a **$5.0 million** share repurchase program on September 17, 2020, repurchasing **25,135 shares** in Q4 2020 at an average price of **$44.78**, with **$3,427,254** remaining[361](index=361&type=chunk)[362](index=362&type=chunk) Cumulative Total Shareholder Return (Dec 31, 2015 = 100) | Index | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | | :-------------------- | :------- | :------- | :------- | :------- | :------- | :------- | | FS Bancorp, Inc. | 100.00 | 140.21 | 214.88 | 170.49 | 256.84 | 224.91 | | S&P 500 Index | 100.00 | 111.96 | 136.40 | 130.42 | 171.49 | 203.04 | | SNL Bank $1B-$5B | 100.00 | 143.87 | 153.37 | 134.37 | 163.35 | 138.81 | | SNL Thrift $1B-$5B | 100.00 | 136.30 | 138.06 | 96.07 | 116.56 | 93.62 | [Issuer Purchases of Equity Securities](index=65&type=section&id=Issuer%20Purchases%20of%20Equity%20Securities) Details the Company's share repurchase programs and activities [Equity Compensation Plan Information](index=66&type=section&id=Equity%20Compensation%20Plan%20Information) Provides data on outstanding options and securities available under equity compensation plans [Performance Graph](index=66&type=section&id=Performance%20Graph) Illustrates the Company's cumulative total shareholder return compared to market indices [Item 6. Selected Financial Data](index=66&type=section&id=Item%206.%20Selected%20Financial%20Data) This section presents a five-year summary of the Company's consolidated financial position and results of operations, highlighting **$2.11 billion** in total assets and **$39.26 million** net income in 2020 Selected Financial Condition Data (in thousands) | Metric | 2020 | 2019 | | :-------------------------- | :-------- | :-------- | | Total assets | $2,113,241 | $1,713,056 | | Loans receivable, net | $1,544,981 | $1,336,346 | | Loans held for sale, at fair value | $166,448 | $69,699 | | Securities available-for-sale, at fair value | $178,018 | $126,057 | | Deposits | $1,674,071 | $1,392,408 | | Borrowings | $165,809 | $84,864 | | Total stockholders' equity | $230,007 | $200,242 | Selected Operations Data (in thousands) | Metric | 2020 | 2019 | | :-------------------------- | :-------- | :-------- | | Total interest and dividend income | $88,837 | $89,625 | | Total interest expense | $14,717 | $19,317 | | Net interest income | $74,120 | $70,308 | | Provision for loan losses | $13,036 | $2,880 | | Total noninterest income | $55,359 | $23,035 | | Total noninterest expense | $66,593 | $62,333 | | Net income | $39,264 | $22,717 | Selected Financial Ratios | Metric | 2020 | 2019 | | :------------------------------------- | :-------- | :-------- | | Return on assets | 2.02 % | 1.38 % | | Return on equity | 18.74 % | 11.92 % | | Net interest margin | 4.02 % | 4.53 % | | Nonperforming assets to total assets at end of period | 0.37 % | 0.19 % | | Allowance for loan losses to gross loans receivable | 1.66 % | 0.98 % | | Basic earnings per share | $9.14 | $5.13 | | Diluted earnings per share | $8.97 | $5.01 | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=69&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section reviews the Company's financial condition and results for 2020 and 2019, highlighting a significant increase in net income to **$39.3 million**, asset growth to **$2.11 billion**, and a decrease in net interest margin to **4.02%** - Net income for 2020 increased by **$16.5 million** (**72.8%**) to **$39.3 million**, driven by a **$32.3 million** increase in noninterest income and a **$3.8 million** increase in net interest income, partially offset by higher provision for loan losses and noninterest expenses[439](index=439&type=chunk) - Net interest margin (NIM) decreased by **51 basis points** to **4.02%** for 2020, from **4.53%** in 2019, primarily due to lower interest rates and the impact of low-yielding PPP loans[385](index=385&type=chunk)[441](index=441&type=chunk) - Total assets increased by **$400.2 million** to **$2.11 billion** at December 31, 2020, funded by a **$281.7 million** increase in deposits and an **$80.9 million** increase in borrowings[413](index=413&type=chunk)[423](index=423&type=chunk) - The provision for loan losses increased to **$13.0 million** in 2020 (from **$2.9 million** in 2019), reflecting COVID-19 credit deterioration and loan portfolio growth, with PPP loans (**$62.1 million**) excluded due to SBA guarantees[387](index=387&type=chunk)[449](index=449&type=chunk) - The Bank maintained a 'well capitalized' status at December 31, 2020, with a Tier 1 leverage-based capital ratio of **10.9%**, exceeding the temporary **8%** Community Bank Leverage Ratio (CBLR) requirement[481](index=481&type=chunk) [Overview](index=69&type=section&id=Overview) Provides a high-level summary of the Company's financial performance and condition [Highlights in Response to the COVID-19 Pandemic](index=71&type=section&id=Highlights%20in%20Response%20to%20the%20COVID-19%20Pandemic) Summarizes the Company's key actions and impacts related to the COVID-19 pandemic [Critical Accounting Policies and Estimates](index=72&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Discusses the accounting policies requiring significant judgment and estimation [Our Business and Operating Strategy and Goals](index=74&type=section&id=Our%20Business%20and%20Operating%20Strategy%20and%20Goals) Outlines the Company's strategic objectives and operational plans [Comparison of Financial Condition at December 31, 2020 and December 31, 2019](index=75&type=section&id=Comparison%20of%20Financial%20Condition%20at%20December%2031%2C%202020%20and%20December%2031%2C%202019) Analyzes changes in the Company's balance sheet between the two fiscal years [Average Balances, Interest and Average Yields/Cost](index=79&type=section&id=Average%20Balances%2C%20Interest%20and%20Average%20Yields%2FCost) Presents average balance sheet data, interest income/expense, and corresponding yields/costs [Rate/Volume Analysis](index=80&type=section&id=Rate%2FVolume%20Analysis) Explains the impact of interest rate and volume changes on net interest income [Comparison of Results of Operations for the Years Ended December 31, 2020 and 2019](index=80&type=section&id=Comparison%20of%20Results%20of%20Operations%20for%20the%20Years%20Ended%20December%2031%2C%202020%20and%202019) Compares the Company's income statement performance for the two fiscal years [Asset and Liability Management and Market Risk](index=84&type=section&id=Asset%20and%20Liability%20Management%20and%20Market%20Risk) Describes how the Company manages its balance sheet and exposure to market risks [Liquidity](index=86&type=section&id=Liquidity) Discusses the Company's ability to meet its financial obligations and funding needs [Commitments and Off-Balance Sheet Arrangements](index=87&type=section&id=Commitments%20and%20Off-Balance%20Sheet%20Arrangements) Details the Company's contractual obligations and off-balance sheet exposures [Capital Resources](index=87&type=section&id=Capital%20Resources) Reviews the Company's capital structure and regulatory capital adequacy [Recent Accounting Pronouncements](index=88&type=section&id=Recent%20Accounting%20Pronouncements) Summarizes the impact of recently issued accounting standards [Item 7A. Quantitative and Qualitative Disclosures about Market Risk](index=88&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The Company's primary market risk is interest rate risk, actively monitored and managed due to its potential material effect on financial condition and operations - The Company's primary market risk is interest rate risk, stemming from lending, investing, deposit, and borrowing activities[485](index=485&type=chunk) - Management actively monitors and manages interest rate risk, recognizing its potential material effect on financial condition and results of operations[485](index=485&type=chunk) - Detailed information on market risk is incorporated by reference from 'Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management'[485](index=485&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=88&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This item presents the Company's audited consolidated financial statements for 2020 and 2019, including balance sheets, income statements, and comprehensive notes on accounting policies and financial details - Includes audited consolidated financial statements for the years ended December 31, 2020 and 2019[491](index=491&type=chunk) - The financial statements comprise Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows[487](index=487&type=chunk) - Notes to Consolidated Financial Statements provide detailed information on accounting policies, investments, loans, servicing rights, debt, employee benefits, income taxes, commitments, regulatory capital, and fair value measurements[487](index=487&type=chunk)[517](index=517&type=chunk) [Index to Consolidated Financial Statements](index=88&type=section&id=Index%20to%20Consolidated%20Financial%20Statements) Provides a listing of all financial statements included in the report [Report of Independent Registered Public Accounting Firm](index=89&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Presents the auditor's opinion on the financial statements and internal controls [Consolidated Balance Sheets](index=92&type=section&id=Consolidated%20Balance%20Sheets) Presents the Company's financial position at specific points in time [Consolidated Statements of Income](index=93&type=section&id=Consolidated%20Statements%20of%20Income) Reports the Company's revenues, expenses, and net income over periods [Consolidated Statements of Comprehensive Income](index=94&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Details changes in equity from non-owner sources, including net income and other comprehensive income [Consolidated Statements of Changes in Stockholders' Equity](index=95&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity) Shows the changes in the Company's equity accounts over periods [Consolidated Statements of Cash Flows](index=96&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Reports the cash inflows and outflows from operating, investing, and financing activities [Notes to Consolidated Financial Statements](index=97&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Provides detailed explanations and disclosures supporting the financial statements [NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=97&type=section&id=NOTE%201%20-%20BASIS%20OF%20PRESENTATION%20AND%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) Explains the accounting principles and policies used in preparing the financial statements [NOTE 2 - INVESTMENTS](index=105&type=section&id=NOTE%202%20-%20INVESTMENTS) Provides details on the Company's investment securities portfolio [NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES](index=109&type=section&id=NOTE%203%20-%20LOANS%20RECEIVABLE%20AND%20ALLOWANCE%20FOR%20LOAN%20LOSSES) Details the loan portfolio and the methodology for the allowance for loan losses [NOTE 4 - SERVICING RIGHTS](index=117&type=section&id=NOTE%204%20-%20SERVICING%20RIGHTS) Describes the accounting for mortgage servicing rights [NOTE 5 - PREMISES AND EQUIPMENT](index=119&type=section&id=NOTE%205%20-%20PREMISES%20AND%20EQUIPMENT) Provides information on the Company's property, plant, and equipment [NOTE 6 - LEASES](index=119&type=section&id=NOTE%206%20-%20LEASES) Details the Company's lease agreements and related accounting [NOTE 7 - OTHER REAL ESTATE OWNED](index=120&type=section&id=NOTE%207%20-%20OTHER%20REAL%20ESTATE%20OWNED) Provides information on real estate acquired through foreclosure [NOTE 8 - DEPOSITS](index=120&type=section&id=NOTE%208%20-%20DEPOSITS) Details the composition and types of the Company's deposits [NOTE 9 - DEBT](index=121&type=section&id=NOTE%209%20-%20DEBT) Provides information on the Company's outstanding debt obligations [NOTE 10 - EMPLOYEE BENEFITS](index=123&type=section&id=NOTE%2010%20-%20EMPLOYEE%20BENEFITS) Describes the Company's employee benefit plans [NOTE 11 - INCOME TAXES](index=124&type=section&id=NOTE%2011%20-%20INCOME%20TAXES) Details the Company's income tax provisions and related balances [NOTE 12 - COMMITMENTS AND CONTINGENCIES](index=125&type=section&id=NOTE%2012%20-%20COMMITMENTS%20AND%20CONTINGENCIES) Discloses significant commitments and potential liabilities [NOTE 13 - SIGNIFICANT CONCENTRATION OF CREDIT RISK](index=127&type=section&id=NOTE%2013%20-%20SIGNIFICANT%20CONCENTRATION%20OF%20CREDIT%20RISK) Identifies areas of significant credit risk concentration within the loan portfolio [NOTE 14 - REGULATORY CAPITAL](index=127&type=section&id=NOTE%2014%20-%20REGULATORY%20CAPITAL) Provides details on the Company's compliance with regulatory capital requirements [NOTE 15 - FAIR VALUE MEASUREMENTS](index=128&type=section&id=NOTE%2015%20-%20FAIR%20VALUE%20MEASUREMENTS) Explains the fair value hierarchy and valuation techniques for financial instruments [NOTE 16 - EARNINGS PER SHARE](index=133&type=section&id=NOTE%2016%20-%20EARNINGS%20PER%20SHARE) Details the calculation of basic and diluted earnings per share [NOTE 17 - DERIVATIVES](index=134&type=section&id=NOTE%2017%20-%20DERIVATIVES) Describes the Company's use of derivative financial instruments [NOTE 18 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)](index=135&type=section&id=NOTE%2018%20-%20ACCUMULATED%20OTHER%20COMPREHENSIVE%20INCOME%20%28LOSS%29) Provides a breakdown of components of accumulated other comprehensive income or loss [NOTE 19 - STOCK-BASED COMPENSATION](index=136&type=section&id=NOTE%2019%20-%20STOCK-BASED%20COMPENSATION) Details the Company's stock-based compensation plans and expenses [NOTE 20 - BUSINESS SEGMENTS](index=138&type=section&id=NOTE%2020%20-%20BUSINESS%20SEGMENTS) Provides financial information segmented by the Company's business lines [NOTE 21 - REVENUE FROM CONTRACTS WITH CUSTOMERS](index=140&type=section&id=NOTE%2021%20-%20REVENUE%20FROM%20CONTRACTS%20WITH%20CUSTOMERS) Details revenue recognition policies from customer contracts [NOTE 22 - GOODWILL AND OTHER INTANGIBLE ASSETS](index=141&type=section&id=NOTE%2022%20-%20GOODWILL%20AND%20OTHER%20INTANGIBLE%20ASSETS) Provides information on goodwill and other intangible assets [NOTE 23 - PARENT COMPANY ONLY FINANCIAL INFORMATION](index=142&type=section&id=NOTE%2023%20-%20PARENT%20COMPANY%20ONLY%20FINANCIAL%20INFORMATION) Presents separate financial information for the parent company [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=142&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There were no changes in or disagreements with accountants on accounting and financial disclosure for the Company - No changes in or disagreements with accountants on accounting and financial disclosure[738](index=738&type=chunk) [Item 9A. Controls and Procedures](index=142&type=section&id=Item%209A.%20Controls%20and%20Procedures) The CEO and CFO concluded disclosure controls were effective as of December 31, 2020, and management assessed internal control over financial reporting as effective, with no significant changes during the quarter - The Company's CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2020[740](index=740&type=chunk) - Management assessed and concluded that the Company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[744](index=744&type=chunk) - Moss Adams LLP, the independent registered public accounting firm, audited and attested to the effectiveness of the Company's internal control over financial reporting[744](index=744&type=chunk)[745](index=745&type=chunk) - There were no significant changes in internal control over financial reporting during the most recent fiscal quarter[746](index=746&type=chunk) [Item 9B. Other Information](index=144&type=section&id=Item%209B.%20Other%20Information) No other information is reported in this item - No other information is reported[747](index=747&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=143&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement, including the Code of Ethics and designated audit committee financial experts - Information regarding Directors, Executive Officers, and Corporate Governance is incorporated by reference from the Company's Proxy Statement[749](index=749&type=chunk) - The Board of Directors has adopted a Code of Ethics for officers (including senior financial officers), directors, and employees, which is posted on the Company's website[752](index=752&type=chunk) - Mr. Ted A. Leech (Chairperson) and Mr. Michael J. Mansfield are designated as 'audit committee financial experts' as defined by the SEC[753](index=753&type=chunk) [Code of Ethics for Senior Financial Officers](index=145&type=section&id=Code%20of%20Ethics%20for%20Senior%20Financial%20Officers) Describes the ethical guidelines for the Company's senior financial management [Audit Committee Financial Expert](index=145&type=section&id=Audit%20Committee%20Financial%20Expert) Identifies the designated financial experts on the Company's audit committee [Item 11. Executive Compensation](index=145&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the Company's definitive Proxy Statement for the 2021 Annual Meeting of Shareholders - Information on executive compensation is incorporated by reference from the Proxy Statement[754](index=754&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=145&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership and changes in control is incorporated by reference from the Proxy Statement, with **335,877** securities outstanding from equity compensation plans at a weighted-average exercise price of **$68.49** - Information on security ownership of certain beneficial owners and management, and changes in control, is incorporated by reference from the Proxy Statement[755](index=755&type=chunk)[756](index=756&type=chunk)[757](index=757&type=chunk) Equity Compensation Plan Information (December 31, 2020) | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted-average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | :------------------------------------------------ | :------------------------------------------------- | :------------------------------ | :------------------------------------------------- | | 2013 Equity Incentive Plan | 122,937 | $16.89 | 6,013 | | 2018 Equity Incentive Plan | 212,940 | $51.60 | 366,965 | | **Total** | **335,877** | **$68.49** | **372,978** | [Security Ownership of Certain Beneficial Owners](index=145&type=section&id=Security%20Ownership%20of%20Certain%20Beneficial%20Owners) Details the ownership stakes of major shareholders [Security Ownership of Management](index=145&type=section&id=Security%20Ownership%20of%20Management) Details the ownership stakes of the Company's directors and executive officers [Changes in Control](index=145&type=section&id=Changes%20in%20Control) Discusses any arrangements that could result in a change of control of the Company [Equity Compensation Plan Information](index=146&type=section&id=Equity%20Compensation%20Plan%20Information) Provides details on the Company's equity compensation plans [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=146&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the Company's Proxy Statement - Information on certain relationships and related transactions, and director independence, is incorporated by reference from the Proxy Statement[761](index=761&type=chunk) [Item 14. Principal Accounting Fees and Services](index=146&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the Company's Proxy Statement - Information on principal accounting fees and services is incorporated by reference from the Proxy Statement[762](index=762&type=chunk) PART IV [Item 15. Exhibits and Financial Statement Schedules](index=147&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This item lists the financial statements and provides a detailed index of exhibits, including corporate documents, various agreements, the Code of Ethics, and regulatory certifications - Financial statements filed as part of this report are listed in 'Part II - Item 8. Financial Statements and Supplementary Data'[766](index=766&type=chunk) - Exhibits include Articles of Incorporation, Bylaws, Common Stock Certificate, Subordinated Note Indenture, Severance Agreement, Equity Incentive Plans, Purchase and Assumption Agreement, Subordinated Loan Agreement, Change of Control Agreements, Code of Ethics, Subsidiaries, Consent of Independent Registered Public Accounting Firm, and Certifications[766](index=766&type=chunk)[770](index=770&type=chunk) [Item 16. Form 10-K Summary](index=148&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item indicates that there is no Form 10-K Summary provided in the report - No Form 10-K Summary is provided[769](index=769&type=chunk) SIGNATURES Contains the required legal attestations for the annual report

Loan Portfolio and Provision for Losses - As of September 30, 2020, the Company had 471 Paycheck Protection Program (PPP) loans totaling $74.1 million for small- to mid-size businesses [181]. - The Company recorded a provision for loan losses of $3.1 million for the quarter ended September 30, 2020, compared to $573,000 for the same quarter in 2019, reflecting the adverse impact of the COVID-19 pandemic [182]. - The total amount of portfolio loans under payment/relief agreements as of September 30, 2020, included $23.8 million in commercial real estate loans and $7.6 million in commercial business loans [182]. - The allowance for loan and lease losses (ALLL) was $24.8 million, or 1.63% of gross loans receivable, at September 30, 2020, compared to $13.2 million, or 0.98%, at December 31, 2019 [211]. - Non-performing loans increased to $7.6 million at September 30, 2020, from $3.0 million at December 31, 2019, with a ratio of non-performing loans to total gross loans of 0.50% [213]. - Substandard loans increased to $18.5 million at September 30, 2020, compared to $6.7 million at December 31, 2019 [211]. - The provision for loan losses increased significantly to $11.4 million for the nine months ended September 30, 2020, compared to $2.2 million in the same period of 2019, reflecting credit deterioration due to the COVID-19 pandemic [243]. Loan Originations and Sales - For the nine months ended September 30, 2020, the Company originated $1.35 billion of one-to-four-family loans, with $1.12 billion sold to investors [191]. - The Company originated $1.35 billion in one-to-four-family loans during the nine months ended September 30, 2020, a 112.0% increase compared to $638.7 million for the same period in 2019 [210]. - The Company sold $1.12 billion of one-to-four-family loans during the nine months ended September 30, 2020, compared to $551.6 million for the same period one year ago [210]. Financial Performance - Net income for the three months ended September 30, 2020, was $12.7 million, a 78.87% increase from $7.1 million for the same period in 2019, primarily due to a $10.8 million increase in noninterest income [223]. - Net income for the nine months ended September 30, 2020, was $27.9 million, a 66.5% increase from $16.8 million in the same period of 2019 [236]. - Noninterest income surged by $10.8 million, or 160.2%, to $17.5 million for the three months ended September 30, 2020, driven by a $11.6 million increase in gain on sale of loans [232]. - Noninterest income rose by $23.2 million, or 133.4%, to $40.6 million for the nine months ended September 30, 2020, driven by a $24.9 million increase in gain on sale of loans [244]. Asset and Liability Management - Total assets increased by $341.6 million, or 19.9%, to $2.05 billion at September 30, 2020, compared to $1.71 billion at December 31, 2019 [207]. - Loans receivable, net increased by $155.2 million to $1.49 billion at September 30, 2020, from $1.34 billion at December 31, 2019 [208]. - Loans held for sale increased by $145.4 million, or 208.6%, to $215.1 million at September 30, 2020, from $69.7 million at December 31, 2019 [209]. - Total liabilities increased by $321.3 million to $1.83 billion at September 30, 2020, from $1.51 billion at December 31, 2019, primarily due to increases in deposits and borrowings [215]. - Total deposits rose by $220.8 million to $1.61 billion at September 30, 2020, driven by organic growth, PPP loan proceeds, and government stimulus checks [216]. Interest Income and Expense - Net interest income increased by $1.2 million to $18.9 million for the three months ended September 30, 2020, compared to $17.7 million for the same period in 2019 [225]. - Interest income decreased by $483,000 to $22.2 million for the three months ended September 30, 2020, primarily due to a 121 basis point decrease in the average yield on interest-earning assets [228]. - The net interest margin decreased by 62 basis points to 3.92% for the three months ended September 30, 2020, from 4.54% for the same period in the prior year [227]. - Interest income for the nine months ended September 30, 2020, decreased by $1.5 million to $65.9 million, primarily due to a 98 basis point decrease in the average yield on interest-earning assets [240]. - Interest expense decreased by $2.8 million to $11.6 million for the nine months ended September 30, 2020, primarily due to a $2.3 million decrease in interest expense on deposits and a $474,000 decrease on borrowings [241]. Capital and Liquidity - The Bank maintained a Tier 1 leverage-based capital ratio of 10.7% at September 30, 2020, down from 11.6% at December 31, 2019, while still exceeding the minimum capital requirements [256]. - FS Bancorp, Inc. had $12.6 million in unrestricted cash to meet liquidity needs as of September 30, 2020 [253]. - As of September 30, 2020, the Bank's total borrowing capacity with the FHLB was $573.8 million, with unused capacity of $495.5 million [249]. Operational Efficiency - The efficiency ratio improved to 47.11% for Q3 2020, compared to 60.14% for Q3 2019, indicating better cost management relative to income [234]. - The efficiency ratio improved to 50.61% for the nine months ended September 30, 2020, compared to 66.24% in the prior year, indicating better cost management relative to income [246]. - Noninterest expense rose by $2.5 million, or 16.7%, to $17.2 million for the three months ended September 30, 2020, primarily due to increased salaries and benefits [233]. - Noninterest expense increased by $1.4 million, or 3.0%, to $48.0 million for the nine months ended September 30, 2020, primarily due to a $2.4 million increase in salaries and benefits [245].

Loan Performance and Provisions - The Company recorded a provision for loan losses of $4.6 million for the quarter ended June 30, 2020, compared to $910,000 for the same quarter in 2019, reflecting the adverse impact of the COVID-19 pandemic [205]. - The allowance for loan and lease losses (ALLL) was $21.5 million, or 1.47% of gross loans receivable, at June 30, 2020, compared to $13.2 million, or 0.98%, at December 31, 2019 [243]. - Non-performing loans increased to $7.9 million at June 30, 2020, from $3.0 million at December 31, 2019, with a ratio of non-performing loans to total gross loans of 0.54% [243]. - The provision for loan losses increased significantly to $4.6 million for the three months ended June 30, 2020, from $910,000 in the same period of 2019, due to credit deterioration from the COVID-19 pandemic [267]. - For the six months ended June 30, 2020, the provision for loan losses increased to $8.3 million from $1.7 million in the same period of 2019, primarily due to credit deterioration related to the COVID-19 pandemic [282]. Loan Originations and Modifications - The Company funded 463 Paycheck Protection Program (PPP) loans totaling $75.3 million as of June 30, 2020, aimed at supporting small to midsize businesses [203]. - As of June 30, 2020, the Bank approved loan modifications for 355 individual loans with aggregate principal balances totaling $103.6 million due to COVID-19 [208]. - The Company originated $764.0 million of one-to-four-family loans during the six months ended June 30, 2020, with $639.4 million sold to investors [218]. - One-to-four-family loan originations increased by $412.3 million, or 117.2%, to $764.0 million during the six months ended June 30, 2020, compared to $351.7 million during the same period in 2019 [239]. - Commercial business loans increased by $54.0 million, primarily due to $75.3 million in PPP loans originated in the second quarter of 2020 [237]. Financial Performance - Net income for the three months ended June 30, 2020, was $10.0 million, a 122.2% increase from $4.5 million for the same period in 2019 [258]. - For the six months ended June 30, 2020, net income was $15.2 million, up from $9.7 million in the same period of 2019, influenced by a $12.4 million increase in noninterest income [273]. - Noninterest income surged by $8.0 million, or 132.3%, to $14.1 million for the three months ended June 30, 2020, driven by a $9.8 million increase in gains on loan sales [268]. - Noninterest income rose by $12.4 million, or 116.4%, to $23.0 million for the six months ended June 30, 2020, driven by a $13.3 million increase in gain on sale of loans [283]. Asset and Liability Changes - Total assets increased by $295.7 million, or 17.3%, to $2.01 billion at June 30, 2020, compared to $1.71 billion at December 31, 2019 [236]. - Loans receivable, net increased by $108.1 million to $1.44 billion at June 30, 2020, from $1.34 billion at December 31, 2019 [237]. - Total liabilities increased by $287.3 million to $1.80 billion at June 30, 2020, from $1.51 billion at December 31, 2019, primarily due to increases in deposits and borrowings [246]. - Total deposits rose by $214.5 million to $1.61 billion at June 30, 2020, driven by PPP loan proceeds and government stimulus checks [247]. Interest Income and Expenses - Net interest income increased by $326,000 to $17.9 million for the three months ended June 30, 2020, compared to $17.5 million for the same period in 2019 [261]. - Interest income decreased by $652,000 to $21.7 million for the three months ended June 30, 2020, primarily due to a 111 basis point decrease in the average yield on interest-earning assets [264]. - Net interest income for the six months ended June 30, 2020, increased slightly by $110,000 to $35.3 million, despite a decrease in interest income of $1.0 million [274]. - Interest income for the six months ended June 30, 2020, decreased by $1.0 million to $43.7 million, with an average yield on interest-earning assets dropping to 5.06% [278]. - Noninterest expense decreased by $2.4 million, or 14.3%, to $14.6 million for the three months ended June 30, 2020, primarily due to a reduction in salaries and benefits [269]. Capital and Efficiency Ratios - Total stockholders' equity increased by $8.4 million to $208.6 million at June 30, 2020, primarily due to net income and other comprehensive income [254]. - The efficiency ratio improved to 45.71% for the three months ended June 30, 2020, compared to 72.28% for the same period in 2019, reflecting increased noninterest income and decreased noninterest expenses [270]. - The efficiency ratio improved to 52.79% for the six months ended June 30, 2020, compared to 69.49% for the same period in 2019, reflecting increased noninterest income and decreased noninterest expense [285]. - The Tier 1 leverage-based capital ratio for the Bank at June 30, 2020 was 10.8%, down from 11.6% at December 31, 2019, while still exceeding the minimum capital requirements [295]. Community Engagement and Operational Adjustments - The Company has taken measures to ensure branch safety, with most employees working remotely and branches operating under specific guidelines [209]. - The Company is actively involved in community activities, strengthening relationships within its market areas [214]. - The Company has emphasized lower cost core deposits to reduce funding costs for loan growth [215]. - The Company is focused on diversifying revenues and expanding lending channels, particularly in residential mortgage and commercial construction [217].

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001‑35589 FS BANCORP, INC. (Exact name of registrant as specified in its charter) Washington 45‑4585178 (Stat ...

Lending Focus and Portfolio Composition - The Company has shifted its lending focus to include non-mortgage commercial business loans and commercial real estate, while maintaining its strength in consumer lending[33]. - As of December 31, 2019, the total loan portfolio was $1,351.9 million, with real estate loans comprising 60.95% of the portfolio[36]. - The Company’s consumer loans increased to $326.2 million, representing 24.13% of the total loan portfolio, up from 20.77% in the previous year[36]. - The Company’s commercial and industrial loans totaled $140.5 million, accounting for 10.40% of the total loan portfolio[36]. - Total real estate loans reached $169.5 million, which is 12.53% of total loans, with a notable increase in commercial real estate loans to $344.7 million, or 25.5% of the gross loan portfolio[46]. - The commercial business loan portfolio totaled $201.6 million, accounting for 14.9% of the gross loan portfolio[76]. - The Company originated $891.4 million of one-to-four-family mortgages in 2019, with $785.4 million sold to investors, including $550.1 million to government-sponsored entities[62]. - The Company’s marine loan portfolio totaled $67.2 million, representing 20.6% of total consumer loans at December 31, 2019[68]. - The Company’s indirect home improvement loans totaled $210.7 million, or 15.6% of the gross loan portfolio, as of December 31, 2019[64]. - The Company had $115.6 million, or 64.3% of the outstanding construction and development loan portfolio, comprised of speculative one-to-four-family construction loans[52]. Loan Performance and Allowance for Losses - The allowance for loan losses was $13.2 million, compared to $12.3 million in the prior year[1]. - The provision for loan losses for the year ended December 31, 2019, was $2.9 million, reflecting ongoing assessments of credit losses in the loan portfolio[107]. - The allowance for loan losses was $13.2 million, or 0.98% of gross loans receivable, compared to $12.3 million, or 0.93% in the previous year, indicating an increase in the allowance coverage ratio[107]. - Non-accruing loans totaled $3.033 million as of December 31, 2019, down from $3.894 million in 2018, showing a decline of approximately 23.1%[96]. - The total loans delinquent for 60-89 days amounted to $343 thousand, while those delinquent for 90 days or more totaled $1,502 thousand[95]. - The total amount of loans due after December 31, 2019, with predetermined interest rates is $546.5 million, while those with floating rates total $805.4 million[41]. Deposits and Funding Sources - As of December 31, 2019, the Bank had $1,392.4 million in total deposits, reflecting a net increase of $118.2 million or 9.28% compared to the previous year[129]. - The composition of total deposits included 39.6% from certificates of deposit and 10.6% from brokered deposits, amounting to $147.6 million[126]. - The Bank's total certificates of deposit amounted to $551.5 million, with 53.87% maturing at rates of 0.00 - 1.99%[135]. - The Bank's reliance on FHLB borrowings for funding was highlighted, with advances used to fund loan originations to increase net interest income[140]. - As of December 31, 2019, the Bank had outstanding advances from the FHLB of Des Moines totaling $84.9 million, with a weighted average interest rate of 2.29%[146]. - The Bank maintained a committed credit facility with the FHLB of Des Moines providing for advances up to $477.2 million[146]. Capital Ratios and Regulatory Compliance - As of December 31, 2019, 1st Security Bank of Washington's total risk-based capital ratio was 14.64%, significantly above the required 8.00%[193]. - The Tier 1 risk-based capital ratio for 1st Security Bank of Washington was 13.70% as of December 31, 2019, exceeding the minimum requirement of 6.00%[193]. - The CET1 capital ratio was 13.70% at the end of 2019, well above the required 4.50%[193]. - The bank's leverage ratio stood at 11.56% as of December 31, 2019, surpassing the minimum requirement of 4.00%[193]. - 1st Security Bank of Washington is categorized as well capitalized under FDIC regulations, meeting all capital requirements[187]. - The bank's capital conservation buffer requirement was fully phased in as of December 31, 2019, ensuring compliance with regulatory guidelines[193]. Economic and Market Conditions - The unemployment rate in King County was 2.1% at December 31, 2019, significantly lower than the state average of 4.3%[31]. - The median household income for King County was $95,000 in 2018, compared to $74,000 for the State of Washington[30]. - The Puget Sound region has a population of approximately 4.2 million, representing a significant market base for potential business[24]. - The average home value in King County was $671,000, with a statewide average increase in home values of 11.5% in Q4 2019[32]. Employee and Operational Metrics - The Company had 452 full-time equivalent employees as of December 31, 2019[152]. - The Company operates 21 full-service bank branches and seven home loan production offices in the Puget Sound region[23]. Miscellaneous - The Company issued an unsecured subordinated term note of $10.0 million due October 1, 2025, with an annual interest rate of 6.50%[143]. - The Company earned gross mortgage servicing fees of $3.5 million for the year ended December 31, 2019, servicing $1.46 billion of one-to-four-family loans[82]. - The Company processed approximately 790 loans and funded about $323.8 million under its mortgage warehouse lending program during the year ended December 31, 2019[74].

Acquisition and Growth - The Company completed the Anchor Acquisition, acquiring $361.6 million in loans and $357.9 million in deposits for a total consideration of $64.6 million[175]. - The Company funded $37.3 million in fixture secured loans during the quarter ended September 30, 2019, totaling approximately 2,000 loans[179]. - The Company originated $638.7 million of one-to-four-family loans during the nine months ended September 30, 2019, with $551.6 million sold to investors[179]. - One-to-four-family residential mortgage loans held for investment totaled $253.8 million, representing 19.1% of the total gross loan portfolio as of September 30, 2019[179]. - One-to-four-family loan originations increased by $83.4 million, or 15.0%, to $638.7 million during the nine months ended September 30, 2019[196]. Financial Performance - Net income for the three months ended September 30, 2019, increased by $3.1 million, or 76.3%, to $7.1 million, from $4.1 million for the same period in 2018[205]. - Net income for the nine months ended September 30, 2019, increased by $4.2 million, or 33.0%, to $16.8 million from $12.6 million for the same period in 2018[220]. - Net interest income increased by $4.9 million, or 37.9%, to $17.7 million for the three months ended September 30, 2019, compared to $12.9 million for the same period in 2018[209]. - Net interest income increased by $16.7 million, or 46.0%, to $53.0 million for the nine months ended September 30, 2019, compared to $36.3 million for the same period in 2018[222]. - Noninterest income increased by $1.9 million, or 40.4%, to $6.7 million for the three months ended September 30, 2019, from $4.8 million for the same period in 2018[216]. - Noninterest income increased by $1.9 million, or 12.6%, to $17.4 million for the nine months ended September 30, 2019, mainly due to higher service charges and fee income[229]. Asset and Liability Management - Total assets increased by $73.4 million, or 4.5%, to $1.69 billion at September 30, 2019, compared to $1.62 billion at December 31, 2018[192]. - Total liabilities increased by $59.1 million to $1.50 billion at September 30, 2019, from $1.44 billion at December 31, 2018[199]. - Total deposits increased to $1.39 billion at September 30, 2019, from $1.27 billion at December 31, 2018[200]. - Loans held for sale increased by $29.4 million, or 57.5%, to $80.6 million at September 30, 2019, from $51.2 million at December 31, 2018[195]. Capital and Liquidity - 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 11.6%, 13.6%, 14.5%, and 13.6%, respectively, as of September 30, 2019[241]. - FS Bancorp, Inc. regulatory capital ratios at September 30, 2019 were 11.3% for Tier 1 leverage-based capital, 13.3% for Tier 1 risk-based capital, 14.2% for total risk-based capital, and 13.3% for CET 1 capital ratio[242]. - The Bank is considered to be well capitalized based on its capital levels at September 30, 2019[241]. - FS Bancorp, Inc. had $3.5 million in unrestricted cash to meet liquidity needs as of September 30, 2019[239]. - At September 30, 2019, the Bank's total borrowing capacity was $451.5 million with unused borrowing capacity of $368.8 million[234]. Expense and Efficiency - Noninterest expense increased by $2.9 million, or 24.4%, to $14.7 million for the three months ended September 30, 2019, from $11.8 million for the same period in 2018[217]. - Noninterest expense rose by $11.6 million, or 33.0%, to $46.6 million for the nine months ended September 30, 2019, largely due to the Anchor Acquisition[230]. - The efficiency ratio improved to 60.1% for the three months ended September 30, 2019, compared to 67.0% for the same period in 2018[218]. - The efficiency ratio improved to 66.2% for the nine months ended September 30, 2019, compared to 67.7% for the same period in 2018[231]. Interest and Taxation - Interest income rose by $7.1 million, or 45.7%, to $22.7 million for the three months ended September 30, 2019, compared to $15.6 million for the same period in 2018[212]. - Interest income rose by $24.8 million, or 58.2%, to $67.4 million for the nine months ended September 30, 2019, driven by a $23.7 million increase in loans receivable interest income[225]. - Interest expense increased by $8.1 million, or 128.6%, to $14.4 million for the nine months ended September 30, 2019, primarily due to higher deposit costs[226]. - The effective corporate income tax rate decreased to 22.2% for the three months ended September 30, 2019, from 24.6% for the same period in 2018[219]. - The effective tax rate increased to 21.9% for the nine months ended September 30, 2019, from 18.3% for the same period in 2018[232]. Risk Management - The Company reviews its allowance for loan and lease losses quarterly, adjusting based on economic conditions and portfolio evaluations[186]. - The allowance for loan and lease losses (ALLL) was $12.8 million, or 0.96% of gross loans receivable, at September 30, 2019, compared to $12.3 million, or 0.93%, at December 31, 2018[197]. - Provision for loan losses was $573,000 for the three months ended September 30, 2019, compared to $450,000 for the same period in 2018[215]. - The provision for loan losses was $2.2 million for the nine months ended September 30, 2019, compared to $1.3 million for the same period in 2018[228]. - There have been no material changes in the market risk disclosures since the Annual Report on Form 10-K for the fiscal year ended December 31, 2018[243].

[PART I FINANCIAL INFORMATION](index=5&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) [Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for FS Bancorp, Inc. as of June 30, 2019, and for the three and six-month periods then ended, including Balance Sheets, Statements of Income, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows, along with detailed notes [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) As of June 30, 2019, total assets were $1.64 billion, a slight increase from $1.62 billion at December 31, 2018, driven by increases in cash and cash equivalents and loans held for sale, partially offset by a decrease in net loans receivable, while total liabilities rose to $1.45 billion, primarily due to a $60.0 million increase in deposits, and stockholders' equity increased to $189.4 million from $180.0 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | **Total Assets** | **$1,641,065** | **$1,621,644** | | Total cash and cash equivalents | $59,594 | $32,779 | | Loans receivable, net | $1,282,119 | $1,312,519 | | Loans held for sale, at fair value | $66,508 | $51,195 | | **Total Liabilities** | **$1,451,639** | **$1,441,606** | | Total deposits | $1,334,217 | $1,274,219 | | Borrowings | $83,211 | $137,149 | | **Total Stockholders' Equity** | **$189,426** | **$180,038** | [Consolidated Statements of Income](index=6&type=section&id=Consolidated%20Statements%20of%20Income) For the six months ended June 30, 2019, net income was $9.7 million, an increase from $8.6 million in the same period of 2018, driven by a significant rise in net interest income to $35.2 million from $23.4 million, primarily due to the Anchor acquisition, partially offset by a higher provision for loan losses and increased noninterest expenses, including acquisition-related costs Income Statement Summary (in thousands) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $17,534 | $11,925 | $35,223 | $23,422 | | Provision for Loan Losses | $910 | $450 | $1,660 | $800 | | Noninterest Income | $6,083 | $5,614 | $10,638 | $10,638 | | Noninterest Expense | $17,071 | $12,144 | $31,868 | $23,179 | | **Net Income** | **$4,463** | **$4,257** | **$9,655** | **$8,579** | | **Diluted EPS** | **$0.98** | **$1.13** | **$2.12** | **$2.28** | [Consolidated Statements of Comprehensive Income](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Comprehensive income for the six months ended June 30, 2019, was $11.6 million, significantly higher than the $6.9 million reported for the same period in 2018, driven by both higher net income and a positive change in other comprehensive income, which saw a $2.0 million gain from unrealized holding gains on securities, compared to a $1.7 million loss in the prior year Comprehensive Income (in thousands) | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net Income | $9,655 | $8,579 | | Other comprehensive income (loss), net of tax | $1,975 | $(1,652) | | **Comprehensive Income** | **$11,630** | **$6,927** | [Consolidated Statements of Changes in Stockholders' Equity](index=8&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Stockholders' equity increased from $180.0 million at the start of 2019 to $189.4 million at June 30, 2019, primarily due to $9.7 million in net income and a $2.0 million positive change in accumulated other comprehensive income, partially offset by $1.3 million in dividends paid and $2.7 million in common stock repurchases - Key drivers for the change in stockholders' equity for the six months ended June 30, 2019 include: - Net income: **+$9.7 million** - Dividends paid: **-$1.3 million** - Common stock repurchased: **-$2.7 million** - Other comprehensive income, net of tax: **+$2.0 million**[14](index=14&type=chunk) [Consolidated Statements of Cash Flows](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2019, net cash from operating activities was a use of $5.0 million, while investing activities provided $29.2 million, primarily from net loan collections, and financing activities provided $2.5 million, driven by a net increase in deposits that offset repayments of borrowings, resulting in an overall increase of $26.8 million in cash and cash equivalents Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash (used) from operating activities | $(4,952) | $12,375 | | Net cash from (used) by investing activities | $29,236 | $(147,986) | | Net cash from financing activities | $2,531 | $138,673 | | **Net Increase in Cash and Cash Equivalents** | **$26,815** | **$3,062** | [Notes to Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations of the accounting policies and financial data presented in the statements, covering topics such as the basis of presentation, the significant impact of the Anchor Bancorp acquisition, composition of securities and loan portfolios, servicing rights, derivatives, leases, regulatory capital, and business segment performance [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=66&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition and results of operations, highlighting the impact of the Anchor Bancorp acquisition completed in November 2018, covering changes in the balance sheet, a detailed breakdown of net interest income and margin, noninterest income and expenses, and asset quality, while also reviewing the company's liquidity position and capital resources, confirming a 'well capitalized' status, and emphasizing its strategy of diversifying revenues and expanding lending channels - The acquisition of Anchor Bancorp in November 2018 significantly impacted financial results, contributing to increased net interest income, higher operating expenses, and expanded market presence[174](index=174&type=chunk) - The company's business plan focuses on growing and diversifying the loan portfolio, maintaining strong asset quality, emphasizing lower-cost core deposits, and expanding its markets[176](index=176&type=chunk) Key Performance Metrics Comparison | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income (in thousands) | $4,463 | $4,257 | $9,655 | $8,579 | | Net Interest Margin (NIM) | 4.60% | 4.58% | 4.65% | 4.66% | | Efficiency Ratio | 72.3% | 69.2% | 69.5% | 68.1% | | Non-performing loans to gross loans | 0.1% | N/A | 0.1% | N/A | [Comparison of Financial Condition](index=74&type=section&id=Comparison%20of%20Financial%20Condition) Total assets grew by $19.4 million to $1.64 billion at June 30, 2019, from year-end 2018, funded by deposit growth, while net loans receivable decreased by $30.4 million, mainly in construction and commercial business loans, offset by a $28.3 million increase in consumer loans, and total deposits increased by $60.0 million, with strong growth in relationship-based checking accounts, leading to stockholders' equity rising by $9.4 million, driven by net income, despite $2.5 million in stock repurchases - Total assets increased by **1.2%** to **$1.64 billion** at June 30, 2019, compared to **$1.62 billion** at December 31, 2018[191](index=191&type=chunk) - Net loans receivable decreased by **$30.4 million**, primarily due to declines in construction & development (**-$33.2M**) and commercial business loans (**-$22.1M**), offset by a **$28.3M** increase in consumer loans[193](index=193&type=chunk) - Total deposits increased by **$60.0 million** to **$1.33 billion**, with relationship-based transactional accounts growing by **$74.1 million**[198](index=198&type=chunk) [Comparison of Results of Operations](index=78&type=section&id=Comparison%20of%20Results%20of%20Operations) For the six months ended June 30, 2019, net income rose 12.5% to $9.7 million year-over-year, driven by a 50.4% increase in net interest income to $35.2 million, largely from the Anchor acquisition, with the Net Interest Margin (NIM) remaining stable at 4.65%, while noninterest income was flat at $10.6 million as higher service fees were offset by lower gains on loan sales, and noninterest expense increased 37.5% to $31.9 million, reflecting acquisition costs and operational growth Results of Operations for the Six Months Ended June 30 | Metric (in thousands) | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $35,223 | $23,422 | +50.4% | | Provision for Loan Losses | $1,660 | $800 | +107.5% | | Noninterest Income | $10,638 | $10,638 | 0.0% | | Noninterest Expense | $31,868 | $23,179 | +37.5% | | **Net Income** | **$9,655** | **$8,579** | **+12.5%** | - The Net Interest Margin (NIM) for the six months ended June 30, 2019 was **4.65%**, a slight decrease of one basis point from **4.66%** in the prior year period, with the impact of higher-cost deposits nearly offset by a positive **18 basis point** impact from interest accretion on acquired loans[222](index=222&type=chunk)[223](index=223&type=chunk) - Acquisition costs related to the Anchor integration totaled **$1.6 million** for the first six months of 2019, contributing significantly to the rise in noninterest expense[229](index=229&type=chunk) [Liquidity and Capital Resources](index=85&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains a strong liquidity position with primary sources including deposit growth, FHLB advances, and cash flows from loans, with the Bank having $390.3 million in unused borrowing capacity with the FHLB at June 30, 2019, and remaining 'well capitalized' under all regulatory measures, with a Tier 1 leverage ratio of 11.4% and a total risk-based capital ratio of 14.7%, well above the required minimums - At June 30, 2019, the Bank had total borrowing capacity of **$484.2 million** with the FHLB of Des Moines, with **$390.3 million** unused[233](index=233&type=chunk) - The Bank also maintained a **$144.8 million** borrowing line with the Federal Reserve Bank and **$51.0 million** in federal funds lines with correspondent banks[234](index=234&type=chunk) Bank Capital Ratios at June 30, 2019 | Ratio | Actual | Well Capitalized Minimum | | :--- | :--- | :--- | | Tier 1 Leverage Capital | 11.4% | 5.00% | | Common Equity Tier 1 (CET 1) Capital | 13.8% | 6.50% | | Tier 1 Risk-Based Capital | 13.8% | 8.00% | | Total Risk-Based Capital | 14.7% | 10.00% | [Quantitative and Qualitative Disclosures About Market Risk](index=87&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company states that there have been no material changes in the market risk disclosures from those presented in its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 - No material changes in market risk disclosures were reported for the period[242](index=242&type=chunk) [Controls and Procedures](index=87&type=section&id=Item%204.%20Controls%20and%20Procedures) Based on an evaluation as of June 30, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective, and they also reported no significant changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[245](index=245&type=chunk) - No significant changes to internal controls over financial reporting were identified during the second quarter of 2019[246](index=246&type=chunk) [PART II OTHER INFORMATION](index=89&type=section&id=PART%20II%20OTHER%20INFORMATION) [Legal Proceedings](index=89&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings in the normal course of business, and management believes that any potential liability from these proceedings will not have a material adverse effect on the company's financial condition - In management's opinion, any liability from pending legal proceedings would not have a material adverse effect on the company's business or financial condition[248](index=248&type=chunk) [Risk Factors](index=89&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes to risk factors were reported from the company's 2018 Annual Report on Form 10-K[249](index=249&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=89&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the second quarter of 2019, the company repurchased 49,978 shares of its common stock at an average price of $48.27 per share as part of a publicly announced plan authorized in January 2019, with 172,378 shares remaining available for repurchase under the plan as of June 30, 2019 Common Stock Repurchases (Q2 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2019 | — | $— | | May 2019 | 38,241 | $48.42 | | June 2019 | 11,737 | $47.78 | | **Total for Quarter** | **49,978** | **$48.27** | - On January 28, 2019, the Board authorized the repurchase of up to **225,000 shares**, and as of the end of Q2 2019, **172,378 shares** were still available for repurchase under this plan[253](index=253&type=chunk) [Exhibits](index=91&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including the CEO and CFO certifications required under the Sarbanes-Oxley Act (Sections 302 and 906) and the XBRL interactive data files - Key exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906[259](index=259&type=chunk)[261](index=261&type=chunk) - The report includes financial statements and notes formatted in Extensible Business Reporting Language (XBRL)[259](index=259&type=chunk)[261](index=261&type=chunk)