FS Bancorp, Inc.

FS BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Nature of Operations – FS Bancorp, Inc. (the “Company”) was incorporated in* September**2011* as the holding company for1st Security Bank of Washington (the “Bank” or*“1st* Security Bank”) in connection with the Bank’s conversion from the mutual to stock form of ownership which was completed on* July 9, 2012.*The Bank is a community-based savings bank with 27 full-service bank branches, a headquarters that also originates loans and accepts deposits, and loan production offices in suburban communities in the greater Puget Sound area, the Kennewick-Pasco-Richland metropolitan area of Washington, also known as the Tri-Cities, Goldendale, Vancouver, and White Salmon, Washington and Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon. The Bank provides loan and deposit services to customers who are predominantly small- and middle-market businesses and individuals. The Company and its subsidiary are subject to regulation by certain federal and state agencies and undergo periodic examination by these regulatory agencies.

Financial Statement Presentation – The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form10‑Q and Article10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form10‑K which includes all the audited financial statements and footnotes required by U.S. GAAP for complete financial statements for the year ended* December 31, 2024*, as filed with the SEC on* March**17,* 2025. In the opinion of management, all normal adjustments and recurring accruals considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.

The results for thethree months ended* March 31, 2025*, arenot necessarily indicative of the results that* maybe expected for the year ending December 31,*2025, or any other future period. The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses (“ACL”), fair value adjustments from assets and liabilities acquired in a business combination, fair value of financial instruments, the valuation of MSRs, deferred income taxes, and if needed, a deferred tax asset valuation allowance.

Amounts presented in the consolidated financial statements and footnote tables are rounded and presented to the nearest thousands of dollars except per share amounts. If the amounts are above*$1.0* million, they are roundedone decimal point, and if they are above*$1.0* billion, they are roundedtwo decimal points.

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

Segment Reporting –*** The Company operates intwo business segments through the Bank: commercial and consumer banking and home lending. The Company’s business segments are determined based on the products and services provided, as well as the nature of the related business activities, and they reflect the way financial information is regularly reviewed for the purpose of allocating resources and evaluating performance of the Company’s businesses. The results for these business segments are based on management’s accounting process, which assigns income statement items and assets to each responsible operating segment. This process is dynamic and is based on management’s view of the Company’s operations. See “Note13* – Business Segments.”

Subsequent Events– The Company has evaluated events and transactions after* March 31, 2025*, for potential recognition or disclosure.

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RECENT ACCOUNTING PRONOUNCEMENTS

In* December 2023,the Financial Accounting Standards Board (“FASB”) issued guidance within Accounting Standards Update (“ASU”)2023-09, Income Taxes (Topic740): Improvements to Income Tax Disclosures.* The amendments in the ASU are intended to enhance transparency regarding income tax information by improving income tax disclosures, particularly related to the rate reconciliation and income taxes paid. The ASU requires entities to disclose specified categories within the rate reconciliation and to provide additional information for reconciling items that meet a defined quantitative threshold.

Those amendments require disclosure of the following information about income taxes paid on an annual basis:

The ASU is effective for annual periods beginning after* December 15, 2024.Early adoption is permitted for annual financial statements that havenot* yet been issued or made available for issuance. The amendments should be applied on a prospective basis. The Company is evaluating the effect that ASU2023-09 will have on its consolidated financial statements and related disclosures.

In* November 2024,the FASB issued guidance within ASU2024*-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic220*-40): Disaggregation of Income Statement Expenses.*The amendments in the ASU require public companies to disclose, in the notes to financial statements, specified information about certain costs and expenses at each interim and annual reporting period. Specifically, public companies will be required to:

This ASU is effective for annual reporting periods beginning after* December 15, 2026,and interim reporting periods beginning after December 15, 2027.Early adoption is permitted. The amendments should be applied prospectively. The Company is currently evaluating the impact of this ASU but doesnot* expect it to have a material effect on its consolidated financial statements.

In* January 2025,the FASB issued guidance within ASU2025*-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic220*-40): Disaggregation of Income Statement Expenses.The amendment in this ASU amends the effective date of ASU204*-03 to clarify that all public business entities are required to adopt the guidance in annual reporting periods beginning after* December 15, 2026,and interim periods within annual reporting periods beginning after December 15, 2027.Early adoption of ASU2024*-03 is permitted. The Company is currently evaluating the impact of this ASU but doesnot expect it to have a material effect on its consolidated financial statements.

Application of New Accounting Guidance Adopted in2025**

None.

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NOTE 2 –** INVESTMENTS**

The following tables present the amortized costs, unrealized gains, unrealized losses, estimated fair values of securities available-for-sale and held-to-maturity, and the ACL on securities available-for-sale and held-to-maturity at* March 31, 2025* and* December 31, 2024*:

The following table presents the activity in the ACL on securities held-to-maturity by major security type for thethree months ended* March 31, 2025and2024*:

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Management measures expected credit losses on held-to-maturity debt securities on an individual basis. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Accrued interest receivable totaled $120,000 and $116,000 on held-to-maturity debt securities and $1.6 million and $1.2 million on available-for-sale debt securities as of* March 31, 2025* and* December 31, 2024*, respectively. Accrued interest receivable on securities is reported in “Accrued interest receivable” on the Consolidated Balance Sheets and is excluded from the calculation of the ACL.

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

At* March 31, 2025* and* December 31, 2024*, there wereno debt securities held-to-maturity that were classified as either nonaccrual or90 days or more past due and still accruing interest.

The following table presents, as of* March 31, 2025*, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law:

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

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There weretwo held-to-maturity debt securities in an unrealized loss position of less thanone year andfour held-to-maturity debt securities in an unrealized loss position of more thanone year at* March 31, 2025*, compared tono held-to-maturity debt securities in an unrealized loss position of less thanone year andseven held-to-maturity debt securities in an unrealized loss position of more thanone year at* December 31, 2024*.

There were 17 available-for-sale securities in an unrealized loss position of less thanone year, and 125 available-for-sale securities in an unrealized loss position of more thanone year at* March 31, 2025*, compared to 22 available-for-sale securities in an unrealized loss position of less thanone year and 121 available-for-sale securities in an unrealized loss position of more thanone year at* December 31, 2024*. The unrealized losses associated with these securities are believed to be caused by changing market conditions and considered to be temporary, and the Company doesnot intend and isnot likely to be required to sell these securities prior to maturity. Management monitors the published credit ratings of the issuers of the debt securities for material ratings or outlook changes. Substantially all the Company’s municipal bond portfolio is comprised of obligations of states and political subdivisions located within the Company’s geographic footprint that are monitored through quarterly or annual financial review utilizing published credit ratings. All the municipal bond securities are investment grade.

All of the available-for-sale mortgage-backed securities and asset-backed securities in an unrealized loss position are issued or guaranteed by government-sponsored enterprises, and the available-for-sale corporate securities are all investment grade and monitored for rating or outlook changes. Based on the Company’s evaluation of these securities, no credit impairment was recorded for thethree months ended* March 31, 2025*, or for the year ended* December 31, 2024*.

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The contractual maturities of securities available-for-sale and held-to-maturity at the dates indicated are listed below. Expected maturities of mortgage-backed securities* maydiffer from contractual maturities because borrowers mayhave the right to call or prepay the obligations; therefore, these securities are classified separately withno* specific maturity date.

The proceeds and resulting gains and losses from sales of securities available-for-sale for thethree months ended* March 31, 2025and2024*:

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

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

Loan amounts are net of unearned loan fees in excess of unamortized costs and premiums of $5.8 million as of* March 31, 2025* and $6.0 million as of* December 31, 2024*. Net loans include unamortized net discounts on acquired loans of $1.9 million and $2.0 million as of* March 31, 2025* and* December 31, 2024*, respectively. Net loans doesnot include accrued interest receivable.

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

At* March 31, 2025*, the Company held approximately $1.08 billion in loans that are pledged as collateral for FHLB borrowings, compared to approximately $1.11 billion at* December 31, 2024*. The Company held approximately $597.4 million in loans that are pledged as collateral for the Federal Reserve Bank of San Francisco (the “FRB”) line of credit at* March 31, 2025*, compared to approximately $606.5 million at* December 31, 2024*.

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

CRE Loans

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

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

Commercial and Speculative Construction and Development Lending. Loans originated by the Company for the construction of, and secured by, commercial real estate,one-to-four-family, and multi-family residences and tracts of land for development that arenot pre-sold. Customone-to-four-family construction loans to the intended occupant of the residence are included under residential custom construction lending below.

Residential Real Estate Loans

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

Home Equity Lending. Loans originated by the Company secured bysecond mortgages onone-to-four-family residences, including home equity lines of credit in our market areas.

Residential Custom Construction Lending. One-to-four-family custom construction loans to the intended occupant of the residence.

Consumer Loans

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

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

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

Commercial Business Loans

C&I* Lending.C&I loans originated by the Company to local small- and mid-sized businesses in our market area are secured primarily by accounts receivable, inventory, or personal property, plant and equipment. Some C&I loans purchased by the Company are outside of our market area. C&I loans are made based on the borrower’s ability to make repayment from the cash flow of the borrower’s business. At March 31, 2025* and* December 31, 2024*, C&I loans included Small Business Administration and United States Department of Agriculture guaranteed certificates of $51.6 million and $52.6 million, respectively.

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

Allowance for Credit Losses

The following tables detail activity in the ACL on loans by loan categories at or for thethree months ended* March 31, 2025and2024*:

The main reason for the provision for credit losses on loans for thethree months ended* March 31, 2025*, was elevated net charge-offs. Additionally, the increase in the ACL on loans reflected 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 and nonperforming loans, as well as higher net charge-offs on consumer loans relative to prior periods.

Nonaccrual and Past Due Loans. Loans are considered past due if the required principal and interest payments havenot been received as of the date such payments were due. Loans are automatically placed on nonaccrual once the loan is90 days past due or sooner if, in management’s opinion, the borrower* may*be unable to meet payment obligations as they become due, or as required by regulatory authorities.

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Loan Modifications to Borrowers Experiencing Financial Difficulty

The Company* maymodify the contractual terms of a loan to a borrower experiencing financial difficulty as a part of ongoing loss mitigation strategies. These modifications mayresult in an interest rate reduction, term extension, an other-than-insignificant payment delay, or a combination thereof. The Company typically doesnot* offer principal forgiveness. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the ACL on loans because of the measurement methodologies used to estimate the allowance.

The following tables present the amortized cost basis of loans at* March 31, 2025and2024*, that were both experiencing financial difficulty and modified during thethree months ended* March 31, 2025and2024*, by class and by type of modification. The tables also present the percentage of the amortized cost basis of loans modified for borrowers experiencing financial difficulty relative to the total amortized cost basis of each class of financing receivable.

As of* March 31, 2025*, the Company had committed to lend additional amounts totaling $3.8 million to borrowers experiencing financial difficulty whose loans were modified within the previous12 months.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified in the last12 months as of* March 31, 2025*:

There wereno loans to borrowers experiencing financial difficulty that had a payment default during thethree months ended* March 31, 2024* and were modified in thetwelve months prior to that default.

The following tables present the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for thethree months ended* March 31, 2025* and for the year ended* March 31, 2024*:

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Nonaccrual and Past Due Loans

The following tables provide information pertaining to the aging analysis of contractually past due loans and nonaccrual loans at* March 31, 2025* and* December 31, 2024*:

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There wereno loans90 days or more past due and still accruing interest at both* March 31, 2025* and* December 31, 2024*.

There were $977,000 and $84,000 in residential real estate loans in the process of foreclosure at* March 31, 2025* and* December 31, 2024*, respectively.

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Credit Quality Indicators

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

The Company utilizes a risk grading matrix to assign a risk grade to its real estate and commercial business loans. Loans are graded on a scale of1 to10, with loans in risk grades1 to6 reported as “Pass” and loans in risk grades7 to10 reported as classified loans in the Company’s ACL analysis.

A description of the10 risk grades is as follows:

Homogeneous loans are risk rated based upon the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy. Loans classified under this policy at the Company are consumer loans which include indirect home improvement, solar, marine, other consumer, andone-to-four-familyfirst andsecond liens. Under the Uniform Retail Credit Classification and Account Management Policy, loans that are current or less than90 days past due are graded “Pass” and risk rated*“4”* or*“5”* internally. Loans that are past due more than90 days are classified “Substandard” and risk graded*“8”* internally until the loan has demonstrated consistent performance, typicallysix months of contractual payments. Closed-end loans that are120 days past due and open-end loans that are180 days past due are charged off based on the value of the collateral less cost to sell. Management* may*choose to conservatively risk rate credits even if paying in accordance with the loan’s repayment terms.

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

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The following tables summarize risk rated loan balances and total current period gross charge-offs by category, as of the dates indicated. Term loans that were renewed or extended for periods longer than90 days are presented as new originations in the year of the most recent renewal or extension.

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

The Company recognized interest income on a cash basis for nonaccrual loans of $105,000 and $111,000 during thethree months ended* March 31, 2025and2024*, respectively.

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

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NOTE 4 –** MORTGAGE SERVICING RIGHTS**

Loans serviced for others arenot included on the Consolidated Balance Sheets. The unpaid principal balance of residential mortgage loans serviced for others was $1.63 billion at both* March 31, 2025* and* December 31, 2024*.

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

The fair value of the MSRs’ assets was $20.7 million and $21.0 million at* March 31, 2025* and* December 31, 2024*, respectively. Fair value adjustments to MSRs are mainly due to market-based assumptions associated with discounted cash flows, loan prepayment speeds, and changes in interest rates. A significant change in prepayments of the loans in the MSRs portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of MSRs.

The following provides valuation assumptions used in determining the fair value of MSRs at the dates indicated:

Key economic assumptions of the current fair value for single family MSRs are presented in the table below. Also presented is the sensitivity to market rate changes for the par rate coupon for a conventionalone-to-four-family FNMA, FHLMC, GNMA, or FHLB serviced home loan. The table below references a 50 basis point and 100 basis point adverse rate change and the impact on prepayment speeds and discount rates at the dates indicated:

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These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSRs which is extremely sensitive to changes in key assumptions. For example, actual prepayment experience* maydiffer and any difference mayhave a material effect on the fair value of MSRs. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value maynot* be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of MSRs is calculated without changing any other assumption; in reality, changes inone factor* maybe associated with changes in another (for example, decreases in market interest rates mayprovide an incentive to refinance, however, this mayalso indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which maymagnify or counteract the sensitivities. Thus, any measurement of the fair value of MSRs is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions maynot* be appropriate if they are applied to a different time.

The Company recorded $1.1 million and $1.4 million of gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of loans for thethree months ended* March 31, 2025and2024*, respectively. The income, net of amortization of MSRs, is reported in “Service charges and fee income” on the Consolidated Statements of Income.

NOTE 5 –** DERIVATIVES**

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

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

Mortgage Banking DerivativesNot Designated as Hedges**

The Company regularly enters into commitments to originate and sell loans held for sale. The Company has exposure to movements in interest rates associated with written interest rate lock commitments with potential borrowers to originateone-tofour-family loans that are intended to be sold and for closedone-to-four-family mortgage loans held for sale for which fair value accounting has been elected, that are awaiting sale and delivery into the secondary market. The Company economically hedges the risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sellone-to-four-family mortgage loans or into contracts to sell forward To-Be-Announced (“TBA”) mortgage-backed securities. These commitments and contracts are considered derivatives but havenot been designated as hedging instruments for reporting purposes under U.S. GAAP. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in noninterest income or noninterest expense. The Bank recognizes all derivative instruments as either “Other assets” or “Other liabilities” on the Consolidated Balance Sheets and measures those instruments at fair value.

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Customer SwapsNot Designated as Hedges**

The Company also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of clients desiring to manage interest rate risk. These swaps arenot designated as accounting hedges under ASC815, Derivatives and Hedging. To economically hedge the interest rate risk associated with offering this product, the Company simultaneously enters into derivative contracts withthird parties to offset the customer contracts such that the Company minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts reduce over time to generally match the expected amortization of the underlying loans. These derivatives arenot speculative and arise from a service provided to clients.

Cash Flow Hedges

The Company has entered into interest rate swaps to reduce the exposure to variability in interest-related cash outflows attributable to changes in forecasted Secured Overnight Financing Rate (“SOFR”) based brokered deposits. These derivative instruments are designated as cash flow hedges. The hedged item is the SOFR portion of the series of future adjustable-rate borrowings and deposits over the term of the interest rate swap. Accordingly, changes to the amount of interest payment cash flows for the hedged transactions attributable to a change in credit risk are excluded from management’s assessment of hedge effectiveness. The Company tests for hedging effectiveness on a quarterly basis. The accumulated other comprehensive income is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company hasnot recorded any hedge ineffectiveness since inception.

The Company expects that approximately $922,000 will be reclassified from accumulated other comprehensive loss as a decrease to interest expense over the next12 months related to these cash flow hedges.

Fair Value Hedges

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

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

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

The following table summarizes the effect of fair value and cash flow hedge accounting on the Consolidated Statements of Income for thethree months ended* March 31, 2025and2024*:

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Changes in the fair value of the non-hedging derivatives recognized in “Noninterest income” on the Consolidated Statements of Income and included in gain on sale of loans resulted in net gains of $72,000 and $201,000 for thethree months ended* March 31, 2025and2024*, respectively.

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

Credit Risk–Related Contingent Features

The Company has derivative contracts with its derivative counterparties that contain a provision to post collateral to the counterparties when these contracts are in a net liability position. At* March 31, 2025*, the Company hadno collateral posted due to this provision. Receivables related to cash collateral that has been paid to counterparties is included in “Cash and cash equivalents” on the Consolidated Balance Sheets. In certain cases, the Company will have posted excess collateral, compared to total exposure due to initial margin requirements or day-to-day rate volatility.

NOTE6 – LEASES

The Company has operating leases for retail bank and home lending branches, loan production offices, and certain equipment. At* March 31, 2025*, these leases have remaining terms ranging fromone month tofive years andthree months, with some including options to extend for up tofive years.

The components of lease cost (included in occupancy expense on the Consolidated Statements of Income) for thethree months ended* March 31, 2025and2024* are as follows:

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The following table provides supplemental information related to operating leases at or for thethree months ended* March 31, 2025and2024*:

The Company’s leases typically donot contain a discount rate implicit in the lease contract. As an alternative, the discount rate used in determining the lease liability for each individual lease was the FHLB of Des Moines’ fixed advance rate.

Maturities of operating lease liabilities at* March 31, 2025* for future periods are as follows:

NOTE 7 –** DEPOSITS**

Deposits are summarized as follows at the dates indicated:

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Scheduled maturities of time deposits at* March 31, 2025* for future periods ending are as follows:

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

NOTE 8 –** COMMITMENTS AND CONTINGENCIES**

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

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

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

Commitments to extend credit are agreements to lend to a customer provided there isno violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the amount of the total commitments doesnot necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon an extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but* may*include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

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Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually donot contain a specified maturity date and ultimately* may**not* be drawn upon to the total extent to which the Company is committed. The Company’s ACL – unfunded loan commitments at* March 31, 2025* and* December 31, 2024* was $1.5 million and $1.4 million, respectively. The Company recorded a provision for credit losses – unfunded loan commitments of $66,000 for thethree months ended* March 31, 2025*, as compared to a recovery from the ACL of $22,000 for thethree months ended* March 31, 2024*.

A portion of theone-to-four-family commitments included in the table above are accounted for as fair value derivatives and donot carry an associated reserve. The Company's derivative positions are presented with the discussion in “Note5 – Derivatives.”

The Company also sellsone-to-four-family loans to the FHLB of Des Moines that require a limited level of recourse if the loans default and exceed a certain loss exposure. Specific to that recourse, the FHLB of Des Moines established afirst loss account (“FLA”) related to the loans and required a credit enhancement (“CE”) obligation by the Bank to be utilized after the FLA is used. Based on loans sold through* March 31, 2025*, total loans serviced on behalf of the FHLB of Des Moines were $8.6 million with the FLA totaling $581,000 and the CE obligation at $389,000 or 4.5% of the loans outstanding. Management has established a holdback of 10% of the outstanding CE, or $39,000, which is a part of the off-balance sheet holdback for loans sold. At both* March 31, 2025* and* December 31, 2024*, there wereno loans sold and serviced on behalf of the FHLB of Des Moines that were greater than90 days past their contractual payment due date.

Contingent liabilities for loans held for sale – In the ordinary course of business, loans are sold with limited recourse against the Company and* mayhave to subsequently be repurchased due to defects that occurred during the origination of the loan. The defects are categorized as documentation errors, underwriting errors, early payoff, early payment defaults, breach of representation or warranty, servicing errors, and/or fraud. When a loan sold to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred. If a defect is identified, the Company maybe required to either repurchase the loan or indemnify the investor for losses sustained. If there areno* such defects, the Company hasno commitment to repurchase the loan. The Company has recorded a holdback reserve of $1.7 million and $2.0 million to cover loss exposure related to these guarantees forone-to-four-family loans sold into the secondary market at* March 31, 2025* and* December 31, 2024*, respectively, which is included in “Other liabilities” on the Consolidated Balance Sheets.

The Company has entered into a severance agreement with its Chief Executive Officer (“CEO”). The severance agreement, subject to certain requirements, generally includes a lump sum payment to the CEO equal to24 months of base compensation in the event his employment is involuntarily terminated, other than for cause or the executive terminates his employment with good reason, as defined in the severance agreement.

The Company has entered into change of control agreements with its executives and select key personnel. The change of control agreements, subject to certain requirements, generally remain in effect until canceled by either party upon at least24 months prior written notice. Under the change of control agreements, the executive generally will be entitled to a change of control payment from the Company if the executive is involuntarily terminated withinsix months preceding or12 months after a change in control (as defined in the change of control agreements). In such an event, the executives would each be entitled to receive a cash payment in an amount equal to12 months of their then current salary, subject to certain requirements in the change of control agreements.

As a result of the nature of our activities, the Company is subject to various pending and threatened legal actions, which arise in the ordinary course of business. From time to time, subordination liens* maycreate litigation which requires us to defend our lien rights. In the opinion of management, liabilities arising from these claims, if any, willnot* have a material effect on our financial position. The Company hadno material pending legal actions at* March 31, 2025*.

NOTE 9 –** FAIR VALUE MEASUREMENTS**

The Company determines fair value based on the requirements established in Accounting Standards Codification (“ASC”)Topic820**,Fair Value Measurements, which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASCTopic820** defines fair value as the exit price, or the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.

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

Level1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

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Level2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

Securities–** **The fair value of securities available-for-sale are recorded on a recurring basis. The fair value of investments and mortgage-backed securities are provided by athird-party pricing service. These valuations are based on market data using pricing models that vary by asset class and incorporate available current trade, bid, and other market information, and for structured securities, cash flow, and loan performance data. The pricing processes utilize benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. Option adjusted spread models are also used to assess the impact of changes in interest rates and to develop prepayment scenarios (Level2). Transfers between the fair value hierarchy are determined through thethird-party service provider which, from time to time will transfer between levels based on market conditions per the related security. All models and processes used consider market convention.

Mortgage Loans Held for Sale –*** *The fair value of loans held for sale reflects the value of commitments with investors and/or the relative price as delivered into a TBA mortgage-backed security (Level2).

Loans Receivable* – Certain residential mortgage loans were initially originated for sale with the fair value option elected; after origination, these loans were transferred to loans held for investment. As of March 31, 2025* and* December 31, 2024*, there were $14.5 million and $12.7 million, respectively, in residential mortgage loans recorded at fair value as they were previously transferred from held for sale, at fair value to loans held for investment. The aggregate unpaid principal balance of these loans was $15.4 million and $13.8 million as of* March 31, 2025* and* December 31, 2024*, respectively. Gains and losses from changes in fair value for these loans are reported in earnings as a component of “Other noninterest income” on the Consolidated Statements of Income. For thethree months ended* March 31, 2025and2024*, the Company recorded a net increase in fair value of $263,000 and $2,000, respectively. For loans originated as held for sale and transferred into loans held for investment, the fair value is determined based on quoted secondary market prices for similar loans (Level2).

Derivative Instruments – Fair values for derivative assets and liabilities are measured on a recurring basis. The primary use of derivative instruments is related to the mortgage banking activities of the Company. The fair value of the interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-though rate assumptions based on historical information, where appropriate. TBA mortgage-backed securities are fair valued on similar contracts in active markets (Level2), while locks and forwards with customers and investors are fair valued using similar contracts in the market and changes in the market interest rates (Level2 and3). Derivative instrumentsnot related to mortgage banking activities include interest rate swap agreements. The fair values of interest rate swap agreements are based on valuation models using observable market data as of the measurement date (Level2). The Company’s derivatives are traded in an over-the-counter market where quoted market prices arenot always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including market transactions andthird-party pricing services. The fair values of all interest rate swaps are determined fromthird-party pricing services without adjustment.

Collateral-Dependent Loans–*** *** Expected credit losses on collateral dependent loans are measured based on the fair value of collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable) at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis is limited to the amount previously charged off. Subsequent changes in expected credit losses on collateral-dependent loans are included within the provision for credit losses, either as an additional provision or as a reduction of the provision that would otherwise be reported (Level3).

Mortgage Servicing Rights –* The fair value of MSRs is estimated using net present value of expected cash flows using athird*-party model that incorporates assumptions used in the industry to value such rights, adjusted for factors such as weighted average prepayments speeds based on historical information where appropriate (Level3).

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

The following tables present financial assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy at* March 31, 2025* and* December 31, 2024*. Level3 assets recorded at fair value on a nonrecurring basis included loans for which a partial charge-off was recorded based on the fair value of collateral.

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Quantitative Information about Level3 Fair Value Measurements** – Shown in the table below is the fair value of financial instruments measured under a Level3 unobservable input on a recurring and nonrecurring basis at the dates indicated:

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

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level3) on a recurring basis during the dates indicated:

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

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

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

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The following table provides estimated fair values of the Company’s financial instruments at the dates indicated, whether recognized at fair value ornot on the Consolidated Balance Sheets:

NOTE 10 –** EARNINGS PER SHARE**

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

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

NOTE 11 –** STOCK-BASED COMPENSATION**

Stock Options and Restricted Stock

On* May 17, 2018,the shareholders of FS Bancorp approved the2018* Equity Incentive Plan (the*“2018* Plan”) that authorized 1.3 million shares of the Company’s common stock to be awarded. The2018 Plan provides for the grant of incentive stock options, nonqualified stock options, and up to 326,000 shares as restricted stock awards (“RSAs”) to directors, emeritus directors, officers, employees or advisory directors of the Company. At* March 31, 2025*, there were 190,432 stock option awards and 38,372 RSAs available for future grants under the2018 Plan.

Total share-based compensation expense was $512,000 and $395,000 for thethree months ended* March 31, 2025and2024*, respectively.

Stock Options

The2018 Plan consists of stock option awards that* may*be granted as incentive stock options or nonqualified stock options. Stock option awards generally vest over aone ortwo-year period for non-employee directors, and over afive-year period for employees and officers with 20% vesting on the anniversary date of each grant date as long as the award recipient remains in service to the Company. The options are exercisable after vesting for up to the remaining term of the original grant. The maximum term of the options granted is 10 years. Any unexercised stock options will expire 10 years after the grant date or sooner in the event of the award recipient’s termination of service with the Company or the Bank. The fair value of each stock option award is estimated on the grant date using a Black-Scholes Option pricing model that uses the following assumptions.

The dividend yield is based on the current quarterly dividend in effect at the time of the grant. The historical volatility of the Company's stock price over a specified period of time is used for the expected volatility. The Company bases the risk-free interest rate on the comparable U.S. Treasury rate for the discount rate associated with the stock in effect on the date of the grant. The Company elected to use Staff Accounting Bulletin107, simplified expected term calculation for the “Share-Based Payments” method permitted by the SEC to calculate the expected term. This method uses the vesting term of an option along with the contractual term, setting the expected life at 5.5 years forone-year vesting,5.75 years fortwo-year vesting, and 6.5 years forfive-year vesting.

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

At* March 31, 2025*, there was $1.7 million of total unrecognized compensation cost related to nonvested stock options granted under the2018 Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 1.6 years.

Restricted Stock Awards

The RSAs’ fair value is equal to the value of the market price of FS Bancorp’s common stock on the grant date and compensation expense is recognized over the vesting period of the awards based on the fair value of the restricted stock. Shares granted under the2018 Plan generally vest over aone ortwo-year period for non-employee directors and afive-year period for employees and officers beginning on the grant date. Any nonvested RSAs will be forfeited in the event of the award recipient’s termination of service with the Company or the Bank.

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

At* March 31, 2025*, there was $2.8 million of total unrecognized compensation cost related to nonvested shares granted under the2018 Plan as RSAs. The cost is expected to be recognized over the remaining weighted-average vesting period of 1.7 years.

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NOTE 12 –** REGULATORY CAPITAL**

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

Under capital adequacy guidelines of the regulatory framework for prompt corrective action,, quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier1 total capital (as defined) and common equity Tier1 (“CET1”) capital to risk-weighted assets (as defined).

The Bank must maintain minimum total risk-based, Tier1 risk-based, Tier1 leverage, and CET1 capital ratios as set forth in the table below to be categorized as “well capitalized”. At* March 31, 2025*, the Bank was categorized as “well capitalized” under applicable regulatory requirements. There areno conditions or events since that notification that management believes have changed the Bank’s category. Management believes, at* March 31, 2025*, that the Bank met all capital adequacy requirements.

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

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In addition to the minimum CET1, Tier1, total capital and leverage ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum capital levels. Failure to maintain the required buffer could result in limitations on the Bank's ability to pay dividends, repurchase shares, and pay discretionary bonuses, based on specified percentages of eligible retained income. At* March 31, 2025*, the Bank’s capital exceeded the conservation buffer.

As a bank holding company registered with the Federal Reserve, the Company is subject to the capital adequacy requirements of the Federal Reserve. Bank holding companies with*$3.0* billion or more in assets or more are subject to compliance with the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to the Bank. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to the holding company’s subsidiary bank and the Federal Reserve expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations. FS Bancorp is subject to regulatory capital guidelines for bank holding companies with*$3.0* billion or more in assets at* March 31, 2025*, and has exceeded all regulatory capital requirements.

The following table presents the Company's regulatory capital ratios at the dates indicated:

NOTE 13 –** BUSINESS SEGMENTS**

The Company’s reportable segments are determined by the Chief Financial Officer (“CFO”), who is the designated chief operating decision maker, or CODM, based upon information provided about the Company's products and services offered, primarily distinguished between commercial and consumer banking and home lending. They are also distinguished by the level of information provided to the CFO, who uses such information to review performance of various components of business for each branch and home lending office, which are aggregated if operating performance, products/services, and customers are similar. The CFO evaluates the financial performance of the Company's business components such as by evaluating revenue streams, significant expenses, and budget to actual results in assessing the performance of the Company's segments and in the determination of allocating resources. The CFO uses revenue streams to evaluate product pricing and significant expenses to assess performance of each segment to evaluate compensation of certain employees. Segment pretax profit or loss is used to assess the performance of the banking segment by monitoring the margin between interest revenue and interest expense. Segment pretax profit or loss is used to assess the performance of the home lending segment by monitoring the premium received on loans sales. Loans, investments, and deposits provide the revenues in the commercial and consumer banking operations, and servicing fees and loan sales provide the revenues in home lending. Interest expense, provisions for credit losses, and payroll provide the significant expenses in commercial and consumer banking, and cost of loan sales and payroll provide the significant expenses in home lending. All operations are domestic and the Company hasno major customers providing greater than10% of total segment revenue. The Company doesnot have any material intra-entity sales or transfers, aside from certain allocations of interest expense and loan servicing cost from the commercial and consumer banking segment to the home lending segment.

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

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

Commercial and Consumer Banking Segment

The commercial and consumer banking segment provides diversified financial products and services to our commercial and consumer customers through Bank branches, online banking platforms, mobile banking apps, and telephone banking. These products and services include deposit products; residential, consumer, business and commercial real estate lending portfolios and cash management services. The Company originates consumer loans, commercial and multi-family real estate loans, construction loans for residential and multi-family construction, and commercial business loans. At* March 31, 2025*, the Company’s retail deposit branch network consisted of 27 branches in the Pacific Northwest. This segment is also responsible for the management of the investment portfolio and other assets of the Bank.

Home Lending Segment

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

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Segment Financial Results

Accounting policies for segments are consistent with those described in “Note1 – Basis of Presentation and Summary of Significant Accounting Policies.” Segment performance is evaluated using net income. Indirect expenses are allocated based on segment assets and full-time equivalent employees (“FTEs”). Transactions among segments are made at fair value. Information reported internally for performance assessment by the CFO follows, inclusive of reconciliations of significant segment totals to the financial statements at or for thethree months ended* March 31, 2025and2024*:

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NOTE 14 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and certain other intangibles generally arise from business combinations accounted for under the acquisition method of accounting. Goodwill totaled $3.6 million at both* March 31, 2025*, and* December 31, 2024*, and represents the excess of the total acquisition price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in the branch purchase on* February 24, 2023 (“Branch Acquisition”), and the purchase offour retail bank branches from Bank of America on January 22, 2016.Goodwill isnot* amortized but is evaluated for impairment on an annual basis at* December 31of each year or whenever events or changes in circumstances indicate the carrying value may**not* be recoverable. The Company performed an impairment analysis at* December 31, 2024*, and determined thatno impairment of goodwill existed.

Core deposit intangible (“CDI”) is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount* may**not* be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life. As of* March 31, 2025*, management believes that there have beenno events or changes in the circumstances that would indicate a potential impairment of CDI.

The following table summarizes the changes in the Company’s other intangible assets comprised solely of CDI for the year ended* December 31, 2024*, and thethree months ended* March 31, 2025*.

The CDI represents the fair value of the intangible core deposit base acquired in business combinations. The CDI will be amortized on an accelerated basis over 10 years for the CDI related to the Branch Acquisition, on a straight-line basis over 10 years for the CDI related to the Anchor Bank acquisition in* November 2018and on an accelerated basis over approximately nine years for the CDI related to the purchase offour retail bank branches from Bank of America on January 22, 2016.Total amortization expense was $831,000 and $941,000 for thethree* months ended* March 31, 2025and2024*, respectively.

Amortization expense for CDI is expected to be as follows at* March 31, 2025*:

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