Item 1A. Risk Factors
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all the other information included in this report and our other documents filed with and furnished to the SEC. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, capital levels, cash flows, liquidity, results of operations, and prospects. The market price of our common stock could decline significantly due to any of these identified or other risks, and you could lose some or all your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. This report is qualified in its entirety by these risk factors.
Risks Related to Macroeconomic Conditions
Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.
Our primary market areas are in the Puget Sound region of Washington and Kitsap, Clallam, Jefferson, Grays Harbor, Thurston, and Benton counties. Following the acquisition of seven banking branches in 2023, our footprint expanded to include Klickitat County in Washington, and Lincoln, Malheur and Tillamook counties in Oregon. Adverse economic conditions in our market areas, including declining employment, reduced consumer spending, or business failures, could adversely affect our growth, customers’ ability to repay loans, and consequently, our business, financial condition, and results of operations.
Broader macroeconomic factors may also adversely affect our performance. Although inflation has moderated, higher input costs and persistent wage pressures continue to affect many borrowers, while the Federal Reserve's interest rate reductions in late 2025 have resulted in increased margin compression and reduced yields on adjustable- and variable-rate loans. Additionally, slowing economic activity, shifting consumer sentiment, and higher levels of household debt may negatively affect credit performance in our consumer and commercial portfolios. Trade disputes, tariffs, U.S. - China tensions, and shifting global supply chain patterns may continue to influence operating costs for our commercial borrowers, particularly those dependent on construction materials, manufacturing inputs, or exports.
A downturn in economic conditions, whether due to recessionary conditions, inflation or deflation, interest rate volatility, geopolitical conflicts, market instability, adverse weather events, or other factors, could have a material adverse effect on the business, financial condition, and results of operations. Any of these conditions could lead to:
● Elevated loan delinquencies, nonperforming assets, and foreclosures.
● An increase in our ACL on loans.
A substantial portion of our loan portfolio consists of loans secured by real estate or fixtures affixed to real property. Any decline in real estate market values could materially affect borrowers' ability to repay loans and reduce the value of collateral. Real estate values are affected by various factors, including economic trends, government regulations, zoning and tax policies, interest rates, natural disasters (including earthquakes and floods), and disruptions in construction or materials supply. Forced liquidation of collateral during periods of declining real estate values could materially impair our financial condition and results of operations.
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Monetary policy, interest rate volatility, inflation, deflation, and other external economic factors could adversely impact our financial performance and operations.
Our financial condition and results of operations are influenced by monetary, fiscal, and trade policies, including those of the Federal Reserve, the U.S. Treasury, and other governmental authorities. Actions by these authorities may lead to inflation, deflation, changes in interest rates, or other economic conditions that could materially adversely affect our results of operations. Tariffs, supply-chain disruptions, or rising costs could reduce the ability of our clients, particularly small- and medium-sized businesses, to repay loans, negatively affecting credit quality and financial performance. Prolonged inflation may increase operational costs, including wages and benefits, while fluctuations in interest rates and the yield curve can significantly impact our net interest income. Interest rates may not move in alignment with inflation or deflation, adding uncertainty to the economic environment.
Risks Related to our Lending Activities
Our loan portfolio possesses increased risk due to a large percentage of consumer loans.
Our consumer loans accounted for $597.0 million, or 22.5% of our total gross loan portfolio as of December 31, 2025, of which $525.8 million (88.1% of total consumer loans) consisted of indirect home improvement loans (some of which were not secured by a lien on the real property), $68.1 million (2.6% of total consumer loans) consisted of marine loans secured by boats, and $3.0 million (0.1% of total consumer loans) consisted of other consumer loans, which includes personal lines of credit, credit cards, automobiles, direct home improvement, loans on deposit, and recreational loans. Generally, we consider these types of loans to involve a higher degree of risk compared to first mortgage loans on owner-occupied, one-to-four-family residential properties. As a result of our large portfolio of consumer loans, it may become necessary to increase the level of provision for credit losses on loans, which would reduce profits. Consumer loans generally entail greater risk than one-to-four-family residential mortgage loans, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles and boats. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance.
Most of our consumer loans are originated indirectly through third-party dealers, which presents greater risk than our direct lending products because we do not have direct contact with the borrower. Unlike direct loans where the borrower applies with us directly, in indirect originations the dealer, who has a financial interest in completing the sale, assists the borrower in preparing the loan application. Although we disburse the loan proceeds directly to the dealer upon receipt of a “completion certificate” signed by the borrower, the absence of direct interaction with the borrower increases the risk of material misstatements in the loan application or misuse of loan proceeds by either the borrower or the dealer. In addition, if the work is not properly performed, the borrower may cease payment on the loan until the problem is rectified.
Although we file a UCC-2 financing statement to perfect the security interest in the personal property collateral for most fixture loans, there are no guarantees on our ability to collect on that security interest or that the repossessed collateral for a defaulted fixture loan will provide an adequate source of repayment for the outstanding loan given the limited stand-alone value of the collateral. See “Item 1. Business – Lending Activities – Consumer Lending” and “– Asset Quality.”
Our business could suffer if we are unsuccessful in making, continuing, and growing relationships with home improvement contractors and dealers.
Our indirect home improvement lending, the largest component of our consumer loan portfolio, is reliant on our relationships with home improvement contractors and dealers. Specifically, our indirect home improvement loan operations rely on our ability to establish and maintain relationships with reputable contractors and dealers who originate loans at the point of sale. As of December 31, 2025, our indirect home improvement contractor/dealer network included 33active contractors and dealers located across Washington, Oregon, California, Idaho, Colorado, Arizona, Minnesota, Nevada, Texas, Utah, Massachusetts, Montana, and New Hampshire. Indirect home improvement loans totaled $525.8 million, or 19.8% of our total gross loan portfolio, at December 31, 2025, reflecting approximately 29,000 loans with an average balance of approximately $18,000.
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Although we have established relationships with home improvement contractors and dealers, these partnerships are generally not exclusive, some are newly formed, and they may be terminated at any time. An economic downturn or recession, coupled with tighter credit availability for contractors, dealers, and their customers, could lead to increased business closures, reduced sales, and lower loan volume within our contractor/dealer network. This could adversely affect our business, results of operations, and financial condition. Additionally, competition poses a significant risk. If competitors offer superior service or more attractive loan products, our contractor/dealer partners may terminate their relationships with us or refer customers to our competitors. Our reliance on a concentrated group of contractors and dealers further heightens this risk, as five dealers accounted for 74.5% of our 2025 annual loan volume. The loss of any one of these key dealers could materially reduce our loan origination volume. Failure to grow existing relationships or develop new ones could have a significant adverse impact on our results of operations and financial condition.
A significant portion of our business involves commercial real estate lending, which is subject to various risks that could adversely impact our results of operations and financial condition.
At December 31, 2025, our loan portfolio included $969.5 million of commercial real estate loans, or 36.5% of our total gross loan portfolio, including $177.1 million secured by non-owner occupied commercial real estate properties, and $262.2 million of multi-family real estate loans. The credit risk associated with these types of loans is generally higher than that of one-to-four-family residential loans. Repayment typically depends on the successful operation and income stream of the property securing the loan, as well as the value of the real estate collateral, both of which can be significantly affected by economic conditions.
Our focus on commercial and multi-family real estate loans increases our risk profile compared to traditional one-to-four-family lending. While these loans are intended to enhance the average yield of our earning assets, they involve different and possibly higher risks of delinquency or collection. This is due to several factors: (i) larger loan balances to a single borrower or groups of related borrowers increase exposure to credit risk; (ii) errors in assessing the collectability of these loans could require significant increases in our provision for credit losses as any charge‐offs would be larger on a per-loan basis, which could materially and adversely affect our future earnings; and (iii) collateral evaluation for these types of loans requires more detailed and ongoing analysis during underwriting and throughout the loan term.
In addition, many of our commercial and multi-family loans are not fully amortizing and include balloon payments upon maturity. Balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, increasing the risk of default or non-payment. In cases of foreclosure on commercial or multi-family real estate loans, the holding period for collateral is typically longer than for one-to-four-family residences because of the lack of liquidity in the secondary market for most types of commercial and multi-family real estate, limiting our ability to mitigate credit risk through asset sales. See “Item 1. Business – Lending Activities – Commercial Real Estate Lending” of this Form 10–K.
Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.
At December 31, 2025, our commercial business loan portfolio included commercial and industrial loans of $301.1 million, or 11.3%, and warehouse lending of $28.2 million, or 1.1%, of our total gross loan portfolio. Commercial business lending involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral-based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. Our commercial and industrial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers’ cash flow may be unpredictable and collateral securing these loans may fluctuate in value. This collateral may consist of equipment, inventory, accounts receivable, or other business assets. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing these loans may depreciate over time, may be difficult to appraise, may be illiquid, and may fluctuate in value based on the specific type of business and equipment. As a result, the availability of funds for the repayment of commercial and industrial business loans may be substantially dependent on the success of the business itself, which in turn, is often dependent in part upon general economic conditions and secondarily on the underlying collateral provided by the borrower. For additional information see, “Our residential mortgage warehouse lending program is subject to various risks that could adversely impact our results of operations and financial condition.”
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Our residential construction lending is subject to various risks that could adversely impact our results of operations and financial condition.
Our lending activities include extending real estate construction loans to individuals and builders, primarily for residential property development. As of December 31, 2025, our construction and development loan portfolio totaled $396.5 million, constituting 14.9% of our total gross loan portfolio, excluding $235.4 million in unfunded construction loan commitments. Of this portfolio, $266.2 million was allocated to speculative residential real estate projects, and $42.3 million was allocated to non-speculative residential custom construction. Additionally, we hadtwo commercial note-secured lines of credit totaling $55.0 million in commitments, directed towards residential construction re-lenders with an outstanding balance of $29.2 million at December 31, 2025. The risks associated with the collateral underlying our commercial construction warehouse lines are similar to those associated with our residential construction and development loans.
Construction financing involves a higher degree of credit risk compared to longer-term financing for improved, owner-occupied real estate. These risks include: (i) advanced disbursement of funds based on estimated project costs to achieve future value at completion, making repayment dependent on successful completion; (ii) uncertainty in estimating construction costs and the market value of completed projects; (iii) governmental regulations and changes in housing demand, which can significantly impact project valuations; and (iv) builder concentration as loans are often concentrated among a small group of builders, increasing exposure to individual credit risks. Market downturns in housing or real estate could result in increased delinquencies, defaults, and foreclosures, significantly impairing the value of collateral and limiting recovery through foreclosure sales. Further, many of our construction loans include interest reserves, allowing borrowers to defer payments by capitalizing interest into the loan principal during the construction phase. As a result, repayment often depends on the project's success, such as the borrower's ability to sell or lease the property or secure permanent financing. If the appraised value of a completed project is overstated, we may have inadequate collateral to cover the loan, resulting in potential losses. In addition, monitoring construction loans requires extensive oversight, including cost comparisons and on-site inspections, making these loans more difficult and costly to monitor.
Increases in market rates of interest can substantially increase borrowing costs for end-purchasers, potentially reducing the ability of homeowners to finance completed homes or overall demand for projects. Properties under construction are often difficult to sell before completion, which complicates the process to resolve problem construction loans. In some cases, we may need to advance additional funds or hire another builder to complete the project, exposing us to market risks and potential financial losses if sale proceeds fail to cover outstanding loan amounts and associated costs.
Furthermore, as of December 31, 2025, our outstanding construction and development loans included $134.4 million in speculative one-to-four-family construction loans and $4.5 million in land acquisition and development loans. Speculative construction loans involve financing projects without a committed buyer, with repayment relying heavily on market demand upon project completion. Fluctuating market conditions can significantly impact the salability of such properties and, by extension, loan repayment. The absence of a confirmed buyer during the construction phase increases uncertainty and risk. Land acquisition loans are often associated with properties lacking income-generating capabilities, with repayment depending on the successful development, sale, or lease of the property. Unlike developed properties, undeveloped land tends to be illiquid and may not readily convert to cash. The lack of income and potential challenges in liquidating the collateral increases the risk of these loans, especially in the event of default. Given these inherent uncertainties, rigorous monitoring, continuous market evaluations, and proactive management of speculative construction and land acquisition loans are essential to mitigate risks and minimize potential adverse impacts on our loan portfolio and financial performance.
At December 31, 2025, $9.2 million inreal estate construction and development loans were nonperforming. A substantial increase in nonperforming loans in this segment could significantly affect our financial condition and results of operations.
Our residential mortgage warehouse lending program is subject to various risks that could adversely impact our results of operations and financial condition.
At December 31, 2025, we had approved residential warehouse lending lines to three companies in varying amounts from $3.0 million to $9.0 million, for an aggregate amount of $15.5 million. At December 31, 2025, there was $2.5 million outstanding under these residential warehouse lines, compared to $2.2 million outstanding at December 31, 2024.
This program provides short-term funding to these companies to facilitate the origination of residential mortgage loans for sale in the secondary market. Our warehouse lending lines are secured by the underlying notes associated with mortgage loans originated by the mortgage banking companies. In addition, we generally require guarantees from the principal shareholder(s) of each mortgage banking company. These loans are repaid when the mortgage notes are sold into the secondary market, with the sales proceeds used to pay down the outstanding balance before being disbursed to the mortgage banking company.
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There are numerous risks associated with residential mortgage warehouse lending, including, but not limited to: (i) potential default by the mortgage bankers who borrow from us; (ii) intentional misrepresentation or fraud by the mortgage banking companies; (iii) changes in the market value of mortgage loans during the warehouse-period, primarily due to interest rate fluctuations, which may affect salability; (iv) unsalable or impaired mortgage loans could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker, and (v) the volatility of mortgage loan originations.
The underlying collateral risks associated with our residential mortgage warehouse lines are similar to the risks related to our one-to-four-family residential mortgage loans. See also, “Revenue from mortgage banking operations is sensitive to changes in economic conditions, decreased economic activity, a slowdown in the housing market, higher interest rates or new legislation and may adversely impact our financial condition and results of operations.”
If our ACL on loans is not sufficient to cover actual loan losses, our earnings could be reduced.
Our business depends on the creditworthiness of our customers. As with most financial institutions, we maintain an ACL on loans to reserve for estimated potential losses on loans from defaults and represents management's best estimate of expected credit losses inherent in the loan portfolio. Determining the appropriate level of the ACL on loans involves estimating future losses at the time a loan is originated or acquired, incorporating a broader range of information and future economic scenarios.
The determination of the appropriate level of the ACL on loans inherently involves a high degree of subjectivity and requires various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for loan repayment. In determining the amount of the ACL on loans, we review loans, analyze our historical loss and delinquency experience, and evaluate economic conditions. Management also recognizes that significant new growth in loan portfolios, new loan products, and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform as historical or projected trends suggest, increasing the risk that our ACL may be insufficient to absorb credit losses without significant additional provisions. If our assumptions are incorrect, our ACL on loans may not be sufficient to cover actual losses, resulting in additional provisions for credit losses on loans to replenish the ACL.
Deterioration in economic conditions, new information regarding existing loans, identification of additional problem loans or relationships, and other factors, both within and outside of our control, may increase our loan charge-offs and/or otherwise require an increase in our provision for credit losses on loans. In addition, bank regulatory agencies periodically review our ACL on loans. Based on their assessment, they may require additional provisions for credit losses or loan charge-offs. Any increase in the provision for credit losses on loans affects net income and could materially impact our financial condition, results of operations, and capital.
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2025, $628.8 million, excluding loans held for sale of $43.7 million, or 23.7% of our total loan portfolio was secured by first liens on one-to-four-family residential loans. Additionally, home equity lines of credit and second lien mortgages totaled $88.3 million, or 3.3% of our total loan portfolio at that date. These loans are sensitive to regional and local economic fluctuations, which can significantly impact borrowers’ ability to meet payment obligations, making loss levels difficult to predict. A downturn in housing markets, particularly in Washington (and to a lesser extent in Oregon), where a concentration of our loans exists could reduce the value of the collateral securing these loans and increase our risk of loss upon a default by the borrower. Economic decline or reduced real estate sales volumes and prices, coupled with higher unemployment rates, may increase loan delinquencies and asset quality concerns, which could also negatively impact demand for our products and services.
Residential loans with higher combined loan-to-value ratios are more vulnerable to property value fluctuations, potentially leading to increased default rates and higher losses, compared to loans with lower loan-to-value ratios. Further, the majority of our home equity lines of credit are second mortgage loans. In the event of defaults on these second mortgage-secured lines of credit, recovering loan proceeds can be challenging unless we cover the first mortgage loan repayment. This repayment, along with foreclosure costs, must be justified by the property's value.
These factors may result in elevated rates of delinquencies, defaults, and related losses, which would adversely affect our net income.
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Severe flooding in Western Washington and Oregon in November 2025, as well as the increasing frequency and severity of flood and wildfire events, could materially and adversely affect the credit quality of our loan portfolio and the adequacy of our allowance for credit losses.
The catastrophic flooding that occurred in November 2025 in Western Washington and Oregon has heightened the risks associated with our loan portfolio, particularly in flood-prone areas where we have significant credit exposure. Borrowers affected by the flooding may experience financial hardship, impairing their ability to meet their loan obligations and increasing the likelihood of delinquencies, nonperforming loans, and charge-offs. Damage to, or destruction of properties securing our loans may also reduce collateral values, which could increase potential losses.
Our ability to recover losses may be further limited if borrowers lack adequate insurance coverage or if insurance claims are delayed or denied. In addition, the flooding caused economic disruption in the impacted communities, including business closures and job losses, which continue to reduce borrowers' repayment capacity and require adjustments to our credit loss assumptions.
Moreover, climate-related events, including both flooding and wildfires, are occurring with greater frequency and severity. These trends may increase the long-term risks to our loan portfolio and may necessitate increases to our allowance for credit losses. While we regularly evaluate the adequacy of our allowance based on current conditions and reasonable and supportable forecasts, there can be no assurance that our allowance will be sufficient to cover actual losses, particularly if sever weather-related events persist or worsen.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition and could result in losses in the future.
At December 31, 2025, our nonperforming assets (which consisted of nonaccrual loans) were $18.7 million or 0.59% of total assets. Nonperforming assets adversely affect our earnings in various ways. We do not record interest income on nonaccrual loans or foreclosed assets, thereby adversely affecting our income and increasing our loan administration costs. Upon foreclosure or similar proceedings, we record the repossessed asset at the estimated fair value, less costs to sell, which may result in a write down or loss. If we experience increases in nonperforming loans and nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations, as our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity. A significant increase in the level of nonperforming assets from current levels would also increase our risk profile and may impact the capital levels our regulators believe are appropriate in light of the increased risk profile.
While we reduce problem assets through collection efforts, asset sales, workouts and restructurings, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations, and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities.
Risk Related to Changes in Market Interest Rates
Changes in interest rates may reduce our net interest income and may result in higher defaults in a rising rate environment.
Our earnings and cash flows are largely dependent upon our net interest income, which is significantly affected by interest rates. Interest rates are highly sensitive to factors beyond our control, including general economic conditions, market expectations, and policies set by governmental and regulatory bodies, particularly the Federal Reserve. Increases in interest rates could reduce our net interest income, weaken the housing market by further curbing refinancing activity and home purchases, and negatively affect the broader U.S. economy, potentially leading to slower economic growth or recessionary conditions. Interest rates may have remained elevated in 2025, with volatility continuing in short- and long-term yields, which may affect net interest income and credit quality.
We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. If we are unable to manage this risk effectively, our business, financial condition, and results of operations could be materially affected.
Our net interest margin, the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities, can be adversely affected by interest rate changes. While yields on assets and costs of liabilities tend to move in the same direction, they may do so at different speeds, causing the margin to expand or contract. As our interest-bearing liabilities often have shorter durations than our interest-earning assets, a rise in the interest rates may lead to funding costs increasing faster than asset yields, compressing our net interest margin. Additionally, changes in the slope of the yield curve, such as flattening or inversion, can further pressure our margins as funding costs rise relative to asset yields. Conversely, falling rates could increase loan prepayments, leading to reinvestment in lower-yielding assets, and reducing income.
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In a heightened rate environment, retaining deposits can become more costly. At December 31, 2025, we held $1.06 billion in certificates of deposit maturing within one year and $1.53 billion in noninterest-bearing and NOW checking accounts, and savings and money market accounts. If deposit and borrowing rates rise faster than loan and investment yields, our net interest income and overall earnings could decline. Additionally, adjustable-rate residential mortgage loans and home equity lines of credit may face increased default risks in a rising rate environment.
Changes in interest rates also affect the fair value of our MSRs. At December 31, 2025, we serviced $1.67 billion in loans, with associated MSRs recorded at an amortized cost of $8.6 million and an estimated fair value of $21.8 million. Rising rates generally increase MSR value by extending the life of underlying loans, while falling rates typically reduce MSR value through faster loan prepayments. Declines in MSR fair value could reduce our earnings. For additional information, see "Note 1 – Basis of Presentation and Summary of Significant Account Policies –Subsequent Events", “Note 4 – Mortgage Servicing Rights” and “Note 14 – Fair Value Measurements” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.
Interest rate fluctuations also influence the fixed-rate investment securities, which inversely correlate with rate changes. At December 31, 2025, the fair value of our securities available-for-sale was $288.7 million, with unrealized net losses of $16.8 million, net of tax, reflected in stockholders' equity. These unrealized losses on securities have been partially offset by unrealized gains on cash flow and fair value hedges with net unrealized gains of $992,000, net of tax, at December 31, 2025. Further declines in fair value from sustained or additional rate increases could have an adverse effect on stockholders’ equity.
While we employ asset and liability management strategies to mitigate interest rate risk, unexpected, substantial, or prolonged rate changes could materially affect our financial condition and results of operations. Additionally, our interest rate risk models and assumptions may not fully capture the impact of actual rate changes on our balance sheet or projected operating results. For further details, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management and Market Risk” of this Form 10–K.
Revenue from mortgage banking operations is sensitive to changes in economic conditions, decreased economic activity, a slowdown in the housing market, higher interest rates or new legislation and may adversely impact our financial condition and results of operations.
Our mortgage banking operations contribute significantly to our noninterest income, primarily through gains on the sale of one-to-four-family mortgage loans. These loans are sold pursuant to programs offered by FNMA, FHLMC, GNMA, FHA, VA, USDA Rural Housing, the FHLB, and non-Government Sponsored Enterprise (“GSE”) investors, which collectively account for a substantial portion of the secondary market for such loans. Changes to these programs, our eligibility to participate, the criteria for loan acceptance, or related laws could materially and adversely affect our results of operations.
Mortgage banking is generally considered a volatile source of income because it depends largely on loan volume which is influenced by prevailing market interest rates. In a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in mortgage banking revenues and a corresponding decrease in noninterest income.
Our results of operations are also affected by noninterest expenses associated with mortgage banking activities, including salaries and employee benefits, occupancy, equipment, data processing, and other operating costs. During periods of reduced loan demand, we may face challenges in reducing these expenses proportionately, which could adversely impact our results of operations.
Although we sell loans into the secondary market without recourse, we provide customary representations and warranties to buyers. If these representations and warranties are breached, we may be required to repurchase the loans, potentially incurring a loss. As of December 31, 2025, we recorded a holdback reserve of $1.8 million to cover potential losses related to these guarantees for one-to-four-family loans sold into the secondary market.
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Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. These fluctuations may result from changes in market interest rates, rating agency actions, issuer defaults, issues with underlying securities, lower market prices, or limited investor demand. Our available-for-sale debt securities in an unrealized loss position are evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. If a credit loss is identified, an allowance for credit losses is recorded, resulting in a charge against earnings. Because available-for-sale securities are reported at estimated fair value, changes in interest rates can adversely affect our financial condition. The fair value of fixed-rate securities generally moves inversely with interest rate changes. Unrealized gains and losses on these securities are reported as a separate component of AOCI, net of tax.
Decreases in the fair value of securities available-for-sale resulting from increases in interest rates could have an adverse effect on shareholders’ equity. Additionally, there is no assurance that the decline in market value will not result in credit losses, which would lead to additional provisions for credit losses that could materially affect our net income and capital levels.
If our hedging against interest rate exposure is ineffective, it could result in volatility in our operating results, including potential losses, which could have a material adverse effect on our results of operations and cash flows.
We employ hedging techniques to mitigate the adverse impacts of rising interest rates on our loans held for sale and interest rate locks provided to customers. Our hedging strategies adapt to varying interest rate levels and market dynamics, utilizing tools such as forward contracts, put and call options on securities, and other mortgage-backed derivatives. However, hedging strategies are not perfect and may not fully shield us from potential losses. The effectiveness of interest rate hedging could be compromised due to several factors, including but not limited to the following:
● Mark-to-market losses could reduce our stockholders’ equity.
We may enter into derivative financial instruments such as interest rate swaps in order to mitigate our interest rate risks. These instruments expose us to several risks:
● Risks related to the counterparty’s inability to fulfill obligations.
Losses on interest rate hedging derivatives could adversely affect our business, financial condition and prospects, leading to decreased net income.
We designate interest rate swaps as effective cash flow hedges under Accounting Standards Codification ("ASC") 815, “Derivatives and Hedging.” Regular evaluations measure hedge effectiveness, and any ineffectiveness may result from factors such as debt early retirement or counterparty creditworthiness. Ineffective hedges could materially impact our operations and cash flows, causing volatility in our financial results. Additionally, changes in accounting standards related to these derivatives, particularly ASC 815, could significantly increase earnings volatility.
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Risks Related to Accounting Matters
We may experience future goodwill impairment, which could reduce our earnings.
In accordance with GAAP, we record assets acquired and liabilities assumed in a business combination at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. As a result, acquisitions typically result in recording goodwill. We perform a goodwill evaluation at least annually to test for goodwill impairment. Our test of goodwill for potential impairment is based on a qualitative assessment by management that takes into consideration macroeconomic conditions, industry and market conditions, cost or margin factors, financial performance and share price. Our evaluation of the fair value of goodwill involves a substantial amount of judgment. If our judgment was incorrect, or if events or circumstances change, and an impairment of goodwill was deemed to exist, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such charge could have a material adverse effect on our results of operations; however, it would have no impact on our liquidity, operations or regulatory capital.
Long-lived assets, such as purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by an asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. We had $3.6 million of goodwill at December 31, 2025.
Our reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates, which, if incorrect, could cause unexpected losses in the future.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and methods, so they comply with generally accepted accounting principles and reflect management’s judgment regarding the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances, yet might result in the Company reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include, but are not limited to, the ACL on loans, MSRs, derivative and hedging activity, fair value, income taxes, securities and unfunded commitments and acquisition accounting, including valuing assets and liabilities of an acquired company, including intangible assets such goodwill. Because of the uncertainty of estimates involved in these matters, we may be required to do one or more of the following: significantly increase the ALC and/or sustain credit losses that are significantly higher than the reserve provided or recognize significant losses on the impairment of goodwill.
For more information, refer to “Critical Accounting Estimates” included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10–K.
Risk Related to Regulatory and Compliance Matters
We may become subject to supervisory actions and enhanced regulation that could have a material adverse effect on our business, reputation, operating flexibility and financial condition.
Under federal and state laws and regulations governing the safety and soundness of insured depository institutions, regulatory agencies such as state banking regulators, the DFI, the Federal Reserve, and the FDIC (as the insurer of bank deposits), have the authority to compel or restrict our actions if they determine that our capital levels are insufficient or that we are operating in a manner inconsistent with safe and sound banking practices. In addition to safety and soundness examinations, we and our subsidiaries are subject to oversight by state and federal regulators to ensure compliance with applicable laws, regulations, and consumer protection initiatives. This regulatory process may result in requirements to address identified concerns through informal or formal supervisory actions, such as board resolutions, memoranda of understanding, written agreements, or consent or cease-and-desist orders, requiring corrective actions or prohibiting specific activities. Failure to comply with the terms of such actions or directives could result in heightened supervisory measures, including consent orders, prompt corrective action restrictions, or additional regulatory penalties. These actions could impose significant restrictions on our ability to pursue new or existing business initiatives, which may adversely affect our business, reputation, and operational flexibility.
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Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations.
The effects of climate change continue to raise significant concerns about the state of the environment. Federal and state policy approaches to climate change continue to evolve, and changes in legislative or regulatory priorities could alter the requirements and expectations placed on businesses, including banks, to address climate-related risks.
The lack of empirical data regarding the financial and credit risks posed by climate change still makes it difficult to predict its specific impact on our financial condition and results of operations. However, the physical effects of climate change, such as more frequent and severe weather disasters, could directly affect us. For instance, such events may damage real property securing loans in our portfolios or reduce the value of that collateral. If our borrowers’ insurance is insufficient to cover these losses or if insurance becomes unavailable, the value of the collateral securing our loans could be negatively affected, potentially impacting our financial condition and results of operations. Moreover, climate change may adversely affect regional and local economic activity, harming our customers and the communities in which we operate. Regardless of changes in federal policy, the effects of climate change and their unknown long-term impacts could still have a material adverse effect on our financial condition and results of operations.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts and related regulations require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. Failure to comply with these regulations could result in fines or sanctions. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations. If our policies and procedures are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the denial of regulatory approvals to proceed with certain aspects of our business plan. Additionally, any perceived or actual failure to prevent money laundering or terrorist financing activities could significantly damage our reputation. These outcomes could have a material adverse effect on our business, financial condition, results of operations, and growth prospects.
Risks Related to Cybersecurity, Data, Fraud, Third Parties and Technology
We rely on other companies to provide key components of our business infrastructure.
We rely on numerous external vendors to provide products and services necessary for our day-to-day operations. Accordingly, our operations are exposed to risks associated with vendor performance under service-level agreements. If a vendor fails to meet its contractual obligations due to changes in its organizational structure, financial condition, support for existing products and services, strategic focus, or any other reason, our operations could be disrupted, potentially causing a material adverse impact on our financial condition and results of operations. Furthermore, we could be adversely affected if a vendor agreement is not renewed or is renewed on terms less favorable to us. Regulatory agencies also require financial institutions to remain accountable for all aspects of vendor performance, including activities delegated to third parties. Additionally, disruptions or failures in the physical infrastructure or operating systems supporting our business and customers, or cyber-attacks or security breaches involving networks, systems, or devices used by our customers to access our services, could lead to client attrition, regulatory fines or penalties, reputational damage, reimbursement or compensation costs, and increased compliance expenses. Any of these outcomes could materially and adversely affect our financial condition and results of operations.
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber-attack.Communications and information systems are essential to our business operations, as we rely on these systems to manage customer relationships, maintain our general ledger, and support virtually all other aspects of our operations. Our business depends on the secure processing, storage, and transmission of confidential and other information through our computer systems and networks. Although we take protective measures and adapt them as circumstances evolve, our systems, software, and networks may remain vulnerable to breaches, unauthorized access, denial-of-service attacks, misuse, malware, or other cyber threats. If any of these events occur, they could compromise our or our customers’ confidential information, disrupt operations, or harm our customers and counterparties.
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We may incur significant expenses to investigate and remediate security vulnerabilities, enhance protective measures, or address the impact of a cyber-attack. Such incidents could expose us to litigation, regulatory scrutiny, and financial losses not fully covered by insurance. They could also cause significant reputational damage, which may deter customers from using our services.
Cybersecurity risks are particularly acute in internet banking. Increases in criminal sophistication, advances in technology, or vulnerabilities in third-party systems (such as browsers and operating systems), could lead to breaches that compromise the security of data and transactions. A breach could discourage customers from using our online services, negatively impacting our business.
While we have developed and continue to invest in systems and processes to detect and prevent security breaches, no system is foolproof. Breaches could result in financial losses to us or our customers, reputational harm, additional compliance costs, business disruption, regulatory penalties, and potential legal liabilities. These outcomes could materially adversely affect our financial condition, results of operations, and ability to grow our online services. In addition, oursecurity measures may not protect us from system failures or interruptions. Although we have policies and procedures to mitigate such risks, we cannot guarantee their effectiveness. We also rely on third-party providers for data processing and operational support. While we carefully select these providers, we do not control their actions. If a third-party vendor experiences disruptions, cyber-attacks, or fails to meet our service standards, it could impair our ability to process transactions, deliver products and services, or conduct business. Transitioning to alternative vendors could involve significant delays and costs.
Further, information security risks may arise from the processing of customer data by third-party vendors and their personnel. We cannot assure you that breaches, system failures, or interruptions will not occur or that they will be adequately addressed by us or our vendors. Additionally, our insurance coverage may not fully protect against all losses from such events.
If any of our third-party providers experience financial, operational, or technological difficulties, or if disruptions occur in our relationships with them, we may be required to find alternative service providers. This could involve negotiating less favorable terms or incurring substantial costs to implement new systems. Any of these occurrences, whether system failures, security breaches, or vendor disruptions, could damage our reputation, result in customer and business losses, expose us to regulatory scrutiny and legal liabilities, and have a material adverse effect on our financial condition and results of operations.
Our current and future uses of Artificial Intelligence (AI) and other emerging technologies may create additional risks.
The increasing adoption of AI in financial services presents significant opportunities but also introduces a range of risks that could impact our operations, regulatory compliance, and customer trust. AI introduces model risk, where flawed algorithms or biased data could result in inaccurate credit decisions, compliance violations, or discriminatory outcomes in lending or customer service. Cybersecurity threats, such as data breaches, adversarial attacks, and data poisoning, pose significant challenges, particularly as these systems handle large volumes of sensitive customer information. Additionally, the opaque nature of some AI models, often referred to as "black-box" systems, raises regulatory compliance concerns, as regulators increasingly require transparency and explainability in AI-driven decision-making.
Operational risks also arise from potential system failures, over-reliance on AI, and integration challenges with existing infrastructure. Disruptions in AI systems could impact critical functions such as fraud detection, transaction monitoring, and customer support. Ethical and reputational risks, including unintended consequences or perceived unfairness in AI-driven decisions, may erode customer trust and expose us to regulatory scrutiny.
Mitigating these risks requires a robust governance framework, regularly testing and auditing of AI models, and strong human oversight. Investments in cybersecurity, data privacy protections, and employee training are critical to managing these risks.
We are subject to certain risks in connection with our data management or aggregation.
We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management. Our ability to manage data and aggregate data may be limited by the effectiveness of our policies, programs, processes, and practices that govern how data is acquired, validated, stored, protected, and processed. While we continuously update our policies, programs, processes, and practices, many of our data management and aggregation processes are manual and subject to human error or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.
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Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
The Bank is susceptible to fraudulent activity that may be committed against us or our clients which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client’s information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.
Risks Related to Our Business and Industry Generally
Ineffective liquidity management could adversely affect our financial results and condition.
Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities/withdrawals, payments on our debt obligations as they come due, and other cash commitments under both normal operating conditions and other unpredictable circumstances causing industry or general financial market stress. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources include a downturn in the geographic markets in which our loans and operations are concentrated or difficult credit markets. Our access to deposits may also be affected by the liquidity needs of our depositors. In particular, a majority of our liabilities are checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial majority of our assets are loans, which cannot be called or sold in the same time frame. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future, especially if a large number of our depositors seek to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could materially and adversely affect our business, results of operations, or financial condition. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity” of this Form 10–K.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be exceedingly high.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. At some point, we may need to raise additional capital or issue additional debt to support our growth or replenish future losses. Our ability to raise additional capital or issue additional debt depends on conditions in the capital markets, economic conditions, and a number of other factors, including investor perceptions regarding the banking industry, market conditions, and governmental activities, and on our financial condition and performance. Such borrowings or additional capital, if sought, may not be available to us or, if available, may not be on favorable terms.
Accordingly, we cannot make assurances that we will be able to raise additional capital or issue additional debt if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital or issue additional debt when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected.
In addition, any additional capital we obtain may dilute the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.
The Company’s ability to pay dividends and make subordinated debt payments is subject to the ability of the Bank to make capital distributions to the Company.
The Company is a separate legal entity from its subsidiary and does not have significant operations of its own. The long-term ability of the Company to pay dividends to its stockholders and debt payments is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level. The availability of dividends from the Bank is limited by the Bank’s earnings and capital, as well as various statutes and regulations. In the event the Bank is unable to pay dividends to the Company, the Company may not be able to pay dividends on its common stock or make payments on its outstanding debt. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, and future prospects. At December 31, 2025, FS Bancorp had $8.1 million in unrestricted cash to support dividend and debt payments.
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The markets in which the Company operates are subject to the risk of flooding, mudslides, and other natural disasters.
The Company’s offices are located in Washington and Oregon. Also, most of the real and personal properties securing the Company’s loans are located in either Washington or Oregon which areas are prone to flooding, mudslides, brush fires, earthquakes, and other natural disasters. In addition to possibly sustaining damage to its own properties, if there is a major flood, mudslide, brush fire, earthquake or other natural disaster, the Company faces the risk that many of the Company’s borrowers may experience uninsured property losses, or sustained job interruption and/or loss which may materially impair their ability to meet the terms of their loan obligations. Therefore, a major flood, mudslide, brush fire, earthquake or other natural disaster could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows.
Regulatory changes to diversity, equity and inclusion (“DEI”) and environmental, social and governance (“ESG”) practices may adversely impact our reputation, compliance costs, and business operations
Recent federal actions, including changes in federal DEI and ESG guidance, have shifted oversight of DEI and ESG practices. These developments alter the regulatory expectations and compliance requirements for companies with DEI and ESG initiatives. This shift increases compliance risk for companies with DEI and ESG initiatives, and new guidance may restrict voluntary programs and training, potentially requiring policy changes, reporting adjustments, and operational modifications.
At the same time, state-level requirements remain inconsistent. Some continue to mandate diversity or climate disclosures, while others limit DEI and ESG activities, creating additional operational complexity for multi-state businesses.
Failure to align DEI and ESG efforts with the current legal framework could result in reputational harm, legal challenges, financial penalties, and limitations on government contracting. Private third-party ESG and DEI evaluations may further influence investor decisions, access to capital, and stakeholder perception.
Although investors, customers, and other stakeholders continue to expect transparency and commitment to broader ESG goals, including workforce diversity, community engagement, and responsible governance, scaling back DEI or ESG efforts to comply with federal mandates may trigger criticism from investors, advocacy groups, and employees. Meanwhile, misalignment with state laws or rating agencies could affect market perception and access to capital.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
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Risk Management Strategy
As a financial institution, cybersecurity presents significant risks that could materially impact the Company’s operations, financial performance, and reputation. A successful cyberattack could result in operational disruptions, financial losses, regulatory scrutiny, legal liability, and reputational damage. Accordingly, the protection of customer and business information is a top priority. Cybersecurity risk management is a component of the Company’s formal Information Security Program. The Information Security Program is incorporated into the Company’s Enterprise Risk Management Program, ensuring a holistic approach to risk prevention, detection, mitigation, and remediation of cybersecurity threats.
The Information Security Program is based on regulation and guidance established by agencies, including but not limited to, the Federal Financial Institutions Counsel (“FFIEC”) and the FDIC. The Information Security Program begins with risk assessment. At least annually, the Company’s Information Security team completes an information security risk assessment in accordance with regulatory guidance. While cyber threats are included in the overall information security risk assessment, a targeted cybersecurity risk assessment is also completed, utilizing the FFIEC Cybersecurity Assessment Tool (“FFIEC CAT”). The FFIEC CAT specifically assesses the maturity and effectiveness of the Bank’s cybersecurity programs. In addition to the FFIEC CAT, the Bank partners with internal and external auditors to conduct various assessments throughout the year to identify, manage, and mitigate cybersecurity risks. The assessments conducted include but are not limited to: vulnerability assessments, penetration testing, social engineering, and onsite security assessments. Risk assessments consider size and complexity, are formally documented, and adapt to changes in the technology and organizational environment. Management and the Board of Directors use risk assessment data to make informed risk management decisions based on a full understanding of the risks. Management and the Board also consider the results of these assessments when overseeing operations. A strong, high-level risk assessment process provides the foundation for more detailed assessments within the functional risk management areas, as well as improves policy and internal control decisions across the organization.
Information Security Risk Assessment
Information security controls result from an effective risk assessment process. The Company identifies, measures, controls, and monitors threats to avoid risks that threaten the safety and soundness of the organization. In accordance with the Gramm-Leach-Bliley Act (GLBA) and FDIC regulation 12 CFR Part 364 Appendix B III B, the objectives of the information security risk assessment include:
Cybersecurity Risk Assessment
Cybersecurity is an integral subset of information security and refers to anything intended to protect enterprises and individuals from intentional attacks, breaches, incidents, and consequences. The foundation of this protection begins with identifying the risk of these threats and assessing the controls in place to mitigate such risks. The Company has included cyber threats in its information security risk assessment in accordance with regulatory guidance and conducts a targeted cyber risk assessment using the FFIEC CAT. Utilizing the FFIEC CAT, the Company’s inherent risk profile is documented along with its maturity level and effectiveness in managing cyber risk.
Both the Information Security Risk Assessment and the FFIEC CAT results are presented to, and approved by, the Audit Committee of the Board of Directors at least annually.
Risk Management Plan
Once risk assessments are complete, a risk management plan is prepared to ensure controls are developed or enhanced to mitigate risks to acceptable levels. The Risk Management Plan is presented to, and approved by, the Audit Committee of the Board of Directors annually and progress on remediation activities is shared quarterly.
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Information Security Program
Governance
The Company’s Board of Directors provides active oversight of cybersecurity threats in accordance with the Board-approved Information Security Policy and Program. Direct oversight of the Program is delegated to the Audit Committee of the Board of Directors. The Audit Committee has an established risk appetite statement that defines the Company’s risk acceptance tolerance. The Audit Committee reviews and approves the Risk Appetite statement annually. The Audit Committee also plays a critical role in overseeing the Bank’s efforts to develop, implement, and maintain an effective Information Security Program. With direction and oversight by the Audit Committee, the Bank’s Chief Risk Officer (“CRO”) oversees the enterprise-wide risk management program, and the Chief Information Officer (“CIO”) and the Information Security Manager are the Board-appointed Information Security Officers, responsible for the Information Security Program, including cybersecurity. The CRO, CIO, and Information Security Manager report cybersecurity related matters directly to the Audit Committee.
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The Information Security team, engaged in enterprise-wide cybersecurity strategy, policy, standards, architecture, and processes, ensures a complete approach to safeguarding the confidentiality, integrity, and availability of sensitive information. The Information Security team consists of experienced information security professionals and is led by the CIO. The CIO has more than 25 years of information technology and banking leadership experience and holds a Certified Information Systems Security Professional (“CISSP”) designation. Reporting to the CIO is the Information Security Manager who has more than 10 years of cybersecurity experience in the Financial Institution industry and possesses a master’s degree in information systems management with an emphasis in cybersecurity. Complementing the independent Information Security team, is the Information Technology (IT) team. The IT System Administration & Engineering Manager has over 10 years financial institution technology experience and a master’s degree in information systems management with a cybersecurity management specialization and the Systems Support Manager has over 20 years of financial institution technology experience, ensuring technology operations occur with a security-focused mindset. In addition to experienced information security and information technology teams, the Company engages with industry experts for managed security services. This collaborative effort includes threat intelligence gathering, firewall management, intrusion detection system monitoring, intrusion prevention services, and security information and event management monitoring, ensuring round-the-clock protection.
The Vendor Management team ensures compliance with the organization’s Vendor Management Policy, including initial and ongoing due diligence of all third-party providers.
Risk assessments and risk management plans are developed, communicated, and tracked. Annually, the CIO and Information Security Manager present the Information Security Risk Assessment to the IT Steering Committee and to the Audit Committee of the Board of Directors for review and approval. Quarterly, the CIO and Information Security Manager provide an Information Security Risk Management Plan status report to the Audit Committee and an Information/Cybersecurity Status report to the full Board of Directors. Reports encompass internal information and cybersecurity assessments, business continuity plans, disaster recovery measures, incident response planning and testing, patch management and vendor management program statuses, as well as internal self-audit results. The information security risk assessment and updates on projects aimed at fortifying information security systems and emerging cybersecurity threat insights are communicated to the Audit Committee, maintaining transparency, and ensuring informed decision-making. Annual review and approval of information security-related policies by the Audit Committee underscore our commitment to governance and regulatory compliance.
Audits and testing of program effectiveness are coordinated by the Company’s Senior Vice President of Audit who oversees the Audit Department and reports to the Audit Committee of the Board of Directors, independent of the technology and cybersecurity functions. The Audit Department utilizes independent third-party audit firms with technology and cybersecurity expertise. Results of all audits and independent assessments are delivered directly to senior management and the Audit Committee of the Board of Directors by the SVP of Audit.
The Information Security team serves as the Bank’s dedicated cybersecurity incident response team. Cybersecurity incident response is a sub-section of the Bank’s Incident Response Plan. The Information Security team handles the technical aspects of the Bank’s response to a cybersecurity incident. Escalation instructions are included in the Plan for engaging resources outside the Information Security team. The Board is notified immediately of cybersecurity incidents, as per the incident response instructions.
Cybersecurity Incidents
As of the reporting period, the Company has not experienced any material cybersecurity incidents that have had a significant impact on operations, data integrity, or financial performance. However, the Company continuously monitors and evaluates cybersecurity threats, including those affecting third-party service providers. While some third-party vendors have reported cybersecurity events, none have materially impacted the Company's systems, computing environments, or customer data. The Company remains committed to enhancing its cybersecurity defenses through ongoing risk assessments, investment in technology, and adherence to industry best practices.
Item 2. Properties
At December 31, 2025, the Company maintained a headquarters office in Mountlake Terrace, Washington, an administrative office in Aberdeen, Washington, 27 full-service bank branches, and 13 loan production offices, with an aggregate net book value of $44.1 million. The Company owns its headquarters office, its administrative office and 21 of its 27 branch offices. The remaining branch offices and the seven stand-alone loan production offices are leased facilities. The lease terms for our branch and loan production offices are not individually material. The Company’s leases have remaining lease terms of 3 months to 9.6 years, some of which include options to extend the leases for up to five years. In the opinion of management, all properties are adequately covered by insurance, are in a good state of repair and are suitable for the Company’s needs. For additional information see “Note 5 – Premises and Equipment” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.
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The Company maintains depositor and borrower customer files on an on-line basis, utilizing a telecommunications network, portions of which are leased. Management has a business continuity plan in place with respect to the data processing system, as well as the Company’s operations as a whole.
Item3. Legal Proceedings
Because of the nature of our activities, the Company is subject to various pending and threatened legal actions which arise in the ordinary course of business. From time to time, subordination liens may create litigation which requires the Company to defend its lien rights. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the Company's financial position.
Item4. Mine Safety Disclosures
Not applicable.
PARTII
Item5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on The NASDAQ Stock Market LLC’s Global Market, under the symbol “FSBW.” At December 31, 2025, there were approximately 181 shareholders of record based upon securities position listings furnished to the Company by its transfer agent. This total does not reflect the number of persons or entities who hold stock in nominee or “street name” accounts with brokers.
1st Security Bank is a wholly-owned subsidiary of FS Bancorp. Under federal regulations, the dollar amount of dividends 1st Security Bank may pay to FS Bancorp depends upon its capital position and recent net income. Generally, if 1st Security Bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed by state law and FDIC regulations. See “Item 1. Business – How We Are Regulated – Regulation of 1st Security Bank – Dividends” and “Regulation and Supervision of FS Bancorp – Restrictions on Dividends and Stock Repurchases.”
The cash dividend policy is reviewed by management and the Board of Directors. Any dividends declared and paid in the future would depend upon a number of factors including capital requirements, the Company’s financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. The future payment of dividends may depend, in part, upon receipt of dividends from the Bank, which are restricted by federal regulations. Management’s projections show an expectation that cash dividends will continue for the foreseeable future.
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Issuer Purchases of Equity Securities. The following table summarizes common stock repurchases during the quarter ended December 31, 2025:
________________________________
(1) Includes 8,543 shares internally repurchased by the Company acting as the cash counterparty for participants exercising options.
(2) On July 9, 2025, the Company announced a stock repurchase program authorizing the repurchase of up to $5.0 million of Company common stock, in addition to any amounts remaining under the prior repurchase program. On October 27, 2025, while a small amount remained available under the July 2025 program, the Board of Directors approved a new stock repurchase program authorizing the repurchase of up to $5.0 million of Company common stock. The July 2025 program was fully completed in October 2025. Repurchases under the October 2025 program may be made from time to time in the open market, through privately negotiated transactions, or by withholding shares upon the exercise of equity awards, during the 12‐month period ending October 27, 2026. Repurchases under this program may be made from time to time in the open market, through privately negotiated transactions, or by withholding shares upon the exercise of equity awards, during the 12‐month period ending October 27, 2026. The actual timing, price, and number of shares repurchased under the program depend on various factors, including any trading plan adopted under Rule 10b5‐1 of the Securities Exchange Act of 1934, as amended, the market price of the Company’s common stock, general business and market conditions, and alternative uses of capital. These programs do not obligate the Company to repurchase any specific number of shares and may be expanded, extended, modified, or discontinued at any time.
Equity Compensation Plan Information. The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this report is incorporated herein by reference.
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Performance Graph. The following graph compares the cumulative total shareholder return on the Company’s common stock with the cumulative total return on the NASDAQ S&P 500 Index (U.S. Stock) and S&P U.S. SmallCap Banks Index. Total return assumes the reinvestment of all dividends and that the value of common stock and bank index was $100 on December 31, 2020.
Source: S&P Global Market Intelligence
Item 6. [Reserved]
Item7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto that appear in Item 8. of this Form 10–K. The information contained in this section should be read in conjunction with these Consolidated Financial Statements and footnotes and the business and financial information provided in this Form 10–K.
Overview
1st Security Bank has been serving the Puget Sound area since 1907, which includes the period in which the predecessor to Anchor Bank, one of its banking acquisitions, was formed. On July 9, 2012, the Bank converted from mutual to stock ownership and became the wholly owned subsidiary of FS Bancorp.
The Company is relationship-driven, delivering banking and financial services to local families, local and regional businesses and industry niches in suburban communities in the greater Puget Sound area, the Kennewick-Pasco-Richland metropolitan area of Washington, also known as the Tri-Cities, as well as Goldendale, Vancouver, and White Salmon, Washington and Manzanita, Newport, Ontario, Tillamook, and Waldport, Oregon.
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The Company also maintains its long-standing indirect consumer lending platform which operates primarily throughout the Western United States. The Company emphasizes long-term relationships with families and businesses within the communities served, working with them to meet their financial needs. The Company is also actively involved in community activities and events within these market areas, which further strengthens its relationships within these markets.
The Company's strategic focus involves diversifying revenues, expanding lending channels, and enhancing the banking franchise. Management is committed to establishing varied revenue streams considering credit, interest rate, and concentration risks. The business plan includes:
● Growing and diversifying our loan portfolio;
● Maintaining strong asset quality;
● Expanding into new markets.
As a diversified lender, the Company specializes in originating one-to-four-family residential loans, CRE mortgages, second mortgages, consumer loans, marine lending, and commercial business loans.
At December 31, 2025, the Company's loan portfolio consisted of the following major categories: CRE loans, residential real estate loans, consumer loans, and commercial business loans representing 36.5%, 28.6%, 22.5% and 12.4% of the portfolio, respectively.
Indirect home improvement loans to finance window, gutter, siding replacement, solar panels, spas, and other improvement renovations are a large segment of the consumer loan portfolio. These indirect home improvement loans are dependent on the Company's contractor/dealer network of 33 currently active fixture dealerships located throughout Washington, Oregon, California, Idaho, Colorado, Nevada, Arizona, Minnesota, Texas, Utah, Massachusetts, Montana, and New Hampshire. During the year ended December 31, 2025, the Company originated 6,146 indirect home improvement loans with an aggregate total of $138.2 million. Five contractor/dealer accounted for 77.5% of the dollar volume funded in this category. In addition, four states represented nearly three-quarters of the loan originations: Washington, Oregon, California, and Colorado with 37.0%, 19.0%, 12.9%, and 6.5% of total loan volume, respectively.
The Company originates one-to-four-family residential mortgage loans through referrals from real estate agents, financial planners, builders, and from existing customers. Retail banking customers are also an important source of the Company’s loan originations. The Company originated $716.6 million of one-to-four-family loans (which included loans held for sale, loans held for investment and fixed seconds) in addition to $22.9 million of loans brokered to other institutions through the home lending segment during the year ended December 31, 2025, of which $555.2 million were sold to investors. Of the loans sold to investors, $209.1 million were sold to the FNMA, FHLMC, FHLB, and GNMA with servicing rights retained for the purpose of further developing these customer relationships.
For the year ended December 31, 2025, one-to-four-family loan originations and refinancing activity increased compared to the prior period as a result of changes in interest rates and economic conditions. Residential construction and development lending, while not as common as other loan origination options like one-to-four-family loans, continues to be an important element in our total loan portfolio, and we continue to take a disciplined approach by concentrating our efforts on loans to builders and developers in our market areas known to us. These short-term loans typically have a maturity period of six to 18 months, with disbursements not fully realized at origination, leading to a short-term reduction in net loans receivable.
The Company is affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs. Deposit flows are influenced by a number of factors, including interest rates paid on time deposits, other investments, account maturities, and the overall level of personal income and savings. Lending activities are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles. Sources of funds for lending activities include primarily deposits, including brokered deposits, borrowings, payments on loans, and income provided from operations.
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The Company’s earnings are primarily dependent upon net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on these loans and investments. Interest expense is a function of the amount of deposits and borrowings outstanding during the same period and the interest rates paid on these deposits and borrowings.
The Company's earnings are also affected by fee income from mortgage banking activities, the provision for (reversal of) credit losses, service charges and fees, gains from sales of assets, operating expenses and income taxes.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting estimates with the audit committee of our Board of Directors. See “Note 1 – Basis of Presentation and Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K for a summary of significant accounting policies and the effect on our financial statements.
Allowance for Credit Losses (“ACL”) on Loans. The ACL reflects Management’s evaluation of our loans and their estimated loss potential, as well as the risk inherent in various components of the portfolio. Significant judgment and assumptions are applied in estimating the ACL. These judgments, assumptions and estimates are susceptible to significant changes based on the current environment. Among the material estimates required to establish the allowance for credit losses are a reasonable and supportable forecast; a reasonable and supportable forecast period and the reversion period; value of collateral; strength of guarantors; the amount and timing of future cash flows for loans individually evaluated; and determination of the qualitative loss factors.
Management estimates the ACL using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The ACL is maintained at a level sufficient to provide for expected credit losses over the life of the asset based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current portfolio. These factors include, among others, changes in the size and composition of the portfolio, delinquency rates, actual loss experience and current economic conditions.
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During 2025, the change in the allowance was primarily driven by loan portfolio growth, changes in delinquency rates, and changes in economic forecast assumptions utilized in the Company’s expected credit loss models. Key forecast variables impacting the estimate included projected unemployment rates, interest rates, and other macroeconomic factors. The Company also updated certain qualitative adjustment factors to reflect observed trends in credit performance and portfolio composition. While the overall modeling framework and methodology remained consistent with the prior year, updates to economic forecasts and qualitative factors resulted in changes to the estimated lifetime loss rates across several portfolio segments.
The ACL is sensitive to changes in economic forecasts and qualitative assumptions. Holding other assumptions constant, deterioration in economic conditions comparable to the Company’s adverse forecast scenario would result in an increase in the ACL, while improvement in forecast assumptions would reduce the allowance. Changes in qualitative factors related to portfolio concentrations, collateral values, or credit performance trends could also materially affect the ACL.
Because current economic conditions and forecasts can change and future events make it inherently difficult to predict the anticipated amount of estimated credit losses on loans, management's determination of the appropriateness of the ACL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may move independently of one another, such that improvement in one or certain factors may offset deterioration in others. Thus, as a result of the significant size of the loan portfolio, the numerous assumptions in the model, and the high degree of potential change in such assumptions, there is a high degree of sensitivity to the reported amounts.
Management believes that the ACL was adequate as of December 31, 2025.
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Our Business and Operating Strategy and Goals
The Company’s primary objective is to operate 1st Security Bank as a well-capitalized, profitable, independent, community-oriented financial institution, serving customers in its primary market area defined generally as the greater Puget Sound market area. The Company’s strategy is to provide innovative products and superior customer service to small businesses, industry and geographic niches, and individuals in its primary market area. Services are provided to communities through the main office, 27 full-service bank branches and 13 loan production offices (seven of which are stand-alone), supported by 24/7 access to online banking and participation in a worldwide ATM network.
The Company focuses on diversifying revenues, expanding lending channels, and growing the banking franchise. Management remains focused on building diversified revenue streams while managing credit, interest rate, and concentration risks. The Board of Directors seeks to accomplish the Company’s objectives through a strategy to improve profitability, maintain a strong capital position, and preserve high asset quality. This strategy primarily involves:
Growing and diversifying the loan portfolio and revenue streams. The Company is a diversified lender that seeks to grow and maintain diversification in its portfolio. At December 31, 2025, the Company's loan portfolio included CRE loans, residential real estate loans, consumer loans, and commercial business loans representing 36.5%, 28.6%, 22.5%, and 12.4% of the total loan portfolio, respectively.
Maintaining strong asset quality. Strong asset quality is a key driver of long-term financial success. The percentages of nonperforming loans to total gross loans were 0.71% and 0.54% at December 31, 2025 and 2024, respectively. The percentages of nonperforming assets to total assets were 0.59% and 0.45% at December 31, 2025 and 2024, respectively. Management actively addresses delinquent loans and nonperforming assets by pursuing aggressive collection efforts for consumer debts, marketing saleable foreclosed or repossessed properties, resolving classified assets, and implementing loan charge-offs. In recent years, the Company focused on originating consumer loans for borrowers with higher credit scores, generally over 720, while maintaining flexibility in its lending policy. While the Company plans to emphasize specific lending products, including commercial and multi-family real estate loans, construction and development loans (including speculative residential construction loans), and commercial business loans, it remains committed to expanding the size of its one-to-four-family residential mortgage loans and consumer loan portfolios. Throughout these initiatives, the Company maintains a conservative approach to lending and manages credit exposures by leveraging the expertise of experienced bankers.
Emphasizing lower cost core deposits to reduce the costs of funding loan growth. The Company provides a range of financial products, including personal and business checking accounts, NOW accounts, and savings and money market accounts. These accounts serve as lower-cost funding sources compared to certificates of deposit and are less sensitive to interest rate fluctuations. The Company employs several strategies to build a core deposit base. First, it actively encourages commercial loan customers to establish and maintain deposit relationships typically through business checking accounts. Second, periodic interest rate promotions are offered on savings and checking accounts to stimulate deposit growth. Third, the Company hires experienced personnel with established community relationships in the areas it serves to further enhance its deposit-building efforts.
Capturing customers’ full relationship. The Company offers a wide range of products and services that provide diversification of revenue sources and solidify the relationship with the Bank’s customers. The Company focuses on core retail and business deposits, including savings and checking accounts, to support long-term customer retention. As part of the commercial lending process, cross-selling the entire business banking relationship, including deposit relationships and business banking products, such as online cash management, treasury management, wires, direct deposit, payment processing and remote deposit capture. The Company’s mortgage banking program also provides opportunities to cross-sell products to new customers.
Expanding the Company’s markets. In addition to deepening relationships with existing customers, the Company intends to broaden its customer base by leveraging the Company’s well-established community involvement. The strategy involves selectively emphasizing products and services tailored to meet the specific banking needs of new customers. Additionally, the Company plans to extend its presence into other market areas through targeted expansion of its home lending network.
Comparison of Financial Condition at December 31, 2025 and December 31, 2024
Assets. Total assets increased $167.7 million to $3.20 billion at December 31, 2025, from $3.03 billion at December 31, 2024, primarily due to increases of $121.2 million in loans receivable, net, $24.8 million in securities held-to-maturity, $15.9 million in loans held for sale, and $14.3 million in premises and equipment, partially offset by a decrease of $7.7 million in FHLB stock, $3.4 million in total cash and cash equivalents, $3.2 million in core deposits intangible, net, and $2.3 million in bank owned life insurance. Assets growth was primarily funded by increases in interest-bearing deposits, primarily driven by the increase in brokered deposits.
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Loans receivable, net, increased $121.2 million, to $2.62 billion at December 31, 2025, compared to $2.50 billion at December 31, 2024.
● CRE loans increased $98.1 million, primarily reflecting:
○ $73.3 million in commercial and speculative construction and development loans,
○ $16.9 million in multi-family loans,
○ $5.7 million in CRE owner occupied loans, and
○ $2.2 million in CRE non-owner occupied loans.
● Residential real estate loans increased $17.0 million, driven by:
○ $13.1 million in home equity loans,
○ $11.4 million in one-to-four-family loans (excluding loans held for sale), and
○ partially offset by a decrease of $7.6 million in residential custom construction loans.
● Total undisbursed construction and development loan commitments increased $61.3 million to $235.4 million at December 31, 2025, from $174.1 million at December 31, 2024.
● Commercial business loans increased $29.4 million, reflecting increases of $15.3 million in warehouse lending and $14.1 million in commercial and industrial (“C&I”) loans.
● Consumer loans decreased $23.2 million, primarily due to declines of $16.1 million in indirect home improvement loans and $6.8 million in marine loans.
Overall, loan growth was concentrated in commercial construction and development, multi-family, and residential real estate segments, reflecting continued demand in those markets. Consumer balances, primarily indirect home improvement loans, declined presumably due to volatile economic conditions, as the Company continued to manage indirect exposures.
Loans held for sale, consisting of one-to-four-family loans, increased $15.9 million to $43.7 million at December 31, 2025, from $27.8 million at December 31, 2024, reflecting continued investment in home lending operations and strategic management of production capacity.
One-to-four-family loan originations for the year ended December 31, 2025, included $528.0 million of loans originated for sale, $188.6 million of portfolio loans including first and second liens, and $22.9 million of loans brokered to other institutions.
Originations of one-to-four-family loans for the periods indicated were as follows:
(Dollars in thousands) For the Year Ended December 31,
Amount Percent Amount Percent $ Change % Change
During the year ended December 31, 2025, the Company sold $555.2 million of one-to-four-family loans, compared to $564.8 million one year ago. The decrease in loan sales reflects a more competitive market environment and lower purchase volume, partially offset by higher refinance activity. The Company remains focused on managing loan production capacity and maintaining a pipeline consistent with market demand. Gross margin on home loan sales was 3.08% for both years ended December 31, 2025 and 2024. Gross margin is defined as the margin on loans sold without the impact of deferred loan costs.
The ACL on loans totaled $31.9 million, or 1.20% of gross loans receivable (excluding loans held for sale), at December 31, 2025, compared to $31.9 million, or 1.26%, at December 31, 2024. The ACL on unfunded loan commitments increased $360,000 to $1.8 million at December 31, 2025, from $1.4 million at December 31, 2024, primarily reflecting growth in commercial and speculative construction and development loan commitments. Total loans 30 days or more past due were unchanged at $22.2 million, or 0.84% of total loans, from $22.2 million, or 0.88% of total loans during the prior year period, reflecting similar economic conditions year over year.
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Nonperforming loans, consisting solely of nonaccrual loans, increased $5.1 million to $18.7 million at December 31, 2025, from $13.6 million at December 31, 2024. The increase was primarily due to construction and development CRE loans, which increased $4.3 million to $9.2 million, indirect home improvement loans, which increased $2.6 million to $4.3 million, and one-to-four-family residential loans, which increased $1.6 million to $1.8 million. These increases were partially offset by decreases of $2.9 million in nonaccrual commercial business loans, to $580,000, and a decrease of $722,000 in nonaccrual CRE owner-occupied loans, to $2.0 million. The increase in nonperforming loans reflects continued elevated losses in certain consumer loans due to strained economic conditions and in construction and development loans due to a collateral deficiency on a commercial construction project. Consequently, the ratio of nonperforming loans to total gross loans rose to 0.71% at December 31, 2025, from 0.54% at December 31, 2024. See “Item 1. Business – Lending Activities – Asset Quality” of this Form 10–K for additional information regarding the Company’s nonperforming loans.
Classified loans, all classified as substandard, totaled $27.3 million at December 31, 2025, compared to $22.9 million at December 31, 2024. The coverage ratio of the ACL on loans to nonperforming loans was 170.6% at December 31, 2025, compared to 234.6% at December 31, 2024. The decline in the coverage ratio primarily reflects the $2.3 million partial charge-off on a CRE loan that was previously reserved and the increase in nonperforming loans.
Overall, asset quality trends reflect growth in construction, multi-family, and residential loan segments, ongoing elevated losses in certain consumer loan portfolios, and continued risk management and monitoring of nonperforming and substandard exposures.
Liabilities. Total liabilities increased $155.7 million to $2.89 billion at December 31, 2025, from $2.73 billion at December 31, 2024, primarily due to an increase of $334.2 million in deposits, offset by a decrease of $178.5 million in borrowings. The loan-to-deposit ratio was approximately 100.9% at December 31, 2025, compared to approximately 109.5% at December 31, 2024, reflecting the mix shift toward deposits, particularly brokered CDs, to fund asset growth and reduce wholesale borrowings.
Total deposits increased $334.2 million to $2.67 billion at December 31, 2025, from $2.34 billion at December 31, 2024, reflecting increases in all deposit categories. Transactional accounts (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased $178.9 million to $993.6 million at December 31, 2025, from $814.7 million at December 31, 2024. This increase was due to increases of $158.9 million in interest-bearing checking ($140.2 million in brokered deposits), $19.5 million in noninterest-bearing checking, and $447,000 in escrow accounts related to mortgages serviced, reflecting higher customer balances and increased activity in mortgage servicing. Money market and savings accounts increased $53.9 million to $549.7 million at December 31, 2025, from $495.8 million at December 31, 2024, due to customer preference for liquidity and slightly higher balances in retail and business savings accounts.
CDs, which include both retail and non-retail CDs, increased $101.5 million to $1.13 billion at December 31, 2025, from $1.03 billion at December 31, 2024. Retail CDs increased $47.6 million to $921.7 million at December 31, 2025, from $874.0 million at December 31, 2024. Non-retail CDs, which include brokered CDs, online CDs and public funds CDs increased $53.9 million to $208.7 million, compared to $154.9 million at December 31, 2024, was primarily due to an increase of $58.9 million in brokered CDs, offset by a decrease of $5.9 million in online CDs. Non-retail CDs represented 18.5% and 15.1% of total CDs at December 31, 2025 and 2024, respectively. The increase in non-retail CDs aligns with the Company's strategy to manage interest rate risk and liquidity by accessing larger and more diversified funding sources at competitive rates that were only slightly higher than local market rates, and to reduce reliance on higher cost borrowings.
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Deposits are summarized as follows at the years indicated:
(Dollars in thousands) December 31,
Escrow accounts related to mortgages serviced (5) 10,926 10,479
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(4) CDs that meet or exceed the FDIC insurance limit.
(5) Noninterest-bearing checking.
The Bank had uninsured deposits of approximately $718.1 million or 26.9% of total deposits, at December 31, 2025, compared to approximately $652.7 million or 27.9% of total deposits at December 31, 2024. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.
Borrowings decreased $178.5 million to $129.3 million at December 31, 2025, from $307.8 million at December 31, 2024. The decrease reflects repayment of higher-cost borrowings with lower-cost brokered deposits, consistent with the Company's funding and liquidity strategy. At December 31, 2025, borrowings were solely comprised of FHLB advances.
Stockholders’ Equity. Total stockholders’ equity increased $11.9 million to $307.7 million at December 31, 2025, from $295.8 million at December 31, 2024. The increase primarily reflects net income of $33.3 million, partially offset by share repurchases of $15.4 million, cash dividends paid totaling $10.3 million and $2.3 million in equity award compensation. Additionally, the issuance of common stock under the Company's Employee Stock Purchase Plan contributed $1.2 million, reflecting the issuance of 30,942 shares of Company common stock. Stockholders' equity was also positively impacted by an increase in accumulated other comprehensive income, net of tax of $1.3 million, primarily due to unrealized net gains on securities available-for-sale of $6.0 million, net of tax, partially offset by unrealized net losses on fair value and cash flow hedges of $4.7 million, net of tax, reflecting changes in market interest rates during the period.
Book value per common share was $41.55 at December 31, 2025, compared to $38.26 at December 31, 2024. The calculation of book value per share at December 31, 2025, was based on 7,404,548 common shares, derived by subtracting the 102,971 unvested restricted stock shares from the 7,507,519 reported common shares outstanding as of that date. Similarly, the book value per share at December 31, 2024, was calculated based on 7,729,951 common shares, after deducting 103,063 unvested restricted stock shares from the 7,833,014 reported common shares outstanding as of that date.
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Average Balances, Interest and Average Yields/Cost
The following table sets forth for the periods indicated, information regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at December 31, 2025. Income and all average balances are monthly average balances. Nonaccrual loans have been included in the table as loans carrying a zero yield. The yields on tax-exempt municipal bonds have not been computed on a tax equivalent basis.
Year Ended December 31,
Average Interest Average Interest Average Interest
Balance Earned Yield/ Balance Earned Yield/ Balance Earned Yield/
Interest-earning assets:
Interest-bearing liabilities:
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____________________________
(3) Shown at amortized cost.
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the periods indicated. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
(Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
Interest-earning assets:
Interest-bearing liabilities:
Subordinated note 3 (3 ) — 3 (3 ) —
Net change in net interest income $ 7,300 $ (198 )
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(1) The average loans receivable, net balances include nonaccrual loans.
Comparison of Results of Operations for the Years Ended December 31, 2025 and 2024
General. Net income was $33.3 million for the year ended December 31, 2025, compared to $35.0 million for the year ended December 31, 2024. The decrease was primarily due to a $4.4 million, or 4.6%, increase in noninterest expense, a $4.0 million, or 73.2%, increase in provision for loan losses, and a $1.2 million, or 18.6%, increase in provision for income taxes, partially offset by a $7.3 million, or 5.9%, increase in net interest income and a $721,000, or 3.3%, increase in total noninterest income.
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Net Interest Income. Net interest income increased $7.3 million to $130.4 million for the year ended December 31, 2025, from $123.1 million for the year ended December 31, 2024, primarily due to an increase in total interest income of $12.4 million, partially offset by an increase in total interest expense of $5.1 million. The $12.4 million increase in total interest income was primarily due to an increase of $11.0 million in interest income on loans receivable, including fees, driven primarily by a 13 basis point increase in the average yield earned on loans receivable as new loans were originated at higher rates and variable-rate loans repriced higher, and a higher average balance of loans outstanding. The $5.1 million increase in total interest expense was primarily the result of a shift in the funding mix toward brokered CDs, which were used to repay higher-cost borrowings in accordance with the Company's funding and liquidity strategy.
Net interest margin (“NIM”) increased three basis points to 4.33% for the year ended December 31, 2025, from 4.30% for the prior year. The increase in NIM reflects the increase in yields earned on interest-earning assets, along with a slight improvement in funding costs.
Interest Income. Total interest income for the year ended December 31, 2025, increased $12.4 million, to $197.2 million, from $184.8 million for the year ended December 31, 2024. The $12.4 million increase in total interest income was primarily due to an increase of $11.0 million in interest income on loans receivable, including fees, primarily as a result of net loan growth and variable rate loans repricing higher.
The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the years ended December 31, 2025 and 2024:
(Dollars in thousands) Year Ended December 31,
Average Average $ Change
Balance Balance in Interest
Outstanding Yield Outstanding Yield Income
___________________________
(1) The average loans receivable, net balances include nonaccrual loans.
(3) Shown at amortized cost.
Interest Expense. Interest expense increased $5.1 million to $66.8 million for the year ended December 31, 2025, from $61.7 million for the prior year, primarily due to an increase of interest expense on deposits of $4.5 million. The higher deposit costs were a result of an increase in the average balances of deposits and the shift in deposit mix toward accounts that generate higher total dollar costs, such as interest-bearing checking (including brokered deposits) and CDs, even though the average rate on some deposit categories, including CDs, declined slightly.
The average cost of total interest-bearing deposits increased four basis points to 3.02% for the year ended December 31, 2025, compared to 2.98% for the year ended December 31, 2024. The average balance of total interest-bearing deposits increased $127.7 million to $1.91 billion for the year ended December 31, 2025, compared to $1.78 billion for the year ended December 31, 2024. The increase in the average cost of deposits was primarily due to higher deposit balances and a shift in the deposit mix toward higher cost accounts.
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The average cost of total interest-bearing liabilities increased three basis points to 3.14% for the year ended December 31, 2025, from 3.11% for the year ended December 31, 2024. The average cost of funds, which includes noninterest-bearing checking, increased five basis points to 2.39% for the year ended December 31, 2025, from 2.34% for the year ended December 31, 2024, primarily reflecting a lower proportion of noninterest-bearing deposits in the overall funding mix.
The following table details average balances of interest-bearing liabilities, associated rates and resulting change in interest expense for the years ended December 31, 2025 and 2024:
(Dollars in thousands) Year Ended December 31,
Average Average $ Change
Balance Balance in Interest
Outstanding Rate Outstanding Rate Expense
Provision for Credit Losses. For the year ended December 31, 2025, the provision for credit losses was $9.5 million, consisting of a $9.0 million provision for credit losses on loans, a $360,000 provision for credit losses on unfunded loan commitments, and a $232,000 provision for securities held to maturity, compared to a provision for credit losses of $5.5 million, for the year ended December 31, 2024, consisting of a $5.6 million provision for credit losses on loans, partially offset by a $123,000 reversal of the ACL on unfunded loan commitments. The increase in the provision for credit losses on loans primarily reflects growth in the loan portfolio, an increase in nonperforming loans, and higher net charge-offs.
Net loan charge-offs totaled $8.9 million for the year ended December 31, 2025, compared to $5.3 million during the year ended December 31, 2024. The increase was primarily due to a partial charge-off of $2.3 million on a commercial construction loan reflecting the expected loss on the project, along with $2.1 million in increased net charge-off in indirect home improvement loans. These increases were partially offset by decreases in charge-offs of C&I loans of $551,000 and marine loans of $292,000. A decline in national and local economic conditions, as a result of the effects of tariffs, inflation, or slowed economic growth, among other factors, could result in a material increase in the ACL on loans and may adversely affect the Company’s financial condition and result of operations.
The following table details activity and information related to the ACL on loans for the years ended December 31, 2025 and 2024:
At or For the Year Ended December 31,
Provision for credit losses on loans $ 8,954 $ 5,635
Allowance for credit losses on loans $ 31,937 $ 31,870
Management considers the ACL on loans at December 31, 2025, to be adequate to cover forecasted losses in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes that the estimates and assumptions used in its determination of the adequacy of the ACL on loans are reasonable, it is important to acknowledge the inherent uncertainties. There is no assurance that these estimates and assumptions will not be proven incorrect in the future. Additionally, there is the possibility that the actual amount of future provisions may exceed past provisions, and any potential increased provisions could adversely impact the Company's financial condition and results of operations. Furthermore, the determination of the amount of the Company's ACL on loans is subject to review by bank regulators as part of the routine examination process. The regulators may adjust the ACL based on their judgment and the information available to them at the time of their examination. This regulatory scrutiny adds an additional layer of evaluation and potential adjustment to the Company's credit loss provisions.
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Noninterest Income. Noninterest income increased $721,000 to $22.3 million for the year ended December 31, 2025, from $21.6 million for the year ended December 31, 2024. The following table provides a detailed analysis of the changes in the components of noninterest income:
Year Ended December 31, (Decrease) Increase
(Dollars in thousands) 2025 2024 Amount Percent
Loss on sale of investment securities — (7,836 ) 7,836 (100.0 )
Earnings on cash surrender value of BOLI 1,035 990 45 4.5
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Gross margin on home loan sales was 3.08% for the years ended December 31, 2025 and 2024.
Noninterest Expense. Noninterest expense increased $4.4 million to $102.0 million for the year ended December 31, 2025, from $97.6 million for the year ended December 31, 2024. The following table provides an analysis of the changes in the components of noninterest expense:
Year Ended December 31, Increase (Decrease)
(Dollars in thousands) 2025 2024 Amount Percent
Impairment (recovery) of servicing rights 54 (38 ) 92 (242.1 )
The increase in noninterest expense was driven primarily by higher salaries and benefits, which rose $2.7 million, due to annual merit increases, increased benefits cost, and an increase employee headcount. Other contributing increases included professional and board fees, which rose due to higher consulting costs associated with our core system contract renewal, and FDIC insurance, which increased due to growth in assets. These increases were partially offset by decreases in data processing expenses, amortization of core deposit intangibles, and marketing and advertising. Data processing expenses decreased primarily due to renegotiated vendor contracts.
The efficiency ratio, which measures noninterest expense as a percentage of net interest income and noninterest income, improved slightly to 66.81% for the year ended December 31, 2025, compared to 67.45% for the year ended December 31, 2024, primarily due to the growth in revenues outpacing the increase in noninterest expenses.
Provision for Income Taxes. For the year ended December 31, 2025, the Company recorded a provision for income taxes of $7.8 million on pre-tax income of $41.1 million, compared to a $6.6 million provision on pre-tax income of $41.6 million in 2024. The $1.2 million increase in the provision was primarily due to the absence of alternative energy tax credits under the Inflation Reduction Act of 2022 for 2025 available in 2024. There was a net deferred tax asset of $7.0 million and $7.1 million at December 31, 2025 and 2024, respectively. The effective corporate income tax rates for the years ended December 31, 2025 and 2024 were 18.9% and 15.8%, respectively. For additional information regarding income taxes, see “Note 10 – Income Taxes” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.
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Comparison of Results of Operations for the Years Ended December 31, 2024 and 2023
See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10–K for the year ended December 31, 2024 filed with the SEC.
Asset and Liability Management and Market Risk
Risk When Interest Rates Change. The Company's interest rates on assets and liabilities are generally contractually established for a set period. However, market rates fluctuate over time, impacting financial performance. Like other financial institutions, the Company’s results of operations are affected by changes in interest rates and sensitivity of its assets and liabilities to these changes. The risk associated with fluctuating interest rates and the Company’s ability to adapt is known as interest rate risk, which represents its most significant market risk.
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, the fair value of the Company’s consolidated financial instruments will change when interest rate levels change, and that change may either be favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed interest rate obligations are less likely to prepay in a rising interest rate environment and more likely to prepay in a falling interest rate environment. Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors interest rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans, and deposits, and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
How The Company Measures Risk of Interest Rate Changes. As part of an attempt to manage exposure to changes in interest rates and comply with applicable regulations, the Company monitors interest rate risk. In doing so, the Company analyzes and manages assets and liabilities based on their interest rates and payment streams, timing of maturities, repricing opportunities, and sensitivity to actual or potential changes in market interest rates.
The Company is subject to interest rate risk to the extent that its interest-bearing liabilities, primarily deposits, subordinated notes, and FHLB advances, reprice more rapidly or at different rates than the interest-earning assets. In order to minimize the potential for adverse effects of material prolonged increases or decreases in interest rates on the Company’s results of operations, the Company has adopted an Asset and Liability Management Policy. The Board of Directors sets the Asset and Liability Management Policy for the Bank, which is implemented by the Asset/Liability Committee (“ALCO”), an internal management committee. The board-level oversight of the ALCO is performed by the Audit Committee of the Board of Directors.
The purpose of the ALCO is to communicate, coordinate, and control asset/liability management consistent with the business plan and board-approved policies. The committee establishes and monitors the volume and mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk, and profitability goals.
The ALCO generally meets monthly to, among other things, protect capital through earnings stability over the interest rate cycle; maintain the Bank’s "well capitalized" status; and provide a reasonable return on investment. The committee recommends appropriate strategy changes based on this review. Additionally, the ALCO is responsible for reviewing and reporting the effects of the policy implementations and strategies to the Board of Directors at least quarterly. The Chief Financial Officer oversees this process on a regular basis.
A key element of the Bank’s asset/liability management plan is to protect net earnings by managing the maturity or repricing mismatch between interest-earning assets and rate-sensitive liabilities. The Company seeks to accomplish this by extending funding maturities through wholesale funding sources, including the use of FHLB advances and brokered certificates of deposit, and through asset management, including the use of adjustable-rate loans and selling certain fixed-rate loans in the secondary market. Management is also focused on matching deposit duration with the duration of earning assets as appropriate.
As part of the efforts to monitor and manage interest rate risk, a number of indicators are used to monitor overall risk. Among the measurements are:
Market Risk. Market risk is the potential change in the value of investment securities if interest rates change. This change in value impacts the value of the Company and the liquidity of the securities. Market risk is controlled by setting a maximum average maturity/average life of the securities portfolio to 10 years.
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Economic Risk. Economic risk is the risk that the underlying value of a bank will change when rates change. This can be caused by a change in value of the existing assets and liabilities (this is called Economic Value of Equity or EVE), or a change in the earnings stream (this is caused by interest rate risk). The Company takes economic risk primarily when fixed rate loans are made, or purchase fixed-rate investments, or issue long term certificates of deposit or take fixed-rate FHLB advances. It is the risk that interest rates will change and these fixed-rate assets and liabilities will change in value. This change in value usually is not recognized in the earnings, or equity (other than marking to market securities available-for-sale or fair value adjustments on loans held for sale). The change is recognized only when the assets and liabilities are liquidated. Although the change in market value is usually not recognized in earnings or in capital, the impact is real to the long-term value of the Company. Therefore, the Company will control the level of economic risk by limiting the amount of long-term, fixed-rate assets it will have and by setting a limit on concentrations and maturities of securities.
Interest Rate Risk. The table presented below, as of December 31, 2025, is an analysis prepared for the Company by a third-party consultant. The analysis employs various market and actual experience-based assumptions and depicts a static shock. to net interest income through instantaneous and sustained shifts in the yield curve, with adjustments in 100 basis point increments, both up and down by 300 basis points. The results present a projected income statement with moderate exposure to immediate changes in interest rates. These simulations take into account repricing, maturity, competitive factors, expected life of non-maturity deposits, and prepayment characteristics of individual products. These assumptions are based upon our experience, business plans and published industry experience. Because these assumptions are inherently uncertain, actual results may differ from simulated results. The ALCO reviews simulation results to determine whether exposure resulting from changes in market interest rates remains within established tolerance levels over a twelve-month horizon and develops appropriate strategies to manage this exposure. The table illustrates the estimated change in net interest income over the next 12 months, starting from December 31, 2025.
Change in Interest Net Interest Income
Rates in Basis Points Amount Change Change
(Dollars in thousands)
As indicated by the table above, the Company's net interest income remains relatively stable across interest rate changes, indicating moderate exposure to immediate rate fluctuations. In a rising rate environment, net interest income increases, with a 2.9% increase at +300 basis points. In a declining rate environment, net interest income decreases, with a 4.9% decline at -300 basis points.
In managing the assets/liability mix the Company typically places an equal emphasis on maximizing net interest margin and matching the interest rate sensitivity of the assets and liabilities. From time to time, however, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, the Company may place somewhat greater emphasis on maximizing net interest margin than on strict dollar for dollar categories matching the interest rate sensitivity of the assets and liabilities. Management also believes that the increased net income which may result from a prepayment assumption mismatch in the actual maturity or repricing of the asset and liability portfolios can, during periods of changing interest rates, provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. Management believes that 1st Security Bank’s level of interest rate risk is acceptable under this approach.
The Bank actively manages its exposure to changes in interest rates as part of its asset-liability management process. In addition to on-balance-sheet strategies, the Bank utilizes derivative instruments, primarily pay-fixed, receive-variable interest rate swaps designated as cash flow hedges, to mitigate the variability of cash flows on borrowings and to effectively lock in fixed borrowing costs over the term of the hedged exposures. Derivatives are an integral component of the Bank’s interest rate risk management strategy and are incorporated into the measurement and monitoring of interest rate risk. The Bank’s asset-liability management models, including net interest income and economic value of equity simulations, include the expected cash flows and repricing characteristics of derivative positions along with related hedged items. Management evaluates interest rate risk on both a hedged and unhedged basis to assess the effectiveness of hedging strategies and the residual exposure to changes in market interest rates. The use of derivatives is intended to reduce the sensitivity of earnings and capital to interest rate movements and to align the repricing characteristics of funding with those of interest-earning assets. The Bank does not use derivatives for speculative purposes.
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In evaluating the Company’s exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk.
Liquidity
Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit runoff that may occur in the normal course of business. The Company relies on several different sources in order to meet potential liquidity demands. The primary sources are increases in deposit accounts, FHLB borrowings, purchases of federal funds, sale of securities available-for-sale, cash flows from loan payments, sales of one-to-four-family loans held for sale, and maturing securities. While the maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund its operations. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At December 31, 2025, the Bank’s total borrowing capacity was $716.2 million with the FHLB of Des Moines, with unused borrowing capacity of $583.5 million. The FHLB borrowing limit is based on certain categories of loans, primarily real estate loans that qualify as collateral for FHLB borrowings. At December 31, 2025, the Bank held approximately $1.08 billion in loans that qualify as collateral for FHLB borrowings.
In addition to the availability of liquidity from the FHLB of Des Moines, the Bank maintains a short-term borrowing line with the FRB with a limit of $276.9 million, and a combined credit limit of $101.0 million in written federal funds lines of credit through correspondent banking relationships at December 31, 2025. The FRB borrowing limit is based on certain categories of loans, primarily consumer loans, that qualify as collateral for FRB line of credit. At December 31, 2025, the Bank held approximately $580.9 million in loans that qualify as collateral for the FRB line of credit. There were no outstanding borrowings with the FRB or correspondent banks as of December 31, 2025, and $8.0 million at December 31, 2024. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.
The Bank’s Asset and Liability Management Policy permits management to utilize brokered deposits up to 20% of total deposits or $536.4 million at December 31, 2025. Total brokered deposits at December 31, 2025 were $362.5 million. Management utilizes brokered deposits to mitigate interest rate risk and to enhance liquidity when appropriate.
Liquidity management is both a daily and long-term function of the Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S. Government obligations and U.S. agency securities. The Company uses sources of funds primarily to meet ongoing commitments, pay maturing deposits, fund withdrawals, and to fund loan commitments. At December 31, 2025, outstanding loan commitments, including unused lines of credit totaled $605.4 million. For information regarding our commitments and off-balance sheet arrangements, see “Note 11 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K. The Company purchased $99.6 million and $110.3 million in securities during the years ended December 31, 2025 and 2024, respectively, and all are classified as available-for-sale. Proceeds from securities repayments, maturities and sales in those periods were $73.3 million and $119.6 million, respectively.
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Our primary investing activity is the origination of loans. During the years ended December 31, 2025 and 2024, our portfolio loan originations, exceeded our loan repayments by $170.2 million and $73.8 million, respectively. The Bank’s liquidity is also affected by the volume of loans originated and then sold. During the years ended December 31, 2025 and 2024, the Bank sold $563.5 million and $564.8 million in loans, respectively.
Total deposits increased $334.2 million during the year ended December 31, 2025, partially driven by a net increase in brokered deposits of $219.2 million. CDs scheduled to mature in one year or less at December 31, 2025, totaled $308.6 million. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this strategy, management believes that a majority of maturing relationship deposits will remain with the Bank.
We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Based on current capital allocation objectives, the Bank expects to incur capital expenditures during the year ending December 31, 2025 related primarily to tenant and operational improvements at the newly purchased headquarters building in connection with the planned headquarters consolidation. These expenditures are expected to be largely offset by proceeds from the anticipated sale of the Bank’s current headquarters, and accordingly are not expected to have a material impact on liquidity. We also have purchase obligations, with remaining terms generally less than three years and contracts with various vendors to provide services, including information processing. These contracts typically extend for periods ranging from one to five years, and our financial obligations are contingent upon satisfactory performance by the vendor.
For the year ending December 31, 2026, we project that fixed commitments will include $2.0 million of operating lease payments. FHLB borrowings of $76.8 million are scheduled to mature within the next 12 months. For information regarding our operating leases and borrowings, see “Note 6 – Leases” and “Note 9 – Debt”, respectively, of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.
The Bank's management believes that the Company's liquid assets combined with its available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months.
As a separate legal entity from the Bank, FS Bancorp must provide for its own liquidity. In addition to its own operating expenses, FS Bancorp is responsible for paying for any stock repurchases, dividends declared to its stockholders, interest and principal on outstanding debt, and other general corporate expenses. Sources of capital and liquidity for FS Bancorp include distributions from the Bank and the issuance of debt or equity securities, although there are regulatory restrictions that limit the Bank's ability to make such distributions.
Dividends and other capital distributions from the Bank are subject to regulatory notice and certain restrictions. Unrestricted cash held by FS Bancorp at the Bank on an unconsolidated basis totaled $8.1 million at December 31, 2025. The Company currently expects to continue paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. The current quarterly common stock dividend rate is $0.29 per share, which we believe balances our objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders. Assuming continued payment during 2026 at this rate of $0.29 per share, our total dividend paid each quarter would be approximately $2.1 million based on the number of our current outstanding shares as of December 31, 2025.
Capital Resources
The Bank is subject to minimum capital requirements imposed by the FDIC. Based on its capital levels at December 31, 2025, the Bank exceeded these requirements as of that date. Consistent with our goals to operate a sound and profitable organization, our policy is for the Bank to maintain a well capitalized status under the capital categories of the FDIC. Based on capital levels at December 31, 2025, the Bank was considered to be “well capitalized”. At December 31, 2025, 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 10.96%, 12.73%, 13.96%, and 12.73%, respectively.
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As a bank holding company registered with the Federal Reserve, FS Bancorp is subject to the capital adequacy requirements of the Federal Reserve. Bank holding companies with $3.0 billion or more in total assets are required to comply with the Federal Reserve’s capital regulations, which are generally consistent with the capital regulations applicable to the Bank. Under these regulations, the Federal Reserve expects the holding company to serve as a source of financial and managerial strength to its subsidiary bank, and expects the subsidiary bank to be well capitalized under the prompt corrective action regulations.
FS Bancorp is subject to these regulatory capital guidelines as of December 31, 2025, and has exceeded all applicable minimum capital requirements. The regulatory capital ratios calculated for FS Bancorp at December 31, 2025 were as follows: 9.66% for Tier 1 leverage-based capital, 11.21% for Tier 1 risk-based capital, 14.25% for total risk-based capital, and 11.21% for CET 1 capital ratio.
For additional information regarding regulatory capital compliance, see the discussion included in “Note 13 – Regulatory Capital” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.
Recent Accounting Pronouncements
For a discussion of recent accounting standards, please see “Note 1 – Basis of Presentation and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10–K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises principally from interest rate risk inherent in lending, investing, deposit and borrowings activities. Management actively monitors and manages its interest rate risk exposure. In addition to other risks that are managed in the normal course of business, such as credit quality and liquidity, management considers interest rate risk to be a significant market risk that could potentially have a material effect on the Company’s financial condition and result of operations. The information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management” of this Form 10–K is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
FS BANCORP,INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets 72
Consolidated Statements of Income 73
Consolidated Statements of Comprehensive Income 74
Consolidated Statements of Changes in Stockholders’ Equity 75
Consolidated Statements of Cash Flows 77
Notes to Consolidated Financial Statements 79
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
FS Bancorp, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of FS Bancorp, Inc., and subsidiary (the “Company”) as of December 31, 2025 and 2024, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2025, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2025 and 2024, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter