FSBW 10-K & 10-Q changes, risk factors and insider trading

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 areasareas, including declining employment, reduced consumer spending, or business failures, could impactadversely affect our growth rate, reduce ourgrowth, customers’ ability to repay loans, and adversely impactconsequently, our business, financial condition, and results of operations. Broader economic factors such as inflation, unemployment and money supply fluctuations also may adversely affect our profitability. Trade wars, tariffs, or shifts in trade policies between the United States and other nations could disrupt supply chains, increase costs for businesses, and reduce export opportunities for our customers. These developments may, in turn, negatively impact these businesses and, by extension, our operations and financial performance.

A downturn in economic conditions, be itwhether due to inflation,recessionary aconditions, recession,inflation war,or deflation, interest rate volatility, geopolitical conflicts, market instability, adverse weather,weather events, or other factors, could have a material adverse effect on the business, financial condition, and results of operations,operations. includingAny butof notthese limitedconditions could lead to:

OurA substantial portion of our loan portfolio predominantlyconsists comprisesof assetsloans secured by real estate or fixtures affixed to real property. Any deteriorationdecline in the real estate marketsmarket associatedvalues withcould thematerially collateralaffect securingborrowers' mortgageability to repay loans couldand significantly impact borrowers' repayment capabilities andreduce the value of collateral. Real estate values are affected by various factors, including economic conditions,trends, governmentalgovernment rulesregulations, orzoning and tax policies, andinterest rates, natural disasters such(including as earthquakes,earthquakes and trade-relatedfloods), pressuresand thatdisruptions may affectin construction costs or materials availability.supply. IfForced we are required to liquidate a significant amountliquidation of collateral during a periodperiods of reduceddeclining real estate values,values could materially impair our financial condition and profitabilityresults couldof be adversely affected.operations.

Monetary policy, interest rate volatility, inflation, deflation, and other external economic factors could adversely impact our financial performance and operations.

Our consumer loans accounted for $620.2$597.0 million, or 24.5%22.5% of our total gross loan portfolio as of December 31, 2024,2025, of which $541.9$525.8 million (87.4%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), $74.9$68.1 million (12.1%2.6% of total consumer loans) consisted of marine loans secured by boats, and $3.3$3.0 million (0.5%0.1% of total consumer loans) consisted of other consumer loans, which includes personal lines of credit, credit cards, automobile,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 do 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 by or through thirdthird-party parties,dealers, which presents greater risk than our direct lending products whichbecause involveswe do not have direct contact between us andwith the borrower. Unlike a direct loanloans where the borrower makesapplies anwith applicationus directly to us,directly, in theseindirect loansoriginations the dealer, who has a direct financial interest in completing the loan transaction,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, becausethe weabsence do not haveof direct contactinteraction with the borrower,borrower theseincreases loansthe mayrisk be more susceptible to aof material misstatementmisstatements onin the loan application or havingmisuse theof loan proceeds beingby misused byeither 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.

A significant portion of our business involves commercial real estate lendinglending, which is subject to various risks that could adversely impact our results of operations and financial condition.

At December 31, 2024,2025, our loan portfolio included $590.5$969.5 million of commercial real estate loans, or 36.5% of our total gross loan portfolio, including $174.9$177.1 million secured by non-owner occupied commercial real estate properties, and $245.2$262.2 million of multi-family real estate loans, or 23.3% of our total gross loan portfolio.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.

At December 31, 2024,2025, our commercial business loan portfolio included commercial and industrial loans of $287.0$301.1 million, or 11.3%, and warehouse lending of $12.9$28.2 million, or 0.4%,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,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 andprogram construction warehouse lending programs areis 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, 2024,2025, our construction and development loan portfolio totaled $330.7$396.5 million, constituting 13.1%14.9% of our total gross loan portfolio, excluding $174.1$235.4 million in unfunded construction loan commitments. Of this portfolio, $223.3$266.2 million was allocated to speculative residential real estate projects, and $42.0$42.3 million was allocated to non-speculative residential custom construction. Additionally, we had threetwo commercial note-secured lines of credit totaling $47.5$55.0 million in commitments, directed towards residential construction re-lenders with an outstanding balance of $10.7$29.2 million at December 31, 2024.2025. The risks associated with the collateral underlying our commercial construction warehouse lines are similar to those associated with our residential construction and development loans.

At December 31, 2024,2025, 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 $19.5$15.5 million. At December 31, 2024,2025, there was $2.2$2.5 million outstanding under these residential warehouse lines, compared to $573,000$2.2 million outstanding at December 31, 2023.2024.

At December 31, 2024,2025, our nonperforming assets (which consisted of nonaccrual loans, other real estate owned (“OREO”), and other repossessed assetsloans) were $13.6$18.7 million or 0.54%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.

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, such asincluding general economic conditionsconditions, 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.

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 cancould increase loan prepayments, leading to reinvestment in lower-yielding assets, and reducing income.

In a heightened rate environment, retaining deposits can become more costly. At December 31, 2024,2025, we held $869.3$1.06 millionbillion in certificates of deposit maturing within one year and $1.31$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.

Interest rate fluctuations also influence the fixed-rate investment securities, which inversely correlatescorrelate with rate changes. At December 31, 2024,2025, the fair value of our securities available-for-sale was $281.2$288.7 million, with unrealized net losses of $29.1$16.8 millionmillion, 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 $7.2$992,000, millionnet of tax, at December 31, 2024.2025. Further declines in fair value from risingsustained ratesor additional rate increases could have an adverse effect on stockholders’ equity.

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 declinesdecline 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.

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, including the CFPB,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.

The effects of climate change continue to raise significant concerns about the state of the environment. However,Federal underand a new Trump administration, federalstate policy may shiftapproaches to reduce the emphasis on climate change initiativescontinue to evolve, and environmentalchanges regulations.in Thislegislative or regulatory priorities could include scaling back federal participation in international agreements, such asalter the Paris Agreement,requirements and reducingexpectations regulatory pressuresplaced on businesses, including banks, to address climate-related risks. Legislative and regulatory proposals aimed at combating climate change may face greater scrutiny or diminished priority.

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,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, 2024,2025, FS Bancorp had $9.2$8.1 million in unrestricted cash to support dividend and debt payments.

Failure to align ourDEI DEIand ESG efforts with the current legal framework could result in reputational damage,harm, legal challenges, and adverse impacts on our operations. Government investigations, enforcement actions, or private litigation challenging our DEI-related policies could lead to financial penalties, increased legal costs, and potential restrictionslimitations on our ability to engage in government contracting. Moreover, various privatePrivate third-party organizations continue to evaluate companies based on ESG and DEI practices.evaluations Unfavorablemay ratings from these entities couldfurther influence investor decisions, limit access to capital, and generatestakeholder negative sentiment among stakeholders.perception.

While the executive order aims to eliminate specific DEI programs,Although investors, customers, and other stakeholders maycontinue stillto expect transparency and commitment to broader ESG goals, including workforce diversity, community engagement, and responsible corporategovernance, governance. Companies that scalescaling back DEI initiativesor ESG efforts to comply with federal mandates may facetrigger backlashcriticism from institutional investors, advocacy groups, and employeesemployees. whoMeanwhile, viewmisalignment suchwith actionsstate aslaws aor retreatrating fromagencies socialcould responsibilityaffect commitments.market Additionally, inconsistencies between federalperception and state-level DEI policies may create further complexities, as certain states continueaccess to mandate affirmative action or corporate diversity disclosures.capital.

1st Security Bank has been serving the Puget Sound area since 1907, which includes whenthe 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.

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 ourits relationships within thosethese markets.

At December 31, 2024,2025, the Company's loan portfolio includedconsisted of the following major categories: CRE loans, residential real estate loans, consumer loans, and commercial business loans representing 63.7%,36.5%, 24.5%,28.6%, 22.5% and 11.8%12.4% of the total loan portfolio, 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 $695.2$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 $20.5$22.9 million of loans brokered to other institutions through the home lending segment during the year ended December 31, 2024,2025, of which $564.8$555.2 million were sold to investors. Of the loans sold to investors, $233.9$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. At December 31, 2024, one-to-four-family residential mortgage loans held for investment totaled $617.3 million, or 24.4% of the total gross loan portfolio, while loans held for sale totaled $27.8 million and residential home equity loans totaled $75.1 million at that date.

For the year ended December 31, 2024,2025, one-to-four-family loan originations and refinancing activity increased compared to the prior period as a result of slightlychanges decreased marketin interest rates and slightlyeconomic more housing inventory.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 significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs. Deposit flows are influenced by a number of factors, including interest rates paid on time deposits, other investments, account maturities, and the overall level of personal income and savings. Lending activities are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles. Sources of funds for lending activities include primarily deposits, including brokered deposits, borrowings, payments on loans, and income provided from operations.

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

Management utilizesestimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, historical loss experience, and reasonable and supportable forecasts. The lookbackACL periodis inmaintained at a level sufficient to provide for expected credit losses over the analysislife includesof the asset based on evaluating historical datacredit fromloss 2009experience toand present.making Adjustmentsadjustments to historical loss information arefor madedifferences whenin managementthe determinesspecific historicalrisk datacharacteristics isin notthe likelycurrent reflectiveportfolio. These factors include, among others, changes in the size and composition of the currentportfolio, portfoliodelinquency suchrates, as limited data sets or lack of default oractual loss history.experience Managementand maycurrent selectivelyeconomic apply external market data to subjectively adjust the Company’s own loss history including index or peer data. Accrued interest receivable is excluded from the estimate of credit losses on loans.conditions.

The Company’s primary objective is to operate 1st Security Bank as a well-capitalized, profitable, independent, community-oriented financial institution, serving customers in its primary market area defined generally as the greater Puget Sound market area. The Company’s strategy is to provide innovative products and superior customer service to small businesses, industry and geographic niches, and individuals located in its primary market area. Services are currently provided to communities through the main office, 27 full-service bank branches and 13 loan production offices (seven of which are stand-alone), which are supported withby 24/7 access to on-lineonline 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 basedwhile uponmanaging credit, interest rate, and concentration risks. The Board of Directors seeks to accomplish the Company’s objectives through the adoption of a strategy designed to improve profitability andprofitability, maintain a strong capital positionposition, 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 the current level of diversification in its portfolio. At December 31, 2024,2025, the Company's loan portfolio included CRE loans, residential real estate loans, consumer loans, and commercial business loans representing 63.7%,36.5%, 24.5%,28.6%, 22.5%, and 11.8%12.4% of the total loan portfolio, respectively.

Maintaining strong asset quality. The Company believes that strongStrong asset quality is a key todriver of long-term financial success. The percentagepercentages of nonperforming loans to total gross loans were 0.54%0.71% and 0.45%0.54% at December 31, 20242025 and 2023,2024, respectively. The percentagepercentages of nonperforming assets to total assets were 0.45%0.59% and 0.37%0.45% at December 31, 20242025 and 2023,2024, respectively. Management actively addresses delinquent loans and nonperforming assets by pursuing aggressive collection efforts for consumer debts, marketing saleable foreclosed or repossessed properties, working onresolving classified assets' resolutionsassets, and implementing loan charge-offs. In recent years, the Company focused on originating consumer loans for borrowers with higher credit scores, generally,generally over 720720, while maintaining flexibility within 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.

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, thatto lead tosupport 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. ThisThe 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.

Loans held for sale, consisting of one-to-four-family loans, increased $2.2$15.9 million to $43.7 million at December 31, 2025, from $27.8 million at December 31, 2024, fromreflecting $25.7continued million at December 31, 2023. The Company continues to investinvestment in its home lending operations and strategicallystrategic managemanagement of production capacity in the markets we serve.capacity.

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

During the year ended December 31, 2024,2025, the Company sold $564.8$555.2 million of one-to-four-family loans, compared to $408.0$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 loansloan sales increased towas 3.08% for theboth yearyears ended December 31, 2024,2025 comparedand to 3.07% for the year ended December 31, 2023.2024. Gross margin is defined as the margin on loans sold without the impact of deferred loan costs.

At MarchJune 31,30, 2026, the Company's loan portfolio consisted of the following major categories: CRE loans, residential real estate loans, consumer loans, and commercial business loans representing 37.2%,37.8%, 28.8%,29.8%, 21.9%,21.5%, and 12.1%10.9% of the portfolio, respectively.

Indirect home improvement loans to finance window, gutter, siding replacement, solar panels, spas, and other improvement renovations represent a large segment of the consumer loan portfolio. These loans are sourced through a contractor/dealer network of 3027 active fixture dealerships located throughout Washington, Oregon, California, Idaho, Colorado, Nevada, Arizona, Minnesota, Texas, Utah, Massachusetts, Montana, and New Hampshire. During the three months ended MarchJune 31,30, 2026, the Company originated 1,1811,221 indirect home improvement loans with an aggregate total of $26.6$28.9 million. Five contractor/dealers accounted for 71.7%72.9% of the dollar volume funded in this category, and fourthree states – Washington, Oregon, California, and UtahCalifornia – represented nearly three-quarters of total loan originations at 36.4%,33.9%, 21.0%, 15.3%,25.3%, and 4.7%,14.6%, respectively.

The Company originates one-to-four-family residential mortgage loans through referrals from real estate agents, financial planners, builders, and existing customerscustomers, with retail banking customers also serving as an important source of loan originations. During the three months ended MarchJune 31,30, 2026, the Company originated $204.9$202.7 million of one-to-four-family loans (including loans held for sale, loans held for investment, and fixed seconds). In addition, $3.1$2.6 million of loans were brokered to other institutions through the home lending segment. Of the loans originated, $154.7$156.1 million were sold to investors, of which $73.6$72.7 million were sold to the FNMA and FHLMC with servicing rights retained to maintain and further develop these customer relationships.

For the three months ended MarchJune 31,30, 2026, one-to-four-family loan originations and refinancing activity increased compared to the prior period, driven by changes in interest rates and economic conditions. Residential construction and development lending, while less common than other origination options, remains an important element of the total loan portfolio. The Company continues to take a disciplined approach concentrating its efforts on loans to builders and developers in its known market areas. These short-term loans typically carry a maturity of six to 18 months, with disbursements not fully realized at origination, resulting in a short-term reduction in net loans receivable.

Comparison of Financial Condition at MarchJune 31,30, 2026 and December 31, 2025

Assets. Total assets remaineddecreased virtually$17.8 unchangedmillion to $3.18 billion at June 30, 2026, compared to $3.20 billion at March 31, 2026, compared to December 31, 2025.2025, Theprimarily mostdue significantto changesdecreases betweenof these periods were a $17.7$19.2 million decrease in securities available-for-sale, a $12.6$13.2 million increase in loans held for sale, aand $10.5$1.5 million increasein core deposit intangible, partially offset by increases of $6.4 million in FHLB stock, $5.8 million in loans receivable, net, $1.6 million in securities held-to-maturity, $1.5 million in total cash and cash equivalents, and a $919,000 increase$866,000 in loansoperating receivable,lease net.right-of-use Assetassets. Loan growth was funded primarily funded by brokeredborrowings, deposits.which also replaced a decline in deposit funding during the period.

●Loans Totalreceivable, undisbursednet constructionincreased and development loan commitments decreased $16.9$5.8 million to $218.5$2.63 millionbillion at MarchJune 31,30, 2026, fromcompared $235.4to million$2.62 billion at December 31, 2025.2025:

● Commercial business loans decreased $6.7$40.8 million, reflecting a decrease of $10.0$20.9 million in warehouse lending,lending partiallyand offset by an increase of $3.4$19.9 million in commercial and industrial (“C&I”) loans.

● Consumer loans decreased $13.5$23.8 million, primarily due to declinesthe decline of $12.4$23.7 million in indirect home improvement loans and $989,000 in marine loans.

Overall,In summary, loan growth was concentrated in CRE, including owner occupied, non-owner occupied,CRE and construction and development loans, and to a lesser extent, multi-family andone-to-four-family residential reallending, estatewhile segments. Consumerconsumer balances declined, driven primarily by a reduction in indirect home improvement loans, reflecting the impact of current economic conditions on consumer demand.

Loans held for sale, consisting of one-to-four-family loans, increaseddecreased $12.6$13.2 million to $56.3$30.5 million at MarchJune 31,30, 2026, from $43.7 million at December 31, 2025, reflecting higher origination volume driven by increased refinance activity resulting from improved mortgage rates.2025.

For the threesix months ended MarchJune 31,30, 2026, one-to-four-family loan originations and refinancing activity increased significantlyincreased, compared to the priorsix period,months ended June 30, 2025, driven by improved mortgage ratesrates. whichRefinance resultedvolume inincreased a$56.6 175%million increaseor in104.9%, refinanceand volume. Purchasepurchase originations also increased $18.9$12.0 million.million or 15.7%,4.1%, reflecting continued demand in the Company'sCompany’s market areas.

During the threesix months ended MarchJune 31,30, 2026, the Company sold $154.7$310.8 million of one-to-four-family loans, compared to $91.9$219.0 million for the same period one year ago. The increase in loan2025, sales reflects improved mortgage rates which is also drivingreflecting higher refinance activity.activity driven by more favorable interest rates. The Company remainscontinues focusedto on managingmanage loan production capacity andin maintainingan effort to maintain a pipeline consistent with market demand. Gross margin on home loan sales (defined as the margin on loans sold, excluding the impact of deferred loan costs) was 3.03%3.01% for the threesix months ended MarchJune 31,30, 2026, compared to 3.26%3.14% for the threesix months ended MarchJune 31,30, 2025. The compression in gross margin reflects competitive pricing pressurespressure in the current mortgage market environment as the Company maintained production volume consistent with market demand. Gross margin is defined as the margin on loans sold without the impact of deferred loan costs.

The ACL on loans totaled $32.4$31.2 million, or 1.22%,1.17%, of gross loans receivable (excluding loans held for sale), at March 31,June 30, 2026, compared to $31.9 million, or 1.20%, at December 31, 2025. The ACL on unfunded loan commitments decreased $121,000$39,000 to $1.6$1.7 million at March 31,June 30, 2026, from $1.8 million at December 31, 2025. Total loans 30 days or more past due increaseddecreased to $23.2$16.6 million, or 0.87%0.62% of total loans, from $22.2 million, or 0.84%, at December 31, 2025, reflecting softeningimproved credit performance across the broader loan portfolio,portfolio drivenas bythe markets respond to current economic conditions and their impact on borrower cash flows.

Nonperforming loans, consisting solely of nonaccrual loans, decreased $477,000$3.1 million to $18.3$15.6 million at March 31,June 30, 2026, from $18.7 million at December 31, 2025. The decrease was primarily attributable to a $2.3 million charge-off on a nonperforming commercial construction loan, and a decrease of $1.4 million in nonperforming CRE owner occupied loans, whichprimarily decreased $762,000due to $10.5loan million, and nonperforming C&I loans, which decreased $415,000 to $165,000,payoffs, partially offset by an increase of $500,000 in nonperforming indirect home improvement loans, which increased $366,000 to $4.6 million and nonperforming residential loans, which increased $290,000 to $2.5 million.loans. The ratio of nonperforming loans to total gross loans reduced slightly to 0.69%0.59% at March 31,June 30, 2026, from 0.71% at December 31, 2025.

Classified loans totaled $26.1$25.0 million at March 31,June 30, 2026, compared to $27.3 million at December 31, 2025. The coverage ratio of the ACL on loans to nonperforming loans was 177.7%199.2% at March 31,June 30, 2026, compared to 170.6% at December 31, 2025. The increase in the coverage ratio primarily reflects increasedthe provisiondecline forin nonperforming loans relative to the ACL on loans.

Overall, asset quality trends reflectreflected improved delinquency and nonperforming loan metrics, continued growth in CRE, construction, multi-family,CRE, and residential loan segments,portfolios, ongoing elevated losses in certain consumer loan portfolios, and continued risk management and monitoring of nonperforming and substandard exposures.

Liabilities. Total liabilities weredecreased $29.0 million to $2.86 billion at June 30, 2026, from $2.89 billion at both March 31, 2026 and December 31, 2025. The loan-to-deposit ratio was approximately 102.9%108.6% at MarchJune 31,30, 2026, compared to approximately 100.9% at December 31, 2025.

Total deposits decreased $36.1$224.8 million to $2.64$2.45 billion at MarchJune 31,30, 2026, from $2.67 billion at December 31, 2025, reflecting decreases in allmost of the deposit categories other than escrow accounts.categories. Transactional accounts (noninterest-bearing checking, interest-bearing checking and escrow accounts) decreased $13.7$54.7 million to $980.0$938.8 million at MarchJune 31,30, 2026, from $993.6 million at December 31, 2025, primarily due to decreases of $12.4$38.5 million in interest-bearing checking, $17.4 million in noninterest-bearing checking, and $9.2an offsetting increase of $1.1 million in interest-bearing checking, partially offset by an $8.0 million increase in escrow accounts related to mortgages serviced, reflecting higher customer balances andassociated increased activity inwith mortgage servicing.servicing activities. Money market and savings accounts decreasedincreased $2.5$3.3 million to $547.1$553.0 million at MarchJune 31,30, 2026, from $549.7 million at December 31, 2025, primarily reflecting a decline$9.0 million increase in moneysavings marketaccount balances, partially offset by ana increase$5.8 million decrease in retailmoney andmarket businessaccount savings accounts.balances.

CDs,Certificates of deposit (“CDs”), which include both retail and non-retail CDs, decreased $19.8$173.3 million to $1.11$957.1 billionmillion at MarchJune 31,30, 2026, from $1.13 billion at December 31, 2025. Retail CDs decreased $5.0$4.3 million to $916.7$917.4 million at MarchJune 31,30, 2026, from $921.7 million at December 31, 2025. Non-retail CDs, which include brokered CDs, online CDs and public funds CDs decreased $14.9$169.0 million to $193.8$39.7 million, compared to $208.7 million at December 31, 2025, primarily due to a decrease of $15.3$167.0 million in brokered CDs. Non-retail CDs represented 17.5%4.2% and 18.5% of total CDs at MarchJune 31,30, 2026 and December 31, 2025, respectively. The decrease in non-retail CDs alignsreflects the Company’s funding strategy of replacing certain brokered deposits with thelower-cost Company'sFHLB strategyand FRB borrowings, while continuing to manage liquidity and 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, while reducing reliance on higher cost borrowings.risk.

The Bank had uninsured deposits of approximately $704.2$719.5 million or 26.7%29.4% of total deposits, at MarchJune 31,30, 2026, compared to approximately $718.1 million or 26.9% of total deposits at December 31, 2025. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

Borrowings increased $38.0$195.2 million to $167.3$324.5 million at MarchJune 31,30, 2026, from $129.3 million at December 31, 2025. The increase reflects a shift toward FHLB and FRB borrowings, which offered more competitive rates on borrowings, compared tothan brokered deposits,deposits during the period, consistent with the Company's funding strategy. At MarchJune 31,30, 2026, borrowings were comprised of FHLB and FRB advances.

Stockholders’ Equity. Total stockholders’ equity increased $6.2$11.3 million to $313.9$319.0 million at MarchJune 31,30, 2026, from $307.7 million at December 31, 2025. The increase primarily reflects net income of $7.8$15.8 million. Declines in the fair value of available-for-sale securities recorded in accumulated other comprehensive income (“AOCI”) were largely offset by improvements in the fair value of interest rate swap cash flow hedges, resulting in a net improvement of $83,000,$4.1 million, net of tax. Gains and losses in fair value reflect changes in market interest rates during the periods. The increase in shareholders’ equity was partially offset by cash dividends paid totaling $2.2$4.3 million, and share repurchases of $620,000.$4.3 million.

Book value per common share was $42.42$43.57 at MarchJune 31,30, 2026, compared to $41.55 at December 31, 2025. The calculation of book value per share at MarchJune 31,30, 2026, was based on 7,398,5717,320,801 common shares, derived by subtracting the102,971 102,971of unvested restricted stock shares from the 7,501,5427,423,772 reported common shares outstanding as of that date. Similarly, the book value per share at December 31, 2025, was calculated based on 7,404,548 common shares, after deducting 102,971 of unvested restricted stock shares from the 7,507,519 reported common shares outstanding as of that date.

Comparison of Results of Operations for the Three Months Ended MarchJune 31,30, 2026 and 2025

General. Net income was $7.8$7.9 million for the three months ended MarchJune 31,30, 2026, compared to $8.0$7.7 million for the three months ended MarchJune 31,30, 2025. The decreaseincrease was primarily due to a $937,000,$980,000, or 58.9%,19.0%, increase in total noninterest income and a $536,000 increase in net interest income, partially offset by a $620,000 increase in provision for credit losses, a $627,000,$602,000, or 43.5%,2.4%, increase in total noninterest expense and an $86,000 increase in provision for income taxes, and a $465,000, or 1.9%, increase in total noninterest expense, partially offset by a $1.6 million, or 5.0%, increase in net interest income, and a $275,000, or 5.4%, increase in total noninterest income.taxes.

Net Interest Income. Net interest income increased $1.6 million$536,000 to $32.5$32.6 million for the three months ended MarchJune 31,30, 2026, from $31.0$32.1 million for the three months ended MarchJune 31,30, 2025, primarily due to an increase in total interest income of $2.5 million,$959,000, partially offset by an increase in total interest expense of $982,000.$423,000. The $959,000 increase in total interest income was primarily due to an increase of $2.7$1.2 million in interest income on loans receivable, including fees, drivenresulting primarilyfrom bynet aloan five-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.growth. The $423,000 increase in total interest expense was primarily the result ofreflected a $1.7 million$612,000 increase in deposit interest expense,expense reflectingon significantlyborrowings resulting from higher average borrowing balances in interest-bearing checking accounts, including brokered deposits, and a 108 basis point$423,000 increase in theinterest rate paidexpense on those accounts. Additionally, the repricing of the Company's subordinated notesnote following its repricing to a floatinghigher interest rate on February 15,in 2026, contributed $206,000 of incremental interest expense. These increases were partially offset by ana $879,000$612,000 decrease in borrowinginterest costs,expense ason the Company reduced average borrowings by $86.4 million in accordance with its funding and liquidity strategy.deposits.

Interest Income. Total interest income for the three months ended MarchJune 31,30, 2026, increased $2.5 million$959,000 to $49.3$49.7 million, from $46.8$48.7 million for the three months ended MarchJune 31,30, 2025. The increase was primarily due to a $2.7$1.2 million increase in interest income on loans receivable, including fees, as a result of higher average loan balancesbalances, andpartially offset by a five-basis point increase inlower average loan yields.yield. Offsetting this growth were decreases in interest income on investment securities and FHLBinterest-bearing stock,deposits at other financial institutions, collectively totaling $190,000,$266,000, primarily reflecting yieldlower compressionaverage on taxable investment securities from 4.34% to 3.99%balances and lower averageyields FHLBon stockinterest-bearing balances.deposits at other financial institutions.

The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest income for the three months ended MarchJune 31,30, 2026 and 2025:

Interest Expense. Total interest expense increased $982,000$423,000 to $16.8$17.0 million for the three months ended MarchJune 31,30, 2026, from $15.8$16.6 million for the comparable quarter in 2025, primarily due to an increase of interest$612,000 expense on deposits of $1.7 million, partially offset by a decrease of $879,000 ofin interest expense on borrowings.borrowings Theresulting from higher depositaverage costs were the result of an increase in interest-bearing checkingborrowing balances, includingwhich brokeredwas deposits, combined with a 108-basis point increase in the rate paid on those accounts, partiallyfully offset by a $332,000 decrease in interest expense on CDsdeposits duefor the same amount, reflecting primarily a shift from brokered deposits to borrowings, and a $423,000 increase in interest expense on the subordinated note following its repricing to a 19-basishigher pointinterest declinerate in CD rates. Additionally, the repricing of the Company's subordinated notes to a floating rate on February 15, 2026, contributed $206,000 of incremental interest expense.2026.

The average cost of total interest-bearing deposits decreased three-basis11-basis points to 2.97%2.92% for the three months ended MarchJune 31,30, 2026, compared to 3.00%3.03% for the three months ended MarchJune 31,30, 2025, primarily reflecting lower rates paid on certificates of deposit,CDs, which more than offset higher rates on interest-bearing checking and savings and money market accounts. The average balance of total interest-bearing deposits increaseddecreased $243.6$13.5 million to $2.0$1.91 billion for the three months ended MarchJune 31,30, 2026, compared to $1.77$1.92 billion for the three months ended MarchJune 31,30, 2025, driven primarily by ana increasedecrease in CDs, partially offset by increases in interest-bearing checking balances,and includingsavings brokeredand deposits.money market accounts.

The average cost of total interest-bearing liabilities similarly decreased fourone-basis basis pointspoint to 3.11%,3.12%, reflecting the benefit of the lower borrowingCD costscost, aspartially averageoffset borrowingsby declinedthe $86.4higher million.cost of the subordinated note following its repricing. The average cost of funds, which includes noninterest-bearing checking, increased onetwo- basis pointpoints to 2.39%,2.41%, from 2.39% for the three months ended June 30, 2025, primarily reflectingattributable to the repricing of the subordinated note to a lowerhigher proportioninterest of noninterest-bearing deposits in the overall funding mix.rate.

The following table details average balances of interest-bearing liabilities, associated rates, and resulting change in interest expense for the three months ended MarchJune 31,30, 2026 and 2025:

Provision for Credit Losses. For the three months ended MarchJune 31,30, 2026, the provision for credit losses was $2.5$2.6 million, consisting of a $2.6 million provision for credit losses on loans and aan $121,000$82,000 recoveryprovision ofon credit losses on unfunded loan commitments. This compares to a $1.6$2.0 million provision for credit losses for the three months ended MarchJune 31,30, 2025.2025, which consisted of a $1.5$1.7 million provision for credit losses on loans, a $21,000$154,000 provision for credit losses on held‑to‑maturityheld-to-maturity securities, and a $66,000$151,000 provision for credit losses on unfunded loan commitments. The increase in the provision for credit losses on loans primarily reflects an increase in nonperforming loans and higher net charge‑offs.offs during the period.

Noninterest Income. Noninterest income increased $275,000$980,000 to $5.4$6.2 million for the three months ended MarchJune 31,30, 2026, from $5.1$5.2 million for the three months ended MarchJune 31,30, 2025. The increase primarily reflects a $684,000$609,000 increase in gain on sale of loans,loans partially offset byand a $246,000$404,000 decreaseincrease in other noninterest income, and a $171,000 decrease in service charges and fee income.

The efficiency ratio, which is calculated by dividing noninterest expense by totalthe sum of net interest income and noninterest income, improved to 67.25%67.28% for the three months ended MarchJune 31,30, 2026, compared to 69.39%68.40% for the three months ended MarchJune 31,30, 2025, due to revenue growth outpacing noninterest expense.

Provision for Income Taxes. For the three months ended MarchJune 31,30, 2026, the Company recorded a provision for income taxes of $2.1 million, compared to $1.4$2.0 million for the three months ended MarchJune 31,30, 2025. The effective corporate income tax rates for the three months ended MarchJune 31,30, 2026 and 2025, were 20.9%21.1% and 15.2%,20.8%, respectively. The increase in both the provision and effective tax rate was primarily attributable to the absence of alternative energy tax credits under the Inflation Reduction Act of 2022, which benefited the comparable quarter in the prior year.year period.