0001530249us-gaap:~~StockOptionMemberfsbw:EquityIncentivePlan2018Member2021-01-012021-06-30~~FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:AgencySecuritiesMemberus-gaap:AvailableforsaleSecuritiesMember2020-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2021 OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35589

FS BANCORP, INC.

(Exact name of registrant as specified in its charter)


Washington		45-4585178
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

6920 220th Street SW, Mountlake Terrace, Washington 98043

(Address of principal executive offices; Zip Code)

(425) 771-5299

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.01 per share	FSBW	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐		Accelerated filer ☒
Non-accelerated filer ☐		Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of ~~August 6,~~November 5, 2021, there were ~~8,230,345~~8,187,383 outstanding shares of the registrant’s common stock.

Table of Contents

FS Bancorp, Inc.

Form 10-Q

Table of Contents


		Page Number
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets at ~~June~~September 30, 2021 and December 31, 2020 (Unaudited)	3

	Consolidated Statements of Income for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020 (Unaudited)	4

	Consolidated Statements of Comprehensive Income for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020 (Unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020 (Unaudited)	6 - 7

	Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020 (Unaudited)	8 - 9

	Notes to Consolidated Financial Statements	10 - 44

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46 - 62

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62

Item 4.	Controls and Procedures	62

PART II	OTHER INFORMATION	63

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3.	Defaults Upon Senior Securities	63

Item 4.	Mine Safety Disclosures	6364

Item 5.	Other Information	64

Item 6.	Exhibits	64

SIGNATURES		65

As used in this report, the terms “we,” “our,” “us,” “Company” and “FS Bancorp” refer to FS Bancorp, Inc. and its consolidated subsidiary, 1st Security Bank of Washington, unless the context indicates otherwise. When we refer to “Bank” in this report, we are referring to 1st Security Bank of Washington, the wholly owned subsidiary of FS Bancorp.

Table of Contents

Item 1. Financial Statements

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts) (Unaudited)


	June 30,		December 31,		September 30,		December 31,
ASSETS	2021		2020		2021		2020
Cash and due from banks	$	12,957	$	11,554	$	11,426	$	11,554
Interest-bearing deposits at other financial institutions		73,597		80,022		16,906		80,022
Total cash and cash equivalents		86,554		91,576		28,332		91,576
Certificates of deposit at other financial institutions		11,782		12,278		11,782		12,278
Securities available-for-sale, at fair value		232,570		178,018		268,802		178,018
Securities held-to-maturity (fair value of $8,000 and $7,556, respectively)		7,500		7,500
Securities held-to-maturity (fair value of $8,113 and $7,556, respectively)						7,500		7,500
Loans held for sale, at fair value		121,395		166,448		118,106		166,448
Loans receivable, net		1,645,664		1,544,981		1,678,043		1,544,981
Accrued interest receivable		7,323		7,030		7,797		7,030
Premises and equipment, net		27,594		27,343		27,243		27,343
Operating lease right-of-use (“ROU”) assets		5,193		4,949		4,875		4,949
Federal Home Loan Bank (“FHLB”) stock, at cost		5,065		7,439		4,871		7,439
Other real estate owned (“OREO”)		—		90		—		90
Deferred tax asset, net		216		—		303		—
Bank owned life insurance (“BOLI”), net		36,655		36,226		36,873		36,226
Servicing rights, held at the lower of cost or fair value		16,356		12,595		16,497		12,595
Goodwill		2,312		2,312		2,312		2,312
Core deposit intangible, net		4,397		4,751		4,220		4,751
Other assets		12,037		9,705		11,138		9,705
TOTAL ASSETS	$	2,222,613	$	2,113,241	$	2,228,694	$	2,113,241
LIABILITIES
Deposits:
Noninterest-bearing accounts	$	432,217	$	362,853	$	446,606	$	362,853
Interest-bearing accounts		1,426,393		1,311,218		1,417,044		1,311,218
Total deposits		1,858,610		1,674,071		1,863,650		1,674,071
Borrowings		42,528		165,809		42,528		165,809
Subordinated notes:
Principal amount		50,000		10,000		50,000		10,000
Unamortized debt issuance costs		(639)		—		(623)		—
Total subordinated notes less unamortized debt issuance costs		49,361		10,000		49,377		10,000
Operating lease liabilities		5,401		5,176		5,097		5,176
Deferred tax liability, net		—		58		—		58
Other liabilities		24,953		28,120		27,589		28,120
Total liabilities		1,980,853		1,883,234		1,988,241		1,883,234
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value; 5,000,000 shares authorized; NaN issued or outstanding		—		—		—		—
Common stock, $.01 par value; 45,000,000 shares authorized; 8,333,566 and 8,475,912 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		83		85
Common stock, $.01 par value; 45,000,000 shares authorized; 8,208,045 and 8,475,912 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively						82		85
Additional paid-in capital		75,797		81,275		68,481		81,275
Retained earnings		164,606		146,405		171,786		146,405
Accumulated other comprehensive income, net of tax		1,434		2,533		198		2,533
Unearned shares – Employee Stock Ownership Plan (“ESOP”)		(160)		(291)		(94)		(291)
Total stockholders’ equity		241,760		230,007		240,453		230,007
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,222,613	$	2,113,241	$	2,228,694	$	2,113,241

Per share data has been adjusted for all periods to reflect a 2-for-one stock split effective July 14, 2021.

See accompanying notes to these consolidated financial statements.

Table of Contents

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts) (Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,


2021

2020

2021

2020
INTEREST INCOME

Loans receivable, including fees

$
22,484

$
20,564

$
44,018

$
41,304
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions

1,313

1,149

2,563

2,358
Total interest and dividend income

23,797

21,713

46,581

43,662
INTEREST EXPENSE

Deposits

1,870

3,226

3,852

7,033
Borrowings

222

458

668

955
Subordinated notes

485

169

741

341
Total interest expense

2,577

3,853

5,261

8,329
NET INTEREST INCOME

21,220

17,860

41,320

35,333
PROVISION FOR LOAN LOSSES

0

4,649

1,500

8,335
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

21,220

13,211

39,820

26,998
NONINTEREST INCOME

Service charges and fee income

1,188

96

1,953

1,020
Gain on sale of loans

6,392

13,365

18,077

19,264
Gain on sale of investment securities

—

182

—

182
Earnings on cash surrender value of BOLI

215

215

429

431
Other noninterest income

391

273

761

2,125
Total noninterest income

8,186

14,131

21,220

23,022
NONINTEREST EXPENSE

Salaries and benefits

11,932

7,420

23,541

16,967
Operations

2,709

2,573

5,132

4,976
Occupancy

1,226

1,216

2,365

2,325
Data processing

1,203

1,051

2,510

2,031
Loss on sale of OREO

—

—

9

2
OREO expenses

—

2

—

2
Loan costs

647

451

1,171

951
Professional and board fees

786

668

1,608

1,349
Federal Deposit Insurance Corporation (“FDIC”) insurance

123

158

371

284
Marketing and advertising

155

103

252

249
Amortization of core deposit intangible

177

177

354

353
(Recovery) impairment of servicing rights

4

803

(2,046)

1,317
Total noninterest expense

18,962

14,622

35,267

30,806
INCOME BEFORE PROVISION FOR INCOME TAXES

10,444

12,720

25,773

19,214
PROVISION FOR INCOME TAXES

1,895

2,700

5,341

4,027
NET INCOME

$
8,549

$
10,020

$
20,432

$
15,187
Basic earnings per share

$
1.00

$
1.17

$
2.39

$
1.74
Diluted earnings per share

$
0.97

$
1.15

$
2.32

$
1.71


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
INTEREST INCOME
Loans receivable, including fees	$	23,520	$	21,066	$	67,538	$	62,370
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions		1,487		1,162		4,050		3,520
Total interest and dividend income		25,007		22,228		71,588		65,890
INTEREST EXPENSE
Deposits		1,629		2,637		5,481		9,670
Borrowings		227		503		895		1,458
Subordinated notes		496		170		1,237		511
Total interest expense		2,352		3,310		7,613		11,639
NET INTEREST INCOME		22,655		18,918		63,975		54,251
PROVISION FOR LOAN LOSSES		0		3,100		1,500		11,435
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		22,655		15,818		62,475		42,816
NONINTEREST INCOME
Service charges and fee income		1,073		546		3,026		1,566
Gain on sale of loans		6,885		16,228		24,962		35,492
Gain on sale of investment securities		—		118		—		300
Earnings on cash surrender value of BOLI		218		219		647		650
Other noninterest income		222		435		983		2,560
Total noninterest income		8,398		17,546		29,618		40,568
NONINTEREST EXPENSE
Salaries and benefits		12,790		10,225		36,331		27,192
Operations		2,628		2,809		7,760		7,785
Occupancy		1,227		1,167		3,592		3,492
Data processing		1,309		1,127		3,819		3,158
Loss on sale of OREO		—		—		9		2
OREO expenses		—		—		—		2
Loan costs		842		593		2,013		1,544
Professional and board fees		757		601		2,365		1,950
Federal Deposit Insurance Corporation (“FDIC”) insurance		120		290		491		574
Marketing and advertising		177		109		429		358
Amortization of core deposit intangible		177		176		531		529
(Recovery) impairment of servicing rights		(11)		82		(2,057)		1,399
Total noninterest expense		20,016		17,179		55,283		47,985
INCOME BEFORE PROVISION FOR INCOME TAXES		11,037		16,185		36,810		35,399
PROVISION FOR INCOME TAXES		2,706		3,472		8,047		7,499
NET INCOME	$	8,331	$	12,713	$	28,763	$	27,900
Basic earnings per share	$	0.99	$	1.50	$	3.38	$	3.25
Diluted earnings per share	$	0.97	$	1.47	$	3.30	$	3.19

Per share data has been adjusted for all periods to reflect a 2-for-one stock split effective July 14, 2021.

See accompanying notes to these consolidated financial statements.

Table of Contents

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2021

2020

2021

2020
Net income

$
8,549

$
10,020

$
20,432

$
15,187
Other comprehensive (loss) income:








Securities available-for-sale:








Unrealized holding (loss) gain during period

(323)

2,516

(2,509)

4,880
Income tax benefit (provision) related to unrealized holding (loss) gain

68

(540)

540

(1,048)
Reclassification adjustment for realized gains, net included in net income

—

(182)

—

(182)
Income tax provision related to reclassification for realized gains, net

—

39

—

39
Cash flow hedges:

Unrealized derivative (losses) gains during period

(165)

(390)

871

(1,442)
Income tax benefit (provision) related to unrealized derivative (losses) gains

35

84

(187)

310
Reclassification adjustment for realized loss (gain), net included in net income

124

(15)

238

(14)
Income tax (benefit) provision related to reclassification, net

(26)

3

(52)

3
Other comprehensive (loss) income, net of tax

(287)

1,515

(1,099)

2,546
COMPREHENSIVE INCOME

$
8,262

$
11,535

$
19,333

$
17,733


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Net income	$	8,331	$	12,713	$	28,763	$	27,900
Other comprehensive (loss) income:
Securities available-for-sale:
Unrealized holding (loss) gain during period		(1,653)		1		(4,162)		4,882
Income tax benefit (provision) related to unrealized holding (loss) gain		356		—		896		(1,049)
Reclassification adjustment for realized gains, net included in net income		—		(118)		—		(300)
Income tax provision related to reclassification for realized gains, net		—		26		—		65
Cash flow hedges:
Unrealized derivative (losses) gains during period		(57)		(43)		814		(1,485)
Income tax benefit (provision) related to unrealized derivative (losses) gains		12		8		(175)		318
Reclassification adjustment for realized loss, net included in net income		135		98		373		84
Income tax benefit related to reclassification, net		(29)		(21)		(81)		(18)
Other comprehensive (loss) income, net of tax		(1,236)		(49)		(2,335)		2,497
COMPREHENSIVE INCOME	$	7,095	$	12,664	$	26,428	$	30,397

See accompanying notes to these consolidated financial statements.

Table of Contents

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands, except share amounts) (Unaudited)

Three Months Ended ~~June 30, 2020 and 2021~~

Accumulated




Other

Additional

Comprehensive

Unearned

Total

Common Stock

Paid-in

Retained

Income,

ESOP

Stockholders’

Shares

Amount

Capital

Earnings

Net of Tax

Shares

Equity
BALANCE, April 1, 2020

8,664,392

$
87

$
84,473

$
114,957

$
1,819

$
(507)

$
200,829
Net income

—

$
—

—

10,020

—

—

$
10,020
Dividends paid ($0.11 per share)

—

$
—

—

(887)

—

—

$
(887)
Share-based compensation

—

$
—

223

—

—

—

$
223
Common stock repurchased

(174,310)

$
(2)

(3,237)

—

—

—

$
(3,239)
Other comprehensive income, net of tax

—

$
—

—

—

1,515

—

$
1,515
ESOP shares allocated

—

$
—

114

—

—

66

$
180
BALANCE, June 30, 2020

8,490,082

$
85

$
81,573

$
124,090

$
3,334

$
(441)

$
208,641

BALANCE, April 1, 2021

8,466,080

$
85

$
81,537

$
157,193

$
1,721

$
(225)

$
240,311
Net income

—

$
—

—

8,549

—

—

$
8,549
Dividends paid ($0.13 per share)

—

$
—

—

(1,136)

—

—

$
(1,136)
Share-based compensation

—

$
—

298

—

—

—

$
298
Common stock repurchased - repurchase plan

(200,588)

$
(2)

(5,540)

—

—

—

$
(5,542)
Stock options exercised, net

68,074

$
—

(928)

—

—

—

$
(928)
Other comprehensive loss, net of tax

—

$
—

—

—

(287)

—

$
(287)
ESOP shares allocated

—

$
—

430

—

—

65

$
495
BALANCE, June 30, 2021

8,333,566

$
83

$
75,797

$
164,606

$
1,434

$
(160)

$
241,760

~~Per share data has been adjusted to reflect a~~ ~~2-for-one stock split effective July 14, 2021.~~

~~See accompanying notes to these consolidated financial statements.~~

~~Table of Contents~~

~~Six Months Ended June~~September 30, 2020 and 2021

Accumulated




Other

Additional

Comprehensive

Unearned

Total

Common Stock

Paid-in

Retained

Income,

ESOP

Stockholders’

Shares

Amount

Capital

Earnings

Net of Tax

Shares

Equity
BALANCE, January 1, 2020

8,918,082

$
89

$
89,223

$
110,715

$
788

$
(573)

$
200,242
Net income

—

$
—

—

15,187

—

—

$
15,187
Dividends paid ($0.21 per share)

—

$
—

—

(1,812)

—

—

$
(1,812)
Share-based compensation

—

$
—

447

—

—

—

$
447
Common stock repurchased - repurchase plan

(446,796)

$
(4)

(8,224)

—

—

—

$
(8,228)
Stock options exercised

18,796

$
—

(246)

—

—

—

$
(246)
Other comprehensive income, net of tax

—

$
—

—

—

2,546

—

$
2,546
ESOP shares allocated

—

$
—

373

—

—

132

$
505
BALANCE, June 30, 2020

8,490,082

$
85

$
81,573

$
124,090

$
3,334

$
(441)

$
208,641

BALANCE, January 1, 2021

8,475,912

$
85

$
81,275

$
146,405

$
2,533

$
(291)

$
230,007
Net income

—

$
—

—

20,432

—

—

$
20,432
Dividends paid ($0.27 per share)

—

$
—

—

(2,231)

—

—

$
(2,231)
Share-based compensation

—

$
—

593

—

—

—

$
593
Common stock repurchased

(215,420)

$
(2)

(5,813)

—

—

—

$
(5,815)
Stock options exercised

73,074

$
—

(1,024)

—

—

—

$
(1,024)
Other comprehensive loss, net of tax

—

$
—

—

—

(1,099)

—

$
(1,099)
ESOP shares allocated

—

$
—

766

—

—

131

$
897
BALANCE, June 30, 2021

8,333,566

$
83

$
75,797

$
164,606

$
1,434

$
(160)

$
241,760


								Accumulated
								Other
				Additional				Comprehensive		Unearned		Total
	Common Stock			Paid-in		Retained		Income,		ESOP		Stockholders’
	Shares	Amount		Capital		Earnings		Net of Tax		Shares		Equity
BALANCE, July 1, 2020	8,490,082	$	84	$	81,574	$	124,090	$	3,334	$	(441)	$	208,641
Net income	—	$	—		—		12,713		—		—	$	12,713
Dividends paid ($0.11 per share)	—	$	—		—		(882)		—		—	$	(882)
Share-based compensation	—	$	—		272		—		—		—	$	272
Restricted stock awards	49,760	$	1		—		—		—		—	$	1
Common stock repurchased	(22,020)	$	—		(447)		—		—		—	$	(447)
Common stock repurchased for employee/director taxes paid on restricted stock awards	(1,640)	$	—		(35)		—		—		—	$	(35)
Stock options exercised, net	10,000	$	—		85		—		—		—	$	85
Other comprehensive loss, net of tax	—	$	—		—		—		(49)		—	$	(49)
ESOP shares allocated	—	$	—		185		—		—		66	$	251
BALANCE, September 30, 2020	8,526,182	$	85	$	81,634	$	135,921	$	3,285	$	(375)	$	220,550

BALANCE, July 1, 2021	8,333,566	$	83	$	75,797	$	164,606	$	1,434	$	(160)	$	241,760
Net income	—	$	—		—		8,331		—		—	$	8,331
Dividends paid ($0.14 per share)	—	$	—		—		(1,151)		—		—	$	(1,151)
Share-based compensation	—	$	—		402		—		—		—	$	402
Restricted stock awards	41,350	$	—		—		—		—		—	$	—
Common stock repurchased	(264,805)	$	(2)		(6,825)		—		—		—	$	(6,827)
Common stock repurchased for employee/director taxes paid on restricted stock	(5,970)	$	—		(212)		—		—		—	$	(212)
Stock options exercised, net	103,904	$	1		(1,054)		—		—		—	$	(1,053)
Other comprehensive loss, net of tax	—	$	—		—		—		(1,236)		—	$	(1,236)
ESOP shares allocated	—	$	—		373		—		—		66	$	439
BALANCE, September 30, 2021	8,208,045	$	82	$	68,481	$	171,786	$	198	$	(94)	$	240,453

Per share data has been adjusted for all periods to reflect a 2-for-one stock split effective July 14, 2021.

See accompanying notes to these consolidated financial statements.

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Nine Months Ended September 30, 2020 and 2021


								Accumulated
								Other
				Additional				Comprehensive		Unearned		Total
	Common Stock			Paid-in		Retained		Income,		ESOP		Stockholders’
	Shares	Amount		Capital		Earnings		Net of Tax		Shares		Equity
BALANCE, January 1, 2020	8,918,082	$	89	$	89,223	$	110,715	$	788	$	(573)	$	200,242
Net income	—	$	—		—		27,900		—		—	$	27,900
Dividends paid ($0.31 per share)	—	$	—		—		(2,694)		—		—	$	(2,694)
Share-based compensation	—	$	—		719		—		—		—	$	719
Restricted stock awards	49,760	$	1		—		—		—		—	$	1
Common stock repurchased - repurchase plan	(468,816)	$	(5)		(8,670)		—		—		—	$	(8,675)
Common stock repurchased for employee/director taxes paid on restricted stock awards	(1,640)	$	—		(35)		—		—		—	$	(35)
Stock options exercised	28,796	$	—		(161)		—		—		—	$	(161)
Other comprehensive income, net of tax	—	$	—		—		—		2,497		—	$	2,497
ESOP shares allocated	—	$	—		558		—		—		198	$	756
BALANCE, September 30, 2020	8,526,182	$	85	$	81,634	$	135,921	$	3,285	$	(375)	$	220,550

BALANCE, January 1, 2021	8,475,912	$	85	$	81,275	$	146,405	$	2,533	$	(291)	$	230,007
Net income	—	$	—		—		28,763		—		—	$	28,763
Dividends paid ($0.41 per share)	—	$	—		—		(3,382)		—		—	$	(3,382)
Share-based compensation	—	$	—		995		—		—		—	$	995
Restricted stock awards	41,350	$	—		—		—		—		—	$	—
Common stock repurchased	(480,225)	$	(4)		(12,638)		—		—		—	$	(12,642)
Common stock repurchased for employee/director taxes paid on restricted stock awards	(5,970)	$	—		(212)		—		—		—	$	(212)
Stock options exercised, net	176,978	$	1		(2,077)		—		—		—	$	(2,076)
Other comprehensive loss, net of tax	—	$	—		—		—		(2,335)		—	$	(2,335)
ESOP shares allocated	—	$	—		1,138		—		—		197	$	1,335
BALANCE, September 30, 2021	8,208,045	$	82	$	68,481	$	171,786	$	198	$	(94)	$	240,453

Per share data has been adjusted for all periods to reflect 2-for-one split effective July 14, 2021.

See accompanying notes to these consolidated financial statements.

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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

Six Months Ended June 30,
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES

2021

2020
Net income

$
20,432

$
15,187
Adjustments to reconcile net income to net cash from (used by) operating activities




Provision for loan losses

1,500

8,335
Depreciation, amortization and accretion

8,815

6,777
Compensation expense related to stock options and restricted stock awards

593

447
ESOP compensation expense for allocated shares

897

505
Increase in cash surrender value of BOLI

(429)

(431)
Gain on sale of loans held for sale

(17,971)

(19,264)
Gain on sale of portfolio loans

(106)

0
Gain on sale of investment securities

0

(182)
Origination of loans held for sale

(738,564)

(708,946)
Proceeds from sale of loans held for sale

806,668

651,962
(Recovery) impairment of servicing rights

(2,046)

1,317
Loss on sale of OREO

9

2
Changes in operating assets and liabilities




Accrued interest receivable

(293)

(395)
Other assets

(3,834)

4,667
Other liabilities

(2,256)

3,464
Net cash from (used by) operating activities

73,415

(36,555)
CASH FLOWS USED BY INVESTING ACTIVITIES




Activity in securities available-for-sale:




Proceeds from sale of investment securities

0

9,173
Maturities, prepayments, and calls

11,537

20,258
Purchases

(69,423)

(67,632)
Maturities of certificates of deposit at other financial institutions

496

2,976
Portfolio loan originations and principal collections, net

(116,050)

(84,333)
Proceeds from sale of portfolio loans

2,699

0
Purchase of portfolio loans

0

(32,743)
Proceeds from sale of OREO, net

81

76
Purchase of premises and equipment, net

(1,595)

(960)
Change in FHLB stock, net

2,374

386
Net cash used by investing activities

(169,881)

(152,799)
CASH FLOWS FROM FINANCING ACTIVITIES




Net increase in deposits

184,462

214,595
Proceeds from borrowings

0

315,114
Repayments of borrowings

(123,281)

(249,723)
Net proceeds from issuance of subordinated notes

49,333

0
Repayment of subordinated notes

(10,000)

0
Dividends paid on common stock

(2,231)

(1,812)
Disbursements from stock options exercised, net

(1,024)

(246)
Common stock repurchased

(5,815)

(8,228)
Net cash from financing activities

91,444

269,700
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

(5,022)

80,346

CASH AND CASH EQUIVALENTS, beginning of period

91,576

45,778
CASH AND CASH EQUIVALENTS, end of period

$
86,554

$
126,124


	Nine Months Ended September 30,
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES	2021		2020
Net income	$	28,763	$	27,900
Adjustments to reconcile net income to net cash from (used by) operating activities
Provision for loan losses		1,500		11,435
Depreciation, amortization and accretion		11,674		9,336
Compensation expense related to stock options and restricted stock awards		995		719
ESOP compensation expense for allocated shares		1,335		756
Increase in cash surrender value of BOLI		(647)		(650)
Gain on sale of loans held for sale		(24,856)		(35,492)
Gain on sale of portfolio loans		(106)		0
Gain on sale of investment securities		0		(300)
Origination of loans held for sale		(1,048,120)		(1,260,250)
Proceeds from sale of loans held for sale		1,133,395		1,140,003
(Recovery) impairment of servicing rights		(2,057)		1,399
Loss on sale of OREO		9		2
Changes in operating assets and liabilities
Accrued interest receivable		(767)		(901)
Other assets		(2,590)		(246)
Other liabilities		997		6,897
Net cash from (used by) operating activities		99,525		(99,392)
CASH FLOWS USED BY INVESTING ACTIVITIES
Activity in securities available-for-sale:
Proceeds from sale of investment securities		0		12,214
Maturities, prepayments, and calls		20,923		30,034
Purchases		(117,152)		(90,610)
Maturities of certificates of deposit at other financial institutions		496		6,640
Portfolio loan originations and principal collections, net		(156,603)		(134,436)
Purchase of portfolio loans		(1,070)		(32,743)
Proceeds from sale of portfolio loans		2,699		0
Proceeds from sale of OREO, net		81		76
Purchase of premises and equipment, net		(1,921)		(1,189)
Change in FHLB stock, net		2,568		1,492
Net cash used by investing activities		(249,979)		(208,522)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		189,470		220,997
Proceeds from borrowings		8,000		549,557
Repayments of borrowings		(131,281)		(460,781)
Dividends paid on common stock		(3,382)		(2,694)
Net proceeds from issuance of subordinated notes		49,333		0
Repayment of subordinated notes		(10,000)		0
Disbursements from stock options exercised, net		(2,076)		(161)
Restricted stock awards		(212)		(34)
Common stock repurchased		(12,642)		(8,675)
Net cash from financing activities		87,210		298,209
NET DECREASE IN CASH AND CASH EQUIVALENTS		(63,244)		(9,705)

CASH AND CASH EQUIVALENTS, beginning of period		91,576		45,778
CASH AND CASH EQUIVALENTS, end of period	$	28,332	$	36,073

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FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands) (Unaudited)

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings	$	4,682	$	7,980	$	6,540	$	11,128
Income taxes		6,206		70		7,824		7,804

SUPPLEMENTARY DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES
Change in unrealized (loss) gain on investment securities	$	(2,509)	$	4,698	$	(4,162)	$	4,582
Change in unrealized gain on cash flow hedges		1,109		1,456
Change in unrealized gain (loss) on cash flow hedges						1,187		(1,401)
Retention in gross mortgage servicing rights from loan sales		5,600		4,401		7,567		7,634
Right-of-use assets in exchange for lease liabilities		979		366		979		1,202

See accompanying notes to these consolidated financial statements

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NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations - FS Bancorp, Inc. (the “Company”) was incorporated in September 2011 as the holding company for 1st Security Bank of Washington (the “Bank” or “1st Security Bank”) in connection with the Bank’s conversion from the mutual to stock form of ownership which was completed on July 9, 2012. The Bank is a community-based savings bank with 21 full-service bank branches, a headquarters that produces loans and accepts deposits, and 1011 loan production offices in suburban communities in the greater Puget Sound area which includes Snohomish, King, Pierce, Jefferson, Kitsap, Clallam, Grays Harbor, Thurston, and Lewis counties, and 1 loan production office in the market area of the Tri-Cities, Washington. The Bank provides loan and deposit services to customers who are predominantly small- and middle-market businesses and individuals. The Company and its subsidiary are subject to regulation by certain federal and state agencies and undergo periodic examination by these regulatory agencies.

Financial Statement Presentation - The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10-K with all of the audited information and footnotes required by U.S. GAAP for complete financial statements for the year ended December 31, 2020, as filed with the SEC on March 16, 2021. In the opinion of management, all normal adjustments and recurring accruals considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.

The results for the three and ~~six~~nine months ended ~~June~~September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, or any other future period. The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses, fair value of financial instruments, the valuation of servicing rights, deferred income taxes, and if needed, a deferred tax asset valuation allowance.

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

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

Segment Reporting - The Company operates in 2 business segments through the Bank: commercial and consumer banking and home lending. The Company’s business segments are determined based on the products and services provided, as well as the nature of the related business activities, and they reflect the manner in which financial information is regularly reviewed for the purpose of allocating resources and evaluating performance of the Company’s businesses. The results for these business segments are based on management’s accounting process, which assigns income statement items and assets to each responsible operating segment. This process is dynamic and is based on management’s view of the Company’s operations. See “Note 15 - Business Segments.”

Subsequent Events - The Company has evaluated events and transactions subsequent to ~~June~~September 30, 2021 for potential recognition or disclosure.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended by ASU 2018-19, ASU 2019-10, and ASU 2019-11. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other

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organizations. The ASU requires the recognition and measurement of all current expected credit losses (“CECL”) for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the approach under CECL. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU and associated amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

The Company has selected a third-party vendor to assist in the implementation of this ASU and has run parallel computations as it continues to evaluate the impact of adoption of the new standard. As part of the implementation, management is also evaluating economic variables and forecast time horizons it believes to be most relevant based on the composition of the loan portfolio to develop a reasonable and supportable forecast, likely to include forecasted levels of employment, gross domestic product, and home price index, depending on the nature of the loan segment, as well as various loss methodologies to estimate expected credit losses. In addition, management has kept current on evolving interpretations and industry practices related to ASU 2016-13 via webcasts, publications, and conferences. Once adopted, the Company anticipates the allowance for loan losses to ~~potentially increase~~change through a one-time adjustment to retained earnings, however, until the evaluation is complete the magnitude of the potential ~~increase~~change will be unknown.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326: Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various FASB Transition Resource Group meetings. Early adoption is permitted. The Company plans to adopt Topic 326 of this ASU, in conjunction with ASU No. 2016-13, on January 1, ~~2023.~~2022. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. This ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The ASU should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet. Early adoption is permitted. The Company plans to adopt this ASU, in conjunction with ASU No. 2016-13, on January 1, ~~2023.~~2022. The adoption of Topic 326 is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform” (“Topic 848”). This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU apply to contract modifications that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) Modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) Modifications of contracts within the scope of Topics 840, Leases, and 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (for example, the incremental borrowing rate) or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted

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for as separate contracts; and 3) Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging - Embedded Derivatives. In January 2021, ASU 2021-01 updated amendments in the new ASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this ASU and the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the effective dates. The amendments in this ASU have differing effective dates, beginning with an interim period including and subsequent to March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

Recent Events - On June 25, 2021, the Company announced a stock split (“stock split”) in the form of a 100% stock dividend consisting of 1 additional common share for each outstanding common share. The stock dividend was distributed on July 14, 2021, to shareholders of record as of July 6, 2021. All share and per share data in this Form 10-Q have been adjusted retrospectively and are reflective of the stock split.

On December 27, 2020, the Consolidated Appropriations Act (“CAA 2021”) was signed into law. Among other purposes, this act provides additional coronavirus emergency response and relief, including extending relief offered under the Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 (“CARES Act”) related to troubled debt restructurings (“TDRs”) as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.

Application of New Accounting Guidance Adopted in 2021

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20: Receivables – Nonrefundable Fees and Other Costs. The ASU clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The adoption of ASU 2020-08 did not have a material impact on the consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material impact on the consolidated financial statements.

NOTE 2 - INVESTMENTS

The following tables present the amortized costs, unrealized gains, unrealized losses, and estimated fair values of securities available-for-sale and held-to-maturity at September 30, 2021 and December 31, 2020:


	September 30, 2021
							Estimated
	Amortized		Unrealized		Unrealized		Fair
SECURITIES AVAILABLE-FOR-SALE	Cost		Gains		Losses		Values
U.S. agency securities	$	26,155	$	175	$	(148)	$	26,182
Corporate securities		9,495		35		(388)		9,142
Municipal bonds		130,806		1,443		(2,940)		129,309
Mortgage-backed securities		85,314		2,181		(364)		87,131
U.S. Small Business Administration securities		16,736		356		(54)		17,038
Total securities available-for-sale		268,506		4,190		(3,894)		268,802

SECURITIES HELD-TO-MATURITY
Corporate securities		7,500		613		—		8,113
Total securities held-to-maturity		7,500		613		—		8,113

Total securities	$	276,006	$	4,803	$	(3,894)	$	276,915

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~~NOTE 2 - INVESTMENTS~~

The following tables present the amortized costs, unrealized gains, unrealized losses, and estimated fair values of securities available-for-sale and held-to-maturity at June 30, 2021 and December 31, 2020:

June 30, 2021








Estimated

Amortized

Unrealized

Unrealized

Fair
SECURITIES AVAILABLE-FOR-SALE

Cost

Gains

Losses

Values
U.S. agency securities

$
16,870

$
146

$
(189)

$
16,827
Corporate securities

11,907

47

(425)

11,529
Municipal bonds

111,469

1,671

(1,687)

111,453
Mortgage-backed securities

74,006

2,176

(183)

75,999
U.S. Small Business Administration securities

16,369

393

—

16,762
Total securities available-for-sale

230,621

4,433

(2,484)

232,570

SECURITIES HELD-TO-MATURITY

Corporate securities

7,500

500

—

8,000
Total securities held-to-maturity

7,500

500

—

8,000

Total securities

$
238,121

$
4,933

$
(2,484)

$
240,570


	December 31, 2020
							Estimated
	Amortized		Unrealized		Unrealized		Fair
SECURITIES AVAILABLE-FOR-SALE	Cost		Gains		Losses		Values
U.S. agency securities	$	7,940	$	166	$	(1)	$	8,105
Corporate securities		11,885		54		(939)		11,000
Municipal bonds		69,572		2,435		(150)		71,857
Mortgage-backed securities		65,722		2,541		(76)		68,187
U.S. Small Business Administration securities		18,441		443		(15)		18,869
Total securities available-for-sale		173,560		5,639		(1,181)		178,018

SECURITIES HELD-TO-MATURITY
Corporate securities		7,500		77		(21)		7,556
Total securities held-to-maturity		7,500		77		(21)		7,556

Total securities	$	181,060	$	5,716	$	(1,202)	$	185,574

At ~~June~~September 30, 2021, the Bank pledged 7 securities held at the FHLB of Des Moines with a carrying value of ~~$8.5~~$8.4 million to secure Washington State public deposits of ~~$16.3~~$13.1 million with a ~~$6.7~~$5.1 million collateral requirement by the Washington Public Deposit Protection Commission. At December 31, 2020, the Bank pledged 7 securities held at the FHLB of Des Moines with a carrying value of $8.8 million to secure Washington State public deposits of $13.2 million with a $5.3 million minimum collateral requirement by the Washington Public Deposit Protection Commission. At ~~June~~September 30, 2021, the Bank had pledged 2 securities with a total carrying value of ~~$3.2~~$3.4 million to secure interest rate swaps designated as cash flow hedges. See “Note 5- Derivatives”, for detail on the Bank’s interest rate swaps.

Investment securities that were in an unrealized loss position at ~~June~~September 30, 2021 and December 31, 2020 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. Management believes that these securities are only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.


	September 30, 2021
	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
SECURITIES AVAILABLE-FOR-SALE	Value		Losses		Value		Losses		Value		Losses
U.S. agency securities	$	2,903	$	(74)	$	1,914	$	(74)	$	4,817	$	(148)
Corporate securities		—		—		5,612		(388)		5,612		(388)
Municipal bonds		73,562		(2,757)		6,114		(183)		79,676		(2,940)
Mortgage-backed securities		17,442		(227)		4,790		(137)		22,232		(364)
U.S. Small Business Administration securities		2,107		(54)		—		—		2,107		(54)
Total securities available-for-sale	$	96,014	$	(3,112)	$	18,430	$	(782)	$	114,444	$	(3,894)

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June 30, 2021

Less than 12 Months

12 Months or Longer

Total


Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
SECURITIES AVAILABLE-FOR-SALE

Value

Losses

Value

Losses

Value

Losses
U.S. agency securities

$
7,688

$
(189)

$
—

$
—

$
7,688

$
(189)
Corporate securities

3,702

(296)

2,870

(129)

6,572

(425)
Municipal bonds

57,949

(1,687)

—

—

57,949

(1,687)
Mortgage-backed securities

6,233

(73)

7,837

(110)

14,070

(183)
Total securities available-for-sale

$
75,572

$
(2,245)

$
10,707

$
(239)

$
86,279

$
(2,484)


	December 31, 2020
	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
SECURITIES AVAILABLE-FOR-SALE	Value		Losses		Value		Losses		Value		Losses
U.S. agency securities	$	1,986	$	(1)	$	—	$	—	$	1,986	$	(1)
Corporate securities		7,059		(939)		—		—		7,059		(939)
Municipal bonds		8,377		(150)		—		—		8,377		(150)
Mortgage-backed securities		6,903		(65)		3,002		(11)		9,905		(76)
U.S. Small Business Administration securities		2,314		(15)		—		—		2,314		(15)
Total securities available-for-sale		26,639		(1,170)		3,002		(11)		29,641		(1,181)

SECURITIES HELD-TO-MATURITY
Corporate securities		4,979		(21)		—		—		4,979		(21)
Total securities held-to-maturity		4,979		(21)		—		—		4,979		(21)

Total	$	31,618	$	(1,191)	$	3,002	$	(11)	$	34,620	$	(1,202)

There were 5063 investments with unrealized losses of less than one year, and 410 investments with an unrealized loss of more than one year at ~~June~~September 30, 2021. There were 21 investments with unrealized losses of less than one year, and 1 investment with an unrealized loss of more than one year at December 31, 2020. The unrealized losses associated with these investments are believed to be caused by changing market conditions that are considered to be temporary and the Company does not intend to sell the securities, and it is not likely to be required to sell these securities prior to maturity. Based on the Company’s evaluation of these securities, 0 other-than-temporary impairment was recorded for the ~~six~~nine months ended ~~June~~September 30, 2021, or for the year ended December 31, 2020. Additional deterioration in market and economic conditions, ~~related to the COVID-19 pandemic,~~ may have an adverse impact on credit quality in the future and result in other-than-temporary impairment charges.

~~Table of Contents~~

The contractual maturities of securities available-for-sale and held-to-maturity at ~~June~~September 30, 2021 and December 31, 2020 are listed below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations; therefore, these securities are classified separately with no specific maturity date.

June 30, 2021

December 31, 2020
SECURITIES AVAILABLE-FOR-SALE

Amortized

Fair

Amortized

Fair
U.S. agency securities

Cost

Value

Cost

Value
Due after one year through five years

$
968

$
1,033

$
978

$
1,060
Due after five years through ten years

4,913

4,927

1,000

1,036
Due after ten years

10,989

10,867

5,962

6,009
Subtotal

16,870

16,827

7,940

8,105
Corporate securities








Due in one year or less

2,413

2,428

2,392

2,433
Due after one year through five years

3,494

3,505

3,493

3,491
Due after five years through ten years

4,000

3,704

4,000

3,676
Due after ten years

2,000

1,892

2,000

1,400
Subtotal

11,907

11,529

11,885

11,000
Municipal bonds








Due in one year or less

0

0

101

101
Due after one year through five years

3,736

3,924

3,749

3,980
Due after five years through ten years

8,902

9,136

7,994

8,321
Due after ten years

98,831

98,393

57,728

59,455
Subtotal

111,469

111,453

69,572

71,857
Mortgage-backed securities








Federal National Mortgage Association (“FNMA”)

58,278

60,204

47,675

50,005
Federal Home Loan Mortgage Corporation (“FHLMC”)

10,948

10,930

11,825

11,913
Government National Mortgage Association (“GNMA”)

4,780

4,865

6,222

6,269
Subtotal

74,006

75,999

65,722

68,187
U.S. Small Business Administration securities








Due after one year through five years

3,436

3,506

2,266

2,353
Due after five years through ten years

5,148

5,280

8,097

8,333
Due after ten years

7,785

7,976

8,078

8,183
Subtotal

16,369

16,762

18,441

18,869
Total securities available-for-sale

230,621

232,570

173,560

178,018

SECURITIES HELD-TO-MATURITY

Corporate securities

Due after five years through ten years

7,500

8,000

7,500

7,556
Total securities held-to-maturity

7,500

8,000

7,500

7,556

Total securities

$
238,121

$
240,570

$
181,060

$
185,574

There were 0 sales proceeds, gains or losses for the three and six months ended June 30, 2021 and $9.2 million in proceeds and $182,000 in gains for both the three and six months ended June 30, 2020 from securities available-for-sale.


	September 30, 2021				December 31, 2020
SECURITIES AVAILABLE-FOR-SALE	Amortized		Fair		Amortized		Fair
U.S. agency securities	Cost		Value		Cost		Value
Due after one year through five years	$	964	$	1,025	$	978	$	1,060
Due after five years through ten years		6,916		6,939		1,000		1,036
Due after ten years		18,275		18,218		5,962		6,009
Subtotal		26,155		26,182		7,940		8,105
Corporate securities
Due in one year or less		0		0		2,392		2,433
Due after one year through five years		3,495		3,530		3,493		3,491
Due after five years through ten years		4,000		3,691		4,000		3,676
Due after ten years		2,000		1,921		2,000		1,400
Subtotal		9,495		9,142		11,885		11,000
Municipal bonds
Due in one year or less		0		0		101		101
Due after one year through five years		3,730		3,899		3,749		3,980
Due after five years through ten years		6,879		7,069		7,994		8,321
Due after ten years		120,197		118,341		57,728		59,455
Subtotal		130,806		129,309		69,572		71,857

1514

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Mortgage-backed securities
Federal National Mortgage Association (“FNMA”)		71,249		72,877		47,675		50,005
Federal Home Loan Mortgage Corporation (“FHLMC”)		9,789		9,907		11,825		11,913
Government National Mortgage Association (“GNMA”)		4,276		4,347		6,222		6,269
Subtotal		85,314		87,131		65,722		68,187
U.S. Small Business Administration securities
Due after one year through five years		2,518		2,568		2,266		2,353
Due after five years through ten years		4,463		4,605		8,097		8,333
Due after ten years		9,755		9,865		8,078		8,183
Subtotal		16,736		17,038		18,441		18,869
Total securities available-for-sale		268,506		268,802		173,560		178,018

SECURITIES HELD-TO-MATURITY
Corporate securities
Due after five years through ten years		7,500		8,113		7,500		7,556
Total securities held-to-maturity		7,500		8,113		7,500		7,556

Total securities	$	276,006	$	276,915	$	181,060	$	185,574

There were 0 sales proceeds, gains or losses from the sale of securities available-for-sale for the three and nine months ended September 30, 2021, compared to $3.0 million and $12.2 million in proceeds and $119,000 and $300,000 in gains for the three and nine months ended September 30, 2020, respectively.

NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio was as follows at ~~June~~September 30, 2021 and December 31, 2020:


	June 30,		December 31,		September 30,		December 31,
REAL ESTATE LOANS	2021		2020		2021		2020
Commercial	$	231,196	$	222,719	$	217,911	$	222,719
Construction and development		242,715		216,975		250,099		216,975
Home equity		40,718		43,093		42,095		43,093
One-to-four-family (excludes loans held for sale)		335,397		311,093		365,326		311,093
Multi-family		133,828		131,601		165,240		131,601
Total real estate loans		983,854		925,481		1,040,671		925,481
CONSUMER LOANS
Indirect home improvement		308,447		286,020		325,630		286,020
Marine		86,216		85,740		83,827		85,740
Other consumer		3,177		3,418		3,188		3,418
Total consumer loans		397,840		375,178		412,645		375,178
COMMERCIAL BUSINESS LOANS
Commercial and industrial		242,287		224,476		207,064		224,476
Warehouse lending		54,072		49,092		49,289		49,092
Total commercial business loans		296,359		273,568		256,353		273,568
Total loans receivable, gross		1,678,053		1,574,227		1,709,669		1,574,227
Allowance for loan and lease losses		(27,234)		(26,172)		(26,925)		(26,172)
Deferred costs and fees, net		(5,514)		(4,017)		(4,978)		(4,017)
Premiums on purchased loans, net		359		943		277		943
Total loans receivable, net	$	1,645,664	$	1,544,981	$	1,678,043	$	1,544,981

Most of the Company’s commercial and multi-family real estate, construction, residential, and/or commercial business lending activities are with customers located in Western Washington and near the loan production office located in the Tri-Cities, Washington. The Company originates real estate, consumer, and commercial business loans and has concentrations

Table of Contents

in these areas, however, indirect home improvement loans, including solar-related home improvement loans, are originated through a network of home improvement contractors and dealers located throughout Washington, Oregon, California, Idaho, Colorado, Arizona, Minnesota, and Nevada. Loans are generally secured by collateral and rights to collateral vary and are legally documented to the extent practicable. Local economic conditions may affect borrowers’ ability to meet the stated repayment terms.

At ~~June~~September 30, 2021, the Bank held approximately ~~$751.8~~$742.8 million in loans that are pledged as collateral for FHLB advances, compared to approximately $774.8 million at December 31, 2020. The Bank held approximately ~~$396.8~~$415.1 million in loans that are pledged as collateral for the Federal Reserve Bank of San Francisco (“FRB”) line of credit at ~~June~~September 30, 2021, compared to approximately $369.2 million at December 31, 2020. At June 30, 2021, the Bank held $73.2 million of loans originated under the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) which qualified as collateral for non-recourse advances under the FRB’s Paycheck Protection Program Liquidity Facility (“PPPLF”). The PPPLF concluded on July 30, 2021.

Included in the carrying value of gross loans are net discounts on loans purchased in the Anchor Bank acquisition in November 2018 (“Anchor Acquisition”). The remaining net discount on loans acquired was ~~$1.0 million~~$868,000 and $1.5 million, on ~~$100.2~~$90.8 million and $132.6 million of gross loans at ~~June~~September 30, 2021 and December 31, 2020, respectively.

The Company has defined its loan portfolio into 3 segments that reflect the structure of the lending function, the Company’s strategic plan and the manner in which management monitors performance and credit quality. The 3 loan portfolio segments are: (a) Real Estate Loans, (b) Consumer Loans, and (c) Commercial Business Loans. Each of these segments is disaggregated into classes based on the risk characteristics of the borrower and/or the collateral type securing the loan. The following is a summary of each of the Company’s loan portfolio segments and classes:

~~Table of Contents~~

Real Estate Loans

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

Construction and Development Lending. Loans originated by the Company for the construction of, and secured by, commercial real estate, one-to-four-family, and multi-family residences and tracts of land for development that are not pre-sold. A portion of the one-to-four-family construction portfolio is custom construction loans to the intended occupant of the residence.

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

One-to-Four-Family Real Estate Lending. One-to-four-family residential loans include owner occupied properties (including second homes), and non-owner-occupied properties with four or less units. These loans originated by the Company or periodically purchased from banks are secured by first mortgages on one-to-four-family residences in our market areas that the Company intends to hold (excludes loans held for sale).

Multi-Family Lending. Apartment term lending (5 or more units) to current banking customers and community reinvestment loans for low to moderate income individuals in the Company’s footprint.

Consumer Loans

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

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

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

Table of Contents

Commercial Business Loans

Commercial and Industrial Lending (“C&I”). Loans originated by the Company to local small- and mid-sized businesses in our Puget Sound market area are secured primarily by accounts receivable, inventory, or personal property, plant and equipment. Some of the C&I loans purchased by the Company are outside of the greater Puget Sound market area. C&I loans are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. PPP loans originated by the Company are also included in this loan class.

Warehouse Lending. Loans originated to non-depository financial institutions and secured by notes originated by the non-depository financial institution. The Company has 2 distinct warehouse lending divisions: commercial warehouse re-lending secured by notes on construction loans and mortgage warehouse re-lending secured by notes on one-to-four-family loans. The Company’s commercial construction warehouse lines are secured by notes on construction loans and typically guaranteed by principals with experience in construction lending. Mortgage warehouse lending loans are funded through third-party residential mortgage bankers. Under this program the Company provides short-term funding to the mortgage banking companies for the purpose of originating residential mortgage loans for sale into the secondary market.

The following tables detail activity in the allowance for loan losses by loan categories at or for the three and nine months ended September 30, 2021 and 2020:


	At or For the Three Months Ended September 30, 2021
					Commercial
ALLOWANCE FOR LOAN LOSSES	Real Estate		Consumer		Business		Unallocated		Total
Beginning balance	$	14,308	$	7,023	$	5,674	$	229	$	27,234
Provision (recapture) for loan losses		124		(2,315)		620		1,571		—
Charge-offs		—		(428)		—		—		(428)
Recoveries		—		119		—		—		119
Net charge-offs		—		(309)		—		—		(309)
Ending balance	$	14,432	$	4,399	$	6,294	$	1,800	$	26,925
Period end amount allocated to:
Loans individually evaluated for impairment	$	—	$	243	$	991	$	—	$	1,234
Loans collectively evaluated for impairment		14,432		4,156		5,303		1,800		25,691
Ending balance	$	14,432	$	4,399	$	6,294	$	1,800	$	26,925
LOANS RECEIVABLE
Loans individually evaluated for impairment	$	755	$	694	$	4,487	$	—	$	5,936
Loans collectively evaluated for impairment		1,039,916		411,951		251,866		—		1,703,733
Ending balance	$	1,040,671	$	412,645	$	256,353	$	—	$	1,709,669

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~~The following tables detail activity in the allowance for loan losses by loan categories at or for the three and six months ended June 30, 2021 and 2020:~~


	At or For the Three Months Ended September 30, 2020
					Commercial
ALLOWANCE FOR LOAN LOSSES	Real Estate		Consumer		Business		Unallocated		Total
Beginning balance	$	11,912	$	5,132	$	4,248	$	232	$	21,524
Provision (recapture) for loan losses		907		1,891		335		(33)		3,100
Charge-offs		—		(196)		(11)		—		(207)
Recoveries		—		254		128		—		382
Net recoveries		—		58		117		—		175
Ending balance	$	12,819	$	7,081	$	4,700	$	199	$	24,799
Period end amount allocated to:
Loans individually evaluated for impairment	$	15	$	274	$	1,057	$	—	$	1,346
Loans collectively evaluated for impairment		12,804		6,807		3,643		199		23,453
Ending balance	$	12,819	$	7,081	$	4,700	$	199	$	24,799
LOANS RECEIVABLE
Loans individually evaluated for impairment	$	2,456	$	781	$	4,324	$	—	$	7,561
Loans collectively evaluated for impairment		888,396		364,027		259,434		—		1,511,857
Ending balance	$	890,852	$	364,808	$	263,758	$	—	$	1,519,418

At or For the Three Months Ended June 30, 2021






Commercial




ALLOWANCE FOR LOAN LOSSES

Real Estate

Consumer

Business

Unallocated

Total
Beginning balance

$
13,615

$
6,815

$
5,669

$
1,276

$
27,375
Provision (recapture) for loan losses

693

349

5

(1,047)

—
Charge-offs

—

(349)

—

—

(349)
Recoveries

—

208

—

—

208
Net charge-offs

—

(141)

—

—

(141)
Ending balance

$
14,308

$
7,023

$
5,674

$
229

$
27,234
Period end amount allocated to:










Loans individually evaluated for impairment

$
—

$
269

$
988

$
—

$
1,257
Loans collectively evaluated for impairment

14,308

6,754

4,686

229

25,977
Ending balance

$
14,308

$
7,023

$
5,674

$
229

$
27,234
LOANS RECEIVABLE










Loans individually evaluated for impairment

$
1,049

$
768

$
4,487

$
—

$
6,304
Loans collectively evaluated for impairment

982,805

397,072

291,872

—

1,671,749
Ending balance

$
983,854

$
397,840

$
296,359

$
—

$
1,678,053

At or For the Three Months Ended June 30, 2020






Commercial




ALLOWANCE FOR LOAN LOSSES

Real Estate

Consumer

Business

Unallocated

Total
Beginning balance

$
7,243

$
4,199

$
4,244

$
1,186

$
16,872
Provision (recapture) for loan losses

4,669

1,055

(121)

(954)

4,649
Charge-offs

—

(303)

—

—

(303)
Recoveries

—

181

125

—

306
Net (charge-offs) recoveries

—

(122)

125

—

3
Ending balance

$
11,912

$
5,132

$
4,248

$
232

$
21,524
Period end amount allocated to:










Loans individually evaluated for impairment

$
15

$
259

$
639

$
—

$
913
Loans collectively evaluated for impairment

11,897

4,873

3,609

232

20,611
Ending balance

$
11,912

$
5,132

$
4,248

$
232

$
21,524
LOANS RECEIVABLE










Loans individually evaluated for impairment

$
2,889

$
746

$
4,262

$
—

$
7,897
Loans collectively evaluated for impairment

865,036

344,575

251,400

—

1,461,011
Ending balance

$
867,925

$
345,321

$
255,662

$
—

$
1,468,908


	At or For the Nine Months Ended September 30, 2021
					Commercial
ALLOWANCE FOR LOAN LOSSES	Real Estate		Consumer		Business		Unallocated		Total
Beginning balance	$	13,846	$	6,696	$	4,939	$	691	$	26,172
Provision (recapture) for loan losses		586		(1,588)		1,393		1,109		1,500
Charge-offs		—		(1,280)		(38)		—		(1,318)
Recoveries		—		571		—		—		571
Net charge-offs		—		(709)		(38)		—		(747)
Ending balance	$	14,432	$	4,399	$	6,294	$	1,800	$	26,925
Period end amount allocated to:
Loans individually evaluated for impairment	$	—	$	243	$	991	$	—	$	1,234
Loans collectively evaluated for impairment		14,432		4,156		5,303		1,800		25,691
Ending balance	$	14,432	$	4,399	$	6,294	$	1,800	$	26,925
LOANS RECEIVABLE
Loans individually evaluated for impairment	$	755	$	694	$	4,487	$	—	$	5,936
Loans collectively evaluated for impairment		1,039,916		411,951		251,866		—		1,703,733
Ending balance	$	1,040,671	$	412,645	$	256,353	$	—	$	1,709,669

Table of Contents

At or For the Six Months Ended June 30, 2021






Commercial




ALLOWANCE FOR LOAN LOSSES

Real Estate

Consumer

Business

Unallocated

Total
Beginning balance

$
13,846

$
6,696

$
4,939

$
691

$
26,172
Provision (recapture) for loan losses

462

727

773

(462)

1,500
Charge-offs

—

(852)

(38)

—

(890)
Recoveries

—

452

—

—

452
Net charge-offs

—

(400)

(38)

—

(438)
Ending balance

$
14,308

$
7,023

$
5,674

$
229

$
27,234
Period end amount allocated to:










Loans individually evaluated for impairment

$
—

$
269

$
988

$
—

$
1,257
Loans collectively evaluated for impairment

14,308

6,754

4,686

229

25,977
Ending balance

$
14,308

$
7,023

$
5,674

$
229

$
27,234
LOANS RECEIVABLE










Loans individually evaluated for impairment

$
1,049

$
768

$
4,487

$
—

$
6,304
Loans collectively evaluated for impairment

982,805

397,072

291,872

—

1,671,749
Ending balance

$
983,854

$
397,840

$
296,359

$
—

$
1,678,053


	At or For the Six Months Ended June 30, 2020										At or For the Nine Months Ended September 30, 2020
					Commercial										Commercial
ALLOWANCE FOR LOAN LOSSES	Real Estate		Consumer		Business		Unallocated		Total		Real Estate		Consumer		Business		Unallocated		Total
Beginning balance	$	6,206	$	3,766	$	3,254	$	3	$	13,229	$	6,206	$	3,766	$	3,254	$	3	$	13,229
Provision for loan losses		5,688		1,715		703		229		8,335		6,595		3,606		1,038		196		11,435
Charge-offs		—		(673)		(11)		—		(684)		—		(869)		(22)		—		(891)
Recoveries		18		324		302		—		644		18		578		430		—		1,026
Net recoveries (charge-offs)		18		(349)		291		—		(40)		18		(291)		408		—		135
Ending balance	$	11,912	$	5,132	$	4,248	$	232	$	21,524	$	12,819	$	7,081	$	4,700	$	199	$	24,799
Period end amount allocated to:
Loans individually evaluated for impairment	$	15	$	259	$	639	$	—	$	913	$	15	$	274	$	1,057	$	—	$	1,346
Loans collectively evaluated for impairment		11,897		4,873		3,609		232		20,611		12,804		6,807		3,643		199		23,453
Ending balance	$	11,912	$	5,132	$	4,248	$	232	$	21,524	$	12,819	$	7,081	$	4,700	$	199	$	24,799
LOANS RECEIVABLE
Loans individually evaluated for impairment	$	2,889	$	746	$	4,262	$	—	$	7,897	$	2,456	$	781	$	4,324	$	—	$	7,561
Loans collectively evaluated for impairment		865,036		344,575		251,400		—		1,461,011		888,396		364,027		259,434		—		1,511,857
Ending balance	$	867,925	$	345,321	$	255,662	$	—	$	1,468,908	$	890,852	$	364,808	$	263,758	$	—	$	1,519,418

Nonaccrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are automatically placed on nonaccrual once the loan is 90 days past due or sooner if, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, or as required by regulatory authorities. The exception is the legacy Anchor Bank credit card portfolio, which is serviced externally, and loans are manually placed on nonaccrual once the credit card payment is 90 days past due.

As a result of the COVID-19 pandemic, the Company has and will continue to assist customers with an array of payment programs during periods of financial hardship, including forbearance. Forbearance allows a borrower to temporarily not make scheduled payments or to make smaller than scheduled payments, in each case for a specified period of time. Forbearance does not grant any reduction in the total principal or interest repayment obligation. While a loan is in forbearance status, interest continues to accrue and is repaid over a specified time period when the loan re-enters repayment status.

As of ~~June~~September 30, 2021, the amount of loans remaining under payment/relief agreements included commercial real estate loans of ~~$24.4~~$6.9 million and commercial business loans of ~~$9.3 million, and consumer loans of $147,000.~~$5.4 million. These loans were

~~Table of Contents~~

classified as current and accruing interest as of ~~June~~September 30, 2021, with the exception of $4.5 million in commercial business loans which were classified as nonaccrual, yet current on contractual payments. These modifications were not classified as TDRs at ~~June~~September 30, 2021 in accordance with the CARES Act and related bank agency regulatory guidance. Loan modifications in accordance with the CARES Act and related banking agency regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. At ~~June~~September 30, 2021 and December 31, 2020, the Company had 0 TDRs.

There were 0 TDRs which incurred a payment default within twelve months of the restructure date during the three and ~~six-month~~nine-month periods ended ~~June~~September 30, 2021 and 2020.

~~The following tables provide information pertaining to the aging analysis of contractually past due loans and nonaccrual loans at June 30, 2021 and December 31, 2020:~~

June 30, 2021


30-59

60-89










Days

Days

90 Days

Total

Total

Past

Past

or More

Past

Loans

Non-
REAL ESTATE LOANS

Due

Due

Past Due

Due

Current

Receivable

Accrual
Commercial

$
0

$
0

$
0

$
0

$
231,196

$
231,196

$
0
Construction and development

0

0

0

0

242,715

242,715

0
Home equity

85

0

479

564

40,154

40,718

479
One-to-four-family

0

126

571

697

334,700

335,397

571
Multi-family

0

0

0

0

133,828

133,828

0
Total real estate loans

85

126

1,050

1,261

982,593

983,854

1,050
CONSUMER LOANS












Indirect home improvement

389

269

293

951

307,496

308,447

605
Marine

0

3

50

53

86,163

86,216

135
Other consumer

15

3

27

45

3,132

3,177

27
Total consumer loans

404

275

370

1,049

396,791

397,840

767
COMMERCIAL BUSINESS LOANS














Commercial and industrial

0

0

0

0

242,287

242,287

4,487
Warehouse lending

0

0

0

0

54,072

54,072

0
Total commercial business loans

0

0

0

0

296,359

296,359

4,487
Total loans

$
489

$
401

$
1,420

$
2,310

$
1,675,743

$
1,678,053

$
6,304

2019

Table of Contents

The following tables provide information pertaining to the aging analysis of contractually past due loans and nonaccrual loans at September 30, 2021 and December 31, 2020:


	September 30, 2021
	30-59		60-89
	Days		Days		90 Days		Total				Total
	Past		Past		or More		Past				Loans		Non-
REAL ESTATE LOANS	Due		Due		Past Due		Due		Current		Receivable		Accrual
Commercial	$	0	$	0	$	0	$	0	$	217,911	$	217,911	$	0
Construction and development		0		0		0		0		250,099		250,099		0
Home equity		124		13		174		311		41,784		42,095		430
One-to-four-family		0		267		325		592		364,734		365,326		325
Multi-family		0		0		0		0		165,240		165,240		0
Total real estate loans		124		280		499		903		1,039,768		1,040,671		755
CONSUMER LOANS
Indirect home improvement		539		355		284		1,178		324,452		325,630		610
Marine		30		0		0		30		83,797		83,827		84
Other consumer		48		2		0		50		3,138		3,188		0
Total consumer loans		617		357		284		1,258		411,387		412,645		694
COMMERCIAL BUSINESS LOANS
Commercial and industrial		0		0		0		0		207,064		207,064		4,487
Warehouse lending		0		0		0		0		49,289		49,289		0
Total commercial business loans		0		0		0		0		256,353		256,353		4,487
Total loans	$	741	$	637	$	783	$	2,161	$	1,707,508	$	1,709,669	$	5,936


	December 31, 2020
	30-59		60-89
	Days		Days		90 Days		Total				Total
	Past		Past		or More		Past				Loans		Non-
REAL ESTATE LOANS	Due		Due		Past Due		Due		Current		Receivable		Accrual
Commercial	$	0	$	0	$	0	$	0	$	222,719	$	222,719	$	0
Construction and development		1,850		0		0		1,850		215,125		216,975		0
Home equity		127		137		219		483		42,610		43,093		636
One-to-four-family		389		404		512		1,305		309,788		311,093		644
Multi-family		0		0		0		0		131,601		131,601		0
Total real estate loans		2,366		541		731		3,638		921,843		925,481		1,280
CONSUMER LOANS
Indirect home improvement		683		331		325		1,339		284,681		286,020		826
Marine		28		77		22		127		85,613		85,740		44
Other consumer		73		22		0		95		3,323		3,418		1
Total consumer loans		784		430		347		1,561		373,617		375,178		871
COMMERCIAL BUSINESS LOANS
Commercial and industrial		0		1,204		0		1,204		223,272		224,476		5,610
Warehouse lending		0		0		0		0		49,092		49,092		0
Total commercial business loans		0		1,204		0		1,204		272,364		273,568		5,610
Total loans	$	3,150	$	2,175	$	1,078	$	6,403	$	1,567,824	$	1,574,227	$	7,761

There were 0 loans 90 days or more past due and still accruing interest at both ~~June~~September 30, 2021 and December 31, 2020.

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The following tables provide additional information about our impaired loans that have been segregated to reflect loans for which no allowance for loan losses has been provided and loans for which an allowance was provided at ~~June~~September 30, 2021 and December 31, 2020:


	June 30, 2021						September 30, 2021
	Unpaid						Unpaid
WITH NO RELATED ALLOWANCE RECORDED	Principal		Recorded		Related		Principal		Recorded		Related
Real estate loans:	Balance		Investment		Allowance		Balance		Investment		Allowance
Home equity	$	534	$	479	$	0	$	485	$	430	$	0
One-to-four-family		631		570		0		361		325		0
		1,165		1,049		0		846		755		0
WITH RELATED ALLOWANCE RECORDED
Consumer loans:
Indirect		606		606		212		610		610		214
Marine		135		135		48		84		84		29
Other consumer		27		27		9
Commercial business loans:
Commercial and industrial		4,487		4,487		988		4,487		4,487		991
		5,255		5,255		1,257		5,181		5,181		1,234
Total	$	6,420	$	6,304	$	1,257	$	6,027	$	5,936	$	1,234


	December 31, 2020
	Unpaid
WITH NO RELATED ALLOWANCE RECORDED	Principal		Recorded		Related
Real estate loans:	Balance		Investment		Allowance
Home equity		687		636		0
One-to-four-family		645		584		0
Commercial business loans:
Commercial and industrial		1,203		1,203		0
		2,535		2,423		0
WITH RELATED ALLOWANCE RECORDED
Real estate loans:
One-to-four-family		61		60		15
Consumer loans:
Indirect		826		826		289
Marine		44		44		15
Other consumer		1		1		1
Commercial business loans:
Commercial and industrial		4,407		4,407		990
		5,339		5,338		1,310
Total	$	7,874	$	7,761	$	1,310

Table of Contents

December 31, 2020


Unpaid




WITH NO RELATED ALLOWANCE RECORDED

Principal

Recorded

Related
Real estate loans:

Balance

Investment

Allowance
Home equity

687

636

0
One-to-four-family

645

584

0
Commercial business loans:

Commercial and industrial

1,203

1,203

0

2,535

2,423

0
WITH RELATED ALLOWANCE RECORDED

Real estate loans:

One-to-four-family

61

60

15
Consumer loans:

Indirect

826

826

289
Marine

44

44

15
Other consumer

1

1

1
Commercial business loans:

Commercial and industrial

4,407

4,407

990

5,339

5,338

1,310
Total

$
7,874

$
7,761

$
1,310

The following tables present the average recorded investment in loans individually evaluated for impairment and the interest income recognized and received for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


	At or For the Three Months Ended								At or For the Three Months Ended
	June 30, 2021				June 30, 2020				September 30, 2021				September 30, 2020
WITH NO RELATED ALLOWANCE RECORDED	Average Recorded		Interest Income		Average Recorded		Interest Income		Average Recorded		Interest Income		Average Recorded		Interest Income
Real estate loans:	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Commercial	$	0	$	0	$	1,090	$	19	$	0	$	0	$	1,089	$	14
Construction and development		1,233		0		0		0
Home equity		506		7		412		11		455		12		672		11
One-to-four-family		645		4		1,124		2		488		3		733		10
Consumer loans:
Other consumer		0		0		4		0
		2,384		11		2,630		32		943		15		2,494		35
WITH AN ALLOWANCE RECORDED
Real estate loans:
One-to-four-family		20		0		60		0		0		0		60		0
Consumer loans:
Indirect		671		8		601		11		554		12		723		16
Marine		102		2		85		1		85		2		0		0
Other consumer		19		1		0		0		2		0		0		0
Commercial business loans:
Commercial and industrial		4,487		105		1,421		162		4,487		86		4,310		0
		5,299		116		2,167		174		5,128		100		5,093		16
Total	$	7,683	$	127	$	4,797	$	206	$	6,071	$	115	$	7,587	$	51


	At or For the Nine Months Ended
	September 30, 2021				September 30, 2020
WITH NO RELATED ALLOWANCE RECORDED	Average Recorded		Interest Income		Average Recorded		Interest Income
Real estate loans:	Investment		Recognized		Investment		Recognized
Commercial	$	—	$	—	$	1,088	$	41
Construction and development		1,028		—		—		—
Home equity		538		21		434		22
One-to-four-family		559		9		1,029		17
Consumer loans:
Other consumer		—		—		4		—
		2,125		30		2,555		80
WITH AN ALLOWANCE RECORDED
Real estate loans:
One-to-four-family		27		—		60		—
Consumer loans:
Indirect		670		34		624		40
Marine		74		5		42		1
Other consumer		8		1		—		—
Commercial business loans:
Commercial and industrial		4,884		191		1,910		162
		5,663		231		2,636		203
Total	$	7,788	$	261	$	5,191	$	283

Table of Contents

At or For the Six Months Ended

June 30, 2021

June 30, 2020
WITH NO RELATED ALLOWANCE RECORDED

Average Recorded

Interest Income

Average Recorded

Interest Income
Real estate loans:

Investment

Recognized

Investment

Recognized
Commercial

$
—

$
—

$
1,087

$
27
Construction and development

1,541

—

—

—
Home equity

579

9

316

11
One-to-four-family

594

6

1,177

7
Consumer loans:

Other consumer

—

—

5

—

2,714

15

2,585

45
WITH AN ALLOWANCE RECORDED

Real estate loans:

One-to-four-family

40

—

60

—
Consumer loans:

—

Indirect

728

22

574

24
Marine

69

3

63

1
Other consumer

11

1

1

—
Commercial business loans:

Commercial and industrial

5,082

105

710

162

5,930

131

1,408

187
Total

$
8,644

$
146

$
3,993

$
232

Credit Quality Indicators

As part of the Company’s on-going monitoring of credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grading of loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) non-performing loans, and (v) the general economic conditions in the Company’s markets. All loans modified due to COVID-19 are separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

The Company utilizes a risk grading matrix to assign a risk grade to its real estate and commercial business loans. Loans are graded on a scale of 1 to 10, with loans in risk grades 1 to 6 considered “Pass” and loans in risk grades 7 to 10 are reported as classified loans in the Company’s allowance for loan loss analysis.

A description of the 10 risk grades is as follows:

●	Grades 1 and 2 - These grades include loans to very high-quality borrowers with excellent or desirable business credit.

●	Grade 3 - This grade includes loans to borrowers of good business credit with moderate risk.

●	Grades 4 and 5 - These grades include “Pass” grade loans to borrowers of average credit quality and risk.

●	Grade 6 - This grade includes loans on management’s “Watch” list and is intended to be utilized on a temporary basis for “Pass” grade borrowers where frequent and thorough monitoring is required due to credit weaknesses and where significant risk-modifying action is anticipated in the near term.

●	Grade 7 - This grade is for “Other Assets Especially Mentioned” (“OAEM”) in accordance with regulatory guidelines and includes borrowers where performance is poor or significantly less than expected.

~~Table of Contents~~

●	Grade 8 - This grade includes “Substandard” loans in accordance with regulatory guidelines which represent an unacceptable business credit where a loss is possible if loan weakness is not corrected.

●	Grade 9 - This grade includes “Doubtful” loans in accordance with regulatory guidelines where a loss is highly probable.

●	Grade 10 - This grade includes “Loss” loans in accordance with regulatory guidelines for which total loss is expected and when identified are charged off.

Consumer, Home Equity, and One-to-Four-Family Real Estate Loans

Homogeneous loans are risk rated based upon the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy. Loans classified under this policy at the Company are consumer loans which include indirect home improvement, solar, marine, other consumer, and one-to-four-family first and second liens. Under the Uniform Retail Credit Classification Policy, loans that are current or less than 90 days past due are graded “Pass” and risk rated “4” or “5” internally. Loans that are past due more than 90 days are classified “Substandard” and risk graded “8” internally until the loan has demonstrated consistent performance, typically six months of contractual payments. Closed-end loans that are 120 days past due and open-end loans that are 180 days past due are charged off based on the value of the collateral less cost to sell. Management may more conservatively risk rate credits even if paying in accordance with the loan’s repayment terms.

Commercial real estate, construction and development, multi-family and commercial business loans are evaluated individually for their risk classification and may be classified as “Substandard” even if current on their loan payment obligations.

~~The following tables summarize risk rated loan balances by category at the dates indicated:~~

June 30, 2021






Special








Pass

Watch

Mention

Substandard

Doubtful

Loss

REAL ESTATE LOANS

(1 - 5)

(6)

(7)

(8)

(9)

(10)

Total
Commercial

$
179,002

$
49,795

$
1,471

$
928

$
—

$
—

$
231,196
Construction and development

242,715

—

—

—

—

—

242,715
Home equity

40,239

—

—

479

—

—

40,718
One-to-four-family

328,206

—

185

7,006

—

—

335,397
Multi-family

133,828

—

—

—

—

—

133,828
Total real estate loans

923,990

49,795

1,656

8,413

—

—

983,854
CONSUMER LOANS














Indirect home improvement

307,841

—

—

606

—

—

308,447
Marine

86,081

—

—

135

—

—

86,216
Other consumer

3,150

—

—

27

—

—

3,177
Total consumer loans

397,072

—

—

768

—

—

397,840
COMMERCIAL BUSINESS LOANS














Commercial and industrial

213,731

13,657

1,805

13,094

—

—

242,287
Warehouse lending

54,072

—

—

—

—

—

54,072
Total commercial business loans

267,803

13,657

1,805

13,094

—

—

296,359
Total loans receivable, gross

$
1,588,865

$
63,452

$
3,461

$
22,275

$
—

$
—

$
1,678,053

2423

Table of Contents

December 31, 2020

Special

Pass

Watch

Mention

Substandard

Doubtful

Loss

REAL ESTATE LOANS

(1 - 5)

(6)

(7)

(8)

(9)

(10)

Total
Commercial

$
157,932

$
60,834

$
3,013

$
940

$
0

$
0

$
222,719
Construction and development

212,209

2,917

1,849

0

0

—

216,975
Home equity

42,457

0

0

636

0

0

43,093
One-to-four-family

303,610

162

187

7,134

0

0

311,093
Multi-family

131,601

0

0

0

0

0

131,601
Total real estate loans

847,809

63,913

5,049

8,710

0

0

925,481
CONSUMER LOANS














Indirect home improvement

285,194

0

0

826

0

0

286,020
Marine

85,696

0

0

44

0

0

85,740
Other consumer

3,417

0

0

1

0

0

3,418
Total consumer loans

374,307

0

0

871

0

0

375,178
COMMERCIAL BUSINESS LOANS














Commercial and industrial

190,392

23,945

2,073

8,066

0

0

224,476
Warehouse lending

49,092

0

0

0

0

0

49,092
Total commercial business loans

239,484

23,945

2,073

8,066

0

0

273,568
Total loans receivable, gross

$
1,461,600

$
87,858

$
7,122

$
17,647

$
0

$
0

$
1,574,227

The following tables summarize risk rated loan balances by category at the dates indicated:


	September 30, 2021
					Special
	Pass		Watch		Mention		Substandard		Doubtful		Loss
REAL ESTATE LOANS	(1 - 5)		(6)		(7)		(8)		(9)		(10)		Total
Commercial	$	196,922	$	17,876	$	2,190	$	923	$	—	$	—	$	217,911
Construction and development		250,099		—		—		—		—		—		250,099
Home equity		41,665		—		—		430		—		—		42,095
One-to-four-family		362,807		—		185		2,334		—		—		365,326
Multi-family		165,240		—		—		—		—		—		165,240
Total real estate loans		1,016,733		17,876		2,375		3,687		—		—		1,040,671
CONSUMER LOANS
Indirect home improvement		325,020		—		—		610		—		—		325,630
Marine		83,743		—		—		84		—		—		83,827
Other consumer		3,188		—		—		—		—		—		3,188
Total consumer loans		411,951		—		—		694		—		—		412,645
COMMERCIAL BUSINESS LOANS
Commercial and industrial		186,318		6,132		1,474		13,140		—		—		207,064
Warehouse lending		49,289		—		—		—		—		—		49,289
Total commercial business loans		235,607		6,132		1,474		13,140		—		—		256,353
Total loans receivable, gross	$	1,664,291	$	24,008	$	3,849	$	17,521	$	—	$	—	$	1,709,669


	December 31, 2020
					Special
	Pass		Watch		Mention		Substandard		Doubtful		Loss
REAL ESTATE LOANS	(1 - 5)		(6)		(7)		(8)		(9)		(10)		Total
Commercial	$	157,932	$	60,834	$	3,013	$	940	$	—	$	—	$	222,719
Construction and development		212,209		2,917		1,849		0		—		—		216,975
Home equity		42,457		0		0		636		—		—		43,093
One-to-four-family		303,610		162		187		7,134		—		—		311,093
Multi-family		131,601		0		0		0		—		—		131,601
Total real estate loans		847,809		63,913		5,049		8,710		—		—		925,481
CONSUMER LOANS
Indirect home improvement		285,194		0		0		826		—		—		286,020
Marine		85,696		0		0		44		—		—		85,740
Other consumer		3,417		0		0		1		—		—		3,418
Total consumer loans		374,307		0		0		871		—		—		375,178
COMMERCIAL BUSINESS LOANS
Commercial and industrial		190,392		23,945		2,073		8,066		—		—		224,476
Warehouse lending		49,092		0		0		0		—		—		49,092
Total commercial business loans		239,484		23,945		2,073		8,066		—		—		273,568
Total loans receivable, gross	$	1,461,600	$	87,858	$	7,122	$	17,647	$	—	$	—	$	1,574,227

NOTE 4 - SERVICING RIGHTS

Loans serviced for others are not included on the Consolidated Balance Sheets. The unpaid principal balances of permanent loans serviced for others were ~~$2.47~~$2.52 billion and $2.17 billion at ~~June~~September 30, 2021 and December 31, 2020, respectively.

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The following tables summarize servicing rights activity for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


	At or For the Three Months Ended				At or For the Three Months Ended
	June 30,				September 30,
	2021		2020		2021		2020
Beginning balance, at the lower of cost or fair value	$	15,735	$	10,626	$	16,356	$	10,672
Additions		2,456		3,216		1,967		3,233
Servicing rights amortized		(1,831)		(2,367)		(1,837)		(2,087)
Impairment of servicing rights		(4)		(803)
Recovery (impairment) of servicing rights						11		(82)
Ending balance, at the lower of cost or fair value	$	16,356	$	10,672	$	16,497	$	11,736


	At or For the Six Months Ended				At or For the Nine Months Ended
	June 30,				September 30,
	2021		2020		2021		2020
Beginning balance, at the lower of cost or fair value	$	12,595	$	11,560	$	12,595	$	11,560
Additions		5,600		4,401		7,567		7,634
Servicing rights amortized		(3,885)		(3,972)		(5,722)		(6,059)
Recovery (impairment) of servicing rights		2,046		(1,317)		2,057		(1,399)
Ending balance, at the lower of cost or fair value	$	16,356	$	10,672	$	16,497	$	11,736

The fair value of the servicing rights’ assets was ~~$23.6~~$24.9 million and $12.8 million at ~~June~~September 30, 2021 and December 31, 2020, respectively. Fair value adjustments to servicing rights are mainly due to market-based assumptions associated with discounted cash flows, loan prepayment speeds, and changes in interest rates. A significant change in prepayments of the loans in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of servicing rights.

The following provides valuation assumptions used in determining the fair value of mortgage servicing rights (“MSR”) at the dates indicated:


	At September 30,		At December 31,
Key assumptions:	2021		2020
Weighted average discount rate	9.1	%	9.1	%
Conditional prepayment rate (“CPR”)	14.6	%	32.6	%
Weighted average life in years	5.9		3.0

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~~loans in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of servicing rights.~~

~~The following provides valuation assumptions used in determining the fair value of mortgage servicing rights (“MSR”) at the dates indicated:~~

At June 30,

At December 31,

Key assumptions:

2021

2020

Weighted average discount rate

9.1
%
9.1
%
Conditional prepayment rate (“CPR”)

15.9
%
32.6
%
Weighted average life in years

5.6

3.0

Key economic assumptions of the current fair value for single family MSR are presented in the table below. Also presented is the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four-family FNMA, FHLMC, GNMA, or FHLB serviced home loan. The table below references a 50 basis point and 100 basis point adverse rate change and the impact on prepayment speeds and discount rates at ~~June~~September 30, 2021 and December 31, 2020:


				June 30, 2021			December 31, 2020 ⁽¹⁾						September 30, 2021			December 31, 2020 ⁽¹⁾
Aggregate portfolio principal balance				$	2,474,223		$	2,133,473					$	2,520,674		$	2,133,473
Weighted average rate of note					3.3	%		3.5	%					3.2	%		3.5	%

At June 30, 2021	Base			0.5% Adverse Rate Change			1.0% Adverse Rate Change
At September 30, 2021										Base			0.5% Adverse Rate Change			1.0% Adverse Rate Change
Conditional prepayment rate		15.9	%		23.9	%		37.0	%		14.6	%		21.7	%		34.3	%
Fair value MSR	$	23,551		$	18,575		$	13,343		$	24,894		$	19,830		$	14,172
Percentage of MSR		1.0	%		0.8	%		0.5	%		1.0	%		0.8	%		0.6	%

Discount rate		9.1	%		9.6	%		10.1	%		9.1	%		9.6	%		10.1	%
Fair value MSR	$	23,551		$	23,126		$	22,717		$	24,894		$	24,431		$	23,985
Percentage of MSR		1.0	%		0.9	%		0.9	%		1.0	%		1.0	%		1.0	%

At December 31, 2020	Base			0.5% Adverse Rate Change			1.0% Adverse Rate Change			Base			0.5% Adverse Rate Change			1.0% Adverse Rate Change
Conditional prepayment rate		32.6	%		40.6	%		59.6	%		32.6	%		40.6	%		59.6	%
Fair value MSR	$	12,833		$	10,922		$	8,286		$	12,833		$	10,922		$	8,286
Percentage of MSR		0.6	%		0.5	%		0.4	%		0.6	%		0.5	%		0.4	%

Discount rate		9.1	%		9.6	%		10.1	%		9.1	% ��		9.6	%		10.1	%
Fair value MSR	$	12,833		$	12,696		$	12,562		$	12,833		$	12,696		$	12,562
Percentage of MSR		0.6	%		0.6	%		0.6	%		0.6	%		0.6	%		0.6	%

___________________________

(1)	Excludes nonperforming serviced loans in forbearance.

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

The Company recorded ~~$1.6~~$1.7 million and ~~$1.0~~$1.1 million of gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of loans for the three months ended ~~June~~September 30, 2021 and 2020, respectively, and ~~$3.0~~

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$4.6 million and ~~$2.0~~$3.1 million for the ~~six~~nine months ended ~~June~~September 30, 2021and 2020, respectively. The income, net of ~~amortization, or the reduction in income, if~~ MSR amortization, ~~is greater than servicing fees,~~ is reported in noninterest income on the Consolidated Statements of Income.

NOTE 5 - DERIVATIVES

The ~~Company~~Bank regularly enters into commitments to originate and sell loans held for sale. The ~~Company~~Bank has established a hedging strategy to protect itself against the risk of loss associated with interest rate movements on loan commitments. The ~~Company~~Bank enters into contracts to sell forward To-Be-Announced (“TBA”) mortgage-backed securities. These commitments and contracts are considered derivatives but have not been designated as hedging instruments for reporting purposes under U.S. GAAP. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in noninterest income or noninterest expense. The ~~Company~~Bank recognizes all derivative instruments as either other assets or other liabilities on the Consolidated Balance Sheets and measures those instruments at fair value.

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Derivative instruments not related to mortgage banking activities primarily relate to interest rate swap agreements. The ~~Company's~~Bank's objectives in using certain interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the ~~Company~~Bank uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the ~~Company~~Bank making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The ~~Company~~Bank has entered into interest rate swaps to reduce the exposure to variability in interest-related cash outflows attributable to changes in forecasted LIBOR-based borrowings and brokered deposits. These derivative instruments are designated as cash flow hedges. The hedged item is the LIBOR portion of the series of future adjustable-rate borrowings and deposits over the term of the interest rate swap. Accordingly, changes to the amount of interest payment cash flows for the hedged transactions attributable to a change in credit risk are excluded from management’s assessment of hedge effectiveness. The ~~Company~~Bank tests for hedging effectiveness on a quarterly basis. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ~~Company~~Bank has not recorded any hedge ineffectiveness since inception. The ~~Company~~Bank has master netting agreements with derivative dealers with which it does business, but reflects gross assets and liabilities as other assets and other liabilities, respectively, on the Consolidated Balance Sheets.

The net unrealized loss on cash flow hedges recorded in accumulated other comprehensive income was ~~$96,000~~$34,000 and $967,000, net of tax, at ~~June~~September 30, 2021 and December 31, 2020, respectively. The ~~Company~~Bank reclassified realized losses of ~~$124,000~~$135,000 and ~~realized gains of $15,000~~$98,000 from accumulated other comprehensive income to interest expense related to these cash flow hedges for the three months ended ~~June~~September 30, 2021 and ~~June~~September 30, 2020, respectively, and realized losses of ~~$238,000~~$373,000 and ~~realized gains of $14,000~~$84,000 for the ~~six~~nine months ended ~~June~~September 30, 2021 and ~~June~~September 30, 2020, respectively. The ~~Company~~Bank expects that approximately ~~$521,000~~$468,000 will be reclassified from accumulated other comprehensive income as an increase to interest expense over the next twelve months related to these cash flow hedges.

The following tables summarize the ~~Company’s~~Bank’s derivative instruments at the dates indicated:


	June 30, 2021						September 30, 2021
			Fair Value						Fair Value
Cash flow hedges:	Notional		Asset		Liability		Notional		Asset		Liability
Interest rate swaps	$	90,000	$	523	$	645	$	90,000	$	527	$	571
Non-hedging derivatives:
Fallout adjusted interest rate lock commitments with customers		110,858		2,106		0		90,277		1,171		0
Mandatory and best effort forward commitments with investors		63,107		0		553		50,658		558		0
Forward TBA mortgage-backed securities		164,000		0		169		147,000		587		0

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	December 31, 2020
			Fair Value
Cash flow hedges:	Notional		Asset		Liability
Interest rate swaps	$	90,000	$	21	$	1,252
Non-hedging derivatives:
Fallout adjusted interest rate lock commitments with customers		136,739		4,024		0
Mandatory and best effort forward commitments with investors		25,027		0		67
Forward TBA mortgage-backed securities		232,000		0		1,602

At ~~June~~September 30, 2021 and December 31, 2020, the ~~Company~~Bank had ~~$164.0~~$147.0 million and $232.0 million of TBA trades with counterparties that held margin collateral of ~~$746,000~~$1.1 million and $3.3 million, respectively. At ~~June~~September 30, 2021, the Bank had pledged 2 securities with a carrying value of ~~$3.2~~$3.4 million to secure interest rate swaps designated as cash flow hedges.

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Changes in the fair value of the non-hedging derivatives recognized in noninterest income on the Consolidated Statements of Income and included in gain on sale of loans resulted in a net loss of ~~$3.0 million~~$402,000 and a net gain of ~~$4.3~~$2.8 million for the three months ended ~~June~~September 30, 2021 and 2020, respectively, and a net loss of ~~$3.9~~$4.3 million and net gain of ~~$6.0~~$8.8 million for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, respectively.

NOTE 6 - LEASES

The Company has operating leases for retail bank branches, home lending branches, and certain equipment. The Company’s leases have remaining lease terms of ~~six~~three months to eight years and nine ~~years,~~months, some of which include options to extend the leases for up to five years.

The components of lease cost (included in occupancy expense on the Consolidated Statements of Income) are as follows for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


	Three Months Ended		Three Months Ended
Lease cost:	September 30, 2021		September 30, 2020
Operating lease cost	$	353	$	339
Short-term lease cost		2		1
Total lease cost	$	355	$	340

Three Months Ended

Three Months Ended
Lease cost:

June 30, 2021

June 30, 2020
Operating lease cost

$
360

$
356
Short-term lease cost

1

1
Total lease cost

$
361

$
357

Six Months Ended

Six Months Ended
Lease cost:

June 30, 2021

June 30, 2020
Operating lease cost

$
709

$
699
Short-term lease cost

2

9
Total lease cost

$
711

$
708


	Nine Months Ended		Nine Months Ended
Lease cost:	September 30, 2021		September 30, 2020
Operating lease cost	$	1,063	$	1,038
Short-term lease cost		3		10
Total lease cost	$	1,066	$	1,048

The following tables provides supplemental information related to operating leases at or for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


	At or For the			At or For the
Cash paid for amounts included in the	Three Months Ended			Three Months Ended
measurement of lease liabilities:	September 30, 2021			September 30, 2020
Operating cash flows from operating leases	$	329		$	349
Weighted average remaining lease term- operating leases		4.9	years		5.5	years
Weighted average discount rate- operating leases		2.18	%		2.48	%


	At or For the			At or For the			At or For the			At or For the
Cash paid for amounts included in the	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
measurement of lease liabilities:	June 30, 2021			June 30, 2020			September 30, 2021			September 30, 2020
Operating cash flows from operating leases	$	353		$	348		$	1,058		$	1,033
Weighted average remaining lease term- operating leases		5.1	years		5.1	years		4.9	years		5.5	years
Weighted average discount rate- operating leases		2.21	%		2.66	%		2.18	%		2.48	%

The Company’s leases typically do not contain a discount rate implicit in the lease contract. As an alternative, the discount rate used in determining the lease liability for each individual lease was the FHLB of Des Moines’ fixed-advance rate.

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At or For the

At or For the
Cash paid for amounts included in the

Six Months Ended

Six Months Ended
measurement of lease liabilities:

June 30, 2021

June 30, 2020
Operating cash flows from operating leases

$
702

$
684

Weighted average remaining lease term- operating leases

5.1
years

5.1
years
Weighted average discount rate- operating leases

2.21
%

2.66
%

Maturities of operating lease liabilities at ~~June~~September 30, 2021 for future periods are as follows:


Remainder of 2021	$	703	$	449
2022		1,440		1,398
2023		1,069		1,027
2024		1,000		968
2025		650		650
Thereafter		1,059		1,059
Total lease payments		5,921		5,551
Less imputed interest		(520)		(454)
Total	$	5,401	$	5,097

NOTE 7 - OTHER REAL ESTATE OWNED (“OREO”)

The following table presents the activity related to OREO at or for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


	At or For the Three Months Ended				At or For the Six Months Ended				At or For the Three Months Ended				At or For the Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2021		2020		2021		2020		2021		2020		2021		2020
Beginning balance	$	0	$	90	$	90	$	168	$	0	$	90	$	90	$	168
Additions		—		—		—		—		—		—		—		—
Gross proceeds from sale of OREO		—		—		(81)		(76)		—		—		(81)		(76)
Loss on sale of OREO		—		—		(9)		(2)		—		—		(9)		(2)
Ending balance	$	0	$	90	$	0	$	90	$	0	$	90	$	0	$	90

There were 0 OREO properties at ~~June~~September 30, 2021, compared to 1 OREO property in the amount of $90,000 at ~~June~~September 30, 2020. There were 0no OREO holding costs for both the three and ~~six~~nine months ended ~~June~~September 30, 2021, and NaN and $2,000 for ~~both~~ the three and ~~six~~nine months ended ~~June~~September 30, ~~2020.~~2020, respectively.

There was ~~$286,000~~$283,000 in portfolio mortgage loans collateralized by residential real estate property in the process of foreclosure at ~~June~~September 30, 2021.

NOTE 8 - DEPOSITS

Deposits are summarized as follows at September 30, 2021 and December 31, 2020:


	September 30,		December 31,
	2021		2020
Noninterest-bearing checking	$	423,091	$	348,421
Interest-bearing checking		308,142		226,282
Savings		191,487		152,842
Money market		497,571		429,548
Certificates of deposit less than $100,000		231,453		299,157
Certificates of deposit of $100,000 through $250,000		126,095		135,901
Certificates of deposit of $250,000 and over		62,296		67,488
Escrow accounts related to mortgages serviced		23,515		14,432
Total	$	1,863,650	$	1,674,071

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Scheduled maturities of time deposits at September 30, 2021 for future periods ending are as follows:


	At September 30, 2021
Maturing in 2021	$	90,527
Maturing in 2022		191,477
Maturing in 2023		39,064
Maturing in 2024		28,014
Maturing in 2025		57,085
Thereafter		13,677
Total	$	419,844

Interest expense by deposit category for the three and nine months ended September 30, 2021 and 2020 is as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Interest-bearing checking	$	56	$	86	$	154	$	299
Savings and money market		348		464		1,232		1,932
Certificates of deposit		1,225		2,087		4,095		7,439
Total	$	1,629	$	2,637	$	5,481	$	9,670

~~NOTE 8 - DEPOSITS~~

~~Deposits are summarized as follows at June 30, 2021 and December 31, 2020:~~

June 30,

December 31,

2021

2020
Noninterest-bearing checking

$
415,748

$
348,421
Interest-bearing checking

257,206

226,282
Savings

181,505

152,842
Money market

483,935

429,548
Certificates of deposit less than $100,000

299,250

299,157
Certificates of deposit of $100,000 through $250,000

138,559

135,901
Certificates of deposit of $250,000 and over

65,938

67,488
Escrow accounts related to mortgages serviced

16,469

14,432
Total

$
1,858,610

$
1,674,071

~~Scheduled maturities of time deposits at June 30, 2021 for future periods ending are as follows:~~

At June 30, 2021
Maturing in 2021

$
232,248
Maturing in 2022

149,703
Maturing in 2023

32,257
Maturing in 2024

24,198
Maturing in 2025

58,912
Thereafter

6,429
Total

$
503,747

~~Interest expense by deposit category for the three and six months ended June 30, 2021 and 2020 is as follows:~~

Three Months Ended

Six Months Ended

June 30,

June 30,

2021

2020

2021

2020
Interest-bearing checking

$
48

$
77

$
98

$
212
Savings and money market

416

642

884

1,469
Certificates of deposit

1,406

2,507

2,870

5,352
Total

$
1,870

$
3,226

$
3,852

$
7,033

NOTE 9 - COMMITMENTS AND CONTINGENCIES

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

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

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The following table provides a summary of the Company’s commitments at ~~June~~September 30, 2021 and December 31, 2020:


COMMITMENTS TO EXTEND CREDIT	June 30,		December 31,		September 30,		December 31,
REAL ESTATE LOANS	2021		2020		2021		2020
Commercial	$	2,438	$	1,293	$	2,310	$	1,293
Construction and development		171,557		143,666		181,402		143,666
One-to-four-family (includes locks for saleable loans)		149,406		147,712		114,933		147,712
Home equity		56,648		52,457		58,809		52,457
Multi-family		3,261		658		3,226		658
Total real estate loans		383,310		345,786		360,680		345,786
CONSUMER LOANS		34,914		23,365		37,966		23,365
COMMERCIAL BUSINESS LOANS
Commercial and industrial		109,653		106,171		123,175		106,171
Warehouse lending		46,428		52,909		48,211		52,909
Total commercial business loans		156,081		159,080		171,386		159,080
Total commitments to extend credit	$	574,305	$	528,231	$	570,032	$	528,231

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the amount of the total commitments do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon an extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include

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accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and ultimately may not be drawn upon to the total extent to which the Company is committed. The Company has established reserves for estimated losses from unfunded commitments of ~~$479,000~~$496,000 at ~~June~~September 30, 2021 and $407,000 at December 31, 2020. One-to-four-family commitments included in the table above are accounted for as fair value derivatives and do not carry an associated holdback. The Company’s derivative positions are presented with discussion in “Note 5 - Derivatives.”

The Company also sells one-to-four-family loans to the FHLB of Des Moines that require a limited level of recourse if the loans default and exceed a certain loss exposure. Specific to that recourse, the FHLB of Des Moines established a first loss account (“FLA”) related to the loans and required a credit enhancement (“CE”) obligation by the Bank to be utilized after the FLA is used. Based on loans sold through ~~June~~September 30, 2021, the total loans sold to the FHLB were ~~$18.8~~$15.3 million with the FLA totaling $938,000 and the CE obligation at $811,000 or ~~4.3%~~5.3% of the loans outstanding. Management has established a holdback of 10% of the outstanding CE, or $81,000, which is a part of the off-balance sheet holdback for loans sold. At ~~June~~September 30, 2021, there were 0 loans sold to the FHLB of Des Moines greater than 30 days past their contractual payment due date, compared to loans totaling $498,000 at December 31, 2020.

Contingent liabilities for loans held for sale - In the ordinary course of business, loans are sold with limited recourse against the Company and may have to subsequently be repurchased due to defects that occurred during the origination of the loan. The defects are categorized as documentation errors, underwriting errors, early payoff, early payment defaults, breach of representation or warranty, servicing errors, and/or fraud. When a loan sold to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred. If a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no such defects, the Company has no commitment to repurchase the loan. The Company has recorded a holdback reserve of ~~$2.4~~$2.5 million and $2.0 million to cover loss exposure related to these guarantees for one-to-four-family loans sold into the secondary market at ~~June~~September 30, 2021 and December 31, 2020, respectively, which is included in other liabilities on the Consolidated Balance Sheets.

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The Company has entered into a severance agreement with its Chief Executive Officer (“CEO”). The severance agreement, subject to certain requirements, generally includes a lump sum payment to the CEO equal to 24 months of base compensation in the event his employment is involuntarily terminated, other than for cause or the executive terminates his employment with good reason, as defined in the severance agreement.

The Company has entered into change of control agreements with its Chief Financial Officer, Chief Operating Officer, Chief Lending Officer, Chief Credit Officer, Chief Risk Officer, Chief Human Resources Officer, Senior Vice President Compliance Officer, Executive Vice President of Retail Banking and Marketing, and the Executive Vice President of Home Lending. The change of control agreements, subject to certain requirements, generally remain in effect until canceled by either party upon at least 24 months prior written notice. Under the change of control agreements, the executive generally will be entitled to a change of control payment from the Company if the executive is involuntarily terminated within six months preceding or 12 months after a change in control (as defined in the change of control agreements). In such an event, the executives would each be entitled to receive a cash payment in an amount equal to 12 months of their then current salary, subject to certain requirements in the change of control agreements.

As a result of the nature of our activities, the Company is subject to various pending and threatened legal actions, which arise in the ordinary course of business. From time to time, subordination liens may create litigation which requires us to defend our lien rights. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on our financial position. The Company had 0 material pending legal actions at ~~June~~September 30, 2021.

NOTE 10 - FAIR VALUE MEASUREMENTS

The Company determines fair value based on the requirements established in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements, which provides a framework for measuring fair value in accordance with U.S. GAAP

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and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 defines fair value as the exit price, or the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, requires us to use the exit price notion when measuring the fair value of instruments for disclosure purposes.

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

Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

Securities - The fair value of securities available-for-sale and held-to-maturity are recorded on a recurring basis. The fair value of investments and mortgage-backed securities are provided by a third-party pricing service. These valuations are based on market data using pricing models that vary by asset class and incorporate available current trade, bid, and other market information, and for structured securities, cash flow, and loan performance data. The pricing processes utilize benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. Option adjusted spread models are also used to assess the impact of changes in interest rates and to develop prepayment scenarios (Level 2). Certain other corporate securities and municipal bonds are generally measured at fair value based on discounted cash flow models (Level 3). Transfers between the fair value hierarchy are determined through the third-party service provider which, from time to time will transfer between levels based on market conditions per the related security. All models and processes used take into account market convention.

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Mortgage Loans Held for Sale - The fair value of loans held for sale reflects the value of commitments with investors and/or the relative price as delivered into a TBA mortgage-backed security (Level 2).

Derivative Instruments - Fair values for derivative assets and liabilities are measured on a recurring basis. The primary use of derivative instruments is related to the mortgage banking activities of the Company. The fair value of the interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-though rate assumptions based on historical information, where appropriate. TBA mortgage-backed securities are fair valued on similar contracts in active markets (Level 2), while locks and forwards with customers and investors are fair valued using similar contracts in the market and changes in the market interest rates (Level 2 and 3). Derivative instruments not related to mortgage banking activities include interest rate swap agreements. The fair values of interest rate swap agreements are based on valuation models using observable market data as of the measurement date (Level 2). The Company’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including market transactions and third-party pricing services. The fair values of all interest rate swaps are determined from third-party pricing services without adjustment.

Impaired Loans - Fair value adjustments to impaired collateral dependent loans are recorded to reflect partial write-downs based on the current appraised value of the collateral or internally developed models, which contain management’s assumptions. Management will utilize discounted cashflow impairment for TDRs when the change in terms results in a discount to the overall cashflows to be received (Level 3).

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Other Real Estate Owned - Fair value adjustments to OREO are recorded at the lower of carrying amount of the loan or fair value of the collateral less selling costs. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell (Level 3).

Servicing Rights - The fair value of mortgage servicing rights is estimated using net present value of expected cash flows using a third-party model that incorporates assumptions used in the industry to value such rights, adjusted for factors such as weighted average prepayments speeds based on historical information where appropriate (Level 3).

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


Financial Assets	At June 30, 2021								At September 30, 2021
Securities available-for-sale:	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
U.S. agency securities	$	0	$	16,827	$	0	$	16,827	$	0	$	26,182	$	0	$	26,182
Corporate securities		0		10,553		976		11,529		0		8,139		1,003		9,142
Municipal bonds		0		111,312		141		111,453		0		129,173		136		129,309
Mortgage-backed securities		0		75,999		0		75,999		0		87,131		0		87,131
U.S. Small Business Administration securities		0		16,762		0		16,762		0		17,038		0		17,038
Mortgage loans held for sale, at fair value		0		121,395		0		121,395		0		118,106		0		118,106
Derivatives:
Mandatory and best effort forward commitments with investors										0		0		558		558
Forward TBA mortgage-backed securities										0		587		0		587
Interest rate swaps		0		523		0		523		0		527		0		527
Interest rate lock commitments with customers		0		0		2,106		2,106		0		0		1,171		1,171
Total assets measured at fair value	$	0	$	353,371	$	3,223	$	356,594	$	0	$	386,883	$	2,868	$	389,751
Financial Liabilities
Derivatives:
Mandatory and best effort forward commitments with investors	$	0	$	0	$	(553)	$	(553)
Forward TBA mortgage-backed securities		0		(169)		0		(169)
Interest rate swaps		0		(645)		0		(645)		0		(571)		0		(571)
Total liabilities measured at fair value	$	0	$	(814)	$	(553)	$	(1,367)	$	0	$	(571)	$	0	$	(571)


Financial Assets	At December 31, 2020
Securities available-for-sale:	Level 1		Level 2		Level 3		Total
U.S. agency securities	$	0	$	8,105	$	0	$	8,105
Corporate securities		0		10,016		984		11,000
Municipal bonds		0		71,730		127		71,857
Mortgage-backed securities		0		68,187		0		68,187
U.S. Small Business Administration securities		0		18,869		0		18,869
Mortgage loans held for sale, at fair value		0		166,448		0		166,448
Derivatives:
Interest rate swaps		0		21		0		21
Interest rate lock commitments with customers		0		0		4,024		4,024
Total assets measured at fair value	$	0	$	343,376	$	5,135	$	348,511
Financial Liabilities
Derivatives:
Mandatory and best effort forward commitments with investors	$	0	$	0	$	(67)	$	(67)
Forward TBA mortgage-backed securities		0		(1,602)		0		(1,602)
Interest rate swaps		0		(1,252)		0		(1,252)
Total liabilities measured at fair value	$	0	$	(2,854)	$	(67)	$	(2,921)

The following tables present impaired loans, OREO, and servicing rights measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting periods indicated. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were evaluated.

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Financial Assets

At December 31, 2020
Securities available-for-sale:

Level 1

Level 2

Level 3

Total
U.S. agency securities

$
0

$
8,105

$
0

$
8,105
Corporate securities

0

10,016

984

11,000
Municipal bonds

0

71,730

127

71,857
Mortgage-backed securities

0

68,187

0

68,187
U.S. Small Business Administration securities

0

18,869

0

18,869
Mortgage loans held for sale, at fair value

0

166,448

0

166,448
Derivatives:

Interest rate swaps

0

21

0

21
Interest rate lock commitments with customers

0

0

4,024

4,024
Total assets measured at fair value

$
0

$
343,376

$
5,135

$
348,511
Financial Liabilities

Derivatives:

Mandatory and best effort forward commitments with investors

$
0

$
0

$
(67)

$
(67)
Forward TBA mortgage-backed securities

0

(1,602)

0

(1,602)
Interest rate swaps

0

(1,252)

0

(1,252)
Total liabilities measured at fair value

$
0

$
(2,854)

$
(67)

$
(2,921)

June 30, 2021


Level 1

Level 2

Level 3

Total
Impaired loans

$
0

$
0

$
6,304

$
6,304
Servicing rights

0


0


23,551


23,551


	September 30, 2021
	Level 1		Level 2		Level 3		Total
Impaired loans	$	0	$	0	$	5,936	$	5,936
Servicing rights		0		0		24,894		24,894


	December 31, 2020
	Level 1		Level 2		Level 3		Total
Impaired loans	$	0	$	0	$	7,761	$	7,761
OREO		0		0		90		90
Servicing rights		0		0		12,833		12,833

Quantitative Information about Level 3 Fair Value Measurements - Shown in the table below is the fair value of financial instruments measured under a Level 3 unobservable input on a recurring and nonrecurring basis at ~~June~~September 30, 2021 and December 31, 2020:


Level 3		Significant		Weighted Average					Significant		Weighted Average
Fair Value	Valuation	Unobservable		June 30,		December 31,		Valuation	Unobservable		September 30,		December 31,
Instruments	Techniques	Inputs	Range	2021		2020		Techniques	Inputs	Range	2021		2020
RECURRING
Interest rate lock commitments with customers	Quoted market prices	Pull-through expectations	80% - 99%	93.0	%	91.6	%	Quoted market prices	Pull-through expectations	80% - 99%	92.9	%	91.6	%
Individual forward sale commitments with investors	Quoted market prices	Pull-through expectations	80% - 99%	93.0	%	91.6	%	Quoted market prices	Pull-through expectations	80% - 99%	92.9	%	91.6	%
Corporate securities	Discounted cash flows	Discount rate	2.5%	2.5	%	2.5	%	Discounted cash flows	Discount rate	2.5% - 4.0%	4.0	%	2.5	%
Municipal bonds	Discounted cash flows	Discount rate	6.4%	6.4	%	6.4	%	Discounted cash flows	Discount rate	5.8% - 6.4%	6.0	%	6.4	%
NONRECURRING
Impaired loans								Fair value of underlying collateral	Discount applied to the obtained appraisal	10.0%	10.0	%	10.0	%
OREO								Fair value of collateral	Discount applied to the obtained appraisal	10.0%	N/A		10.0	%
Servicing rights								Industry sources	Pre-payment speeds	0% - 50%	14.6	%	32.6	%

An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitments with customers and forward sale commitments with investors will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).

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NONRECURRING







Impaired loans

Fair value of underlying collateral

Discount applied to the obtained appraisal

10.0%

10.0
%

10.0
%
OREO

Fair value of collateral

Discount applied to the obtained appraisal

10.0%

N/A

10.0
%
Servicing rights

Industry sources

Pre-payment speeds

0% - 50%

15.9
%

32.6
%

The following tables provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


			Purchases						Net change in		Net change in				Purchases						Net change in			Net change in
Three Months Ended	Beginning		and		Sales and		Ending		fair value for		fair value for		Beginning		and		Sales and		Ending		fair value for			fair value for
June 30, 2021	Balance		Issuances		Settlements		Balance		gains/(losses) ⁽¹⁾		gains/(losses) ⁽²⁾
September 30, 2021													Balance		Issuances		Settlements		Balance		gains/(losses) ⁽¹⁾			gains/(losses) ⁽²⁾
Interest rate lock commitments with customers	$	1,985	$	7,169	$	(7,048)	$	2,106	$	121	$	—	$	2,106	$	4,920	$	(5,855)	$	1,171	$	(935)		$	—
Individual forward sale commitments with investors		506		(1,200)		141		(553)		(1,059)		—		(553)		1,081		30		558		1,111			—
Securities available-for-sale, at fair value		1,129		—		(12)		1,117		—		(9)		1,117		25		(3)		1,139		—			25
June 30, 2020
September 30, 2020																							��
Interest rate lock commitments with customers	$	4,291	$	12,692	$	(12,261)	$	4,722	$	431	$	—	$	4,722	$	18,863	$	(17,399)	$	6,186	$	1,464		$	—
Individual forward sale commitments with investors		(181)		(1,089)		1,126		(144)		37		—		(144)		(1,591)		973		(762)		(618)			—
Securities available-for-sale, at fair value		1,171		(5)		(3)		1,163		—		(5)		1,163		—		(54)		1,109		—			(51)


			Purchases						Net change in		Net change in				Purchases						Net change in		Net change in
Six Months Ended	Beginning		and		Sales and		Ending		fair value for		fair value for
June 30, 2021	Balance		Issuances		Settlements		Balance		gains/(losses) ⁽¹⁾		gains/(losses) ⁽²⁾
Nine Months Ended													Beginning		and		Sales and		Ending		fair value for		fair value for
September 30, 2021													Balance		Issuances		Settlements		Balance		gains/(losses) ⁽¹⁾		gains/(losses) ⁽²⁾
Interest rate lock commitments with customers	$	4,024	$	14,860	$	(16,778)	$	2,106	$	(1,918)	$	—	$	4,024	$	19,780	$	(22,633)	$	1,171	$	(2,853)	$	—
Individual forward sale commitments with investors		(67)		(546)		60		(553)		(486)		—		(67)		534		91		558		625		—
Securities available-for-sale, at fair value		1,111		12		(6)		1,117		—		12		1,111		38		(10)		1,139		—		38
June 30, 2020
September 30, 2020
Interest rate lock commitments with customers	$	557	$	20,103	$	(15,938)	$	4,722	$	4,165	$	—	$	557	$	38,966	$	(33,337)	$	6,186	$	5,629	$	—
Individual forward sale commitments with investors		(195)		(1,620)		1,671		(144)		51		—		(195)		(3,211)		2,644		(762)		(567)		—
Securities available-for-sale, at fair value		1,162		7		(6)		1,163		—		7		1,162		—		(53)		1,109		—		(44)

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

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

Gains (losses) on interest rate lock commitments carried at fair value are recorded in other noninterest income. Gains (losses) on forward sale commitments with investors carried at fair value are recorded in noninterest income. Unrealized gains (losses) on securities available-for-sale, at fair value are recorded in accumulated other comprehensive income.

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The following table provides estimated fair values of the Company’s financial instruments at ~~June~~September 30, 2021 and December 31, 2020, whether or not recognized at fair value on the Consolidated Balance Sheets:


	June 30,				December 31,				September 30,				December 31,
	2021				2020				2021				2020
Financial Assets	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
Level 1 inputs:	Amount		Value		Amount		Value		Amount		Value		Amount		Value
Cash and cash equivalents	$	86,554	$	86,554	$	91,576	$	91,576	$	28,332	$	28,332	$	91,576	$	91,576
Certificates of deposit at other financial institutions		11,782		11,782		12,278		12,278		11,782		11,782		12,278		12,278
Level 2 inputs:
Securities available-for-sale, at fair value		231,453		231,453		176,907		176,907		267,663		267,663		176,907		176,907
Securities held-to-maturity		7,500		8,000		7,500		7,556		7,500		8,113		7,500		7,556
Loans held for sale, at fair value		121,395		121,395		166,448		166,448		118,106		118,106		166,448		166,448
FHLB stock, at cost		5,065		5,065		7,439		7,439		4,871		4,871		7,439		7,439
Forward TBA mortgage-backed securities										587		587		—		—
Interest rate swaps		523		523		21		21		527		527		21		21
Accrued interest receivable		7,323		7,323		7,030		7,030		7,797		7,797		7,030		7,030
Level 3 inputs:
Securities available-for-sale, at fair value		1,117		1,117		1,111		1,111		1,139		1,139		1,111		1,111
Loans receivable, gross		1,678,053		1,685,326		1,574,227		1,580,360		1,709,669		1,708,741		1,574,227		1,580,360
Servicing rights, held at lower of cost or fair value		16,356		23,551		12,595		12,833		16,497		24,894		12,595		12,833
Fair value interest rate locks with customers		2,106		2,106		4,024		4,024		1,171		1,171		4,024		4,024
Mandatory and best effort forward commitments with investors										558		558		—		—
Financial Liabilities
Level 2 inputs:
Deposits		1,858,610		1,855,162		1,674,071		1,674,328		1,863,650		1,861,964		1,674,071		1,674,328
Borrowings		42,528		43,834		165,809		167,680		42,528		43,631		165,809		167,680
Subordinated notes		49,361		50,500		10,000		11,083
Subordinated notes, excluding unamortized debt issuance costs										50,000		50,500		10,000		11,083
Accrued interest payable		792		792		406		406		305		305		406		406
Interest rate swaps		645		645		1,252		1,252		571		571		1,252		1,252
Forward TBA mortgage-backed securities		169		169		1,602		1,602		—		—		1,602		1,602
Level 3 inputs:
Mandatory and best effort forward commitments with investors		553		553		67		67		—		—		67		67

NOTE 11 - EMPLOYEE BENEFITS

Employee Stock Ownership Plan (“ESOP”)

On January 1, 2012, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank are eligible to participate in the ESOP if they have been credited with at least 1,000 hours of service during the employees’ first 12-month period and based on the employee’s anniversary date will be vested in the ESOP. The employee will be 100% vested in the ESOP after two years of working at least 1,000 hours in each of those two years.

The ESOP borrowed $2.6 million from FS Bancorp, Inc. and used those funds to acquire ~~259,210~~518,420 shares of FS Bancorp, Inc. common stock in the open market at an average price of ~~$10.17~~$5.09 per share during the second half of 2012. It is anticipated that the Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to FS Bancorp, Inc. over a period of 10 years, bearing interest at 2.30%. Intercompany expenses associated with the ESOP are eliminated in consolidation. Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to FS Bancorp, Inc. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank’s discretionary contributions to the ESOP and earnings on the ESOP assets. Payments of principal and interest are due annually on December 31, the Company’s fiscal year end. On December 31, 2020, the ESOP paid the ninth

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annual installment of principal in the amount of $282,000, plus accrued interest of $13,000 pursuant to the ESOP loan agreement.

As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares for the quarter ended ~~June~~September 30, 2021. These shares become outstanding for earnings per share computations. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.

Compensation expense related to the ESOP for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 was ~~$495,000~~$439,000 and ~~$897,000,~~$1.3 million, respectively and ~~$180,000~~$251,000 and ~~$505,000,~~$756,000, respectively.

Shares held by the ESOP at ~~June~~September 30, 2021 and December 31, 2020 were as follows (shown as actual, post stock split):


	Balances		Balances		Balances		Balances
	at June 30, 2021		at June 30, 2020		at September 30, 2021		at December 31, 2020
Allocated shares		427,488		379,022		427,488		427,488
Committed to be released shares		25,921		25,920		38,881		—
Unallocated shares		25,921		77,764		12,961		51,842
Total ESOP shares		479,330		482,706		479,330		479,330

Fair value of unallocated shares (in thousands)	$	897	$	1,515	$	445	$	1,307

Share data has been adjusted for all periods to reflect athe 2-for-one stock split effective July 14, 2021.

NOTE 12 - EARNINGS PER SHARE

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

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The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


	At or For the Three Months Ended June 30,				At or For the Six Months Ended June 30,				At or For the Three Months Ended September 30,				At or For the Nine Months Ended September 30,
Numerator (in thousands):	2021		2020		2021		2020		2021		2020		2021		2020
Net income	$	8,549	$	10,020	$	20,432	$	15,187	$	8,331	$	12,713	$	28,763	$	27,900
Dividends and undistributed earnings allocated to participating securities		(128)		(113)		(299)		(176)		(139)		(73)		(465)		(69)
Net income available to common shareholders	$	8,421	$	9,907	$	20,133	$	15,011	$	8,192	$	12,640	$	28,298	$	27,831
Denominator (shown as actual, post stock split):
Basic weighted average common shares outstanding		8,393,164		8,465,552		8,418,299		8,630,755		8,240,218		8,449,642		8,360,249		8,571,910
Dilutive shares		267,449		144,946		252,852		161,190		207,733		141,026		213,948		154,666
Diluted weighted average common shares outstanding		8,660,613		8,610,498		8,671,151		8,791,945		8,447,951		8,590,668		8,574,197		8,726,576
Basic earnings per share	$	1.00	$	1.17	$	2.39	$	1.74	$	0.99	$	1.50	$	3.38	$	3.25
Diluted earnings per share	$	0.97	$	1.15	$	2.32	$	1.71	$	0.97	$	1.47	$	3.30	$	3.19
Potentially dilutive weighted average share options that were not included in the computation of diluted earnings per share because to do so would be anti-dilutive		—		189,292		—		130,032		23,067		204,374		7,774		151,060

Share data has been adjusted for all periods to reflect athe 2-for-one stock split effective July 14, 2021.

NOTE 13 - STOCK-BASED COMPENSATION

Stock Options and Restricted Stock

On May 17, 2018, the shareholders of FS Bancorp, Inc. approved the 2018 Equity Incentive Plan (the “2018 Plan”) that authorizes 1.3 million shares of the Company’s common stock to be awarded. The 2018 Plan provides for the grant of incentive stock options, non-qualified stock options, and up to 326,000 restricted stock awards (“RSAs”) to directors, emeritus directors, officers, employees or advisory directors of the Company. On August 15, 2020, the Company awarded grants of 49,760 RSAs and 124,570 stock options with an exercise price equal to the market price of FS Bancorp’s common stock on the grant date of $21.35 per share. At ~~June~~September 30, 2021, there were ~~548,120~~429,270 stock option awards and ~~185,510~~144,160 RSAs available to be granted under the 2018 Plan (post stock split).

Total share-based compensation expense was ~~$298,000~~$402,000 and ~~$593,000~~$995,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, and ~~$223,000~~$272,000 and ~~$447,000~~$719,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively.

Stock Options

The 2018 Plan consists of stock option awards that may be granted as incentive stock options or non-qualified stock options. Stock option awards generally vest at one year for independent directors or over a five-year period for employees and officers with 20% vesting on the anniversary date of each grant date as long as the award recipient remains in service to the Company. The options are exercisable after vesting for up to the remaining term of the original grant. The maximum term of the options granted is 10 years. Any unexercised stock options will expire 10 years after the grant date or sooner in the event of the award recipient’s termination of service with the Company or the Bank. The fair value of each stock option award is estimated on the grant date using a Black-Scholes Option pricing model that uses the following assumptions. The dividend yield is based on the current quarterly dividend in effect at the time of the grant. Historical employment data is used to estimate the forfeiture rate. The Company elected to use Staff Accounting Bulletin 107, simplified expected term calculation for the “Share-Based Payments” method permitted by the SEC to calculate the expected term. This method uses the vesting term of an option along with the contractual term, setting the expected life at 5.5 years for one-year vesting, 6.0 years for three-year vesting, and 6.5 years for five-year vesting.

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The following table presents a summary of the Company’s stock option awards during the ~~six~~nine months ended ~~June~~September 30, 2021 (shown as actual, post stock split):


				Weighted-Average						Weighted-Average
		Weighted-		Remaining				Weighted-		Remaining
		Average		Contractual Term In	Aggregate			Average		Contractual Term In	Aggregate
	Shares	Exercise Price		Years	Intrinsic Value		Shares	Exercise Price		Years	Intrinsic Value
Outstanding at January 1, 2021	671,754	$	19.45	6.58	$	5,721,159	671,754	$	19.45	6.58	$	5,721,159
Granted	—		—	—		—	118,850		35.46	6.41		—
Less exercised	73,074	$	8.45	—	$	1,905,920	176,978	$	12.73	—	$	4,265,369
Forfeited or expired	—		—	—		—	—		—	—		—
Outstanding at June 30, 2021	598,680	$	20.79	6.48	$	8,886,172
Outstanding at September 30, 2021							613,626	$	25.24	7.43	$	5,847,783

Expected to vest, assuming a 0.31% annual forfeiture rate⁽¹⁾	597,072	$	20.78	6.48	$	8,867,752	611,361	$	25.23	7.42	$	5,833,496

Exercisable at June 30, 2021	276,902	$	15.86	4.55	$	5,476,741
Exercisable at September 30, 2021							261,822	$	20.98	5.85	$	3,569,689

__________________________

(1) Forfeiture rate has been calculated and estimated to assume a forfeiture of 3.1% of the options forfeited over 10 years.

Share data has been adjusted to reflect athe 2-for-one stock split effective July 14, 2021.

At ~~June~~September 30, 2021, there was ~~$1.2~~$2.3 million of total unrecognized compensation cost related to nonvested stock options granted under the 2018 plan. The cost is expected to be recognized over the remaining weighted-average vesting period of ~~3.0~~3.7 years.

Restricted Stock Awards

The RSAs’ fair value is equal to the value of the stock based on the market price of FS Bancorp’s common stock on the grant date and compensation expense is recognized over the vesting period of the awards based on the fair value of the restricted stock. Shares for the 2018 Plan generally vest at one ~~year~~ or three years for independent directors or over a five-year period for employees and officers beginning on the grant date. Any unvested RSAs will expire after vesting or sooner in the event of the award recipient’s termination of service with the Company or the Bank.

The following table presents a summary of the Company’s nonvested awards during the ~~six~~nine months ended ~~June~~September 30, 2021 (shown as actual, post stock split):


		Weighted-Average			Weighted-Average
		Grant-Date Fair Value			Grant-Date Fair Value
Nonvested Shares	Shares	Per Share		Shares	Per Share
Nonvested at January 1, 2021	110,184	$	24.35	110,184	$	24.35
Granted	0		0	41,350		35.46
Less vested	0		0	29,862		24.78
Forfeited or expired	0		0	0		0
Nonvested at June 30, 2021	110,184	$	24.35
Nonvested at September 30, 2021				121,672	$	28.02

Share data has been adjusted to reflect athe 2-for-one stock split effective July 14, 2021.

At ~~June~~September 30, 2021, there was ~~$2.0~~$3.3 million of total unrecognized compensation cost related to nonvested shares granted under the 2018 Plan as RSAs. The cost is expected to be recognized over the remaining weighted-average vesting period of ~~3.2~~3.7 years.

NOTE 14 - REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by the Federal Reserve and the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

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Under capital adequacy guidelines of the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the community bank leverage ratio framework, for qualifying community banking organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. This final rule is applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets. The community bank leverage ratio (“CBLR”) final rule was effective on January 1, 2020, and will allow qualifying community banking organizations to calculate a leverage ratio to measure capital adequacy. Banks opting into the CBLR framework will not be required to calculate or report risk-based capital. A qualifying community banking organization is defined as having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. The final rule adopts Tier 1 capital and the existing leverage ratio into the community bank leverage ratio framework. A bank electing the framework will not be subject to other capital and leverage requirements. A bank electing the framework that ceases to meet any qualifying criteria in a future period and that has a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or comply with the generally applicable capital requirements. A bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rule.

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. Among other things, the CARES Act directs federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal banking agencies issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratio falls no more than one percentage point below the applicable CBLR requirement, so long as the banking organization maintains a leverage ratio of 7.5% or greater in 2021, or 8% thereafter. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. Effective October 1, 2020, the final rule made no change to the interim final rule issued in April 2020.

The Bank qualified for and elected the CBLR framework as of ~~June~~September 30, 2021. The Tier 1 leverage-based capital ratio calculated for the Bank at ~~June~~September 30, 2021 was 11.9%, compared to 10.9% at December 31, 2020. At ~~June~~September 30, 2021, the Bank had Tier 1 capital of ~~$257.0~~$263.7 million and a minimum Tier 1 capital requirement of ~~$184.6~~$187.8 million to be considered well capitalized under the CBLR framework. At December 31, 2020, the Bank had Tier 1 capital of $215.9 million and a minimum Tier 1 capital requirement of $159.1 million to be considered well capitalized for the Tier 1 leverage-based ratio under the Basel Committee on ~~Companying~~Banking Supervision’s capital guidelines for U.S. Banks (“Basel III”) requirements. At both ~~June~~September 30, 2021 and December 31, 2020, the Bank was categorized as well capitalized under applicable regulatory requirements. There are no conditions or events since that notification that management believes have changed the Bank’s category. Management believes, at ~~June~~September 30, 2021, that the Bank met all capital adequacy requirements.

FS Bancorp, Inc. is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Bank holding companies with less than $3.0 billion in assets are generally not subject to compliance with the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to the Bank. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to the holding company’s subsidiary bank and expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations. If FS Bancorp, Inc. was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at ~~June~~September 30, 2021, FS Bancorp, Inc. would ~~have~~

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have exceeded all regulatory capital requirements. The Tier 1 leverage-based capital ratio calculated for FS Bancorp, Inc. at ~~June~~September 30, 2021 and December 31, 2020 was ~~10.8%~~10.6% and 11.1%, respectively.

NOTE 15 - BUSINESS SEGMENTS

The Company’s business segments are determined based on the products and services provided, as well as the nature of the related business activities, and they reflect the manner in which financial information is currently evaluated by management. This process is dynamic and is based on management’s current view of the Company’s operations and is not necessarily comparable with similar information for other financial institutions. The Company defines its business segments by product type and customer segment which it has organized into 2 lines of business: commercial and consumer banking and home lending.

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

● a funds transfer pricing (“FTP”) system, which allocates interest income credits and funding charges between the segments, assigning to each segment a funding credit for its liabilities, such as deposits, and a charge to fund its assets;

● a cost per loan serviced allocation based on the number of loans being serviced on the balance sheet and the number of loans serviced for third parties;

● an allocation based upon the approximate square footage utilized by the home lending segment in Company owned locations;

● an allocation of charges for services rendered to the segments by centralized functions, such as corporate overhead, which are generally based on the number of full-time employees (“FTEs”) in each segment; and

● an allocation of the Company’s consolidated income taxes which are based on the effective tax rate applied to the segment’s pretax income or loss.

●an allocation of ALLL provisioning based on Home Lending’s portfolio loans included in the Company’s incurred loss model and their respective calculated allowance balance.

The FTP methodology is based on management’s estimated cost of originating funds including the cost of overhead for deposit generation.

A description of the Company’s business segments and the products and services that they provide is as follows:

Commercial and Consumer Banking Segment

The commercial and consumer banking segment provides diversified financial products and services to its commercial and consumer customers through Bank branches, automated teller machines (“ATM”), online banking platforms, mobile banking apps, and telephone banking. These products and services include deposit products; residential, consumer, business and commercial real estate lending portfolios and cash management services. The Company originates consumer loans, commercial and multi-family real estate loans, construction loans for residential and multi-family construction, and commercial business loans. At ~~June~~September 30, 2021, the Company’s retail deposit branch network consisted of 21 branches in the Pacific Northwest. This segment is also responsible for the management of the investment portfolio and other assets of the Bank.

Home Lending Segment

The home lending segment originates one-to-four-family residential mortgage loans primarily for sale in the secondary markets as well as ~~originating adjustable-rate mortgage (“ARM”)~~ loans held for investment. The majority of mortgage loans are sold to or securitized by FNMA, FHLMC, GNMA, or the FHLB of Des Moines, while the Company retains the right to service these loans. Loans originated under the guidelines of the Federal Housing Administration or FHA, US Department of Veterans Affairs or VA, and United States Department of Agriculture or USDA are generally sold servicing released to a correspondent bank or mortgage company. The Company has the option to sell loans on a servicing-released or servicing-retained basis to securitizers and correspondent lenders. A small percentage of its loans are brokered to other

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Department of Agriculture or USDA are generally sold servicing released to a correspondent bank or mortgage company. The Company has the option to sell loans on a servicing-released or servicing-retained basis to securitizers and correspondent lenders. A small percentage of its loans are brokered to other lenders. On occasion, the Company may sell a portion of its MSR portfolio and may sell small pools of loans initially originated to be held in the loan portfolio. The Company manages the loan funding and the interest rate risk associated with the secondary market loan sales and the retained one-to-four-family mortgage servicing rights within this business segment. One-to-four-family loans originated for investment and held in this segment are allocated to the home lending segment with a corresponding provision expense and FTP for cost of funds.

Segment Financial Results

The tables below summarize the financial results for each segment based on the factors mentioned above within each segment for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


	At or For the Three Months Ended June 30, 2021						At or For the Three Months Ended September 30, 2021
Condensed income statement:	Home Lending		Commercial and Consumer Banking		Total		Home Lending		Commercial and Consumer Banking		Total
Net interest income ⁽¹⁾	$	2,246	$	18,974	$	21,220	$	2,278	$	20,377	$	22,655
Benefit (provision) for loan losses(2)		(499)		499		—		1,986		(1,986)		—
Noninterest income		5,801		2,385		8,186		6,439		1,959		8,398
Noninterest expense		(5,389)		(13,573)		(18,962)		(5,612)		(14,404)		(20,016)
Income before provision for income taxes		2,159		8,285		10,444		5,091		5,946		11,037
Provision for income taxes		(304)		(1,591)		(1,895)		(1,244)		(1,462)		(2,706)
Net income	$	1,855	$	6,694	$	8,549	$	3,847	$	4,484	$	8,331
Total average assets for period ended	$	388,174	$	1,787,344	$	2,175,518	$	417,763	$	1,799,890	$	2,217,653
FTEs		156		366		522		154		373		527

At or For the Three Months Ended June 30, 2020
Condensed income statement:

Home Lending

Commercial and Consumer Banking

Total
Net interest income ⁽¹⁾

$
1,204

$
16,656

$
17,860
Provision for loan losses

(497)

(4,152)

(4,649)
Noninterest income

12,076

2,055

14,131
Noninterest expense

(4,069)

(10,553)

(14,622)
Income before provision for income taxes

8,714

4,006

12,720
Provision for income taxes

(1,834)

(866)

(2,700)
Net income

$
6,880

$
3,140

$
10,020
Total average assets for period ended

$
376,033

$
1,561,753

$
1,937,786
FTEs

130

334

464


	At or For the Three Months Ended September 30, 2020
Condensed income statement:	Home Lending		Commercial and Consumer Banking		Total
Net interest income ⁽¹⁾	$	1,085	$	17,833	$	18,918
Provision for loan losses⁽²⁾		(960)		(2,140)		(3,100)
Noninterest income		15,078		2,468		17,546
Noninterest expense		(4,117)		(13,062)		(17,179)
Income before provision for income taxes		11,086		5,099		16,185
Provision for income taxes		(2,372)		(1,100)		(3,472)
Net income	$	8,714	$	3,999	$	12,713
Total average assets for period ended	$	445,927	$	1,568,582	$	2,014,509
FTEs		137		336		473

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	At or For the Six Months Ended June 30, 2021						At or For the Nine Months Ended September 30, 2021
Condensed income statement:	Home Lending		Commercial and Consumer Banking		Total		Home Lending		Commercial and Consumer Banking		Total
Net interest income ⁽¹⁾	$	3,868	$	37,452	$	41,320	$	6,146	$	57,829	$	63,975
Provision for loan losses(2)		(441)		(1,059)		(1,500)		1,545		(3,045)		(1,500)
Noninterest income		16,633		4,587		21,220		23,072		6,546		29,618
Noninterest expense		(8,520)		(26,747)		(35,267)		(14,132)		(41,151)		(55,283)
Income before provision for income taxes		11,540		14,233		25,773		16,631		20,179		36,810
Provision for income taxes		(2,391)		(2,950)		(5,341)		(3,636)		(4,411)		(8,047)
Net income	$	9,149	$	11,283	$	20,432	$	12,995	$	15,768	$	28,763
Total average assets for year ended	$	395,032	$	1,756,642	$	2,151,674
Total average assets for period ended							$	402,693	$	1,771,216	$	2,173,909
FTEs		156		366		522		154		373		527


	At or For the Six Months Ended June 30, 2020						At or For the Nine Months Ended September 30, 2020
Condensed income statement:	Home Lending		Commercial and Consumer Banking		Total		Home Lending		Commercial and Consumer Banking		Total
Net interest income ⁽¹⁾	$	2,385	$	32,948	$	35,333	$	3,470	$	50,781	$	54,251
Provision for loan losses(2)		(1,056)		(7,279)		(8,335)		(2,016)		(9,419)		(11,435)
Noninterest income		17,234		5,788		23,022		32,312		8,256		40,568
Noninterest expense		(8,231)		(22,575)		(30,806)		(12,348)		(35,637)		(47,985)
Income before provision for income taxes		10,332		8,882		19,214		21,418		13,981		35,399
Provision for income taxes		(2,165)		(1,862)		(4,027)		(4,537)		(2,962)		(7,499)
Net income	$	8,167	$	7,020	$	15,187	$	16,881	$	11,019	$	27,900
Total average assets for year ended	$	351,737	$	1,484,173	$	1,835,910
Total average assets for period ended							$	383,363	$	1,512,515	$	1,895,878
FTEs		130		334		464		137		336		473

_________________________

(1)

Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to the other segment. The cost of liabilities includes interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of assigned liabilities to fund segment assets.

(2)

Provision for loan losses includes shifts in allocation between segments due to various changes, to include adjustments to qualitative factors, changes in loan balances, and charge-off and recovery activity.

NOTE 16 - GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and certain other intangibles generally arise from business combinations accounted for under the acquisition method of accounting. Goodwill totaled $2.3 million at ~~June~~September 30, 2021 and December 31, 2020, and represents the excess of the total acquisition price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed as a result of four retail branches purchased from Bank of America, N.A. in 2016 (“Branch Purchase”). Goodwill is not amortized but is evaluated for impairment on an annual basis at December 31 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company performed an impairment analysis at December 31, 2020, and determined that 0 impairment of goodwill existed. However, if adverse economic conditions or the decrease in the Company’s stock price and market capitalization as a result of the COVID-19 pandemic were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill. Accordingly, no assurances can be given that the Company will not record an impairment loss on goodwill in the future.

Core deposit intangible (“CDI”) is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the ~~revised remaining life. As of June 30, 2021, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI.~~

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revised remaining life. As of September 30, 2021, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI.

The following table summarizes the changes in the Company’s other intangible assets comprised solely of CDI for the year ended December 31, 2020, and the ~~six~~nine months ended ~~June~~September 30, 2021.


	Other Intangible Assets						Other Intangible Assets
			Accumulated						Accumulated
	Gross CDI		Amortization		Net CDI		Gross CDI		Amortization		Net CDI
Balance, December 31, 2019	$	7,490	$	(2,033)	$	5,457	$	7,490	$	(2,033)	$	5,457
Amortization		—		(706)		(706)		—		(706)		(706)
Balance, December 31, 2020		7,490		(2,739)		4,751		7,490		(2,739)		4,751
Amortization		—		(354)		(354)		—		(531)		(531)
Balance, June 30, 2021	$	7,490	$	(3,093)	$	4,397
Balance, September 30, 2021							$	7,490	$	(3,270)	$	4,220

The CDI represents the fair value of the intangible core deposit base acquired in business combinations. The CDI will be amortized on a straight-line basis over 10 years for the CDI related to the Anchor Acquisition and on an accelerated basis over approximately nine years for the CDI related to the Branch Purchase. Total amortization expense was $177,000 and ~~$354,000~~$531,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, and ~~$177,000~~$176,000 and ~~$353,000~~$529,000 for the same periods, respectively, in 2020.

Amortization expense for CDI is expected to be as follows at ~~June~~September 30, 2021:


Remainder of 2021	$	337	$	160
2022		691		691
2023		691		691
2024		621		621
2025		525		525
Thereafter		1,532		1,532
Total	$	4,397	$	4,220

NOTE 17 - REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue Recognition

In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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All the Company’s revenue from contracts with customers in-scope of ASC 606 is recognized in noninterest income and included in our commercial and consumer banking segment. The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020.


(Dollars in thousands):	At or For the Three Months Ended June 30,				At or For the Six Months Ended June 30,				At or For the Three Months Ended September 30,				At or For the Nine Months Ended September 30,
Noninterest income	2021		2020		2021		2020		2021		2020		2021		2020
In-scope of Topic 606:
Debit card interchange fees	$	585	$	444	$	1,100	$	879	$	585	$	504	$	1,685	$	1,382
Deposit service and account maintenance fees		173		145		346		411		192		172		538		583
Noninterest income (in-scope of Topic 606)		758		589		1,446		1,290		777		676		2,223		1,965
Noninterest income (out-of-scope of Topic 606)		7,428		13,542		19,774		21,732		7,621		16,870		27,395		38,603
Total noninterest income	$	8,186	$	14,131	$	21,220	$	23,022	$	8,398	$	17,546	$	29,618	$	40,568

Deposit Fees

The Bank earns fees from its deposit customers for account maintenance, transaction-based services, and overdraft charges. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as wire fees, as well as charges against the account, such as fees for non-sufficient funds and overdrafts. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

Debit Interchange Income

Debit and ATM interchange income represent fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ debit card.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions. Forward-looking statements include, but are not limited to:

●	statements of our goals, intentions, and expectations;

●	statements regarding our business plans, prospects, growth, and operating strategies;

●	statements regarding the quality of our loan and investment portfolios; and

●	estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

●

the effect of the COVID-19 pandemic, including on the Company’ credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity;

●	general economic conditions either nationally or in our market area, that are worse than expected;

●	the credit risks of lending activities, including changes in the level and trend of loan delinquencies, write offs, changes in our allowance for loan losses, and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;

●	secondary market conditions and our ability to originate loans for sale and sell loans in the secondary market;

●	fluctuations in the demand for loans, the number of unsold homes, land and other properties, and fluctuations in real estate values in our market area;

●	staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

●	the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

●	changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

●	uncertainty regarding the future of the London Interbank Offered Rate (“LIBOR”), and the potential transition away from LIBOR toward new interest rate benchmarks;

●	increased competitive pressures among financial services companies;

●	our ability to execute our plans to grow our residential construction lending, our home lending operations, our warehouse lending, and the geographic expansion of our indirect home improvement lending;

●	our ability to attract and retain deposits;

●	our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

●	our ability to control operating costs and expenses;

●	our ability to retain key members of our senior management team;

●	changes in consumer spending, borrowing, and savings habits;

●	our ability to successfully manage our growth;

●

legislative or regulatory changes that adversely affect our business, including the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, changes in regulation policies and principles, an increase in regulatory capital requirements or change in the interpretation of regulatory capital or other rules, including as a result of Basel III;

●	adverse changes in the securities markets;

●	changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board (“FASB”), including as a result of the

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Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”) and the Consolidated Appropriations Act, 2021 (“CAA 2021”);

●	costs and effects of litigation, including settlements and judgments;

●	disruptions, security breaches, or other adverse events, failures, or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;

●	inability of key third-party vendors to perform their obligations to us; and

●

other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products, and services, including as a result of the CARES Act and the CAA 2021 and recent COVID-19 vaccination and economic stimulus efforts, and other risks described elsewhere in this Form 10-Q and our other reports filed with the U.S. Securities and Exchange Commission (“SEC”).

Any of the forward-looking statements made in this Form 10-Q and in other public statements may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. The Company undertakes no obligation to update or revise any forward-looking statement included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.

Highlights in Response to the COVID-19 Pandemic

Due to the current global situation surrounding the COVID-19 pandemic, the Company is offering a variety of relief options designed to support our customers and the communities we serve.

Paycheck Protection Program ("PPP") Participation. The CARES Act was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a loan program called the Paycheck Protection Program, or PPP. The goal of the PPP was to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a two or five-year loan term to maturity, and (c) principal and interest payments deferred for six months or less from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA provided that certain criteria is met by the borrower. The PPP program concluded on May 31, 2021. Cumulative to date as of September 30, 2021, PPP loan balances totaling $88.6 million were submitted for approval and forgiven by the SBA. The Company has ~~412~~171 PPP loans totaling ~~$73.2~~$38.3 million outstanding as of ~~June~~September 30, 2021 for customers in the communities we serve who are small- to mid-size businesses as well as independent contractors, sole proprietors and partnerships as allowed under the PPP guidance issued in April 2020. We ~~have~~ also from time-to-time utilized the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), created on April 9, 2020, pursuant to which the Company ~~has~~ pledged its PPP loans as collateral at face value to obtain FRB non-recourse loans. AsExtensions of ~~June 30, 2021, no PPPLF funds were outstanding. The~~credit under the PPPLF concluded on July 30, 2021. As of September 30, 2021, no PPPLF loans were outstanding.

Allowance for Loan Losses and Loan Modifications. The Company recorded a provision for loan losses of ~~$0.0~~$0 and $1.5 million for the quarter and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to ~~$4.6~~$3.1 million and ~~$8.3~~$11.4 million for the quarter and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. The prior periods provision for loan losses was due primarily to probable loan losses reflecting the adverse impact of the COVID-19 pandemic on the economy. According to the CARES Act and related banking agency guidance, banks are not required to designate as TDRs the modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current, as defined under the CARES Act prior to any relief. This includes short-term (e.g., less than six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related banking agency guidance if they are not more than 30 days past due on their contractual payments as of December 31, 2019, or prior to any relief, respectively, and have experienced financial difficulty as a result of COVID-19. As of ~~June~~September 30, 2021, the amount of portfolio loans remaining under payment/relief agreements includes commercial real estate loans of ~~$24.4~~$6.9 million and commercial business

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loans of ~~$9.1 million, and consumer loans of $147,000.~~$5.4 million. The primary method of relief is to allow the ~~borrower~~borrowers up to 90-days of interest only payments and/or loan payment deferments, and, on a more limited basis, waived interest, late fees, or interest only loan payments and suspended

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foreclosure proceedings. These modifications were not classified as TDRs at ~~June~~September 30, 2021 in accordance with the guidance of the CARES Act and related banking agency guidance. Loan modifications in accordance with the CARES Act and related banking agency guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.

Branch Operations and Additional Client Support. We have taken various steps to ensure the safety of our customers and our personnel. The majority of our employees are working remotely or have flexible work schedules, and we have established protective measures within our offices to help ensure the safety of those employees who must work on-site. The Families First Coronavirus Response Act also provides additional flexibility to our employees to help navigate their individual challenges with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. Since the termination of the stay-at-home order in Washington State and phased re-opening of businesses, the Company has taken steps to resume more normal branch activities with specific guidelines in place to ensure the safety of the Company’s customers and personnel. All of our branches are currently open.

Overdraft and fee reversals are waived on a case-by-case basis. We are cautious when paying overdrafts beyond the client's total deposit relationship, overdraft protection options or their overdraft coverage limits.

Overview

FS Bancorp, Inc. and its subsidiary bank, 1st Security Bank of Washington have been serving the Puget Sound area since 1907. Originally chartered as a credit union, known as Washington’s Credit Union, the credit union served various select employment groups. On April 1, 2004, the credit union converted to a Washington state-chartered mutual savings bank. On July 9, 2012, the Bank converted from mutual to stock ownership and became the wholly owned subsidiary of FS Bancorp, Inc.

The Company is relationship-driven, delivering banking and financial services to local families, local and regional businesses and industry niches within distinct Western Washington communities, predominately, the Puget Sound area, and one loan production office located in the Tri-Cities, Washington.

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

The Company focuses on diversifying revenues, expanding lending channels, and growing the banking franchise. Management remains focused on building diversified revenue streams based upon credit, interest rate, and concentration risks. Our business plan remains as follows:

●	Growing and diversifying our loan portfolio;

●	Maintaining strong asset quality;

●	Emphasizing lower cost core deposits to reduce the costs of funding our loan growth;

●	Capturing our customers’ full relationship by offering a wide range of products and services by leveraging our well-established involvement in our communities and by selectively emphasizing products and services designed to meet our customers’ banking needs; and

●	Expanding the Company’s markets.

The Company is a diversified lender with a focus on the origination of one-to-four-family loans, commercial real estate mortgage loans, second mortgage or home equity loan products, consumer loans including indirect home improvement (“fixture secured”) loans which also include solar-related home improvement loans, marine lending, and commercial business loans. As part of our expanding lending products, the Company experienced growth in residential mortgage and commercial construction warehouse lending consistent with our business plan to further diversify revenues. Historically, consumer loans, in particular, fixture secured loans had represented the largest portion of the Company’s loan portfolio and had traditionally been the mainstay of the Company’s lending strategy. At ~~June~~September 30, 2021 consumer loans

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represented ~~23.7%~~24.1% of the Company’s total gross loan portfolio, ~~up slightly from 23.5%~~compared to 24.0% at ~~June~~September 30, 2020. In recent years, the Company has placed more of an emphasis on real estate lending products, such as one-to-four-family loans, commercial real estate

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loans, including speculative residential construction loans, as well as commercial business loans, while growing the current size of the consumer loan portfolio.

Fixture secured loans to finance window, gutter, siding replacement, solar panels, pools, and other improvement renovations are a large and regionally expanding segment of the consumer loan portfolio. These fixture secured consumer loans are dependent on the Bank’s contractor/dealer network of ~~105~~101 active dealers located throughout Washington, Oregon, California, Idaho, Colorado, Nevada, Arizona, ~~Minnesota,~~ and ~~Nevada~~Minnesota with four contractor/dealers responsible for ~~46.8%~~51.6% of the funded loans dollar volume for the three months ended ~~June~~September 30, 2021. The Company funded ~~$56.5~~$63.3 million, or approximately 3,000 loans during the quarter ended ~~June~~September 30, 2021.

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


	For the Six Months Ended				For the Year Ended				For the Nine Months Ended				For the Year Ended
	June 30, 2021				December 31, 2020				September 30, 2021				December 31, 2020
State	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Washington	$	50,057	42.1	%	$	79,063	42.6	%	$	79,440	42.5	%	$	79,063	42.6	%
Oregon		26,755	22.5			48,272	26.0			42,382	22.7			48,272	26.0
California		25,576	21.5			37,835	20.4			38,676	20.7			37,835	20.4
Idaho		9,281	7.8			10,681	5.7			14,615	7.8			10,681	5.7
Colorado		2,863	2.4			5,005	2.7			5,102	2.7			5,005	2.7
Nevada		1,850	1.6			1,222	0.6			2,773	1.5			1,222	0.6
Arizona		1,936	1.6			2,728	1.5			2,915	1.6			2,728	1.5
Minnesota		621	0.5			918	0.5			952	0.5			918	0.5
Total consumer loans	$	118,939	100.0	%	$	185,724	100.0	%	$	186,855	100.0	%	$	185,724	100.0	%

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 ~~$396.9~~$380.5 million of one-to-four-family loans which includes loans held for sale, loans held for investment, and fixed seconds in addition to loans brokered to other institutions of ~~$627,000~~$527,000 through the home lending segment during the three months ended ~~June~~September 30, 2021, of which ~~$378.0~~$319.9 million were sold to investors. Of the loans sold to investors, ~~$298.4~~$208.1 million were sold to the FNMA, FHLMC, FHLB, and/or GNMA with servicing rights retained for the purpose of further developing these customer relationships. At ~~June~~September 30, 2021, one-to-four-family residential mortgage loans held for investment, which excludes loans held for sale of ~~$121.4~~$118.1 million, totaled ~~$335.4~~$365.3 million, or ~~20.0%~~21.4%, of the total gross loan portfolio.

For the three months ended ~~June~~September 30, 2021, there were ~~higher~~more one-to-four-family loans originated to finance home purchases, reflecting increased sales of one-to-four-family homes, and decreased refinance activity, compared to the same period in the prior ~~years’ surge in residential construction loans~~year as refinances surged due to ~~lower housing inventories.~~the lowering of market interest rates in response to COVID-19. Residential construction and development lending, while not as common as other options like one-to-four-family loans, will continue to be an important element in our total loan portfolio, and we will 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 mature in six to twelve months. In addition, the funding is usually not fully disbursed at origination, thereby reducing our net loans receivable in the short-term.

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.

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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

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borrowings outstanding during the same period and interest rates paid on these deposits and borrowings. The significant 150 basis point reduction in the targeted federal funds rate during the quarter ended June 30, 2020, resulted in a larger impact to our interest-earning assets than to our interest-bearing liabilities, reducing our net interest margin. In addition, our net interest margin is adversely impacted by the low loan yields from the PPP loan portfolio. The continuing low interest rate environment is expected to continue to put downward pressure on loan yields and the yields on other floating rate interest earning assets as well. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, ~~including the 150 basis point reductions in the targeted federal funds rate,~~ until the pandemic subsides the Company expects its net interest income and net interest margin will be adversely affected in 2021 and possibly longer.

Another significant influence on the Company’s earnings is fee income from mortgage banking activities. The Company’s earnings are also affected by the provision for loan losses, service charges and fees, gains from sales of assets, operating expenses and income taxes. The Company recorded a provision of $1.5 million for the ~~six~~nine months ended ~~June~~September 30, 2021, compared to ~~$8.3~~$11.4 million for the same period one year ago, reflecting improved economic factors on credit-deterioration due to the adverse impact of the COVID-19 pandemic at ~~June~~September 30, 2021, the increase in the loan portfolio due to organic growth, and net loan charge-offs. The reduction of the provision for loan losses also reflects improvements in ~~watch~~“watch” classified loans that were downgraded based on the COVID-19 pandemic and have shown loan-level improvements at ~~June~~September 30, 2021.

~~Basic earnings per share (“EPS”) and diluted~~Diluted EPS ~~were~~was reported for the ~~six~~nine months ended ~~June~~September 30, ~~2021 at $2.36 and $2.29, respectively,~~2021at $3.27 on the ~~July 23,~~October 28, 2021 press release. Management revised the diluted EPS calculation to update the ~~income allocation~~number of dilutive shares due to ~~participating securities~~the stock split and recalculated with the ~~days outstanding for certain participating securities.~~stock-split-adjusted price. The ~~reported basic EPS and~~corrected diluted EPS for the ~~six~~nine months ended ~~June~~September 30, 2021 of ~~$2.39 and $2.32, respectively, reflect~~$3.30 reflects the updates made subsequent to the ~~July 23~~October 28^rdth press release.

Critical Accounting Policies and Estimates

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex, or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, and changes in the financial condition of borrowers. Management believes that its critical accounting policies include the following:

Allowance for Loan and Lease Losses (“ALLL”). The ALLL is the amount estimated by management as necessary to cover probable losses inherent in the loan portfolio at the balance sheet date. The ALLL is established through the provision for loan losses, which is charged to income. A high degree of judgment is necessary when determining the amount of the ALLL. Among the material estimates required to establish the ALLL are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the ALLL at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions, and other factors related to the collectability of the loan portfolio. Although the Company believes that use of the best information available currently establishes the ALLL, future adjustments to the ALLL may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. As the Company adds new products to the loan portfolio and expands the Company’s market area, management intends to enhance and adapt the methodology to keep pace with the size and complexity of the loan portfolio. Changes in any of the above factors could have a significant effect on the calculation of the ALLL in any given period. Management believes that its systematic methodology continues to be appropriate.

Servicing Rights. Servicing assets are recognized as separate assets when rights are acquired through the purchase or through the sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, the value of servicing is capitalized during the month of sale. Fair value is based on market prices for comparable mortgage contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market

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participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses.

Servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranches. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as a recovery and an increase to income. Capitalized servicing rights are stated separately on the Consolidated Balance Sheets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Derivatives and Hedging Activity. ASC 815, “Derivatives and Hedging,” requires that derivatives of the Company be recorded in the consolidated financial statements at fair value. Management considers its accounting policy for derivatives to be a critical accounting policy because these instruments have certain interest rate risk characteristics that change in value based upon changes in the capital markets. Fair values for derivative assets and liabilities are measured on a recurring basis. The Company’s primary use of derivative instruments are related to the mortgage banking activities in the form of commitments to extend credit, commitments to sell loans, TBA mortgage-backed securities trades and option contracts to mitigate the risk of the commitments to extend credit. Estimates of the percentage of commitments to extend credit on loans to be held for sale that may not fund are based upon historical data and current market trends. The fair value adjustments of the derivatives are recorded in the Consolidated Statements of Income with offsets to other assets or other liabilities on the Consolidated Balance Sheets.

Derivative instruments not related to mortgage banking activities primarily relate to interest rate swap agreements accounted for as cash flow hedges. To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. If derivative instruments are designated as cash flow hedges, fair value adjustments related to the effective portion are recorded in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of cash flow hedges are reflected in earnings as they occur. Actual cash receipts and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the interest income or interest expense associated with the hedged item. During the life of the hedge, the Company formally assesses whether derivatives designated as hedging instruments continue to be highly effective in offsetting changes in the fair value or cash flows of hedged items. If it is determined that a hedge has ceased to be highly effective, the Company will discontinue hedge accounting prospectively. At such time, previous adjustments to the carrying value of the hedged item are reversed into current earnings and the derivative instrument is reclassified to a trading position recorded at fair value. For derivatives not designated as hedges, changes in fair value are recognized in earnings, in noninterest income.

Fair Value. ASC 820, “Fair Value Measurements and Disclosures,” establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). For additional details, see “Note 10 - Fair Value Measurements” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

Income Taxes. Income taxes are reflected in the Company’s consolidated financial statements to show the tax effects of the operations and transactions reported in the consolidated financial statements and consist of taxes currently payable plus deferred taxes. ASC 740, “Accounting for Income Taxes,” requires the asset and liability approach for financial accounting and reporting for deferred income taxes. Deferred tax assets and liabilities result from temporary differences

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between the financial statement carrying amounts and the tax bases of assets and liabilities. They are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled and are determined using the assets and liability method of accounting. The deferred income provision represents the difference between net deferred tax asset/liability at the beginning and end of the reported period. In formulating the deferred tax asset, the Company is required to estimate income and taxes in the jurisdiction in which the Company operates. This process involves estimating the actual current tax exposure for the reported period together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses, for tax and financial reporting purposes.

Deferred tax assets and liabilities occur when taxable income is larger or smaller than reported income on the income statements due to accounting valuation methods that differ from tax, as well as tax rate estimates and payments made quarterly and adjusted to actual at the end of the year. Deferred tax assets and liabilities are temporary differences deductible or payable in future periods. The Company had net deferred tax assets of ~~$216,000~~$303,000 and net deferred tax liabilities of $58,000, at ~~June~~September 30, 2021 and December 31, 2020, respectively.

Comparison of Financial Condition at ~~June~~September 30, 2021 and December 31, 2020

Assets. Total assets increased ~~$109.4~~$115.5 million to ~~$2.22~~$2.23 billion at ~~June~~September 30, 2021, compared to $2.11 billion at December 31, 2020, primarily due to increases in loans receivable, net of ~~$100.7~~$133.1 million, securities available-for-sale of ~~$54.6~~$90.8 million, servicing rights of ~~$3.8~~$3.9 million, and other assets of ~~$2.3~~$1.4 million, partially offset by decreases in ~~loans held for sale of $45.0 million,~~ total cash and cash equivalents of ~~$5.0~~$63.2 million, loans held for sale of $48.3 million, and Federal Home Loan Bank stock of ~~$2.4~~$2.6 million. The increases in total assets were primarily funded by deposit growth and net proceeds from the issuance of subordinated notes during the ~~six~~nine months ended ~~June~~September 30, 2021.

Loans receivable, net increased ~~$100.7~~$133.1 million to ~~$1.65~~$1.68 billion at ~~June~~September 30, 2021, from $1.54 billion at December 31, 2020. Total real estate loans increased ~~$58.4~~$115.2 million, including increases in one-to-four-family loans of $54.2 million, multi-family loans of $33.6 million, and construction and development loans of ~~$25.7 million, one-to-four-family loans of $24.3 million, commercial real estate loans of $8.5 million, and multi-family loans of $2.2~~$33.1 million, partially offset by a decrease in commercial real estate loans of $4.8 million and home equity loans of ~~$2.4 million.~~$998,000. Undisbursed construction and development loan commitments increased ~~$27.9~~$37.7 million to ~~$171.6~~$181.4 million at ~~June~~September 30, 2021, as compared to $143.7 million at December 31, 2020. Consumer loans increased ~~$22.7~~$37.5 million, primarily due to an increase of ~~$22.4~~$39.6 million in indirect home improvement loans, partially offset by a decrease of $1.9 million in marine loans. Commercial business loans ~~increased $22.8~~decreased $17.2 million, primarily due to ~~an increase~~a decrease in commercial and industrial loans of ~~$17.8~~$17.4 million, including a net ~~increase~~decrease in PPP loans of ~~$11.2~~$23.8 million. The focused increase in commercial and industrial loans, excluding PPP loans, is tied to the Bank’s investment in our business lending platform, including employees to service business lending customers and cash management teams to support business deposits.

Loans held for sale, consisting of one-to-four-family loans, decreased by ~~$45.0~~$48.3 million, or ~~27.1%~~29.0%, to ~~$121.4~~$118.1 million at ~~June~~September 30, 2021, from $166.4 million at December 31, 2020. The Company continues to ~~build~~invest its home lending operations and strategically add production staff in the markets we serve.

One-to-four-family loan originations for the ~~six~~nine months ended ~~June~~September 30, 2021, included ~~$738.6 million~~$1.05 billion of loans originated for sale, ~~$89.8~~$160.3 million of portfolio loans including first and second liens, and ~~$3.0~~$3.5 million of loans brokered to other institutions. Purchase activity was driven by a strong housing market in the Pacific Northwest ~~as well as the Company’s focus on purchase originations to support housing demand.~~while slightly higher market rates in 2021 reduced refinance activity.

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


	For the Six Months Ended				For the Six Months Ended				Year		Year	For the Nine Months Ended				For the Nine Months Ended				Year		Year
	June 30, 2021				June 30, 2020				over Year		over Year	September 30, 2021				September 30, 2020				over Year		over Year
	Amount		Percent		Amount		Percent		$ Change		% Change	Amount		Percent		Amount		Percent		$ Change		% Change
Purchase	$	438,460	52.7	%	$	257,712	33.7	%	$	180,748	70.1	$	682,181	56.3	%	$	501,686	37.1	%	$	180,495	36.0
Refinance		392,903	47.3			506,283	66.3			(113,380)	(22.4)		529,705	43.7			852,202	62.9			(322,497)	(37.8)
Total	$	831,363	100.0	%	$	763,995	100.0	%	$	67,368	8.8	$	1,211,886	100.0	%	$	1,353,888	100.0	%	$	(142,002)	(10.5)

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During the ~~six~~nine months ended ~~June~~September 30, 2021, the Company sold ~~$792.0 million~~$1.11 billion of one-to-four-family loans compared to sales of ~~$639.4 million~~$1.12 billion for the same period one year ago. Gross margins on home loan sales increased slightly to ~~4.23%~~4.05% for the

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~~six~~ nine months ended ~~June~~September 30, 2021, compared to ~~3.71%~~4.02% for the ~~six~~nine months ended ~~June~~September 30, 2020. Gross margins are defined as the margin on loans sold (cash sales) without the impact of deferred costs.

The ALLL was ~~$27.2~~$26.9 million, or ~~1.62%~~1.57% of gross loans receivable, excluding loans held for sale at ~~June~~September 30, 2021, compared to $26.2 million, or 1.66% of gross loans receivable, excluding loans held for sale at December 31, 2020. Substandard loans ~~increased $4.6 million~~decreased $126,000 to ~~$22.3~~$17.5 million at ~~June~~September 30, 2021, compared to $17.6 million at December 31, 2020. ~~This~~The slight decrease was primarily due to a $4.8 million decrease in one-to-four-family loans and a $177,000 decrease in consumer loans, partially offset by a $5.1 million increase in ~~substandard loans was mostly driven by one lending relationship with two~~ commercial and industrial ~~loans totaling $4.5 million.~~loans. Nonperforming loans, consisting solely of nonaccruing loans 90-days or more past due, decreased ~~$1.5~~$1.8 million to ~~$6.3~~$5.9 million at ~~June~~September 30, 2021, from $7.8 million at December 31, 2020. The ratio of nonperforming loans to total gross loans was ~~0.38%~~0.35% at ~~June~~September 30, 2021, compared to 0.49% at December 31, 2020. There were no OREO properties at ~~June~~September 30, 2021, and one OREO property ~~totaling~~of $90,000 at December 31, 2020.

In accordance with acquisition accounting, the ALLL does not include the recorded discount on loans acquired in the Anchor Bank acquisition in November 2018 (“Anchor Acquisition”) of ~~$1.0 million~~$868,000 and $1.5 million on ~~$100.2~~$90.8 million and $132.6 million of gross loans at ~~June~~September 30, 2021 and December 31, 2020, respectively.

Commercial loans reported at a risk rating below “pass” or receiving elevated risk monitoring as a result of the COVID-19 pandemic and their respective industries at the dates indicated are as follows:


(Dollars in thousands)
Loan types:	June 30, 2021		December 31, 2020		June 30, 2020		September 30, 2021		December 31, 2020		September 30, 2020
Construction and development	$	2,836	$	3,480	$	4,704	$	2,771	$	3,480	$	4,335
Education/worship		227		734		5,558		—		734		4,796
Food and beverage		12,788		14,577		16,199		6,600		14,577		14,346
Hospitality		38,547		43,960		44,136		16,188		43,960		43,903
Manufacturing		606		12,579		19,777		602		12,579		18,765
Retail		1,878		2,554		11,865		1,736		2,554		2,663
Transportation		4,487		4,407		4,532		4,487		4,407		4,992
Other		13,599		20,979		20,040		4,454		20,979		23,241
Total	$	74,968	$	103,270	$	126,811	$	36,838	$	103,270	$	117,041

Additionally, management last year increased the economic factors of the ALLL associated with the loan portfolio based on current economic conditions and the potential effects from higher forecasted unemployment rates and lower gross domestic product, as well as the impact on other economic conditions on the U.S. and global economies from COVID-19. Management recognizes the potential impact of COVID-19 on all of our customers and will continue to ~~assess and evaluate the economic factors utilized to calculate the ALLL and our level of~~prudently reserve for probable loan losses, including reserves against our homogenous residential and consumer ~~portfolios during the COVID-19 pandemic.~~portfolios.

Liabilities. Total liabilities increased ~~$97.6~~$105.0 million to ~~$1.98~~$1.99 billion at ~~June~~September 30, 2021, from $1.88 billion at December 31, 2020, primarily due to increases of ~~$184.5~~$189.6 million in deposits, and $39.4 million in subordinated notes, partially offset by a decrease of $123.3 million in borrowings and ~~$3.2 million~~$531,000 in other liabilities.

Total deposits increased ~~$184.5~~$189.6 million to $1.86 billion at ~~June~~September 30, 2021, from $1.67 billion at December 31, 2020. The increase in deposits was primarily driven by organic growth in customer relationships, proceeds from PPP loans and government stimulus checks deposited directly into customer accounts, and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19. ~~Relationship-based transactional~~Transactional accounts (noninterest-bearing checking, interest-bearing checking, and escrow accounts) increased ~~$100.3~~$165.6 million to ~~$689.4~~$754.7 million at ~~June~~September 30, 2021, from $589.1 million at December 31, 2020, primarily due to increases of ~~$67.3~~$81.9 million in interest-bearing checking and $74.7 million in noninterest-bearing checking. Nonretail transaction accounts increased to $60.0 million from none at December 31, 2020 due to an increase in brokered interest-bearing checking ~~and $30.9 million in interest-bearing checking.~~accounts. Money market and savings accounts increased ~~$83.1~~$106.7 million to ~~$665.4~~$689.1 million at ~~June~~September 30, 2021, from $582.4 million at December 31, 2020. Time deposits ~~increased $1.2~~decreased $82.7 million to ~~$503.7~~$419.8 million at ~~June~~September 30, 2021, from $502.5 million at December 31, 2020. Nonretail certificates of deposit (“CDs”) which includes brokered CDs, online CDs, and public funds ~~increased $15.3~~decreased $44.0 million to ~~$211.9~~$152.6 million at ~~June~~September 30, 2021, compared to $196.6 million at December 31, 2020, primarily due to ~~an $8.4~~a $50.9 million ~~increase~~decrease in brokered CDs, ~~and~~primarily offset by a $6.9 million increase in online CDs. ~~Growth~~Escrow accounts related to mortgages serviced increased $9.1 million to $23.5 million at September 30, 2021, reflecting an increase in ~~non-retail CDs is directly tied to~~ the ~~Company utilizing the wholesale market to manage interest rate risk and balance the funding of longer-term asset growth through wholesale term CDs. Escrow~~servicing portfolio.

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~~accounts related to mortgages serviced increased $2.0 million to $16.5 million at June 30, 2021, reflecting an increase in the servicing portfolio.~~

Deposits are summarized as follows at the dates indicated:


	June 30,		December 31,		September 30,		December 31,
	2021 ⁽¹⁾⁽²⁾		2020⁽¹⁾⁽²⁾		2021 ⁽¹⁾⁽²⁾		2020⁽¹⁾⁽²⁾
Noninterest-bearing checking	$	415,748	$	348,421	$	423,091	$	348,421
Interest-bearing checking(6)		257,206		226,282		308,142		226,282
Savings		181,505		152,842		191,487		152,842
Money market⁽³⁾		483,935		429,548		497,571		429,548
Certificates of deposit less than $100,000⁽⁴⁾		299,250		299,157		231,453		299,157
Certificates of deposit of $100,000 through $250,000		138,559		135,901		126,095		135,901
Certificates of deposit of $250,000 and over⁽⁵⁾		65,938		67,488		62,296		67,488
Escrow accounts related to mortgages serviced		16,469		14,432		23,515		14,432
Total	$	1,858,610	$	1,674,071	$	1,863,650	$	1,674,071

__________________________

(1)	Includes ~~$140.9~~$147.5 million of deposits at ~~June~~September 30, 2021 ~~from the Branch Purchase~~ and $129.5 million at December 31, ~~2020.~~2020 from the Branch Purchase.

(2)	Includes ~~$291.5~~$282.2 million and $286.5 million of deposits at ~~June~~September 30, 2021 and December 31, 2020, respectively, from the Anchor Acquisition.

(3)	Includes $5.0 million and $15.0 million of brokered deposits at ~~June~~September 30, 2021 and December 31, 2020, respectively.

(4)	Includes ~~$194.8~~$135.5 million and $186.4 million of brokered deposits at ~~June~~September 30, 2021 and December 31, 2020, respectively.

(5)	Time deposits that meet or exceed the FDIC insurance limit.

(6)	Includes $60.0 million and $0 of brokered deposits at September 30, 2021 and December 31, 2020, respectively.

As a result, primarily ofdue to the COVID-19 pandemic and the resulting availability of PPP loan funds and stimulus funds made available during the first half of 2021, the tables above reflect increases as well as changes in deposits, partially impacted by customers transferring funds from CDs to more liquid interest-bearing accounts, such as money market and interest-bearing checking.

Borrowings decreased $123.3 million to $42.5 million at ~~June~~September 30, 2021, from $165.8 million at December 31, 2020, primarily related to the repayment of $63.3 million of PPPLF borrowings, due in part to SBA forgiveness of the underlying PPP loans and the maturity of $60.0 million of FHLB borrowings utilizing funds attributable to deposit growth.

Management entered into two liability interest rate swap arrangements designated as cash flow hedges in the first quarter of 2020 and one liability interest rate swap arrangement in the third quarter of 2020 to lock the expense costs associated with $90.0 million in brokered deposits and borrowings. The average cost of these $90.0 million in notional pay fixed interest rate swap agreements was 73 basis points for which the Bank will pay a fixed rate of 73 basis points to the interest rate swap counterparty, compared to the quarterly reset of three-month LIBOR that will adjust quarterly. Management will continue to implement processes to match balance sheet funding duration and minimize interest rate risk and costs.

Stockholders’ Equity. Total stockholders’ equity increased ~~$11.8~~$10.4 million to ~~$241.8~~$240.5 million at ~~June~~September 30, 2021, from $230.0 million at December 31, 2020. The increase in stockholders’ equity during the ~~six~~nine months ended ~~June~~September 30, 2021, was primarily due to net income of ~~$20.4~~$28.8 million, partially offset by ~~cash dividends of $2.2 million and~~ common stock repurchases of ~~$7.4~~$12.7 million, cash dividends of $3.4 million and a reduction in accumulated other comprehensive income of $2.3 million. On June 25, 2021, the Company announced a two-for-one stock split in the form of a share distribution of one additional common share for each outstanding common share. The stock dividend was distributed on July 14, 2021, to shareholders of record as of July 6, 2021.The Company repurchased ~~215,420~~486,195 shares of its common stock during the ~~six~~nine months ended ~~June~~September 30, 2021, at an average price of ~~$34.46~~$34.43 per share. Book value per common share was ~~$29.49~~$29.78 at ~~June~~September 30, 2021, compared to $27.67 at December 31, 2020.

We calculated book value based on common shares outstanding of ~~8,333,566~~8,208,045 at ~~June~~September 30, 2021, less ~~110,184~~121,672 unvested restricted stock shares, and ~~25,921~~12,961 of unallocated ESOP shares for the reported common shares outstanding of ~~8,197,461.~~8,073,412. Common shares outstanding was calculated using 8,475,912 shares at December 31, 2020, less 110,184 unvested restricted stock shares, and 51,842 of unallocated ESOP shares for the reported common shares outstanding of 8,313,886.

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Basic earnings per share (“EPS”) and diluted EPS were reported for the six months ended June 30, 2021 at $2.36 and $2.29, respectively, on the July 23, 2021 press release. Management revised the EPS calculation to update the income allocation to participating securities and the days outstanding for certain participating securities. The basic EPS and diluted EPS for the six months ended June 30, 2021 of $2.39 and $2.32, respectively, reflect the updates made subsequent to the July 23^rd ~~press release.~~

Comparison of Results of Operations for the Three Months Ended ~~June~~September 30, 2021 and 2020

General. Net income was ~~$8.5~~$8.3 million for the three months ended ~~June~~September 30, 2021, and ~~$10.0~~$12.7 million for the three months ended ~~June~~September 30, 2020. The decrease in net income for the three months ended ~~June~~September 30, 2021 was primarily due to a ~~$5.9~~$9.1 million, or ~~42.1%~~52.1% decrease in noninterest income and a ~~$4.3~~$2.8 million increase in noninterest expenses, partially offset by a ~~$4.6~~$3.7 million increase in net interest income, a $3.1 million decrease in the provision for loan losses, ~~a $3.4 million increase in net interest income,~~ and a ~~$805,000~~$766,000 decrease in the provision for income tax.

The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities to calculate the comparison of results of operations for the three months ended ~~June~~September 30, 2021 and 2020:


	For the Three Months Ended					For the Three Months Ended					For the Three Months Ended					For the Three Months Ended
	June 30, 2021					June 30, 2020					September 30, 2021					September 30, 2020
Average Balances	Average Balance Outstanding		Interest Earned/ Paid		Yield/ Rate	Average Balance Outstanding		Interest Earned/ Paid		Yield/ Rate	Average Balance Outstanding		Interest Earned/ Paid		Yield/ Rate	Average Balance Outstanding		Interest Earned/ Paid		Yield/ Rate
ASSETS
Loans receivable, net deferred loan fees ⁽¹⁾	$	1,742,720	$	22,484	5.17%	$	1,542,581	$	20,564	5.36%	$	1,776,424	$	23,520	5.25%	$	1,648,070	$	21,066	5.09%
Mortgage-backed securities		71,209		417	2.35%		69,801		440	2.54%		79,264		427	2.14%		70,502		408	2.30%
Investment securities available-for-sale		144,550		627	1.74%		82,220		422	2.06%		168,915		797	1.87%		94,593		502	2.11%
Investment securities held-to-maturity		7,500		95	5.08%		—		—	0.00%		7,500		95	5.03%		2,462		31	5.01%
Federal Home Loan Bank stock		5,155		65	5.06%		9,252		111	4.83%		4,973		56	4.47%		7,219		83	4.57%
Interest-bearing deposits at other financial institutions		111,225		109	0.39%		135,308		176	0.52%		87,440		112	0.51%		97,473		138	0.56%
Total interest-earning assets		2,082,359		23,797	4.58%		1,839,162		21,713	4.75%		2,124,516		25,007	4.67%		1,920,319		22,228	4.60%
Noninterest-earning assets		90,159					98,624					93,137					94,190
Total assets	$	2,172,518				$	1,937,786				$	2,217,653				$	2,014,509
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings and money market	$	645,616	$	416	0.26%	$	447,170	$	642	0.58%	$	678,738	$	348	0.20%	$	499,138	$	464	0.37%
Interest-bearing checking		254,317		48	0.08%		209,519		77	0.15%		269,546		56	0.08%		223,578		87	0.15%
Certificates of deposit		506,205		1,406	1.11%		545,038		2,507	1.85%		466,855		1,225	1.04%		546,079		2,086	1.52%
Borrowings		42,616		222	2.09%		171,445		458	1.07%		42,528		227	2.12%		152,045		503	1.32%
Subordinated notes		49,351		485	3.94%		9,892		169	6.87%		49,367		496	3.99%		9,897		170	6.83%
Total interest-bearing liabilities		1,498,105		2,577	0.69%		1,383,064		3,853	1.12%		1,507,034		2,352	0.62%		1,430,737		3,310	0.92%
Noninterest-bearing accounts		409,845					325,865					442,291					344,731
Other noninterest-bearing liabilities		26,527					24,975					29,224					28,698
Stockholders’ equity		238,041					203,882					239,104					210,343
Total liabilities and stockholders’ equity	$	2,172,518				$	1,937,786				$	2,217,653				$	2,014,509
Net interest income			$	21,220				$	17,860				$	22,655				$	18,918
Net interest rate spread					3.89%					3.63%					4.05%					3.68%
Net earning assets	$	584,254				$	456,098				$	617,482				$	489,582
Net interest margin					4.09%					3.91%					4.23%					3.92%
Average interest-earning assets to average interest-bearing liabilities		139.00%					132.98%					140.97%					134.22%

~~_______________________~~_________________________

~~(1)~~

~~Includes loans held for sale.~~

~~Table of Contents~~

(1) Includes loans held for sale and recognized “net” deferred PPP fees.

Net Interest Income. Net interest income increased ~~$3.4~~$3.7 million to ~~$21.2~~$22.7 million for the three months ended ~~June~~September 30, 2021, from ~~$17.9~~$18.9 million for the three months ended ~~June~~September 30, 2020. This comparable quarter over quarter increase was primarily the result of an improved mix of loans versus other interest-earning assets and increased balances in higher yielding loans funded by lower cost deposits. Interest income increased ~~$2.1~~$2.8 million, primarily due to an increase of ~~$1.9~~$2.5 million in interest income on loans receivable, including fees, impacted primarily by loan growth ~~with low market interest rates on new loan originations, including low yielding PPP loans, resetting adjustable-rate instruments, refinances of higher yielding one-to-four-family portfolio loans,~~ and net deferred fees recognized upon SBA forgiveness of PPP loans. Interest expense decreased ~~$1.3 million,~~$958,000, primarily as a result of repricing

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deposit ~~rates.~~rates and a reduction in higher cost borrowings. For the three months ended ~~June~~September 30, 2021, the total recognition of net deferred fees on forgiven and amortizing PPP loans was ~~$436,000.~~$823,000.

The net interest margin (“NIM”) increased 1831 basis points to ~~4.09%~~4.23% for the three months ended ~~June~~September 30, 2021, from ~~3.91%~~3.92% for the same period in the prior year. The comparable quarter over quarter increase in NIM was impacted by an improved mix of interest-bearing assets, including a ~~lower cost~~higher balance of ~~funds~~higher yielding portfolio loans and ~~a decrease in average interest-earning~~investment securities instead of interest-bearing cash, earning a nominal ~~yield. During the quarter, $128,000 in premium was amortized on purchased loans~~yield combined with ~~early payoffs, partially offset by $271,000 in discount accretion from the Anchor Acquisition.~~declining deposit and borrowing costs.

Interest Income. Interest income for the three months ended ~~June~~September 30, 2021, increased ~~$2.1~~$2.8 million, to ~~$23.8~~$25.0 million, from ~~$21.7~~$22.2 million for the three months ended ~~June~~September 30, 2020. The increase during the period was primarily attributable to the ~~$243.2~~$204.2 million increase in the average balance of total interest-earning assets, asand to a lesser extent, an increase in the average yield on interest-earning assets ~~decreased~~ from the same period last year. The ~~decrease~~increase in average yield on interest-earning assets compared to the same period a year earlier primarily reflects the ~~reduction of~~increase in higher ~~interest rate~~yielding and fee income loans, ~~the impact of refinances of one-to-four-family~~in particular construction and development loans, and an increase in deferred SBA PPP loan fees recognized due to an increase in the volume of forgiven PPP loans during the quarter ended September 30, 2021 which benefited the average yield on loans compared to a reduction in the average yield on loans from the Company's origination of low yielding PPP ~~loans.~~loans during the same period in 2020. The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the maturity of the loans.

The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the three months ended ~~June~~September 30, 2021 and 2020:


	Three Months Ended June 30,										Three Months Ended September 30,
	2021				2020				Increase/		2021				2020				Increase/
	Average				Average				(Decrease)		Average				Average				(Decrease)
	Balance		Yield/		Balance		Yield/		in Interest		Balance		Yield/		Balance		Yield/		in Interest
(Dollars in thousands)	Outstanding		Rate		Outstanding		Rate		Income		Outstanding		Rate		Outstanding		Rate		Income
Loans receivable, net and loans held for sale	$	1,742,720	5.17	%	$	1,542,581	5.36	%	$	1,920	$	1,776,424	5.25	%	$	1,648,070	5.09	%	$	2,454
Mortgage-backed securities		71,209	2.35			69,801	2.54			(23)		79,264	2.14			70,502	2.30			19
Investment securities available-for-sale		144,550	1.74			82,220	2.06			205		168,915	1.87			94,593	2.11			295
Investment securities held-to-maturity		7,500	5.08			—	—			95		7,500	5.03			2,462	5.01			64
FHLB stock		5,155	5.06			9,252	4.83			(46)		4,973	4.47			7,219	4.57			(27)
Interest-bearing deposits at other financial institutions		111,225	0.39			135,308	0.52			(67)		87,440	0.51			97,473	0.56			(26)
Total interest-earning assets	$	2,082,359	4.58	%	$	1,839,162	4.75	%	$	2,084	$	2,124,516	4.67	%	$	1,920,319	4.60	%	$	2,779

Interest Expense. Interest expense decreased ~~$1.3 million,~~$958,000, to ~~$2.6~~$2.4 million for the three months ended ~~June~~September 30, 2021, from ~~$3.9~~$3.3 million for the same prior year period, primarily due to a decrease of interest expense on deposits of ~~$1.3~~$1.0 million. The average cost of funds for total interest-bearing liabilities decreased 4330 basis points to ~~0.69%~~0.62% for the three months ended ~~June~~September 30, 2021, from ~~1.12%~~0.92% for the three months ended ~~June~~September 30, 2020. The decrease was predominantly due to the decrease in cost for market rate deposits and decreased borrowing costs reflecting a decrease in borrowings from the same period in the prior year. The average cost of total interest-bearing deposits decreased 5537 basis points to ~~0.53%~~0.46%, for the three months ended ~~June~~September 30, 2021, compared to ~~1.08%~~0.83%, for the three months ended ~~June~~September 30, 2020, predominantly due to the decrease in cost for market rate deposits as well as a strategic shift away from higher cost CDs.

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The following table details average balances for cost of funds on interest-bearing liabilities and the change in interest expense for the three months ended ~~June~~September 30, 2021 and 2020:


	Three Months Ended June 30,										Three Months Ended September 30,
	2021				2020				(Decrease)/		2021				2020				(Decrease)/
	Average				Average				Increase		Average				Average				Increase
	Balance		Yield/		Balance		Yield/		in Interest		Balance		Yield/		Balance		Yield/		in Interest
(Dollars in thousands)	Outstanding		Rate		Outstanding		Rate		Expense		Outstanding		Rate		Outstanding		Rate		Expense
Savings and money market	$	645,616	0.26	%	$	447,170	0.58	%	$	(226)	$	678,738	0.20	%	$	499,138	0.37	%	$	(116)
Interest-bearing checking		254,317	0.08			209,519	0.15			(29)		269,546	0.08			223,578	0.15			(31)
Certificates of deposit		506,205	1.11			545,038	1.85			(1,101)		466,855	1.04			546,079	1.52			(861)
Borrowings		42,616	2.09			171,445	1.07			(236)		42,528	2.12			152,045	1.32			(276)
Subordinated note		49,351	3.94			9,892	6.87			316		49,367	3.99			9,897	6.83			326
Total interest-bearing liabilities	$	1,498,105	0.69	%	$	1,383,064	1.12	%	$	(1,276)	$	1,507,034	0.62	%	$	1,430,737	0.92	%	$	(958)

Provision for Loan Losses. ~~For the three months ended June 30, 2021, there~~There was no provision for loan losses for the three months ended, September 30, 2021, compared to ~~$4.6~~$3.1 million for the three months ended ~~June~~September 30, 2020 with the reduction of the provision primarily reflecting improved economic factors on credit-deterioration due to the adverse impact of the COVID-19 pandemic at September 30, 2021, the increase in the loan portfolio as a result of organic growth, and net loan charge-offs. The reduction of the provision for loan losses also reflects improvements in ~~watch~~“watch” classified loans that were downgraded based on the COVID-19 pandemic and shown loan-level improvements at ~~June~~September 30, 2021, compared to the same time last year. The $73.2 million balance of PPP loans was excluded from the calculation for the allowance for loan and lease losses at June 30, 2021 as these loans are fully guaranteed by the SBA and management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reduce the Bank’s loan balance for the amount forgiven. During the three months ended ~~June~~September 30, 2021, net loan charge-offs totaled ~~$141,000,~~$309,000, compared to net loan recoveries of ~~$3,000~~$175,000 during the three months ended ~~June~~September 30, 2020. The increase in net charge-offs was primarily due to increased consumer loan ~~charge-offs, including overdraft~~ charge-offs. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the ALLL and may adversely affect the Company’s financial condition and results of operations.

Noninterest Income. Noninterest income decreased ~~$5.9~~$9.1 million, or ~~42.1%~~52.1%, to ~~$8.2~~$8.4 million for the three months ended ~~June~~September 30, 2021, from ~~$14.1~~$17.5 million for the three months ended ~~June~~September 30, 2020. The decrease during the period primarily reflects a ~~$7.0~~$9.3 million, or ~~52.2%~~57.6% decrease in gain on sale of loans due ~~primarily~~ to ~~a reduction~~reductions in the amount of originated and sold refinance loans ~~sold,~~and market pricing, partially offset by a ~~$1.1 million~~$527,000 increase in service charges and fee income due to less MSR amortization and increased servicing fees. Refinance originations were $136.8 million for the ~~Company’s prior~~three months ended September 30, 2021 compared to $345.9 million for the same period ~~COVID-19 related relief temporarily waiving~~last year. Gross margins on ~~a case-by-case basis, customer-related service charges and fees. During~~home loan sales decreased to 3.61% for the ~~current quarter, a pool of United States Department of Agriculture (“USDA”) loans with a principal balance of $2.4 million were sold with a gain on sale of $106,000, net of unamortized premium~~three months ended September 30, 2021, from 4.44% for the three months ended September 30, 2020.

Noninterest Expense. Noninterest expense increased ~~$4.3~~$2.8 million to ~~$18.9~~$20.0 million for the three months ended ~~June~~September 30, 2021, from ~~$14.6~~$17.2 million for the three months ended ~~June~~September 30, 2020. The increase in noninterest expense reflects a ~~$4.5~~$2.6 million increase in salaries and benefits, primarily attributable to ~~additional staffing costs to support loan growth of $1.3 million and~~ a ~~decrease~~reduction in recognized deferred costs on direct loan origination activities of ~~$3.4 million. Other increases included~~$4.4 million, an increase in additional staffing costs to support loan ~~costs~~growth of ~~$196,000, data processing~~$1.4 million and an increase in medical expense of ~~$152,000, operation expenses of $136,000, and professional and board fees of $118,000,~~$827,000, partially offset by a ~~reduction~~decrease in ~~the impairment~~incentives and commissions of ~~servicing rights of $799,000.~~$4.1 million.

The efficiency ratio, which is noninterest expense as a percentage of net interest income and noninterest income, rose to ~~64.33%~~64.46% for the three months ended ~~June~~September 30, 2021, compared to ~~45.71%~~47.11% for the three months ended ~~June~~September 30, 2020, representing the increase in noninterest expense as well as the decrease in noninterest income noted above.

Provision for Income Tax. For the three months ended ~~June~~September 30, 2021, the Company recorded a provision for income tax expense of ~~$1.9~~$2.7 million on pre-tax income as compared to ~~$2.7~~$3.5 million for the three months ended ~~June~~September 30, 2020. The decrease in the tax provision is primarily due to a ~~$2.2~~$5.1 million decrease in pre-tax income during the three months ended ~~June~~September 30, 2021, as compared to the same period last year. The effective corporate income tax rates for the three months ended ~~June~~September 30, 2021 and 2020 were ~~18.1%~~24.5% and ~~21.2%~~21.5%, respectively. The ~~decrease~~increase in the effective corporate income tax rate was primarily due to ~~excess tax benefits of $360,000 on option exercises recognized as tax-exempt income according~~nondeductible compensation cost attributable to Internal Revenue Code Section 162(m) limitations.

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~~to Accounting Standards Update 2016-09 in the three months ended June 30, 2021, compared to no excess tax benefits for the three months ended June 30, 2020.~~

Comparison of Results of Operations for the ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020

General. Net income was ~~$20.4~~$28.8 million for the ~~six~~nine months ended ~~June~~September 30, 2021, and ~~$15.2~~$27.9 million for the ~~six~~nine months ended ~~June~~September 30, 2020. The increase in net income for the ~~six~~nine months ended ~~June~~September 30, 2021 was primarily impacted by a ~~$12.8~~$9.9 million reduction in the provision for loan losses, and a $9.7 million, or ~~47.5%~~17.9% increase in net interest income, ~~after provision for loans losses,~~ partially offset by ~~a $4.5~~an $11.0 million, or ~~14.5%~~27.0% decrease in noninterest income and a $7.3 million, or 15.2% increase in noninterest ~~expense and a $1.8 million, or 7.8% decrease in noninterest income.~~expense. Earnings for the period also reflect the impact of the COVID-19 pandemic.

The following table sets forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities to calculate the comparison of results of operations for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


	For the Six Months Ended					For the Six Months Ended					For the Nine Months Ended					For the Nine Months Ended
	June 30, 2021					June 30, 2020					September 30, 2021					September 30, 2020
Average Balances	Average Balance Outstanding		Interest Earned/ Paid		Yield/ Rate	Average Balance Outstanding		Interest Earned/ Paid		Yield/ Rate	Average Balance Outstanding		Interest Earned/ Paid		Yield/ Rate	Average Balance Outstanding		Interest Earned/ Paid		Yield/ Rate
ASSETS
Loans receivable, net deferred loan fees ⁽¹⁾	$	1,729,956	$	44,018	5.13%	$	1,481,404	$	41,304	5.61%	$	1,745,616	$	67,538	5.17%	$	1,537,365	$	62,370	5.42%
Mortgage-backed securities		67,897		770	2.29%		68,235		823	2.43%		71,728		1,197	2.23%		68,996		1,231	2.38%
Investment securities available-for-sale		131,930		1,231	1.88%		75,905		868	2.30%		144,394		2,029	1.88%		82,180		1,370	2.23%
Investment securities held-to-maturity		7,500		190	5.11%		—		—	0.00%		7,500		285	5.08%		826		31	5.01%
Federal Home Loan Bank stock		6,196		149	4.85%		8,756		218	5.01%		5,783		205	4.74%		8,240		301	4.88%
Interest-bearing deposits at other financial institutions		119,259		223	0.38%		102,535		449	0.88%		108,536		334	0.41%		100,836		587	0.78%
Total interest-earning assets		2,062,738		46,581	4.55%		1,736,835		43,662	5.06%		2,083,557		71,588	4.59%		1,798,443		65,890	4.89%
Noninterest-earning assets		88,936					99,075					90,352					97,435
Total assets	$	2,151,674				$	1,835,910				$	2,173,909				$	1,895,878
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings and money market	$	625,379	$	884	0.29%	$	426,262	$	1,469	0.69%	$	643,361	$	1,233	0.26%	$	450,731	$	1,932	0.57%
Interest-bearing checking		242,278		98	0.08%		194,995		212	0.22%		251,467		153	0.08%		204,592		299	0.20%
Certificates of deposit		498,797		2,870	1.16%		545,166		5,352	1.97%		488,032		4,095	1.12%		545,473		7,439	1.82%
Borrowings		86,153		668	1.56%		132,028		955	1.45%		71,452		895	1.67%		138,749		1,458	1.40%
Subordinated notes		38,858		741	3.85%		9,889		341	6.93%		42,399		1,237	3.90%		9,892		511	6.90%
Total interest-bearing liabilities		1,491,465		5,261	0.71%		1,308,340		8,329	1.28%		1,496,711		7,613	0.68%		1,349,437		11,639	1.15%
Noninterest-bearing accounts		398,942					299,654					413,551					314,789
Other noninterest-bearing liabilities		27,517					24,390					28,093					25,837
Stockholders’ equity		233,750					203,526					235,554					205,815
Total liabilities and stockholders’ equity	$	2,151,674				$	1,835,910				$	2,173,909				$	1,895,878
Net interest income			$	41,320				$	35,333				$	63,975				$	54,251
Net interest rate spread					3.84%					3.78%					3.91%					3.74%
Net earning assets	$	571,273				$	428,495				$	586,846				$	449,006
Net interest margin					4.04%					4.09%					4.11%					4.03%
Average interest-earning assets to average interest-bearing liabilities		138.30%					132.75%					139.21%					133.27%

_________________________

(1) Includes loans held for sale and recognized “net” deferred PPP fees.

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Net Interest Income. Net interest income increased ~~$6.0~~$9.7 million to ~~$41.3~~$64.0 million for the ~~six~~nine months ended ~~June~~September 30, 2021, from ~~$35.3~~$54.3 million for the ~~six~~nine months ended ~~June~~September 30, ~~2020. This increase was due to decreases~~2020 in ~~interest expense of $3.1 million and~~a similar manner as for the three-month comparison described above, with an increase in interest income of ~~$2.9~~$5.7 million and a decrease in interest expense of $4.0 million. For the ~~six~~nine months ended ~~June~~September 30, 2021, the total recognition of net deferred fees on forgiven and amortizing PPP loans was ~~$1.1~~$1.9 million.

The NIM ~~decreased five~~increased eight basis points to ~~4.04%~~4.11% for the ~~six~~nine months ended ~~June~~September 30, 2021, from ~~4.09%~~4.03% for the same period in the prior year. The slight ~~decrease~~increase in NIM between the ~~six~~nine months ended ~~June~~September 30, 2021 and ~~2021~~2020 reflects the ~~change~~reduction in our ~~asset mix, including increased investment securities, commercial business loans,~~deposit and one-to-four-family loans that generally carry lower yields than other interest-earning products, offset by our reduction in funding costs, due to our improved funding mix, including an increase in noninterest-bearing deposits.borrowing costs. Management remains focused on matching deposit/liability duration with the duration of loans/assets where appropriate.

Interest Income. Interest income for the ~~six~~nine months ended ~~June~~September 30, 2021, increased ~~$2.9~~$5.7 million, to ~~$46.6~~$71.6 million, from ~~$43.7~~$65.9 million for the ~~six~~nine months ended ~~June~~September 30, 2020. The increase during the period was primarily attributable to an increase in the average balance of total interest-earning assets, partially offset by the decline in the average loan yield. The decrease in average yield on interest-earning assets compared to the same period a year earlier primarily reflects decreases in the ~~reduction of higher~~average yield for almost all interest ~~rate and fee income loans, particularly construction and development loans, the impact of~~earning assets, in particular, loan yields impacted by refinances of one-to-four-family loans and loan repricing to a lower market interest rate, and the origination last year of low-yielding PPP loans. The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the maturity of the loans.

The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


	Six Months Ended June 30,										Nine Months Ended September 30,
	2021				2020				Increase/		2021				2020				Increase/
	Average				Average				(Decrease)		Average				Average				(Decrease)
	Balance		Yield/		Balance		Yield/		in Interest		Balance		Yield/		Balance		Yield/		in Interest
(Dollars in thousands)	Outstanding		Rate		Outstanding		Rate		Income		Outstanding		Rate		Outstanding		Rate		Income
Loans receivable, net and loans held for sale ⁽¹⁾	$	1,729,956	5.13	%	$	1,481,404	5.61	%	$	2,714	$	1,745,616	5.17	%	$	1,537,365	5.42	%	$	5,168
Mortgage-backed securities		67,897	2.29			68,235	2.43			(53)		71,728	2.23			68,996	2.38			(34)
Investment securities available-for-sale		131,930	1.88			75,905	2.30			363		144,394	1.88			82,180	2.23			659
Investment securities held-to-maturity		7,500	5.11			—	—			190		7,500	5.08			826	5.01			254
FHLB stock		6,196	4.85			8,756	5.01			(69)		5,783	4.74			8,240	4.88			(96)
Interest-bearing deposits at other financial institutions		119,259	0.38			102,535	0.88			(226)		108,536	0.41			100,836	0.78			(253)
Total interest-earning assets	$	2,062,738	4.55	%	$	1,736,835	5.06	%	$	2,919	$	2,083,557	4.59	%	$	1,798,443	4.89	%	$	5,698

Interest Expense. Interest expense decreased ~~$3.1~~$4.0 million, to ~~$5.3~~$7.6 million for the ~~six~~nine months ended ~~June~~September 30, 2021, from ~~$8.3~~$11.6 million for the same prior year period, primarily due to decreased interest expense on deposits of ~~$3.2~~$4.2 million. The average cost of funds for total interest-bearing liabilities decreased 5747 basis points to ~~0.71%~~0.68% for the ~~six~~nine months ended ~~June~~September 30, 2021, from ~~1.28%~~1.15% for the ~~six~~nine months ended ~~June~~September 30, 2020. The decrease was predominantly due to the repricing of ~~CDs.~~CDs to a lower market interest rate. The average cost of total interest-bearing deposits decreased 6455 basis points to ~~0.57%~~0.53%, for the ~~six~~nine months ended ~~June~~September 30, 2021, compared to ~~1.21%~~1.08%, for the ~~six~~nine months ended ~~June~~September 30, 2020, reflecting lower market interest ~~rates primarily in interest-bearing checking, brokered CDs, and CDs.~~rates.

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The following table details average balances for cost of funds on interest-bearing liabilities and the change in interest expense for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


	Six Months Ended June 30,										Nine Months Ended September 30,
	2021				2020				(Decrease)/		2021				2020				(Decrease)/
	Average				Average				Increase		Average				Average				Increase
	Balance		Yield/		Balance		Yield/		in Interest		Balance		Yield/		Balance		Yield/		in Interest
(Dollars in thousands)	Outstanding		Rate		Outstanding		Rate		Expense		Outstanding		Rate		Outstanding		Rate		Expense
Savings and money market	$	625,379	0.29	%	$	426,262	0.69	%	$	(585)	$	643,361	0.26	%	$	450,731	0.57	%	$	(699)
Interest-bearing checking		242,278	0.08			194,995	0.22			(114)		251,467	0.08			204,592	0.20			(146)
Certificates of deposit		498,797	1.16			545,166	1.97			(2,482)		488,032	1.12			545,473	1.82			(3,344)
Borrowings		86,153	1.56			132,028	1.45			(287)		71,452	1.67			138,749	1.40			(563)
Subordinated note		38,858	3.85			9,889	6.93			400		42,399	3.90			9,892	6.90			726
Total interest-bearing liabilities	$	1,491,465	0.71	%	$	1,308,340	1.28	%	$	(3,068)	$	1,496,711	0.68	%	$	1,349,437	1.15	%	$	(4,026)

Provision for Loan Losses. For the ~~six~~nine months ended ~~June~~September 30, 2021, the provision for loan losses was $1.5 million, compared to ~~$8.3~~$11.4 million for the ~~six~~nine months ended ~~June~~September 30, 2020, with the reduction of the provision primarily reflecting improved economic factors on credit-deterioration due to the adverse impact of the COVID-19 pandemic at ~~June~~September 30, ~~2021, the increase in the loan portfolio due to organic growth, and net loan charge-offs.~~2021. The reduction of the provision for loan losses also reflects improvements in ~~watch~~“watch” classified loans that were downgraded based on the COVID-19 pandemic and have shown loan-level improvements at ~~June~~September 30, 2021. During the ~~six~~nine months ended ~~June~~September 30, 2021, net loan charge-offs totaled ~~$439,000,~~$747,000, primarily in consumer loans, compared to ~~$40,000~~net loan recoveries of $135,000 during the ~~six~~nine months ended ~~June~~September 30, 2020. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations.

Noninterest Income. Noninterest income decreased ~~$1.8~~$11.0 million, to ~~$21.2~~$29.6 million for the ~~six~~nine months ended ~~June~~September 30, 2021, from ~~$23.0~~$40.6 million for the ~~six~~nine months ended ~~June~~September 30, 2020. This decrease was the result of a ~~$1.4~~$10.5 million decrease in gain on sale of loans, and a $1.6 million decrease in other noninterest income due to the one- time sale of Class B Visa stock shares of $1.5 million during the same period last year, ~~and a $1.2 million decrease in gain on sale of loans,~~ partially offset by a ~~$933,000~~$1.5 million increase in service charges and fee income.

Noninterest Expense. Noninterest expense increased ~~$4.5~~$7.3 million, or ~~14.5%~~15.2%, to ~~$35.3~~$55.3 million for the ~~six~~nine months ended ~~June~~September 30, 2021, from ~~$30.8~~$48.0 million for the ~~six~~nine months ended ~~June~~September 30, 2020. The increase was primarily due to increases of ~~$6.6~~$9.1 million in salaries and benefits, mostly attributable to ~~increases in compensation and benefits of $5.0 million, including incentives and commissions of $1.3 million, partially offset by~~ a ~~decrease~~reduction in recognized deferred costs on direct loan origination activities of ~~$1.5~~$5.9 million and increases in compensation of $3.0 million and medical expenses of $1.9 million, partially offset by a decrease in incentives and commissions of $2.7 million. Other increases included ~~$479,000~~$661,000 in data processing, ~~$259,000~~$469,000 in loan costs, and $415,000 in professional and board fees, ~~$220,000 in loan costs, and $156,000 in operation expenses,~~ partially offset by the ~~$3.4~~$3.5 million net change on servicing rights which reflect a recovery of servicing rights of ~~$2.0 million in 2021.~~$2.1 million. In the comparable period for 2020, we recognized an impairment of ~~$1.3~~$1.4 million on our servicing rights asset due to falling interest rates as a result of the COVID-19 pandemic.

The efficiency ratio, which is noninterest expense as a percentage of net interest income and noninterest income, rose to ~~56.39%~~59.07% for the ~~six~~nine months ended ~~June~~September 30, 2021, compared to ~~52.79%~~50.61% for the ~~six~~nine months ended ~~June~~September 30, 2020, representing the decrease in noninterest income and the ~~increases~~increase in noninterest expense noted above.

Provision for Income Tax. For the ~~six~~nine months ended ~~June~~September 30, 2021, the Company recorded a provision for income tax expense of ~~$5.3~~$8.0 million on pre-tax income of ~~$25.8~~$36.8 million, as compared to a provision of income tax expense of ~~$4.0~~$7.5 million on pre-tax income of ~~$19.2~~$35.4 million for the ~~six~~nine months ended ~~June~~September 30, 2020. The effective corporate income tax rates for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 were ~~20.7%~~21.9% and ~~21.0%~~21.2%, respectively.

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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 a number of different sources in order to meet potential liquidity demands. The primary sources are increases in deposit accounts, FHLB advances, purchases of federal funds, sale of securities available-for-sale, cash flows from loan payments, sales of one-to-four-family loans held for sale, and maturing securities.

At ~~June~~September 30, 2021, the Bank’s total borrowing capacity was ~~$559.0~~$505.8 million with the FHLB of Des Moines, with unused borrowing capacity of ~~$515.7~~$457.4 million. The FHLB borrowing limit is based on certain categories of loans, primarily real estate loans that qualify as collateral for FHLB advances. At ~~June~~September 30, 2021, the Bank held approximately ~~$751.8~~$742.8 million in loans that qualify as collateral for FHLB advances.

In addition to the availability of liquidity from the FHLB of Des Moines, the Bank maintained a short-term borrowing line with the FRB, with a current limit of ~~$191.4~~$195.5 million, and a combined credit limit of $101.0 million in written federal funds lines of credit through correspondent banking relationships at ~~June~~September 30, 2021. The FRB borrowing limit is based on certain categories of loans, primarily consumer loans that qualify as collateral for FRB line of credit. At ~~June~~September 30, 2021, the Bank held approximately ~~$396.8~~$415.1 million in loans that qualify as collateral for the FRB line of credit.

The Bank’s Asset and Liability Management Policy permits management to utilize brokered deposits up to 20% of deposits or ~~$376.9~~$376.3 million at ~~June~~September 30, 2021. Total brokered deposits at ~~June~~September 30, 2021 were ~~$214.8~~$200.5 million. Management utilizes brokered deposits to mitigate interest rate risk and liquidity risk exposure 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 ~~June~~September 30, 2021, the approved outstanding loan commitments, including unused lines of credit amounted to ~~$574.3~~$570.0 million. Certificates of deposit scheduled to mature in three months or less at ~~June~~September 30, 2021, totaled ~~$170.7~~$90.5 million. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, the Company believes that a majority of maturing relationship deposits will remain with the Bank.

As a separate legal entity from the Bank, FS Bancorp, Inc. must provide for its own liquidity. Sources of capital and liquidity for FS Bancorp, Inc. include distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory notice. At ~~June~~September 30, 2021, FS Bancorp, Inc. had ~~$25.6~~$18.0 million in unrestricted cash to meet liquidity needs.

Commitments and Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers. For information regarding our commitments and off-balance sheet arrangements, see “Note 9 - Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

Capital Resources

The Bank is subject to minimum capital requirements imposed by the FDIC. Based on its capital levels at June 30, 2021, 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 ~~June~~September 30, 2021, the Bank was considered to be well capitalized. Effective January 1, 2020, a bank that elects to use the Community Bank Leverage Ratio (“CBLR”) will generally be considered well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%. At ~~June~~September 30, 2021, the Bank qualified and elected to use the CBLR to measure capital adequacy. The Tier 1 leverage-based capital ratio calculated for the Bank at ~~June 31,~~September 30, 2021 was 11.9%, compared to 10.9% at December ~~31, 2020. As~~

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31, 2020. As required by the CARES Act, the FDIC has temporarily lowered the CBLR to 8.5% beginning on January 1, 2021 for this calendar year. The CBLR will return to 9% on January 1, 2022.

As a bank holding company registered with the Federal Reserve, the Company is subject to the capital adequacy requirements of the Federal Reserve. Bank holding companies with less than $3.0 billion in assets are generally not subject to compliance with the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to the Bank. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to the holding company’s subsidiary bank and the Federal Reserve expects the holding company’s subsidiary bank to be well capitalized under the prompt corrective action regulations. If FS Bancorp, Inc. were subject to regulatory capital guidelines for bank holding companies with $3.0 billion or more in assets at ~~June~~September 30, 2021, FS Bancorp, Inc. would have exceeded all regulatory capital requirements. The Tier 1 leverage-based capital ratio calculated for FS Bancorp, Inc. at ~~June~~September 30, 2021 was ~~10.8%~~10.6%. For additional information regarding regulatory capital compliance, see the discussion included in “Note 14 - Regulatory Capital” to the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the market risk disclosures contained in FS Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Item 4. Controls and Procedures

(a)Evaluation of Disclosure Controls and Procedures

An evaluation of the disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) was carried out as of ~~June~~September 30, 2021 under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) and several other members of the Company’s senior management. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

The Company’s CEO and CFO concluded that based on their evaluation at ~~June~~September 30, 2021, the Company’s disclosure controls and procedures were effective in ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to FS Bancorp management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC’s rules and forms.

(b)Changes in Internal Controls

There were no significant changes in the Company’s internal control over financial reporting that occurred during the three months ended ~~June~~September 30, 2021, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in ~~conditions,~~

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conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of business, the Company occasionally becomes involved in various legal proceedings. In the opinion of management, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.

Item 1A. Risk Factors

There have been no material changes in the Risk Factors previously disclosed in FS Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)	Not applicable

(b)	Not applicable

(c)	The following table summarizes common stock repurchases during the three months ended ~~June~~September 30, 2021:

Maximum

Total Number

Dollar Value of

of Shares

Shares that

Average

Repurchased as

May Yet Be

Total Number

Price

Part of Publicly

Repurchased

of Shares

Paid per

Announced

Under the

Period

Purchased ⁽²⁾

Share ⁽²⁾

Plan ⁽²⁾

Plan

April 1, 2021 - April 30, 2021

11,732

$
33.74

11,732

$
14,604,143

May 1, 2021 - May 31, 2021 ⁽¹⁾

128,168

34.94

128,168

10,126,637

June 1, 2021 - June 30, 2021

60,688

35.24

60,688

7,988,417

Total for the quarter

200,588

$
34.96

200,588

$
7,988,417


					Maximum
				Total Number	Dollar Value of
				of Shares	Shares that
		Average		Repurchased as	May Yet Be
	Total Number	Price		Part of Publicly	Repurchased
	of Shares	Paid per		Announced	Under the
Period	Purchased ⁽¹⁾	Share ⁽¹⁾		Plan ⁽¹⁾	Plan
July 1, 2021 - July 31, 2021 ⁽²⁾	93,467	$	35.16	93,467	$	4,702,338
August 1, 2021 - August 31, 2021 ^{(2) (3)}	129,283		34.23	129,283		10,276,470
September 1, 2021 - September 30, 2021	48,025		33.46	48,025		8,669,393
Total for the quarter	270,775	$	34.42	270,775	$	8,669,393

_________________________

(1)	~~20,984~~Share data has been adjusted to reflect a two-for-one stock split effective July 14, 2021.

(2)	66,890 shares were internally repurchased by the Company acting as the cash counterparty for participants exercising options.

~~(2)~~(3)

~~Share data has been adjusted to reflect a two-for-one~~5,970 shares were surrendered by participants included in the 2018 Equity Incentive Plan in satisfaction of payment for withholding taxes for vesting of restricted stock ~~split effective July 14, 2021.~~shares .

On ~~April 26,~~August 30, 2021, the Company announced that its Board of Directors approved ~~a renewed and increased~~an additional share repurchase ~~plan, providing~~program of up to ~~$15.0~~$10.0 million of the Company’s common shares authorized and ~~outstanding.~~outstanding in addition to the $900,000 remaining common shares authorized and available for repurchase under the previous share repurchase plan. The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, from time to time, to be repurchased through June 30, 2022, depending on market conditions and other factors, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission.

Item 3. Defaults Upon Senior Securities

Not applicable.

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Item 4. Mine Safety Disclosures

Not applicable.

~~Table of Contents~~

Item 5. Other Information

Not applicable.

Item 6. Exhibits


3.1		Articles of Incorporation of FS Bancorp, Inc. (1)
3.2		Bylaws of FS Bancorp, Inc. (2)
4.1		Form of Common Stock Certificate of FS Bancorp, Inc. (1)
4.2		Indenture dated February 10, 2021, by and between FS Bancorp, Inc. and U.S. Bank National Association, as trustee (3)
4.3		Forms of 3.75 Fixed-to-Floating Rate Subordinated Notes due 2031 (included as Exhibit A-1 and Exhibit A-2 to the Indenture filed as Exhibit 4.2 hereto (3)
10.1		Severance Agreement between 1st Security Bank of Washington and Joseph C. Adams (1)
10.2		Form of Change of Control Agreement between 1st Security Bank of Washington and Matthew D. Mullet (1)
10.3		FS Bancorp, Inc. 2013 Equity Incentive Plan (the “2013 Plan”) (4)
10.4		Form of Incentive Stock Option Agreement under the 2013 Plan (4)
10.5		Form of Non-Qualified Stock Option Agreement under the 2013 Plan (4)
10.6		Form of Restricted Stock Agreement under the 2013 Plan (4)
10.9		Form of change of control agreement with Donn C. Costa, Dennis O’Leary, Rob Fuller, Erin Burr, Victoria Jarman, Kelli Nielsen, Lisa Cleary, and May-Ling Sowell (5)
10.10		FS Bancorp, Inc. 2018 Equity Incentive Plan (6)
10.11		Form of Incentive Stock Option Award Agreement under the 2018 Equity Incentive Plan (6)
10.12		Form of Non-Qualified Stock Option Award Agreement under the 2018 Equity Incentive Plan (6)
10.13		Form of Restricted Stock Award Agreement under the 2018 Equity Incentive Plan (6)
10.14		Form of Registration Rights Agreement for Subordinated Notes (7)
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~June~~September 30, 2021 formatted in Inline Extensible Business Reporting Language (IXBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Changes in Stockholders’ Equity; (5) Consolidated Statements of Cash Flows; and (6) Notes to Consolidated Financial Statements.
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
(1)		Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (333-177125) filed on October 3, 2011, and incorporated by reference.
(2)		Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on July 10, 2013 (File No. 001-355589).
(3)		Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 11, 2021 (File No. 001-35589).
(4)		Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (333-192990) filed on December 20, 2013 and incorporated by reference.
(5)		Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 1, 2016 (File No. 001-35589).
(6)		Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (333-22513) filed on May 23, 2018.
(7)		Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 11, 2021 (File No. 001-35589).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	FS BANCORP, INC.


Date: ~~August~~November 9, 2021	By:	/s/Joseph C. Adams
		Joseph C. Adams,
		Chief Executive Officer
		(Principal Executive Officer)

Date: ~~August~~November 9, 2021	By:	/s/Matthew D. Mullet
		Matthew D. Mullet
		Secretary, Treasurer and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
INTEREST INCOME
Loans receivable, including fees	$	22,484	$	20,564	$	44,018	$	41,304
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions		1,313		1,149		2,563		2,358
Total interest and dividend income		23,797		21,713		46,581		43,662
INTEREST EXPENSE
Deposits		1,870		3,226		3,852		7,033
Borrowings		222		458		668		955
Subordinated notes		485		169		741		341
Total interest expense		2,577		3,853		5,261		8,329
NET INTEREST INCOME		21,220		17,860		41,320		35,333
PROVISION FOR LOAN LOSSES		0		4,649		1,500		8,335
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		21,220		13,211		39,820		26,998
NONINTEREST INCOME
Service charges and fee income		1,188		96		1,953		1,020
Gain on sale of loans		6,392		13,365		18,077		19,264
Gain on sale of investment securities		—		182		—		182
Earnings on cash surrender value of BOLI		215		215		429		431
Other noninterest income		391		273		761		2,125
Total noninterest income		8,186		14,131		21,220		23,022
NONINTEREST EXPENSE
Salaries and benefits		11,932		7,420		23,541		16,967
Operations		2,709		2,573		5,132		4,976
Occupancy		1,226		1,216		2,365		2,325
Data processing		1,203		1,051		2,510		2,031
Loss on sale of OREO		—		—		9		2
OREO expenses		—		2		—		2
Loan costs		647		451		1,171		951
Professional and board fees		786		668		1,608		1,349
Federal Deposit Insurance Corporation (“FDIC”) insurance		123		158		371		284
Marketing and advertising		155		103		252		249
Amortization of core deposit intangible		177		177		354		353
(Recovery) impairment of servicing rights		4		803		(2,046)		1,317
Total noninterest expense		18,962		14,622		35,267		30,806
INCOME BEFORE PROVISION FOR INCOME TAXES		10,444		12,720		25,773		19,214
PROVISION FOR INCOME TAXES		1,895		2,700		5,341		4,027
NET INCOME	$	8,549	$	10,020	$	20,432	$	15,187
Basic earnings per share	$	1.00	$	1.17	$	2.39	$	1.74
Diluted earnings per share	$	0.97	$	1.15	$	2.32	$	1.71


	At June 30,		At December 31,
Key assumptions:	2021		2020
Weighted average discount rate	9.1	%	9.1	%
Conditional prepayment rate (“CPR”)	15.9	%	32.6	%
Weighted average life in years	5.6		3.0


	At June 30, 2021
Maturing in 2021	$	232,248
Maturing in 2022		149,703
Maturing in 2023		32,257
Maturing in 2024		24,198
Maturing in 2025		58,912
Thereafter		6,429
Total	$	503,747