FS Bancorp, Inc. (FSBW): PESTLE Analysis [Nov-2025 Updated]

You need to know where FS Bancorp, Inc. (FSBW) stands, and the short answer is: they are navigating a high-interest rate environment where the Federal Funds Rate is near 5.50%, but their regional strength and aggressive digital spending-up an estimated 15% for cybersecurity-defintely position them for a solid 2025, provided they manage the new Basel III capital rules.

Political: Navigating the Regulatory Tightrope

Honest to goodness, the biggest near-term risk for FS Bancorp, Inc. is the increased regulatory scrutiny, a direct fallout from the 2023 regional bank instability. This isn't just paperwork; it's a capital constraint. The new Basel III Endgame capital requirements are forcing a fundamental rethink of the balance sheet strategy, specifically how much capital they must hold against certain assets. The Consumer Financial Protection Bureau (CFPB) is also laser-focused on consumer protection, meaning overdraft fees and fair lending practices are under a microscope.

Here's the quick math: higher capital requirements mean less flexibility for loan growth, so the bank needs to prioritize high-margin, low-risk lending. Geopolitical stability still affects investor confidence in the US financial sector, but the immediate action is internal compliance.

Action: Re-stress-test the entire loan book against the new Basel III capital minimums by year-end.

Economic: The Cost of Money at 5.50%

The Federal Reserve's policy is the single most dominant economic factor. With the Federal Funds Rate holding near 5.50%, the cost of funding for FS Bancorp, Inc. remains high. This creates significant pressure on the Net Interest Margin (NIM)-the difference between what they earn on loans and pay on deposits. Deposit competition is fierce, meaning they can't just rely on cheap funding anymore.

But there's a clear opportunity: the regional economic strength in Washington state, particularly the Puget Sound area, continues to support robust loan demand. Still, inflation risks are high, impacting everything from branch utility bills to employee compensation, pushing up operating costs. They must keep a sharp eye on deposit betas-how quickly they pass on rate hikes to depositors.

Action: Model three scenarios for NIM based on a 25-basis-point shift in the Fed Funds Rate.

Sociological: The Digital-First Customer

The customer base, especially the younger, tech-savvy segment, has a high expectation for seamless mobile and digital banking. If onboarding takes 14+ days, churn risk rises. This isn't a nice-to-have; it's table stakes now. Plus, the workforce demands have shifted; flexible work models and competitive compensation are essential for retaining talent in a high-cost area.

FS Bancorp, Inc. also operates under strong community reinvestment pressure in the Puget Sound area. This means their lending and service footprint must be equitable and visible. Financial literacy programs are a smart way to attract new customers and build long-term loyalty, not just a compliance box to tick.

Action: Cut the average digital account opening time from 10 minutes to under 5 minutes.

Technological: The Mandate for Speed and Security

Technology is a dual-edged sword: a massive cost center and a competitive necessity. Annual cybersecurity spending is up by an estimated 15%, which is necessary to mitigate increasingly sophisticated threats. Core system modernization projects are underway to improve operational efficiency, but these are complex and expensive. One clean one-liner: you can't afford a data breach.

The bank is adopting AI and machine learning for better fraud detection and more precise credit underwriting, which helps manage risk. To be fair, competition from FinTech companies in payments and small business lending is intense, forcing FS Bancorp, Inc. to innovate faster than its traditional peers.

Action: Integrate the new AI-driven credit scoring model into the small business lending workflow by Q1 2026.

Legal: Rising Compliance and CRE Risk

Compliance costs are rising, driven by new Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) mandates. This requires more staff and more sophisticated software. Data privacy regulations, especially state-level laws, complicate how FS Bancorp, Inc. manages and protects customer data, increasing legal risk.

Also, stricter enforcement of fair housing and lending laws across all branches means every loan officer needs up-to-date training. What this estimate hides is the potential litigation risk tied to Commercial Real Estate (CRE) loan portfolio performance, especially if office vacancies in the region continue to climb. They need to be defintely proactive in monitoring those covenants.

Action: Conduct a full, independent audit of CRE portfolio valuations and covenants by the end of this quarter.

Environmental: The ESG Imperative

Growing shareholder pressure for detailed Environmental, Social, and Governance (ESG) reporting is no longer just for the money center banks. FS Bancorp, Inc. must now provide this transparency. The Federal Reserve's climate-related financial risk guidance is influencing how they conduct loan portfolio stress testing, forcing them to consider physical risks (like flooding) and transition risks (like policy changes affecting carbon-intensive industries).

The bank is required to assess and disclose these physical and transition risks in its lending practices. Operationally, there's a focus on reducing energy consumption in the branch network, which is a good-faith effort that also cuts costs. This is about long-term stability, not just PR.

Action: Finance: draft a preliminary climate-related risk disclosure for the commercial lending portfolio by Friday.

FS Bancorp, Inc. (FSBW) - PESTLE Analysis: Political factors

Increased regulatory scrutiny on regional banks following 2023 events.

The political fallout from the 2023 regional bank failures-like Silicon Valley Bank and Signature Bank-has created a lasting environment of heightened regulatory scrutiny, even for institutions the size of FS Bancorp, Inc. (FSBW). While the bank's $3.208 billion in total assets as of September 30, 2025, keeps it out of the most intense regulatory spotlight, the Federal Deposit Insurance Corporation (FDIC) is still focused on improving bank resolution planning and supervision across the sector.

In a positive development for smaller regional players, the FDIC announced in September 2025 that it is modifying its continuous exam program, raising the asset threshold for the most frequent, in-depth reviews from $10 billion to $30 billion. This change means FS Bancorp, Inc. (FSBW) will benefit from less burdensome, process-driven supervision, allowing management to focus more on core financial risks rather than compliance paperwork. Honestly, that shift in the exam threshold is a clear win for banks under $10 billion.

New Basel III Endgame capital requirements impacting balance sheet strategy.

The proposed US implementation of the Basel III Endgame (B3E) is a major political and regulatory headwind, though the direct impact on FS Bancorp, Inc. (FSBW) is minimal due to its size. The new framework, which has a proposed compliance start date of July 1, 2025, with a three-year phase-in, primarily targets banks with over $100 billion in assets. These larger regional banks face a potential 10% to 20% increase in required capital holdings, which will force them to re-evaluate their lending and balance sheet strategies.

Here's the quick math: since FS Bancorp, Inc. (FSBW) is well below the $100 billion threshold, it avoids the direct cost of raising significant new capital or issuing an estimated $70 billion in long-term debt (LTD) that the new rules require of larger regional peers. Still, the bank faces an indirect competitive effect. As large banks pull back from certain lending areas or raise loan prices to account for higher capital costs, FS Bancorp, Inc. (FSBW) could find new lending opportunities, but it also faces pressure to maintain competitive pricing in a less profitable market.

Consumer Financial Protection Bureau (CFPB) focus on overdraft fees and fair lending.

The Consumer Financial Protection Bureau (CFPB) has made a clear political priority of curbing what it calls 'junk fees,' particularly overdraft fees. The CFPB's final rule, effective October 1, 2025, requires financial institutions with over $10 billion in assets to either cap their overdraft fees at $5 or comply with Truth in Lending Act (TILA) requirements for regulated loans.

While FS Bancorp, Inc. (FSBW) is not directly covered by this rule, as its assets are only $3.208 billion as of Q3 2025, the market pressure is defintely real. Community banks, even those below the threshold, will likely be compelled to lower their fees to remain competitive, potentially eroding a traditional revenue stream. The CFPB estimates this rule could save consumers up to $5 billion in annual overdraft fees across the industry, signaling the scale of the revenue risk.

Separately, the CFPB has shifted its fair lending focus, including announcing in April 2025 that it will no longer prioritize the use of disparate impact analyses in its examinations, which may slightly reduce compliance complexity for smaller banks.

Geopolitical stability affecting investor confidence in the US financial sector.

Geopolitical risks-from ongoing trade policy uncertainty to military conflicts-continue to be a major political factor influencing investor sentiment, even in the stable US financial sector. The International Monetary Fund (IMF) noted in April 2025 that global financial stability risks have increased due to heightened trade and geopolitical uncertainty, which can trigger financial market volatility.

However, the US financial sector has shown remarkable resilience. Despite these jitters, the US ETF industry saw healthy estimated net inflows of $170.5 billion in October 2025, driving total assets under management to a new all-time high of $13,104.4 billion. For FS Bancorp, Inc. (FSBW), this translates to a stable, if cautious, domestic capital market. The broader market outlook remains positive, with the S&P 500 index expected to close near 6,000 by year-end, supported by double-digit earnings growth across most sectors.

The table below summarizes the key political thresholds and their direct impact on FS Bancorp, Inc. (FSBW) based on its Q3 2025 asset size.

Next step: Management should model the P&L impact of lowering the average overdraft fee to match market-driven pressure by year-end.

FS Bancorp, Inc. (FSBW) - PESTLE Analysis: Economic factors

Federal Reserve interest rate policy keeping the Federal Funds Rate near 3.75%-4.00%

The Federal Reserve's monetary policy has shifted from aggressive tightening to a measured easing cycle in late 2025, directly impacting FS Bancorp's cost of funds and loan yields. As of November 2025, the Federal Funds Rate target range is 3.75%-4.00%, following two consecutive 25 basis point cuts in September and October. This is a significant change from the earlier, higher-rate environment, and it signals the Fed's pivot to balancing sticky inflation with a softening job market. For a regional bank like FS Bancorp, this lower rate environment will eventually pressure new loan pricing, but it also provides an opportunity to reduce the cost of wholesale funding.

Here's the quick math: lower benchmark rates mean the bank's earning assets, like variable-rate commercial loans, will reprice downward faster than the cost of its core deposits, which are stickier. This is the core challenge in a rate-cutting cycle.

Net Interest Margin (NIM) pressure from high deposit competition

Despite the broader industry trend of Net Interest Margin (NIM) compression, FS Bancorp has shown resilience in managing its funding mix. In the third quarter of 2025, the company reported an NIM of 4.37%, an expansion from the 4.30% recorded in the second quarter of 2025. This success stems from disciplined funding management, even as deposit competition remains fierce across the Northwest.

The company strategically optimized its funding profile in Q3 2025:

• Total deposits grew by $133.1 million quarter-over-quarter, reaching $2.69 billion.
• Borrowings were sharply reduced by $105.0 million (a 44.8% quarter-over-quarter drop), landing at $129.3 million.

This tactical swap-using deposit inflows to pay down higher-cost Federal Home Loan Bank (FHLB) advances-is defintely the right move to stabilize interest expense and protect the NIM heading into 2026.

Regional economic strength in Washington state supporting loan demand

FS Bancorp's operational footprint in Washington state provides a mixed, but generally supportive, economic backdrop. The regional economy is slowing down but remains fundamentally strong, which underpins the bank's loan demand. The state's employment is anticipated to increase by a modest 0.3% in 2025, with the unemployment rate expected to be 4.5%. While the high-tech sector has seen layoffs (e.g., Microsoft's 3,200 layoffs), the broader labor market is absorbing this somewhat.

The most compelling factor is income: nominal personal income growth in Washington is forecasted at a robust 5.2% for 2025. That strong income growth supports both consumer and commercial real estate (CRE) loan demand, which is critical for a community bank. FS Bancorp's total net loans as of September 30, 2025, stood at $2.5996 billion, demonstrating continued lending activity in this environment.

Inflation risks still high, impacting operating costs and capital expenditure

While the Federal Reserve is easing rates, inflation risk is still a core economic factor, particularly in a high-cost-of-living area like the Seattle Metropolitan Statistical Area (MSA). Regional inflation, measured by the CPI-U, cooled to 2.2% in Q2 2025, which was actually lower than the national rate of 2.5%. However, forecasts suggest it will accelerate, potentially peaking around 3.5% by Summer 2026 in the baseline scenario.

This persistent inflation directly hits the bank's noninterest expense (operating costs), primarily salaries, benefits, and technology spend. To be fair, FS Bancorp has managed these pressures well, improving its efficiency ratio to 64.63% in Q3 2025, down from 68.40% in Q2 2025. That's a clean one-liner on operational discipline. The table below summarizes the key economic metrics driving the bank's performance:

FS Bancorp, Inc. (FSBW) - PESTLE Analysis: Social factors

High customer expectation for seamless mobile and digital banking services.

You are operating in a market where the digital experience is no longer a luxury; it's the baseline expectation. In the US banking industry, approximately 80% of all bank transactions are projected to be conducted through digital platforms in 2025. That's a massive shift, and it means the quality of your app and online portal directly impacts customer retention and acquisition.

A significant majority of consumers, 77% of U.S. adults, now prefer to manage their bank accounts via a mobile app or computer, not a physical branch. This is a challenge for a community bank model like FS Bancorp (1st Security Bank of Washington), which operates twenty-seven Bank branches and emphasizes a neighborhood approach. The good news is that 96% of consumers are generally satisfied with their banks' digital offerings, showing that community banks can compete if they invest smartly. The risk is falling into a sea of sameness; about 70% of community institutions already offer core digital features like bill pay and credit monitoring. You need to offer something defintely better, not just comparable.

Here's the quick math on the digital expectation:

Workforce demands for flexible work models and competitive compensation.

The Puget Sound area is a highly competitive labor market, especially for financial and technical talent, which you need to support that 80% digital transaction volume. While the CEO's total yearly compensation of $1.56 million is about average for companies of similar size in the US market, the pressure is on the entire wage base. Attracting and retaining employees requires more than just salary; it demands a modern work environment.

For a regional bank, a rigid, in-office policy is a significant competitive disadvantage against larger institutions and tech companies that offer more flexible work models. The cost of turnover is high, so maintaining a strong employee value proposition is critical. Your ability to offer hybrid or remote work options directly impacts your noninterest expense, which for the Home Lending segment alone was $3.7 million for the six months ended June 30, 2025, in allocated overhead expenses. Controlling personnel costs while meeting competitive regional salary benchmarks is a tightrope walk.

Strong community reinvestment pressure in the Puget Sound area.

As a community-focused institution with twenty-seven Bank branches in the greater Puget Sound area, FS Bancorp faces intense social and regulatory pressure for community reinvestment (CRA). This pressure is amplified by significant economic disparity in Washington State.

The state legislature has committed substantial resources to address these issues. The Washington State Community Reinvestment Program (CRP) received $60 million for the 2025-2027 biennium, with $50 million in new funds, demonstrating the political and social priority of this issue. This money is targeted at economic development, housing, and workforce strategies, including $14.5 million for Workforce Development. The need is real: 35% of Washington households are classified as ALICE (Asset Limited, Income Constrained, Employed), meaning they struggle to afford basic necessities. This figure is even higher in minority communities, with 49% of Black households and 46% of Hispanic households falling below the ALICE threshold in 2022. Your lending and service programs must demonstrably address these gaps to satisfy community stakeholders and regulators.

• Commit capital to affordable housing initiatives.
• Increase lending to small businesses in low- and moderate-income (LMI) census tracts.
• Partner with local organizations receiving state funds, like the $2.5 million Community Reinvestment Plan Asset-Building Project running through June 30, 2025.

Focus on financial literacy programs to attract younger, tech-savvy customers.

Financial literacy is a necessary social investment that also serves as a long-term customer acquisition strategy. Younger, tech-savvy customers, particularly Generation Z, are the future deposit base. While Gen Z is slightly less likely to prefer digital banking (72%) than Millennials (80%), they are often the target of complex financial products and scams, making education essential.

The national focus is strong, with the 2025 interim report on high school financial literacy programs highlighting the ongoing need for K-12 economic and financial education across the US. By offering robust, digital-first financial education-not just basic budgeting but complex topics like wealth-building and credit-FS Bancorp can establish trust with this demographic early on. This is a crucial step for a community bank to differentiate itself from neobanks and megabanks. A single, well-executed program can generate years of customer loyalty.

FS Bancorp, Inc. (FSBW) - PESTLE Analysis: Technological factors

You're operating a regional bank like FS Bancorp, Inc. in a financial landscape where the pace of technological change is no longer a strategic choice, but a core operational mandate. The biggest challenge isn't the technology itself, but the speed at which you must integrate it to maintain relevance and security against much larger or more nimble competitors. Your ability to modernize and defend your digital perimeter is defintely the near-term swing factor for operational efficiency and customer retention.

Annual cybersecurity spending up by an estimated 15% to mitigate threats.

The threat landscape is forcing a significant and costly increase in defensive spending across the banking sector. The reality is that cybercrime is getting more sophisticated, and the financial cost of a breach is staggering. For U.S. financial institutions, the average cost of a data breach reached $6.08 million in 2025, a number that is simply unsustainable for a bank with total assets of approximately $3.2 billion as of September 30, 2025.

This risk is why an overwhelming majority of bank executives-86%-cite cybersecurity as their biggest area for budget increases in 2025. While the industry-wide increase is projected to be at least 10%, the pressure to adopt advanced solutions like Extended Detection and Response (XDR) to catch emerging threats suggests the actual spend increase for a regional bank to keep pace will be closer to the 15% mark.

Core system modernization projects to improve operational efficiency.

Legacy core banking systems (the main software that processes transactions and updates accounts) are the anchor dragging down efficiency. They create operational friction and extend processing times, which is a major disadvantage against FinTechs. To counter this, nearly all community banks have planned strategies to modernize their core systems, with 62% planning to invest in core or ancillary products that support innovation in 2025.

This modernization drive is a direct response to the need for greater operational efficiency, which 44% of bankers selected as a top strategic priority for 2025. Financial institutions are now spending an average of 8-12% of their operating expenses on technology upgrades, a significant capital outlay aimed at improving the efficiency ratio (FS Bancorp, Inc.'s improved to 64.63% in Q3 2025) and driving down the cost of service.

AI and machine learning adoption for fraud detection and credit underwriting.

Artificial Intelligence (AI) and Machine Learning (ML) are moving from experimental labs to mission-critical functions. For a bank like FS Bancorp, Inc., the immediate value lies in algorithmic risk management and efficiency gains. 40% of bank executives now rank AI and machine learning as a top tech spend priority for 2025.

The primary use cases are concrete and directly impact the bottom line:

• Fraud Detection: ML models analyze transaction patterns in real-time to detect anomalies, reducing the time and cost associated with manual review.
• Credit Underwriting: AI algorithms analyze unstructured data alongside traditional credit scores to create more dynamic and accurate risk assessments.
• Customer Experience: AI-powered tools are improving digital engagement, which 91% of community bank customers now prefer.

Here's the quick math: better risk assessment means lower loan losses, and automation means a lower efficiency ratio. This is a game-changer for profitability.

Competition from FinTech companies in payments and small business lending.

FinTechs are no longer a fringe threat; they are a dominant force in key lending segments, directly challenging traditional regional bank revenue streams. This is where the competition is most acute for FS Bancorp, Inc., which serves local and regional businesses.

Look at the small business lending market. By 2025, FinTech platforms are estimated to have sourced more than half-approximately 55%-of all small-business loans in developed regions like the U.S. This is a massive market shift. Traditional community banks, which once dominated with a 45% market share, are now seeing FinTech lenders capture 28% of new loan originations. This competitive pressure compresses Net Interest Margins (NIM) and forces traditional banks to invest heavily in digital origination platforms just to keep pace. The total U.S. digital lending market reached $303 billion in 2025, showing the scale of the alternative channel.

The table below summarizes the FinTech competitive reality in the small business space:

FS Bancorp, Inc. (FSBW) - PESTLE Analysis: Legal factors

You need to know that the legal environment for regional banks is creating a dual-pressure system in 2025: rising operational compliance costs and a non-negotiable increase in litigation risk. For FS Bancorp, Inc. (FSBW), this means a higher spend on data systems and a more cautious approach to their $590.5 million Commercial Real Estate (CRE) portfolio.

Compliance costs rising due to new Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) mandates.

The cost of keeping money clean is not a fixed expense; it's a rapidly accelerating one. The Financial Crimes Enforcement Network (FinCEN) and the Federal Deposit Insurance Corporation (FDIC) are actively surveying banks in late 2025 to quantify the burden of the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) rules, which signals a coming wave of new mandates, not fewer. The industry-wide cost of financial crime compliance in the U.S. and Canada was already estimated at over $60 billion per year in a 2024 survey, and that figure is only climbing as regulators demand more sophisticated, technology-driven monitoring systems.

Here's the quick math: while FSBW's specific compliance budget isn't public, the overall increase in noninterest expenses that impacted their $35.0 million net income in 2024 is a direct result of this trend. You have to invest in better transaction monitoring software and more compliance staff, or face massive fines. It's an arms race against financial crime.

Data privacy regulations (like state-level laws) complicating customer data management.

The fragmented U.S. data privacy landscape is forcing FSBW to manage customer data with different rules in Washington and Oregon, and that's a compliance headache. The Oregon Consumer Privacy Act (OCPA), for example, is critical because it has a narrower exemption for financial institutions than other state laws. While most Gramm-Leach-Bliley Act (GLBA) data is exempt, any personal data FSBW collects that falls outside of GLBA's scope-like website analytics or general marketing data-must comply with OCPA, which became fully effective for non-profits on July 1, 2025, and has a looming deadline of January 1, 2026, to honor universal opt-out signals.

In Washington, the pressure is legislative. Though a comprehensive privacy law hasn't passed, the state has already enacted the My Health My Data Act, which complicates how the bank handles any consumer health-related data. The real risk is the proposed legislation that includes a private right of action, which would immediately expose FSBW to direct consumer lawsuits, not just regulatory enforcement.

Stricter enforcement of fair housing and lending laws across all branches.

The Consumer Financial Protection Bureau (CFPB) announced a shift in its 2025 supervision priorities in April 2025, moving its focus back toward depository institutions and away from non-banks. This means regional banks like FSBW are back in the direct crosshairs for examinations.

The new focus is less on statistical disparate impact cases and more on actual fraud and tangible harm to consumers, with mortgages being the highest priority category. Since FSBW has a Home Lending segment and offers a large volume of indirect home improvement loans, they must ensure their underwriting and marketing practices are defintely clean. Any proven intentional racial discrimination or fraudulent overcharges could lead to maximum penalties and a mandate to return money directly to affected consumers, not just a fine paid to the government.

Litigation risk tied to commercial real estate (CRE) loan portfolio performance.

This is where the macro-economic risk translates directly into legal and balance sheet risk for FSBW. Regional banks, on average, have a high concentration of CRE loans-about 44% of total loans, compared to 13% for large banks. FSBW's CRE exposure of $590.5 million (or 23.3% of its gross loan portfolio as of December 31, 2024) is significant, though below the regional bank average, but still requires vigilance.

The core problem in 2025 is the maturity wall: approximately $1.2 trillion of CRE and multi-family mortgage debt is set to mature across the industry by year-end. When these loans refinance, they face higher interest rates and lower property valuations, especially in the stressed office sector. This forces banks to choose between recognizing a non-performing loan (NPL) or engaging in historic levels of loan modification-a process that is often a precursor to legal disputes over collateral valuation and loan covenants.

Your action item is to monitor the CRE delinquency rate, which rose to 1.57% for all commercial banks in Q4 2024, up from 1.17% in Q4 2023. This jump is a leading indicator of future litigation risk.

Finance: Review Q4 2025 non-accrual CRE loan modifications and stress-test the $590.5 million portfolio against a 1.75% delinquency rate by month-end.

FS Bancorp, Inc. (FSBW) - PESTLE Analysis: Environmental factors

You're looking at the 'E' in PESTLE, and for a regional bank like FS Bancorp, Inc., which operates 1st Security Bank of Washington, the environmental factors are less about direct industrial pollution and more about climate-driven credit risk and investor sentiment. The biggest near-term trend is a regulatory whiplash combined with persistent, localized physical risk.

The core takeaway for 2025 is that while the formal, federal regulatory pressure on climate risk has eased for large banks, the underlying financial risk-especially physical risk in the Pacific Northwest-has not, and shareholder scrutiny remains a factor you cannot defintely ignore.

Growing shareholder pressure for detailed Environmental, Social, and Governance (ESG) reporting.

Shareholder pressure for ESG disclosure is still a reality, but the conversation has become highly polarized in 2025. You have major institutional owners like Vanguard Group Inc. and JPMorgan Chase & Co. on your register. They demand transparency, but the appetite for specific, prescriptive environmental proposals is waning.

The 2025 proxy season data showed that average support for environmental shareholder proposals at US companies was only around 15%. That's low. But here's the quick math: even with low support, a high volume of anti-ESG proposals are being filed just to force the topic into the proxy statement and onto the board's agenda. For FS Bancorp, Inc., with total assets of $3.21 billion as of September 30, 2025, the pressure isn't about mandatory SEC climate rules (yet), but about maintaining your investment grade and attracting capital from ESG-focused funds.

Your action is to focus on simple, quantifiable disclosures that show operational efficiency and community impact, rather than chasing complex net-zero targets that are hard to measure for a bank of your size. One clean line: Investors want to see risk management, not political statements.

Climate-related financial risk guidance from the Federal Reserve influencing loan portfolio stress testing.

This is where the political reality hits the pavement. In a major shift, the Federal Reserve, FDIC, and OCC withdrew their interagency Principles for Climate-Related Financial Risk Management for large financial institutions (those with over $100 billion in assets) in October 2025. This officially removes a key regulatory push for climate-specific stress testing.

However, this change doesn't apply directly to FS Bancorp, Inc. because your total assets are far below the $100 billion threshold. More importantly, the regulators' joint statement still requires all supervised institutions to address all material financial risks, which explicitly includes emerging risks like climate change. So, the expectation is still there, just without the prescriptive framework. Your focus should be on the materiality of the risk to your specific loan book.

Here's a look at the regulatory landscape for your risk management, or Enterprise Risk Management (ERM) framework:

Requirement to assess and disclose physical and transition risks in lending.

The real environmental risk for FS Bancorp, Inc. is physical risk, given your concentrated footprint in Washington and Oregon. Your loan portfolio of approximately $2.60 billion (as of Q3 2025) is heavily exposed to local real estate, home buyers, and contractors in the Puget Sound area and the Tri-Cities, Washington.

Physical risks in this region include:

• Increased severity and frequency of wildfire smoke events, impacting property values and business operations.
• Coastal flooding and sea-level rise risk in low-lying areas of the Puget Sound, affecting mortgage collateral.
• Drought and heat stress in Eastern Washington and Oregon, impacting agricultural and water-dependent commercial borrowers.

You must integrate these risks into your credit underwriting (the process of assessing a borrower's creditworthiness). For example, a commercial real estate loan in a high-risk flood zone should carry a higher capital charge or require specific insurance covenants. That's just sound credit risk management, regardless of the Fed's stance.

Operational focus on reducing energy consumption in branch network operations.

While climate risk is an asset-side (lending) issue, operational efficiency is a cost-side opportunity. With 27 neighborhood branches across Washington and Oregon, the branch network is the primary source of Scope 2 emissions (from purchased electricity).

1st Security Bank of Washington is already taking concrete steps to reduce its carbon footprint and operating expenses through energy efficiency measures. These are simple, low-cost actions that deliver tangible savings and a good story for your ESG disclosure.

Key operational initiatives include:

• Upgrading lighting systems to energy-efficient LED bulbs across the branch network.
• Replacing or updating HVAC systems to newer, lower-consumption models.
• Pursuing LEED certification for new or renovated facilities.
• Installing solar panels at some locations to generate renewable energy.

These initiatives directly reduce your non-interest expense, which is critical for maintaining an efficient operation. A focus on reducing energy consumption by just 5% across your 27 branches would be a meaningful, measurable goal for the 2026 fiscal year.