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					                                    As filed with the Securities and Exchange Commission on March 1, 2012
                                                                                                                    Registration No. 333- 177125


                                                           UNITED STATES
                                               SECURITIES AND EXCHANGE COMMISSION
                                                      WASHINGTON, D.C. 20549

                                                          AMENDMENT NO. 1
                                                                TO THE
                                                  FORM S-1 REGISTRATION STATEMENT
                                                                UNDER
                                                     THE SECURITIES ACT OF 1933



                                                              FS BANCORP, INC

                                              (Exact Name of Registrant as Specified in Its Charter)



                   Washington                                          6036                                          45-4585178
           (State or Other Jurisdiction                   (Primary Standard Industrial                            (I.R.S. Employer
       of Incorporation or Organization)                  Classification Code Number)                          Identification Number)

                         6920 220 th Street SW, Suite 200, Mountlake Terrace, Washington 98043; (425) 771-8840

           (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)

                                                 Joseph C. Adams, Chief Executive Officer
                                                     1 ST Security Bank of Washington
                         6920 220 th Street SW, Suite 200, Mountlake Terrace, Washington 98043; (425) 771-8840

                      (Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

                                                                    Copies to:
                        Michael S. Sadow, P.C.                                                    Steven T. Lanter, Esq.
                       Martin L. Meyrowitz, P.C.                                             Luse Gorman Pomerenk & Schick
                    Silver, Freedman & Taff, L.L.P.                                       5535 Wisconsin Avenue, NW, Suite 780
                    3299 K Street, N.W., Suite 100                                               Washington, D.C. 20015
                        Washington, D.C. 20007                                                       (202) 274-4000
                             (202) 295-4500

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: 

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering: 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering: 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acclerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.
    Large accelerated filer                                                                 Accelerated filer 
    Non-accelerated filer  (Do not check if a smaller reporting company)                    Smaller reporting company 


                                             CALCULATION OF REGISTRATION FEE

                                                                                   Proposed            Proposed
                                                               Amount              maximum            maximum
Title of each class of                                           to be           offering price       aggregate           Amount of
securities to be registered                                   registered           per share       offering price (1)   registration fee
Common Stock, par value $.01 per shares                    3,240,125 shares         $10.00           $32,401,250           $3,762 (1)

(1) Previously paid.

      The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which specifically states that this registration shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
PROSPECTUS
Up to 2,817,500 Shares of Common Stock
(Subject to increase to up to 3,240,125 shares)

                                                                                                                        FS BANCORP, INC.
                                                                              (Proposed Holding Company for 1st Security Bank of Washington)


     We are offering up to 2,817,500 shares of our common stock for sale in connection with our conversion from a mutual savings bank
structure to a stock holding company structure. As part of the conversion, 1st Security Bank of Washington will become our wholly owned
subsidiary. We may increase the maximum number of shares that we sell in the offering by up to 15%, to 3,240,125 shares, as a result of the
demand for shares or changes in market and financial conditions. The shares of our common stock are being offered for sale at a price of
$10.00 per share. We expect our common stock will be listed on the Nasdaq Capital Market under the symbol “FSBW.” We cannot predict,
however, whether an active and liquid trading market for our common stock will develop.

     We are offering these shares for sale first to our depositors and other eligible subscribers in a subscription offering. Concurrently with or
immediately after the subscription offering, any shares not subscribed for in the subscription offering will be offered to the general public in a
direct community offering and/or a syndicated community offering (collectively referred to as the “offering”). In order to complete the
offering, we must sell, in the aggregate, at least 2,082,500 shares. The minimum purchase is 25 shares. The subscription offering is scheduled
to end at 12:00 Noon, Pacific time, on _________ __, 2012 . However, we may extend this expiration date, without notice to you, until
_________ __, 2012, unless the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation approve a
later date, which may not be extended beyond _________ __, 2014 . Once submitted, orders are irrevocable unless the offering is terminated
or extended beyond _________ __, 2012. If the offering is extended beyond _________ __, 2012, subscribers will have the right to modify or
rescind their purchase orders. FS Bancorp, Inc. will hold all subscribers’ funds received before the completion of the conversion in a
segregated account at 1st Security Bank of Washington until the conversion is completed or terminated. We will pay interest on all funds
received at a rate equal to 1st Security Bank of Washington’s passbook (statement savings) rate, which is currently ___% per annum. Funds
will be returned promptly with interest if the conversion is terminated.

                         Investing in our common stock involves risks. See “Risk Factors” beginning on page 18.


                                                        TERMS OF THE OFFERING
                                       Price Per Share: $10.00; Minimum Subscription: 25 shares or $250

                                                                                                                                     Maximum
                                                                                             Minimum             Maximum             as adjusted

Number of Shares                                                                               2,082,500           2,817,500            3,240,125
Gross Offering Proceeds                                                                  $    20,825,000     $    28,175,000     $     32,401,250
Estimated Selling Agent Fees and Expenses (1)                                            $       339,750     $       429,750     $        481,750
Estimated Other Expenses (2)                                                             $     1,765,000     $     1,765,000     $      1,765,000
Estimated Net Proceeds to FS Bancorp, Inc.                                               $    18,720,250     $    25,980,250     $     30,154,500
Estimated Net Proceeds Per Share                                                         $          8.99     $          9.22     $           9.31



(1) For additional information regarding selling agent fees, including the assumptions regarding the number of shares sold in the offering that
    we used to determine the estimated offering expenses, see “Pro Forma Data” and “The Conversion and Stock Offering - Marketing
    Arrangements.” If shares are sold in a syndicated community offering, we have agreed to pay Keefe, Bruyette & Woods, Inc. and any
    other broker-dealers participating in the syndicated community offering selling commission in an amount up to 5.50% of the aggregate
    amount of common stock sold in the syndicated community offering, which would result in higher selling commissions and lower net
    proceeds and net proceeds per share. If all shares were sold in the syndicated community offering (excluding shares purchased by the
    employee stock ownership plan, directors and executive officers) , the maximum commission payable to participating members would be
    $ 1.0 million, $ 1.4 million and $ 1.6 million at the minimum, maximum and adjusted maximum of the offering range.
(2) Includes $853,000 of deferred conversion-related costs .

     Keefe, Bruyette & Woods will use its best efforts to assist us in our selling efforts, but is not required to purchase any of the common stock
that is being offered for sale. Subscribers will not pay any commissions to purchase shares of common stock in the offering.

    These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other governmental agency.
    Neither the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal
Reserve System, the Washington Department of Financial Institutions, nor any other federal agency or state securities regulator has
approved or disapproved these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.

    For information on how to subscribe, call the stock information center at (___) ___-____.




                                                    KEEFE, BRUYETTE & WOODS



                                                             ________ __, 2012
                                                   TABLE OF CONTENTS

                                                                                        Page

Summary                                                                                     1
Risk Factors                                                                              18
Selected Financial and Other Data                                                         31
A Warning About Forward-Looking Statements                                                33
FS Bancorp, Inc.                                                                          34
1st Security Bank of Washington                                                           34
How We Intend to Use the Proceeds From This Offering                                      35
Our Policy Regarding Dividends                                                            36
Market for the Common Stock                                                               37
Capitalization                                                                            38
Regulatory Capital Requirements                                                           39
Pro Forma Data                                                                            40
Proposed Purchases By Management                                                          45
Management’s Discussion and Analysis of Financial Condition and Results of Operations     46
Business of FS Bancorp, Inc.                                                              64
Business of 1st Security Bank of Washington                                               64
Management                                                                                92
How We Are Regulated                                                                     101
Taxation                                                                                 112
The Conversion and Stock Offering                                                        113
Restrictions on Acquisition of FS Bancorp, Inc. and 1st Security Bank of Washington      135
Description of Capital Stock of FS Bancorp, Inc.                                         138
Transfer Agent and Registrar                                                             140
Experts                                                                                  140
Legal and Tax Opinions                                                                   140
Where You Can Find More Information                                                      140
Index to Financial Statements                                                            F- 1
                                                                 SUMMARY

          This summary provides an overview of the key aspects of the stock offering as described in more detail elsewhere in this prospectus
and may not contain all the information that is important to you. To completely understand the stock offering, you should read the entire
prospectus carefully, including the sections entitled “Risk Factors” and “The Conversion and Stock Offering” beginning on pages 18 and 113
, respectively, and the financial statements and the notes to the financial statements beginning on page F-1, before making a decision to invest
in our common stock.

Overview

         As part of the conversion to stock ownership, FS Bancorp, Inc., hereafter referred to as FS Bancorp, is conducting this offering of
between 2,082,500 and 2,817,500 shares of common stock to raise additional capital to support operational growth. We may increase the
maximum number of shares that we sell in the offering by up to 15% to 3,240,125 shares, as a result of the demand for shares or changes in
market and financial conditions. The offering includes a subscription offering in which certain persons, including depositors of 1st Security
Bank of Washington, have prioritized subscription rights. There are limitations on how many shares a person may purchase. The amount of
capital being raised is based on an appraisal of FS Bancorp and a decision by management to offer all of our shares of common stock to the
public. Most of the terms and requirements of this offering are required by regulations of the Washington Department of Financial Institutions
and the Federal Deposit Insurance Corporation, which is also referred to in this document as the FDIC.

         The following tables show how many shares of common stock may be issued in the offering and subsequently issued if our proposed
stock-based equity incentive plan is adopted.

                                   Shares to be sold            Shares to be sold          Shares proposed              Total shares of
                                         to the                  to the employee              to be sold             common stock to be
                                       public in                       stock                 to directors            outstanding after the
                                     this offering             ownership plan (2)            and officers                  offering
                                  Amount           % (1)       Amount         % (1)       Amount         % (1)       Amount              %
Minimum                           1,829,900          87.9 %     166,600          8.0 %     86,000          4.1 %      2,082,500         100.0 %
Midpoint                          2,168,000          88.5 %     196,000          8.0 %     86,000          3.5 %      2,450,000         100.0 %
Maximum                           2,506,100          88.9 %     225,400          8.0 %     86,000          3.1 %      2,817,500         100.0 %
Maximum, as adjusted              2,894,915          89.3 %     259,210          8.0 %     86,000          2.7 %      3,240,125         100.0 %

                                    Shares that may be awarded under an
                                             equity incentive plan
                                  Restricted Stock              Stock Option
                                 Amount           % (1)      Amount          % (1)

Minimum                              83,300         4.0 %       208,250         10.0 %
Midpoint                             98,000         4.0 %       245,000         10.0 %
Maximum                             112,700         4.0 %       281,750         10.0 %
Maximum, as adjusted                129,605         4.0 %       324,013         10.0 %



(1) As a percentage of total shares sold in the offering.
(2) Assumes 8% of the shares sold in the offering are sold to the employee stock ownership plan.
                                                              FS Bancorp, Inc.
                                                            6920 220th Street SW
                                                     Mountlake Terrace, Washington 98043
                                                               (425) 771-5299

        FS Bancorp is a newly formed Washington corporation that will hold all of the outstanding shares of 1st Security Bank of Washington
following the conversion to stock ownership. FS Bancorp is conducting the stock offering in connection with the conversion of 1st Security
Bank of Washington from the mutual to the stock form of organization. Upon completion of the offering, FS Bancorp will be a bank holding
company and its primary regulator will be the Board of Governors of the Federal Reserve System.

                                                      1st Security Bank of Washington
                                                            6920 220th Street SW
                                                     Mountlake Terrace, Washington 98043
                                                               (425) 771-5299

          1st Security Bank of Washington is a relationship-driven community bank. We deliver banking and financial services to local
families, local and regional businesses and industry niches within distinct Puget Sound area communities. We emphasize long-term
relationships with families and businesses within the communities we serve, working with them to meet their financial needs. We are also
actively involved in community activities and events within these market areas, which further strengthens our relationships within these
markets. We have been serving the Puget Sound area since 1936. Originally chartered as a credit union, previously known as Washington’s
Credit Union, we served various select employment groups. On April 1, 2004, we converted from a credit union to a Washington
state-chartered mutual savings bank. Upon completion of the conversion and public stock offering , 1st Security Bank of Washington will be a
Washington state-chartered stock savings bank and the wholly owned subsidiary of FS Bancorp.

          Since our conversion to a mutual savings bank in 2004, our institution has faced numerous operational and economic
challenges. At the time of our conversion to a mutual savings bank we operated 14 branch locations in the Puget Sound area, along with our
Mountlake Terrace headquarters, and had 132 full-time equivalent employees. Our assets at December 31, 2004 totaled $261.4 million. As of
December 31, 2011, our assets totaled $283.8 million, and we were conducting operations through 6 locations, along with our Mountlake
Terrace headquarters, with 86 full-time equivalent employees. Our branch network and high level of employee overhead, which were an
outgrowth of our credit union roots, resulted in inefficiencies and an extremely high operating cost for an institution our size. Beginning in
2007, adverse economic conditions, including increased levels of unemployment, depressed real estate values and the loss of major employers
in our market area, such as Washington Mutual, also reduced our rate of growth, affected our customers ’ ability to repay loans and adversely
impacted our financial condition and earnings. As a result of the foregoing, we experienced net losses of $4.6 million, $3.8 million and $4.1
million during the years ended December 31, 2009, 2008 and 2007, respectively. In comparison, during the years ended December 31, 2011
and 2010, we recorded net earnings of $1.5 million and $1.6 million, respectively. We attribute our return to profitability, in large part, to the
following:

       ●       We restructured the board of trustees (hereafter referred to throughout this document as the board of directors) , adding
               individuals with attributes more suited for the banking industry than those members who previously sat on the board of the
               institution as a credit union.


                                                                        2
       ●       A new executive management team was put in place and a number of other seasoned bankers were hired since our conversion
               to a mutual savings bank.

       ●       Aggressive cost cutting measures were put in place , including (i) salary reductions or freezes for a number of our senior staff,
               (ii) reduced employee benefits ; (iii) staff reductions and (iv) consolidation of our branch network.

       ●       Active management of our delinquent loans and non-performing assets.

See “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations ” for additional information.

         1st Security Bank of Washington is a diversified lender with a focus on the origination of home improvement loans, commercial real
estate mortgage loans, commercial business loans and second mortgage/home equity loan products. Consumer loans, in particular indirect
home improvement loans to finance window replacement, gutter replacement, siding replacement, and other improvement renovations ,
represent the largest portion of the loan portfolio and have traditionally been the mainstay of our lending strategy. As of December 31, 2011,
consumer loans represented 51.7% of our total portfolio, with indirect home improvement loans representing 71.0% of the total consumer loan
portfolio.

          Our indirect home improvement lending is reliant on our relationships with home improvement contractors and dealers. Our indirect
home improvement contractor/dealer network is currently comprised of approximately 150 active contractors and dealers with businesses
located throughout Washington and Oregon, with approximately 10 contractors/dealers responsible for more than half of this loan volume. As
a result of the recent economic downturn and contraction of credit to both contractors/dealers and their customers, there has been an increase in
business closures and our existing contractor/dealer base has experienced decreased sales and loan volume. In order to maintain our indirect
home improvement loan volume, we are considering expanding this line of business into the State of California. We are currently testing the
California market with a limited number of contractors/dealers with whom our lenders have had previous experience. To the extent we
determine to expand our indirect home improvement lending program in California, we anticipate that these California loans will represent no
more than 20% of the total consumer loan portfolio. See “ Our business could suffer if we are unsuccessful in making, continuing and growing
relationships with home improvement contractors and dealers. ”

          Going forward, an emphasis will be placed on diversifying our lending products by expanding our commercial real estate, commercial
business and residential construction lending, while maintaining the current size of our consumer loan portfolio. Further, as a result of
demand by depository customers, we reintroduced in-house originations of residential mortgage loans during the fourth quarter of 2011,
primarily for sale into the secondary market, through a mortgage banking program. Our lending strategies are intended to take advantage of:
(1) our historical strength in indirect consumer lending, (2) recent market dislocation that has created new lending opportunities and the
availability of experienced bankers, and (3) our strength in relationship lending. Retail deposits will continue to serve as an important funding
source. See “Risk Factors - Risks Related to Our Business.”


                                                                        3
Operating Strategy

         Our primary objective is to operate 1st Security Bank of Washington as a well-capitalized, profitable, independent,
community-oriented financial institution, serving customers in our primary market area. Our strategy is to provide innovative products and
superior service to small businesses, industry and geographic niches, and individuals in our primary market area. Our primary market area is
defined generally as the greater Puget Sound market area. After the conversion and offering, we plan to continue our strategy of:

               ●               Growing and diversifying our loan portfolio and revenue streams by expanding our commercial real estate,
                               commercial business and residential construction lending operations, and reintroducing in-house originations of
                               residential mortgage loans through a mortgage banking program.

               ●               Maintaining and improving asset quality , including actively managing our delinquent loans and
                               non-performing assets by aggressively pursuing the collection of consumer debts and marketing saleable
                               properties upon which we foreclosed or repossessed.

               ●               Emphasizing lower cost core deposits to reduce the costs of funding our loan growth. In order to build our
                               core deposit base, we provide sales promotions on savings and checking accounts and diligently attempt to
                               recruit all commercial loan customers to maintain a deposit relationship with us, generally a business checking
                               account relationship, for the term of their loan.

               ●               Capturing our customers’ full relationship by offering a wide range of products and services. As part of our
                               commercial lending process we cross-sell the entire business banking relationship, including deposit
                               relationships and business banking products, such as online cash management, treasury management, wires,
                               direct deposit, payment processing and remote deposit capture. Our mortgage banking program also will
                               provide us with opportunities to cross-sell products to new customers.

               ●               Expanding our reach by leveraging our well-established involvement in the community and by selectively
                               emphasizing products and services designed to meet our customers’ banking needs. We also intend to pursue
                               expansion in our market area through selective growth of our branch network. We recently signed a notice of
                               intent for a new branch location in the Capitol Hill area of Seattle , which is expected to open during the third
                               quarter of 2012.

         For a more detailed description of our products and services, as well as our business operating strategy and goals, see “Business of 1st
Security Bank of Washington” beginning on page 64 .

The Conversion and Stock Offering

         We do not have shareholders in our current mutual form of ownership. The conversion is a series of transactions by which we are
reorganizing from a mutual savings bank structure to a stock holding company which will be 100% owned by public shareholders. As a result
of the conversion, 1st Security Bank of Washington will be owned directly by FS Bancorp. Voting rights in FS Bancorp will be vested solely
in the public shareholders following the conversion.

         The chart below shows our structure before the conversion and offering:




                                                                        4
            The chart below shows our structure after the conversion and offering:




Terms of the Offering

            We are offering between 2,082,500 and 2,817,500 shares of common stock to those with subscription rights in the following order of
priority:

                   (1)             Depositors who held at least $50 with us as of the close of business on June 30, 2007.

                    (2)           The FS Bancorp, Inc. employee stock ownership plan.

                    (3)           Depositors who held at least $50 with us as of the close of business on ________ __, 2012.

                    (4)           Depositors with us as of the close of business on ________ __, 2012 to the extent not already included in a
                                  prior category.

         We may increase the maximum number of shares that we sell in the offering by up to 15% to 3,240,125 shares with the approval of
the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation and without any notice to you as a result of
market demand, regulatory considerations or changes in financial conditions. If we increase the offering up to 3,240,125 shares , you will not
have the opportunity to change or cancel your stock order. The offering price is $10.00 per share. All purchasers will pay the same purchase
price per share. No commission will be charged to purchasers in the offering.

          If we receive subscriptions for more shares than are to be sold in the subscription offering, shares will be allocated in order of the
priorities described above under a formula outlined in the plan of conversion. Shares of common stock not subscribed for in the subscription
offering will be offered to the general public in a direct community offering with a preference to natural persons residing in King, Kitsap,
Pierce and Snohomish Counties, Washington and, if necessary, a syndicated community offering. The direct community offering, if any, shall
begin at the same time as, during or promptly after the subscription offering. See “The Conversion and Stock Offering - Subscription Offering
and Subscription Rights,” “- Direct Community Offering” and “- Syndicated Community Offering.”


                                                                          5
          Keefe, Bruyette & Woods, our financial advisor and selling agent in connection with the offering, will use its best efforts to assist us
in selling our common stock in the offering. Keefe, Bruyette & Woods is not obligated to purchase any shares of common stock in the
offering. For further information about the role of Keefe, Bruyette & Woods in the offering, see “The Conversion and Stock Offering -
Marketing Arrangements.”

Reasons for the Conversion and Offering

         The primary reasons for the conversion and our decision to conduct the offering are to:

                  ●             increase our capital to support future growth; and

                 ●              provide us with greater operating flexibility and allow us to better compete with other financial institutions.

         The conversion and the capital raised in the offering are expected to:

                  ●             give us the financial strength to grow our bank;

                  ●             better enable us to serve our customers in our market area;

                  ●             enable us to increase lending and support our emphasis on commercial business and commercial real estate
                                lending and the development of new products and services;

                 ●              help us attract and retain qualified management through stock-based compensation plans; and

                  ●             structure our business in a form that will enable us to access the capital markets.

           We recently signed a notice of intent for a new branch location in the Capitol Hill area of Seattle, which is expected to open during
the third quarter of 2012 ; otherwise, we do not have any specific plans or arrangements for expanding our branch network and/or any specific
acquisition plans.

How We Determined the Offering Range and the $10.00 Price Per Share

          Valuation Range and Background. The amount of common stock we are offering is based on an independent appraisal by RP
Financial, LC. (“RP Financial”) of the estimated pro forma market value of FS Bancorp, assuming the conversion and offering are
completed. The appraisal was based in part on our consolidated financial condition and results of operations, the pro forma effect of the
additional capital raised by the sale of shares of our common stock in the offering, and an analysis of a peer group of publicly-traded companies
utilized by RP Financial in its appraisal that RP Financial considers comparable to FS Bancorp.

         RP Financial concluded that, as of February 17, 2012, the estimated pro forma market value of FS Bancorp was $24.5 million. This
pro forma market value is the midpoint of a valuation range established by regulation with a minimum of $20.8 million and a maximum of
$28.2 million. Based on this market value and a $10.00 per share purchase price, the number of shares of our common stock that will be
offered for sale will range from 2,082,500 to 2,817,500 with a midpoint of 2,450,000. The $10.00 per share price was selected primarily
because it is the price most commonly used in mutual-to-stock conversions of financial institutions. If a greater demand for shares of our
common stock or a change in financial or market conditions warrant, the offering range may be increased by 15.0%, which would result in an
adjusted maximum pro forma market value of $32.4 million and total shares offered of 3,240,125.

         RP Financial advised the board of directors that the appraisal was prepared in conformance with the regulatory appraisal
methodology. That methodology requires a valuation based on an analysis of trading prices of comparable companies whose stocks have
traded for at least one year prior to the valuation date. RP Financial selected a group of comparable public companies for this analysis.


                                                                         6
         In preparing its appraisal, RP Financial considered the information in this prospectus, including our financial statements. RP Financial
also considered the following factors, among others.

              ●              the present results and financial condition of 1st Security Bank of Washington, and the projected results and
                             financial condition of FS Bancorp;

              ●              the economic and demographic conditions in our existing market area;

              ●              certain historical, financial and other information relating to 1st Security Bank of Washington;

              ●              a comparative evaluation of the operating and financial characteristics of 1st Security Bank of Washington with the
                             peer group companies, which are headquartered in the states of Washington (two companies), Louisiana (two
                             companies) , Michigan (two companies), and Tennessee, Montana, Illinois and Ohio (one company);

              ●              the impact of the conversion and the offering on FS Bancorp’s shareholders’ equity and earnings potential;

              ●              the proposed dividend policy of FS Bancorp; and

              ●              the trading market for the securities of the peer group institutions and general conditions in the stock market for the
                             peer group institutions and all publicly traded thrift institutions.

       Furthermore, RP Financial had various discussions with management. RP Financial did not perform a detailed analysis of the separate
components of our assets and liabilities. We did not impose any limitations on RP Financial in connection with its appraisal.

          RP Financial relied primarily on a comparative market value methodology in determining the pro forma market value of our common
stock. In applying this methodology, RP Financial analyzed financial and operational comparisons of 1st Security Bank of Washington with a
selected peer group of publicly traded savings institutions. The peer group used by RP Financial consists of ten companies listed in the table
below. The pro forma market value of FS Bancorp’s common stock was determined by RP Financial based on the market pricing ratios of the
peer group, subject to certain valuation adjustments based on fundamental differences between 1st Security Bank of Washington and the
institutions comprising the peer group. RP Financial took into account the significant volatility in the broader stock market and the after
market pricing characteristics of recently converted savings institutions. RP Financial utilized the results of this overall analysis to establish
pricing ratios that resulted in the determination of the pro forma market value.


                                                                         7
       The selection criteria for the peer group included consideration of geographic location, earnings and asset size. The peer group
companies are:

                         Peer Group (Ticker Symbol)                                                 City and State                       Assets
                                                                                                                                      (In millions)

First Financial NW, Inc . ( FFNW )                                                    Renton , WA                                 $            1,059
Timberland Bancorp , Inc. ( TSBK )                                                    Hoquiam , WA                                               736
Eagle Bancorp Montana , Inc. (EBMT)                                                   Helena, MT                                                 332
Louisiana Bancorp, Inc. (LABC)                                                        Metairie, LA                                               316
Jacksonville Bancorp, Inc. (JXSB)                                                     Jacksonville, IL                                           307
Wolverine Bancorp, Inc. (WBKC)                                                        Midland, MI                                                294
Athens Bancshares Corp . (AFCB)                                                       Athens, TN                                                 284
Home Federal Bancorp, Inc. of LA (HFBL )                                              Shreveport , LA                                            252
FFD Financial Corp. (FFDF)                                                            Dover, OH                                                  235
First Federal of N. Michigan Bncp, Inc. (FFNM)                                        Alpena, MI                                                 222

          Two of the measures investors use to analyze whether a stock might be a good investment are the ratio of the offering price to the
issuer’s “book value” and the ratio of the offering price to the issuer’s annual net income. RP Financial considered these ratios, among other
factors, in preparing its appraisal. Book value is the same as total shareholders’ equity, and represents the difference between the issuer’s
assets and liabilities. Tangible book value is equal to total shareholders’ equity less intangible assets. Reported earnings reflect net income
recorded by 1st Security Bank of Washington for the year ended December 31, 2011. Core earnings represent 1st Security Bank of
Washington’s earnings, adjusted for non-operating items. RP Financial’s appraisal also incorporates an analysis of a peer group of publicly
traded companies that RP Financial considered to be comparable to us.

         The following table presents a summary of selected pricing ratios for the peer group companies and 1st Security Bank of Washington
(on a pro forma basis). The pricing ratios are based on book value, earnings and other information as of and for the year ended December 31,
2011, stock price information as of February 17, 2012 as reflected in RP Financial’s appraisal report, dated February 17, 2012, and the number
of shares assumed to be outstanding as described in “Pro Forma Data.” Compared to the average pricing of the peer group, our pro forma
pricing ratios at the maximum of the offering range indicated a discount of 16.1 % on a price-to-reported earnings basis, a premium of 1.8 % on
a price-core earnings basis, a discount of 17.3 % on a price-to-book value basis, and a discount of 18.5 % on a price-to-tangible book value
basis.

                                                                       Price-to-         Price-to-core
                                                                       earnings            earnings          Price-to-book       Price-to-tangible
                                                                       multiple            multiple           value ratio        book value ratio

FS Bancorp, Inc.
 Minimum of offering range                                                  15.88 x                14.40 x             48.45 %                  48.47 %
 Midpoint of offering range                                                 19.26 x                17.42 x             53.05 %                  53.05 %
 Maximum of offering range                                                  22.85 x                20.61 x             57.08 %                  57.08 %
 Maximum of offering range, as adjusted                                     27.28 x                24.51 x             61.09 %                  61.05 %

Valuation of peer group companies using stock market prices as of
February 17, 2012
 Average                                                                    22.44 x                17.75 x             69.00 %                  70.02 %
 Median                                                                     21.06 x                17.05 x             71.39 %                  72.28 %


                                                                        8
         Our board of directors reviewed the appraisal report of RP Financial, including the methodology and the assumptions used, and
determined that the valuation range was reasonable and adequate. Given that the shares are to be sold at $10.00 per share in the offering, the
estimated number of shares would be between 2,082,500 at the minimum of the valuation range and 2,817,500 at the maximum of the valuation
range, with a midpoint of 2,450,000.

         The independent appraisal does not indicate per share market value. Do not assume or expect that the valuation of FS
Bancorp as indicated above means that, after the conversion and the offering, the shares of common stock will trade at or above the
$10.00 offering price. Furthermore, the pricing ratios presented above were utilized by RP Financial to estimate our market value and
not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the
capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market
location.

        For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, including a
comparison of selected pro forma pricing ratios compared to pricing ratios of the peer group, see “The Conversion and Offering—Share Pricing
and Number of Shares to be Issued.”

          RP Financial will update its appraisal before we complete the offering. If, as a result of demand for the shares or changes in market
conditions, RP Financial determines that our pro forma market value has increased, we may sell up to 3,240,125 shares in the offering without
notice to you. If our pro forma market value at that time is either below $20.8 million or above $32.4 million, then, after consulting with the
Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation, we may:

              ●             set a new offering range;

              ●             take such other actions as may be permitted by the Washington Department of Financial Institutions, the FDIC and
                            the Securities and Exchange Commission; or

              ●             terminate the offering and promptly return all funds.

          If we set a new offering range, we will be required to cancel your stock order and promptly return your subscription funds, with
interest calculated at the statement savings rate, and cancel any authorization to withdraw funds from your deposit accounts for the purchase of
shares of common stock. You will have the opportunity to place a new stock order.

After-Market Performance Information Provided by the Independent Appraiser

         The following table, prepared by our independent appraiser, presents for all full stock conversions that began trading from January 1,
2011 to February 17, 2012 the percentage change in the trading price from the initial trading date of the offering to the dates shown in the
table. The table also presents the average and median trading prices and percentage change in trading prices for the same dates. This
information relates to stock performance experienced by other companies that may have no similarities to us with regard to market
capitalization, offering size, earnings quality and growth potential, among other factors.


                                                                       9
         The table is not intended to indicate how our common stock may perform. Data represented in the table reflects a small number of
transactions and is not indicative of general stock market performance trends or of price performance trends of companies that undergo
conversions. Furthermore, this table presents only short-term price performance and may not be indicative of the longer-term stock price
performance of these companies. There can be no assurance that our stock price will appreciate or that our stock price will not trade below
$10.00 per share. The movement of any particular company’s stock price is subject to various factors, including, but not limited to, the amount
of proceeds a company raises, the company’s historical and anticipated operating results, the nature and quality of the company’s assets, the
company’s market area and the quality of management and management’s ability to deploy proceeds (such as through loans and investments,
the acquisition of other financial institutions or other businesses, the payment of dividends and common stock repurchases). In addition, stock
prices may be affected by general market and economic conditions, the interest rate environment, the market for financial institutions and
merger or takeover transactions and the presence of professional and other investors who purchase stock on speculation, as well as other
unforeseeable events not in the control of management. Before you make an investment decision, please carefully read this prospectus,
including “Risk Factors.”

                                                          After Market Trading Activity
                                                 Initial Stock Offerings - Standard Conversions
                                      Completed Closing Dates between January 1, 2011 and February 17, 2012

                                                                                  Change from Initial Trading Date Offering Price
                                                                                                             After One        Through
                                                                              After One     After One         Month          February 17,
Transaction (Ticker Symbol)                               IPO Date            Day (%)       Week (%)            (%)          2012 (%)

Wellesley Bancorp, Inc. ( WEBK )                          01 / 26 / 12              20.00 %         21.00 %           26.70 %            26.70 %
West Indiana Bancshares, Inc. (WEIN)                       01/11/12                 12.60           11.50             20.00              25.50
Carroll Bancorp, Inc. (CROL)                               10/13/11                  0.40           (2.50 )            4.00                2.10
ASB Bancorp, Inc. (ASBB)                                   10/12/11                 16.40           14.50             15.50              19.10
BSB Bancorp, Inc. (BLMT)                                   10/05/11                  3.10            3.40              2.50              16.56
Poage Bankshares, Inc. (PBSK)                              09/13/11                 11.30           12.30              8.80              14.90
IF Bancorp, Inc. (IROQ)                                    07/08/11                 16.70           16.50              8.50              15.00
State Investors Bancorp, Inc. (SIBC)                       07/07/11                 18.50           16.60             16.00              13.50
First Connecticut Bancorp, Inc. (FBNK)                     06/30/11                 10.80           11.60             11.10              35.00
Franklin Financial Corp. (FRNK)                            04/28/11                 19.70           17.70             19.60              34.10
Sunshine Financial, Inc. (SSNF)                            04/06/11                 12.50           10.00             14.00               (5.00 )
Fraternity Comm. Bancorp (FRTR)                            04/01/11                 10.00           11.70             10.00            ( 14.99 )
Anchor Bancorp (ANCB)                                      01/26/11                  0.00            0.40              4.50              ( 8.30 )
Wolverine Bancorp, Inc. (WBKC)                             01/20/11                 24.50           22.40             35.00              54.80

                                         Average:                                   12.61 %         11.94 %           14.01 %            16.36 %
                                         Median:                                    12.55 %         12.00 %           12.55 %            15.78 %

Termination of the Offering

          The subscription offering will end at 12:00 Noon, Pacific time, on _________ __, 2012, unless extended. The direct community
offering and syndicated community offering, if any, may continue for up to 45 days after the end of the subscription offering, ______ ___,
2012, if necessary. If fewer than the minimum number of shares are subscribed for in the subscription offering and we do not get orders for at
least the minimum number of shares by _________ __, 2012, we will either:

         (1)      promptly return any payment you made to us, with interest, or cancel any withdrawal authorization you gave us; or

         (2)      extend the offering, if allowed, and give you notice of the extension and of your rights to cancel, change or confirm your
order. If we extend the offering and you do not respond to the notice, then we will cancel your order and return your payment, with interest, or
cancel any withdrawal authorization you gave us. We must complete or terminate the offering by _________ __, 2014.


                                                                         10
How We Will Use the Proceeds Raised From the Sale of Common Stock

        We intend to use the net proceeds received from the stock offering as follows:

                                                                                                                  Maximu       Maximum,
                                                                                                     Minimum          m        as adjusted
                                                                                                           (Dollars in thousands)

Retained by FS Bancorp                                                                               $    7,694    $   10,736    $    12,485
Loan to employee stock ownership plan                                                                     1,666         2,254          2,592
Contributed to 1st Security Bank of Washington                                                            9,360        12,990         15,077
Net proceeds from stock offering                                                                     $   18,720    $   25,980    $    30,154


          FS Bancorp will purchase all of the capital stock of 1st Security Bank of Washington to be issued in the offering in exchange for an
amount of net proceeds sufficient for 1st Security Bank of Washington to have at least 10% tangible capital upon completion of the
offering. In no event will less than 50% of the net proceeds be transferred to 1st Security Bank of Washington in exchange for its shares. The
portion of the net proceeds used by FS Bancorp to purchase the capital stock of 1st Security Bank of Washington will be added to the bank’s
general funds for general corporate purposes. The net proceeds 1st Security Bank of Washington receives from FS Bancorp are initially
intended to be invested into short-term liquid investments. In addition, a majority of the net proceeds retained by FS Bancorp, excluding the
amount needed to fund the loan to the employee stock ownership plan, is expected to be deposited with 1st Security Bank of Washington as an
interest-earning deposit, providing additional funds for reinvestment in earning assets. See “How We Intend to Use the Proceeds of the
Offering.”

         Except as described above, neither FS Bancorp nor 1st Security Bank of Washington has any specific plans for the investment of the
proceeds of this offering, nor have they allocated a specific portion of the proceeds to any particular use. For a discussion of our business
reasons for undertaking the conversion, see “The Conversion and Stock Offering - Our Reasons for the Conversion.”

We Intend to Pay a Cash Dividend in the Future

        We currently plan to pay cash dividends in the future. The amount and timing of any dividends, however, has not yet been
determined. Future dividends are not guaranteed and will depend upon our ability to pay them. Although future dividends are not guaranteed,
based on our pro forma shareholders’ equity and the cash to be retained by FS Bancorp, we believe FS Bancorp will be capable of paying a
dividend after completion of this offering. See “Our Policy Regarding Dividends.”

Plans to List the Common Stock for Trading on the Nasdaq Capital Market

          We plan to list our common stock for trading on the Nasdaq Capital Market under the symbol “FSBW” and have submitted an
application to The Nasdaq Stock Market LLC for this purpose. Keefe, Bruyette & Woods currently intends to become a market maker in the
common stock, but it is under no obligation to do so. We cannot assure you that other market makers will be obtained or that an active and
liquid trading market for the shares of common stock will develop, or if developed will be maintained. After shares of the common stock begin
trading, you may contact a stockbroker to buy or sell shares. Due to the unpredictability of the stock market and other factors, persons
purchasing shares may not be able to sell their shares when they want to, or at a price equal to or above $10.00.


                                                                      11
Limitations on the Purchase of Common Stock in the Conversion

         The minimum purchase is 25 shares.

      The maximum purchase in the subscription offering by any person or group of persons through a single deposit account is $250,000 of
common stock, which equals 25,000 shares.

         The maximum purchase by any person in the community offering is $250,000 of common stock, which equals 25,000 shares.

         The maximum purchase in the subscription offering and community offering combined by any person, related persons or persons
acting together is $500,000 of common stock, which equals 50,000 shares.

         If any of the following persons purchase common stock, their purchases when combined with your purchases cannot exceed $500,000
or 50,000 shares:

                 (1)            your spouse, or your relatives or your spouse’s relatives living in your house;

                 (2)            companies or other entities in which you have a 10% or greater equity or substantial beneficial interest or in
                                which you serve as a senior officer or partner;

                 (3)            a trust or other estate if you have a substantial beneficial interest in the trust or estate or you are a trustee or
                                fiduciary for the trust or other estate; or

                 (4)            other persons who may be acting together with you (including, but not limited to, persons who file jointly a
                                Schedule 13G or Schedule 13D Beneficial Ownership Report with the Securities and Exchange Commission
                                (“SEC”), persons living at the same address or persons exercising subscription rights through qualifying
                                deposits registered at the same address, whether or not related).

         Subject to Washington Department of Financial Institutions and Federal Deposit Insurance Corporation approval, we may increase or
decrease the purchase limitations in the offering at any time. Our tax-qualified benefit plans, including our employee stock ownership plan, are
authorized to purchase up to 8% of the shares sold in the offering without regard to these purchase limitations, which is the amount intended to
be purchased. See “The Conversion and Stock Offering - Limitations on Stock Purchases.”

How to Purchase Common Stock

         Note: Once we receive your order, you cannot cancel or change it without our consent. If FS Bancorp changes the offering range
to fewer than 2,082,500 shares or more than 3,240,125 shares, all subscribers will be notified and given the opportunity to change or cancel
their orders. If you do not respond to the notice, we will return your funds promptly with interest or cancel your withdrawal authorization.

         You must complete and return the enclosed Stock Order and Certification Form (“stock order form”) along with full
payment. Instructions for completing your stock order form are included with the form. Your order must be received by us (not postmarked)
by 12:00 Noon, Pacific time, on _______ ___, 2012. Delivery of an original stock order form (we reserve the right to reject copies or
facsimiles) and full payment may be made by overnight courier to the address listed on the top of the stock order form, by hand-delivery to any
of our full service banking locations, or by mail, using the Stock Order Reply Envelope provided. Please do not mail stock order forms to any
1st Security Bank of Washington branch office. You must sign the certification that is part of the stock order form. We must receive your stock
order form before the end of the offering period.


                                                                        12
         You may pay for shares in any of the following ways:

                 ●              By personal check, bank check or money order made payable to FS Bancorp, Inc.

                 ●             By authorizing a withdrawal from a savings or certificate of deposit account at 1st Security Bank of
                               Washington, designated on the stock order form. To use funds in an individual retirement account (“IRA”) at
                               1st Security Bank of Washington, you must transfer your account to a self-directed IRA at an unaffiliated
                               institution or broker. Because transferring your account will take time, please contact the stock information
                               center as soon as possible for assistance.

                 ●              In cash , if delivered in person to a full-service banking office of 1st Security Bank of Washington, although
                                we request that you exchange cash for a check with any of our tellers.

          1st Security Bank of Washington is not permitted to lend funds to anyone for the purpose of purchasing shares of common stock in the
offering. Additionally, you may not use a 1st Security Bank of Washington line of credit or third party check to pay for shares of our common
stock.

         We will pay interest on your subscription funds at the rate 1st Security Bank of Washington pays on passbook (statement savings)
accounts from the date it receives your funds until the date the conversion is completed or terminated. All funds received before the
completion of the conversion will be held in a segregated account at 1st Security Bank of Washington. All funds authorized for withdrawal
from deposit accounts with 1st Security Bank of Washington will earn interest at the applicable account rate until the conversion is
completed. There will be no early withdrawal penalty for withdrawals from certificates of deposit at 1st Security Bank of Washington used to
pay for stock.

          It may be possible for you to subscribe for shares of common stock using funds you hold within an IRA. However, only a
self-directed retirement account may hold common stock. 1st Security Bank of Washington’s IRAs are not self-directed, so they cannot be
invested in common stock. If you wish to use some or all of the funds in your 1st Security Bank of Washington IRA, the applicable funds must
be transferred to a self-directed account reinvested by an independent trustee, such as a brokerage firm. If you do not have such an account,
you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent
trustee. Because individual circumstances differ and processing of retirement fund orders takes additional time, we recommend that you
contact the stock information center promptly, preferably at least two weeks before the end of the offering period, for assistance with purchases
using your IRA or other retirement account that you may have. Whether you may use these funds for the purchase of shares in the stock
offering may depend on timing constraints and possible limitations imposed by the institution where the funds are held.

Purchases of Common Stock by Our Officers and Directors

          Collectively, our directors and executive officers intend to subscribe for 86,000 shares regardless of the number of shares sold in the
offering. This number equals 3.1 % of the 2,817,500 shares that would be sold at the maximum of the offering range. If fewer shares are sold
in the offering, then officers and directors will own a greater percentage of FS Bancorp. These shares do not include any shares that may be
awarded or issued in the future under any stock-based equity incentive plan we intend to adopt or any shares that may be earned by employees
under the employee stock ownership plan. Directors and executive officers will pay the same $10.00 per share price for these shares as
everyone else who purchases shares in the conversion.


                                                                        13
           These proposed purchases of common stock by our directors and executive officers ( 4.1 % and 3.1 % of the aggregate shares sold in
the offering at the minimum and maximum of the offering range, respectively), together with the purchase by the employee stock ownership
plan (8% of the aggregate shares sold in the offering), as well as the potential acquisition of common stock through the proposed equity
incentive plan (an amount equal to 14% of the aggregate shares sold in the offering) will result in ownership by insiders of FS Bancorp in
excess of 26.0 % and 25.0 % of the total shares sold in the offering at the minimum and maximum of the offering range, respectively. As a
result, it could be more difficult to obtain majority support for shareholder proposals opposed by the board and management. See “Risk Factors
- Risks Related to This Offering - The amount of common stock we will control, our articles of incorporation and bylaws, and state and federal
law could discourage hostile acquisitions of control of FS Bancorp.”

Tax Consequences of the Conversion

          As a general matter, the conversion and offering will not be taxable transactions for federal or state income tax purposes to FS
Bancorp, 1st Security Bank of Washington, or persons eligible to subscribe in the subscription offering. Silver Freedman & Taff, L.L.P. has
issued an opinion to us to the effect that consummation of transactions contemplated by the conversion and offering qualifies as a tax-free
transaction for federal income tax purposes and should not result in the imposition of income taxes to FS Bancorp, 1st Security Bank of
Washington, or persons eligible to subscribe in the subscription offering. Harlowe & Falk LLP has issued an opinion to us to the effect that
consummation of transactions contemplated by the conversion and offering should qualify as a tax-free transaction for Washington State
income tax purposes and should not result in the imposition of income taxes to FS Bancorp, 1st Security Bank of Washington or persons
eligible to subscribe in the subscription offering. See “The Conversion and Stock Offering - Effects of the Conversion - Tax Effects of the
Conversion.”

Benefits to Management from the Offering

          We intend to establish an employee stock ownership plan, which will purchase 8% of the aggregate shares sold in the offering, or,
alternatively, in the open market after the conversion. A loan from FS Bancorp to the employee stock ownership plan, funded by a portion of
the proceeds from this offering, will be used to purchase these shares. The loan will accrue interest at the applicable long-term federal interest
rate as published by the Internal Revenue Service (“IRS”) in effect at the time the employee stock ownership loan is entered into. The
employee stock ownership plan will provide a retirement benefit to all employees eligible to participate in the plan.

          Currently, we intend to adopt, within one year after completion of the offering, an equity incentive plan that will provide for grants of
stock options and restricted stock awards to directors, officers and employees. Implementation of the equity incentive plan would be subject to
prior shareholder approval. If we adopt the equity incentive plan, some of these individuals will be awarded shares of our common stock at no
cost to them. As a result, both the employee stock ownership plan and the equity incentive plan will increase the voting control of management
without any cash being paid by the recipient.

          If we adopt an equity incentive plan within one year of the closing of the conversion, the number of options granted or restricted
shares awarded under the proposed equity incentive plan may not, pursuant to Federal regulations, exceed 10% and 4%, respectively, of the
total shares sold in this offering (including shares sold to our employee stock ownership plan).


                                                                        14
          The employee stock ownership plan and our proposed equity incentive plan will increase our future compensation costs, thereby
reducing our earnings. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time
because applicable accounting practices generally require that they be based on the fair market value of the options or shares of common stock
at the date of the grant; however, we expect them to be significant. We will recognize expenses for our employee stock ownership plan when
shares are committed to be released to participants’ accounts, and will recognize expenses for restricted stock awards and stock options
generally over the vesting period of awards made to recipients. We estimate, once these plans are adopted, the increase in compensation
expense will be approximately $ 436,000 per year on an after-tax basis, based on the maximum of the valuation range. Additionally,
shareholders will experience a reduction in their ownership interest if newly issued shares of common stock are used to fund stock options and
restricted stock awards. In the event newly issued shares of our common stock are used to fund stock options and restricted stock offering
awards in an amount equal to 10% and 4%, respectively, of the total shares sold in this offering, shareholders would experience dilution in their
ownership interest of 9.1% and 3.9%, respectively, or 12.3% in the aggregate. See “Risk Factors - Risks Related to this Offering - After this
offering, our compensation expenses will increase and our return on equity will be low compared to other companies. These factors could
negatively impact the price of our stock.” and “Management - Benefits.”

          The following table summarizes the stock benefits that our officers, directors and employees may receive following the offering at the
minimum and maximum of the offering range. It assumes that the proposed equity incentive plan is approved by shareholders within one year
after completion of the offering to permit the (i) granting of options to purchase a number of shares equal to 10% of the shares outstanding after
the offering and (ii) awarding of a number of shares of common stock equal to 4% of the shares sold in the offering. It further assumes that, at
the maximum of the offering range, a total of 2,817,500 shares will be sold to the public and that our tangible regulatory capital is 10% or more
following the offering.

                                                                                                                   Value of          Value of
                                                        Number           Number                                    Benefits          Benefits
                                                        of Shares        of Shares                                  Based             Based
                                                        Based on         Based on            As a % of           on Minimum        on Maximum
                                    Individuals        Minimum of       Maximum of          Outstanding               of                of
                                    Eligible to         Offering         Offering         Shares Issued in         Offering          Offering
        Plan/Awards               Receive Awards         Range            Range            the Offering            Range (1)         Range (1)
                                                                                                                    (Dollars in thousands)
Employee stock ownership
plan                             Employees                  166,600          225,400                     8.0 % $         1,666    $        2,254

                                 Directors/
Restricted stock                 Employees                   83,300          112,700                     4.0 %             833             1,127

                                 Directors/
Stock options                    Employees                  208,250          281,750                   10.0 %              558               755
                                                            458,150          619,850                   22.0 % $          3,057    $        4,136




(1) For purposes of this table, fair value of shares held in the employee stock ownership plan and the restricted stock awards is assumed to be
    the offering price of $10.00 per share. The actual value of the shares held in the employee stock ownership plan and restricted stock
    awards will be determined based on their fair value as of the allocation date and the date the grants are made, respectively. The fair value
    of stock options has been estimated at $ 2.68 per option using the Black-Scholes option pricing model with the following assumptions: a
    grant-date share price and option exercise price of $10.00; dividend yield of 0.0%; expected option life of 7.5 years; risk free interest rate
    of 1.89 % (based on the ten-year Treasury Note rate); and a volatility rate of 19.34 % based on an index of publicly traded thrift holding
    company institutions. The actual expense of the stock options will be determined by the grant-date fair value of the options, which will
    depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted.

          The value of the restricted stock awards will be based on the price of FS Bancorp’s common stock at the time those shares are granted,
which, subject to shareholder approval, cannot occur until at least six months after the offering is completed. The following table presents the
total value of all restricted shares to be available for award and issuance under the equity incentive plan, assuming the shares for the plan are
issued in a range of market prices from $8.00 per share to $14.00 per share.


                                                                        15
                                                                                                                            129,605
                                    83,300                       98,000                      112,700                         Shares
                                    Shares                       Shares                       Shares                       Awarded at
                                  Awarded at                   Awarded at                   Awarded at                     Maximum of
        Share                     Minimum of                   Midpoint of                  Maximum of                       Range,
        Price                       Range                        Range                        Range                        as adjusted
                                             (Dollars in thousands, except per share price)
$                 8.00       $                 666       $                    784      $                 902         $                   1,037
$                10.00       $                 833       $                    980      $               1,127         $                   1,296
$                12.00       $               1,000       $                  1,176      $               1,352         $                   1,555
$                14.00       $               1,166       $                  1,372      $               1,578         $                   1,814

          The grant-date fair value of the options granted under the equity incentive plan will be based in part on the price of FS Bancorp’s
common stock at the time the options are granted, which, subject to shareholder approval, cannot occur until at least six months after the
offering is completed. The value also will depend on the various assumptions utilized in estimating the value using the Black-Scholes option
pricing model. The following table presents the total estimated value of the options to be available for grant under the equity incentive plan,
assuming the market price and exercise price for the stock options are equal, with a range of market prices for the shares from $8.00 per share
to $14.00 per share.

                                                                                                                                  324,013
    Market/                                             208,250                 245,000                    281,750                Options
    Exercise                 Grant-Date                 Options                 Options                    Options             at Maximum
    Price Per                Fair Value              at Minimum               at Midpoint               at Maximum               of Range,
     Share                   Per Option                of Range                of Range                   of Range              as adjusted
                                         (Dollars in thousands, except per share information)
$             8.00       $              2.14    $                446     $                524       $              603     $               693
$            10.00       $              2.68    $                558     $                657       $              755     $               868
$            12.00       $              3.22    $                671     $                789       $              907     $             1,043
$            14.00       $              3.75    $                781     $                919       $            1,057     $             1,215

         For a further discussion of benefits to management, see “Management.”

Conditions to Completing the Conversion and Offering

         We are conducting the conversion and offering under the terms of our plan of conversion. We cannot complete the conversion and
offering unless:

                 ●               our plan of conversion is approved by at least a majority of votes eligible to be cast by depositors of 1st
                                 Security Bank of Washington;

                 ●               we sell at least the minimum number of shares of common stock offered;

                 ●               we receive approval from the Washington Department of Financial Institutions and no objection from the
                                 Federal Deposit Insurance Corporation to complete the conversion and offering; and

                 ●               We receive approval from the Board of Governors of the Federal Reserve System for the formation of the bank
                                 holding company.


                                                                       16
Stock Information Center

         If you have any questions regarding the offering or our conversion to stock form, please call us, toll free, at (___) ___-____, Monday
through Friday, between 7:00 a.m. and 4:00 p.m., Pacific time. You can also stop into our Stock Information Center located at 6920 220th
Street SW, Mountlake Terrace, Washington, Tuesday through Thursday from 8:00 a.m. to 5:00 p.m. to speak with a stock center
representative. The Stock Information Center will be closed weekends and bank holidays. The banking operations portion of our office is
separate and apart from the Stock Information Center and will not have offering materials.

         To ensure that you receive a prospectus at least 48 hours before the offering deadline, we may not mail prospectuses any later than
five days prior to such date or hand-deliver any prospectus later than two days prior to the date. Stock order forms may only be distributed
with or preceded by a prospectus.

         By signing the stock order form, you are acknowledging your receipt of a prospectus and your understanding that the shares
are not a deposit account and are not insured or guaranteed by FS Bancorp or 1st Security Bank of Washington, or the Federal
Deposit Insurance Corporation or any other federal or state governmental agency.

        We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The
subscription offering and all subscription rights will expire at 12:00 Noon, Pacific time, on _________ __, 2012, whether or not we have
been able to locate each person entitled to subscription rights.

Delivery of Stock Certificates

          Certificates representing shares of common stock issued in the offering will be mailed to the persons entitled to receive these
certificates at the certificate registration address noted on the order form, as soon as practicable following completion of the offering. Until
certificates for the shares of common stock are available and delivered to purchasers, purchasers may not be able to sell the shares of common
stock which they ordered, even though the common stock will have begun trading.

Subscription Rights

         Subscription rights are not allowed to be transferred, and we will act to ensure that you do not do so. We will not accept any stock
orders that we believe involve the transfer of subscription rights.

Restrictions on the Acquisition of FS Bancorp, Inc.

         Federal regulations, as well as provisions contained in the articles of incorporation, restrict the ability of any person, firm or entity to
acquire FS Bancorp or a controlling interest in its capital stock. These restrictions include the requirement that a potential acquirer of common
stock obtain the prior approval of the Board of Governors of the Federal Reserve System before acquiring in excess of 10% of the voting stock
of FS Bancorp. Additionally, Washington Department of Financial Institutions regulations prohibit anyone from acquiring FS Bancorp for a
period of three years following the offering, unless this prohibition is waived by the Washington Department of Financial Institutions. See
“Risk Factors - Risks Related to the Offering - The amount of common stock we will control, our articles of incorporation and bylaws, and
state and federal law could discourage hostile acquisitions of control of FS Bancorp.”

Important Risks in Owning FS Bancorp’s Common Stock

         Before you decide to purchase stock, you should read the “Risk Factors” beginning on page 18 of this prospectus.


                                                                         17
                                                               RISK FACTORS

        You should consider these risk factors, in addition to the other information in this prospectus, in deciding whether to make an
investment in FS Bancorp’s stock.

Risks Related to Our Business

Our financial condition and results of operations are dependent on the economy, particularly in 1st Security Bank of Washington’s
market area. The current economic conditions in the market area we serve may continue to impact our earnings adversely and could
increase the credit risk of our loan portfolio.

          Our primary market area is concentrated in the Puget Sound region of Washington. Our business is directly affected by market
conditions, trends in industry and finance, legislative and regulatory changes, and changes in governmental monetary and fiscal policies and
inflation, all of which are beyond our control. Adverse economic conditions in our region, including an increase in the level of unemployment,
a decline in real estate values and the loss of major employers such as Washington Mutual, have reduced our rate of growth, affected our
customers’ ability to repay loans and adversely impacted our financial condition and earnings. General economic conditions, including
inflation, unemployment and money supply fluctuations, also may affect our profitability adversely. Weak economic conditions and ongoing
strains in the financial and housing markets have resulted in higher levels of loan delinquencies, problem assets and foreclosures and a decline
in the values of the collateral securing our loans.

        A further deterioration in economic conditions in the market area we serve could result in the following consequences, any of which
could have a material adverse effect on our business, financial condition and results of operations:

                 ●              demand for our products and services may decline;

                 ●             loan delinquencies, problem assets and foreclosures may increase;

                 ●             collateral for our loans may further decline in value; and

                 ●             the amount of our low-cost or non-interest-bearing deposits may decrease.

Our loan portfolio possesses increased risk due to our large percentage of consumer loans.

          Our consumer loans accounted for approximately $ 114.2 million or 51.7 % of our total loan portfolio as of December 31, 2011 of
which $ 81.1 million ( 71.0 % of total consumer loans) consisted of indirect home improvement loans (some of which were not secured by a
lien on the real property), $ 24.5 million ( 21.4 % of total consumer loans) consisted of recreational loans, predominantly boats, $5.8 million (
5.1 % of total consumer loans) consisted of automobile loans and $2.8 million (2.4% of total consumer loans) consisted of other consumer
loans. Generally, we consider these types of loans to involve a higher degree of risk compared to first mortgage loans on owner-occupied, one-
to four-family residential properties. As a result of our large portfolio of consumer loans, it may become necessary to increase the level of our
provision for loan losses, which would reduce our profits. Consumer loans generally entail greater risk than do one to four-family residential
mortgage loans, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles and boats. In these cases,
any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. In addition,
most of our consumer loans are originated indirectly by or through third parties, which presents greater risk than our direct lending products
which involves direct contact between us and the borrower. See “Business of 1st Security Bank of Washington - Lending Activities -
Consumer Lending” and “- Asset Quality.”


                                                                       18
Our business could suffer if we are unsuccessful in making, continuing and growing relationships with home improvement contractors
and dealers.

          Our indirect home improvement lending, which is the largest component of our loan portfolio, is reliant on our relationships with
home improvement contractors and dealers. In particular, our indirect home improvement loan operations depend in large part upon our ability
to establish and maintain relationships with reputable contractors and dealers who originate loans at the point of sale. Our indirect home
improvement contractor/dealer network is currently comprised of approximately 150 active contractors and dealers with businesses located
throughout Washington and Oregon, with approximately 10 contractors/dealers responsible for more than half of this loan volume. Indirect
home improvement loans totaled $ 81.1 million, or 36.7 % of our gross loan portfolio, as of December 31, 2011, reflecting approximately
13,700 loans with an average balance of approximately $ 6,000.

          Although we have relationships with home improvement contractors/dealers, our relationships generally are not exclusive, some of
them are newly established and they may be terminated at any time. As a result of the recent economic downturn and contraction of credit to
both contractors/dealers and their customers, there has been an increase in business closures and our existing contractor/dealer base has
experienced decreased sales and loan volume, and may continue to experience decreased sales and loan volume in the future, which may have
an adverse effect on our business, results of operations and financial condition. In addition, if a competitor were to offer better service or more
attractive loan products to our contractor/dealer partners, it is possible that our partners would terminate their relationships with us or
recommend customers to our competitors. If we are unable to continue to grow our existing relationships and develop new relationships, our
results of operations and financial condition could be adversely affected.

         In order to maintain our indirect home improvement loan volume, we are considering expanding this line of business into the State of
California. We are currently testing the California market with a limited number of contractors/dealers. To the extent we determine to move
forward with our indirect home improvement lending program in California, we will need to add contractors and dealers and may require more
account executives and contractor/dealer management resources to manage existing and solicit new contractor/dealer relationships. As
application volume for loans increases, we may also require more processing and underwriting staff and, as the portfolio grows, we will require
more servicing and collections staff. The additional staff will increase our noninterest expense. If we cannot generate a sufficient volume of
loans our results of operations may be adversely affected.

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

         At December 31, 2011, our loan portfolio included $ 73.4 million of commercial and multi-family real estate loans and commercial
business loans, or approximately 33.2 % of our total gross loan portfolio, compared to $ 37.5 million, or 15.6 %, at December 31, 2007. We
have been increasing and intend to continue to increase, subject to market demand, our origination of commercial real estate and commercial
business loans after this offering. The credit risk related to these types of loans is considered to be greater than the risk related to one- to
four-family residential loans because the repayment of commercial real estate loans and commercial business loans typically is dependent on
the successful operations and income stream of the borrowers’ business and the value of the real estate securing the loan as collateral, which
can be significantly affected by economic conditions.


                                                                        19
         Our renewed focus on these types of lending will increase our risk profile relative to traditional one- to four-family lenders as we
continue to implement our business strategy. Although commercial business and commercial real estate loans are intended to enhance the
average yield of our earning assets, they do involve a different, and possibly higher, level of risk of delinquency or collection than generally
associated with one- to four-family loans for a number of reasons. Among other factors, these loans involve larger balances to a single
borrower or groups of related borrowers. Since commercial business and commercial real estate loans generally have large balances, if we
make any errors in judgment in the collectibility of these loans, we may need to significantly increase our provision for loan losses since any
resulting charge-offs will be larger on a per loan basis. Consequently, this could materially adversely affect our future earnings. Collateral
evaluation and financial statement analysis in these types of loans also requires a more detailed analysis at the time of loan underwriting and on
an ongoing basis. Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral, if any, typically is longer than
for a one- to four-family residence because the secondary market for most types of commercial real estate is not readily liquid, so we have less
opportunity to mitigate credit risk by selling part or all of our interest in these assets. See “Business of 1st Security Bank of Washington -
Lending Activities -- Commercial Real Estate Lending” and “-- Commercial Business Lending.” At December 31, 2011, we had $ 427,000 of
non-performing commercial business loans and no non-performing commercial real estate loans in our portfolio.

We are expanding our mortgage warehouse lending program which is subject to various risks that could adversely impact our results
of operations and financial condition.

           In October 2009, we commenced a mortgage warehouse lending program. Our mortgage warehouse lending program focuses on
nine (9) Pacific Northwest mortgage banking companies. We provide short term funding to the mortgage banking companies for the purpose
of originating residential mortgage loans for sale into the secondary market. Our warehouse lending lines are secured by the underlying notes
associated with mortgage loans made to borrowers by the mortgage banking company and we generally require guarantees from the principle
shareholder(s) of the mortgage banking company. These loans are repaid when the note is sold by the mortgage bank into the secondary
market, with the proceeds from the sale used to pay down the outstanding loan before being dispersed to the mortgage bank. As of December
31, 2011, we had approved warehouse lending lines in varying amounts up to $4.0 million with each of nine companies, for an aggregate
amount of $ 35.5 million. During the year ended December 31, 2011, we processed approximately 900 loans and funded approximately $
226.6 million under this program. Our mortgage warehouse related gross revenues totaled $ 498,000 for the year ended December 31, 2011.

         There are numerous risks associated with this type of lending, which include, without limitation, (i) credit risks relating to the
mortgage bankers that borrow from us, (ii) the risk of intentional misrepresentation or fraud by any of these mortgage bankers, (iii) changes in
the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings
under the warehouse line of credit, due to changes in interest rates during the time in warehouse, (iv) unsalable or impaired mortgage loans so
originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the
mortgage banker, and (v) the volatility of mortgage loan originations.

         Additionally, the impact of interest rates on our mortgage warehouse lending business can be significant. Changes in interest rates can
impact the number of residential mortgages originated and initially funded under mortgage warehouse lines of credit and thus our mortgage
warehouse related revenues. A decline in mortgage rates generally increases the demand for mortgage loans. Conversely, in a constant or
increasing rate environment, we would expect fewer loans to be originated.


                                                                        20
Our lending limit may limit our growth.

          At December 31, 2011, there was no specified maximum amount that we could have loaned to any one borrower and the borrower’s
related entities under applicable State of Washington regulations. Our internal policy, however, limits loans to one borrower and the
borrower’s related entities to 20% of our unimpaired capital and surplus, or approximately $ 5.4 million at December 31, 2011, without the
express prior consent of our board of directors. These amounts are significantly less than that of many of our competitors and may discourage
potential commercial borrowers who have credit needs in excess of our lending limit from doing business with us. Our lending limit also
impacts the efficiency of our commercial lending operation because it tends to lower our average loan size, which means we have to generate a
higher number of transactions to achieve the same portfolio volume. We can accommodate larger loans by selling participations in those loans
to other financial institutions, but this strategy is not efficient or always available. We may not be able to attract or maintain clients seeking
larger loans or may not be able to sell participations in these loans on terms we consider favorable.

We are expanding our residential construction lending which is subject to various risks that could adversely impact our results of
operations and financial condition.

         To assist us in expanding our residential construction lending program, we hired several new experienced construction lenders in the
third quarter of 2011. Our residential construction lending program will focus on the origination of loans, both pre-sold and speculative, for
the purpose of constructing and selling primarily one to four-family residences within our market area. Our construction and development
loans totaled $ 10.1 million, or 4.6 %, of total gross loans at December 31, 2011.

          Construction and development lending contains the inherent difficulty in estimating both a property’s value at completion of the
project and the estimated cost (including interest) of the project. If the estimate of construction cost proves to be inaccurate, we may be
required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon
completion proves to be inaccurate, we may be confronted at, or prior to, the maturity of the loan with a project the value of which is
insufficient to assure full repayment. Speculative construction loans to a builder are often associated with homes that are not pre-sold, and thus
pose a greater potential risk to us than construction loans to individuals on their personal residences. Loans on land under development or held
for future construction pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the
collateral. These risks can be significantly impacted by supply and demand. As a result, this type of lending often involves the disbursement
of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property,
rather than the ability of the borrower or guarantor themselves to repay principal and interest.

Revenue from mortgage banking operations are sensitive to changes in economic conditions, decreased economic activity, a slowdown
in the housing market, higher interest rates or new legislation and may adversely impact our financial condition and results of
operations.

          In an effort to diversify our revenue streams and to generate additional income, we recently hired several experienced bankers to
reintroduce in-house originations of residential mortgage loans through a mortgage banking program. We expect to hire additional staff as loan
volume increases. Our mortgage banking program, which went on-line in the fourth quarter of 2011, will be dependent upon our ability to
originate and sell loans to investors. We expect to generate mortgage revenues primarily from gains on the sale of one-to four-family
residential loans underwritten to programs currently offered by Fannie Mae, Freddie Mac, FHA, VA, USDA Rural Housing and other non-GSE
investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. We will be selling loans on
both a servicing retained and servicing released basis utilizing market execution analysis and customer relationships as the criteria. Any future
changes in these programs, our eligibility to participate in these programs, the criteria for loans to be accepted or laws that significantly affect
the activity of these entities could, in turn, materially adversely affect the success of our mortgage banking program and, consequently, our
results of operations.


                                                                        21
        Mortgage loan production levels are sensitive to changes in economic conditions and can suffer from decreased economic activity, a
slowdown in the housing market or higher interest rates. Generally, any sustained period of decreased economic activity or higher interest rates
could adversely affect mortgage originations and, consequently, adversely affect income from mortgage lending activities.

          Currently, as a result of government actions and other economic factors related to the economic downturn, interest rates are at
historically low levels. It is unknown how long interest rates will remain at these historically low levels. To the extent that market interest rates
increase in the future, our ability to originate mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors.
This would adversely affect our ability to generate mortgage revenues, and consequently noninterest income. Because interest rates depend on
factors outside of our control, we cannot eliminate the interest rate risk associated with our mortgage operations.

          Our results of operations will also be affected by the amount of noninterest expense associated with mortgage banking activities, such
as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. If we cannot generate a
sufficient volume of loans for sale our results of operations may be adversely affected. In addition, during periods of reduced loan demand, our
results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan
originations.

          Finally, deteriorating economic conditions may also increase the potential for home buyers to default on their mortgages. In certain of
these cases where we have originated loans and sold them to investors, we may be required to repurchase loans or provide a financial
settlement to investors if it is proven that the borrower failed to provide full and accurate information on or related to their loan application or
for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan
investor. Such repurchases or settlements would also adversely affect our net income.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could be reduced.

          We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the
amount of the allowance for loan losses, we review our loans and our historical loss and delinquency experience, and evaluate economic
conditions. Management recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can
result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner. If our assumptions are incorrect,
our allowance for loan losses may not be sufficient to cover actual losses, resulting in additions to our allowance. Material additions to our
allowance could materially decrease our net income. Our allowance for loan losses was 2.0 % of total gross loans, and 195.1 % of
non-performing loans at December 31, 2011, compared to 2.5% and 3.1% of total gross loans, and 93.7% and 99.3% of non-performing loans
at December 31, 2010 and 2009, respectively. In addition, bank regulators periodically review our allowance for loan losses and may require
us to increase our provision for loan losses or recognize additional loan charge-offs. Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory authorities could have a material adverse effect on our financial condition and results of operations.


                                                                         22
The unseasoned nature of our commercial business and commercial real estate portfolios may result in difficulties in judging
collectibility, which may lead to additional provisions or charge-offs, which would reduce our profits.

         During the periods from January 1, 2009 through December 31, 2011, we originated in the aggregate $ 77.1 million in commercial
business (excluding warehouse lending activities) and commercial real estate (including multi-family) loans of which $ 46.9 million, or 60.8 %,
are included in our gross loan portfolio at December 31, 2011. As a result, a significant portion of our portfolio is relatively unseasoned and,
although these loans are not to subprime borrowers, they may not have had sufficient time to perform to properly indicate the magnitude of
potential losses. These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our
future performance.

New lines of business or new products and services may subject us to additional risk.

           From time to time, we may implement new lines of business or offer new products and services within existing lines of
business. Currently, we are expanding our existing commercial real estate, commercial business and residential construction lending
programs. We also reintroduced in-house originations of residential mortgage loans through a mortgage banking program in the fourth quarter
of 2011. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully
developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources.
Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price
and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting
market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any
new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls.
Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services
could have a material adverse effect on our business, results of operations and financial condition.

If we are unable to successfully integrate new personnel hired to grow our residential construction lending program, or our mortgage
banking operations, our business may be adversely affected.

          We have recently hired a number of experienced bankers in the areas of residential construction lending and residential mortgage
banking. We expect to hire additional personnel in these areas in order to successfully carryout our business plan. The difficulties in hiring
and training new personnel include integrating personnel with different business backgrounds, and combining different corporate cultures,
while retaining other key employees. The process of integrating personnel could cause an interruption of, or loss of momentum in, our
operations and the loss of customers and key personnel. In addition, we may not realize expected revenue increases and other projected
benefits from the increased emphasis in these lending areas. Any delays or difficulties encountered in connection with integrating and growing
of this portion of our operations could have an adverse effect on our business and results of operations or otherwise adversely affect our ability
to achieve the anticipated results.

We are subject to interest rate risk.

          Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that
are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular,
the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans
and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate
loans and obtain deposits, (ii) the fair value of our financial assets and liabilities and (iii) the average duration of our mortgage-backed
securities portfolio and other interest-earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the
interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings
could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on
deposits and other borrowings.


                                                                         23
         Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects
of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in market interest rates could have a
material adverse effect on our financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions
likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Asset and Liability Management and Market Risk.”

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

          Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans or other sources could
have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or the terms of
which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in
general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a
result of a downturn in the Washington markets in which our loans are concentrated or adverse regulatory action against us. Our ability to
borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and
expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the
continued deterioration in credit markets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity.”

Loss of key employees may disrupt relationships with certain customers.

         Our business is primarily relationship-driven in that some of our business development and relationship managers have extensive
customer relationships. Loss of such key personnel could result in the loss of some of our customers. While we believe our relationship with
our key producers is good, we cannot guarantee that all of our key personnel will remain with our organization.

We operate in a highly competitive industry and market area.

           We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and
may have more financial resources. These competitors primarily include national, regional and internet banks within the various markets in
which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans,
credit unions, mortgage banking finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial
services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued
consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer
virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant
banking. Also, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided
by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may
have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may
offer a broader range of products and services as well as better pricing for those products and services than we can.


                                                                         24
         Our ability to compete successfully depends on a number of factors including the following:

         ●        the ability to develop, maintain and build upon long-term customer relationships based on top-quality service, high ethical
                  standards and safe, sound assets;

         ●        the ability to expand our market position;

         ●        the scope, relevance and pricing of products and services offered to meet customer needs and demands;

         ●        the rate at which we introduce new products and services relative to our competitors;

         ●        customer satisfaction with our level of service; and

         ●        industry and general economic trends.

         Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth
and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations. See “Business of 1st
Security Bank of Washington - Competition.”

We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations,
including new financial reform legislation recently enacted by Congress that is expected to increase our costs of operations.

          We are currently subject to extensive examination, supervision and comprehensive regulation by the Federal Deposit Insurance
Corporation and the Washington Department of Financial Institutions. The Federal Deposit Insurance Corporation and the Washington
Department of Financial Institutions govern the activities in which we may engage, primarily for the protection of depositors and the Deposit
Insurance Fund. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities,
including the ability to impose restrictions on an institution’s operations, reclassify assets, determine the adequacy of an institution’s allowance
for loan losses and determine the level of deposit insurance premiums assessed.

         Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has significantly changed
the bank regulatory structure and will affect the lending, deposit, investment, trading and operating activities of financial institutions and their
holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations,
and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing
rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many
months or years.

          Certain provisions of the Dodd-Frank Act are expected to have a near term impact on 1st Security Bank of Washington. For example,
a provision of the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have
interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact
on our interest expense.

         The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments are now
based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently
increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, and
non-interest-bearing transaction accounts have unlimited deposit insurance through December 31, 2013.


                                                                         25
         The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and
so-called “golden parachute” payments and authorizes the Securities and Exchange Commission to promulgate rules that would allow
stockholders to nominate their own candidate using a company’s proxy materials. The legislation also directs the Federal Reserve to
promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly
traded or not.

         The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer
protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that
apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer
Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in
assets. Financial institutions such as 1st Security Bank of Washington with $10 billion or less in assets will continue to be examined for
compliance with the consumer laws by their primary bank regulators.

         It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and
regulations will have on community banks. However, it is expected that at minimum they will increase our operating and compliance costs and
could increase our interest expense. Any additional changes in our regulation and oversight, whether in the form of new laws, rules and
regulations could make compliance more difficult or expensive or otherwise materially adversely affect our business, financial condition or
prospects.

If our investment in the Federal Home Loan Bank of Seattle becomes impaired, our earnings and shareholders’ equity could decrease.

          At December 31, 2011 we owned $1.8 million in Federal Home Loan Bank of Seattle stock. We are required to own this stock to be a
member of and to obtain advances from our Federal Home Loan Bank. This stock is not marketable and can only be redeemed by our Federal
Home Loan Bank, which currently is not redeeming any excess member stock. Our Federal Home Loan Bank’s financial condition is linked,
in part, to the eleven other members of the Federal Home Loan Bank System and to accounting rules and asset quality risks that could
materially lower their capital, which would cause our Federal Home Loan Bank stock to be deemed impaired, resulting in a decrease in our
earnings and assets.

Risks Related to this Offering

Our operating expenses are high as a percentage of our net interest income, making it more difficult to maintain profitability. After
this offering, our expenses will increase. Our return on equity also will be low compared to other companies. These factors could
negatively impact the price of our stock.

           Like many smaller financial institutions, our non-interest expense, which consists primarily of the costs associated with operating our
business, represents a high percentage of the income we generate. The cost of generating our income is measured by our efficiency ratio,
which represents non-interest expense divided by the sum of our net interest income and our non-interest income. The lower our efficiency
ratio is, the more effective our ability to generate income from our operations. For the years ended December 31, 2011, 2010 and 2009, our
efficiency ratios were 75.5 %, 70.3 % and 84.8 %, respectively. Generally, this means that we spent approximately $ 0.76, $0.70 and $ 0.85
during the years ended December 31, 2011, 2010 and 2009, respectively, to generate $1.00 of income.


                                                                        26
         The proceeds we will receive from the sale of our common stock will increase our capital substantially. It will take us a significant
period of time to fully deploy these proceeds in our business operations. Our compensation expenses will increase as a result of the costs
associated with the employee stock ownership plan, the proposed stock-based equity incentive plan and the other costs of being a public
company. In addition the Federal Deposit Insurance Corporation could increase insurance premiums, which would increase non-interest
expense. See “How We Are Regulated – Insurance of Accounts and Regulation by the Federal Deposit Insurance Corporation.” Therefore, we
expect our return on equity to be less than many of our regional and national peers. This low return on equity could hurt our stock price. We
do not know when or if we will achieve returns on equity that are comparable to industry peers. For further information regarding pro forma
income and expenses, see “Pro Forma Data.”

While we have been profitable recently, we recorded a loss in each of the years in the three year period ended December 31, 2009, and
if we cannot continue to generate and increase our income our stock price may be adversely affected.

          Net income for the years ended December 31, 2011 and 2010 totaled $ 1.5 million and $1.6 million, respectively. However, we
experienced a $4.6 million net loss for the year ended December 31, 2009, a $3.8 million net loss for the year ended December 31, 2008 and a
$4.1 million net loss for the year ended December 31, 2007. See “Management’s Discussion and Analysis of Financial Condition and Results
of Operations.” While we have identified and implemented various strategic initiatives to reduce costs and improve earnings, and intend to
increase our interest-earning assets by leveraging the proceeds of this offering, our strategic initiatives may not succeed in generating and
increasing income. If we are unable to generate and increase income, our stock price may be adversely affected. For a description of our
strategic initiatives to improve earnings, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Business and Operating Strategy and Goals.”

Our net operating loss carryforwards could be substantially limited or eliminated if we experience an ownership change as defined in
the Internal Revenue Code.

         As of December 31, 2011 we had approximately $ 7.4 million of net operating losses (“NOLs”). Our ability to use our NOLs and
other pre-ownership change losses (collectively, “Pre-Change Losses”) to offset future taxable income will be limited, and may be eliminated,
if we experience an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended from time to time (the
“Code”). Although we do not expect that the offering itself will result in an ownership change, without taking into account the effects or
likelihood of future transactions in our common stock, we could be close to the “ownership change” threshold upon completion of the offering.

          In general, an ownership change will occur if there is a cumulative increase in our ownership by “5% shareholders” (as defined in the
Code) that exceeds 50% over a rolling three-year period. If we experience an ownership change our Pre-Change Losses will be subject to an
annual limitation of their use, which is generally equal to the fair market value of our outstanding stock immediately before the ownership
change multiplied by the long-term tax-exempt rate, which is currently 3.55 % for ownership changes occurring in December 2011. Depending
on the size of the annual limitation (which is in part a function of our market capitalization at the time of the ownership change) and the
remaining carryforward period for our Pre-Change Losses (U.S. federal net operating losses generally may be carried forward for a period of
20 years), we could realize a permanent loss of some or all of our Pre-Change Losses, which could have a material adverse effect on our results
of operations and financial condition.

        The determination of an ownership change under Section 382 of the Code is often complex, particularly in our case, because of the
absence of precedents involving mutual to stock conversions.


                                                                      27
The market for stock of financial institutions has been unusually volatile lately and our stock price may decline when trading
commences.

          If you purchase shares in the offering you might not be able to sell them later at or above the $10.00 purchase price. Publicly traded
stock, including stock of financial institutions, has recently experienced substantial market price volatility. In several recent transactions,
shares of common stock issued by newly converted savings institutions have traded below the price at which the shares were sold in the
offering conducted by those companies.

The final aggregate purchase price of the shares of common stock in the offering will be based on an independent appraisal and may
not be indicative of the actual value of FS Bancorp.

          The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing
shares of common stock. The valuation is based on estimates and projections of a number of matters, all of which are subject to change from
time to time. After our shares begin trading, the trading price of our common stock will be determined by the marketplace and may be
influenced by many factors, including prevailing interest rates, the overall performance of the economy, investor perceptions of FS Bancorp
and the outlook for the financial institutions industry in our region and in general.

There may be a limited trading market in our common stock, which would hinder your ability to sell our common stock and may lower
the market price of the stock.

          FS Bancorp has never issued stock and, therefore, there is no current trading market for the shares of common stock. While we expect
our common stock to be quoted on the Nasdaq Capital Market under the symbol “FSBW,” we cannot predict whether an active and liquid
trading market for our common stock will develop. Persons purchasing shares may not be able to sell their shares when they desire if a liquid
trading market does not develop or sell them at a price equal to or above the initial purchase price of $10.00 per share even if a liquid trading
market develops. A limited trading market for our common stock may reduce the market value of the common stock and make it difficult to
buy or sell our shares on short notice. A limited trading market could also result in a wider spread between the bid and ask price for the stock,
meaning the highest price being offered for shares for sale at any particular time may be further from the lowest price being offered by buyers
for the stock at that moment than if the stock were more actively traded (the difference between the bid and ask price being the “spread” for the
stock). This could make it more difficult to sell a large number of shares at one time and could mean the sale of a large number of shares at one
time could depress the market price. See “Market for the Common Stock.”

The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting
requirements will increase our expenses.

         As a result of the completion of this offering, we will become a public reporting company. We expect that the obligations of being a
public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on
our management team. Compliance with the Sarbanes-Oxley Act of 2002, particularly Section 404 of the Sarbanes-Oxley Act regarding
required internal controls and procedures, and the related rules and regulations of the SEC will require us to assess our internal controls and
procedures and evaluate our accounting systems. In addition, we may need to hire additional compliance, accounting and financial staff with
appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may
need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our
operating expenses and could divert our management’s attention from our operations.


                                                                        28
Management and the board of directors have significant discretion over the investment of the offering proceeds and may not be able to
achieve acceptable returns on the proceeds from the offering.

          The board of directors and management of FS Bancorp will have discretion in the investment of the capital raised in this offering. We
will use a portion of the net proceeds retained to finance the purchase of common stock in the offering by the employee stock ownership plan
and may use the remaining net proceeds to pay dividends to shareholders, repurchase shares of common stock, purchase securities, deposit
funds in 1st Security Bank of Washington or other financial institutions, acquire other financial services companies or for other general
corporate purposes. 1st Security Bank of Washington may use the proceeds it receives to fund new loans, purchase securities, or for general
corporate purposes. We have not, however, identified specific amounts of proceeds for any of these purposes and we will have significant
flexibility in determining the amount of net proceeds we apply to different uses and the timing of these applications. Our failure to utilize these
funds effectively could reduce our profitability. We have not established a timetable for the effective deployment of the proceeds, and we
cannot predict how long we will need to effectively deploy the proceeds. Investing the offering proceeds in securities until we are able to
deploy the proceeds will provide lower margins than we generally earn on loans, potentially adversely affecting shareholder returns, including
earnings per share, return on assets and return on equity.

The amount of common stock we will control, our articles of incorporation and bylaws, and state and federal law could discourage
hostile acquisitions of control of FS Bancorp.

         Our board of directors and executive officers intend to purchase in the aggregate approximately 4.1 % and 3.1 % of our common stock
at the minimum and maximum of the offering range, respectively. These purchases, together with the purchase by the employee stock
ownership plan of 8.0% of the aggregate shares sold in the offering, as well as the potential acquisition of common stock through the proposed
equity incentive plan could result in ownership by insiders of FS Bancorp in excess of 25.0 % of the total shares issued in the offering at the
maximum of the offering range. This insider ownership and provisions in our articles of incorporation and bylaws may discourage attempts to
acquire FS Bancorp, pursue a proxy contest for control of FS Bancorp, assume control of FS Bancorp by a holder of a large block of common
stock, and remove FS Bancorp’s management, all of which shareholders might think are in their best interests. These provisions include a
prohibition on any holder of common stock voting more than 10% of the outstanding common stock. See “Restrictions on Acquisition of FS
Bancorp, Inc. and 1st Security Bank of Washington - Anti-takeover Provisions in FS Bancorp’s Articles of Incorporation and Bylaws.”

         In addition, the business corporation law of Washington, the state where FS Bancorp is incorporated, provides for certain restrictions
on acquisition of FS Bancorp. Furthermore, federal law restricts acquisitions of control of bank holding companies such as FS Bancorp.

The implementation of an equity incentive plan may dilute your ownership interest.

          We intend to adopt an equity incentive plan following the offering. This stock-based incentive plan will be funded through either
open market purchases, if permitted, or from the issuance of authorized but unissued shares of our common stock. In the event authorized but
unissued shares of our common stock are used to fund stock options or awards of shares of common stock under the plan in amounts equal to
10.0% and 4.0%, respectively, of the shares to be outstanding after the offering, shareholders would experience dilution in their ownership
interest of 9.1% and 3.9%, respectively, or 12.3% in the aggregate. See “Pro Forma Data” and “Management - Benefits to Be Considered
Following Completion of the Conversion.”


                                                                        29
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is
needed or the cost of that capital may be very high.

         We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We
believe the net proceeds of this offering will be sufficient to permit 1st Security Bank of Washington to maintain regulatory capital
compliance for the foreseeable future. Nonetheless, we may at some point need to raise additional capital to support continued growth.

          Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our
control, and on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed on terms that
are acceptable to us, or at all. If we cannot raise additional capital when needed, our operations could be materially impaired and our financial
condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by
Federal Deposit Insurance Corporation and the Washington Department of Financial Institutions, we may be subject to additional adverse
regulatory action. See “How We Are Regulated.”


                                                                        30
                                                SELECTED FINANCIAL AND OTHER DATA

         The Financial Condition Data as of December 31, 2011 and 2010 and the Operating Data for the years ended December 31, 2011 and
2010 presented below are derived from the audited financial statements and related notes included elsewhere in the prospectus. The following
information is only a summary and you should read it in conjunction with our financial statements and related notes beginning on page F - 1
and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

                                                                                                December 31,
                                                              2011              2010                   2009             2008            2007
                                                                                                (In thousands)
Selected Financial Condition Data:

Total assets                                              $    283,793      $     292,334         $     281,836     $    255,368    $    263,066
Loans receivable, net (1)                                      217,131            230,822               231,441          222,974         237,807
Investment securities available-for-sale, at fair value         26,899              7,642                   603            2,834           4,485
Investment securities, at amortized cost:
 Corporate debt securities                                          ---                ---                   ---              ---            136
Federal Home Loan Bank stock                                     1,797              1,797                 1,797            1,797           1,797
Deposits                                                       246,418            243,957               230,985          216,056         208,863
Borrowings                                                       8,900             21,900                25,900            9,400          19,800
Total equity                                                    26,767             24,795                23,315           27,862          31,689

                                                                                    Years Ended December 31,
                                                              2011              2010             2009                   2008            2007
                                                                                          (In thousands)
Selected Operations Data:

Total interest and dividend income                        $      16,478     $         17,333      $      16,404     $     16,899    $     17,619
Total interest expense                                            3,006                3,886              4,521            5,798           6,942
 Net interest income                                             13,472               13,447             11,883           11,101          10,677
Provision for loan losses                                         2,369                3,480              7,067            4,937             578
 Net interest income after provision
  for loan losses                                                11,103                9,967              4,816            6,164          10,099
Fees and service charges                                          1,971                2,255              2,839            2,667           2,718
Gain (loss) on sale on assets                                       172                1,006              1,398             (306 )             7
Other noninterest income                                            332                  406                252              552             640
 Total noninterest income                                         2,475                3,667              4,489            2,913           3,365
Total noninterest expense                                        12,033               12,032             13,879           12,881          17,322
Income (loss) before provision for taxes                          1,545                1,602             (4,574 )         (3,804 )        (3,858 )
Income tax provision                                                 ---                  ---                ---              ---            271
 Net income (loss)                                        $       1,545     $          1,602      $      (4,574 )   $     (3,804 ) $      (4,129 )




(1)     Net of allowances for loan losses, loans in process and deferred loan fees.


                                                                       31
                                                                                      At or For the
                                                                               Years Ended December 31,
                                                        2011              2010            2009              2008              2007

Selected Financial Ratios and Other Data:
Performance ratios:
 Return on assets (ratio of net income (loss) to
                                                                                                    )                 )                 )
 average total assets)                                         0.56 %         0.60 %          (1.75 %           (1.55 %           (1.60 %
 Return on equity (ratio of net income (loss)
                                                                                                    )                 )                 )
   to average equity)                                          5.92 %         6.54 %         (16.84 %          (11.95 %          (11.82 %
 Yield on average interest-earning assets                      6.34 %         6.86 %           6.62 %            7.30 %            7.28 %
 Rate paid on average interest-bearing liabilities             1.31 %         1.75 %           2.12 %            2.99 %            3.50 %
 Interest rate spread information:
  Average during period                                        5.04 %         5.11 %           4.50 %              4.31 %            3.79 %
  End of period                                                5.50 %         4.99 %           4.17 %              4.24 %            3.78 %
 Net interest margin (1)                                       5.19 %         5.32 %           4.79 %              4.80 %            4.41 %
 Operating expense to average total assets                     4.35 %         4.49 %           5.32 %              5.24 %            6.69 %
 Average interest-earning assets to average
  interest-bearing liabilities                             112.90 %         113.98 %        116.01 %          119.50 %          121.83 %
 Efficiency ratio (2)                                       75.46 %          70.31 %         84.77 %           91.92 %          123.36 %

Asset quality ratios:
 Non-performing assets to total assets at end
 of period (3)                                                 2.43 %         3.45 %           4.64 %              0.99 %            0.08 %
 Non-performing loans to total gross loans (4)                 1.01 %         2.66 %           3.12 %              1.09 %            0.08 %
 Allowance for loan losses to non-performing
 loans (4)                                                 195.11 %          93.70 %         99.34 %          225.00 %         1499.45 %
 Allowance for loan losses to gross loans receivable         1.97 %           2.50 %          3.10 %            2.45 %            1.14 %

Capital ratios:
 Equity to total assets at end of period                       9.43 %         8.48 %          8.27 %           10.91 %           12.05 %
 Average equity to average assets                              9.44 %         9.13 %         10.40 %           12.95 %           13.50 %

Other data:
 Number of full service offices                                  6               6               8                  12                12
 Full-time equivalent employees                                 86              79              84                 112               125



(1)      Net interest income divided by average interest earning assets.
(2)      Total non-interest expense as a percentage of net interest income and total other non-interest income.
(3)      Non-performing assets consists of non-performing loans (which include non-accruing loans and accruing loans more than 90 days
         past due), foreclosed real estate and other repossessed assets.
(4)      Non-performing loans consists of non-accruing loans and accruing loans more than 90 days past due.


                                                                     32
                                     A WARNING ABOUT FORWARD-LOOKING STATEMENTS

         This prospectus 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:

                 ●             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:

                 ●             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 and write
                               offs and 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;

                 ●             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;

                 ●             increases in premiums for deposit insurance;

                 ●             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;

                 ●             increased competitive pressures among financial services companies;

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

                 ●             our ability to attract and retain deposits;

                 ●             our ability to control operating costs and expenses;

                 ●             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 Act,
                               changes in regulation policies and principles, or the interpretation of regulatory capital or other rules;

                 ●             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;

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


                                                                         33
                 ●             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 and other risks described elsewhere in this prospectus.

         Any of the forward-looking statements that we make in this prospectus and in other public statements we make 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. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these
forward-looking statements and you should not rely on such statements.

                                                             FS BANCORP, INC.

         We are a newly formed Washington corporation. We are conducting the stock offering in connection with the conversion of 1st
Security Bank of Washington from the mutual to the stock form of organization. Following the completion of the offering, we will be a bank
holding company and our primary regulator will be the Board of Governors of the Federal Reserve System. See “How We Are Regulated -
Regulation and Supervision of FS Bancorp, Inc.”

         Following the conversion we will have no significant assets other than all of the outstanding shares of common stock of 1st Security
Bank of Washington, the net proceeds we keep from the offering and a loan to the FS Bancorp employee stock ownership plan. We will have
no significant liabilities. See “How We Intend to Use the Proceeds From this Offering.” Our board of directors and management, and the
board of directors and management of 1st Security Bank of Washington, are substantially the same. We utilize the support staff and offices of
1st Security Bank of Washington and pay 1st Security Bank of Washington for these services. If we expand or change our business in the
future, we may hire our own employees.

        The principal executive offices of FS Bancorp are located at 6920 220th Street SW, Mountlake Terrace, Washington 98043 and its
telephone number is (425) 771-5299.

                                                1st SECURITY BANK OF WASHINGTON

          1st Security Bank of Washington is a relationship-driven community bank. We deliver banking and financial services to local
families, local and regional businesses and industry niches within distinct Puget Sound area communities. We emphasize long-term
relationships with families and businesses within the communities we serve, working with them to meet their financial needs. We are also
actively involved in community activities and events within these market areas, which further strengthens our relationships within these
markets. We have been serving the Puget Sound area since 1936. Originally chartered as a credit union, previously known as Washington’s
Credit Union, we served various select employment groups. On April 1, 2004, we converted from a credit union to a Washington
state-chartered mutual savings bank. Upon completion of the conversion, 1st Security Bank of Washington will be a Washington
state-chartered stock savings bank and the wholly owned subsidiary of FS Bancorp. At December 31, 2011, we maintained six branch
locations, along with our headquarters, and had total assets of $ 283.8 million, total deposits of $ 246.4 million and total equity of $ 26.8
million.

          1st Security Bank of Washington is a diversified lender with a focus on the origination of home improvement loans, commercial real
estate mortgage loans, commercial business loans and second mortgage/home equity loan products. Consumer loans, in particular indirect
home improvement loans, represent the largest portion of the loan portfolio and have traditionally been the mainstay of the bank’s lending
strategy, a carryover from its days as a credit union. Going forward, we plan to place more emphasis on certain lending products, such as
commercial real estate, commercial business and residential construction lending, while maintaining the current size of our consumer loan
portfolio. We also recently reintroduced in-house originations of residential mortgage loans, primarily for sale into the secondary market,
through a mortgage banking program. Our future lending strategies are intended to take advantage of: (1) our historical strength in indirect
consumer lending, (2) recent market dislocation that has created new lending opportunities, and (3) relationship lending. Retail deposits will
continue to serve as an important funding source. See “Risk Factors - Risks Related to Our Business.” For more information regarding the
business and operations of 1st Security Bank of Washington, see “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and “Business of 1st Security Bank of Washington.”


                                                                       34
         1st Security Bank of Washington is examined and regulated by the Washington Department of Financial Institutions, its primary
regulator, and by the Federal Deposit Insurance Corporation. 1st Security Bank of Washington is required to have certain reserves set by the
Board of Governors of the Federal Reserve System and is a member of the Federal Home Loan Bank of Seattle, which is one of the 12 regional
banks in the Federal Home Loan Bank System.

       The principal executive offices of 1st Security Bank of Washington are located at 6920 220th Street SW, Mountlake Terrace,
Washington 98043 and its telephone number is (425) 771-5299.

                                HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING

          Although the actual net proceeds from the sale of the shares of common stock cannot be determined until the conversion is completed,
we presently anticipate that the net proceeds will be between $ 18.7 million at the minimum of the offering range and $ 26.0 million at the
maximum of the offering range and may be up to $30.2 million assuming an increase in the estimated offering range by 15%. See “Pro Forma
Data” and “The Conversion and Stock Offering - How We Determined Our Price and the Number of Shares to Be Issued in the Stock Offering”
as to the assumptions used to arrive at these amounts.

         We intend to use the net proceeds received from the stock offering as follows:

                                                                                                                     Maximu       Maximum,
                                                                                                        Minimum          m        as adjusted
                                                                                                              (Dollars in thousands)

Retained by FS Bancorp                                                                                  $    7,694     $   10,736    $    12,485
Loan to employee stock ownership plan                                                                        1,666          2,254          2,592
Contributed to 1st Security Bank of Washington                                                               9,360         12,990         15,077
Net proceeds from stock offering                                                                        $   18,720     $   25,980    $    30,154


         FS Bancorp will purchase all of the capital stock of 1st Security Bank of Washington to be issued in the offering in exchange for an
amount of net proceeds sufficient for the bank to have at least 10% tangible capital upon completion of the offering. In no event will less than
50% of the net proceeds be transferred to 1st Security Bank of Washington in exchange for its shares. The portion of the net proceeds used by
FS Bancorp to purchase the capital stock of 1st Security Bank of Washington will be added to the bank’s general funds for general corporate
purposes. The net proceeds 1st Security Bank of Washington receives from FS Bancorp are initially intended to be invested into short-term
liquid investments. In addition, a majority of the net proceeds retained by FS Bancorp, excluding the amount needed to fund the loan to the
employee stock ownership plan, is expected to be deposited with 1st Security Bank of Washington as deposits, providing additional funds for
reinvestment in earning assets.

         Except as described above, neither FS Bancorp , nor 1st Security Bank of Washington , has any specific plans for the investment of
the proceeds of this offering, nor have they allocated a specific portion of the proceeds to any particular use. For a discussion of our business
reasons for undertaking the conversion, see “The Conversion and Stock Offering - Our Reasons for the Conversion.”


                                                                        35
         FS Bancorp intends to use a portion of the net proceeds to make a loan directly to the employee stock ownership plan to enable it to
purchase up to 8% of the aggregate shares of common stock sold in the offering; or, alternatively, in the open market after the
conversion. Based upon the sale of 2,082,500 and 2,817,500 shares of common stock in the offering at the minimum and maximum of the
estimated offering range, respectively, the loan to the FS Bancorp employee stock ownership plan would be $1.7 million and $2.3 million,
respectively. See “Management - Benefits to Be Considered Following Completion of the Conversion - Employee Stock Ownership Plan.”

         Within one year after completion of the offering, FS Bancorp intends to adopt an equity incentive plan, subject to shareholder
approval, and use a portion of its proceeds to fund the purchase of shares in the open market for the plan. The equity incentive plan intends to
purchase in the open market 4% of the aggregate shares sold in the offering, or $833,000 and $1.1 million at the minimum and maximum of the
estimated offering range, respectively.

         The net proceeds may vary because total expenses of the conversion may be more or less than those estimated. The net proceeds will
also vary if the number of shares to be issued in the conversion is adjusted to reflect a change in the estimated pro forma market value of 1st
Security Bank of Washington. Payments for shares made through withdrawals from existing deposit accounts at 1st Security Bank of
Washington will not result in the receipt of new funds for investment by 1st Security Bank of Washington but will result in a reduction of 1st
Security Bank of Washington’s interest expense and liabilities as funds are transferred from interest-bearing certificates or other deposit
accounts.

                                                  OUR POLICY REGARDING DIVIDENDS

         The board of directors of FS Bancorp intends to pay cash dividends on the common stock in the future. However, the amount and
timing of any dividends has not yet been determined. The payment of dividends will depend upon a number of factors, including capital
requirements, FS Bancorp’s and 1st Security Bank of Washington’s financial condition and results of operations, tax considerations, statutory
and regulatory limitations and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid,
dividends will not be reduced or eliminated in future periods. FS Bancorp may file consolidated tax returns with 1st Security Bank of
Washington. Accordingly, it is anticipated that any cash distributions made by FS Bancorp to its shareholders would be treated as cash
dividends and not as a return of capital for federal and state tax purposes.

          Dividends from FS Bancorp will depend, in large part, upon receipt of dividends from 1st Security Bank of Washington, because FS
Bancorp initially will have limited sources of funds other than the portion of the proceeds retained from this offering, dividends from 1st
Security Bank of Washington, earnings from the investment of proceeds retained by FS Bancorp from the sale of shares of common stock and
interest payments with respect to FS Bancorp’s loan to the FS Bancorp employee stock ownership plan. Under Washington law, FS Bancorp is
prohibited from paying a dividend if, as a result of its payment, it would be unable to pay its debts as they become due in the normal course of
business, or if its total liabilities would exceed its total assets. In addition, as a bank holding company, banking regulations prohibit a return of
capital during the three-year term of the business plan submitted by FS Bancorp in connection with the stock offering. See “How We Are
Regulated – Limitations on Dividends and Stock Repurchases.”


                                                                         36
                                                MARKET FOR THE COMMON STOCK

         FS Bancorp has never issued capital stock, and, consequently, there is no established market for the common stock at this time. FS
Bancorp has applied to have its common stock listed on the Nasdaq Capital Market under the symbol “FSBW.” There can be no assurance,
however, that FS Bancorp will meet Nasdaq’s listing requirements. The development of a liquid public market depends on the existence of
willing buyers and sellers, the presence of which is not within the control of FS Bancorp, 1st Security Bank of Washington or any market
maker. Accordingly, the number of active buyers and sellers of the common stock at any particular time may be limited. There can be no
assurance, however, that purchasers will be able to sell their shares at or above the initial purchase price of $10.00 per share.


                                                                      37
                                                            CAPITALIZATION

          The following table presents the capitalization of 1st Security Bank of Washington at December 31, 2011, and the pro forma
consolidated capitalization of FS Bancorp after giving effect to the conversion, excluding assumed earnings on the net proceeds, based upon the
sale of the number of shares shown below and the other assumptions set forth under “Pro Forma Data.”


                                                      1st Security
                                                       Bank of
                                                     Washington
                                                     Capitalization
                                                           At
                                                     December 31,                             FS Bancorp – Pro Forma
                                                         2011                            Based Upon Sale at $10.00 Per Share
                                                                                                                                     3,240,125
                                                                             2,082,500         2,450,000            2,817,500        Shares (1)
                                                                               Shares            Shares               Shares       (Maximum of
                                                                            (Minimum of        (Midpoint           (Maximum          Range, as
                                                                              Range)           of Range)            of Range)        Adjusted)
                                                                                    (Dollars in thousands)

Deposits (2)                                     $           246,418        $    246,418      $    246,418     $       246,418     $    246,418
Borrowings                                                     8,900               8,900             8,900               8,900            8,900
 Total deposits and borrowings                   $           255,318        $    255,318      $    255,318     $       255,318     $    255,318


Shareholders’ equity
  Preferred stock, $0.01 par value, 5,000,000
    shares authorized, none issued               $                    ---   $          ---    $         ---    $            ---    $         ---
  Common stock, $0.01 par value, 45,000,000
    shares authorized; shares to be issued as
    reflected                                                     ---                  21               25                  28               32
  Additional paid-in capital                                      ---              18,699           22,326              25,952           30,122
  Retained earnings (3)                                       26,451               26,451           26,451              26,451           26,451
  Accumulated other comprehensive income                         316                  316              316                 316              316

Less:
  Common stock to be acquired by the
    employee stock ownership plan (4)                                 ---          (1,666 )         (1,960 )            (2,254 )         (2,592 )
  Common stock to be acquired for restricted
    stock awards (5)                                                  ---            (833 )           (980 )            (1,127 )         (1,296 )

Total shareholders’ equity                       $            26,767        $      42,988     $     46,178     $        49,366     $     53,033



Total shareholders’ equity as a percentage of
  total assets                                                   9.43 %             14.33 %          15.23 %             16.11 %          17.10 %



(1)    As adjusted to give effect to an increase in the number of shares of common stock which would be offered as a result of a 15% increase
       in the estimated offering range to reflect demand for shares, changes in market and general financial conditions following the
       commencement of the subscription and community offerings or regulatory considerations.
(2)    Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion. These withdrawals
       would reduce pro forma deposits by the amount of the withdrawals.
(3)    The retained earnings of 1st Security Bank of Washington will be substantially restricted after the conversion. Additionally, 1st
       Security Bank of Washington will be prohibited from paying any dividend that would reduce its regulatory capital below the amount
       required for the liquidation account that will be set up in connection with the conversion. See “The Conversion and Stock Offering -
       Effects of the Conversion - Depositors’ Rights if We Liquidate.”
(4)    Assumes that 8% of the shares sold in the offering will be purchased by the employee stock ownership plan financed by a loan from FS
      Bancorp. The loan will be repaid principally from 1st Security Bank of Washington’s contributions to the employee stock ownership
      plan. Since FS Bancorp will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no
      liability will be reflected on FS Bancorp’s consolidated financial statements. Accordingly, the amount of shares of common stock
      acquired by the employee stock ownership plan is shown in this table as a reduction of total shareholders’ equity.
(5)   Assumes that a number of shares equal to 4.0% of the shares outstanding after the offering are purchased in the open market by the
      stock-based incentive plan, with funding from FS Bancorp, subsequent to the offering at the purchase price of $10.00 per share. The
      stock-based incentive plan is subject to shareholder approval.


                                                                    38
                                                      1st SECURITY BANK OF WASHINGTON
                                                                 EXCEEDS ALL
                                                     REGULATORY CAPITAL REQUIREMENTS

          At December 31, 2011, 1st Security Bank of Washington exceeded all of its applicable regulatory capital requirements. The following
table sets forth the regulatory capital of 1st Security Bank of Washington at December 31, 2011 and the pro forma regulatory capital of 1st
Security Bank of Washington after giving effect to the conversion and offering, based upon the sale of the number of shares shown in the
table. The pro forma regulatory capital amounts reflect the receipt by 1st Security Bank of Washington of 50% of the net stock proceeds. The
pro forma risk-based capital amounts assume the investment of the net proceeds received by 1st Security Bank of Washington in assets that
have a risk-weight of 20% or higher under applicable regulations, as if the net proceeds had been received and so applied at December 31,
2011.

                                                                                           Pro Forma at December 31, 2011
                                                                                                                                                 3,240,125 Shares
                                                        2,082,500 shares               2,450,000 Shares             2,817,500 Shares          Sold at $10.00 per Share
                                   At                Sold at $10.00 per Share      Sold at $10.00 per Share      Sold at $10.00 per Share      (Maximum of Range,
                             December 31, 2011        (Minimum of Range)              (Midpoint of Range)         (Maximum of Range)                as Adjusted)
                                       Percent of                   Percent of                      Percent of                   Percent of                  Percent of
                            Amount      Assets (1)    Amount          Assets         Amount          Assets       Amount          Assets       Amount          Assets
                                                                                 (Dollars in thousands)
Equity capital under
  generally accepted
  accounting principles
  (“GAAP”)                  $ 26,767          9.43 % $   34,461          11.76 % $      35,982          12.20 % $    37,503          12.64 % $    39,252          13.13 %


Tier I leverage             $ 26,431          9.30 % $   34,125        11.63 % $         35,646        12.07 % $      37,167        12.51 % $     38,916        13.00 %
Requirement                   11,365          4.00       11,742           4.00          11,814            4.00       11,887            4.00       11,970           4.00
Excess                      $ 15,066         5.30 % $    22,383          7.63 % $       23,832           8.07 % $    25,280           8.51 % $    26,946          9.00 %


Tier I risk based           $ 26,431        11.04 % $    34,125        14.14 % $        35,646         14.75 % $     37,167         15.35 % $     38,916        16.05 %
Requirement                    9,579          4.00       9,654            4.00           9,668            4.00       9,683             4.00        9,699           4.00
Excess                      $ 16,852         7.04 % $    24,471        10.14 % $        25,978         10.75 % $     27,484         11.35 % $     29,217        12.05 %


Total risk based            $ 29,441        12.29 % $     37,135       15.39 % $        38,656         15.99 % $      40,177        16.60 % $     41,926        17.29 %
Risk based requirement        19,158          8.00       19,307           8.00          19,336            8.00       19,365            8.00       19,399           8.00
Excess                      $ 10,283         4.29 % $    17,828          7.39 % $       19,320           7.99 % $    20,812           8.60 % $    22,527          9.29 %

Reconciliation of capital
   infused into 1st
   Security Bank of
   Washington:
Net proceeds infused                                 $    9,360                    $    11,175                   $   12,990                   $   15,077
  Common stock acquired
by
    employee stock
ownership plan                                            (1,666 )                       (1,960 )                     (2,254 )                    (2,592 )
Pro forma increase in
GAAP and
  regulatory capital                                 $    7,694                    $     9,215                   $   10,736                   $   12,485




(1) Adjusted total or adjusted risk-weighted assets, as appropriate.


                                                                                   39
                                                             PRO FORMA DATA

         We cannot determine the actual net proceeds from the sale of our common stock until the conversion is completed. However, we
estimate that net proceeds will be between $ 18.7 million and $ 26.0 million, or $30.2 million if the estimated offering range is increased by
15%, based upon the following assumptions:

                ●               all shares of common stock will be sold through non-transferable rights to subscribe for the common stock, in
                                order of priority, to:

                    ●     eligible account holders, who are depositors of 1st Security Bank of Washington with account balances of at least
                          $50.00 as of the close of business on June 30, 2007,

                    ●    the proposed employee stock ownership plan, which will purchase 8% of the shares of common stock sold in the
                         offering,

                    ●    supplemental eligible account holders, who are depositors of 1st Security Bank of Washington (other than directors
                         and executive officers and their associates) with account balances of at least $50.00 as of the close of business on
                         ____________ __, 2012, and

                    ●    other members, who are depositors of 1st Security Bank of Washington as of the close of business on _______ __,
                         2012, other than eligible account holders or supplemental eligible account holders.

                ●               Keefe, Bruyette & Woods will receive a success fee equal to 1.0% of the gross proceeds from the subscription
                                offering (estimated to be 70% of the shares sold), excluding shares of common stock sold to directors, executive
                                officers, employees (and members of their immediate families) and the employee stock ownership plan and a
                                success fee equal to 2.0% of the gross proceeds from the direct community offering (estimated to be 30% of the
                                shares sold); and

                ●               total expenses, excluding the success fee paid to Keefe, Bruyette & Woods, are estimated to be approximately $
                                1.9 million as of the completion of the Offering . Actual expenses may vary from those estimated; and

                ●               FS Bancorp will grant options under the equity incentive plan to acquire common stock equal to 10.0% of the
                                shares of common stock outstanding after the offering, and will grant restricted stock awards in an amount
                                equal to 4.0% of such shares. FS Bancorp will acquire common stock underlying these awards through open
                                market purchases. The estimated fair value of the options, estimated using an application of the Black-Scholes
                                option pricing model, is recognized as an expense over the requisite service period of the options. The expense
                                recorded in the pro forma financial information assumes the retrospective method under U.S. generally accepted
                                accounting principles.

          Pro forma net income and shareholders’ equity of FS Bancorp have been calculated for the year ended December 31, 2011 as if the
common stock to be issued in the conversion had been sold at the beginning of the period and the net proceeds had been invested at 0.83% ,
which represent the yield on five-year U.S. Government securities at December 31, 2011. We believe that this rate more accurately reflects a
pro forma reinvestment rate than the arithmetic average method, which assumes reinvestment of the net proceeds at a rate equal to the average
of the yield on interest-earning assets and the cost of deposits for this period . The effect of withdrawals from deposit accounts for the purchase
of common stock has not been reflected. A tax rate of 34% has been assumed for the period resulting in an after-tax yield of 0.55 % for the
year ended December 31, 2011. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma
amounts by the indicated number of shares of common stock, as adjusted to give effect to the shares purchased by the employee stock
ownership plan. See Note 2 to the following tables. As discussed under “How We Intend to Use the Proceeds From this Offering,” FS
Bancorp intends to make a loan to fund the purchase of 8% of the common stock sold in the offering by the employee stock ownership plan and
intends to retain 50% of the net proceeds from the conversion.


                                                                        40
          No effect has been given in the tables to the issuance of additional shares of common stock pursuant to any stock options available for
grant under the equity incentive plan. The table below gives effect to the restricted stock awards that would be available for grant under the
equity incentive plan and which is expected to be adopted by FS Bancorp following the conversion and presented to shareholders for approval
at an annual or special meeting of shareholders to be held at least six months following the completion of the conversion. If the equity
incentive plan is approved by shareholders, FS Bancorp intends to acquire an amount of common stock equal to 4% of the shares of common
stock issued in the conversion, either through open market purchases or from authorized but unissued shares of common stock, if
permissible. See “Management - Benefits – Equity Incentive Plan.” The following tables assume that shareholder approval has been obtained,
as to which there can be no assurance, and that the shares acquired by FS Bancorp are purchased in the open market at $10.00 per share. No
effect has been given to FS Bancorp’s results of operations after the conversion, the market price of the common stock after the conversion, or
a less than 4% purchase by FS Bancorp.

          The following pro forma information may not be representative of the financial effects of the foregoing transactions at the dates on
which the transactions actually occur and should not be taken as indicative of future results of operations. Pro forma shareholders’ equity
represents the difference between the stated amount of assets and liabilities of FS Bancorp computed in accordance with GAAP. Shareholders’
equity does not give effect to intangible assets in the event of a liquidation to 1st Security Bank of Washington’s bad debt reserve or to the
liquidation account to be maintained by 1st Security Bank of Washington. The pro forma shareholders’ equity is not intended to represent the
fair market value of the common stock and may be different than amounts that would be available for distribution to shareholders in the event
of liquidation.

        The tables on the following pages summarize historical data of FS Bancorp’s pro forma data at or for the year ended December 31,
2011 based on the assumptions set forth above and in the tables and should not be used as a basis for projection of the market value of our
common stock following the conversion and the offering.


                                                                       41
                                                                                 At or For the Year Ended December 31, 2011
                                                                                                                                 3,240,125
                                                                          2,082,500         2,450,000         2,817,500         Shares Sold
                                                                         Shares Sold       Shares Sold       Shares Sold             at
                                                                              at                at                at            $10.00 Per
                                                                         $10.00 Per        $10.00 Per        $10.00 Per            Share
                                                                            Share             Share             Share          (Maximum of
                                                                         (Minimum           (Midpoint        (Maximum            Range, as
                                                                          of Range)         of Range)         of Range)         Adjusted) (1)
                                                                                             (Dollars in thousands)

Pro forma market capitalization:
Gross proceeds of offering                                               $     20,825      $     24,500      $     28,175      $      32,401
  Less expenses                                                                (2,105 )          (2,150 )          (2,195 )           (2,247 )
Estimated net proceeds                                                         18,720            22,350            25,980             30,154
 Less: common stock acquired by employee stock ownership plan (2)              (1,666 )          (1,960 )          (2,254 )           (2,592 )
 Less: common stock acquired for restricted stock awards (3)                     (833 )            (980 )          (1,127 )           (1,296 )
Estimated investable net proceeds                                        $     16,221      $     19,410      $     22,599      $      26,266

Pro forma net income for the year ended December 31, 2011 :
Historical                                                               $      1,545      $      1,545      $      1,545      $       1,545
Pro forma income on net proceeds                                                   89               106               124                144
  Less: pro forma employee stock ownership plan adjustment (2)                   (110 )            (129 )            (149 )             (171 )
  Less: pro forma restricted stock award adjustment (3)                          (110 )            (129 )            (149 )             (171 )
  Less: pro forma stock option adjustment (4)                                    (102 )            (120 )            (138 )             (159 )
Pro forma net income                                                     $      1,312      $      1,273      $      1,233      $       1,188


Per share net income for the year ended December 31, 2011 :
Historical                                                               $        0.80     $        0.68     $        0.59     $         0.51
Pro forma income on net proceeds                                                  0.05              0.05              0.05               0.05
  Less: pro forma employee stock ownership plan adjustment (2)                   (0.06 )           (0.06 )           (0.06 )            (0.06 )
  Less: pro forma restricted stock award adjustment (3)                          (0.06 )           (0.06 )           (0.06 )            (0.06 )
  Less: pro forma stock option adjustment (4)                                    (0.05 )           (0.05 )           (0.05 )            (0.05 )
Pro forma net income per share (5)                                       $        0.68     $        0.56     $        0.47     $         0.39


Offering price as a multiple of pro forma net income per share                  14.71 x           17.86 x           21.28 x            25.64 x

Number of shares outstanding for pro forma income per share
calculations                                                                 1,932,560         2,273,600         2,614,640         3,006,836

                                                    (table continued on following page)                               (Footnotes on page 44)


                                                                    42
                                                                                            At or For the Year Ended December 31, 2011
                                                                                                                                                3,240,125
                                                                                  2,082,500            2,450,000           2,817,500          Shares Sold at
                                                                                Shares Sold at       Shares Sold at      Shares Sold at        $10.00 Per
                                                                                 $10.00 Per           $10.00 Per          $10.00 Per              Share
                                                                                    Share                Share               Share            (Maximum of
                                                                                 (Minimum              (Midpoint          (Maximum              Range, as
                                                                                  of Range)            of Range)           of Range)           Adjusted) (1)
                                                                                                         (Dollars in thousands)

Pro forma shareholders’ equity at December 31, 2011 :
Historical                                                                      $      26,767        $      26,767        $      26,767       $      26,767
Estimated net proceeds                                                                 18,720               22,350               25,980              30,154
                                                                                                 )                    )                   )                    )
 Less: common stock acquired by the employee stock ownership plan (2)                   (1,666               (1,960              (2,254               (2,592
                                                                                                 )                    )                   )                    )
  Less: common stock acquired for restricted stock awards (3)(4)                         (833                 (980               (1,127              (1,296
Pro forma shareholders’ equity                                                  $      42,988        $      46,177        $      49,366       $      53,033


Pro forma shareholders’ equity per share at December 31, 2011 :
Historical                                                                      $       12.85        $       10.93        $        9.50       $         8.26
Estimated net proceeds                                                                   8.99                 9.12                 9.22                 9.31
                                                                                                 )                    )                   )                    )
 Less: common stock acquired by the employee stock ownership plan (2)                    (0.80                (0.80               (0.80                (0.80
                                                                                                 )                    )                   )                    )
  Less: common stock acquired for restricted stock awards (3)                           (0.40                (0.40                (0.40               (0.40
Pro forma shareholders’ equity per share (5)                                    $       20.64        $       18.85        $       17.52       $       16.37


Offering price as a percentage of pro forma shareholders’ equity                        48.45 %              53.05 %              57.08 %             61.09 %

Number of shares outstanding for pro forma book value per share calculations        2,082,500            2,450,000            2,817,500           3,240,125

                                                                                                                              (Footnotes on following page)


                                                                           43
(1)   As adjusted to give effect to an increase in the number of shares which could occur as a result of a 15% increase in the offering range to
      reflect demand for the shares, changes in market and financial conditions following the commencement of the offering or regulatory
      considerations.

(2)   Assumes that 8% of shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes
      of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from FS
      Bancorp. 1st Security Bank of Washington intends to make annual contributions to the employee stock ownership plan in an amount at
      least equal to the required principal and interest payments on the debt. 1st Security Bank of Washington’s total annual payments on the
      employee stock ownership plan debt are based upon a 10 year loan. The pro forma adjustments assume that the employee stock
      ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be
      paid by 1st Security Bank of Washington, the fair value of the common stock remains equal to the subscription price and the employee
      stock ownership plan expense reflects an effective combined federal and state tax rate of 34%. The unallocated employee stock
      ownership plan shares are reflected as a reduction of shareholders’ equity. No reinvestment is assumed on proceeds contributed to fund
      the employee stock ownership plan. The pro forma net income further assumes that 16,660, 19,600, 22,540 and 25,921 shares were
      committed to be released during the year ended December 31, 2011 , at the minimum, midpoint, maximum, and adjusted maximum of
      the offering range, respectively, and only the employee stock ownership plan shares committed to be released during the period were
      considered outstanding for purposes of income per share calculations. See “Management - Benefits - Employee Stock Ownership
      Plan.”

(3)   If the stock-based incentive plan is approved by FS Bancorp’s shareholders, FS Bancorp may purchase an aggregate number of shares
      of common stock equal to 4.0% of the shares outstanding after the offering (or possibly a greater number of shares if the plan is
      implemented more than one year after completion of the conversion), to be awarded as restricted stock to officers and directors under
      the stock-based incentive plan. Shareholder approval of the stock-based incentive plan and purchases of stock for grant under the plan
      may not occur earlier than six months after the completion of the offering. The shares may be issued directly by FS Bancorp or
      acquired through open market purchases. The funds to be used to purchase the shares to be awarded by the stock-based incentive plan
      will be provided by FS Bancorp. The table assumes that (i) the shares to be awarded under the stock-based incentive plan are acquired
      through open market purchases at $10.00 per share, (ii) 20.0% of the amount contributed for restricted stock awards is expensed during
      the year ended December 31, 2011 (based on a five-year vesting period), and (iii) the stock-based incentive plan expense reflects an
      estimated marginal federal and state effective tax rate of 34%. Assuming shareholder approval of the stock-based incentive plan and
      that shares of common stock (equal to 4.0% of the shares outstanding after the offering) are awarded through the use of authorized but
      unissued shares of common stock, shareholders would have their ownership and voting interests diluted by approximately 3.9%.

(4)   Gives effect to the options we expect to grant under the stock-based incentive plan, which is expected to be adopted by FS Bancorp
      following the offering and presented for shareholder approval not earlier than six months after the completion of the offering. We have
      assumed that options will be granted to acquire a number of shares equal to 10% of the shares outstanding after the offering. In
      calculating the pro forma effect of the stock options, it is assumed that the exercise price of the stock options and the trading price of the
      stock at the date of grant were $10.00 per share, the estimated grant-date fair value pursuant to the application of the Black-Scholes
      option pricing model (see “Summary – Benefits to Management from the Offering” for applicable assumptions) was $ 2.68 for each
      option and the aggregate grant-date fair value of the stock options was amortized to expense on a straight line basis over a five-year
      vesting period of options with a 7.5 year expected life . Finally, we assumed that 25.0% of the stock options were non-qualified options
      granted to directors, resulting in a tax benefit (at an assumed rate of 34%) for a deduction equal to the grant date fair value of the
      option. Under the above assumptions, the granting of options under the stock-based incentive plan will result in no additional shares
      under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price
      of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise options under the
      stock-based incentive plan are obtained from the issuance of authorized but unissued shares, our net income per share and shareholders’
      equity per share will decrease. This will also have a dilutive effect of up to 9.1% on the ownership interest of persons who purchase
      common stock in the offering.

(5)   Adjusted shares used for the pro-forma net income per share computations are determined by taking the number of shares assumed to
      be sold in the offering and subtracting the employee stock ownership plan shares that have not been committed for release during the
      period. See note 2, above.


                                                                       44
                                             PROPOSED PURCHASES BY MANAGEMENT

          The following table sets forth for each of the directors and executive officers of FS Bancorp and 1st Security Bank of Washington and
for all of the directors and executive officers as a group, the proposed purchases of common stock, assuming sufficient shares are available to
satisfy their subscriptions. The amounts include shares that may be purchased through individual retirement accounts and by associates. These
purchases are intended for investment purposes only, and not for resale. Directors, officers, their associates and employees will pay the same
price as all other subscribers for the shares for which they subscribe.

                                                                                                          As a Percent of Shares Offered
                                                                                                             At the             At the
                                                                                                           Minimum            Maximum
                                                                                                               of                 of
                                                                                                           Estimated          Estimated
                                                                                         Number            Offering            Offering
                              Name                                       Amount          of Shares          Range               Range

Directors :

Ted A. Leech                                                         $     100,000            10,000                0.48 %               0.35 %
Joseph C. Adams                                                            250,000            25,000                1.20                 0.89
Judith A. Cochrane                                                          50,000             5,000                0.24                 0.18
Michael J. Mansfield                                                       150,000            15,000                0.72                 0.53
Margaret R. Piesik                                                          10,000             1,000                0.05                 0.04
Joseph P. Zavaglia                                                          50,000             5,000                0.24                 0.18

Executive officers who
 are not directors :

Matthew D. Mullet                                                          125,000            12,500                0.60                 0.44
Steven L. Haynes                                                           100,000            10,000                0.48                 0.35
Drew B. Ness                                                                25,000             2,500                0.12                 0.09

All directors and executive officers as a group (9 persons)          $     860,000            86,000                4.13 %               3.05 %



                                                                      45
                                         MANAGEMENT’S DISCUSSION AND ANALYSIS OF
                                      FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

         1st Security Bank of Washington has been serving the Puget Sound area since 1936. Originally chartered as a credit union, previously
known as Washington’s Credit Union, we served various select employment groups. On April 1, 2004, we converted from a credit union to a
Washington state-chartered mutual savings bank. The charter conversion enabled us to more effectively compete in the local market area with
commercial banks and thrifts, and provided us with the ability to raise capital for growth purposes. This offering will position us to take
advantage of the business opportunities that we believe exist in our market area. In particular, the added capital will allow us to pursue
portfolio growth and product diversification, as well as provide 1st Security Bank of Washington with the ability to further attract and retain a
qualified Board and management.

          Since our conversion to a mutual savings bank in 2004, our institution has faced numerous operational and economic
challenges. At the time of our conversion to a mutual savings bank we operated 14 branch locations in the Puget Sound area, along with our
Mountlake Terrace headquarters, and had 132 full-time equivalent employees. Our assets at December 31, 2004 totaled $261.4 million. As of
December 31, 2011, our assets totaled $283.8 million, and we were conducting operations through 6 locations, along with our Mountlake
Terrace headquarters, with 86 full-time equivalent employees. Our branch network and high level of employee overhead, which were an
outgrowth of our credit union roots, resulted in inefficiencies and an extremely high operating cost for an institution our size. Beginning in
2007, adverse economic conditions, including increased levels of unemployment, depressed real estate values and the loss of major employers
in our market area, such as Washington Mutual, also reduced our rate of growth, affected our customers ’ ability to repay loans and adversely
impacted our financial condition and earnings. As a result of the foregoing, we experienced net losses of $4.6 million, $3.8 million and $4.1
million during the years ended December 31, 2009, 2008 and 2007, respectively.

          In 2007, our loss was primarily the result of a $3.1 million increase in non-interest expense associated with management ’ s strategic
decision to terminate the defined benefit plan and reorganize the overhead structure and operations of 1st Security Bank of Washington in order
to enhance our future profitability. During 2008 and 2009, like many financial institutions, we were faced with large loan loss provisions and
charge-offs to address asset quality issues associated with the adverse economic conditions. In 2008, we also determined that a number of
additional cost cutting measures were needed due to the deepening recession in order to return the institution to profitability, including salary
reductions or freezes for a number of our senior officers, reduced employee benefits , a reduction in staff size and a consolidation of our branch
network . We initiated a number of these measures in 2009.

           During the years ended December 31, 2011 and 2010, we recorded net earnings of $1.5 million and $1.6 million, respectively. We
attribute our return to profitability during 2010 and 2011, in large part, to the following:

         ●        We restructured the board of trustees (hereafter referred to throughout this document as the board of directors), adding
                  individuals with attributes more suited for the banking industry than those members who previously sat on the board of the
                  institution as a credit union. See “ Management. ”

         ●        A new executive management team was put in place and a number of other seasoned bankers were hired since our
                  conversion to a mutual savings bank.


                                                                       46
         ●        Aggressive cost cutting measures discussed above, including (i) salary reductions or freezes for a number of our senior staff,
                  (ii) reduced employee benefits; (iii) staff reductions, and (iv) consolidation of our branch network.

         ●        Active management of our delinquent loans and non-performing assets through the aggressive pursuit of the collection of
                  consumer debts and the marketing of saleable properties upon which we foreclosed or repossessed.

         Since January 2005, 1st Security Bank of Washington has been operating under some form of regulatory agreement, either with the
Washington Department of Financial Institutions, the Federal Deposit Insurance Corporation, or both. These regulatory agreements placed
numerous requirements on us and limited our operating flexibility, which affected our ability to grow. As of August 2011, we are no longer
subject to any formal or informal regulatory agreements with either the Washington Department of Financial Institutions or the Federal Deposit
Insurance Corporation.

          We are a relationship-driven community bank. We deliver banking and financial services to local families, local and regional
businesses and industry niches within distinct Puget Sound area communities. We emphasize long-term relationships with families and
businesses within the communities we serve, working with them to meet their financial needs. We are also actively involved in community
activities and events within these market areas, which further strengthens our relationships within these markets.

         1st Security Bank of Washington is a diversified lender with a focus on the origination of home improvement loans, commercial real
estate mortgage loans, commercial business loans and second mortgage/home equity loan products. Consumer loans, in particular indirect
home improvement loans to finance window replacement, gutter replacement, siding replacement, and other improvement renovations ,
represent the largest portion of the loan portfolio and have traditionally been the mainstay of our lending strategy . As of December 31, 2011,
consumer loans represented 51.7% of our total portfolio, with indirect home improvement loans representing 71.0% of the total consumer loan
portfolio.

          Our indirect home improvement lending is reliant on our relationships with home improvement contractors and dealers. Our indirect
home improvement contractor/dealer network is currently comprised of approximately 150 active contractors and dealers with businesses
located throughout Washington and Oregon, with approximately 10 contractors/dealers responsible for more than half of this loan volume. As
a result of the recent economic downturn and contraction of credit to both contractors/dealers and their customers, there has been an increase in
business closures and our existing contractor/dealer base has experienced decreased sales and loan volume. In order to maintain our indirect
home improvement loan volume, we are considering expanding this line of business into the State of California. We are currently testing the
California market with a limited number of contractors/dealers with whom our lenders have had previous experience. To the extent we
determine to move forward with our indirect home improvement lending program in California, we anticipate that these California loans will
represent no more than 20% of the total consumer loan portfolio. See “ Our business could suffer if we are unsuccessful in making, continuing
and growing relationships with home improvement contractors and dealers. ”

          Going forward, an emphasis will be placed on diversifying our lending products by expanding our commercial real estate, commercial
business and residential construction lending, while maintaining the current size of our consumer loan portfolio. Further, as a result of
demand by depository customers, we reintroduced in-house originations of residential mortgage loans during the fourth quarter of 2011,
primarily for sale into the secondary market, through a mortgage banking program. Our lending strategies are intended to take advantage of:
(1) our historical strength in indirect consumer lending, (2) recent market dislocation that has created new lending opportunities and the
availability of experienced bankers, and (3) our strength in relationship lending. Retail deposits will continue to serve as an important funding
source. See “ Risk Factors - Risks Related to Our Business. ”


                                                                       47
         1st Security Bank of Washington 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
of 1st Security Bank of Washington include primarily deposits, including brokered deposits, borrowings, payments on loans and income
provided from operations.

         Our earnings are primarily dependent upon our net interest income, the difference between interest income and interest
expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on these
loans and investments. Interest expense is a function of the amount of deposits and borrowings outstanding during the same period and interest
rates paid on these deposits and borrowings. Our earnings are also affected by our provision for loan losses, service charges and fees, gains
from sales of assets, operating expenses and income taxes.

Critical Accounting Policies and Estimates

           Certain of our accounting policies are important to the portrayal of our 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 determining the allowance for loan losses, the fair
value of other real estate owned and the need for a valuation allowance related to the deferred tax asset . Our accounting policies are discussed
in detail in Note 1 of the Notes to Financial Statements included in this prospectus.

          Allowance for Loan Loss. The allowance for loan losses is the amount estimated by management as necessary to cover losses
inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to
income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material
estimates required to establish the allowance 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 allowance 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 we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. As we add new
products, increase the complexity of the loan portfolio, and expand our market area, we intend to enhance and adapt our 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 allowance for loan losses in any given period. Management believes that its systematic methodology continues to be appropriate given our
size and level of complexity.

         Other Real Estate Owned. Property acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value, less cost to
sell. Development and improvement costs relating to the property are capitalized. The carrying value of the property is periodically evaluated
by management and, if necessary, allowances are established to reduce the carrying value to net realizable value. Gains or losses at the time
the property is sold are charged or credited to operations in the period in which they are realized. The amounts that we will ultimately realize
from the sale of other real estate owned may differ substantially from the carrying value of the assets because of market factors beyond our
control or because of changes in management’s strategies for recovering the investment.


                                                                       48
          Income Taxes . Income taxes are reflected in our financial statements to show the tax effects of the operations and transactions
reported in the financial statements and consist of taxes currently payable plus deferred taxes. Accounting Standards Codification, 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 differences 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 our deferred
tax asset, we are required to estimate our income and taxes in the jurisdiction in which we operate. This process involves estimating our 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 are deferred tax liabilities attributable to deductible temporary differences and carryforwards. After the deferred
tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need
for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that
some portion of the deferred tax asset will not be realized. As required by generally accepted accounting principles, available evidence is
weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is
dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible
temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available evidence,
management determined that a full valuation allowance to offset the net deferred tax assets at December 31, 2011 and December 31, 2010 was
required.

Our Business and Operating Strategy and Goals

          Our primary objective is to operate 1st Security Bank of Washington as a well-capitalized, profitable, independent,
community-oriented financial institution, serving customers in our primary market area. Our strategy is to provide innovative products and
superior service to small businesses, industry and geographic niches, and individuals in our primary market area. Our primary market area is
defined generally as the greater Puget Sound market area. We currently provide services to communities through our main office and 6
full-service banking centers. We support these banking centers with 24/7 access to on-line banking and participation in a worldwide ATM
network. This offering is a critical component of our business strategy because of the increased capital base, lending and deposit opportunities
it will provide 1st Security Bank of Washington.

         The board of directors has sought to accomplish our objective through the adoption of a strategy designed to improve profitability, a
strong capital position and high asset quality. This strategy primarily involves:

         Growing and diversifying our loan portfolio and revenue streams. We intend to transition our lending activities from a
         predominantly consumer-driven model to a more diversified consumer and business model by emphasizing three key lending
         initiatives: expansion of commercial business lending programs, including our warehouse lending program, through which we fund
         third party mortgage bankers; reintroduction of in-house originations of residential mortgage loans, primarily for sale into the
         secondary market , through a mortgage banking program ; and commercial real estate lending. Additionally, we will seek to diversify
         our loan portfolio by increasing lending to small businesses in our market area, as well as residential construction lending.


                                                                         49
         Maintaining and improving asset quality . We believe that strong asset quality is a key to long-term financial success. Historically,
         our asset quality has been very strong, however, like most financial institutions in our market area, our asset quality began to
         deteriorate in 2008 and continued to do so during 2009 and 2010. Our percentage of non-performing loans to total loans was 1.0 % at
         December 31, 2011, down from 2.7% at December 31, 2010 and 3.1% at December 31, 2009. Our percentage of non-performing
         assets to total assets was 2.4 % at December 31, 2011, down from 3.5% at December 31, 2010 and 4.6% at December 31, 2009. We
         have actively managed our delinquent loans and non-performing assets by aggressively pursuing the collection of consumer debts and
         marketing saleable properties upon which we foreclosed or repossessed, work-outs of classified assets and loan charge-offs. In the
         past several years, we also began emphasizing consumer loan originations to borrowers with higher credit scores, generally credit
         scores over 720 (although our policy allows us to go lower), which has led to lower charge-offs in recent periods. Although we intend
         to grow our loan portfolio by expanding our commercial real estate and commercial business lending, we intend to manage our credit
         exposures through the use of experienced bankers in this area and a conservative approach to lending.

         Emphasizing lower cost core deposits to reduce the costs of funding our loan growth. We offer personal and business checking
         accounts, NOW accounts and savings and money market accounts, which generally are lower-cost sources of funds than certificates of
         deposit, and are less sensitive to withdrawal when interest rates fluctuate. In order to build our core deposit base, we are pursuing a
         number of strategies. First, we provide interest rate promotions on savings and checking accounts from time to time to encourage the
         growth of these types of deposits. Second, we diligently attempt to recruit all commercial loan customers to maintain a deposit
         relationship with us, generally a business checking account relationship to the extent practicable, for the term of their loan.

         Capturing our customers’ full relationship. We offer a wide range of products and services that provide diversification of revenue
         sources and solidify our relationship with our customers. We focus on core retail and business deposits, including savings and
         checking accounts, that lead to long-term customer retention. As part of our commercial lending process we cross-sell the entire
         business banking relationship, including deposit relationships and business banking products, such as online cash management,
         treasury management, wires, direct deposit, payment processing and remote deposit capture. Our mortgage banking program also will
         provide us with opportunities to cross-sell products to new customers.

         Expanding our reach. In addition to deepening our relationships with existing customers, we intend to expand our business to new
         customers by leveraging our well-established involvement in the community and by selectively emphasizing products and services
         designed to meet their banking needs. We also intend to pursue expansion in our market area through selective growth of our branch
         network. We recently signed a notice of intent for a new branch location in the Capitol Hill area of Seattle , which is expected to open
         during the third quarter of 2012. We may also consider the acquisition of other financial institutions or branches of other banks in the
         Puget Sound market area, although currently no specific transactions are planned.

Comparison of Financial Condition at December 31, 2011 and December 31, 2010

         Assets. Total assets decreased $ 8.5 million, or 3.0 %, to $ 283.8 million at December 31, 2011 from $292.3 million at December 31,
2010. The decrease in assets was primarily the result of a $ 13.7 million, or 5.9 %, decrease in loans receivable and a $ 16.3 million, or 49.1 %,
decrease in interest-bearing deposits at other financial institutions , partially offset by a $ 19.3 million, or 252.0 %, increase in securities
available for sale.


                                                                       50
         Loans receivable, net, decreased $ 13.7 million, or 5.9 %, to $ 217.1 million at December 31, 2011 from $230.8 million at December
31, 2010, primarily as a result of lower loan demand in our market area, coupled with loan repayments, foreclosures and repossession of
assets. The lower loan demand is attributable primarily to the continuing weakness in the economy, as well as management ’ s strategic
decision to compete less aggressively for commercial real estate loans as we focused on improving asset quality during the economic downturn.

          Real estate secured loans decreased $ 4.4 million, or 6.91 %, to $ 63.5 million at December 31, 2011 from $67.9 million at December
31, 2010, primarily as a result of a $ 4.5 million, or 33.8 %, decrease in residential mortgage loans. Consumer loans decreased $ 21.6 million,
or 15.9 %, to $ 114.2 million at December 31, 2011 from $135.8 million at December 31, 2010, including a $ 13.7 million, or 14.4 %, decrease
in indirect home improvement loans and a $ 6.8 million, or 53.9 %, decrease in automobile loans . As a result of the recent economic downturn
and contraction of credit to both contractors/dealers and their customers, there has been an increase in business closures and our existing
contractor/dealer base has experienced decreased sales and loan volume resulting in a decline in our indirect home improvement loan
portfolio. In 2009, we terminated our indirect auto loan program and currently only originate automobile loans at our branch office locations,
which has resulted in a steady decline in the size of our automobile loan portfolio. Further, in the past several years, we also began
emphasizing consumer loan originations to borrowers with higher credit scores, generally credit scores over 720 (although our policy allows us
to go lower), which has led to lower loan volume, as well as lower charge-offs, in recent periods . Commercial business loans increased $10.5
million, or 32.0%, to $43.3 million at December 31, 2011 from $32.8 million at December 31, 2010, offsetting some of the decline in the real
estate and consumer loan portfolios. Commercial business loans increased as a result of the low interest rate environment, which drove
refinance activity for mortgage bankers using our warehouse lending program.

           Our allowance for loan losses at December 31, 2011 was $4.3 million, or 2.0% of gross loans receivable, compared to $5.9 million,
or 2.5% of gross loans receivable, at December 31, 2010. Improved asset quality was the primary driver behind reductions in reserve balances.

          Non-performing loans, consisting of nonaccruing loans and accruing loans more than 90 days delinquent, decreased $4.1 million, or
64.6%, to $2.2 million at December 31, 2011 from $6.3 million at December 31, 2010, primarily as a result of charge-offs and foreclosures, as
well as the transfer of $3.1 million of troubled debt restructured loans from nonaccrual to accrual status. At December 31, 2011, our
non-performing loans consisted of $412,000 of one- to four-family loans, $267,000 of home equity loans, $623,000 of construction and
development loans, $498,000 of consumer loans and $427,000 of commercial business loans. Non-performing loans to total loans decreased to
1.0% at December 31, 2011 from 2.7% at December 31, 2010. Real estate owned and repossessed assets totaled $4.7 million at December 31,
2011, compared to $3.8 million at December 31, 2010. The increase reflected the migration of problem loans through the foreclosure process
into real estate owned.

          At December 31, 2011, we also had $ 3.2 million in restructured loans , of which $3.1 million were performing in accordance with
their revised terms and returned to accrual status . See “Business of 1st Security Bank of Washington - Asset Quality” for additional
information regarding our non-performing loans.

         Liabilities. Total liabilities decreased $ 10.5 million, or 3.9 %, to $ 257.0 million at December 31, 2011, from $267.5 million at
December 31, 2010, primarily due to a $13.0 million decrease in borrowings, partially offset by a $2.5 million, or 1.0%, increase in
deposits. The increase in deposits was due to a $ 17.6 million, or 21.5%, increase in money market savings deposits, a $1.9 million, or 5.0%,
increase in interest-bearing and noninterest-bearing checking accounts , partially offset by a $15.6 million, or 14.0%, decrease in certificate of
deposit accounts and $1.4 million, or 10.8% decrease in savings accounts . The increase in deposits was due to management ’ s direct
marketing of transactional accounts to its existing customer base as part of its continued focus on core deposits, partially offset by the
disintermediation of funds back into the equity and residential markets from savings accounts .


                                                                        51
         Our total borrowings, which consisted of Federal Home Loan Bank advances, decreased $ 13.0 million, or 59.4 %, to $ 8.9 million at
December 31, 2011 from $21.9 million at December 31, 2010. The decrease in borrowings was related to our continued focus on reducing our
reliance on non-core funding and reflects the reduction in our assets.

        Equity. Total equity increased $ 2.0 million, or 8.0 %, to $ 26.8 million at December 31, 2011 from $24.8 million at December 31,
2010. The increase primarily was a result of net income of $ 1.5 million for the year ended December 31, 2011 and a $427,000 increase in other
comprehensive income consisting of unrealized gains on investments securities .


                                                                     52
Average Balances, Interest and Average Yields/Cost

          The following table sets forth for the periods indicated, information regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant
yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average
interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid
on interest-bearing liabilities and the resultant spread at December 31, 2011. Income and all average balances are monthly average
balances. Non-accruing loans have been included in the table as loans carrying a zero yield.

                                   At                                                                     Years Ended December 31,
                                December
                                   31,
                                  2011                               2011                                           2010                                                   2009
                                                    Average             Interest                      Average          Interest                           Average             Interest
                                 Yield/             Balance             Earned           Yield/       Balance          Earned           Yield/            Balance             Earned           Yield/
                                 Rate              Outstanding            Paid           Rate       Outstanding          Paid           Rate             Outstanding            Paid           Rate
                                                                                                (Dollars in thousands)
Interest-earning assets:
 Loans receivable, net (1)            7.55 % $           217,859      $     16,191           7.43 % $          236,630     $   17,270       7.30 % $           231,965      $     16,289           7.02 %
 Mortgage-backed securities           2.11                 1,830                37           2.02                  546             15       2.75                   988                38           3.85
 Investment securities                1.88                11,556               190           1.64                1,390             19       1.37                 1,267                52           4.10
 Federal Home Loan Bank
stock                                   ---                1,797                   ---         ---               1,797            ---         ---                1,797                   ---         ---
 Other (2)                            0.32                26,525                   60        0.23               12,585            29        0.23                11,807                   25        0.21
  Total interest-earning
assets (1)                            6.51               259,567            16,478           6.35              252,948         17,333       6.85               247,824            16,404           6.62

Interest-bearing liabilities:
 Savings and money market             0.64               102,945               770           0.75               76,065            711       0.94                74,407               705           0.95
 Interest-bearing checking            0.33                18,124                92           0.51               19,798            187       0.94                20,977               246           1.17
 Certificates of deposit              1.76               103,297             1,964           1.90              118,217          2,770       2.34               101,802             3,281           3.22
 Borrowings                           2.11                 5,744               180           3.13                7,499            218       2.91                16,436               289           1.76
   Total interest-bearing
liabilities                           1.13               230,110             3,006           1.31              221,579          3,886       1.75               213,622             4,521           2.12

Net interest income                                                   $     13,472                                         $   13,447                                       $     11,883

Net interest rate spread              5.38 %                                                 5.04 %                                         5.10 %                                                 4.50 %
Net earning assets                             $          29,457                                      $         31,369                               $          34,202

Net yield on average
   interest-earning assets            5.41 %                                                 5.19 %                                         5.32 %                                                 4.79 %
Average interest-earning
assets to
   average interest-bearing
   liabilities                                            112.80 %                                              114.16 %                                        116.01 %




(1) The average loans receivable, net balances include non-accruing loans.
(2) Includes interest-bearing deposits (cash) at other financial institutions.


                                                                                                      53
Rate/Volume Analysis

          The following table presents the dollar amount of changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to the
changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by
old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.

                                                                    Years Ended                                      Years Ended
                                                                   December 31,                                     December 31,
                                                                   2011 vs. 2010                                    2010 vs. 2009
                                                              Increase                                         Increase
                                                             (Decrease)                     Total             (Decrease)                     Total
                                                              Due To                      Increase             Due To                      Increase
                                                         Volume         Rate             (Decrease)       Volume         Rate             (Decrease)
                                                                                               (In thousands)
Interest-earning assets:

Loans receivable                                     $     (1,370 )   $     291      $        (1,079 )   $    300 $          681      $           981
Mortgage-backed securities                                     35           (13 )                 22          (17 )            (6 )               (23 )
Investment securities                                         139            32                  171            5            (38 )                (33 )
Federal home loan bank stock                                   ---           ---                  ---          ---            ---                  ---
Other (1)                                                      32             (1 )                31            2               2                   4
  Total interest-earning assets                      $     (1,164 )   $     309      $          (855 )   $    290 $          639      $           929


Interest-bearing liabilities:
 Savings and money market                            $        252     $    (193 )    $            59           16 $           (9 )                  6
 Interest-bearing checking                                    (16 )         (79 )                (95 )        (14 )          (46 )                (59 )
 Certificates of deposit                                     (350 )        (456 )               (806 )        529         (1,040 )               (511 )
 Borrowings                                                   (51 )          13                  (38 )       (157 )           86                  (71 )
   Total interest-bearing liabilities                $       (165 )   $    (715 )               (880 )   $    374 $       (1,009 )               (635 )


Net change in interest income                                                        $            25                                  $         1,564




         (1) Includes interest-bearing deposits (cash) at other financial institutions.


                                                                          54
Comparison of Results of Operations for the Years Ended December 31, 2011 and 2010

         General . Net income for the year ended December 31, 2011 decreased $57,000 to $1.5 million , compared to $1.6 million for the year
ended December 31, 2010. Our provision for loan losses decreased $1.1 million, or 31.9%, during the year ended December 31, 2011
compared the year ended December 31, 2010, which was offset by a $1.2 million, or 32.5 %, decrease in noninterest income during these same
periods due the absence of any gain on the sale of branches in 2011.

          Net Interest Income . Net interest income remained relatively flat, increasing $25,000 to $ 13.5 million for the year ended December
31, 2011 compared to the year ended December 31, 2010. The increase in net interest income was attributable to an $880,000 decrease in
interest expenses, primarily due to a reduction of our overall cost of funds, partially offset by an $855,000 reduction in interest income resulting
from a decrease in average loans outstanding.

           Our net interest margin decreased 13 basis points to 5.19% for the year ended December 31, 2011, from 5.32% for the prior year,
primarily due to the lower yield we earned on our interest-earning assets as a result of a shift in the average balances of outstanding
interest-earning assets, as set forth below. Excess funds from maturing consumer loans were invested in lower interest yielding investment
securities as consumer loan volume, particularly our indirect home improvement loans, was down. The cost of average interest-bearing
liabilities decreased 44 basis points to 1.31% for the year ended December 31, 2011 compared to 1.75% for the prior year primarily due to
reduction in deposit rates. The decline was related to the repricing of our money market accounts and certificates of deposit to lower current
rates during the year ended December 31, 2011.

         Interest Income . Total interest income for the year ended December 31, 2011 decreased $ 855,000, or 4.9 %, to $ 16.5 million,
from $ 17.3 million for the year ended December 31, 2010. The decrease during the year was primarily attributable to the decline in net loans
receivable over the last year, partially offset by a 13 basis point increase in the yield earned on loans receivable.

        The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the years
ended December 31, 2011 and 2010:

                                                                                        Year Ended December 31,
                                                                          2011                            2010                        Increase/
                                                                  Average                        Average                            (Decrease) in
                                                                  Balance                        Balance                               Interest
                                                                 Outstanding       Yield       Outstanding      Yield                  Income
                                                                                         (Dollars in thousands)

Loans receivable, net                                        $        217,859          7.43 % $        236,630           7.30 % $          (1,079 )
Mortgage-backed securities                                              1,830          2.02                546           2.75                  22
Investment securities                                                  11,556          1.64              1,390           1.37                 171
Federal Home Loan Bank stock                                            1,797            ---             1,797             ---                 ---
Cash and due from banks                                                26,525          0.23             12,585           0.23                  31
  Total interest-earning assets                              $        259,567          6.35 % $        252,948           6.85 % $            (855 )


           Interest Expense . Interest expense decreased $ 880,000, or 22.6 %, to $ 3.0 million for the year ended December 31, 2011, from $ 3.9
million for the year ended December 31, 2010. As a result of general market rate decreases, the average cost of funds for total interest-bearing
liabilities decreased 44 basis points to 1.31 % for the year ended December 31, 2011, compared to 1.75 % for the year ended December 31,
2010. The decrease was primarily due to a decline in rates paid on our certificates of deposits and savings and money market accounts ,
partially offset by the higher average balances for savings and money market accounts. The average balance of total interest-bearing liabilities
increased $ 8.5 million, or 3.9 %, to $ 230.1 million for the year ended December 31, 2011 from $221.6 million for the year ended December
31, 2010.


                                                                        55
        The following table details average balances, cost of funds and the change in interest expense for the years ended December 31, 2011
and 2010:

                                                                                      Years Ended December 31,
                                                                         2011                            2010                       Increase/
                                                                 Average                         Average                          (Decrease) in
                                                                 Balance                         Balance                             Interest
                                                                Outstanding       Yield        Outstanding     Yield                Expense
                                                                                        (Dollars in thousands)

Savings and money market                                    $        102,945          0.75 % $        76,065           0.94 % $              59
Interest-bearing checking                                             18,124          0.51            19,798           0.94                 (95 )
Certificates of deposit                                              103,297          1.90           118,217           2.34                (806 )
Borrowings                                                             5,744          3.13             7,499           2.91                 (38 )
  Total interest-bearing liabilities                        $        230,110          1.31 % $       221,579           1.75 % $            (880 )


          Provision for Loan Losses . In connection with its analysis of the loan portfolio for the year ended December 31, 2011, management
determined that a provision for loan losses of $ 2.4 million was required for the year ended December 31, 2011, compared to a provision for
loan losses of $ 3.5 million established for the year ended December 31, 2010. The $ 1.1 million decrease in the provision reflects the decrease
in non-performing loans. Non-performing loans were $ 2.2 million or 1.0 % of total loans at December 31, 2011, compared to $ 6.3 million, or
2.7% of total loans at December 31, 2010. Management considers the allowance for loan losses at December 31, 2011 to be adequate to cover
probable losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While
management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no
assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not
exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition
and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators,
as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of
information available to them at the time of their examination.


                                                                       56
        The following table details activity and information related to the allowance for loan losses for the years ended December 31, 2011
and 2010:

                                                                                                                     At or For the Years
                                                                                                                     Ended December 31,
                                                                                                                    2011               2010
                                                                                                                    (Dollars in thousands)

Provision for loan losses                                                                                      $     2,369         $     3,480
Net charge-offs                                                                                                $     3,929         $     4,980
Allowance for loan losses                                                                                      $     4,345         $     5,905
Allowance for losses as a percentage of total gross loans receivable at the end of this period                         2.0%                2.5%
Nonaccrual and 90 days or more past due loans                                                                  $     2,227         $     6,302
Allowance for loan losses as a percentage of non-performing loans at end of period                                   195.1%               93.7%
Nonaccrual and 90 days or more past due loans as a percentage of gross loans receivable at the end of the
    period                                                                                                           1.0%                2.7%
Total gross loans                                                                                              $ 221,052           $ 236,504

         Noninterest Income . Noninterest income decreased $ 1.2 million, or 32.5 %, to $ 2.5 million for the year ended December 31, 2011
from $ 3.7 million for the year ended December 31, 2010. The following table provides a detailed analysis of the changes in the components of
noninterest income:

                                                                                        Years Ended December
                                                                                                 31                   Increase (Decrease)
                                                                                         2011          2010          Amount      Percent
                                                                                                     (Dollars in thousands)

Service charges and fee income                                                        $     1,971     $    2,255     $   ( 284)         (12.6 )%
Gain on sale of loans                                                                         113             ---           113           NM
Gain on sale of equipment                                                                      41             ---             41          NM
Gain on sale of branches                                                                       ---         1,006       ( 1,006)        100.00%
Gain on sale of investment securities                                                          18             ---             18          NM
Other noninterest income                                                                      332            406           ( 74)       (18.2 ) %
 Total noninterest income                                                             $     2,475     $    3,667     $ ( 1,192)         (32.5 )%




NM- Not meaningful.

          Noninterest income decreased during the year ended December 31, 2011, primarily as a result of the one-time gains associated with
the sale of two branches during 2010 and regulatory changes that occurred in August 2010 affecting the amount of non-sufficient fees (“NSF”)
we can charge on deposit accounts . Also, other noninterest income declined $95,000, primarily as a result of a $39,000 decrease in rental
income due to the loss of some tenants renting space at our administrative offices and reduced rents offered as an incentive for other tenants to
remain, and a $36,000 decrease in collection fees associated with past due loans due to lower loan delinquencies than in the prior year. These
declines were partially offset by gains on the sale of one SBA loan, as well as gains on the sale of fixed assets and securities and reduced losses
associated with the disposition of repossessed assets .


                                                                        57
        Noninterest Expense . Noninterest expense increased $1,000 to $12.0 million for the year ended December 31, 2011 compared to the
year ended December 31, 2010. The following table provides an analysis of the changes in the components of noninterest expense:

                                                                                       At or For the Years                  Increase
                                                                                      Ended December 31 ,                 (Decrease)
                                                                                      2011            2010          Amount           Percent
                                                                                                     (Dollars in thousands)

Salaries and benefits                                                             $     5,616     $    5,117     $      499               9.8%
Operations                                                                              1,733          2,122           (389)            (18.3)
Occupancy                                                                               1,103            941            162              17.2
Data processing                                                                           890            739            151              20.4
OREO fair value write-downs, net of(gain) loss on sales                                   601            (79)           680              NM
OREO expenses                                                                             138            503           (365)            (72.6)
Loan costs                                                                                459            847           (388)            (45.8)
Professional fees                                                                         485            556            (71)            (12.8)
FDIC insurance                                                                            391            556           (165)            (29.7)
Marketing and advertising                                                                 236            344           (108)            (31.4)
ATM costs                                                                                 216            238            (22)             (9.2)
Board Fees                                                                                146            148             (2)             (1.4)
Impairment loss on mortgage servicing rights                                               19             ---            19              NM
  Total noninterest expense                                                       $    12,033     $   12,032     $        1                ---%




NM – Not meaningful.

          Compensation and benefits increased $499,000, or 9.8%, to $5.6 million for the year ended December 31, 2011, from $5.1 million for
the prior year, primarily as a result of the hiring of additional employees in the commercial and mortgage-related lending areas. At December
31, 2011 we employed 86 full-time equivalent employees compared to 79 at December 31, 2010. Other real estate owned, or OREO,
write-downs increased $680,000 for the year ended December 31, 2011, primarily as a result of the write-down in real estate owned values
during the current year. Occupancy expense increased $162,000, or 17.2%, primarily as a result of the remodeling of two older branches and
data processing expense increased $151,000, or 20.4%, as a result of our decision to outsource our data processing to a third party
vendor. Offsetting these increases were a $389,000, or 18.3%, decline in operations expense, a $388,000, or 45.8%, decrease in loan costs
related primarily to loan origination and servicing costs, a $365,000, or 72.6%, decrease in OREO expenses associated with maintaining,
managing and disposing of OREO and a $165,000, or 29.7%, decrease in FDIC insurance premiums during December 31, 2011 compared to
December 31, 2010. The decrease in operations expense was related to the branch closings and sales that occurred in 2010 and the decrease in
loan costs was the result of the lower volume of loan originations. The decrease in OREO expenses was the result of higher upfront repair and
initial holding costs associated with the OREO properties at initial foreclose in 2010. Our FDIC insurance premiums declined as a result of a
lower rate for deposit insurance premiums due to our improved regulatory rating. Marketing and advertising expense also decreased $108,000,
or 31.4%, during December 31, 2011 compared to December 31, 2010, as a result of management ’ s decision to focus more on cross-selling
our existing customers.

         Our efficiency ratio was 75.5 % for the year ended December 31, 2011, compared to 70.3 % for the year ended December 31, 2010.
The increase in our efficiency ratio was primarily attributable to a decrease in fee income and an increase in expenses associated with
investments in our mortgage banking and residential construction operations, and modernization of our branch facilities. By definition, a lower
efficiency ratio would be an indication that we are more efficiently utilizing resources to generate income.

       Provision (Benefit) for Income Tax . There was no income tax provision for the years ended December 31, 2011 and 2010.
Management has established a full valuation allowance related to the deferred tax asset, due to previous years operating losses.


                                                                      58
Asset and Liability Management and Market Risk

          Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally is established
contractually for a period of time. Market rates change over time. Like other financial institutions, our results of operations are impacted by
changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our
ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

          How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates
and comply with applicable regulations, we monitor our interest rate risk. In doing so, we analyze and manage assets and liabilities based on
their interest rates and payment streams, timing of maturities, repricing opportunities, and sensitivity to actual or potential changes in market
interest rates.

         1st Security Bank of Washington is subject to interest rate risk to the extent that its interest-bearing liabilities, primarily deposits and
Federal Home Loan Bank advances, reprice more rapidly or at different rates than our interest-earning assets. In order to minimize the
potential for adverse effects of material prolonged increases or decreases in interest rates on our results of operations, we have adopted an Asset
and Liability Management Policy . The board of directors sets the asset and liability policy for 1st Security Bank of Washington, which is
implemented by the asset/liability committee (“ALCO”), an internal management committee. The board level oversight for ALCO is
performed by the audit committee of the board of directors.

         The purpose of the ALCO committee is to communicate, coordinate, and control asset/liability management consistent with our
business plan and board-approved policies. The committee establishes and monitors the volume and mix of assets and funding sources, taking
into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to
produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals.

         The committee generally meets monthly to, among other things, protect capital through earnings stability over the interest rate cycle;
maintain our well-capitalized status; and provide a reasonable return on investment. The committee recommends appropriate strategy changes
based on this review. The committee is responsible for reviewing and reporting the effects of the policy implementations and strategies to the
board of directors at least quarterly. The Chief Financial Officer oversees the process on a daily basis.

        A key element of our asset/liability management plan is to protect net earnings by managing the maturity or repricing mismatch
between our interest-earning assets and rate-sensitive liabilities. We seek to accomplish this by extending funding maturities through
wholesale funding sources, including the use of Federal Home Loan Bank advances and brokered certificates of deposit , and through asset
management, including the use of adjustable-rate loans and selling certain fixed-rate loans in the secondary market.

       As part of our efforts to monitor and manage interest rate risk, we use a number of indicators to monitor overall risk. Among the
measurements are:

         Market Risk . Market risk is the potential change in the value of investment securities if interest rates change. This change in value
impacts the value of 1st Security Bank of Washington and the liquidity of the securities. We control market risk by setting a maximum average
maturity/average life of the securities portfolio to 10 years.


                                                                          59
          Economic Risk . Economic risk is the risk that the underlying value of a bank will change when rates change. This can be caused by
a change in value of the existing assets and liabilities (this is called Economic Value of Equity or EVE) or a change in the earnings stream (this
is caused by interest rate risk). We take economic risk primarily when we make fixed rate loans, or purchase fixed-rate investments, or issue
long term certificates of deposit or take fixed rate Federal Home Loan Bank advances. It is the risk that interest rates will change and these
fixed-rate assets and liabilities will change in value. This change in value usually is not recognized in the earnings, or equity (other than
marking to market available for sale securities). The change is recognized only when the assets and liabilities are liquidated. Although the
change in market value is usually not recognized in earnings or in capital, the impact is real to the long-term value of 1st Security Bank of
Washington. Therefore, we will control the level of economic risk by limiting the amount of long-term, fixed-rate assets we will have and by
setting a limit on concentrations and maturities of securities.

        Interest Rate Risk. If the Federal Reserve Board changes the Federal Funds rate 100, 200 or 300 basis points, our policy dictates that
our change in net interest income should not change more that 7.5% , 15% and 30 %, respectively.

          The table presented below, as of December 31, 2011, is an analysis prepared for 1st Security Bank of Washington by Olson Research
Associates, Inc. utilizing various market and actual experience-based assumptions. The table represents a static shock to the net interest
income using instantaneous and sustained shifts in the yield curve, in 100 basis point increments, up and down 300 basis points. The results
reflect a projected income statement with minimal exposure to instantaneous changes in interest rates. These results are primarily based upon
historical prepayment speeds within the consumer lending portfolio in combination with the above average yields associated with the consumer
portfolio if those prepayments do not occur.

                                                                          December 31 , 2011
                                        Change
                                           in
                                        Interest
                                        Rates in                        Net Interest Income
                                         Basis                                         $             %
                                         Points                $ Amount             Change         Change
                                                                  Dollars in thousands
                                          300bp                $ 15,152            $ (354 )            (2.28 )%
                                          200bp                $ 15,308            $ (198 )            (1.27 )%
                                          100bp                $ 15,427            $     (79 )         (0.51 )%
                                           0bp                 $ 15,506                   ---             --- %
                                         (100)bp               $ 15,585            $      79            0.51 %
                                         (200)bp               $ 15,332            $ (174 )            (1.12 )%
                                         (300)bp               $ 14,940            $ (566 )            (3.65 )%

          In managing our assets/liability mix we typically place an equal emphasis on maximizing our net interest margin and matching the
interest rate sensitivity of our assets and liabilities. From time to time, however , depending on the relationship between long and short term
interest rates, market conditions and consumer preference, we may place somewhat greater emphasis on maximizing our net interest margin
than on strictly matching the interest rate sensitivity of our assets and liabilities. Management also believes that the increased net income
which may result from an acceptable mismatch in the actual maturity or repricing of our asset and liability portfolios can, during periods of
declining or stable interest rates, provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates
which may result from such a mismatch. Management believes that 1st Security Bank of Washington’s level of interest rate risk is acceptable
under this approach.

           In evaluating 1st Security Bank of Washington’s exposure to interest rate movements, certain shortcomings inherent in the method of
analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or
repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest
rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis
and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an
interest rate increase. 1st Security Bank of Washington considers all of these factors in monitoring its exposure to interest rate risk.


                                                                         60
Liquidity

          Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run-off that
may occur in the normal course of business. We rely on a number of different sources in order to meet our potential liquidity demands. The
primary sources are increases in deposit accounts, Federal Home Loan Bank advances and cash flows from loan payments and maturing
securities.

         As of December 31, 2011, our total borrowing capacity was $ 26.4 million with the Federal Home Loan Bank of Seattle, with unused
borrowing capacity of $ 17.5 million at that date. In addition to the availability of liquidity from the Federal Home Loan Bank of Seattle, we
maintained a short-term borrowing line, with a current limit of $ 107.7 million at December 31, 2011, with the Federal Reserve Bank. As of
December 31, 2011, $ 8.9 million in Federal Home Loan Bank advances were outstanding and no advances were outstanding against the
Federal Reserve Bank line of credit. Our Asset Liability Management Policy permits management to utilize brokered deposits up to 20% of
deposits or $ 49.3 million as of December 31, 2011. Total brokered deposits as of December 31, 2011 were $ 4.3 million.

         Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in
short-term investments, such as overnight deposits and federal funds. On a longer-term basis, we maintain a strategy of investing in various
lending products and investment securities, including U.S. Government obligations and federal agency securities. We use our sources of funds
primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At December 31, 2011,
the approved outstanding loan commitments, including unused lines of credit, amounted to $ 58.7 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 2011, totaled $ 65.1 million. It is management’s policy to offer deposit rates that are competitive
with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with 1st
Security Bank of Washington.

          For the year ended December 31, 2011, cash and cash equivalents decreased $ 16.0 million, or 45.4 %, from $35.3 million as of
December 31, 2010 to $ 19.3 million as of December 31, 2011. Cash from operating activities of $ 4.7 million and cash from investing
activities of $ 10.2 million were partially offset by cash used for financing activities of $ 10.5 million for the year ended December 31,
2011. Primary sources of cash included $ 8.1 million from the collection of principal on and sale of loans and a $2.5 million increase in
deposits. Primary uses of cash included the purchase of $21.5 million of investment securities and the paying down of $13.0 million of Federal
Home Loan Bank net advances.

         Except as set forth above, management is not aware of any trends, events, or uncertainties that will have, or that are reasonably likely
to have a material impact on liquidity, capital resources or operations. Further, management is not aware of any current recommendations by
regulatory agencies, which, if they were to be implemented, would have this effect.

Off-Balance Sheet Activities

         In the normal course of operations, 1st Security Bank of Washington engages in a variety of financial transactions that are not
recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity
risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of
credit. For the year ended December 31, 2011, we engaged in no off-balance sheet transactions likely to have a material effect on our financial
condition, results of operations or cash flows.


                                                                        61
         A summary of our off-balance sheet commitments to extend credit at December 31, 2011, was as follows:

                    Off-balance sheet loan commitments :

                    Home equity loans and lines of credit                                                                $ 11,621
                    Real estate secured                                                                                     7,710
                    Commercial business loans                                                                              31,789
                    Other                                                                                                   7,589
                     Total loan commitments                                                                              $ 58,709


Capital Resources

          1st Security Bank of Washington is subject to minimum capital requirements imposed by the FDIC. Based on its capital levels at
December 31, 2011, 1st Security Bank of Washington exceeded these requirements as of that date and continues to exceed them as of the date
of this prospectus. Consistent with our goals to operate a sound and profitable organization, our policy is for 1st Security Bank of Washington
to maintain a “well-capitalized” status under the capital categories of the FDIC. Based on capital levels at December 31, 2011, 1st Security
Bank of Washington was considered to be well-capitalized. See “How We Are Regulated - Regulatory Capital Requirements.”

          At December 31, 2011, equity totaled $ 26.8 million. Management monitors the capital levels of 1st Security Bank of Washington to
provide for current and future business opportunities and to meet regulatory guidelines for “well-capitalized” institutions. The Bank’s actual
capital ratios are presented in the following table:

                                                                                                                                  To be Well
                                                                                                                                  Capitalized
                                                                                                                                    Under
                                                                                                           For Capital              Prompt
                                                                                                        Adequacy                  Corrective
                                                                                          Actual        Purposes               Action Provisions
                                                                                          Ratio              Ratio                   Ratio

As of December 31 , 2011
Total Risk-based Capital
(to Risk- weighted Assets)                                                                   12.29 %                 8.00 %                  10.00 %
Tier 1 Risk-based Capital
(to Risk- weighted Assets)                                                                   11.04 %                 4.00 %                   6.00 %
Tier 1 Leverage Capital
(to Average Assets)                                                                            9.30 %                4.00 %                   5.00 %

As of December 31, 2010
Total Risk-based Capital
(to Risk- weighted Assets)                                                                   11.06 %                 8.00 %                  10.00 %
Tier 1 Risk-based Capital
(to Risk- weighted Assets)                                                                     9.79 %                4.00 %                   6.00 %
Tier 1 Leverage Capital
(to Average Assets)                                                                            9.09 %                4.00 %                   5.00 %

         The capital raised in this offering, with net proceeds estimated to be between $ 18.7 million and $ 26.0 million, will significantly
increase our regulatory capital levels and ratios. Based upon our existing capital, and the capital to be raised in this offering, we believe that we
will have sufficient capital to carry out our proposed business plan for at least the next year and to meet any applicable regulatory capital
requirements during that period.


                                                                         62
Recent Accounting Pronouncements

         In May 2011, the Financial Accounting Standards Board ( “ FASB ” ) issued Accounting Standard Update No. 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income (the “ASU”). The objective of this ASU is to improve the
comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive
income. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in
stockholder’s equity. The ASU requires that all non owner changes in stockholders’ equity be presented either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. In the two statement approach, the first statement should present total
net income and its components followed consecutively by a second statement that should present total other comprehensive income (OCI), the
components of other comprehensive income, and the total of comprehensive income. The new guidance will be effective for annual and
interim periods beginning after December 15, 2011. We do not expect the adoption of this guidance to have a material impact on our financial
statements.

         In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRS . Since 2006, the FASB and IASB have been working closely together to
develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S.
GAAP and IFRSs and to ensure that fair value has the same meaning in U.S. GAAP and IFRSs. The Amendments in this Update explain how
to measure fair value – they do not require additional fair value measurements and are not intended to establish valuation standards or affect
valuation practices outside of financial reporting. The new guidance will be effective for annual and interim periods beginning after
December 15, 2011. We do not expect the adoption of this guidance to have a material impact on our financial statements.

         In May 2011, the FASB issued Accounting Standards Update No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of
Effective Control for Repurchase Agreements. The objective is to improve the accounting for repurchase agreements and other agreements that
both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. Topic 860, Transfers and Servicing,
prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. That
determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. The new guidance
will be effective for annual and interim periods beginning after December 15, 2011. We do not expect the adoption of this guidance to have a
material impact on our financial statements.

         In April 2011, the FASB issued Accounting Standards Update No. 2011 - 02, A Creditor’s Determination of Whether a
Restructuring is a Troubled Debt Restructuring . This ASU clarifies guidance within Accounting Standards Codification Topic 310,
Receivables—Troubled Debt Restructurings by Creditors , of whether a creditor has granted to the borrower a concession during a loan
restructuring and clarifies the guidance applicable to evaluating whether a borrower is experiencing financial difficulties. Both of these
evaluations must be performed by a creditor during a loan restructuring to determine if the restructuring qualifies as a troubled debt
restructuring . This ASU also requires additional disclosures included in ASU 2010-20, but deferred from the original adoption date, regarding
troubled debt restructurings to be disclosed. The effective date of this ASU is for the first interim period beginning after June 15, 2011, and is
to be applied retrospectively to restructurings occurring on or after January 1, 2011. The adoption of this ASU did not have a material impact
on the Bank ’ s financial statements.

         In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about
Offsetting Assets and Liabilities . The objective of this ASU is to enhance disclosures and provide converged disclosures under U.S. GAAP and
IFRS about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an
enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial
position. This ASU requires disclosure of both net and gross information for these assets and liabilities. The new guidance will be effective for
annual and interim periods beginning on or after January 1, 2013. We do not expect the adoption of this guidance to have a material impact
on our financial statements.


                                                                        63
         In December 2011, the FASB issued Accounting Standard Update No. 2011-12, Comprehensive Income (Topic 220): Deferral of the
Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05 (the “ ASU ” ). The objective of this ASU is to defer the effective date of only the changes in ASU
No. 2011-05 (see below) that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income on the
components of net income and other comprehensive income. This guidance reinstates the requirements for the presentation of reclassifications
out of accumulated other comprehensive income that was in place before the issuance of ASU No. 2011-05. The new guidance will be
effective for annual and interim periods beginning after December 15, 2011. We do not expect that the adoption of this guidance to have a
material impact on our financial statements.

                                                     BUSINESS OF FS BANCORP, INC.

          FS Bancorp was formed at the direction of 1st Security Bank of Washington in September 2011 for the purpose of owning all of the
outstanding stock of 1st Security Bank of Washington issued in the conversion and stock offering. FS Bancorp is incorporated under the laws
of the State of Washington, and generally is authorized to engage in any activity that is permitted by the Washington Business Corporation
Act. The business of FS Bancorp initially will consist only of the business of 1st Security Bank of Washington. The holding company
structure will, however, provide FS Bancorp with greater flexibility than 1st Security Bank of Washington has to diversify its business
activities, through existing or newly formed subsidiaries, or through acquisitions or mergers of both mutual and stock thrift institutions as well
as other companies. Although there are no current arrangements, understandings or agreements regarding any such activity or acquisition, FS
Bancorp will be in a position after the conversion, subject to regulatory restrictions, to take advantage of any favorable acquisition
opportunities that may arise.

         The assets of FS Bancorp will consist initially of the stock of 1st Security Bank of Washington, the loan to the Employee Stock
Ownership Plan (“ESOP”) and up to 50% of the net proceeds from the conversion and stock offering (less the amount loaned to the
ESOP). Initially, any activities of FS Bancorp are anticipated to be funded by the retained proceeds and the income thereon and dividends from
1st Security Bank of Washington, if any. See “Our Policy Regarding Dividends” and “How We Are Regulated – Limitations on Dividends and
Stock Repurchases.” Thereafter, activities of FS Bancorp may also be funded through sales of additional securities, through borrowings and
through income generated by other activities of FS Bancorp. At this time, there are no plans regarding such other activities other than the
intended loan to the ESOP to facilitate its purchase of common stock in the conversion. See “Management – Benefit Plans – Employee Stock
Ownership Plan.”

        The executive offices of FS Bancorp are located at 6920 220 th Street SW, Mountlake Terrace, Washington 98043. Its telephone
number at that address is (425) 771-5299.

                                         BUSINESS OF 1st SECURITY BANK OF WASHINGTON

General

          1st Security Bank of Washington is a relationship-driven community bank. We deliver banking and financial services to local
families, local and regional businesses and industry niches within distinct Puget Sound area communities. We emphasize long-term
relationships with families and businesses within the communities we serve, working with them to meet their financial needs. We are also
actively involved in community activities and events within these market areas, which further strengthens our relationships within these
markets. We have been serving the Puget Sound area since 1936. Originally chartered as a credit union, previously known as Washington’s
Credit Union, we served various select employment groups. On April 1, 2004, we converted from a credit union to a Washington
state-chartered mutual savings bank.


                                                                        64
          1st Security Bank of Washington is a diversified lender with a focus on the origination of home improvement loans, commercial real
estate mortgage loans, commercial business loans and second mortgage/home equity loan products. Consumer loans, in particular indirect
home improvement loans, represent the largest portion of the loan portfolio and have traditionally been the mainstay of the bank’s lending
strategy, a carryover from its days as a credit union. Going forward, we plan to place more emphasis on commercial real estate, commercial
business and residential construction lending, while maintaining the current size of our consumer loan portfolio. We also reintroduce in-house
originations of residential mortgage loans during the fourth quarter of 2011, primarily for sale into the secondary market, through a mortgage
banking program. Our lending strategies are intended to take advantage of: (1) our historical strength in indirect consumer lending, (2) recent
market dislocation that we believe has created new lending opportunities and the availability of experienced lenders, and (3) our strength in
relationship lending. Retail deposits will continue to serve as an important funding source.

Market Area

        We conduct our operations out of our main administrative office and 6 full-service branch offices in the Puget Sound region of
Washington. The administrative office is located in Mountlake Terrace, in Snohomish County, Washington. Three branch offices are located
in Snohomish County, while there is one office each in King and Pierce Counties to the south and Kitsap County to the west.

         The primary market area for business operations is the Seattle-Tacoma-Bellevue, WA Metropolitan Statistical Area (the “Seattle
MSA”). Kitsap County, though not in the Seattle MSA, is also part of our market area. This overall region is typically known as the “Puget
Sound” region. The population of the Puget Sound region was an estimated 3.4 million in 2010, approximately one-half of the state’s
population, representing a large population base for potential business. The region has a well-developed urban area in the western portion
along Puget Sound, with the central and eastern portions remaining undeveloped, rural and mountainous.

          The Puget Sound region is the largest business center in both the state of Washington and the Pacific Northwest. Currently, key
elements of the economy are aerospace, military bases, clean technology, biotechnology, education, information technology, logistics,
international trade and tourism. The region is well known for the long presence of The Boeing Corporation and Microsoft, two major industry
leaders, and for its leadership in technology. The workforce in general is well-educated and strong in technology. Washington state’s location
with regard to the Pacific Rim, along with a deepwater port has made international trade a significant part of the regional economy
(approximately one in three jobs in Washington is tied to foreign exports). Tourism has also developed into a major industry for the area, due
to the scenic beauty, temperate climate and easy accessibility.

          King County, the location of the city of Seattle, has the largest employment base and overall level of economic activity. King
County’s largest employers include The Boeing Company, Microsoft Corporation, and the University of Washington. Companies that are
headquartered in King County include Alaska Airlines, Amazon.com, Attachmate, Costco, Starbucks and Microsoft. Pierce County’s economy
is also well diversified with the presence of military related government employment (Joint Base Lewis-McChord), along with health care (the
Franciscan Health System and the Multicare Health System). In addition, there is a large employment base in the economic sectors of shipping
(the Port of Tacoma) and aerospace employment (Boeing). Snohomish County to the north has an economy based on aerospace employment
(Boeing), military (the Everett Naval Station) along with additional employment concentrations in biotechnology, electronics/computers, and
wood products. Eight of the largest employers in the state are headquartered in King County.

         The United States Navy is a key element for Kitsap County’s economy. The United States Navy is the largest employer in the county,
with installations at Puget Sound Naval Shipyard, Naval Undersea Warfare Center Keyport and Naval Base Kitsap (which comprises former
Naval Submarine Base Bangor, and Naval Station Bremerton). The largest private employers in the county are the Harrison Medical Center,
Wal-Mart, and Port Madison Enterprises.


                                                                      65
          The 2010 median household income and per capita income levels in King, Snohomish, and Kitsap Counties were higher than the state
and national averages, while Pierce County reported income levels slightly below the Washington state average. King and Snohomish
Counties contain a larger percentage of white-collar professional employment. Approximately 86.6% of King County households had income
levels in excess of $50,000 annually in 2010, compared to 82.5% for the state of Washington and 79.2% for the United States. In 2008, the
U.S. Census Bureau determined that Seattle has the highest percentage of college and university graduates of any U.S. city; it was listed as the
most literate or second most literate city of the country every year since 2005. Seattle’s high income and education levels, especially compared
to other major cities, result in King County ranking in the top 100 wealthiest counties in the United States.

         Unemployment rates in Pierce, Kitsap, King, Snohomish counties have roughly stabilized in the last 12 months after dropping from
their 2010 first quarter highs. Overall unemployment in Washington was 9.0% as of July 2011, down from a high of 10.9% in January 2010,
closely paralleling national trends. As of July 2011, Kitsap County and King County reported rates slightly lower than the state and national
averages, at 7.7% and 8.6%, respectively. In the same time period, unemployment in Pierce County was 9.6%, and unemployment in
Snohomish County was slightly higher at 10%, both consistently tracking the overall unemployment levels of Washington by within 1% since
the beginning of the 2008 recession.

          According to the Washington Center for Real Estate Research, home values in the state of Washington have suffered declines in the
last year. For the quarter ended June 30, 2011, the average home value was $241,500 in Snohomish County, $197,000 in Pierce County,
$348,300 in King County, and $235,000 in Kitsap County. Compared to the statewide average decline in home values of 8% over the last year,
Snohomish and Pierce counties have performed worse, with 14% and 11% declines, respectively. King County’s decline of 7% is slightly
better than the state average. Only Kitsap County avoided any decrease, with average home values this year approximately unchanged since
the year prior.

        For a discussion regarding the competition in our primary market area, see “Business of 1st Security Bank of Washington -
Competition.”

Lending Activities

          General. Historically, while operating as a credit union, our primary emphasis was the origination of consumer loans (primarily
indirect home improvement and automobile-secured loans), one-to four-family residential first mortgages, and second mortgage/home equity
loan products. More recently, while maintaining the active indirect consumer lending program, we have shifted our lending focus to
non-mortgage commercial business loans, as well as commercial real estate and residential construction and development loans. We have also
recently reintroduced in-house originations of residential mortgage loans, primarily for sale in the secondary market, through a mortgage
banking program. While maintaining our historical strength in consumer lending, we recently added management and personnel in the
commercial lending area to take advantage of the relatively favorable long-term business and economic environments prevailing in our markets
for small business lending.


                                                                       66
          Loan Portfolio Analysis . The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.

                                                                              December 31,
                                  2011                      2010                         2009                      2008                      2007
                            Amount     Percent        Amount     Percent        Amount         Percent       Amount     Percent        Amount     Percent
                                                                           (Dollars in thousands)
Real estate loans:
  Commercial            $     28,931      13.09 % $     28,061      11.86 % $       29,099       12.20 % $     25,872      11.33 % $     17,309       7.19 %
  Multi-family                 1,175       0.53          1,159       0.49              409        0.17            408       0.18            972       0.41
  One- to four-family          8,752       3.96         13,218       5.59            8,233        3.45          6,969       3.05         60,556      25.15
  Home equity                 14,507       6.56         15,655       6.62           16,448        6.90         18,689       8.19         19,721       8.19
  Construction and
development                   10,144       4.59          9,805       4.15           17,390         7.29        23,861      10.45          6,520       2.71
    Total real estate
loans                         63,509      28.73         67,898      28.71           71,579       30.01         75,799      33.20        105,078      43.65

Consumer Loans:
  Indirect home
improvement                   81,143      36.70         94,833      40.10           89,883       37.68         75,203      32.94         69,559      28.89
  Recreational                24,471      11.07         24,105      10.19           18,011        7.55         12,165       5.33         11,727       4.87
  Automobile                   5,832       2.64         12,645       5.35           23,359        9.79         30,514      13.37         25,991      10.80
  Home improvement               934       0.42          1,295       0.55            1,725        0.72          2,203       0.96          2,952       1.23
  Other                        1,826       0.83          2,887       1.21            4,277        1.80          6,190       2.71          6,251       2.59
    Total consumer
loans                        114,206      51.66        135,765      57.40          137,255       57.54        126,275      55.31        116,480      48.38

Commercial business
loans                         43,337      19.61         32,841      13.89           29,699       12.45         26,218      11.49         19,197       7.97

    Total gross loans
receivable                   221,052     100.00 %      236,504     100.00 %        238,533      100.00 %      228,292     100.00 %      240,755     100.00 %


Less:
  Deferred fees and
discounts                    424                           223                         313                        280                      (204 )
  Allowance for losses    (4,345 )                      (5,905 )                    (7,405 )                   (5,598 )                  (2,744 )
  Total loans
receivable, net        $ 217,131                    $ 230,822                 $ 231,441                    $ 222,974                 $ 237,807



                                                                              67
          The following table shows the composition of our loan portfolio by fixed- and adjustable-rate loans at the dates indicated.

                                                                                   December 31,
                                    2011                         2010                         2009                       2008                      2007
                              Amount     Percent           Amount     Percent        Amount         Percent        Amount     Percent        Amount     Percent
                                                                                (Dollars in thousands)
Fixed-rate loans:
Real estate loans:
  Commercial              $     17,578          7.95 % $     16,333       6.90 % $       15,729         6.59 % $     16,449       7.20 % $     15,852       6.58 %
  Multi-family                   1,175          0.53          1,159       0.49              409         0.17            405       0.17            968       0.40
  One- to four-family            5,452          2.47          6,585       2.79            4,552         1.91          6,159       2.70         57,610      23.93
  Home equity                    2,154          0.97          2,784       1.18            3,839         1.61          5,399       2.36          6,616       2.75
  Construction and
development                      3,407          1.54          1,556       0.66              501         0.21            105       0.05            110       0.05
    Total real estate
loans                           29,766         13.46         28,417      12.02           25,030       10.49          28,517      12.48         81,156      33.71

Consumer                       114,201         51.65        135,752      57.39          137,231       57.53         126,221      55.29        116,329      48.32
Commercial business              8,971          4.07          1,049       0.45              870        0.36             454       0.20            165       0.07
    Total fixed-rate
loans                          152,938         69.18        165,218      69.86          163,131       68.38         155,192      67.97        197,650      82.10

Adjustable-rate
loans:
Real estate loans:
  Commercial                    11,353          5.14         11,728       4.96           13,370         5.61          9,423       4.13          1,457       0.61
  Multi-family                      ---           ---            ---        ---              ---          ---             3       0.01              4       0.01
  One- to four-family            3,300          1.49          6,633       2.80            3,681         1.54            810       0.35          2,946       1.22
  Home equity                   12,353          5.59         12,871       5.44           12,609         5.29         13,290       5.83         13,105       5.44
  Construction and
development                      6,737          3.05          8,249       3.49           16,889         7.08         23,756      10.40          6,410       2.66
    Total real estate
loans                           33,743         15.27         39,481      16.69           46,549       19.52          47,282      20.72         23,922       9.94

Consumer                             5          0.01             13       0.01               24        0.01              54       0.02            151       0.06
Commercial business             34,366         15.54         31,792      13.44           28,829       12.09          25,764      11.29         19,032       7.90
    Total
adjustable-rate loans           68,114         30.82         71,286      30.14           75,402       31.62          73,100      32.03         43,105      17.90

      Total gross loans
receivable                     221,052        100.00 %      236,504     100.00 %        238,533      100.00 %       228,292     100.00 %      240,755     100.00 %


Less:
  Deferred fees and
discounts                          424                          223                         313                         280                      (204 )
                                          )

  Allowance for losses    (4,345                             (5,905 )                    (7,405 )                    (5,598 )                  (2,744 )
  Total loans
receivable, net        $ 217,131                         $ 230,822                 $ 231,441                    $ 222,974                  $ 237,807



                                                                                   68
        Loan Maturity and Repricing. The following table sets forth certain information at December 31, 2011 regarding the dollar
amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential
prepayments. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.

                                                                  Real Estate
                                                                                                                             Construction and                                          Commercial
                 One- to Four-family         Home Equity              Multi-family               Commercial                   Development                      Consumer                 Business                        Total
                             Weighted                Weighted                   Weighted                 Weighted                       Weighted                      Weighted                Weighted                          Weighted
                             Average                 Average                    Average                  Average                        Average                       Average                 Average                           Average
                Amount        Rate        Amount      Rate        Amount         Rate        Amount       Rate             Amount        Rate              Amount      Rate        Amount      Rate            Amount            Rate
                                                                                                  (Dollars in thousands)
 Due During
Years Ending
December 31,
2012(1)         $ 3,896           6.27 % $ 12,352          5.81 % $    374           6.57 % $ 1,668            6.80 % $       5,774             6.41 % $      1,135        8.99 % $ 25,631          5.18 % $     50,830              5.71 %
2013                 ---            ---          4         7.75         ---            ---     3,547           2.99           2,991             5.36          2,548        8.79      6,098          5.52         15,188              5.45
2014                 ---            ---        ---           ---        ---            ---     4,075           6.21              ---              ---         2,957        9.13      3,845          3.51         10,877              6.05
2015 and 2016        ---            ---        ---           ---       683           6.00     11,128           4.56              ---              ---         8,485        8.95      4,779          6.03         25,074              6.36
2017 to 2021      1,471           4.25      1,079          7.74         14           5.57      8,513           5.47           1,379             5.43         49,954        9.76      2,984          4.95         65,395              8.73
2022 to 2026        347           5.73      1,072          8.37         10           5.86         ---            ---             ---              ---        36,687        9.23         ---           ---        38,116              9.17
2027 and
following          3,038          5.22         ---          ---         94           5.53         ---            ---             ---             ---         12,440        7.81         ---          ---         15,572              7.29
 Total          $ 8,752           5.55 % $ 14,507          6.14 % $ 1,175            6.14 % $ 28,931           5.00 % $      10,144             5.96 % $    114,206        9.27 % $ 43,337          5.16 % $    221,052              7.36 %




(1) Includes demand loans, loans having no stated maturity and overdraft loans.


                                                                                                               69
        The total amount of loans due after December 31, 2012 which have predetermined interest rates is $ 146.1 million, while the total
amount of loans due after this date which have floating or adjustable interest rates is $ 24.1 million.

         Lending Authority. The Chief Executive Officer and Chief Lending Officer have the authority to approve loans up to $1.5
million. Loans in excess of $1.5 million require approval of the Loan Committee, which includes members of the board of directors of 1st
Security Bank of Washington. The Chief Lending Officer may delegate lending authority to other individuals at levels consistent with their
responsibilities.

          As a state chartered savings bank chartered under Washington law, 1st Security Bank of Washington is not subject to any statutory
lending limits. At December 31, 2011, however, our internal policy limits loans to one borrower and the borrower’s related entities to 20% of
our unimpaired capital and surplus, or approximately $5.4 million at December 31, 2011, without the express prior consent of our board of
directors . Our largest loan or lending relationship at December 31, 2011, totaled $4.3 million and consisted of two lines of credit, the largest
was a $4.0 million warehouse line of credit secured by the underlying notes associated with mortgage loans made to borrowers by the mortgage
banking company. Our next largest lending relationship at December 31, 2011, totaled $3.9 million and consisted of three separate commercial
real estate loans to related parties, the largest of which was $2.8 million secured by a commercial retail building located in Seattle, WA. The
next largest lending relationship at December 31, 2011, totaled $3.7 million and consisted of two lines of credit to a limited liability company
. One of these lines had an outstanding balance of $2.8 million secured by 18 rental homes and the other line had an outstanding balance of $
924,600 secured by 6 rental homes. The next two largest lending relationships at December 31, 2011, were as follows: a $3.5 million
warehouse line of credit secured by the underlying notes associated with mortgage loans made to borrowers by the mortgage banking company;
and a $3.4 million loan secured by an owner-occupied commercial office building in Kirkland, WA . At December 31, 2011, we had twelve
additional relationships that exceeded $2.0 million. All of the foregoing loans were current at December 31, 2011.

          Commercial Real Estate Lending . We offer a variety of commercial real estate loans. Most of these loans are secured by income
producing properties, including retail centers, warehouses and office buildings located in our market areas. We also have a limited amount of
loans secured by multi-family residences. At December 31, 2011, commercial real estate loans (including multi-family residential loans)
totaled $ 30.1 million, or 13.6 %, of our gross loan portfolio.

         Our loans secured by commercial real estate are originated with a fixed or variable interest rate for up to a 10-year term and a 25-year
amortization. The variable rate loans are indexed to the prime rate of interest or a short-term LIBOR rate, with rates ranging from 0.5% below
the prevailing index rate to 3.0% above the prevailing rate. Loan-to-value ratios on our commercial real estate loans typically do not exceed
80% of the appraised value of the property securing the loan. In addition, personal guarantees are obtained from the primary borrowers on
substantially all credits.

         Loans secured by commercial real estate are generally underwritten based on the net operating income of the property and the
financial strength of the borrower. The net operating income, which is the income derived from the operation of the property less all operating
expenses, must be sufficient to cover the payments related to the outstanding debt plus an additional coverage requirement. We generally
require an assignment of rents or leases in order to be assured that the cash flow from the project will be sufficient to repay the
debt. Appraisals on properties securing commercial real estate loans are performed by independent state certified or licensed fee
appraisers. We do not generally maintain insurance or tax escrows for loans secured by commercial real estate. In order to monitor the
adequacy of cash flows on income-producing properties, the borrower is required to provide financial information on at least an annual basis.


                                                                       70
          Loans secured by commercial real estate properties generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans. These loans typically involve large balances to single borrowers or groups of related borrowers. Because payments
on loans secured by commercial and multi-family real estate properties are often dependent on the successful operation or management of the
properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the
project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired.

         We intend to continue to emphasize commercial real estate lending and, as a result, we have assembled a highly experienced team,
with an average of over 20 years experience. Our Chief Lending Officer has over 23 years of commercial lending experience in the
northwestern U.S. region, and other experienced commercial loan officers have recently been hired to support our commercial real estate
lending objectives. As the commercial loan portfolio expands, we intend to bring in additional experienced personnel in the areas of loan
analysis and commercial deposit relationship management, as needed.

          One- to Four-Family Real Estate Lending. We have historically originated loans secured by first mortgages on one- to four-family
residences, primarily in our market area. We originate one- to four-family residential mortgage loans through referrals from real estate agents,
builders and from existing customers. Walk-in customers are also an important source of our loan originations. During 2008, we securitized
into mortgage-backed securities $50.2 million of one- to four-family residential loans, selling $48.6 million of these securities. The
securitization and sale was done to provide liquidity for operations and future lending activities, to repay a portion of our outstanding
borrowings, and to limit our overall exposure to the real estate mortgage market. This transaction also allowed us to reduce the amount of
lower yielding, long-term residential loans in our portfolio and to manage our interest rate risk exposure. At December 31, 2011, one- to
four-family residential mortgage loans totaled $ 8.8 million, or 4.0 %, of our gross loan portfolio.

         In recent years, we have primarily utilized local community mortgage lenders to provide home loans to our customers. This
origination structure allowed us to devote internal resources to commercial and consumer lending, while continuing to serve the needs of our
customers. In order to control the customer experience, as well as to increase and diversify our sources of income, we recently hired several
experienced bankers to implement and oversee an in-house mortgage banking operation. Mortgage banking operations commenced during the
fourth quarter of 2011, with one loan closing and six loan commitments made during the fourth quarter. The mortgage banking operation
originates residential mortgage loans, primarily for sale into the secondary market. Servicing of these loans will be released in some cases and
retained in others, depending on the customer relationship and market execution.

          We will generally underwrite our one- to four-family loans based on the applicant’s ability to repay. This includes employment and
credit history and the appraised value of the subject property. We will lend up to 100% of the lesser of the appraised value or purchase price
for one- to four-family first mortgage loans. For first mortgage loans with a loan-to-value ratio in excess of 80%, we generally require either
private mortgage insurance or government sponsored insurance in order to mitigate the higher risk level associated with higher loan-to-value
loans. Fixed-rate loans secured by one- to four-family residences have contractual maturities of up to 30 years and are generally fully
amortizing, with payments due monthly. Adjustable-rate mortgage loans generally pose different credit risks than fixed-rate loans, primarily
because as interest rates rise the borrower’s payments rise, increasing the potential for default. Properties securing our one- to four-family
loans are appraised by independent fee appraisers who are selected in accordance with industry and regulatory standards. We require our
borrowers to obtain title and hazard insurance, and flood insurance, if necessary. We anticipate that the underwriting criteria used for our new
one- to four-family loans originated by our mortgage banking division will be similar to our historical underwriting standards and will conform
to secondary market guidelines.


                                                                       71
            Home Equity Lending . We have been active in second mortgage and home equity lending, with the focus of this lending being
conducted in our primary market area. Our home equity lines of credit generally have adjustable rates tied to the prime rate of interest with a
draw term of ten years and a term to maturity of 15 years. Monthly payments are based on 1.0% of the outstanding balance with a maximum
combined loan-to-value ratios of up to 90%, including any underlying first mortgage. Second mortgage home equity loans are typically fixed
rate, amortizing loans with terms of up to 15 years. Total second mortgage/home equity loans totaled $ 14.5 million, or 6.6 % of the loan
portfolio, as of December 31, 2011, $ 12.4 million of which were adjustable rate home equity lines of credit.

          Construction and Development Lending . Historically, we have originated construction loans secured by commercial real estate and,
to a lesser extent, one- to four-family residences. We have also originated loans secured by tracts of land for development. Construction and
development lending was modest over the last several years. As the real estate markets weakened, demand for new construction declined and
many builders experienced cash flow problems. Going forward, we intend to increase our residential construction lending and have recently
hired a team of three lenders and one operations manager to support this initiative. This team has over 60 years of combined experience and
expertise in acquisition, development and construction (“ADC”) lending in the Puget Sound market area. We are implementing this strategy to
take advantage of what we believe is an unmet demand for construction and ADC loans to experienced, successful and relationship driven
builders in our market area after many other banks abandoned this segment because of previous overexposure. At December 31, 2011, our
construction and development loans totaled $ 10.1 million, or 4.6 %, of our total loan portfolio and consisted of loans for commercial
construction projects. At December 31, 2011, $623,000 for these loans were on non-accrual status .

          Our residential construction lending program focuses on the origination of loans for the purpose of constructing, on both a pre-sold
and speculative basis, and selling primarily one- to four-family residences within our market area. We generally limit these types of loans to
known builders and developers in our market area. Our construction loans generally provide for the payment of interest only during the
construction phase, which is typically up to 12 months. At the end of the construction phase, the construction loan is generally paid off through
the sale of the newly constructed home and a permanent loan from another lender, although commitments to convert to a permanent loan may
be made by us. Construction loans are made with a maximum loan-to-value ratio of the lower of 95% of cost or 80% of appraised value at
completion. These loans generally include an interest reserve of 5% to 7% of the loan commitment amount.

         Commitments to fund construction loans generally are made subject to an appraisal of the property by an independent licensed
appraiser. We also review and inspect each property before disbursement of funds during the term of the construction loan. Loan proceeds are
disbursed after inspection by a third party inspector based on the percentage of completion method.

         We may also make land acquisition and development loans to builders or residential lot developers on a limited basis. These loans
involve a higher degree of credit risk, similar to commercial construction loans. At December 31, 2011, included in the $ 10.1 million of
construction loans, were three land acquisition and development loans totaling $2.8 million. These land loans also involve additional risks
because the loan amount is based on the projected value of the lots after development. We make these loans for up to 75% of the estimated
value with a term of up to two years. These loans are required to be paid on an accelerated basis as the lots are sold, so that we are repaid
before all the lots are sold.

         Construction financing is generally considered to involve a higher degree of credit risk than longer-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the
property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the
estimate of construction costs is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect
the value of the property. Additionally, if the estimate of value is inaccurate, we may be confronted with a project that, when completed, has a
value that is insufficient to generate full payment.


                                                                       72
          We seek to address the forgoing risks associated with construction development lending by developing and adhering to underwriting
policies, disbursement procedures and monitoring practices. Specifically, we (i) seek to diversify loans in our market areas, (ii) evaluate and
document the creditworthiness of the borrower and the viability of the proposed project, (iii) limit loan-to-value ratios to specified levels, (iv)
control disbursements on construction loans on the basis of on-site inspections by bank personnel, and (v) monitor economic conditions and the
housing inventory in each market. No assurances, however, can be given that these practices will be successful in mitigating the risks of
construction development lending.

          Consumer Lending . Consumer lending represents a significant and important historical activity for us, primarily reflecting our
indirect lending through home improvement contractors and dealers. As of December 31, 2011, consumer loans totaled $ 114.2 million, or
51.7 % of our gross loan portfolio.

         Our indirect home improvement loans, also referred to as fixture secured loans, represent the largest portion of our loan portfolio and
have traditionally been the mainstay of our lending strategy. These loans totaled $ 81.1 million, or 36.7 % of total loans and 71.0 % of total
consumer loans, at December 31, 2011. Indirect home improvement loans are originated through a network of approximately 150 home
improvement contractors and dealers located in Washington and Oregon. Approximately 10 dealers are responsible for a majority of the loan
volume. These fixture secured loans consist of loans for a wide variety of products, such as replacement windows, siding, roofs, HVAC
systems and roofing materials.

         In connection with our fixture secured loans, we receive loan applications from the dealers, and originate the loans based on
pre-defined lending criteria. The loans are processed by us through our loan origination software, with approximately 40% of the loan
applications receiving an automated approval based on the information provided, and the remaining loans processed by our credit analysts. We
follow our internal underwriting guidelines in evaluating loans obtained through the indirect dealer program, including using FICO credit
scores to approve loans.

          Our fixture secured loans generally range in amounts from $2,500 to $35,000, and generally carry terms of up to 12 years with fixed
rates of interest. In some instances, the participating dealer may receive a premium rate for the amount over our initial interest rate. Our
fixture secured loans 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. We generally file a UCC-2 financing statement to perfect our
security interest in the personal property in situations where the borrower’s credit score is below 720 or the home improvement loan is for an
amount in excess of $20,000. Perfection gives us a claim to the collateral that is superior to someone that obtains a lien through the judicial
process subsequent to the perfection of a security interest. The failure to perfect a security interest does not render the security interest
unenforceable against the borrower. However, failure to perfect a security interest risks avoidance of the security interest in bankruptcy or
subordination to the claims of third parties.

         The decline in home prices experienced in our market area in recent years has resulted in a lower level of demand for home
improvement loans, as homeowners are less likely to invest in existing homes if the amount owed on the property exceeds the current fair
value. Thus, we have experienced a modest decline in the balances of these types of loans. In order to maintain our indirect home
improvement loan volume, we are considering expanding this line of business into the State of California. We are currently testing the
California market with a limited number of contractors and dealers. To the extent we determine to move forward with expanding our indirect
home improvement lending program into California, we will need to add contractors and dealers and may require more account executives and
contractor/dealer management resources to manage existing and solicit new contractor/dealer relationships. As application volume for loans
increases, we also may require more processing and underwriting staff and as the portfolio grows, we will require more servicing and
collections staff.


                                                                        73
          We also offer other consumer loans, primarily secured by boats and automobiles. Recreational loans, substantially all of which are
boat loans, represent the second largest segment of our consumer loan portfolio, with the balances increasing in recent periods as a replacement
for the reduction in auto loans. As of December 31, 2011, our recreational loan portfolio totaled $ 24.5 million, or 11.1 % of total loans and
21.4 % of total consumer loans. Boat loans are originated with borrowers on both a direct and indirect basis and carry terms of up to 20 years,
and generally have fixed rates of interest. We require a 10% down payment, and the loan amount may be up to the lesser of 120% of factory
invoice or 90% of the purchase price.

         Automobile loans represent a prior lending focus whereby indirect loans were originated through a dealer network throughout the
northwest region of the United States for new and used cars. However, this program has been terminated and auto loans are currently only
originated at our branch office locations. The balance of auto loans has declined substantially in recent years and totaled $ 5.8 million, or 2.6
% of our gross loan portfolio, at December 31, 2011. It is expected to continue to decline in the future. Auto loans currently originated by the
branches may be written for up to seven years for a new or used car with fixed rates of interest. We also originate a small number of other
consumer loans, including direct home improvement, loans on deposit and other consumer loans, which totaled $ 2.8 million as of December
31, 2011. These loans generally carry fixed as well and terms up to five years.

         In evaluating any consumer loan application, a borrower’s FICO score is utilized as an important indicator of credit risk. Over the last
several years we have emphasized originations of loans to consumers with higher credit scores . This has resulted in a lower level of loan
charge-offs in recent periods. As of December 31, 2011, 65.0 % of our consumer loan portfolio was originated with borrowers having a FICO
score over 720 at the time of origination, and 94.1 % was originated with borrowers having a FICO score over 660 at the time of origination.

        Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition,
management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing
the number of customer relationships and providing cross-marketing opportunities.

          Consumer and other loans generally entail greater risk than do one- to four-family residential mortgage loans, particularly in the case
of consumer loans that are secured by rapidly depreciable assets, such as boats, automobiles and other recreational vehicles. In these cases, any
repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result,
consumer loan collections are dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. In the case of our fixture secured loans, it is very difficult to repossess the personal property
securing these loans as they are typically attached to the borrower’s personal residence. Accordingly, if a borrower defaults on a fixture
secured loan our only practical recourse, due to the general small size of these loans, is to wait until the borrower wants to sell or refinance the
home, at which time if we have a perfected security interest we generally will be able to collect.


                                                                        74
         Commercial Business Lending. We originate commercial business loans and lines of credit to local small- and mid-sized
businesses in our Puget Sound market area that are secured by accounts receivable, inventory or property, plant and equipment. Consistent
with management’s objectives to expand our commercial business lending, in 2010 we commenced a mortgage warehouse lending program
through which we fund third party mortgage bankers. Under this program we provide short term funding to the mortgage banking companies
for the purpose of originating residential mortgage loans for sale into the secondary market. Our warehouse lending lines are secured by the
underlying notes associated with mortgage loans made to borrowers by the mortgage banking company and we generally require guarantees
from the principle shareholder(s) of the mortgage banking company. These loans are repaid when the note is sold by the mortgage bank into
the secondary market, with the proceeds from the sale used to pay down the outstanding loan before being dispersed to the mortgage bank. At
December 31, 2011, we had approved warehouse lending lines for nine companies with varying limits up to $4.0 million for an aggregate
amount of $ 35.5 million. During the year ended December 31, 2011, we processed approximately 900 loans and funded approximately $
226.6 million under this program , with $17.4 million outstanding at December 31, 2011. In addition, we recently started to offer Small
Business Administration loans.

          Our commercial business loans may be fixed-rate, but are usually adjustable-rate loans indexed to the prime rate of interest, plus a
margin. Some of our commercial business loans, such as those made pursuant to our warehouse lending program, are structured as lines of
credit with terms of 12 months and interest only payments required during the term, while other loans may reprice on an annual basis and
amortize over a two to five year period. Due to the current interest rate environment, these loans and lines of credit are generally originated
with a floor, which is generally set at 5.5%. Loan fees are generally charged at origination depending on the credit quality and account
relationships of the borrower. Advance rates on these types of lines are generally limited to 80% of accounts receivable and 50% of
inventory. We also generally require the borrower to establish a deposit relationship with us as part of the loan approval process. At December
31, 2011, our commercial business loan portfolio totaled $ 43.3 million, or 19.6 %, of our gross loan portfolio.

          At December 31, 2011, most of our commercial business loans were secured. Our commercial business lending policy includes credit
file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral,
as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an
important aspect of our credit analysis. We generally require personal guarantees on our commercial business loans. Nonetheless, commercial
business loans are believed to carry higher credit risk than residential mortgage loans. At December 31, 2011, our largest commercial business
lending relationship consisted of two loans, with an aggregate outstanding balance of $ 4.3 million, to a single borrower ; a warehouse line of
credit secured by the underlying notes associated with mortgage loans and a line of credit secured by all business assets . These loans were
performing in accordance with their terms at December 31, 2011.

          Unlike residential mortgage loans, commercial business loans, particularly unsecured loans, are made on the basis of the borrower’s
ability to make repayment from the cash flow of the borrower’s business and, therefore, are of higher risk. We make commercial loans secured
by business assets, such as accounts receivable, inventory, equipment, real estate and cash as collateral with loan-to-value ratios of up to 80%,
based on the type of collateral. This collateral depreciates over time, may be difficult to appraise and may fluctuate in value based on the
specific type of business and equipment used. As a result, the availability of funds for the repayment of commercial business loans may be
substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions).


                                                                       75
Loan Originations, Servicing, Purchases and Sales

          We originate both fixed-rate and adjustable-rate loans. Our ability to originate loans, however, is dependent upon customer demand
for loans in our market areas. Over the past few years, we have continued to originate consumer loans, and increased our emphasis on
commercial real estate and commercial business lending, and to a lesser extent construction and development lending. Demand is affected by
competition and the interest rate environment. In periods of economic uncertainty, the ability of financial institutions, including us, to originate
large dollar volumes of commercial business and real estate loans may be substantially reduced or restricted, with a resultant decrease in
interest income. From time to time, we purchase loan participations to supplement our loan originations.

         In addition to interest earned on loans and loan origination fees, we receive fees for loan commitments, late payments and other
miscellaneous services. The fees vary from time to time, generally depending on the supply of funds and other competitive conditions in the
market.

          We historically sold long term, fixed rate residential real estate loans in the secondary market. These loans were sold in order to
improve our interest rate risk. These loans are generally sold for cash in amounts equal to the unpaid principal amount of the loans determined
using present value yields to the buyer. These sales allowed for a servicing fee on loans when the servicing is retained by us. Most residential
real estate loans sold by us were sold with servicing retained. In addition, during the year ended December 31, 2008, we securitized and sold
$48.6 million of our existing portfolio of residential mortgage loans. We earned mortgage servicing income of $ 128,000 for the year ended
December 31, 2011. At December 31, 2011, we were servicing a $ 45.8 million portfolio. Those servicing rights constituted a $ 200,000
asset on our books on that date, which is amortized in proportion to and over the period of the net servicing income. These mortgage servicing
rights are periodically evaluated for impairment based on their fair value, which takes into account the rates and potential prepayments of those
sold loans being serviced. The fair value of our mortgage servicing rights at December 31, 2011 was $ 255,000. See Notes 4 and 14 of the
Notes to Financial Statements.

        Sales of whole real estate loans and participations in real estate loans can be beneficial to us since these sales generally generate
income at the time of sale, produce future servicing income on loans where servicing is retained, provide funds for additional lending and other
investments, and increase liquidity.


                                                                        76
         The following table shows total loans originated, purchased, sold and repaid during the periods indicated.

                                                                                                                 Years Ended December 31,
                                                                                                               2011          2010       2009
                                                                                                                       (In thousands)
Originations by type:
Fixed-rate:
  One- to four-family                                                                                      $        44    $    2,378    $     7,331
  Home equity                                                                                                       ---           ---           148
  Multi-family                                                                                                      31           759              6
  Commercial                                                                                                     6,436         3,037          3,813
  Construction and development                                                                                   1,302            ---           404
  Consumer                                                                                                      26,254        53,043         63,047
  Commercial business (excluding warehouse lines)                                                                8,098           384            476
   Total fixed-rate                                                                                             42,165        59,601         75,225

Adjustable- rate:
 One- to four-family                                                                                               533         1,221          2,582
 Home equity                                                                                                     4,007         5,266          4,743
 Multi-family                                                                                                       ---           ---            ---
 Commercial                                                                                                        163           555          1,122
 Construction and development                                                                                    5,475           775          3,471
 Consumer                                                                                                           ---            3             11
 Commercial business (excluding warehouse lines)                                                                12,956        15,380         23,853
 Warehouse lines, net                                                                                           17,405        11,940          8,199
   Total adjustable-rate                                                                                        40,539        35,140         43,981
   Total loans originated                                                                                       82,704        94,741        119,206

Sales and repayments:
One- to four-family                                                                                                 ---        ---          6,429
Commercial                                                                                                       2,100         ---             ---
Consumer                                                                                                            ---        ---             ---
Commercial business                                                                                              1,470         ---             ---
    Total loans sold                                                                                             3,570         ---          6,429
Mortgage-backed securities                                                                                          ---        ---             ---
    Total sales                                                                                                  3,570         ---          6,429
    Total principal repayments                                                                                  94,586     96,770         102,536
    Total reductions                                                                                            98,156     96,770         108,965
    Net increase (decrease)                                                                                $   (15,452 ) $ (2,029 )     $ 10,241


Asset Quality

         When a borrower fails to make a required payment on a residential real estate loan, we attempt to cure the delinquency by contacting
the borrower. In the case of loans secured by residential real estate, a late notice typically is sent 16 days after the due date, and the borrower is
contacted by phone within 16 to 25 days after the due date. When the loan is 30 days past due, an action plan is formulated for the credit under
the direction of the Manager of Collection department. Generally, a delinquency letter is mailed to the borrower. All delinquent accounts are
reviewed by a loan control representative who attempts to cure the delinquency by contacting the borrower once the loan is 30 days past due. If
the account becomes 60 days delinquent and an acceptable repayment plan has not been agreed upon, a loan control representative will
generally refer the account to legal counsel with instructions to prepare a notice of intent to foreclose. The notice of intent to foreclose allows
the borrower up to 30 days to bring the account current. If foreclosed, generally we take title to the property and sell it directly through a real
estate broker.


                                                                         77
          Delinquent consumer loans are handled in a similar manner. Appropriate action is taken in the form of phone calls and notices to
collect any loan payment that is delinquent more than 16 days. Once the loan is 90 days past due, it is classified as nonaccrual. Generally,
credits are charged off if past due 120 days, unless the collections department provides support for continuing its collection efforts. Our
procedures for repossession and sale of consumer collateral are subject to various requirements under the applicable consumer protection laws
as well as other applicable laws and the determination by us that it would be beneficial from a cost basis.

          Delinquent commercial business loans and loans secured by commercial real estate are handled by the loan officer in charge of the
loan, who is responsible for contacting the borrower. The loan officer works with outside counsel and, in the case of real estate loans, a third
party consultant to resolve problem loans. In addition, management meets as needed and reviews past due and classified loans, as well as other
loans that management feels may present possible collection problems, which are reported to the loan committee and the board on a monthly
basis. If an acceptable workout of a delinquent commercial loan cannot be agreed upon, we generally initiate foreclosure or repossession
proceedings on any collateral securing the loan.

         The following table shows our delinquent loans by the type of loan and number of days delinquent as of December 31, 2011.

                                                                    Loans Delinquent For:
                                                                                                              Total Loans Delinquent
                                     60-89 Days                         90 Days and Over                          60 Days or More
                                                  Percent of                              Percent of                              Percent of
                                                     Loan                                   Loan                                    Loan
                        Number        Amount      Category        Number      Amount      Category         Number     Amount      Category
                                                                   (Dollars in thousands)
Real estate loans:
 One- to four-family           ---   $      ---           --- %             2   $    412         4.71 %           2    $    412           4.71 %
 Home equity                    2           69          0.48                7        267         1.85             9         336           2.32
 Construction
 and development               ---          ---           ---               1        623         6.14             1         623           6.14
    Total real estate
      loans                     2           69          0.11            10          1,302        2.05            12        1,371          2.16

Consumer:
 Indirect home
   improvement                 53          453          0.56            52           454         0.56           105         907           1.12
 Automobile                    10           53          0.91             3            23         0.39            13          76           1.30
 Recreational                   2           50          0.20             2             1           ---            4          51           0.21
 Home improvement               1           31          3.32            ---           ---          ---            1          31           3.32
 Other                          3           10          0.55             5            20         1.10             8          30           1.64
   Total consumer
      loans                    69          597          0.52            62           498         0.44           131        1,095          0.96
Commercial business
 loans                         ---          ---           ---            5          427          0.99             5        427            0.99
   Total                       71    $     666          0.30 %          77      $ 2,227          1.01 %         148    $ 2,893            1.31 %



                                                                       78
           Non-performing Assets. The following table sets forth information with respect to our non-performing assets.

                                                                                                                     December 31,
                                                                                               2011             2010           2009            2008             2007
Non-accruing loans:                                                                                               (Dollars in thousands)
 Real estate loans :

    One- to four-family                                                                    $      412       $       211     $       ---    $       ---      $      ---
    Home equity                                                                                   267               574             40             87              10
    Commercial                                                                                     ---            1,201             ---            ---             ---
    Construction and development                                                                  623             2,175          6,758          1,953              ---
  Total real estate loans                                                                       1,302             4,161          6,798          2,040              10

  Consumer loans:
   Indirect home improvement                                                                      454               522            276            308             117
   Automobile                                                                                      23                54             35             62              50
   Recreational                                                                                      1               38            119             32                3
   Home improvement                                                                                ---               75               3            ---             ---
   Other                                                                                           20                 3             60             16                3
     Total consumer loans                                                                         498               692            493            418             173
  Commercial business loans                                                                       427             1,387             ---            ---             ---
     Total non-accruing loans                                                                   2,227             6,240          7,291          2,458             183

Accruing loans delinquent more than 90 days:
    Home equity                                                                                       ---            62           163                 30           ---
      Total accruing loans delinquent more than 90 days                                               ---            62           163                 30           ---

Real estate owned                                                                               4,589             3,701          5,484                ---          ---

Repossessed automobiles, recreational vehicles                                                        78             78           130                 44           16

Total non-performing assets                                                                $    6,894       $    10,081     $   13,068     $    2,532       $     199


Restructured loans                                                                         $    3,249       $     1,508     $       ---    $          ---   $      ---

Total non-performing assets as a percentage of total assets                                      2.43 %            3.45 %         4.64 %         0.99 %           0.08 %

         For the year ended December 31, 2011, gross interest income which would have been recorded had the non-accruing loans been
current in accordance with their original terms amounted to $ 266,000. The amount that was included in interest income on such loans was
$229,000.

           Real Estate Owned and Repossessed Property . Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure
is classified as real estate owned until it is sold. When the property is acquired, it is recorded at the lower of its cost, which is the unpaid
principal balance of the related loan plus foreclosure costs, or the fair market value of the property less selling costs. We had five real estate
owned properties as of December 31, 2011, totaling $ 4.6 million, consisting of one $ 1.3 million residential lot development, one $ 1.5 million
commercial lot development, one $ 900,000 commercial building/lot, one $700,000 condo conversion, and one $200,000 single family
residential building . We had repossessed property totaling $ 78,000 at December 31, 2011.

          Restructured Loans. According to generally accepted accounting principles, we are required to account for certain loan
modifications or restructuring as a “troubled debt restructuring.” In general, the modification or restructuring of a debt is considered a troubled
debt restructuring if we, for economic or legal reasons related to the borrower’s financial difficulties, grant a concession to the borrowers that
we would not otherwise consider. We had six restructured loans as of December 31, 2011, totaling $ 3.2 million , of which $3.1 million of
these restructured loans have performed as agreed for over six months and are listed as accrual loans. The remaining three loans totaling
$132,000 are secured by single family residential loans with adequate collateral and are included in non-accruing loans in the table above .


                                                                        79
         Other Assets Especially Mentioned. At December 31, 2011, there was approximately $ 973,000 of loans with respect to which
known information about the possible credit problems of the borrowers have caused management to have doubts as to the ability of the
borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset
categories.

          Classified Assets. Federal regulations provide for the classification of lower quality loans and other assets (such as other real estate
owned and repossessed property), debt and equity securities, as substandard, doubtful or loss. An asset is considered substandard if it is
inadequately protected by the current net worth and pay capacity of the borrower or of any collateral pledged. Substandard assets include those
characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have
all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or
liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets classified as loss
are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is
not warranted.

         When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem
prudent to address specific impairments. General allowances represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem
assets. When an insured institution classifies problem assets as a loss, it is required to charge off those assets in the period in which they are
deemed uncollectible. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review
by the Federal Deposit Insurance Corporation and the Washington Department of Financial Institutions, which can order the establishment of
additional loss allowances. Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated as special mention.

          In connection with the filing of periodic reports with the Federal Deposit Insurance Corporation and in accordance with our
classification of assets policy, we regularly review the problem assets in our portfolio to determine whether any assets require classification in
accordance with applicable regulations. On the basis of our review of our assets, as of December 31, 2011, we had classified $ 12.3 million of
our assets. The $ 12.3 million of classified assets, consisting of $ 4.7 million in other real estate owned and repossessed property and $ 7.6
million of substandard and restructured loans, represented 45.8 % of equity and 4.3 % of total assets as of December 31, 2011. With the
exception of the classified loans, management is not aware of any loans as of December 31, 2011, where the known credit problems of the
borrower would cause us to have serious doubts as to the ability of such borrowers to comply with their present loan repayment terms. The $
973,000 of loans under the caption “Other Assets Especially Mentioned” above are not included in our classified assets.

Allowance for Loan Losses

         We maintain an allowance for loan losses to absorb probable incurred credit losses in the loan portfolio. The allowance is based on
ongoing, monthly assessments of the estimated probable incurred losses in the loan portfolio. In evaluating the level of the allowance for loan
losses, management considers the types of loans and the amount of loans in the loan portfolio, peer group information, historical loss
experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing
economic conditions. Large groups of smaller balance homogeneous loans, such as residential real estate, small commercial real estate, home
equity and consumer loans, are evaluated in the aggregate using historical loss factors and peer group data adjusted for current economic
conditions. More complex loans, such as commercial real estate loans and commercial business loans, are evaluated individually for
impairment, primarily through the evaluation of net operating income and available cash flow and their possible impact on collateral values.


                                                                        80
        The allowance is increased by the provision for loan losses, which is charged against current period earnings and decreased by the
amount of actual loan charge-offs, net of recoveries.

         The provision for loan losses was $ 2.4 million for the year ended December 31, 2011. The allowance for loan losses was $ 4.3
million or 2.0 % of total loans at December 31, 2011 as compared to $5.9 million, or 2.5% of total loans outstanding at December 31, 2010.
The level of the allowance is based on estimates, and the ultimate losses may vary from the estimates. Management will continue to review the
adequacy of the allowance for loan losses and make adjustments to the provision for loan losses based on loan growth, economic conditions,
charge-offs and portfolio composition.

         Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and
timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In the opinion of
management, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio. See Notes 1 and 3 of the
Notes to Financial Statements.


                                                                       81
           The following table summarizes the distribution of the allowance for loan losses by loan category.

                                                                               December 31
                                    2011                   2010                          2009                   2008                   2007
                                                              Percent of                    Percent of             Percent of             Percent of
                                       Percent of               loans in                      loans in               loans in               loans in
                                        loans in                 each                          each                   each                   each
                                          each                  category                      category               category               category
                                        category                   to                            to                     to                     to
                                           to                     total                         total                  total                  total
                        Amount        total loans   Amount       loans         Amount          loans     Amount       loans     Amount       loans
                                                                           (Dollars in thousands)

Allocated at end of
year to:

Real estate loans
 One- to
 four-family            $    181             3.96 % $    170        5.59 % $         59           3.45 % $    16         3.05 % $    347       25.15 %
 Home equity                 242             6.56        265        6.62            191           6.90       170         8.19        212        8.19
 Multi-family                  9             0.53          5        0.49              2           0.17         1         0.18          7        0.41
 Commercial                  218            13.09        246       11.86            370          12.20     2,513        11.33         48        7.19
 Construction or
    development              206             4.59        670        4.15           1,751          7.29       505        10.45        106        2.71
    Total real estate
    loans                    856            28.73       1,356      28.71           2,373         30.01     3,205        33.20        720       43.65

Consumer loans
 Indirect home
 improvement                2,205           36.70       2,580      40.10           2,108         37.68     1,188        32.94       1,069      28.89
 Automobile                   279            2.64         405       5.35             931          9.79       583        13.37         435      10.80
 Recreational                 412           11.07         544      10.19             633          7.55       197         5.33         192       4.87
 Home
 improvement                  20             0.42         47        0.55             64           0.72        54         0.96        126        1.23
 Other                        38             0.83         68        1.21            168           1.80       125         2.71        142        2.59
   Total consumer
   loans                    2,954           51.66       3,644      57.40           3,904         57.54     2,147        55.31       1,964      48.38

Commercial
business loans               535            19.61        905       13.89           1,128         12.45       246        11.49         60        7.97

   Total                $ 4,345            100.00 % $ 5,905       100.00 % $ 7,405              100.00 % $ 5,598       100.00 % $ 2,744       100.00 %



                                                                              82
        Management believes that it uses the best estimate information available to determine the allowance for loan losses. However,
unforeseen market conditions could result in adjustments to the allowance for loan losses and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in determining the allowance. The following table sets forth an analysis of our
allowance for loan losses at the dates and for the periods indicated.

                                                                                     Years Ended December 31,
                                                             2011                2010             2009             2008                2007
                                                                                       (Dollars in thousands)
Balance at beginning of year:                            $       5,905       $      7,405 $           5,598 $         2,744        $      2,706

Charge-offs:
 Real estate loans
   One- to four-family                                               11                32              ---                 ---                 ---
   Home equity                                                      435               163             160                  18                   1
   Commercial                                                       152                ---             ---                 ---                 ---
   Construction                                                      38             1,529           1,436                 843                  ---
     Total real estate loans                                        636             1,724           1,596                 861                   1
 Consumer loans
   Indirect home improvement                                     2,497              2,490           2,195             1,006                 600
   Automobile                                                      507                637           1,380               615                 427
   Recreational                                                    372                413             545                93                 108
   Home improvement                                                 52                 76              35                11                  13
   Other                                                            91                178             174               112                  61
     Total consumer loans                                        3,519              3,794           4,329             1,837               1,209
 Commercial business loans                                         684                175              ---               ---                 ---
     Total charge-offs                                           4,839              5,693           5,925             2,698               1,210

Recoveries:
 Real estate loans
   Home equity                                                       30                ---             ---                 60                  ---
     Total real estate loans                                         30                ---             ---                 60                  ---
 Consumer loans
   Indirect home improvement                                        528               351             262                 269                 214
   Automobile                                                       252               275             305                 178                 295
   Recreational                                                      52                70              53                  36                  70
   Home improvement                                                  14                ---              1                   1                  16
   Other                                                             34                17              44                  71                 129
     Total consumer loans                                           880               713             665                 555                 724
 Commercial business loans                                           ---               ---             ---                 ---                 ---

      Total recoveries                                              910               713             665                 615                 724

Net charge-offs                                                  3,929              4,980           5,260             2,083                 486
Additions charged to operations                                  2,369              3,480           7,067             4,937                 578
Reclassification for off-balance sheet contingencies                ---                ---             ---               ---                (54 )
Balance at end of year                                   $       4,345       $      5,905     $     7,405      $      5,598        $      2,744


Net charge-offs during the period to average loans
 outstanding during the year                                        1.81 %           2.11 %           2.27 %              1.00 %              0.21 %


Net charge-offs during the year to average
 non-performing assets                                              0.51 %          47.40 %         89.36 %          148.57 %            195.18 %


Allowance as a percentage of non-performing loans               195.11 %            93.70 %         99.34 %          225.00 %           1499.45 %
Allowance as a percentage of gross loans receivable
  (end of year )                                      1.97 %   2.50 %   3.10 %   2.45 %   1.14 %



                                                         83
Investment Activities

         General. Under Washington law, savings banks are permitted to invest in various types of liquid assets, including U.S. Treasury
obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, banker’s acceptances,
repurchase agreements, federal funds, commercial paper, investment grade corporate debt securities, and obligations of states and their political
sub-divisions.

         Our Chief Financial Officer has the basic responsibility for the management of our investment portfolio, subject to consultation with
our Chief Executive Officer, and the direction and guidance of the board of directors. Various factors are considered when making investment
decisions, including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments will
be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of
new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.

          The general objectives of our investment portfolio will be to provide liquidity when loan demand is high, to assist in maintaining
earnings when loan demand is low and to maximize earnings while satisfactorily managing risk, including credit risk, reinvestment risk,
liquidity risk and interest rate risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and
Liability Management and Market Risk.” We expect that a portion of the net proceeds of this offering initially will be used to invest in US
Government and federal agency securities of various maturities, mortgage-backed or other marketable securities, deposits in other financial
institutions, or a combination thereof, until they can be deployed in an orderly fashion.

       As a member of the Federal Home Loan Bank of Seattle, we had $1.8 million in stock of the Federal Home Loan Bank of Seattle at
December 31, 2011. For the year ended December 31, 2011, the Bank received no dividends from the Federal Home Loan Bank of Seattle.

         The table below sets forth information regarding the composition of our securities portfolio and other investments at the dates
indicated. At December 31, 2011, our securities portfolio did not contain securities of any issuer with an aggregate book value in excess of
10% of our equity capital, excluding those issued by the United States Government or its agencies.

                                                                                     December 31,
                                                      2011                                   2010                               2009
                                             Book                Fair               Book              Fair            Book                Fair
                                             Value              Value               Value            Value            Value              Value
                                                                                  (Dollars in thousands)
     Securities available-for-sale:
       Federal agency securities         $       14,202     $      14,329     $        6,175    $       6,086     $            ---   $            ---
       Municipal Bonds                            3,905             4,005              1,144            1,103                  ---                ---
       Mortgage-backed                            8,476             8,565                434              453                 592                603
         Total available-for-sale                26,583            26,899              7,753            7,642                 592                603

        Federal Home Loan Bank
        stock                                     1,797             1,797              1,797            1,797              1,797             1,797

     Total securities                    $       28,380     $      28,696     $        9,550    $       9,439     $        2,389     $       2,400



                                                                         84
         The composition and contractual maturities of our investment portfolio at December 31 2011, excluding Federal Home Loan Bank
stock, are indicated in the following table. The yields on municipal bonds have not been computed on a tax equivalent basis.

                                                                                           December 31, 2011
                                     1 year or less           Over 1 year to 5 years       Over 5 to 10 years           Over 10 years                   Total Securities
                                                 Weighted                    Weighted                   Weighted                  Weighted                    Weighted
                                 Amortized       Average     Amortized        Average    Amortized       Average    Amortized      Average    Amortized       Average        Fair
                                   Cost            Yield       Cost             Yield      Cost           Yield       Cost          Yield       Cost            Yield       Value
Securities available-for-sale:
  Federal agency securities      $       ---           ---   $    3,399           1.33 % $         7,440     1.77 % $    3,363         1.36 % $    14,202           1.57 % $ 14,329
  Municipal Bonds                        ---           ---        1,859           2.34               862     3.73        1,184         4.29         3,905           3.24      4,005
  Mortgage-backed                        ---           ---           ---            ---            3,036     2.56        5,440         2.64         8,476           2.61      8,565

    Total available-for-sale     $       ---           ---   $    5,258           1.69 % $        11,338     2.13 % $    9,987         2.41 % $    26,583           2.15 % $ 26,899




                                                                                             85
Deposit Activities and Other Sources of Funds

         General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment
purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and market conditions. Borrowings from the Federal Home Loan Bank of Seattle are used to
supplement the availability of funds from other sources and also as a source of term funds to assist in the management of interest rate risk.

          Our deposit composition reflects a mixture with certificates of deposit accounting for approximately 38.9 % of the total deposits at
December 31, 2011 and interest and noninterest-bearing checking, savings and money market accounts comprising the balance of total
deposits. We rely on marketing activities, convenience, customer service and the availability of a broad range of deposit products and services
to attract and retain customer deposits. We also had $ 4.3 million of brokered deposits at December 31, 2011.

         Deposits . Deposits are attracted from within our market area through the offering of a broad selection of deposit instruments,
including checking accounts, money market deposit accounts, savings accounts and certificates of deposit with a variety of rates. Deposit
account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among
other factors. In determining the terms of our deposit accounts, we consider the development of long term profitable customer relationships,
current market interest rates, current maturity structure and deposit mix, our customer preferences and the profitability of acquiring customer
deposits compared to alternative sources.

         The following table sets forth our total deposit activities for the periods indicated.

                                                         Years Ended December 31,
                                                   2011                2010                   2009
                                                       (Dollars in thousands)

Beginning balance                            $      243,957       $      230,985        $     216,056
Net deposits (withdrawals)                             (365 )              9,304               10,697
Interest credited                                     2,826                3,668                4,232
Ending balance                               $      246,418       $      243,957        $     230,985


Net increase (decrease)                      $        2,461       $       12,972        $         14,929


Percent increase (decrease)                            1.01 %                  5.62 %               6.91 %



                                                                          86
         The following table sets forth the dollar amount of savings deposits in the various types of deposits programs we offered at the dates
indicated.

                                                                                  December 31,
                                                     2011                              2010                                 2009
                                                             Percent                             Percent                            Percent
                                            Amount           of Total          Amount           of Total          Amount            of Total
                                                                              (Dollars in thousands)
       Transactions and Savings
       Deposits:

       Interest-bearing checking        $      20,669              8.39 % $        19,458              7.98 % $       22,764              9.85 %
       Noninterest-bearing checking            19,254              7.81            18,547              7.60           25,126             10.88
       Savings                                 11,567              4.69            12,961              5.31           16,858              7.30
       Money market                            99,022             40.18            81,470             33.40           53,611             23.21

       Total transaction and savings
         deposits                             150,512             61.07           132,436             54.29          118,359             51.24


       Certificates:

       0.00 – 1.99%                            65,421             26.55            74,366             30.48           38,303             16.58
       2.00 – 3.99%                            29,167             11.84            33,006             13.53           59,618             25.81
       4.00 – 5.99%                             1,312              0.53             3,720              1.52           14,290              6.19
       6.00 – 7.99%                                ---               ---               ---               ---              18              0.01
       8.00 – 9.99%                                 6              0.01               429              0.18              397              0.17
       10.00 and over                              ---               ---               ---               ---              ---               ---

       Total certificates                      95,906             38.93           111,521             45.71          112,626             48.76

       Total deposits                   $     246,418            100.00 % $       243,957            100.00 % $      230,985            100.00 %



                                                                        87
          The following table sets forth the rate and maturity information of our time deposit certificates at December 31, 2011.

                                                                                                                       10.00%                          Percent
                                   0.00-           2.00-           4.00-          6.00-          8.00-                   or                               of
                                  1.99%           3.99%           5.99%          7.99%          9.99%                  greater           Total          Total
                                                                              (Dollars in thousands)

Certificate accounts
maturing
in quarter ending:

March 31, 2012              $       7,540     $       386     $       291      $         ---     $            6    $         ---     $     8,223           8.57 %
June 30, 2012                      10,253           7,606               9                ---                 ---             ---          17,868          18.63
September 30, 2012                 14,884             135              14                ---                 ---             ---          15,033          15.67
December 31, 2012                  22,361           1,240             395                ---                 ---             ---          23,996          25.02
March 31, 2013                        826             431              82                ---                 ---             ---           1,339           1.40
June 30, 2013                       1,292              81              ---               ---                 ---             ---           1,373           1.43
September 30, 2013                  1,553             776             130                ---                 ---             ---           2,459           2.56
December 31, 2013                     304           1,824             208                ---                 ---             ---           2,336           2.44
March 31, 2014                        207             317             174                ---                 ---             ---             698           0.73
June 30, 2014                         321             437              ---               ---                 ---             ---             758           0.79
September 30, 2014                    210             307              ---               ---                 ---             ---             517           0.54
December 31, 2014                   4,356             638              ---               ---                 ---             ---           4,994           5.21
Thereafter                          1,314          14,989               9                ---                 ---             ---          16,312          17.01

  Total                     $      65,421     $    29,167     $     1,312      $         ---     $            6    $         ---     $    95,906         100.00 %


  Percent of total                  68.21 %         30.41 %          1.37 %              --- %          0.01 %               --- %        100.00 %


        The following table indicates the amount of our jumbo certificates of deposit by time remaining until maturity as of December 31,
2011. Jumbo certificates of deposit are certificates in amounts of $100,000 or more.

                                                                                                 Maturity
                                                                                         Over                 Over
                                                                  3 Months              3 to 6               6 to 12                Over
                                                                   or Less              Months               Months              12 Months             Total
                                                                                                       (In thousands)

Certificates of deposit less than $100,000                    $            3,935    $          7,779     $         12,649    $       11,857        $     36,220

Certificates of deposit of $100,000 or more                                4,288           10,089                  26,380            18,929              59,686

  Total certificates of deposit                               $            8,223    $      17,868        $         39,029    $       30,786        $     95,906


          The Board of Governors of the Federal Reserve System requires 1st Security Bank of Washington to maintain reserves on transaction
accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the Federal Reserve
Bank of San Francisco. Negotiable order of withdrawal (NOW) accounts and other types of accounts that permit payments or transfers to third
parties fall within the definition of transaction accounts and are subject to the reserve requirements, as are any non-personal time deposits at a
savings bank. As of December 31, 2011, our deposit with the Federal Reserve Bank of San Francisco and vault cash exceeded our reserve
requirements.


                                                                               88
         Borrowings. Although customer deposits are the primary source of funds for our lending and investment activities, we do use
advances from the Federal Home Loan Bank of Seattle, and to a lesser extent federal funds purchased to supplement our supply of lendable
funds, to meet short-term deposit withdrawal requirements and also to provide longer term funding to better match the duration of selected loan
and investment maturities.

         As one of our capital management strategies, we have used advances from the Federal Home Loan Bank of Seattle to fund loan
originations in order to increase our net interest income. Depending upon the retail banking activity and the availability of excess
post-conversion capital that may be provided to us, we will consider and may undertake additional leverage strategies within applicable
regulatory requirements or restrictions. These borrowings would be expected to primarily consist of Federal Home Loan Bank of Seattle
advances.

          As a member of the Federal Home Loan Bank of Seattle, we are required to own capital stock in the Federal Home Loan Bank of
Seattle and are authorized to apply for advances on the security of that stock and certain of our mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been
met. Advances are individually made under various terms pursuant to several different credit programs, each with its own interest rate and
range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit. We maintain a committed credit facility with the Federal Home Loan
Bank of Seattle that provides for immediately available advances up to an aggregate of $ 26.4 million. At December 31, 2011, our outstanding
advances from the Federal Home Loan Bank of Seattle totaled $ 8.9 million. At December 31, 2011, we also had $ 107.7 million additional
short-term borrowing capacity with the Federal Reserve Bank.

         The following tables set forth information regarding our borrowing at the end of and during the periods indicated. The tables include
both long- and short-term borrowings.

                                                          Years Ended December 31,
                                                   2011                2010                  2009
                                                            (Dollars in thousands)

Maximum balance:
 Federal Home Loan Bank advances              $       30,900        $        18,000      $     11,900
 Fed Funds Purchased                                      ---       $            ---     $        600
 Federal Reserve Bank                                  1,000        $        37,000      $     30,000

Average balances:
 Federal Home Loan Bank advances                        5,741       $         4,879      $      6,147
 Fed Funds Purchased                                       ---      $            ---     $          7
 Federal Reserve Bank                                       3       $         2,620      $      9,977

Weighted average interest rate:
 Federal Home Loan Bank advances                          1.07 %               1.42 %               4.41 %
 Fed Funds Purchased                                        --- %                --- %              1.27 %
 Federal Reserve Bank                                     0.75 %               0.29 %               0.25 %


                                                                        89
                                                                                December 31,
                                                                  2011                2010              2009
                                                                           (Dollars in thousands)

Balance outstanding at end of period:
 Federal Home Loan Bank advances                              $       8,900        $    21,900      $      5,900
 Fed Funds Purchased                                                     ---                ---               ---
 Federal Reserve Bank                                                    ---                ---           20,000
    Total borrowings                                          $       8,900        $    21,900      $     25,900


Weighted average interest rate of:
 Federal Home Loan Bank advances                                         2.08 %           1.42 %               4.41 %
 Fed Funds Purchased                                                       --- %            --- %                --- %
 Federal Reserve Bank                                                      --- %            --- %              0.25 %

Subsidiary and Other Activities

         We have one inactive subsidiary. We had no capital investment in that inactive subsidiary as of December 31, 2011.

Competition

          We face strong competition in attracting deposits. Competition in originating real estate loans comes primarily from other savings
institutions, commercial banks, credit unions, life insurance companies and mortgage bankers. Other savings institutions, commercial banks,
credit unions and finance companies provide vigorous competition in consumer lending, including our indirect lending. Commercial business
competition is primarily from local commercial banks. We compete by delivering high-quality, personal service to our customers that result in
a high level of customer satisfaction.

          Our market area has a high concentration of financial institutions, many of which are branches of large money center and regional
banks that have resulted from the consolidation of the banking industry in Washington and other western states. These include such large
national lenders as Wells Fargo, Bank of America, Chase and others in our market area that have greater resources than we do and offer
services that we do not provide. For example, we do not offer trust services. Customers who seek “one-stop shopping” may be drawn to
institutions that offer services that we do not.

          We attract our deposits through our branch office system. Competition for those deposits is principally from other savings
institutions, commercial banks and credit unions located in the same community, as well as mutual funds and other alternative
investments. We compete for these deposits by offering superior service and a variety of deposit accounts at competitive rates. Based on the
most recent branch deposit data provided by the FDIC, as of June 30, 2011, 1st Security Bank of Washington’s share of deposits in our market
areas was approximately 0.8 %.

Employees

         At December 31, 2011, we had 85 full-time employees and 1 part-time employee . Our employees are not represented by any
collective bargaining group. We consider our employee relations to be good.


                                                                      90
Properties

         At December 31, 2011, we had our administrative offices and 6 full-service banking offices with an aggregate net book value of $ 8.7
million. The following table sets forth certain information concerning our offices at December 31, 2011. See also Note 5 of the Notes to
Financial Statements. In the opinion of management, the facilities are adequate and suitable for our needs.

                                                                                                             Lease
                                                                             Square        Owned or         Expiration      Net Book Value at
                                    Location                                 Footage        Leased            Date         December 31, 2011
                                                                                                                             (In thousands)
       Canyon Park                                                                2,997      Leased       May 2015 (1)     $                24
       22020 17 th Ave SE, Suite 100
       Bothell, WA 98021

       Edmonds (2)                                                                1,500      Owned              ---                         307
       620 Edmonds Way
       Edmonds, WA 98020

       Lynnwood                                                                   3,000      Leased         June 2020                       214
       19002 33 rd Ave W
       Lynnwood, WA 98036

       Mountlake Terrace (Admin)                                                 39,535      Owned              ---                       3,363
       6920 220 th St SW
       Mountlake Terrace, WA 98043

       Poulsbo                                                                    3,498      Owned              ---                       2,933
       21650 Market Place
       Poulsbo, WA 98370

       Puyallup                                                                   2,474      Owned              ---                       1,473
       307 W Stewart St
       Puyallup, WA 98371

       Overlake                                                                   2,331      Leased       June 2016 (3)                     346
       14808 NE 24 th St, Suite D
       Redmond, WA 98052



       (1)     Lease provides for one five-year renewal.
       (2 )    The existing building for the Edmonds branch office has been replaced by a new building (2,474 sq. ft.) on the same
               site. Construction costs at December 31, 2011 totaled $1.1 million, with an expected total cost at completion of approximately
               $1.4 million. The new building will be placed in service during the first quarter of 2012.
       (3 )    Lease provides for two five-year renewals.

         We recently signed a notice of intent for a new branch location in the Capitol Hill area of Seattle, which is expected to open during the
third quarter of 2012.

         We maintain depositor and borrower customer files on an on-line basis, utilizing a telecommunications network, portions of which are
leased. The book value of all data processing and computer equipment utilized by 1st Security Bank of Washington at December 31, 2011 was
$ 232,000. Management has a business continuity plan in place with respect to the data processing system, as well as 1st Security Bank of
Washington’s operations as a whole.

Legal Proceedings

         1st Security Bank of Washington from time to time is involved in various claims and legal actions arising in the ordinary course of
business. Except as set forth below, there are currently no matters that, in the opinion of management, would have material adverse effect on
our financial position, results of operation or liquidity.
91
         In the matter of McClain v 1st Security Bank of Washington , Cause No.: 10-2-10798-1, Charles McClain sued 1st Security Bank of
Washington in December 2010, seeking damages for conversion, 5th Amendment due process violation and breach of fiduciary duty. In his
complaint, the Plaintiff sought actual damages in the amount of $8.8 million, consequential damages of $50 million, and punitive damages of
$35.1 million. 1st Security Bank of Washington counterclaimed against the Plaintiff alleging violations of Civil Rule 11 and malicious
prosecution.

          The Plaintiff ’ s claims arose out of our discovery of a fraudulent internet scheme under which a large amount of money was
erroneously deposited into the Plaintiff ’ s account at the 1st Security Bank of Washington. The victims of the fraud, Cox Communications,
Inc. and Comcast Cable, Inc., directed electronic payments to Plaintiff ’ s account thinking that they were paying a mutual vendor, completely
unrelated to Plaintiff. The erroneous deposits were in excess of $4.2 million dollars . We discovered the fraud and at the request of the
victims, returned the funds to the victim ’ s banks.

          Pursuant to Automated Clearing House rules, we received letters of indemnity from both Cox and Comcast, under which those entities
agreed to pay our costs and fees in defending the lawsuit. We vigorously defended the case. On December 31, 2011, both parties had
summary judgment motions pending. On January 27, 2012, the Plaintiff ’ s motion for summary judgment was denied. Our motion for
summary judgment was granted and all of Plaintiff ’ s claims were dismissed with prejudice. The only claims remaining in this lawsuit are our
counterclaims. We are evaluating whether we will seek to prosecute our counterclaims against the Plaintiff and are working with Cox and
Comcast to determine if they will pay the legal costs associated therewith. On February 24, 2012, the Plaintiff filed a Notice of Appeal to the
Washington State Court of Appeals, Division I. The basis of the appeal is not known at this time and until the Plaintiff provides us with a legal
basis for his appeal, we cannot determine the likelihood of an unfavorable outcome at the appellate level. Our litigation counsel has advised us
that the risk of liability on appeal approaching the amounts claimed by Plaintiff in this case is remote.

                                                                 MANAGEMENT

         The board of directors of FS Bancorp consists of the same six individuals who currently serve as directors of 1st Security Bank of
Washington. Each of the initial directors of FS Bancorp will serve until the first annual meeting of shareholders of FS Bancorp, at which time
the directors will stand for re-election. The board of directors of FS Bancorp will be divided into three classes so that, after the first annual
meeting of shareholders, one-third of the directors will be elected at each annual meeting of shareholders.

           The following individuals are executive officers and hold the offices set forth below opposite their names.

Name                                            Age (1)        Position

Joseph C. Adams                                    52          Chief Executive Officer
Matthew D. Mullet                                  33          Chief Financial Officer, Treasurer and Secretary



(1)   As of December 31, 2011.

        The executive officers of FS Bancorp are appointed annually by the board of directors and hold office until their respective successors
have been elected or until death, resignation or removal by the board of directors.


                                                                          92
         Information concerning the principal occupations, employment and compensation of the directors and executive officers of FS
Bancorp is set forth under “- Directors of 1st Security Bank of Washington” and “- Executive Officers Who Are Not Directors.” Directors of
FS Bancorp initially will not be compensated by FS Bancorp; however, they will continue to be compensated by 1st Security Bank of
Washington. It is not anticipated that separate compensation will be paid to directors of FS Bancorp until such time as these persons devote
significant time to the separate management of FS Bancorp’s affairs, which is not expected to occur until FS Bancorp becomes actively
engaged in additional businesses other than holding the stock of 1st Security Bank of Washington. FS Bancorp may determine that such
compensation is appropriate in the future.

         Corporate Governance. FS Bancorp, incorporated under the laws of the State of Washington, was organized by 1st Security Bank of
Washington for the purpose of acquiring all of the outstanding capital stock of 1st Security Bank of Washington to be issued in the
conversion. Following its incorporation, the board of directors of FS Bancorp held an organizational meeting at which, among other actions, it
established an Audit Committee and Compensation Committee, Governance/Nominating Committee. The composition of these committees is
as follows:

               Audit                                  Compensation Committee                               Governance/Nominating
Ted A. Leech (Chair)                        Michael J. Mansfield (Chair)                       Margaret R. Piesik (Chair)
Michael J. Mansfield                        Ted A. Leech                                       Joseph P. Zavaglia
Joseph P. Zavaglia                          Joseph P. Zavaglia                                 Judith A. Cochrane

          Each of the directors serving on the Audit, Compensation and Governance/Nominating Committees is independent as defined in the
listing standards of The Nasdaq Stock Market. Five of the six directors of FS Bancorp are independent as defined in the listing standards of
The Nasdaq Stock Market. The independent directors are Ted A. Leech, Judith A. Cochrane, Margaret R. Piesik, Michael J. Mansfield and
Joseph P. Zavaglia. Ted A. Leech will serve on the Audit Committee as the “audit committee financial expert,” as defined in the rules of the
SEC.

          The board also adopted written charters for the Audit, Compensation and Governance/ Nominating Committees, as well as a code of
business conduct and ethics. These charters govern the composition and responsibilities of these committees and also address other matters
that are required under applicable Nasdaq listing standards and that the board of directors believes to be good corporate governance
practices. The code of business conduct and ethics, which applies to all employees and directors, addresses conflicts of interest, the treatment
of confidential information, general employee conduct and compliance with applicable laws, rules and regulations. In addition, the code of
business conduct and ethics is designed to attempt to deter wrongdoing and to promote: honest and ethical conduct; the avoidance of conflicts
of interest; full and accurate disclosure; compliance with all applicable laws, rules and regulations; prompt internal reporting of violations of
the code; and accountability for adherence to the code. We expect to post FS Bancorp’s committee charters and code of business conduct and
ethics on our website at www.FSBWA.com following the conversion.

Directors of 1st Security Bank of Washington

         Upon completion of the stock conversion, the directors of 1st Security Bank of Washington immediately prior to the conversion will
continue to serve as directors of 1st Security Bank of Washington in stock form. The board of directors of 1st Security Bank of Washington in
stock form will consist of six directors divided into three classes, with approximately one-third of the directors elected at each annual meeting
of shareholders. Currently, one class of directors of 1st Security Bank of Washington are elected annually by the current directors. Following
the conversion, FS Bancorp will elect directors of 1st Security Bank of Washington, as its sole shareholder.


                                                                        93
         The following table sets forth certain information regarding the board of directors of 1st Security Bank of Washington.

                                                                                                                                     Term of
                                                                    Positions Held With                           Director            Office
Name                                 Age (1)                  1st Security Bank of Washington                      Since             Expires

Ted A. Leech                           64        Chairman of the Board                                              2005              2013
Joseph C. Adams                        52        Chief Executive Officer and Director                               2005              2015
Judith A. Cochrane                     65        Director                                                           2006               2013
Michael J. Mansfield                   55        Director                                                           2008              2014
Margaret R. Piesik                     61        Director                                                           2006              2014
Joseph P. Zavalgia                     63        Director                                                           2011              2015



(1)   As of December 31, 2011.

         The business experience of each director for at least the past five years is set forth below. The biographies also contain information
regarding the person’s experience, qualifications, attributes or skills that caused the Governance and Nominating Committee and the board of
directors to determine that the person should serve as a director. Unless otherwise indicated, directors and executive officers have held their
positions for the past five years.

          Ted A. Leech , Chairman of the Board, is retired from Univar Corporation. From January 2003 to February 2005, Mr. Leech was Vice
President of Business Development where he conducted feasibility studies and investigated potential investments in China, Hong Kong,
Singapore, Australia, Malaysia, Indonesia and Brazil. Prior to that Mr. Leech was Senior Vice President of Administration for Univar USA
where he was responsible for accounting, payables/receivables, information systems, treasury, legal, human resources and internal audit. As a
result of his professional experiences, Mr. Leech brings strong leadership, management, finance, accounting and human resource skills to our
board. Mr. Leech’s expertise also qualifies him as a financial expert, which was the basis of his selection as chairman of the Audit Committee.

         Joseph C. Adams is a director and has been the Chief Executive Officer of 1st Security Bank of Washington since July 2004. He
joined 1st Security Bank of Washington in April 2003 as its Chief Financial Officer. Mr. Adams served as Supervisory Committee
Chairperson from 1993 to 1999 when the bank was Washington’s Credit Union. Mr. Adams is a lawyer having worked for Deloitte as a tax
consultant, K&L Gates as a lawyer and then at Univar USA as a lawyer and Director, Regulatory Affairs. Mr. Adams received a Masters
Degree equivalent from the Pacific Coast Banking School. Mr. Adams’ legal and accounting backgrounds, as well as his duties as Chief
Executive Officer of 1st Security Bank of Washington, bring a special knowledge of the financial, economic and regulatory challenges faced by
the Bank which makes him as well suited to educating the Board on these matters.

         Judith A. Cochrane , from May 2006 until her retirement in February 2011, was the Vice President, Public Finance for
Seattle-Northwest Securities Corporation. Prior to that, Ms. Cochrane was Vice President/Manager, Municipal Trading and Underwriting for
BancAmerica Securities, LLC., where she was employed for 23 years Ms. Cochrane is an arbitrator for Financial Industry Regulatory
Authority (FINRA). She also served as Managing Director for Bank of America, in charge of Northwest Capital Markets. Ms. Cochrane is
now retired from Seattle Northwest as of February 2011. Ms. Cochrane’s professional experience brings depth to the Board in the areas of
finance and the capital markets.


                                                                       94
          Michael J. Mansfield joined the board of directors in September 2008. Mr. Mansfield spent 16 years with Deloitte before joining
Moss Adams in 1995 where he was a partner for more than 10 years. During his time with Moss Adams, Mr. Mansfield served as the lead of
the Business Owner Succession Services Practice in the Seattle office and he served as a member of the firm’s Tax Committee. He provided
taxation, business and financial accounting services to a variety of clients in the financial services, construction, manufacturing and
distribution, and service industries. In January 2008, Mr. Mansfield left Moss Adams to start Family Fortunes, LLC., a consulting company
aimed at assisting individuals and business owners develop and execute strategic plans, with the goals of enhancing value proposition and
creating a legacy vision for families and business owners. In addition, Mr. Mansfield is a minority owner/part-time CFO for Pacific Pile &
Marine, L.P., a construction company, and Columbia Pacific Finance, LLC, a financial services company. Mr. Mansfield’s 26 years of
experience as a public accountant, together with his experience running small businesses, has provided him with strong leadership,
management, financial and administrative skills, which brings valuable knowledge and skills to our organization.

          Margaret R. Piesik was a senior manager for Microsoft Corporation in its PowerPoint Presentation Division. Ms. Piesik worked at
Microsoft for 11 years until retiring in 1998. She served on the board of directors of the Providence Hospital Foundation from 2001 to 2003
and since 2004 has served as the President of Swedish Medical Center Service League. She is a co-owner of White Barn Farm, a family owned
organic flower and vegetable farm. She previously served on the boards of Providence Hospital Foundation and the Kirkland Performance
Center. Ms. Piesik is also active in local organizations such as Swedish Hospital Service League and participates in the Grow A Row program
for local food banks. Ms. Piesik’s managerial experience, together with her various board experiences and active participation in the local
community, brings valuable knowledge and skills to our organization.

          Joseph P. Zavaglia, since February 2008, has been the owner and operator of Zavaglia Consulting, L.L.C., which provides retail
banking and small business advisory services to community banks. He also runs the Heart of Italy, an Italian cooking school. In addition, Mr.
Zavaglia works part time for Pacific Coast Banking School, serving as the Director of Extension Programs, and for the Washington Bankers
Association, overseeing their Executive Development Program. Mr. Zavaglia started his career with Rainier Bank in 1975 in branch operations
and was ultimately promoted to manager, overseeing up to 13 branches. From 1987 until 2003, he served as a Senior Vice President and
Regional Manager with Security Pacific Bank, which acquired Rainier Bank in 1987, and then with Bank of America, which acquired Security
Pacific Bank in 1992. In February 2003, Mr. Zavaglia joined First Mutual Bank as its Executive Vice President, Retail Banking Group
manager. He resigned in 2008 to begin his consulting company and cooking school. Mr. Zavaglia has formerly held Series 6, 63, and 26
securities licenses and his state insurance license for life and disabilities. He has been a member of the administrative board of Pacific Coast
Banking School for the past 9 years, and is a 1986 graduate of the program. He was a member of the Pete Gross House Board for 14 years, is
chair of the Italian Studies board at the University of Washington, is past State Board Chair for the March of Dimes where he served for 15
years, and is a former mentor in the Seattle University mentorship program and a former member of the Dean’s advisory board for the School
of Business at Seattle University. Mr. Zavaglia is a member of the athletic Hall of Fame, a Regent, and a member of the Hall of Fame selection
committee at Seattle University. Additionally, he is a member of the Advisory Board for the Dean of the College of Education at Western
Washington University. Mr. Zavaglia’s extensive banking experience, together with his numerous board experiences, educational background
and active participation in the local community, brings valuable knowledge, experience and skills to our organization.

Director Compensation

          The non-employee directors of 1st Security Bank of Washington receive compensation for their service on the board. In setting their
compensation, the board of directors considers the significant amount of time and level of skill required for director service. Director
compensation is reviewed annually by the Compensation Committee, which makes recommendations for approval by the board of
directors. Non-employee directors currently receive $2,000 per month, except for the Chairman of the Board who receives $3,000 per month,
for service on the board of directors. No fees currently are paid for service on any board committees.


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         The following table provides compensation information for each member of the board of directors of 1st Security Bank of Washington
during the year ended December 31, 2011 except for Mr. Adams, our Chief Executive Officer, whose compensation is presented in the
Summary Compensation table under the caption “Executive Compensation” below.

                                                                                         Fees Earned
                                                                                              or               All Other
                                        Name                                             Paid in Cash        Compensation             Total

Ted A. Leech                                                                            $      36,000                       ---   $      36,000
Judith A. Cochrane                                                                             24,000                       ---          24,000
Michael J. Mansfield                                                                           24,000                       ---          24,000
Margaret R. Piesik                                                                             24,000                       ---          24,000
Joseph P. Zavaglia (1)                                                                          2,000                       ---           2,000
Michele L. Rozinek (2)                                                                         36,000                       ---          36,000



(1) Appointed to the board of directors during 2011.
(2) Service on the board of directors terminated during 2011.

          Directors are provided or reimbursed for travel and lodging and other customary out-of-pocket expenses incurred in attending
industry conferences and continuing education seminars.

Board Leadership Structure

        1st Security Bank of Washington currently has an independent chairman from the chief executive officer. The chairman leads the
board and presides at all board meetings. The board supports having an independent director in a board leadership position and has had an
independent chairman for many years. Having an independent chairman enables non-management directors to raise issues and concerns for
board consideration without immediately involving management. The chairman also serves as a liaison between the board and senior
management.

Board Role in Risk Oversight

          As part of its overall responsibility to oversee the management, business and strategy of our company, one of the primary
responsibilities of our board of directors is to oversee the amounts and types of risk taken by management in executing the corporate strategy,
and to monitor our risk experience against the policies and procedures set to control those risks. The board’s risk oversight function is carried
out through its approval of various policies and procedures, such as our lending and investment polices; ratification or approval of investments
and loans exceeding certain thresholds; and regular review of risk elements such as interest rate risk exposure, liquidity and problem
assets. Some oversight functions are delegated to committees of the board, with such committees regularly reporting to the full board the
results of their oversight activities. For example, the Audit Committee is responsible for oversight of the independent auditors and meets
directly with the auditors at various times during the course of the year.

Meetings and Committees of the Board of Directors of 1st Security Bank of Washington

        Our board of directors generally meets monthly. During the year ended December 31, 2011, the board of directors held 11
meetings. No current director attended fewer than 75% of the total meetings of the board of directors and committees on which such board
member served during this period.

         The Audit Committee’s primary responsibilities were to (i) meet with both the internal and external auditors on behalf of the board of
directors to review and discuss their findings, and to make recommendations to the board regarding the selection of the external auditors and
(ii) work closely with our compliance officer to monitor 1st Security Bank of Washington’s compliance with all applicable laws and
regulations. At December 31, 2011, the Audit Committee was comprised of Directors Leech (Chair) , Mansfield and Zavaglia. The Audit
Committee met 11 times in 2011. Directors Leech (Chair), Mansfield and Zavaglia are expected to serve on the Audit Committee of FS
Bancorp following completion of the stock conversion. All of those directors will be “independent” as that term is defined for audit committee
members in the listing standards of the Nasdaq Marketplace Rules, and Ted Leech will be designated as the “audit committee financial expert”
as defined in the rules of the SEC.


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         The Governance and Nomination Committee is responsible for developing and recommending corporate governance policies and
guidelines for 1st Security Bank of Washington, identifying and recommending director and committee member candidates, chief executive
officer evaluation and succession planning. At December 31, 2011, the Governance and Nomination Committee was comprised of Directors
Piesik (Chair), Zavaglia and Cochrane. The Governance and Nominating Committee met five times in 2011. Directors Piesik (Chair),
Cochrane and Zavaglia, all of whom are independent directors, are expected to serve on the Governance and Nomination Committee of FS
Bancorp following completion of the stock conversion.

         The Compensation Committee is responsible for the recommendation to the board of directors of the chief executive officer’s annual
compensation package, as well as board compensation, the review and approval of executive incentive packages and perquisite programs, and
overseeing and administering our qualified, tax exempt benefit plans. At December 31 2011, the Compensation Committee was comprised of
Directors Mansfield (Chair), Leech and Zavaglia. The Compensation Committee met eight times in 2011. Directors Mansfield (Chair), Leech
and Zavaglia, all of whom are independent directors, will serve on the Compensation Committee of FS Bancorp following completion of the
stock conversion.

Executive Officers of 1st Security Bank of Washington Who Are Not Directors

          Each of the executive officers of 1st Security Bank of Washington will retain his or her office following the conversion. Executive
officers are appointed annually by the board of directors of 1st Security Bank of Washington. The business experience for at least the past five
years for each of the executive officers of 1st Security Bank of Washington, who do not serve as directors, is set forth below.

          Matthew D. Mullet, age 33, joined 1st Security Bank of Washington in July 2011 and was appointed Chief Financial Officer in
September 2011. Mr. Mullet started his banking career in June 2000 as a financial examiner with the Washington Department of Financial
Institutions, Division of Banks, where he worked until October 2004. From October 2004 until August 2010, Mr. Mullet was employed at Golf
Savings Bank, Mountlake Terrace, WA, where he served in several financial capacities, including as Chief Financial Officer from May 2007
until August 2010. In August 2010, Golf Savings Bank was merged with Sterling Savings Bank, where Mr. Mullet held the position as Senior
Vice President of the Home Loan Division until resigning and commencing work at 1st Security Bank of Washington.

          Steven L. Haynes , age 62, joined 1st Security Bank of Washington as Chief Lending Officer in November 2005, after a 23 year
career at US Bank. His responsibilities currently include commercial, consumer and real estate lending. Mr. Haynes held several senior lending
positions at US Bank in commercial lending- middle-market, national and international and credit review. He left as a Senior Vice President -
Commercial Lending. Prior to US Bank, Mr. Haynes held international and middle-market lending positions at Rainier Bank and Bank of
America. He has been involved in downtown associations and arts related boards in Seattle and Bellevue. He currently is a member of the
Woodland Park Zoo Board where he is chair of the Audit Committee and member of the Executive and Finance Committees.

         Drew B. Ness , age 47, joined 1st Security Bank of Washington as Chief Operating Officer in September 2008. Mr. Ness has 21 years
of diverse banking experience, including retail branch sales and service, branch network management, and national customer service training
experience. He served as Vice President and Manager of the Corporate Deposit Operations Department for Washington Federal Savings,
Seattle Washington from February 2008 until August 2008, following its acquisition of First Mutual Bank. Mr. Ness served as Vice-President
and Administrative/Operations Manager of the Retail Banking Group at First Mutual Bank, Bellevue, Washington from June 2004 through
February 2008, and as Bank Account Executive and Premier Banking Client Manager at Bank of America, Newport Beach, California from
June 2002 through June 2004.


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Executive Compensation

          We use a combination of salary, bonuses and other employee benefits to attract and retain qualified persons to serve as executive
officers 1st Security Bank of Washington. Executive officers are not compensated for their positions with FS Bancorp at this time. In setting
compensation for executive officers, the Compensation Committee considers the significant amount of time and level of skill required to
perform the required duties of each person’s position, taking into account the complexity of our business. The Compensation Committee
establishes executive officer compensation annually. After the conversion, we intend to add stock-based compensation as a component of our
executive compensation program.

         Summary Compensation Table . The following table sets forth a summary of certain information concerning the compensation paid
by 1st Security Bank of Washington for services rendered in all capacities during the year ended December 31, 2011 to the Chief Executive
Officer of 1st Security Bank of Washington and the next two highest paid executive officers of 1st Security Bank of Washington at December
31, 2011, whose total compensation for 2011 exceeded $100,000. We will use the term “named executive officers” in this prospectus to refer
to the persons listed in this table.

                      Name and                                                                                  All Other
                  Principal Position                        Year            Salary          Bonus             Compensation             Total

Joseph C. Adams
   Chief Executive Officer                                 2011       $       247,000   $           ---   $                  ---   $    247,000

T. Bradford Canfield (1)
   Chief Financial Officer                                 2011       $       217,100   $           ---   $                  ---   $    217,100

Steven L. Haynes
   Chief Loan Officer                                      2011       $       191,000   $           ---   $                  ---   $    191,000



(1) Mr. Canfield resigned from his position with 1st Security Bank of Washington in September, 2011.

Severance and Change of Control Agreements

          Severance Agreement . On November 30, 2006, 1st Security Bank of Washington entered into a severance agreement with Joseph
Adams in his capacity as our Chief Executive Officer. The agreement provides that Mr. Adams would be entitled to receive a lump sum
payment equal to 24 months of his base compensation in the event (i) his employment is involuntarily terminated by us, other than “for cause”,
or (ii) he terminates his employment with us for “good reason,” as those terms are defined in the agreement. Mr. Adams would also be entitled
to receive the foregoing severance payment in the event there is a change of control of 1st Security Bank of Washington, which either results in
his termination of employment or requires him to execute a release of any and all claims arising out of his employment with 1st Security Bank
of Washington. In the event Mr. Adams had been terminated as of December 31, 2011, under circumstances entitling him to the severance
payment under his agreement, Mr. Adams would have received a lump sum payment equal to $494,000.


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          Change of Control Agreements . 1st Security Bank of Washington has entered into a change of control agreement with Matthew
Mullet, its Chief Financial Officer, Drew Ness, its Chief Operating Officer, and Steven Haynes, its Chief Lending Officer. The change in
control agreements remain in effect until canceled by either party, upon at least 24 months prior written notice to the other party. Under these
agreements, the executive generally will be entitled to a change of control payment from 1st Security Bank of Washington if he is involuntarily
terminated within six months preceding or 12 months after a change in control (as defined in the agreements). In such an event, Messrs.
Mullet, Ness and Haynes would each be entitled to receive a cash payment in an amount equal to 12 months of their then current salary. Mr.
Mullet’s current salary is $180,000, Mr. Ness’s current salary is $175,000 and Mr. Haynes’ current salary is $191,000. Any payments that
would be made in connection with a change in control are subject to cut-back to the extent the payments would result in either the loss of a tax
deduction to 1st Security Bank of Washington or the imposition of a penalty tax on the executive.

Benefits

         Medical Benefits. We currently provide health benefits to our employees, including hospitalization and comprehensive medical
benefits. Dental insurance, life and short- and long-term disability insurance are subject to certain deductibles and copayments by employees.

        401(k) Plan. We currently offer a qualified, tax-exempt savings plan to our employees with a cash or deferred feature qualifying
under Section 401(k) of the Code (the “401(k) Plan”). Generally, all employees, as of the first day of the month following the commencement
of employment, who have attained age 18, are eligible to make 401(k) contributions.

          During 2011, participants were permitted to make salary reduction contributions to the 401(k) Plan of up to 90% of their annual
salary, up to a maximum of $16,500. In addition, participants who have attained age 50 may defer an additional $5,500 annually as a 401(k)
“catch-up” contribution. All contributions made by participants are either before-tax contributions or after-tax “Roth 401(k) contributions,” as
elected by the participant. We have the ability to match 401(k) contributions. We did not make any matching contributions during 2011. We
may also make a discretionary profit sharing contribution under the 401(k) Plan, though no such contribution was made in 2010. A participant
must complete at least 501 hours of service during the plan year and be employed as of the last day of the plan year to be eligible to receive any
profit sharing contributions that may be made for that plan year. All participant 401(k) contributions and earnings, as well as all matching and
profit sharing contributions and earnings, are fully and immediately vested.

          Participants may invest amounts contributed by them, as well as employer contributions, to their 401(k) Plan accounts in one or more
investment options available under the 401(k) Plan. Changes in investment directions among the funds are permitted on a periodic basis
pursuant to procedures established by the plan administrator. Each participant receives a quarterly statement which provides information
regarding, among other things, the market value of his investments and contributions made to the 401(k) Plan on his behalf. Participants are
permitted to borrow against their account balance in the 401(k) Plan. Hardship distributions are also permitted as are in-service distributions
after attaining age 59½.

         Distribution of a participant’s vested account may be made upon termination of employment. Distributions will be made in a lump
sum, as and when elected by the participant but subject to plan rules.

         Employee Stock Ownership Plan. We intend to adopt an employee stock ownership plan for employees of FS Bancorp and 1st
Security Bank of Washington to become effective upon the conversion. Employees of FS Bancorp and 1st Security Bank of Washington who
have been credited with at least 1,000 hours of service during a twelve month period are eligible to participate in the employee stock ownership
plan.


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          As part of the conversion, it is anticipated that the employee stock ownership plan will borrow funds from FS Bancorp. The employee
stock ownership plan will use these funds to purchase a number of shares of common stock up to 8.0% of the shares of common stock to be
outstanding after this offering. It is anticipated that this loan will equal 100% of the aggregate purchase price of the common stock acquired by
the employee stock ownership plan. The loan to the employee stock ownership plan will be repaid primarily from 1st Security Bank of
Washington’s contributions to the employee stock ownership plan over a period of ten years, and from dividends on common stock held by the
employee stock ownership plan. Collateral for the loan will be the common stock purchased by the employee stock ownership plan. The
interest rate for the loan is expected to be set at the applicable long-term federal rate as published by the IRS in effect at the time the loan is
funded. FS Bancorp may, in any plan year, make additional discretionary contributions for the benefit of plan participants. These
contributions may be made either in cash or in shares of common stock, which may be acquired through the purchase of outstanding shares in
the market or from individual stockholders, upon the original issuance of additional shares by FS Bancorp or upon the sale of treasury shares by
FS Bancorp. The timing, amount and manner of future contributions to the employee stock ownership plan will be affected by various factors,
including the terms of the employee stock ownership loan, prevailing regulatory policies, the requirements of applicable laws and regulations
and market conditions.

          Shares purchased by the employee stock ownership plan with the proceeds of the loan will be held in a suspense account and released
to participants’ accounts as debt service payments are made. Shares released from the employee stock ownership plan suspense account will be
allocated to each eligible participant’s employee stock ownership plan account based on the ratio of each such participant’s eligible
compensation to the total eligible compensation of all eligible employee stock ownership plan participants. An employee is eligible for an
employee stock ownership allocation if he is credited with 1,000 or more hours of service during the plan year, and either is actually employed
on the last day of the plan year. Forfeitures will be reallocated among remaining participating employees in the same manner as an employee
contribution. The account balances of participants within the employee stock ownership plan will become 100% vested upon completion of
three years of service. Credit for eligibility and vesting is given for years of service with 1st Security Bank of Washington and its predecessor,
Washington’s Credit Union, prior to adoption of the employee stock ownership plan. In the case of a “change in control,” as defined in the
employee stock ownership plan, which triggers a termination of the employee stock ownership plan, participants immediately will become fully
vested in their account balances. Benefits are payable upon retirement or other separation from service, or upon termination of the plan. FS
Bancorp’s contributions to the employee stock ownership plan are not fixed and the value of the common stock cannot be determined in
advance, so benefits payable under the employee stock ownership plan cannot be estimated.

         Bankers Trust Company of South Dakota, Minneapolis, Minnesota, is expected to serve as trustee of the employee stock ownership
plan. Under the employee stock ownership plan, the trustee must vote all allocated shares held in the employee stock ownership plan in
accordance with the instructions of the participating employees, and unallocated shares will be voted in the same ratio on any matter as those
allocated shares for which instructions are given.

           Generally accepted accounting principles require that any third party borrowing by the employee stock ownership plan be reflected as
a liability on FS Bancorp’s statement of financial condition. Since the employee stock ownership plan is borrowing from FS Bancorp, such
obligation is not treated as a liability, but will be excluded from stockholders’ equity. If the employee stock ownership plan purchases newly
issued shares from FS Bancorp, total stockholders’ equity would neither increase nor decrease, but per share stockholders’ equity and per share
net earnings would decrease as the newly issued shares are allocated to the employee stock ownership plan participants.

        The employee stock ownership plan will be subject to the requirements of the Internal Revenue Code of 1986, Employment
Retirement Income Security Act (“ERISA”), and the regulations of the IRS and the Department of Labor thereunder.


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          Equity Incentive Plan. Currently, we intend to adopt, within one year after completion of the offering, an equity incentive plan
providing for stock options and restricted stock for the benefit of selected directors, officers and employees. We anticipate that the plan will
have reserved a number of shares equal to 10.0% and 4.0% of the common stock to be outstanding after this offering for stock option and
restricted stock awards, respectively. Grants of restricted stock will be issued without cost to the recipient. If a determination is made to
implement a plan for stock options and restricted stock, the plan will be submitted to shareholders for their consideration, at which time the
shareholders would be provided with detailed information regarding such plan. If such plan is approved and effected, it will have a dilutive
effect on FS Bancorp’s shareholders as well as affect FS Bancorp’s net income and shareholders’ equity, although the actual results cannot be
determined until the plan is implemented.

Business Relationships and Transactions with Executive Officers, Directors and Related Persons

         1st Security Bank of Washington may engage in a transaction or series of transactions with our directors, executive officers and
certain persons related to them. These transactions are subject to the review and approval of the board of directors of 1st Security Bank of
Washington. During 2011, there were no transactions of this nature.

         1st Security Bank of Washington has followed a policy of granting loans to officers and directors, which fully complies with all
applicable federal regulations. Loans to directors and executive officers are made in the ordinary course of business and on the same terms and
conditions, including interest rates and collateral, as those of comparable transactions with persons not related to 1st Security Bank of
Washington prevailing at the time, in accordance with our underwriting guidelines, and do not involve more than the normal risk of
collectability or present other unfavorable features. We had no loans to directors and executive officers and their related persons at December
31, 2011.

                                                        HOW WE ARE REGULATED

         The following is a brief description of certain laws and regulations applicable to FS Bancorp and 1st Security Bank of Washington.
Descriptions of laws and regulations here and elsewhere in this prospectus do not purport to be complete and are qualified in their entirety by
reference to the actual laws and regulations. Legislation is introduced from time to time in the United States Congress or the Washington State
Legislature that may affect the operations of FS Bancorp and 1st Security Bank of Washington. In addition, the regulations governing us may
be amended from time to time. Any such legislation or regulatory changes in the future could adversely affect our operations and financial
condition. See “Restrictions on Acquisitions of FS Bancorp and 1st Security Bank of Washington” for information on regulatory limits and
requirements on persons or companies seeking to acquire control of those entities.

          On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank
Act). The act imposes new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository
institutions. In addition, the new law changes the jurisdictions of existing bank regulatory agencies, but does not change the banking regulatory
agencies with jurisdiction over FS Bancorp and 1st Security Bank of Washington. The new law also establishes an independent federal
consumer protection bureau within the Federal Reserve Board. The following discussion summarizes significant aspects of the new law that
may affect 1st Security Bank of Washington and FS Bancorp. For certain of these changes, implementing regulations have not been
promulgated, so we cannot determine the full impact on our business and operations at this time.

         The following aspects of the Dodd-Frank Act are related to the operations of 1st Security Bank of Washington:

         ●        A new independent Consumer Financial Protection Bureau (CFPB) is established within the Federal Reserve Board,
                  empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing
                  consumer financial protection laws. Financial institutions with assets of less than $10 billion, like 1st Security Bank of
                  Washington, will continue to be subject to supervision and enforcement by their primary federal banking regulator with
                  respect to federal consumer financial protection laws.


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●        The Federal Deposit Insurance Act was amended to direct federal regulators to require depository institution holding
         companies to serve as a source of strength for their depository institution subsidiaries.

●        The prohibition on payment of interest on demand deposits was repealed, effective July 21, 2011.

●        Deposit insurance is permanently increased to $250,000 and unlimited deposit insurance for noninterest-bearing transaction
         accounts is extended through December 31, 2013.

●        The deposit insurance assessment base is the depository institution’s total average assets minus the sum of its average
         tangible equity during the assessment period.

●        The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35 percent of estimated annual insured deposits or
         assessment base; however, the Federal Deposit Insurance Corporation is directed to “offset the effect” of the increased
         reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

The following aspects of the Dodd-Frank Act are related to the operations of FS Bancorp:

●        Tier 1 capital treatment for “hybrid” capital items is eliminated. The federal banking agencies must promulgate new rules on
         regulatory capital within 18 months from July 21, 2010, for both depository institutions and their holding companies, to
         include leverage capital and risk-based capital measures at least as stringent as those now applicable to 1st Security Bank of
         Washington under the prompt corrective action regulations.

●        The Securities and Exchange Commission is authorized to adopt rules requiring public companies to make their proxy
         materials available to shareholders for nomination of their own candidates for election to the board of directors.

●        Public companies are required to provide their shareholders with a non-binding vote: (i) at least once every three years on
         the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on
         pay” vote every one, two or three years.

●        A separate, non-binding shareholder vote is required regarding golden parachutes for named executive officers when a
         shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute
         payments.

●        Securities exchanges are required to prohibit brokers from using their own discretion to vote shares not beneficially owned
         by them for certain “significant” matters, which include votes on the election of directors, executive compensation matters,
         and any other matter determined to be significant.

●        Stock exchanges, not including the OTC Bulletin Board, are prohibited from listing the securities of any issuer that does not
         have a policy providing for (i) disclosure of its policy on incentive compensation payable on the basis of financial
         information reportable under the securities laws, and (ii) the recovery from current or former executive officers, following an
         accounting restatement triggered by material noncompliance with securities law reporting requirements, of any incentive
         compensation paid erroneously during the three-year period preceding the date on which the restatement was required that
         exceeds the amount that would have been paid on the basis of the restated financial information.


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         ●         Disclosure in annual proxy materials is required concerning the relationship between the executive compensation paid and
                   the financial performance of the issuer.

         ●         Item 402 of Regulation S-K is amended to require companies to disclose the ratio of the Chief Executive Officer’s annual
                   total compensation to the median annual total compensation of all other employees.

         ●         Smaller reporting companies are exempt from complying with the internal control auditor attestation requirements of Section
                   404(b) of the Sarbanes-Oxley Act.

Regulation of 1st Security Bank of Washington

         1st Security Bank of Washington, as a state-chartered savings bank, is subject to applicable provisions of Washington law and to
regulations and examinations of the Washington Department of Financial Institutions. As an insured institution, it also is subject to examination
and regulation by the Federal Deposit Insurance Corporation, which insures the deposits of 1st Security Bank of Washington to the maximum
permitted by law. During these state or federal regulatory examinations, the examiners may require 1st Security Bank of Washington to provide
for higher general or specific loan loss reserves, which can impact our capital and earnings. This regulation of 1st Security Bank of Washington
is intended for the protection of depositors and the Deposit Insurance Fund of the Federal Deposit Insurance Corporation and not for the
purpose of protecting shareholders of 1st Security Bank of Washington or FS Bancorp. 1st Security Bank of Washington is required to
maintain minimum levels of regulatory capital and is subject to some limitations on the payment of dividends to FS Bancorp. See “- Regulatory
Capital Requirements” and “- Limitations on Dividends and Stock Repurchases.”

          Federal and State Enforcement Authority and Actions . As part of its supervisory authority over Washington-chartered savings
banks, the Washington Department of Financial Institutions may initiate enforcement proceedings to obtain a cease-and-desist order against an
institution believed to have engaged in unsafe and unsound practices or to have violated a law, regulation, or other regulatory limit, including a
written agreement. The Federal Deposit Insurance Corporation also has the authority to initiate enforcement actions against insured institutions
for similar reasons and may terminate the deposit insurance if it determines that an institution has engaged in unsafe or unsound practices or is
in an unsafe or unsound condition. Both these agencies may utilize less formal supervisory tools to address their concerns about the condition,
operations of compliance status of a savings bank.

          Regulation by the Washington Department of Financial Institutions . State law and regulations govern 1st Security Bank of
Washington’s ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make consumer loans,
to invest in securities, to offer various banking services to its customers, and to establish branch offices. As a state savings bank, 1st Security
Bank of Washington must pay semi-annual assessments, examination costs and certain other charges to the Washington Department of
Financial Institutions.

          Washington law generally provides the same powers for Washington savings banks as federally and other-state chartered savings
institutions and banks with branches in Washington, subject to the approval of the Washington Department of Financial Institution.
Washington law allows Washington savings banks to charge the maximum interest rates on loans and other extensions of credit to Washington
residents which are allowable for a national bank in another state if higher than Washington limits. In addition, the Washington Department of
Financial Institutions may approve applications by Washington savings banks to engage in an otherwise unauthorized activity, if it determines
that the activity is closely related to banking, and 1st Security Bank of Washington is otherwise qualified under the statute. This additional
authority, however, is subject to review and approval by the Federal Deposit Insurance Corporation if the activity is not permissible for national
banks.


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         1st Security Bank of Washington is a member of the Deposit Insurance Fund (Deposit Insurance Fund), which is administered by the
Federal Deposit Insurance Corporation. Deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation, backed
by the full faith and credit of the United States Government. The basic deposit insurance limit is $250,000, and until December 31, 2012, there
is unlimited coverage for non-interest bearing transaction accounts (typically, business checking accounts).

         As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by
FDIC-insured institutions. Our deposit insurance premiums for the ended December 31, 2011 were $ 391,000. Those premiums have
increased in recent years due to recent strains on the FDIC deposit insurance fund due to the cost of large bank failures and increase in the
number of troubled banks.

          The FDIC assesses deposit insurance premiums on each insured institution quarterly based on annualized rates for one of four risk
categories. Each institution is assigned to one of four risk categories based on its capital, supervisory ratings and other factors. Well capitalized
institutions that are financially sound with only a few minor weaknesses are assigned to Risk Category I. Risk Categories II, III and IV present
progressively greater risks to the DIF. Under the rules in effect through March 31, 2011, a range of initial base assessment rates applied to each
Risk Category, subject to adjustments based on an institution’s unsecured debt, secured liabilities and brokered deposits, such that the total base
assessment rates assessed on the deposits of an institution ranged, after adjustments, from 7 to 24 basis points for Risk Category I, 17 to 43
basis points for Risk Category II, 27 to 58 basis points for Risk Category III, and 40 to 77.5 basis points for Risk Category IV.

          As required by the Dodd-Frank Act, the FDIC adopted rules effective April 1, 2011, under which insurance premium assessments are
assessed on an institution’s total assets minus its tangible equity (defined as Tier 1 capital) instead of its deposits. Under these rules, an
institution with total assets of less than $10 billion is assigned to a Risk Category as described above, and a range of initial base assessment
rates applies to each category, subject to adjustment downward based on unsecured debt issued by the institution and, except for an institution
in Risk Category I, adjustment upward if the institution’s brokered deposits exceed 10% of its domestic deposits, to produce total base
assessment rates. Total base assessment rates range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18
to 33 basis points for Risk Category III, and 30 to 45 basis points for Risk Category IV, all subject to further adjustment upward if the
institution holds more than a de minimis amount of unsecured debt issued by another FDIC-insured institution. The FDIC may increase or
decrease its rates by 2.0 basis points without further rulemaking. In an emergency, the FDIC may also impose a special assessment.

          As a result of a decline in the reserve ratio (the ratio of the net worth of the Deposit Insurance Fund to estimated insured deposits) and
concerns about expected failure costs and available liquid assets in the Deposit Insurance Fund, the Federal Deposit Insurance Corporation
adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the
fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter due on
December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly
expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments are measured at the institution’s assessment rate as
of September 30, 2009, with a uniform increase of 3 basis points effective January 1, 2011, and are based on the institution’s assessment base
for the third quarter of 2009, with growth assumed quarterly at annual rate of 5%. If events cause actual assessments during the prepayment
period to vary from the prepaid amount, institutions will pay excess assessments in cash, or receive a rebate of prepaid amounts not exhausted
after collection of assessments due on June 13, 2013, as applicable. Collection of the prepayment does not preclude the Federal Deposit
Insurance Corporation from changing assessment rates or revising the risk-based assessment system in the future. The balance of 1st Security
Bank of Washington’s prepaid assessment at December 31, 2011 was $ 689,000.


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          The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio. The FDIC has adopted a plan under which it will meet this ratio
by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on
institutions with assets less than $10 billion of the increase in the statutory minimum reserve ratio to 1.35% from the former statutory minimum
of 1.15%. The FDIC has not yet announced how it will implement this offset. In addition to the statutory minimum ratio, the FDIC must
designate a reserve ratio, known as the designated reserve ratio or DRR, which may exceed the statutory minimum. The FDIC has established
2.0% as the DRR.

         In addition to assessments for deposit insurance, institutions are required to make quarterly payments on bonds issued in the late 1980s
by the Financing Corporation to recapitalize a predecessor deposit insurance fund. For the year ended December 31, 2011, these payments
totaled approximately $21,000.

          The Federal Deposit Insurance Corporation conducts examinations of and requires reporting by state non-member banks, such as 1st
Security Bank of Washington. The Federal Deposit Insurance Corporation also may prohibit any insured institution from engaging in any
activity determined by regulation or order to pose a serious risk to the deposit insurance fund.

          The Federal Deposit Insurance Corporation may terminate the deposit insurance of any insured depository institution, including 1st
Security Bank of Washington, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an
agreement with the Federal Deposit Insurance Corporation. It also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as
determined by the Federal Deposit Insurance Corporation. Management is aware of no existing circumstances which would result in
termination of 1st Security Bank of Washington’s deposit insurance.

         Federal law generally limits the activities, subsidiary investments and activities, and equity investments of 1st Security Bank of
Washington, as principal, to those that are permissible for national banks. Our relationship with our depositors and borrowers is regulated to a
great extent by federal laws and regulations, especially with respect to disclosure requirements.

          The Federal Deposit Insurance Corporation has adopted regulatory guidelines establishing safety and soundness standards on such
matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and information systems, audit systems,
interest rate risk exposure and compensation and other benefits. If the Federal Deposit Insurance Corporation determines that 1st Security Bank
of Washington fails to meet any standard prescribed by these guidelines, it may require 1st Security Bank of Washington to submit an
acceptable plan to achieve compliance with the standard.

          Among these safety and soundness standards are FDIC regulations that require 1st Security Bank of Washington to adopt and
maintain written policies that establish appropriate limits and standards for real estate loans. These standards, which must be consistent with
safe and sound banking practices, establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value
ratio limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. 1st
Security Bank of Washington is obligated to monitor conditions in its real estate markets to ensure that its standards continue to be appropriate
for current market conditions. 1st Security Bank of Washington’s board of directors is required to review and approve 1st Security Bank of
Washington’s standards at least annually. The FDIC has published guidelines for compliance with these regulations, including supervisory
limitations on loan-to-value ratios for different categories of real estate loans. Under the guidelines, the suggested aggregate level of all loans in
excess of the supervisory loan-to-value ratios should not exceed 100% of total capital, and the total of all loans for commercial, agricultural,
multifamily or other non-one-to-four-family residential properties should not exceed 30% of total capital. Loans in excess of the supervisory
loan-to-value ratio limitations must be identified in 1st Security Bank of Washington’s records and reported at least quarterly to 1st Security
Bank of Washington’s board of directors. 1st Security Bank of Washington is in compliance with the record and reporting requirements. As of
December 31, 2011 1st Security Bank of Washington’s aggregate loans in excess of the supervisory loan-to-value ratios were zero.


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          The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) is a federal statute that generally
imposes strict liability on, all prior and present “owners and operators” of sites containing hazardous waste. However, Congress asked to
protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its
security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial
interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as
collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including 1st Security Bank of Washington, that have
made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability
for cleanup costs, which costs often substantially exceed the value of the collateral property.

          1st Security Bank of Washington is subject to regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley
Act of 1999 and the anti-money laundering provisions of the USA Patriot Act. These Gramm-Leach-Bliley privacy requirements place
limitations on the sharing of consumer financial information with unaffiliated third parties. They also require 1st Security Bank of Washington
to disclose its privacy policy to customers and with an opportunity to “opt-out” of the sharing of their personal information with unaffiliated
third parties. The USA Patriot Act significantly expands the responsibilities of banking institutions in preventing the use of the United States
financial system to fund terrorist activities. These anti-money laundering provisions require institutions to develop anti-money laundering
compliance programs and due diligence polices and controls to ensure the detection and reporting of money laundering. These compliance
programs are intended to supplement existing compliance requirements under 1st Security Bank of Washington Secrecy Act and Office of
Foreign Assets Control regulations.

           Transactions between 1st Security Bank of Washington and its affiliates, including FS Bancorp, generally are required to be on terms
as favorable to 1st Security Bank of Washington as transactions with non-affiliates, and certain of these transactions, such as loans to an
affiliate, are restricted to a percentage of 1st Security Bank of Washington’s capital and may require eligible collateral in specified amounts.
With some exceptions, 1st Security Bank of Washington and its affiliates are prohibited from tying the provision of various products and series,
such as loans, with other products and services.

         1st Security Bank of Washington is subject to a broad array of federal and state consumer protection laws and regulations that govern
almost every aspect of its business relationships with consumers. While the list set forth below is not exhaustive, these include the
Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit
Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit
Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the
Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws
governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting
unfair and deceptive business practices, and various regulations that implement some or all of the foregoing. These laws and regulations
mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits,
making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject 1st Security Bank of
Washington to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive
damages, and the loss of certain contractual rights.


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         The Federal Reserve Board requires that all depository institutions maintain reserves on transaction accounts or non-personal time
deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. Negotiable order
of withdrawal (NOW) accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to the reserve requirements, as are any non-personal time deposits at a savings bank. As of December 31,
2011, 1st Security Bank of Washington’s deposit with the Federal Reserve Bank and vault cash exceeded its reserve requirements.

         Banks are also subject to the provisions of the Community Reinvestment Act of 1977, which requires the appropriate federal bank
regulatory agency to assess a bank’s record in meeting the credit needs of the community serviced by 1st Security Bank of Washington,
including low and moderate income neighborhoods. The regulatory agency’s assessment of 1st Security Bank of Washington’s record is made
available to the public. Further, an assessment is required of any bank which has applied to establish a new branch office that will accept
deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. 1st Security Bank of Washington received a “satisfactory” rating during its most recent examination.

         1st Security Bank of Washington is a member of the Federal Home Loan Bank of Seattle, which is one of 12 regional Federal Home
Loan Banks that administer the home financing credit function of savings institutions. Each Federal Home Loan Bank serves as a reserve or
central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations
of the Federal Home Loan Bank System. It makes loans or advances to members in accordance with policies and procedures, established by the
Board of Directors of the Federal Home Loan Bank, which are subject to the oversight of the Federal Housing Finance Board. All advances
from the Federal Home Loan Bank are required to be fully secured by sufficient collateral as determined by the Federal Home Loan Bank. In
addition, all long-term advances are required to provide funds for residential home financing.

          As a member, 1st Security Bank of Washington is required to purchase and maintain stock in the Federal Home Loan Bank of Seattle.
At December 31, 2011, 1st Security Bank of Washington had $1.8 million in Federal Home Loan Bank stock, which was in compliance with
this requirement. 1st Security Bank of Washington did not receive any dividends from the Federal Home Loan Bank of Seattle for the year
ended December 31, 2011. Subsequent to December 31, 2008, the Federal Home Loan Bank of Seattle announced that it was below its
regulatory risk-based capital requirement and it is now precluded from paying dividends or repurchasing capital stock. The Federal Home Loan
Bank of Seattle is not anticipated to resume dividend payments until its financial results improve. The Federal Home Loan Bank of Seattle has
not indicated when dividend payments may resume.

          The Federal Home Loan Banks have continued to contribute to low- and moderately-priced housing programs through direct loans or
interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have
affected adversely the level of Federal Home Loan Bank dividends paid and could continue to do so in the future. These contributions could
also have an adverse effect on the value of Federal Home Loan Bank stock in the future. A reduction in value of 1st Security Bank of
Washington’s Federal Home Loan Bank stock may result in a corresponding reduction in its capital.


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         The Federal Deposit Insurance Corporation and the Washington Department of Financial Institutions must approve any merger
transaction involving 1st Security Bank of Washington as the acquirer, including an assumption of deposits from another depository institution.
The Federal Deposit Insurance Corporation is authorized to approve interstate merger transactions without regard to whether the transaction is
prohibited by the law of any state, unless the home state of one of 1st Security Bank of Washingtons adopted a law prior to June 1, 1997 which
applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of
branches will be permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch
acquisitions will also be subject to the nationwide and statewide insured deposit concentration amounts described below.

Regulation and Supervision of FS Bancorp, Inc.

         FS Bancorp, as the sole shareholder of 1st Security Bank of Washington, will be a bank holding company registered with the Board of
Governors of the Federal Reserve System. Bank holding companies are subject to comprehensive regulation by the Board of Governors of the
Federal Reserve System under the Bank Holding Company Act of 1956, as amended, and the regulations promulgated thereunder. This
regulation and oversight is generally intended to ensure that FS Bancorp limits its activities to those allowed by law and that it operates in a
safe and sound manner without endangering the financial health of 1st Security Bank of Washington.

          As a bank holding company, FS Bancorp is required to file quarterly and annual reports with the Board of Governors of the Federal
Reserve System and any additional information required by the Board of Governors of the Federal Reserve System and is subject to regular
examinations by the Board of Governors of the Federal Reserve System. The Board of Governors of the Federal Reserve System also has
extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, to issue cease and desist or
removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may
be initiated for violations of law and regulations and unsafe or unsound practices.

          The Dodd-Frank Act requires a bank holding company to serve as a source of financial strength to its subsidiary banks, with the
ability to provide financial assistance to a subsidiary bank in financial distress. Regulations to implement this provision are required, but to
date, none have been promulgated.

          Under the Bank Holding Company Act, the Board of Governors of the Federal Reserve System may approve the ownership of shares
by a bank holding company in any company the activities of which the Board of Governors of the Federal Reserve System has determined to be
so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities generally
include, among others, operating a savings institution, mortgage company, finance company, credit card company or factoring company;
performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent
for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and
U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers. The Bank Holding Company Act prohibits a bank holding company, with
certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank
holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its
subsidiaries. A bank holding company that meets certain supervisory and financial standards and elects to be designed as a financial holding
company may also engage in certain securities, insurance and merchant banking activities and other activities determined to be financial in
nature or incidental to financial activities.


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          The Board of Governors of the Federal Reserve System must approve an application of a bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank, and may approve an acquisition located in a state other than the holding company’s
home state, without regard to whether the transaction is prohibited by the laws of any state, but may not approve the acquisition of a bank that
has not been in existence for the minimum time period, not exceeding five years, specified by the law of the host state, or an application where
the applicant controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target
bank’s home state or in any state in which the target bank maintains a branch. Federal law does not affect the authority of states to limit the
percentage of total insured deposits in the state that may be held or controlled by a bank holding company to the extent such limitation does not
discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit
contained in the federal law. The Bank Holding Company Act prohibits a bank holding company, with certain exceptions, from acquiring
ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in
activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.

Regulatory Capital Requirements

          Capital Requirements for 1st Security Bank of Washington. 1st Security Bank of Washington is required by Federal Deposit
Insurance Corporation regulations to maintain minimum levels of regulatory capital consisting of core (Tier 1) capital and supplementary (Tier
2) capital. Tier 1 capital generally includes common shareholders’ equity and noncumulative perpetual preferred stock, less most intangible
assets. Tier 2 capital, which is limited to 100 percent of Tier 1 capital, includes such items as qualifying general loan loss reserves, cumulative
perpetual preferred stock, mandatory convertible debt, term subordinated debt and limited life preferred stock; however, the amount of term
subordinated debt and intermediate term preferred stock (original maturity of at least five years but less than 20 years) that may be included in
Tier 2 capital is limited to 50 percent of Tier 1 capital.

         The Federal Deposit Insurance Corporation currently measures an institution’s capital using a leverage limit together with certain
risk-based ratios. The Federal Deposit Insurance Corporation’s minimum leverage capital requirement for a bank to be considered adequately
capitalized specifies a minimum ratio of Tier 1 capital to average total assets of 4%. At December 31, 2011, 1st Security Bank of Washington
had a Tier 1 leverage capital ratio to average assets of 9.30 %. The Federal Deposit Insurance Corporation retains the right to require a
particular institution to maintain a higher capital level based on its particular risk profile.

          Federal Deposit Insurance Corporation regulations also establish a measure of capital adequacy based on ratios of qualifying capital to
risk-weighted assets. Assets are placed in one of four categories and given a percentage weight based on the relative risk of that category. In
addition, certain off-balance sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of
the four categories. Under the guidelines, for a bank to be considered adequately capitalized the ratio of total capital (Tier 1 capital plus Tier 2
capital) to risk-weighted assets (the total risk-based capital ratio) must be at least 8%, and the ratio of Tier 1 capital to risk-weighted assets (the
Tier 1 risk-based capital ratio) must be at least 4%. In evaluating the adequacy of a bank’s capital, the Federal Deposit Insurance Corporation
may also consider other factors that may affect the bank’s financial condition, such as interest rate risk exposure, liquidity, funding and market
risks, the quality and level of earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the
effectiveness of loan and investment policies, and management’s ability to monitor and control financial operating risks.


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          Under prompt corrective action requirements under federal law and regulations, the Federal Deposit Insurance Corporation as the
primary federal banking regulator of an institution such as 1st Security Bank of Washington is authorized and, under certain circumstances,
required to take certain actions against insured that fail to meet certain designated capital levels. The agency generally is required to take action
to restrict the activities of an “undercapitalized institution,” which is an institution with less than a 4.0% Tier 1 capital ratio, a 4.0% Tier 1
risk-based capital ratio or an 8.0% total risk-based capital ratio. Any such institution must submit a capital restoration plan and until such plan
is approved by the Federal Deposit Insurance Corporation may not increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The Federal Deposit Insurance Corporation is authorized to impose the
additional restrictions on undercapitalized institutions. In connection with a capital restoration plan, each holding company of the institution
submitting a plan must guarantee the institution’s performance of the plan until it has been adequately capitalized during four consecutive
quarters. The liability on this guarantee is limited to the lesser of 5% of the institution’s assets when it became undercapitalized or the amount
necessary for the institution to meet the capital standards when it fails to comply with the plan. Any institution that fails to comply with its
capital plan or has Tier 1 or Tier 1 risk-based capital ratios of less than 3.0% or a total risk-based capital ratio of less than 6.0% is considered
“significantly undercapitalized” and must be made subject to one or more additional specified actions and operating restrictions that may cover
all aspects of its operations and may include a forced merger or acquisition of the institution. The holding company of such an institution must
obtain prior approval of any dividend to its shareholders. An institution with tangible equity to total assets of less than 2.0% is “critically
undercapitalized” and becomes subject to further mandatory restrictions on its operations. In general, the FDIC must be appointed receiver for a
critically undercapitalized institution whose capital is not restored within the time provided. When the FDIC as receiver liquidates an
institution, the claims of depositors and the FDIC as their successor (for deposits covered by the FDIC insurance) have priority over other
unsecured claims against the institution.

          The Federal Deposit Insurance Corporation may impose additional restrictions on institutions that are under capitalized and generally
is authorized to reclassify an institution into a lower capital category and impose the restrictions applicable to such category if the institution is
engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the Federal Deposit Insurance Corporation
of any of these measures on 1st Security Bank of Washington may have a substantial adverse effect on its operations and profitability.
Institutions with at least a 4.0% Tier 1 capital ratio, a 4.0% Tier 1 risk-based capital ratio and an 8.0% total risk-based capital ratio are
considered “adequately capitalized.” An institution is deemed “well capitalized” if it has at least a 5% Tier 1 capital ratio, a 6.0% Tier 1
risk-based capital ratio and 10.0% total risk-based capital ratio. Institutions that are not well capitalized are subject to certain restrictions on
brokered deposits and interest rates on deposits. At December 31, 2011, 1st Security Bank of Washington was considered a “well capitalized”
institution. For a complete description of 1st Security Bank of Washington’s required and actual capital levels on December 31, 2011, see “1st
Security Bank of Washington Exceeds All Regulatory Capital Requirements.”

          Capital Requirements for FS Bancorp, Inc. The Board of Governors of the Federal Reserve System has adopted capital guidelines
pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications
under the Bank Holding Company Act. These guidelines apply on a consolidated basis to bank holding companies with $500 million or more in
assets or with less assets but certain risky activities, and on a bank-only basis to other companies. These bank holding company capital
adequacy guidelines are similar to those imposed on 1st Security Bank of Washington by the Federal Deposit Insurance Corporation. For a
bank holding company with less than $500 million in assets, the capital guidelines apply on a bank only basis and the Board of Governors of
the Federal Reserve System expects the holding company’s subsidiary banks to be well capitalized under the prompt corrective action
regulations.

Limitations on Dividends and Stock Repurchases

        Limits on FS Bancorp, Inc. FS Bancorp’s ability to declare and pay dividends is subject to Board of Governors of the Federal
Reserve System limits and Washington law, and it may depend on its ability to receive dividends received from 1st Security Bank of
Washington.


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          A policy of the Board of Governors of the Federal Reserve System limits the payment of a cash dividend by a bank holding company
if the holding company’s net income for the past year is not sufficient to cover both the cash dividend and a rate of earnings retention that is
consistent with capital needs, asset quality and overall financial condition. A bank holding company that does not meet any applicable capital
standard would not be able to pay any cash dividends under this policy. A bank holding company not subject to consolidated capital
requirements is expected not to pay dividends unless its debt-to-equity ratio is less than 1:1 and it meets certain additional criteria. The Board
of Governors of the Federal Reserve System also has indicated that it would be inappropriate for a company experiencing serious financial
problems to borrow funds to pay dividends.

          Except for a company that meets the well-capitalized standard for bank holding companies, is well managed, and is not subject to any
unresolved supervisory issues, a bank holding company is required to give the Board of Governors of the Federal Reserve System prior written
notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the
company’s consolidated net worth. The Board of Governors of the Federal Reserve System may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation or regulatory order, condition,
or written agreement. A bank holding company is considered well-capitalized if on a consolidated basis it has a total risk-based capital ratio of
at least 10.0% and a Tier 1 risk-based capital ratio of 6.0% or more, and is not subject to an agreement, order, or directive to maintain a specific
level for any capital measure.

        In addition, federal regulations and polices prohibit a return of capital during the three-year term of the business plan submitted by FS
Bancorp in connection with the stock offering.

           Under Washington corporate law, FS Bancorp generally may not pay dividends if after that payment it would not be able to pay its
liabilities as they become due in the usual course of business, or its total assets would be less than the sum of its total liabilities .

          Limits on 1st Security Bank of Washington. The amount of dividends payable by 1st Security Bank of Washington to FS Bancorp
depends upon 1st Security Bank of Washington’s earnings and capital position, and is limited by federal and state laws, regulations and
policies. Washington law will not permit 1st Security Bank of Washington to declare or pay a cash dividend on its capital stock if the payment
would cause its net worth to be reduced below: (1) the amount required for its liquidation account; or (2) its net worth requirements, if any,
imposed by the Washington Department of Financial Institutions. Dividends on 1st Security Bank of Washington’s capital stock may not be
paid in an aggregate amount greater than the aggregate retained earnings of 1st Security Bank of Washington without the approval of the
Washington Department of Financial Institutions.

         The amount of dividends actually paid during any one period will be strongly affected by 1st Security Bank of Washington’s policy of
maintaining a strong capital position. Federal law further provides that without prior approval no insured depository institution may pay a cash
dividend if it would cause the institution to be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the Federal
Deposit Insurance Corporation also has the general authority to limit the dividends paid by insured banks if such payments are deemed to
constitute an unsafe and unsound practice. In addition, dividends may not be declared or paid if 1st Security Bank of Washington is in default
in payment of any assessment due the Federal Deposit Insurance Corporation.

Federal Securities Law

        The stock of FS Bancorp will be registered with the SEC under the Securities Exchange Act of 1934, as amended. As a result, FS
Bancorp will become subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities
Exchange Act of 1934.


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         FS Bancorp stock held by persons who are affiliates of FS Bancorp may not be resold without registration unless sold in accordance
with certain resale restrictions. Affiliates are generally considered to be officers, directors and principal shareholders. If FS Bancorp meets
specified current public information requirements, each affiliate of FS Bancorp will be able to sell in the public market, without registration, a
limited number of shares in any three-month period.

          The SEC has adopted regulations and policies under the Sarbanes-Oxley Act of 2002 that apply to FS Bancorp as a registered
company under the Securities Exchange Act of 1934. The stated goals of these Sarbanes-Oxley requirements are to increase corporate
responsibility, provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors
by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The SEC and Sarbanes-Oxley-related
regulations and policies include very specific additional disclosure requirements and new corporate governance rules. The Sarbanes-Oxley Act
represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting
profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors
and its committees.

                                                                   TAXATION

Federal Taxation

         General . FS Bancorp and 1st Security Bank of Washington are subject to federal income taxation in the same general manner as
other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain
pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to FS Bancorp or 1st Security Bank of
Washington. The income tax returns of FS Bancorp and 1st Security Bank of Washington have not been audited in the past seven years.

          FS Bancorp anticipates that it will file a consolidated federal income tax return with 1st Security Bank of Washington commencing
with the first taxable year after completion of the conversion. Accordingly, it is anticipated that any cash distributions made by FS Bancorp to
its shareholders would be considered to be taxable dividends and not as a non-taxable return of capital to shareholders for federal and state tax
purposes.

         Method of Accounting. For federal income tax purposes, 1st Security Bank of Washington currently reports its income and expenses
on the accrual method of accounting and uses a fiscal year ending on December 31 for filing its federal income tax return.

          Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable
income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent such
alternative minimum taxable income is in excess of an exemption amount. Net operating losses can offset no more than 90% of alternative
minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future
years. 1st Security Bank of Washington has not been subject to the alternative minimum tax, nor does it have any such amounts available as
credits for carryover.

         Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years and
forward to the succeeding 20 taxable years. This provision applies to losses incurred in taxable years beginning after August 6, 1997. At
December 31, 2011, 1st Security Bank of Washington had a net operating loss carryforward for federal income tax purposes in the amount of $
7.4 million. See Note 10 of the Notes to Financial Statements included in this prospectus for information about our net operating losses .


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         Corporate Dividends-Received Deduction. FS Bancorp may eliminate from its income dividends received from 1st Security Bank of
Washington as a wholly owned subsidiary of FS Bancorp if it elects to file a consolidated return with 1st Security Bank of Washington. The
corporate dividends-received deduction is 100%, or 80%, in the case of dividends received from corporations with which a corporate recipient
does not file a consolidated tax return, depending on the level of stock ownership of the payor of the dividend. Corporations which own less
than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.

Washington Taxation

         1st Security Bank of Washington is subject to a business and occupation tax imposed under Washington law at the rate of 1.8 % of
gross receipts. Interest received on loans secured by mortgages or deeds of trust on residential properties and certain investment securities are
exempt from this tax.

                                              THE CONVERSION AND STOCK OFFERING

         The board of directors of 1st Security Bank of Washington has adopted the plan of conversion, and an application for approval of the
plan of conversion has been filed with the Washington Department of Financial Institutions and the Federal Deposit Insurance
Corporation. The Washington Department of Financial Institutions has approved our application with the condition that the plan of conversion
is approved by our members and that certain other conditions imposed are satisfied. The Washington Department of Financial Institutions’
approval does not constitute a recommendation or endorsement of the plan of conversion. We also must receive a letter of non-objection to the
conversion from the Federal Deposit Insurance Corporation to consummate the conversion. A holding company application has also been filed
with the Federal Reserve Board.

General

         On July 10, 2008, the board of directors of 1st Security Bank of Washington unanimously adopted a plan of conversion from the
mutual to the stock form of organization. Due to market conditions and regulatory issues, the process was put on hold. On August 18, 2011,
the board of directors voted to move forward with the conversion. Pursuant to the plan of conversion, 1st Security Bank of Washington will
convert from the mutual form of organization (meaning no shareholders) to the stock form of organization and will become the wholly owned
subsidiary of FS Bancorp, a new Washington corporation. FS Bancorp will own all of the capital stock of 1st Security upon completion of the
conversion. All of the common stock of FS Bancorp will be owned by public shareholders and our tax qualified employee benefit plans.

         FS Bancorp anticipates that net proceeds of the offering will be between $ 18.7 million and $ 26.0 million, or $30.2 million if the
offering range is increased by 15%. The conversion will be consummated only upon the issuance of at least 2,082,500 shares of our common
stock offered pursuant to the plan of conversion.

         The plan of conversion provides that we will offer shares of common stock for sale in a subscription offering to eligible members of
1st Security Bank of Washington and to our tax-qualified employee benefit plans, consisting of the employee stock ownership plan, and, if
necessary, to members of the general public through a community offering and, possibly, through a syndicate of registered broker-dealers. In
any community offering, we will give a preference to natural persons residing in the Washington Counties of King, Kitsap, Pierce and
Snohomish.

         We have the right to accept or reject, in whole or in part, any orders to purchase shares of common stock in the community
offering. The community offering, if any, may begin at the same time as, during, or after the subscription offering, and must be completed
within 45 days after the completion of the subscription offering unless otherwise extended by us with the approval of the Washington
Department of Financial Institutions. See “-Direct Community Offering.”


                                                                       113
         We determined the number of shares of common stock to be offered in the offering based upon an independent appraisal of the
estimated consolidated pro forma market value of FS Bancorp. All shares of common stock to be sold in the offering will be sold at $10.00 per
share. Investors will not be charged a commission to purchase shares of common stock in the offering. The independent valuation will be
updated and the final number of the shares of common stock to be issued in the offering will be determined at the completion of the
offering. See “-How We Determined Our Price and the Number of Shares to be Issued in the Offering” for more information as to the
determination of the estimated pro forma market value of the common stock.

         The following is a brief summary of the pertinent aspects of the conversion and offering. A copy of the plan of conversion is available
from us upon request and is available for inspection at the offices of 1st Security Bank of Washington and at the Washington Department of
Financial Institutions. The plan of conversion is also filed as an exhibit to the registration statement that we have filed with the SEC. See
“Where You Can Find More Information.”

Our Reasons for the Conversion

           The primary reasons for the conversion and our decision to conduct the offering are to:

       ●        increase our capital to support future growth; and

       ●        provide us with greater operating flexibility and allow us to better compete with other financial institutions.

           The conversion and the capital raised in the offering are expected to:

       ●        give us the financial strength to continue to grow our bank;

       ●        better enable us to serve customers in our market area;

                enable us to increase lending limits and support our emphasis on commercial business and commercial real estate and the
       ●
                development of new products and services;

       ●        help us attract and retain qualified management through stock-based compensation plans; and

       ●        structure our business in a form that will enable us to access the capital markets.

          In addition, in the stock holding company structure we will have greater flexibility in structuring mergers and acquisitions. Potential
sellers often want an acquiror’s stock for at least part of the acquisition consideration. Our new stock holding company structure will enable us
to offer stock or cash consideration, or a combination thereof, and will therefore enhance our ability to compete with other bidders when
acquisition opportunities arise. We have no current arrangements or agreements to acquire other banks, thrifts or financial service companies
or branch offices.

         The offering will allow our directors, officers and employees to become shareholders, which we believe will be an effective
performance incentive and an effective means of attracting and retaining qualified personnel. The offering also will provide our customers and
local community members with an opportunity to acquire our common stock.


                                                                          114
Effects of the Conversion

         General. The conversion will have no effect on 1st Security Bank of Washington’s present business of accepting deposits and
investing its funds in loans and other investments permitted by law. Following completion of the conversion, 1st Security Bank of Washington
will continue to be subject to regulation by the Washington Department of Financial Institutions, and its accounts will continue to be insured by
the Federal Deposit Insurance Corporation, up to applicable limits, without interruption. After the conversion, 1st Security Bank of
Washington will continue to provide services for depositors and borrowers under current policies and by its present management and staff.

          Deposits and Loans. Each holder of a deposit account in 1st Security Bank of Washington at the time of the conversion will
continue as an account holder in 1st Security Bank of Washington after the conversion, and the conversion will not affect the deposit balance,
interest rate or other terms of the depositor’s accounts. Each account will be insured by the Federal Deposit Insurance Corporation to the same
extent as before the conversion. Depositors in 1st Security Bank of Washington will continue to hold their existing certificates, passbooks
(statement savings) and other evidence of their accounts. The conversion will not affect the loan terms of any borrower from 1st Security Bank
of Washington. The amount, interest rate, maturity, security for and obligations under each loan will remain as they existed prior to the
conversion. See “- Voting Rights” and “-Depositors’ Rights if We Liquidate” below for a discussion of the effects of the conversion on the
voting and liquidation rights of the depositors of 1st Security Bank of Washington.

           Continuity. The board of directors presently serving 1st Security Bank of Washington will serve as the board of directors of 1st
Security Bank of Washington after the conversion. The board of directors of FS Bancorp consists of the same individuals who serve as
directors of 1st Security Bank of Washington. After the conversion, the voting shareholders of FS Bancorp will elect approximately one-third
of its directors annually. All current officers of 1st Security Bank of Washington will retain their positions with 1st Security Bank of
Washington after the conversion.

         Voting Rights. After completion of the conversion, members will have no voting rights in 1st Security Bank of Washington or FS
Bancorp and, therefore, will not be able to elect directors of either entity or to control their affairs. Currently depositors of 1st Security Bank of
Washington do have limited voting rights regarding charter amendments and corporate reorganization, but do not have any voting right with
respect to the election of directors. After the conversion, voting rights in FS Bancorp will be vested exclusively in the shareholders of FS
Bancorp. Each holder of common stock will be entitled to vote on any matter to be considered by the shareholders of FS Bancorp. After
completion of the conversion voting rights in 1st Security Bank of Washington will be vested exclusively in its sole shareholder, FS Bancorp.

         Depositors’ Rights if We Liquidate. We have no plans to liquidate. However, if there should ever be a complete liquidation of 1st
Security Bank of Washington, either before or after the conversion, deposit account holders would receive the protection of insurance by the
Federal Deposit Insurance Corporation up to applicable limits. In addition, liquidation rights before and after the conversion would be as
follows:

         Liquidation Rights in Present Mutual Institution. In addition to the protection of Federal Deposit Insurance Corporation insurance
         up to applicable limits, in the event of the complete liquidation of 1st Security Bank of Washington, each holder of a deposit account
         would receive his or her pro rata share of any assets of 1st Security Bank of Washington remaining after payment of claims of all
         creditors (including the claims of all depositors in the amount of the withdrawal value of their accounts). Each holder’s pro rata share
         of the remaining assets, if any, would be in the same proportion of the assets as the balance in his or her deposit account was to the
         aggregate balance in all our deposit accounts at the time of liquidation.


                                                                         115
         Liquidation Rights After the Conversion. In the unlikely event that 1st Security Bank of Washington were to liquidate after the
         conversion, all claims of creditors, including those of depositors, would be paid first, followed by distribution of the liquidation
         account (described below) to depositors as of June 30, 2007 and _________ __, 2012, who continue to maintain their deposit accounts
         as of the date of liquidation, with any assets remaining thereafter distributed to FS Bancorp, as the holder of 1st Security Bank of
         Washington’s capital stock.

         1st Security Bank of Washington will, at the time of the conversion, establish a liquidation account in an amount equal to its total
         equity as of the date of the latest statement of financial condition contained in this prospectus. The liquidation account will be a
         memorandum account on the records of 1st Security Bank of Washington and there will be no segregation of assets of 1st Security
         Bank of Washington related to it.

         The liquidation account will be maintained subsequent to the conversion for the benefit of eligible account holders and supplemental
         eligible account holders who retain their deposit accounts in 1st Security Bank of Washington. Each eligible account holder and
         supplemental eligible account holder will, with respect to each deposit account held, have a related inchoate interest in a portion of the
         liquidation account balance called a subaccount.

         The initial subaccount balance for a deposit account held by an eligible account holder or a supplemental eligible account holder will
         be determined by multiplying the opening balance in the liquidation account by a fraction of which the numerator is the amount of the
         holder’s qualifying deposit in the deposit account and the denominator is the total amount of the qualifying deposits of all such
         holders. The initial subaccount balance will not be increased, and it will be subject to downward adjustment as provided below.

         If the balance in any deposit account of an eligible account holder or supplemental eligible account holder at the close of business on
         any December 31 subsequent to the effective date of the conversion is less than the lesser of (1) the balance in the deposit account at
         the close of business on any other December 31 subsequent to June 30, 2007 or _________ __, 2012, as applicable, or (2) the amount
         of the qualifying deposit in the deposit account on June 30, 2007 or _________ __, 2012, as applicable, then the subaccount balance
         for the deposit account will be adjusted by reducing the subaccount balance in an amount proportionate to the reduction in the deposit
         balance. In the event of a downward adjustment, the subaccount balance will not be subsequently increased, notwithstanding any
         subsequent increase in the deposit balance of the related deposit account. If any such deposit account is closed, the related subaccount
         balance will be reduced to zero.

         In the event of a complete liquidation of 1st Security Bank of Washington (and only in that event), each eligible account holder and
         supplemental eligible account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of
         the then current adjusted subaccount balance(s) for the deposit account(s) then held by the holder before any liquidation distribution
         may be made to shareholders. No merger, consolidation, bulk purchase of assets with assumptions of deposit accounts and other
         liabilities or similar transactions with another federally insured institution in which 1st Security Bank of Washington is not the
         surviving institution will be considered to be a complete liquidation. In any such transaction, the liquidation account will be assumed
         by the surviving institution.

        Tax Effects of the Conversion. We have received an opinion from our special counsel, Silver, Freedman & Taff, L.L.P.,
Washington, D.C. that the conversion will constitute a tax free reorganization under the Internal Revenue Code and that no gain or loss will be
recognized for federal income tax purposes by 1st Security Bank of Washington or FS Bancorp as a result of the completion of the
conversion. However, this opinion is not binding on the IRS or the State of Washington Department of Revenue.


                                                                       116
         If the liquidation rights in 1st Security Bank of Washington or subscription rights to purchase FS Bancorp common stock have a
market value when received, or in the case of subscription rights, when exercised, then depositors receiving or exercising these rights may have
a taxable gain. Any gain will be limited to the fair market value of these rights.

          Liquidation rights are the proportionate interest of certain depositors of 1st Security Bank of Washington in the special liquidation
account to be established by FS Bancorp under the plan of conversion. See “- Depositors’ Rights if We Liquidate.” Special counsel believes
that the liquidation rights will have no fair market or ascertainable value.

          The subscription rights are the preferential rights of eligible subscribers to purchase shares of FS Bancorp common stock in the
conversion. See “- Subscription Offering and Subscription Rights.” Because the subscription rights are acquired without cost, are not
transferable, last for only a short time period and give the recipients a right to purchase stock in the conversion only at fair market value,
special counsel believes these rights do not have any taxable value when they are granted or exercised. Special counsel’s opinion states that it
is not aware of the IRS claiming in any similar conversion transaction that subscription rights have any market value. Because there are no
judicial opinions or official IRS positions on this issue, however, special counsel’s opinion relating to subscription rights comes to a reasoned
conclusion instead of an absolute conclusion on this issue. Special counsel’s conclusion is supported by a letter from RP Financial which states
that the subscription rights do not have any value when they are distributed or exercised.

         If the IRS disagrees and says the subscription rights have value, income may be recognized by recipients of these rights, in certain
cases whether or not the rights are exercised. This income may be capital gain or ordinary income, and FS Bancorp and 1st Security Bank of
Washington could recognize gain on the distribution of these rights. Eligible subscribers are encouraged to consult with their own tax advisor
regarding their own circumstances and any tax consequences if subscription rights are deemed to have value.

          The opinion of special counsel makes certain assumptions consisting solely of factual matters that would be contained in a
representation letter of 1st Security Bank of Washington to the IRS if it were seeking a private letter ruling relating to the federal income tax
consequences of the conversion. Special counsel’s opinion is based on the Internal Revenue Code, regulations now in effect or proposed,
current administrative rulings and practice and judicial authority, all of which are subject to change. Any change may be made with retroactive
effect. Unlike private letter rulings received from the IRS, special counsel’s opinion is not binding on the IRS and there can be no assurance
that the IRS will not take a position contrary to the positions reflected in special counsel’s opinion, or that special counsel’s opinion will be
upheld by the courts if challenged by the IRS.

          Special counsel’s opinion does not address whether the “pre-change losses” (as such term is defined in the Income Tax Regulations)
of 1st Security Bank of Washington will be subject to limitations on use under Section 382 of the Internal Revenue Code. These limitations
would apply if the issuance of shares in the conversion results in an “ownership change” (as defined in Section 382 of the Internal Revenue
Code) of 1st Security Bank of Washington. Absent the cash issuance exception contained in Section 382 of the Internal Revenue Code, the
issuance of shares in the conversion would constitute an ownership change and place limitations on or the elimination of the use of the
pre-change losses of 1st Security Bank of Washington under Section 382 of the Internal Revenue Code. If the cash issuance exception under
Section 382 of the Internal Revenue Code applies to a sufficient number of the shares issued in the conversion to preclude an ownership
change, the consummation of the conversion will not result in the imposition of limitations on the pre-change losses of 1st Security Bank of
Washington under Section 382 of the Internal Revenue Code. However, in such case, an ownership change could subsequently occur due to
the aggregation of the shift in ownership occurring in the conversion and shifts in ownership that occur at any time within the three year period
thereafter, at which time the limitations under Section 382 would become applicable if 1st Security Bank of Washington has pre-change losses
at such time.


                                                                       117
          1st Security Bank of Washington is required to file an information statement with its federal income tax return for the year ending
after the conversion setting forth, among other things, shifts in ownership and whether an ownership change has occurred. If the independent
accountants of 1st Security Bank of Washington concur at the time of the preparation of the information statement that the conversion did not
result in an ownership change by reason of the cash issuance exception (after taking into account any applicable post-conversion shifts in
ownership), then 1st Security Bank of Washington intends to reflect no ownership change on this information statement.

          1st Security Bank of Washington has also obtained an opinion from Harlowe & Falk LLP, Tacoma, Washington, that the income tax
effects of the conversion under Washington tax laws will be substantially the same as the federal income tax consequences described above.

How We Determined Our Price and the Number of Shares to Be Issued in the Stock Offering

          The plan of conversion requires that the purchase price of the common stock must be based on the appraised pro forma market value
of FS Bancorp and 1st Security Bank of Washington, as determined on the basis of an independent valuation. We have retained RP Financial,
a financial services industry consulting firm with over 20 years of experience in valuing financial institutions for mutual to stock conversions,
to make this valuation. We have no prior relationship with RP Financial. For its services in making this appraisal, RP Financial’s fees and
out-of-pocket expenses are estimated to be $ 54,500 (excluding any fees paid in 2008). We have agreed to indemnify RP Financial and any
employees of RP Financial who act for or on behalf of RP Financial in connection with the appraisal against any and all loss, cost, damage,
claim, liability or expense of any kind, including claims under federal and state securities laws, arising out of any misstatement, untrue
statement of a material fact or omission to state a material fact in the information we supply to RP Financial, unless RP Financial is determined
to be negligent or otherwise at fault.

          The amount of common stock we are offering is based on an independent appraisal by RP Financial of the estimated pro forma market
value of FS Bancorp, assuming the conversion and offering are completed. The appraisal was based in part on our consolidated financial
condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of our common stock in the
offering, and an analysis of a peer group of publicly-traded companies utilized by RP Financial in its appraisal that RP Financial considers
comparable to FS Bancorp.

         RP Financial concluded that, as of February 17, 2012 the estimated pro forma market value of FS Bancorp was $24.5 million. This
pro forma market value is the midpoint of a valuation range established by regulation with a minimum of $20.8 million and a maximum of
$28.2 million. Based on this market value and a $10.00 per share purchase price, the number of shares of our common stock that will be
offered for sale will range from 2,082,500 to 2,817,500 with a midpoint of 2,450,000. The $10.00 per share price was selected primarily
because it is the price most commonly used in mutual-to-stock conversions of financial institutions. If a greater demand for shares of our
common stock or a change in financial or market conditions warrant, the offering range may be increased by 15.0%, which would result in an
adjusted maximum pro forma market value of $32.4 million and total shares offered of 3,240,125.

         RP Financial advised the board of directors that the appraisal was prepared in conformance with the regulatory appraisal
methodology. That methodology requires a valuation based on an analysis of trading prices of comparable companies whose stocks have
traded for at least one year prior to the valuation date. RP Financial selected a group of comparable public companies for this analysis. RP
Financial also advised our board of directors that the after market trading experience of recent transactions was considered in the appraisal as a
general indicator of current market value, but was not relied upon as a primary valuation methodology.


                                                                       118
         In preparing its appraisal, RP Financial considered the information in this prospectus, including our financial statements. RP Financial
also considered the following factors, among others.

               the present results and financial condition of 1st Security Bank of Washington, and the projected results and financial condition
         ●
               of FS Bancorp;

         ●     the economic and demographic conditions in our existing market area;

         ●     certain historical, financial and other information relating to 1st Security Bank of Washington;

         ●     a comparative evaluation of the operating and financial characteristics of 1st Security Bank of Washington with the peer group
               companies, which are headquartered in the states of Washington (two companies), Louisiana (two companies) , Michigan (two
               companies), and Tennessee, Montana , Illinois, and Ohio (one company);

         ●     the impact of the conversion and the offering on FS Bancorp’s shareholders’ equity and earnings potential;

         ●     the proposed dividend policy of FS Bancorp; and

         ●     the trading market for the securities of the peer group institutions and general conditions in the stock market for the peer group
               institutions and all publicly traded thrift institutions.

       Furthermore, RP Financial had various discussions with management. RP Financial did not perform a detailed analysis of the separate
components of our assets and liabilities. We did not impose any limitations on RP Financial in connection with its appraisal.

         RP Financial relied primarily on a comparative market value methodology in determining the pro forma market value of our common
stock. In applying this methodology, RP Financial analyzed financial and operational comparisons of 1st Security Bank of Washington with a
selected peer group of publicly traded savings institutions. The peer group used by RP Financial consists of ten companies listed in the table
below. The pro forma market value of FS Bancorp’s common stock was determined by RP Financial based on the market pricing ratios of the
peer group, subject to certain valuation adjustments based on fundamental differences between 1st Security and the institutions comprising the
peer group. RP Financial took into account the significant volatility in the broader stock market and the after market pricing characteristics of
recently converted savings institutions. RP Financial utilized the results of this overall analysis to establish pricing ratios that resulted in the
determination of the pro forma market value.

       The selection criteria for the peer group included consideration of geographic location, earnings and asset size. The peer group
companies are:


                                                                        119
                                     Peer Group (Ticker Symbol)                                            City and State             Assets
                                                                                                                                   (In millions)

First Financial NW, Inc . ( FFNW )                                                                       Renton , WA           $            1,059
Timberland Bancorp , Inc. ( TSBK )                                                                       Hoquiam , WA                         736
Eagle Bancorp Montana , Inc. (EBMT)                                                                      Helena, MT                           332
Louisiana Bancorp, Inc. (LABC)                                                                           Metairie, LA                         316
Jacksonville Bancorp, Inc. (JXSB)                                                                        Jacksonville, IL                     307
Wolverine Bancorp, Inc. (WBKC)                                                                           Midland, MI                          294
Athens Bancshares Corp . (AFCB)                                                                          Athens, TN                           284
Home Federal Bancorp, Inc. of LA (HFBL )                                                                 Shreveport , LA                      252
FFD Financial Corp. (FFDF)                                                                               Dover, OH                            235
First Federal of N. Michigan Bncp, Inc. (FFNM)                                                           Alpena, MI                           222

          Two of the measures investors use to analyze whether a stock might be a good investment are the ratio of the offering price to the
issuer’s “book value” and the ratio of the offering price to the issuer’s annual net income. RP Financial considered these ratios, among other
factors, in preparing its appraisal. Book value is the same as total shareholders’ equity, and represents the difference between the issuer’s
assets and liabilities. Tangible book value is equal to total shareholders’ equity less intangible assets. Reported earnings reflect net income
recorded by 1st Security Bank of Washington during the 12 month period ended December 31, 2011. Core earnings represent 1st Security
Bank of Washington’s earnings, adjusted for non-operating items. RP Financial’s appraisal also incorporates an analysis of a peer group of
publicly traded companies that RP Financial considered to be comparable to us.

          The following table presents a summary of selected pricing ratios for the peer group companies and 1st Security Bank of Washington
(on a pro forma basis). The pricing ratios are based on book value, earnings and other information as of and for the 12 months ended
December 31, 2011, stock price information as February 17, 2012 as reflected in RP Financial’s appraisal report, dated February 17, 2012, and
the number of shares assumed to be outstanding as described in “Pro Forma Data.” Compared to the average pricing of the peer group, our pro
forma pricing ratios at the maximum of the offering range indicated a discount of premium of 1.8 % on a price-to-reported earnings basis, a
premium of 16.1 % on a price-core earnings basis, a discount of 17.3 % on a price-to-book value basis, and a discount of 18.5 % on a
price-to-tangible book value basis.

                                                                                                                     Price -          Price -
                                                                               Price-to-       Price-to-core        to-book         to-tangible
                                                                               earnings          earnings            value          book value
                                                                               multiple          multiple             ratio            ratio

FS Bancorp, Inc.
  Minimum of offering range                                                         15.88 x               14.40 x       48.45 %             48.47 %
  Midpoint of offering range                                                        19.26 x               17.42 x       53.05 %             53.05 %
  Maximum of offering range                                                         22.85 x               20.61 x       57.08 %             57.08 %
  Maximum of offering range, as adjusted                                            27.28 x               24.51 x       61.09 %             61.05 %

Valuation of peer group companies using stock market prices as of
February 17, 2012
  Average                                                                           22.44 x               17.75 x       69.00 %             70.02 %
  Median                                                                            21.06 x               17.05 x       71.39 %             72.28 %

         Our board of directors reviewed the appraisal report of RP Financial, including the methodology and the assumptions used, and
determined that the valuation range was reasonable and adequate. Given that the shares are to be sold at $10.00 per share in the offering, the
estimated number of shares would be between 2,082,500 at the minimum of the valuation range and 2,817,500 at the maximum of the valuation
range, with a midpoint of 2,450,000.


                                                                       120
         The following table, prepared by our independent appraiser, presents for all full stock conversions that began trading from January 1,
2012 to February 17, 2012, the percentage change in the trading price from the initial trading date of the offering to the dates shown in the
table. The table also presents the average and median trading prices and percentage change in trading prices for the same dates. This
information relates to stock performance experienced by other companies that may have no similarities to us with regard to market
capitalization, offering size, earnings quality and growth potential, among other factors.

         The table is not intended to indicate how our common stock may perform. Data represented in the table reflects a small number of
transactions and is not indicative of general stock market performance trends or of price performance trends of companies that undergo
conversions. Furthermore, this table presents only short-term price performance and may not be indicative of the longer-term stock price
performance of these companies. There can be no assurance that our stock price will appreciate or that our stock price will not trade below
$10.00 per share. The movement of any particular company’s stock price is subject to various factors, including, but not limited to, the amount
of proceeds a company raises, the company’s historical and anticipated operating results, the nature and quality of the company’s assets, the
company’s market area and the quality of management and management’s ability to deploy proceeds (such as through loans and investments,
the acquisition of other financial institutions or other businesses, the payment of dividends and common stock repurchases). In addition, stock
prices may be affected by general market and economic conditions, the interest rate environment, the market for financial institutions and
merger or takeover transactions and the presence of professional and other investors who purchase stock on speculation, as well as other
unforeseeable events not in the control of management. Before you make an investment decision, please carefully read this prospectus,
including “Risk Factors.”

                                                          After Market Trading Activity
                                                 Initial Stock Offerings - Standard Conversions
                                      Completed Closing Dates between January 1, 2011 and February 17, 2012

                                                                                Change from Initial Trading Date Offering Price
                                                                                                                            Through
                                                                                                           After One        February
                                                                            After One     After One          Month              17,
Transaction (Ticker Symbol)                                IPO Date         Day (%)       Week (%)            (%)          2012 (%)

Wellesley Bancorp, Inc. ( WEBK )                           01 / 26 / 12            20.00 %           21.00 %          26.70 %            26.70 %
West Indiana Bancshares, Inc. (WEIN)                        01/11/12               12.60             11.50            20.00              25.50
Carroll Bancorp, Inc. (CROL)                                10/13/11                0.40             (2.50 )           4.00               2.10
ASB Bancorp, Inc. (ASBB)                                    10/12/11               16.40             14.50            15.50              19.10
BSB Bancorp, Inc. (BLMT)                                    10/05/11                3.10              3.40             2.50              16.56
Poage Bankshares, Inc. (PBSK)                               09/13/11               11.30             12.30             8.80              14.90
IF Bancorp, Inc. (IROQ)                                     07/08/11               16.70             16.50             8.50              15.00
State Investors Bancorp, Inc. (SIBC)                        07/07/11               18.50             16.60            16.00              13.50
First Connecticut Bancorp, Inc. (FBNK)                      06/30/11               10.80             11.60            11.10              35.00
Franklin Financial Corp. (FRNK)                             04/28/11               19.70             17.70            19.60              34.10
Sunshine Financial, Inc. (SSNF)                             04/06/11               12.50             10.00            14.00              (5.00 )
Fraternity Comm. Bancorp (FRTR)                             04/01/11               10.00             11.70            10.00             (14.99 )
Anchor Bancorp (ANCB)                                       01/26/11                0.00              0.40             4.50              (8.30 )
Wolverine Bancorp, Inc. (WBKC)                              01/20/11               24.50             22.40            35.00              54.80

                                               Average:                            12.61 %           11.94 %          14.01 %            16.36 %
                                               Median:                             12.55 %           12.00 %          12.55 %            15.78 %


                                                                      121
          Data presented in the table reflects a small number of transactions. There can be no assurance that our stock price will appreciate or
that our stock price will not trade below the initial offering price of $10.00 per share.

         RP Financial’s valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of
purchasing these shares. RP Financial did not independently verify the financial statements and other information we provided, nor
did RP Financial value independently our assets or liabilities. The valuation considers 1st Security Bank of Washington as a going
concern and should not be considered as an indication of the liquidation value of 1st Security Bank of Washington. Moreover, because
this valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time
to time, no assurance can be given that persons purchasing common stock in the offering will thereafter be able to sell these shares at
prices at or above the purchase price or in the range of the valuation described above.

          RP Financial will update its appraisal before we complete the offering. If, as a result of demand for the shares or changes in market
conditions, RP Financial determines that our pro forma market value has increased, we may sell up to 3,240,125 shares in the offering without
notice to you. No sale of shares of common stock in the offering may be completed unless, prior to the completion, RP Financial confirms that
nothing of a material nature has occurred which, taking into account all relevant factors, would cause it to conclude that the aggregate value of
the common stock to be issued is materially incompatible with the estimate of the aggregate consolidated pro forma market value of FS
Bancorp. If our pro forma market value at that time is either below $20.8 million or above $32.4 million, then, after consulting with the
Washington Department of Financial Institutions and the FDIC, we may:

           ●   set a new offering range;

           ●   take such other actions as may be permitted by the Washington Department of Financial Institutions, the FDIC and the
               Securities and Exchange Commission; or

           ●   terminate the offering and promptly return all funds.

          If we set a new offering range, we will be required to cancel your stock order and promptly return your subscription funds, with
interest calculated at the statement savings rate, and cancel any authorization to withdraw funds from your deposit accounts for the purchase of
shares of common stock. You will have the opportunity to place a new stock order.

         An increase in the number of shares of common stock as a result of an increase in the estimated pro forma market value would
decrease both a subscriber’s ownership interest and FS Bancorp’s pro forma net income and shareholders’ equity on a per share basis while
increasing pro forma net income and shareholders’ equity on an aggregate basis. A decrease in the number of shares of common stock would
increase both a subscriber’s ownership interest and FS Bancorp’s pro forma net income and shareholders’ equity on a per share basis while
decreasing pro forma net income and shareholders’ equity on an aggregate basis. See “Risk Factors - Risks Related to This Offering - The
implementation of an equity incentive plan may dilute your ownership interest” and “Pro Forma Data.”

          Copies of the appraisal report of RP Financial, LC including any amendments, and the detailed report of the appraiser setting forth the
method and assumptions for the appraisal are available for inspection at the office of 1st Security Bank of Washington and as specified under
“Where You Can Find More Information.” In addition, the appraisal report is an exhibit to the registration statement of which this prospectus
is a part. The registration statement is available on the SEC’s website (http://www.sec.gov).


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Subscription Offering and Subscription Rights

        Under the plan of conversion, rights to subscribe for the purchase of common stock have been granted to the following persons in the
following order of descending priority:

         ●     depositors of 1st Security Bank of Washington with account balances of at least $50 as of the close of business on June 30, 2007
               (“Eligible Account Holders”);

         ●     the proposed employee stock ownership plan (“Tax-Qualified Employee Stock Benefit Plans”);

         ●     depositors of 1st Security Bank of Washington, other than directors and executive officers and their associates, with account
               balances of at least $50 as of the close of business on _________ __, 2012 (“Supplemental Eligible Account Holders”); and

         ●     depositors of 1st Security Bank of Washington, as of the close of business on _______, 2012, other than Eligible Account
               Holders or Supplemental Eligible Account Holders (“Other Members”).

         All subscriptions received will be subject to the availability of common stock after satisfaction of all subscriptions of all persons
having prior rights in the subscription offering and to the maximum and minimum purchase limitations set forth in the plan of conversion and
as described below under “- Limitations on Stock Purchases.”

          Preference Category No. 1: Eligible Account Holders . Each Eligible Account Holder shall receive, without payment, first
priority, nontransferable subscription rights to subscribe for shares of common stock in an amount equal to the greater of:

         (1)       $250,000 or 25,000 shares of common stock;

         (2)       one-tenth of one percent of the total offering of shares of common stock; or

         (3)       15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of
                   common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the Eligible
                   Account Holder and the denominator is the total amount of qualifying deposits of all Eligible Account Holders in 1st
                   Security Bank of Washington in each case on the close of business on June 30, 2007 (the “Eligibility Record Date”), subject
                   to the overall purchase limitations.

See “- Limitations on Stock Purchases.”

           If there are not sufficient shares available to satisfy all subscriptions, shares first will be allocated among subscribing Eligible Account
Holders so as to permit each such Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of the number of shares subscribed for or 100 shares. Thereafter, any shares remaining will be allocated among
the subscribing Eligible Account Holders whose subscriptions remain unfilled pro rata in the proportion that the amounts of their respective
qualifying deposits bear to the total amount of qualifying deposits of all subscribing Eligible Account Holders whose subscriptions remain
unfilled. For example, if an Eligible Account Holder with an unfilled subscription has qualifying deposits totaling $100, and the total amount
of qualifying deposits for Eligible Account Holders with unfilled subscriptions was $1,000, then the number of shares that may be allocated to
fill this Eligible Account Holder’s subscription would be 10% of the shares remaining available, up to the amount subscribed for.


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         To ensure proper allocation of stock, each Eligible Account Holder must list on his or her subscription order form all accounts in
which he or she has an ownership interest. Failure to list an account could result in fewer shares being allocated than if all accounts had been
disclosed. The subscription rights of Eligible Account Holders who are also directors or officers of 1st Security Bank of Washington or their
associates will be subordinated to the subscription rights of other Eligible Account Holders to the extent attributable to increased deposits in the
year preceding June 30, 2007.

          Preference Category No. 2: Tax-Qualified Employee Stock Benefit Plans . The plan of conversion provides that each
Tax-Qualified Employee Stock Benefit Plan , excluding the 401(k) plan, shall receive nontransferable subscription rights to purchase up to 8%
of the common stock sold in the offering, provided that individually or in the aggregate these plans (other than that portion of these plans which
is self-directed) shall not purchase more than 8% of the shares of common stock, including any increase in the number of shares of common
stock after the date hereof as a result of an increase of up to 15% in the maximum of the estimated valuation range. The proposed employee
stock ownership plan intends to purchase 8% of the shares of common stock sold in the offering, or 166,600 shares and 225,400 shares based
on the minimum and maximum of the estimated offering range, respectively. Subscriptions by the Tax-Qualified Employee Stock Benefit
Plans will not be aggregated with shares of common stock purchased directly by or which are otherwise attributable to any other participants in
the subscription and direct community offerings, including subscriptions of any of 1st Security Bank of Washington’s directors, officers,
employees or associates thereof. Subscription rights received pursuant to this category shall be subordinated to all rights received by Eligible
Account Holders to purchase shares pursuant to Preference Category No. 1. If the employee stock ownership plan’s subscription is not filled in
its entirety, the plan may, with the approval of the Washington Department of Financial Institutions and the Federal Deposit Insurance
Corporation, purchase shares in the open market. See “Management - Benefits - Employee Stock Ownership Plan.”

          Preference Category No. 3: Supplemental Eligible Account Holders . To the extent that there are sufficient shares remaining after
satisfaction of subscriptions by Eligible Account Holders and the Tax-Qualified Employee Stock Benefit Plans, each Supplemental Eligible
Account Holder shall be entitled to receive, without payment therefore, third priority, nontransferable subscription rights to subscribe for shares
of common stock in an amount equal to the greater of:

         (1)       $250,000 or 25,000 shares of common stock;

         (2)       one-tenth of one percent of the total offering of shares of common stock; or

         (3)       15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of
                   common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the Supplemental
                   Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Supplemental Eligible Account
                   Holders in 1st Security Bank of Washington in each case on the close of business on _________ __, 2012 (the
                   “Supplemental Eligibility Record Date”), subject to the overall purchase limitations.

See “- Limitations on Stock Purchases.”

           If there are not sufficient shares available to satisfy all subscriptions of all Supplemental Eligible Account Holders, available shares
first will be allocated among subscribing Supplemental Eligible Account Holders so as to permit each such Supplemental Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of the number of
shares subscribed for or 100 shares. Thereafter, any shares remaining available will be allocated among the Supplemental Eligible Account
Holders whose subscriptions remain unfilled pro rata in the proportion that the amounts of their respective qualifying deposits bear to the total
amount of qualifying deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unfilled.


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         Preference Category No. 4: Other Members . To the extent that there are sufficient shares remaining after satisfaction of
subscriptions by Eligible Account Holders, the Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders, each
Other Member shall receive, without payment therefore, fourth priority, nontransferable subscription rights to subscribe for shares of common
stock, up to the greater of:

         (1)      $250,000 or 25,000 shares of common stock; or

         (2)      one-tenth of one percent of the total offering of shares of common stock in the offerings, subject to the overall purchase
                  limitations.

See “- Limitations on Stock Purchases.”

          In the event the Other Members subscribe for a number of shares which, when added to the shares subscribed for by Eligible Account
Holders, the Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders, is in excess of the total number of
shares of common stock offered in the conversion, available shares will be allocated among the subscribing Other Members pro rata on the
basis of the amounts of their respective subscriptions.

         Expiration Date for the Subscription Offering. The subscription offering will expire at 12:00 Noon, Pacific time, on _________ __,
2012, unless extended for the full 45 day period to __________ __, 2012, and may be extended an additional 45 days to _________ __, 2012
without the approval of the Washington Department of Financial Institutions. Any further extensions of the subscription offering must be
approved by the Washington Department of Financial Institutions. The subscription offering may not be extended beyond _________ __,
2014. Subscription rights which have not been exercised prior to _________ __, 2012 (unless extended) will become void.

          FS Bancorp and 1st Security Bank of Washington will not execute orders until at least the minimum number of shares of common
stock, 2,082,500 shares, have been subscribed for or otherwise sold. If all shares have not been subscribed for or sold by _________ __, 2012,
unless this period is extended with the consent of the Washington Department of Financial Institutions, all funds delivered to 1st Security Bank
of Washington pursuant to the subscription offering will be returned promptly to the subscribers with interest and all withdrawal authorizations
will be canceled. If an extension beyond _________ __, 2012 is granted, FS Bancorp and 1st Security Bank of Washington will notify
subscribers of the extension of time and of any rights of subscribers to confirm, modify or rescind their subscriptions. This is commonly
referred to as a “resolicitation offering.”

          In a resolicitation offering, FS Bancorp would mail you a supplement to this prospectus if you subscribed for stock to let you confirm,
modify or cancel your subscription. If you fail to respond to the resolicitation offering, it would be as if you had canceled your order and all
subscription funds, together with accrued interest, would be returned to you. If you authorized payment by withdrawal of funds on deposit at
1st Security Bank of Washington, that authorization would terminate. If you affirmatively confirm your subscription order during the
resolicitation offering, FS Bancorp and 1st Security Bank of Washington would continue to hold your subscription funds until the end of the
resolicitation offering. Your resolicitation order would be irrevocable without the consent of FS Bancorp and 1st Security Bank of Washington
until the conversion is completed or terminated.


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Direct Community Offering

          To the extent that shares remain available for purchase after satisfaction of all subscription rights discussed above, we anticipate
offering shares pursuant to the plan of conversion to members of the general public who receive a prospectus, with a preference given to natural
persons residing in King, Kitsup, Pierce and Snohomish Counties. These natural persons are referred to as preferred subscribers. We may limit
total subscriptions in the direct community offering to ensure that the number of shares available for the syndicated community offering may be
up to a specified percentage of the number of shares of common stock. The opportunity to subscribe for shares of common stock in any direct
community offering will be subject to our right, in our sole discretion, to accept or reject any such orders either at the time of receipt of an
order or as soon as practicable following _________ __, 2012. The direct community offering, if any, will begin at the same time as, during
or promptly after the subscription offering and will not be for more than 45 days after the end of the subscription offering.

         The price at which common stock would be sold in the direct community offering will be the same price at which shares are offered
and sold in the subscription offering. No person, may purchase more than $250,000 of common stock in the direct community offering, and no
person together with an associate or group of persons acting in concert, may purchase more than $500,000 of common stock in the direct
community offering, subject to the maximum purchase limitations. See “- Limitations on Stock Purchases.” In the event of an
oversubscription for shares in the direct community offering, shares may be allocated, to the extent shares remain available, on a pro rata basis
to such person based on the amount of their respective subscriptions.

Syndicated Community Offering

          As a final step in the conversion, the plan of conversion provides that, if feasible, all shares of common stock not purchased in the
subscription offering and direct community offering may be offered for sale to selected members of the general public in a syndicated
community offering through a syndicate of registered broker-dealers managed by Keefe, Bruyette & Woods as agent of FS Bancorp. We call
this the syndicated community offering. Keefe, Bruyette & Woods may enter into agreements with broker-dealers to assist in the sale of the
shares in the syndicated community offering, although no such agreements currently exist. The syndicated community offering, if any, will
begin as soon as practicable after termination of the subscription offering and the direct community offering, if any.

         We, in our sole discretion, have the right to reject orders in whole or in part received in the syndicated community offering. Neither
Keefe, Bruyette & Woods nor any registered broker-dealer shall have any obligation to take or purchase any shares of common stock in the
syndicated community offering; however, Keefe, Bruyette & Woods has agreed to use its best efforts in the sale of shares in any syndicated
community offering.

          The syndicated offering will be conducted in accordance with certain Securities and Exchange Commission rules applicable to best
efforts offerings. Under these rules, Keefe, Bruyette &Woods, Inc. or the other broker-dealers participating in the syndicated offering,
generally will accept payment for shares of common stock to be purchased in the syndicated offering through a “sweep” arrangement under
which a customer’s brokerage account at the applicable participating broker-dealer will be debited in the amount of the purchase price for the
shares of common stock that such customer wishes to purchase in the syndicated offering on the settlement date. Customers who authorize
participating broker-dealers to debit their brokerage accounts are required to have the funds for the payment in their accounts on, but not
before, the settlement date which will only occur if the minimum of the offering range is met. Customers who do not wish to authorize
participating broker-dealers to debit their brokerage accounts will not be permitted to purchase shares of common stock in the syndicated
offering. Customers without brokerage accounts will not be able to participate in the syndicated offering.


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          Normal customer ticketing will be used for order placement. In the syndicated offering, order forms will not be used. The closing of
the syndicated offering is subject to conditions set forth in an agency agreement among and between FS Bancorp, Inc. and 1st Security Bank of
Washington on one hand and Keefe, Bruyette & Woods, Inc. on the other hand. If and when all the conditions for the closing are met, funds for
common stock sold in the syndicated offering, less fees and commissions payable, will be delivered promptly to us. If the offering is
consummated, but some or all of an interested investor’s funds in the syndicated offering are not accepted by us, those funds will be returned to
the interested investor promptly after closing, without interest.

          If for any reason we cannot affect a syndicated offering of shares of common stock not purchased in the subscription and direct
community offerings, or in the event that there are an insignificant number of shares remaining unsold after such offerings, we will try to make
other arrangements for the sale of unsubscribed shares, if possible. The Washington Department of Financial Institutions must approve any
such arrangements. Any such arrangements will be disclosed in either a prospectus supplement or a post-effective amendment to the
registration statement of which this prospectus is a part or in a new registration statement, and any such arrangements must be approved by the
Financial Industry Regulatory Authority.

         The price at which common stock would be sold in the syndicated community offering will be the same price at which shares are
offered and sold in the subscription offering and direct community offering. No person may purchase more than $250,000 of common stock in
the syndicated community offering, and no person together with an associate or group of persons acting in concert may purchase more than
$500,000 of common stock in the syndicated community offering, subject to the maximum purchase limitations. See “- Limitations on Stock
Purchases.”

         The syndicated community offering will be completed within 45 days after the termination of the subscription offering, unless
extended by 1st Security Bank of Washington with the approval of the Washington Department of Financial Institutions and the Federal
Deposit Insurance Corporation. The syndicated community offering may not be extended past _________ __, 2014. See “- How We
Determined Our Price and the Number of Shares to Be Issued in the Stock Offering” above for a discussion of rights of subscribers, if any, in
the event an extension is granted.

Persons Who Are Not Permitted to Participate in the Stock Offering

         We will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the plan of conversion reside. However, we are not required to offer stock in the subscription offering to any
person who resides in a foreign country or resides in a state of the United States with respect to which:

         ●    the number of persons otherwise eligible to subscribe for shares under the plan of conversion who reside in such state is small;

         ●    the granting of subscription rights or the offer or sale of shares of common stock to such persons would require any of us or our
              officers, directors or employees, under the laws of such state to register as a broker, dealer, salesperson or selling agent or to
              register or otherwise qualify the securities of FS Bancorp for sale in such state; or

         ●    such registration, qualification or filing in our judgment would be impracticable or unduly burdensome for reasons of cost or
              otherwise.

          Where the number of persons eligible to subscribe for shares in one state is small, we will base our decision as to whether or not to
offer the common stock in that state on a number of factors, including but not limited to the size of accounts held by account holders in the
state, the cost of registering or qualifying the shares or the need to register us or our officers, directors or employees as brokers, dealers or
salespersons.


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Limitations on Stock Purchases

        The plan of conversion includes the following limitations on the number of shares of FS Bancorp common stock which may be
purchased in the conversion:

        (1)      No fewer than 25 shares of common stock may be purchased, to the extent shares are available;

        (2)      Each Eligible Account Holder may subscribe for and purchase in the subscription offering up to the greater of:

                 a.       $250,000 or 25,000 shares of common stock;

                 b.       one-tenth of one percent of the total offering of shares of common stock; or

                 c.       15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares
                          of common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the
                          Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Eligible Account
                          Holders in 1st Security Bank of Washington in each case as of the close of business on the Eligibility Record Date,
                          subject to the overall limitation in clause (7) below;

        (3)      The Tax-Qualified Employee Stock Benefit Plans, including the employee stock ownership plan, may purchase in the
                 aggregate up to 8% of the shares of common stock issued in the conversion, at this time the employee stock ownership plan
                 intends to purchase all 8% of these shares;

        (4)      Each Supplemental Eligible Account Holder may subscribe for and purchase in the subscription offering up to the greater of:

                 a.       $250,000 or 25,000 shares of common stock;

                 b.       one-tenth of one percent of the total offering of shares of common stock; or

                 c.       15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares
                          of common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the
                          Supplemental Eligible Account Holder and the denominator is the total amount of qualifying deposits of all
                          Supplemental Eligible Account Holders in 1st Security Bank of Washington in each case as of the close of business
                          on the Supplemental Eligibility Record Date, subject to the overall limitation in clause (7) below;

        (5)      Each Other Member may subscribe for and purchase in the subscription offering up to the greater of:

                 a.       $250,000 or 25,000 shares of common stock; or


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                   b.        one-tenth of one percent of the total offering of shares of common stock, subject to the overall limitation in clause
                             (7) below;

         (6)       Persons purchasing shares of common stock in the direct community offering or syndicated community offering may
                   purchase in the direct community offering or syndicated community offering up to $250,000 or 25,000 shares of common
                   stock, subject to the overall limitation in clause (7) below; and

         (7)       Except for the Tax-Qualified Employee Stock Benefit Plans, and the Eligible Account Holders and Supplemental Eligible
                   Account Holders whose subscription rights are based upon the amount of their deposits, as a result of (2)(c) and (4)(c) above
                   the maximum number of shares of FS Bancorp common stock subscribed for or purchased in all categories of the offerings
                   by any person, together with associates of and groups of persons acting in concert with such persons, shall not exceed
                   $500,000 or 50,000 shares of common stock.

          Subject to any required Washington Department of Financial Institutions or other regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of 1st Security Bank of Washington, the boards of directors of FS
Bancorp and 1st Security Bank of Washington may, in their sole discretion, increase the maximum individual amount permitted to be
subscribed to provide that any person, group of associated persons, or persons otherwise acting in concert subscribing for five percent, may
purchase between five and ten percent as long as the aggregate amount that the subscribers purchase does not exceed ten percent of the total
stock offering. Requests to purchase additional shares of common stock will be allocated by the boards of directors on a pro rata basis giving
priority in accordance with the preference categories set forth in this prospectus.

         The term “associate” when used to indicate a relationship with any person means:

         ●     any corporation or organization (other than 1st Security Bank of Washington, FS Bancorp or a majority-owned subsidiary of any
               of them) of which the person is an officer or partner or is directly or indirectly the beneficial owner of 10% or more of any class
               of equity securities;

         ●     any trust or other estate in which the person has a substantial beneficial interest or as to which the person serves as trustee or in a
               similar fiduciary capacity;

         ●     any relative or spouse of the person, or any relative of the spouse, who has the same home as the person or who is a director or
               officer of 1st Security Bank of Washington, FS Bancorp or any subsidiary of 1st Security Bank of Washington or FS Bancorp;
               and

         ●     any person acting in concert with any of the persons or entities specified above;

provided, however, that Tax-Qualified Employee Plans shall not be deemed to be an associate of any director or officer of 1st Security Bank of
Washington or FS Bancorp. When used to refer to a person other than an officer or director of 1st Security Bank of Washington, the board of
directors of 1st Security Bank of Washington or officers delegated by the board of directors in their sole discretion may determine the persons
that are associates of other persons.

         The term “acting in concert” means knowing participation in a joint activity or parallel action towards a common goal whether or not
pursuant to an express agreement, or a combination or pooling of voting or other interests in the securities of an issuer for a common purpose
pursuant to any arrangement. A person or company which acts in concert with another person or company shall also be deemed to be acting in
concert with any person or company who is also acting in concert with that other party, except that the Tax-Qualified Employee Stock Benefit
Plans will not be deemed to be acting in concert with their trustees or a person who serves in a similar capacity solely for the purpose of
determining whether stock held by the trustee and stock held by each plan will be aggregated. The determination of whether a group is acting
in concert shall be made solely by the board of directors of 1st Security Bank of Washington or officers delegated by the board of directors and
may be based on any evidence upon which the board or delegatees chooses to rely.


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Marketing Arrangements

         We have engaged Keefe, Bruyette & Woods, Inc., a broker-dealer registered with the Financial Industry Regulatory Authority, as a
financial advisor in connection with the offering of our common stock. In its role as financial advisor, Keefe, Bruyette & Woods, Inc., will:

         ●    provide advice on the financial and securities market implications of the plan of conversion and related corporate documents,
              including our business plan;

         ●    assist in structuring our stock offering, including developing and assisting in implementing a market strategy for the stock
              offering;

         ●    review all offering documents, including this prospectus, stock order forms and related offering materials (we are responsible for
              the preparation and filing of such documents);

         ●    assist us in preparing for and scheduling meetings with potential investors and broker-dealers, as necessary;

         ●    assist us in analyzing proposals from outside vendors retained in connection with the stock offering, including printers, transfer
              agents and appraisal firms;

         ●    assist us in the drafting and distribution of press releases as required or appropriate in connection with the stock offering ;

         ●    meet with the board of directors and management to discuss any of these services; and

         ●    provide such other financial advisory and investment banking services in connection with the stock offering as may be agreed
              upon by Keefe, Bruyette & Woods, Inc. and us.

         For its services, Keefe, Bruyette & Woods will receive a management fee of $40,000 (excluding any fees paid in 2008), payable in
four consecutive monthly installments commencing October 2011, a success fee of 1.0% of the aggregate purchase price of shares of common
stock sold in the subscription offering, less any shares of common stock sold to our directors, officers and employees (or members of their
immediate family) and the Tax-Qualified Employee Stock Benefit Plans and a success fee of 2.0% of the aggregate purchase price of shares of
common stock sold in the direct community offering. The success fee paid to Keefe, Bruyette & Woods will be reduced by the amount of the
management fee. If selected dealers are used to assist in the sale of shares of FS Bancorp common stock in the syndicated community offering,
these dealers will be paid a fee of up to 5.5% of the total purchase price of the shares sold by the dealers. We have agreed to indemnify Keefe,
Bruyette & Woods against certain claims or liabilities, including certain liabilities under the Securities Act of 1933, as amended, and will
contribute to payments Keefe, Bruyette & Woods may be required to make in connection with any such claims or liabilities. In addition,
Keefe, Bruyette & Woods will be reimbursed for the fees and expenses of its legal counsel, and other actual out of pocket expenses, in an
amount not to exceed $ 95,000. In the event of unusual circumstances or delays or a re-solicitation in connection with the offering, the total
expense cap may be increased by up to an additional $10,000.


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        We have also engaged Keefe, Bruyette & Woods, Inc. to act as our conversion agent in connection with the offering. In its role as
conversion agent, Keefe, Bruyette & Woods, Inc. will, among other things:

         ●        consolidate accounts and develop a central file;

         ●        prepare proxy forms and proxy materials;

         ●        tabulate proxies and ballots;

         ●        act as inspector of election at the special meeting of members;

         ●        assist us in establishing and managing the Stock Information Center;

         ●        assist our financial printer with labeling of stock offering materials;

         ●        process stock order forms and certification forms and produce daily reports and analysis;

         ●        assist our transfer agent with the generation and mailing of stock certificates;

         ●        advise us on interest and refund calculations; and

         ●        create tax forms for interest reporting.

          For these services, Keefe, Bruyette & Woods, Inc. will receive a fee of $25,000, and we have made an advance payment of $ 20,000
to Keefe, Bruyette & Woods, Inc. with respect to this fee. We also will reimburse Keefe, Bruyette & Woods, Inc. for its reasonable
out-of-pocket expenses associated with its acting as conversion agent up to a maximum of $25,000. In the event of unusual circumstances or
delays or a re-solicitation in connection with the offering, expenses related to the conversion agent services may be increased to an amount not
to exceed $40,000. If the plan of conversion is terminated or if Keefe, Bruyette & Woods, Inc.’s engagement is terminated in accordance with
the provisions of the agreement, Keefe, Bruyette & Woods, Inc. will be entitled to the advance payment and also receive reimbursement of its
reasonable out-of-pocket expenses. We will indemnify Keefe, Bruyette & Woods, Inc. against liabilities and expenses (including legal fees)
related to or arising out of Keefe, Bruyette & Woods, Inc.’s engagement as our conversion agent and performance of services as our conversion
agent.

          Sales of shares of FS Bancorp common stock will be made by registered representatives affiliated with Keefe, Bruyette & Woods or
by the broker-dealers managed by Keefe, Bruyette & Woods. Keefe, Bruyette & Woods has undertaken that the shares of FS Bancorp common
stock will be sold in a manner which will ensure that the distribution standards of the Nasdaq Stock Market will be met. A stock information
center will be established at 1st Security Bank of Washington’s executive office located at 6920 220th Street SW, in Mountlake Terrace,
Washington. FS Bancorp will rely on Rule 3a4-1 of the Securities Exchange Act of 1934 and sales of FS Bancorp common stock will be
conducted within the requirements of this rule, so as to permit officers, directors and employees to participate in the sale of FS Bancorp
common stock in those states where the law permits. No officer, director or employee of FS Bancorp or 1st Security Bank of Washington will
be compensated directly or indirectly by the payment of commissions or other remuneration in connection with his or her participation in the
sale of common stock.


                                                                        131
Procedure for Purchasing Shares in the Subscription Offering

          To ensure that each purchaser receives a prospectus at least 48 hours before _________ __, 2012 the subscription expiration date,
unless extended, in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed any later than five days
prior to that date or hand delivered any later than two days prior to that date. Execution of the stock order form will confirm receipt or delivery
in accordance with Rule 15c2-8. Stock order forms will only be distributed with, or preceded by, a prospectus.

          To purchase shares in the subscription offering, an executed stock order form with the required payment for each share subscribed for,
or with appropriate authorization for withdrawal from a deposit account at 1st Security Bank of Washington must be received by 1st Security
Bank of Washington by 12:00 Noon, Pacific time, on _________ __, 2012 unless extended. In addition, FS Bancorp and 1st Security Bank of
Washington will require a prospective purchaser to execute a certification in the form required by the Washington Department of Financial
Institutions. Stock order forms which are not received by this time, are executed defectively, are received without full payment or appropriate
withdrawal instructions, or are submitted on photocopied or facsimile stock order forms are not required to be accepted. In addition, 1st
Security Bank of Washington will not accept orders without an executed certification. 1st Security Bank of Washington has the right to waive
or permit the correction of incomplete or improperly executed forms, but does not represent that it will do so. Once received, an executed order
form may not be modified, amended or rescinded without the consent of 1st Security Bank of Washington, unless the conversion has not been
completed within 45 days after the end of the subscription offering, or this period has been extended.

        In order to ensure that Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account
Holders and Other Members are properly identified as to their stock purchase priority, depositors as of the close of business on the Eligibility
Record Date, June 30, 2007, the Supplemental Eligibility Record Date, ________ __, 2012, or the Other Members Record Date, _______ __,
2012, must list all accounts on the stock order form giving all names in each account and the account numbers.

         Payment for subscriptions may be made:

         ●    by personal check, bank check or money order;

         ●    by authorization of withdrawal from savings accounts or certificates of deposit maintained with 1st Security Bank of
              Washington.

         ●    in cash, if delivered in person to a full-service banking office of 1st Security Bank of Washington, although we request that you
              exchange cash for a check with any of our tellers.

          No wire transfers will be accepted. Funds received before the completion of the conversion will be held in a segregated account at the
1st Security Bank of Washington. Interest will be paid on payments made by cash, check or money order at our then-current passbook
(statement savings) rate from the date payment is received until completion of the conversion. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from a deposit account will continue to accrue interest at the
contractual rate, but may not be used by the subscriber until all of FS Bancorp’s common stock has been sold or the plan of conversion and
reorganization is terminated, whichever is earlier. If a subscriber authorizes 1st Security Bank of Washington to withdraw the amount of the
purchase price from his or her deposit account, 1st Security Bank of Washington will do so as of the effective date of the conversion. 1st
Security Bank of Washington will waive any applicable penalties for early withdrawal from certificate accounts for the purpose of purchasing
stock in the offering.


                                                                       132
         If any amount of a subscription order is unfilled, 1st Security Bank of Washington will make an appropriate refund or cancel an
appropriate portion of the related withdrawal authorization, after completion of the conversion. If the conversion is not consummated,
purchasers will have refunded to them all payments made, with interest, and all withdrawal authorizations will be canceled in the case of
subscription payments authorized from accounts at 1st Security Bank of Washington.

         If any Tax-Qualified Employee Stock Benefit Plans subscribe for shares during the subscription offering, these plans will not be
required to pay for the shares subscribed for at the time they subscribe, but rather, they may pay for shares of common stock subscribed for at
the purchase price upon completion of the subscription offering and direct community offering, if all shares are sold, or upon completion of the
syndicated community offering if shares remain to be sold in that offering. If, after the completion of the subscription offering, the amount of
shares to be issued is increased above the maximum of the estimated valuation range included in this prospectus, the Tax-Qualified Employee
Stock Benefit Plans will be entitled to increase their subscriptions by a percentage equal to the percentage increase in the amount of shares to
be issued above the maximum of the estimated valuation range, provided that such subscription will continue to be subject to applicable
purchase limits and stock allocation procedures.

          It may be possible for you to subscribe for shares of common stock using funds you hold within an IRA. However, common stock
must be held in a self-directed retirement account. 1st Security Bank of Washington’s IRAs are not self-directed, so they cannot be invested in
common stock. If you wish to use some or all of the funds in your 1st Security Bank of Washington IRA, the applicable funds must be
transferred to a self-directed account reinvested by an independent trustee, such as a brokerage firm. If you do not have this type of account,
you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent
trustee. Because individual circumstances differ and processing of retirement fund orders takes additional time, we recommend that you
contact the stock information center promptly, preferably at least two weeks before the end of the offering period, for assistance with
purchases using your IRA or any other retirement account that you may have. Whether you may use these funds for the purchase of shares
in the stock offering may depend on timing constraints and possible limitations imposed by the institution where the funds are held.

          The records of 1st Security Bank of Washington will control all matters related to the existence of subscription rights and/or one’s
ability to purchase shares of common stock in the subscription offering.

          Should an oversubscription result in an allocation of shares, the allocation of shares will be completed in accordance with the
plan of conversion. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the order form
will be final. If a partial payment for your shares is required, we will first take the funds from the cash or check you paid with and
secondly from any account from which you wanted funds withdrawn.

Restrictions on Transfer of Subscription Rights and Shares

         No person with subscription rights may transfer or enter into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the plan of conversion or the shares of common stock to be issued upon their exercise. These
rights may be exercised only by the person to whom they are granted and only for that person’s account. Each person exercising subscription
rights will be required to certify that the person is purchasing shares solely for the person’s own account and that this person has no agreement
or understanding regarding the sale or transfer of the shares. Regulations also prohibit any person from offering or making an announcement of
an offer or intent to make an offer to purchase subscription rights or shares of common stock prior to the completion of the conversion.

          1st Security Bank of Washington will refer to the Washington Department of Financial Institutions and the Federal Deposit Insurance
Corporation any situations that it believes may involve a transfer of subscription rights and will not honor orders believed by it to involve the
transfer of such rights.


                                                                       133
Issuance of FS Bancorp’s Common Stock

          Certificates representing shares of common stock issued in the conversion will be mailed to the persons entitled thereto at the
registration address noted on the order form, as soon as practicable following consummation of the conversion. Any certificates returned as
undeliverable will be held by us until claimed by persons legally entitled thereto or otherwise disposed of in accordance with applicable
law. Until certificates for the shares of common stock are available and delivered to purchasers, purchasers may not be able to sell the shares
of common stock which they ordered.

Required Approvals

         In order to complete the conversion, we will need to receive the final approval of the Washington Department of Financial Institutions
and a final non-objection letter from the Federal Deposit Insurance Corporation. We also will need to have our members approve the plan of
conversion at a special meeting of members, which will be called for that purpose. Finally, the Board of Governors of the Federal Reserve
System must approve FS Bancorp’s application to become a bank holding company and to acquire all of 1st Security Bank of Washington’s
common stock.

        FS Bancorp may be required to make certain filings with state securities regulatory authorities in connection with the issuance of FS
Bancorp common stock in the offerings.

Restrictions on Purchase or Transfer of Shares After the Conversion

          All shares of common stock purchased in connection with the conversion by a director or an executive officer of FS Bancorp and 1st
Security Bank of Washington will be subject to a restriction that the shares not be sold for a period of one year following the conversion except
in the event of the death of the director or officer or pursuant to a merger or similar transaction approved by the Washington Department of
Financial Institutions. Each certificate for restricted shares will bear a legend giving notice of this restriction, and instructions will be issued to
the effect that any transfer within the first year of any certificate or record ownership of the shares other than as provided above is a violation of
the restriction. Any shares of common stock issued at a later date within this one year period as a stock dividend, stock split or otherwise with
respect to the restricted stock will be subject to the same restrictions.

        Purchases of common stock of FS Bancorp by directors, executive officers and their associates during the three-year period following
completion of the conversion may be made only through a broker or dealer registered with the SEC, except with the prior written approval of
the Washington Department of Financial Institutions. This restriction does not apply, however, to negotiated transactions involving more than
1% of FS Bancorp’s outstanding common stock or to certain purchases of stock pursuant to an employee stock benefit plan.

        For information regarding the proposed purchases of common stock by officers and directors of 1st Security Bank of Washington and
FS Bancorp, see “Proposed Purchases by Management.” Any purchases made by the officers and directors of 1st Security Bank of Washington
and FS Bancorp are intended for investment purposes only, and not for resale, including any purchases made for the purpose of meeting the
minimum of the offering range.

         Pursuant to regulations of the Washington Department of Financial Institutions, FS Bancorp may not, for a period of one year
following completion of this offering, repurchase shares of the common stock except on a pro rata basis, pursuant to an offer approved by the
Washington Department of Financial Institutions and made to all shareholders, or through open market purchases of up to five percent of the
outstanding stock where extraordinary circumstances exist.


                                                                         134
                                      RESTRICTIONS ON ACQUISITION OF FS BANCORP, INC.
                                           AND 1st SECURITY BANK OF WASHINGTON

         The principal federal regulatory restrictions which affect the ability of any person, firm or entity to acquire FS Bancorp, 1st Security
Bank of Washington or their respective capital stock are summarized below. Also discussed are certain provisions in FS Bancorp’s articles of
incorporation and bylaws which may be deemed to affect the ability of a person, firm or entity to acquire it. These provisions include a
prohibition on any holder of common stock voting more than 10% of the outstanding common stock.

Prior Approval of Acquisition of Control

          Under federal law and Washington law, the written consent of the Washington Department of Financial Institutions and either the
Board of Governors of the Federal Reserve System or the Federal Deposit Insurance Corporation is required prior to any person or company
acquiring “control” of a Washington-chartered savings bank or its holding company. Generally, control is conclusively presumed to exist if,
among other things, an individual or company or group acting in concert acquires the power to direct the management or policies of FS
Bancorp or 1st Security Bank of Washington or to vote 25% or more of any class of voting stock. Control is rebuttably presumed to exist
under federal law if, among other things, a person acquires more than 10% of any class of voting stock, and the issuer’s securities are registered
under Section 12 of the Securities and Exchange Act of 1934 or the person would be the single largest shareholder. A company that acquires
control thereby becomes a bank holding company, subject to restrictions applicable to the operations of bank holding companies and any
conditions imposed by the Board of Governors of the Federal Reserve System in connection with its approval of such acquisition. Such
restrictions and conditions may deter potential acquirers from seeking to obtain control of FS Bancorp. See “How We Are Regulated -
Regulation and Supervision of FS Bancorp.

Anti-takeover Provisions in FS Bancorp’s Articles of Incorporation and Bylaws

          The articles of incorporation and bylaws of FS Bancorp contain certain provisions that are intended to encourage a potential acquiror
to negotiate any proposed acquisition of FS Bancorp directly with its board of directors. An unsolicited non-negotiated takeover proposal can
seriously disrupt the business and management of a corporation and cause it great expense. Accordingly, the board of directors believes it is in
the best interests of FS Bancorp and its shareholders to encourage potential acquirors to negotiate directly with management. The board of
directors believes that the provisions in the articles of incorporation and bylaws will encourage negotiations and discourage hostile takeover
attempts. The board also believes that these provisions should not discourage persons from proposing a merger or transaction at prices
reflective of the true value of FS Bancorp and that otherwise is in the best interests of all shareholders. However, these provisions may have
the effect of discouraging offers to purchase FS Bancorp or its securities that are not approved by the board of directors but which certain of FS
Bancorp’s shareholders may deem to be in their best interests or pursuant to which shareholders would receive a substantial premium for their
shares over then current market prices. As a result, shareholders who might desire to participate in such a transaction may not have an
opportunity to do so. These provisions will also render the removal of the current board of directors and management more difficult. The
boards of directors of 1st Security Bank of Washington and FS Bancorp believe these provisions are in the best interests of the shareholders
because they will assist FS Bancorp’s board of directors in managing the affairs of FS Bancorp in the manner they believe to be in the best
interests of shareholders generally and because a company’s board of directors is often best able in terms of knowledge regarding the
company’s business and prospects, as well as resources, to negotiate the best transaction for its shareholders as a whole.

         The following description of certain of the provisions of the articles of incorporation and bylaws of FS Bancorp is necessarily general
and reference should be made in each instance to the articles of incorporation and bylaws. See “Where You Can Find More Information”
regarding how to obtain a copy of these documents.


                                                                       135
          Board of Directors. The articles of incorporation provide that the number of directors shall not be less than five nor more than
15. The initial number of directors is six, but this number may be changed by resolution of the board of directors. The board of directors is
divided into three groups, with each group containing one-third of the total number of directors, or as near as may be. This may make it more
difficult for a person seeking to acquire control of FS Bancorp to gain majority representation on the board of directors in a relatively short
period of time. FS Bancorp believes this is important in ensuring continuity in the composition and policies of the board of directors.

         Cumulative Voting. The articles of incorporation specifically do not permit cumulative voting for the election of
directors. Cumulative voting in an election of directors entitles a shareholder to cast a total number of votes equal to the number of directors to
be elected multiplied by the number of his or her shares and to distribute that number of votes among the number of nominees as the
shareholder chooses. The absence of cumulative voting for directors limits the ability of a minority shareholder to elect directors. Because the
holder of less than a majority of FS Bancorp’s shares cannot be assured representation on the board of directors, the absence of cumulative
voting may discourage accumulations of FS Bancorp’s shares or proxy contests that would result in changes in FS Bancorp’s
management. The board of directors believes that elimination of cumulative voting will help to assure continuity and stability of management
and policies; directors should be elected by a majority of the shareholders to represent the interests of the shareholders as a whole rather than be
the special representatives of particular minority interests; and efforts to elect directors representing specific minority interests are potentially
divisive and could impair the operations of FS Bancorp.

         Special Meetings. The articles of incorporation of FS Bancorp provide that special meetings of shareholders of FS Bancorp may be
called only by the chief executive officer or by a majority of the board of directors. If a special meeting is not called, shareholder proposals
cannot be presented to the shareholders for action until the next annual meeting. Shareholders are not permitted to call special meetings.

          Authorized Capital Stock. The articles of incorporation of FS Bancorp authorize the issuance of 45,000,000 shares of common stock
and 5,000,000 shares of preferred stock. The shares of common stock and preferred stock were authorized in an amount greater than that to be
issued in the conversion to provide FS Bancorp’s board of directors with flexibility to effect, among other transactions, financings, acquisitions,
stock dividends, stock splits and employee stock options. However, these additional authorized shares may also be used by the board of
directors consistent with its fiduciary duty to deter future attempts to gain control of FS Bancorp. The board of directors also has sole authority
to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates and liquidation preferences. As a
result of the ability to fix voting rights for a series of preferred stock, the board of directors has the power, to the extent consistent with its
fiduciary duty, to issue a series of preferred stock to persons friendly to management in order to attempt to block a post tender offer merger or
other transaction by which a third party seeks control, and thereby assist management to retain its position. FS Bancorp’s board of directors
currently has no plan to issue additional shares, other than the issuance of additional shares pursuant to the proposed stock-based equity
incentive plan.

          Director Nominations. The articles of incorporation of FS Bancorp require a shareholder who intends to nominate a candidate for
election to the board of directors at a shareholders’ meeting to give written notice to the secretary of FS Bancorp at least 30 days (but not more
than 60 days) in advance of the date of the meeting at which such nominations will be made. The nomination notice is also required to include
specified information concerning the nominee and the proposing shareholder. The board of directors of FS Bancorp believes that it is in the
best interests of FS Bancorp and its shareholders to provide sufficient time for the board of directors to study all nominations and to determine
whether to recommend to the shareholders that any of these nominees be considered.


                                                                        136
         Supermajority Voting Provisions. FS Bancorp’s articles of incorporation require the affirmative vote of 80% of the outstanding
shares entitled to vote to approve a merger, consolidation or other business combination, unless the transaction is approved, prior to
consummation, by the vote of at least two-thirds of the number of the continuing directors (as defined in the articles of incorporation) on FS
Bancorp’s board of directors. “Continuing directors” generally includes all members of the board of directors who are not affiliated with any
individual, partnership, trust or other person or entity (or the affiliates and associates of such person or entity) which is a beneficial owner of
10% or more of the voting shares of FS Bancorp. This provision could tend to make the acquisition of FS Bancorp more difficult to
accomplish without the cooperation or favorable recommendation of FS Bancorp’s board of directors.

         Amendment of Articles of Incorporation and Bylaws. FS Bancorp’s articles of incorporation may be amended by the vote of the
holders of a majority of the outstanding shares of its common stock, except that the provisions of the articles of incorporation governing the
duration of the corporation, the purpose and powers of the corporation, authorized capital stock, denial of preemptive rights, the number and
staggered terms of directors, removal of directors, shareholder nominations and proposals, approval of certain business combinations, the
evaluation of certain business combinations, limitation of directors’ liability, indemnification of officers and directors, calling of special
meetings of shareholders, the authority to repurchase shares and the manner of amending the bylaws and articles of incorporation may not be
repealed, altered, amended or rescinded except by the vote of the holders of at least 80% of the outstanding shares of FS Bancorp. This
provision is intended to prevent the holders of a lesser percentage of the outstanding stock of FS Bancorp from circumventing any of the
foregoing provisions by amending the articles of incorporation to delete or modify one of such provisions.

        FS Bancorp’s bylaws may only be amended by a majority vote of the board of directors of FS Bancorp or by the holders of at least
80% of the outstanding stock by FS Bancorp.

          Purpose and Takeover Defensive Effects of FS Bancorp’s Articles of Incorporation and Bylaws. The board of directors believes
that the provisions described above are prudent and will reduce FS Bancorp’s vulnerability to takeover attempts and certain other transactions
that have not been negotiated with and approved by the board. These provisions will also assist in the orderly deployment of the conversion
proceeds into productive assets during the initial period after the conversion. The board of directors believes these provisions are in the best
interest of 1st Security Bank of Washington, and FS Bancorp and its shareholders. In the judgment of the board of directors, FS Bancorp’s
board will be in the best position to determine the true value of FS Bancorp and to negotiate more effectively for what may be in the best
interests of its shareholders. Accordingly, the board of directors believes that it is in the best interest of FS Bancorp and its shareholders to
encourage potential acquirors to negotiate directly with the board of directors of FS Bancorp and that these provisions will encourage these
negotiations and discourage hostile takeover attempts. It is also the view of the board of directors that these provisions should not discourage
persons from proposing a merger or other transaction at a price reflective of the true value of FS Bancorp and that is in the best interest of all
shareholders.

          Attempts to acquire control of financial institutions and their holding companies have recently become increasingly
common. Takeover attempts that have not been negotiated with and approved by the board of directors present to shareholders the risk of a
takeover on terms that may be less favorable than might otherwise be available. A transaction that is negotiated and approved by the board of
directors, on the other hand, can be carefully planned and undertaken at an opportune time in order to obtain maximum value of FS Bancorp for
its shareholders, with due consideration given to matters such as the management and business of the acquiring corporation and maximum
strategic development of FS Bancorp’s assets.

          An unsolicited takeover proposal can seriously disrupt the business and management of a corporation and cause great
expense. Although a tender offer or other takeover attempt may be made at a price substantially above current market prices, these offers are
sometimes made for less than all of the outstanding shares of a target company. As a result, shareholders may be presented with the alternative
of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise that is under
different management and whose objectives may not be similar to those of the remaining shareholders. The concentration of control, which
could result from a tender offer or other takeover attempt, could also deprive FS Bancorp’s remaining shareholders of benefits of certain
protective provisions of the Securities Exchange Act of 1934, if the number of beneficial owners became less than 300, thereby allowing for
deregistration.


                                                                        137
         Despite the belief of 1st Security Bank of Washington and FS Bancorp as to the benefits to shareholders of these provisions of FS
Bancorp’s articles of incorporation and bylaws, these provisions may also have the effect of discouraging a future takeover attempt that would
not be approved by FS Bancorp’s board of directors, but pursuant to which shareholders may receive a substantial premium for their shares
over then current market prices. As a result, shareholders who might desire to participate in such a transaction may not have any opportunity to
do so. These provisions will also render the removal of FS Bancorp’s board of directors and of management more difficult. The board of
directors of 1st Security Bank of Washington and FS Bancorp, however, have concluded that the potential benefits outweigh the possible
disadvantages.

         Following the conversion, pursuant to applicable law and, if required, following the approval by shareholders, FS Bancorp may adopt
additional anti-takeover charter provisions or other devices regarding the acquisition of its equity securities that would be permitted for a
Washington business corporation.

         The cumulative effect of the restrictions on acquisition of FS Bancorp contained in the articles of incorporation and bylaws of FS
Bancorp and in Federal and Washington law may be to discourage potential takeover attempts and perpetuate incumbent management, even
though certain shareholders of FS Bancorp may deem a potential acquisition to be in their best interests, or deem existing management not to
be acting in their best interests.

                                     DESCRIPTION OF CAPITAL STOCK OF FS BANCORP, INC.

General

         FS Bancorp, Inc. is authorized to issue 45,000,000 shares of common stock having a par value of $0.01 per share and 5,000,000 shares
of preferred stock having a par value of $0.01 per share. FS Bancorp currently expects to issue up to 2,817,500 shares of common stock,
subject to adjustment up to 3,240,125 shares, and no shares of preferred stock in the conversion. Each share of FS Bancorp’s common stock
will have the same relative rights as, and will be identical in all respects with, each other share of common stock. Upon payment of the
purchase price for the common stock, in accordance with the plan of conversion and reorganization, all the stock will be duly authorized, fully
paid and nonassessable.

         The common stock of FS Bancorp represents nonwithdrawable capital. The common stock is not a savings or deposit account and is
not insured by the Federal Deposit Insurance Corporation or any other government agency.

Common Stock

         Dividends. FS Bancorp can pay dividends out of statutory surplus or from certain net profits if, as and when declared by its board of
directors. The payment of dividends by FS Bancorp is subject to limitations which are imposed by law and applicable regulation. See “Our
Policy Regarding Dividends” and “How We Are Regulated.” The holders of common stock of FS Bancorp will be entitled to receive and share
equally in the dividends declared by the board of directors of FS Bancorp out of funds legally available therefore. If FS Bancorp issues
preferred stock, the holders of preferred stock may have a priority over the holders of the common stock with respect to dividends.


                                                                      138
        Stock Repurchases. Regulations of the Board of Governors of the Federal Reserve System place certain limitations on the
repurchase of FS Bancorp’s capital stock. See “How We Intend to Use the Proceeds From this Offering.”

         Voting Rights. Upon conversion, the holders of common stock of FS Bancorp will possess exclusive voting rights in FS
Bancorp. They will elect FS Bancorp’s board of directors and act on other matters as are required to be presented to them under Washington
law or as are otherwise presented to them by the board of directors. Except as discussed in “Restrictions on Acquisition of FS Bancorp, Inc.
and 1st Security Bank of Washington,” each holder of common stock will be entitled to one vote per share and will not have any right to
cumulate votes in the election of directors. If FS Bancorp issues preferred stock, holders of the preferred stock may also possess voting
rights. Certain matters require a vote of 80% of the outstanding shares entitled to vote thereon. See “Restrictions on Acquisition of FS
Bancorp, Inc. and 1st Security Bank of Washington.”

         As a state-chartered stock savings bank that is the subsidiary of a holding company, voting rights are vested exclusively in the owners
of the shares of capital stock of 1st Security Bank of Washington, all of which will be owned by FS Bancorp and voted at the direction of FS
Bancorp’s board of directors. Consequently, the holders of the common stock will not have direct control of 1st Security Bank of Washington.

          Liquidation. In the event of any liquidation, dissolution or winding up of 1st Security Bank of Washington, FS Bancorp, as holder of
1st Security Bank of Washington’s capital stock would be entitled to receive, after payment or provision for payment of all debts and liabilities
of 1st Security Bank of Washington, including all deposit accounts and accrued interest thereon, and after distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental Eligible Account Holders, all assets of 1st Security Bank of
Washington available for distribution. In the event of liquidation, dissolution or winding up of FS Bancorp, the holders of its common stock
would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of FS Bancorp available for
distribution. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of
liquidation or dissolution.

         Preemptive Rights. Holders of the common stock of FS Bancorp will not be entitled to preemptive rights with respect to any shares
that may be issued. The common stock is not subject to redemption.

Preferred Stock

          None of the shares of FS Bancorp’s authorized preferred stock will be issued in the conversion and there are no current plans to issue
the preferred stock. Preferred stock may be issued with the designations, powers, preferences and rights as the board of directors may
determine. The board of directors can, without shareholder approval, issue preferred stock with voting, dividend, liquidation and conversion
rights that could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover
or attempted change in control.

Restrictions on Acquisition

         Acquisitions of FS Bancorp are restricted by provisions in its articles of incorporation and bylaws and by the rules and regulations of
various regulatory agencies. See “How We Are Regulated - Regulation and Supervision of FS Bancorp” and “Restrictions on Acquisition of
FS Bancorp, Inc. and 1st Security Bank of Washington.”


                                                                        139
                                                   TRANSFER AGENT AND REGISTRAR

         The transfer agent and registrar for FS Bancorp common stock is Registrar and Transfer Company, Cranford, New Jersey.

                                                                    EXPERTS

         The balance sheets of 1st Security Bank of Washington as of December 31, 2011 and 2010 and the related statements of income ,
equity and comprehensive income, and cash flows for the years then ended included in this prospectus have been audited by Moss Adams LLP,
an independent registered public accounting firm, as set forth in its report thereon appearing elsewhere herein and in the registration statement,
and are included in reliance upon the report of this firm given upon the authority as experts in accounting and auditing.

          RP Financial, LC. has consented to the publication herein of the summary of its report to 1st Security Bank of Washington setting
forth its opinion as to the estimated pro forma market value of the FS Bancorp common stock upon conversion and its letter with respect to
subscription rights.

                                                        LEGAL AND TAX OPINIONS

         The federal income tax consequences of the conversion have been passed upon for 1st Security Bank of Washington. Silver,
Freedman & Taff, L.L.P., Washington, D.C., special counsel to FS Bancorp and 1st Security Bank of Washington. The legality of the common
stock issued in the offering by FS Bancorp and the Washington state income tax consequences of the conversion have been passed upon for
FS Bancorp and 1st Security Bank of Washington by Harlowe & Falk LLP. Certain legal matters will be passed upon for Keefe, Bruyette &
Woods, Inc. by Luse Gorman Pomerenk & Schick, P.C.

                                             WHERE YOU CAN FIND MORE INFORMATION

          FS Bancorp has filed with the SEC a registration statement under the Securities Act of 1933 with respect to the common stock offered
hereby. As permitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registration
statement. This information, including the appraisal report which is an exhibit to the registration statement, can be examined without charge at
the public reference facilities of the SEC located at 100 F Street, N.E., Washington, D.C. 20549, and copies of this material can be obtained
from the SEC at prescribed rates. You may obtain information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC, including FS Bancorp. The statements contained in this prospectus
as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions thereof
and are not necessarily complete; each statement is qualified by reference to the contract or document. We believe, however, that we have
included the material information an investor needs to consider in making an investment decision. 1st Security Bank of Washington also
maintains a website (http://www.fsbwa.com), which contains various information about 1st Security Bank of Washington. In addition, 1st
Security Bank of Washington files quarterly call reports with the Federal Deposit Insurance Corporation, which are available at the Federal
Deposit Insurance Corporation’s website ( http://www.fdic.gov ).


                                                                        140
          1st Security Bank of Washington has filed with the Washington Department of Financial Institutions an Application for Approval of
Conversion, which includes proxy materials for the special meeting of members and certain other information. This prospectus omits certain
information contained in the Application for Approval of Conversion. The Application for Approval of Conversion, including the proxy
materials, exhibits and certain other information, may be inspected, without charge, at the office of the Washington Department of Financial
Institutions, Division of Banks, Department of Financial Institutions, 150 Israel Road SW, Tumwater, Washington 98501. A copy of the
Application for Approval of Conversion has also been filed with the Federal Deposit Insurance Corporation.

         In connection with the conversion, FS Bancorp has registered its common stock with the SEC under Section 12 of the Securities
Exchange Act of 1934, and, upon that registration, FS Bancorp and the holders of its stock will become subject to the proxy solicitation rules,
reporting requirements and restrictions on stock purchases and sales by directors, officers and greater than 10% shareholders, the annual and
periodic reporting and certain other requirements of the Securities Exchange Act of 1934. Under the plan of conversion, FS Bancorp has
undertaken that it will not terminate this registration for a period of at least three years following the conversion.

         A copy of the plan of conversion, the articles of incorporation and bylaws of FS Bancorp and 1st Security Bank of Washington are
available without charge from 1st Security Bank of Washington. Requests for this information should be directed to: Joseph Adams, Chief
Executive Officer, 1st Security Bank of Washington, 6920 220 th Street SW, Suite 205, Mountlake Terrace, Washington 98043.


                                                                      141
                                                1st SECURITY BANK OF WASHINGTON

                                                  INDEX TO FINANCIAL STATEMENTS

                                                                                                                                           Page

Report of Independent Registered Public Accounting Firm                                                                                        F- 2

Financial Statements

    Balance Sheets as of December 31, 2011 and 2010                                                                                            F- 3

    Statements of Income for the Years Ended December 31, 2011 and 2010                                                                        F- 4

    Statements of Equity and Comprehensive Income for the Years Ended December 31, 2011 and 2010                                               F- 5

    Statements of Cash Flows for the Years Ended December 31, 2011 and 2010                                                                    F- 6

Notes to Financial Statements                                                                                                           F- 7 - F-
                                                                                                                                               38

         All schedules are omitted because the required information is not applicable or is included in the Financial Statements and related
Notes.

           The financial statements of FS Bancorp, Inc. have been omitted because FS Bancorp , Inc. has not yet issued any stock, has no assets
or liabilities, and has not conducted any business other than that of an organizational nature.


                                                                                                                                               F-1
                                     REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees
1st Security Bank of Washington
Mountlake Terrace, Washington

We have audited the accompanying balance sheets of 1st Security Bank of Washington (the “ Bank ”) as of December 31, 2011 and 2010, and
the related statements of income , equity and comprehensive income , and cash flows for the years then ended. These financial statements are
the responsibility of the Bank ’ s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Bank is not required to have, nor were we engaged to perform an audit of the Bank ’s internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances , but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining evidence, on a test basis, supporting the
amounts and disclosures in the financial statements , assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 1st Security Bank of
Washington as of December 31, 2011 and 2010, and the results of its operations, and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

/s/ Moss Adams LLP

Bellingham, Washington
February 27, 2012


                                                                                                                                               F-2
1ST SECURITY BANK OF WASHINGTON
BALANCE SHEETS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

                                                                    2011           2010

ASSETS
    Cash and due from banks                                     $      2,356   $      2,067
    Interest-bearing deposits at other financial institutions         16,897         33,183
           Total cash and cash equivalents                            19,253         35,250
    Securities available-for-sale, at fair value                      26,899          7,642
    Federal Home Loan Bank stock, at cost                              1,797          1,797
    Loans receivable, net                                            217,131        230,822
    Accrued interest receivable                                        1,020            914
    Premises and equipment, net                                        9,852          9,249
    Other real estate owned                                            4,589          3,701
    Other assets                                                       3,252          2,959
TOTAL ASSETS                                                    $    283,793   $    292,334


LIABILITIES
     Deposits:
        Interest-bearing accounts                               $    227,164   $    225,410
        Noninterest-bearing accounts                                  19,254         18,547
           Total deposits                                            246,418        243,957

   Borrowings                                                          8,900         21,900
   Other liabilities                                                   1,708          1,682
          Total liabilities                                          257,026        267,539
COMMITMENTS AND CONTINGENCIES (NOTE 11)

EQUITY
    Retained earnings                                                 26,451         24,906
    Accumulated other comprehensive income (loss)                        316           (111 )
          Total equity                                                26,767         24,795

TOTAL LIABILITIES AND EQUITY                                    $    283,793   $    292,334


See accompanying notes to these financial statements.

                                                                                          F-3
1ST SECURITY BANK OF WASHINGTON
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

                                                                                       2011           2010
INTEREST INCOME
  Loans receivable                                                                 $     16,191   $     17,270
  Interest and dividends on investment securities, and cash and cash equivalents            287             63
         Total interest income                                                           16,478         17,333

INTEREST EXPENSE
  Deposits                                                                                2,826          3,668
  Borrowings                                                                                180            218
        Total interest expense                                                            3,006          3,886

NET INTEREST INCOME                                                                      13,472         13,447

PROVISION FOR LOAN LOSSES                                                                 2,369          3,480

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES                                                                11,103          9,967

NONINTEREST INCOME
 Service charges and fee income                                                           1,971          2,255
 Gain on sale of loans                                                                      113              –
 Gain on sale of branches                                                                     –          1,006
 Gain on sale of equipment                                                                   41              –
 Gain on sale of investment securities                                                       18              –
 Other noninterest income                                                                   332            406
       Total noninterest income                                                           2,475          3,667

NONINTEREST EXPENSE
 Salaries and benefits                                                                    5,616          5,117
 Operations                                                                               1,733          2,122
 Occupancy                                                                                1,103            941
 Data processing                                                                            890            739
 OREO fair value write-downs, net of (gain) loss on sales                                   601            (79 )
 OREO expenses                                                                              138            503
 Loan costs                                                                                 459            847
 Professional fees                                                                          485            556
 FDIC insurance                                                                             391            556
 Marketing and advertising                                                                  236            344
 ATM costs                                                                                  216            238
 Board fees                                                                                 146            148
 Impairment loss on mortgage servicing rights                                                19              –
        Total noninterest expense                                                        12,033         12,032

INCOME BEFORE PROVISION FOR INCOME TAX                                                    1,545          1,602

PROVISION FOR INCOME TAX EXPENSE                                                              –              –

NET INCOME                                                                         $      1,545   $      1,602


See accompanying notes to these financial statements.

                                                                                                             F-4
1ST SECURITY BANK OF WASHINGTON
STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

                                                                                Accumulated
                                                                                   Other                                    Total
                                                            Retained           Comprehensive           Total            Comprehensive
                                                            Earnings           Income (Loss)           Equity              Income

BALANCE, January 1, 2010                                $       23,304     $               11      $     23,315     $                   –
 Comprehensive income:
   Net income                                                    1,602                         –           1,602                 1,602
   Other comprehensive loss:
     Unrealized loss on securities available-for-sale                  –                 (122 )            (122 )                 (122 )
       Total comprehensive income                                                                                   $            1,480


BALANCE, December 31, 2010                                      24,906                   (111 )          24,795
 Comprehensive income:
   Net income                                                    1,545                         –           1,545                 1,545
   Other comprehensive income:
     Unrealized gain on securities available-for-sale                  –                  427               427                    427
       Total comprehensive income                                                                                   $            1,972


BALANCE, December 31, 2011                              $       26,451     $              316      $     26,767


See accompanying notes to these financial statements.

                                                                                                                                        F-5
1ST SECURITY BANK OF WASHINGTON
 STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

                                                                                2011             2010
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                $      1,545     $      1,602
Adjustments to reconcile net income to net cash from operating activities
  Provision for loan losses                                                        2,369            3,480
  Depreciation and amortization of mortgage servicing rights                         847              907
  Provision for deferred income taxes                                                536              552
  Valuation allowance on deferred income taxes                                      (536 )           (552 )
  Gain on sale of loans                                                             (113 )              –
  Gain on sale of investment securities                                              (18 )              –
  Gain on sale of branches                                                             –           (1,006 )
  Gain on sale of equipment                                                          (41 )              –
  Impairment loss on mortgage servicing rights                                        19                –
  Impairment loss on other real estate owned                                         594              111
Changes in operating assets and liabilities
  Accrued interest receivable                                                       (106 )             38
  Other assets                                                                      (398 )            198
  Other liabilities                                                                   26               46
         Net cash from operating activities                                        4,724            5,376

CASH FLOWS FROM INVESTING ACTIVITIES
 Activity in securities available-for-sale:
     Maturities, prepayments, sales, and calls                                     2,737              158
     Purchases                                                                   (21,549 )         (7,319 )
 Loan originations and principal collections, net                                  4,576           (7,384 )
 Proceeds from sale of loans                                                       3,570                –
 Proceeds from sale of other real estate owned                                     1,806            6,260
 Capitalized improvements for other real estate owned                                  –              (13 )
 Sale of premises and equipment                                                       74            2,266
 Purchase of premises and equipment                                               (1,396 )         (1,600 )
        Net cash from investing activities                                       (10,182 )         (7,632 )

CASH FLOWS FROM FINANCING ACTIVITIES
 Net increase in deposits                                                          2,461           12,972
 Proceeds from borrowings                                                         15,000          163,301
 Repayments of borrowings                                                        (28,000 )       (167,301 )
        Net cash from financing activities                                       (10,539 )          8,972

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             (15,997 )          6,716

CASH AND CASH EQUIVALENTS, beginning of year                                      35,250           28,534

CASH AND CASH EQUIVALENTS, end of year                                      $     19,253     $     35,250


SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
   Cash paid during the year for interest                                   $      3,005     $      3,904


SUPPLEMENTARY DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
   Change in unrealized gain (loss) on securities                           $          427   $          (122 )
    Property taken in settlement of loans               $   3,288   $   4,523


See accompanying notes to these financial statements.

                                                                           F-6
1ST SECURITY BANK OF WASHINGTON
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – 1st Security Bank of Washington (the “ Bank ”) is a mutually-owned savings bank chartered in the State of
Washington with six branches in suburban communities in the greater Puget Sound area. The Bank provides loan and deposit services to
customers who are predominantly small and middle-market businesses and individuals in western Washington. The Bank closed two branches
during 2010 ( See Note 15).

Plan of Conversion – The Board of Trustees of the Bank (hereafter referred to as the “ Board of Directors ”) approved a Plan of Conversion
(the “ Plan ”) which provides for the conversion of the Bank from a Washington State chartered mutual savings bank to a Washington State
chartered stock savings bank pursuant to the rules and regulations of the Washington State Department of Financial Institutions (“ DFI ”) and
the Federal Deposit Insurance Corporation (“ FDIC ”) . As part of the conversion, the Plan provides for the concurrent formation of a holding
company (the “ Holding Company ”) that will own 100% of the common stock of the Bank . Following receipt of all required regulatory
approvals, the approval of the depositors of the Bank eligible to vote on the Plan and the satisfaction of all other conditions precedent to the
conversion, the Bank will consummate the conversion, which is anticipated to be completed in 2012 .

Upon the consummation of the conversion, the legal existence of the Bank shall not terminate , but the stock bank shall be a continuation of the
mutual bank. The stock bank shall have, hold, and enjoy the same in its own right as fully and to the same extent as the same was possessed,
held, and enjoyed by the mutual bank. The stock bank , at the time and the taking effect of the conversion , shall continue to have and succeed
to all the rights, obligations, and relations of the mutual bank.

At the time of conversion, the Bank will establish a liquidation account in an amount equal to its total net worth as of the latest statement of
financial condition appearing in the final prospectus. The liquidation account will be maintained for the benefit of eligible depositors who
continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent that eligible
depositors have reduced their qualifying deposits. Subsequent increases will not restore an eligible holder’s interest in the liquidation account.
In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then held. The liquidation account balance is not available for payment of
dividend, and the Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

Conversion costs will be deferred and deducted from the proceeds of the shares sold in the offering. If the conversion transaction is not
completed, all costs will be charged to expense. As of December 31, 2011 , there were conversion costs totaling $ 1,338 which have been
deferred, and are included in other assets.

Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles (“ GAAP ”) in the
United States of America 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 change in the near term are allowances
for loan losses, fair value of other real estate owned (“OREO”), and the determination of a need for a valuation allowance related to the
deferred tax asset.

Certain prior year amounts have been reclassified to conform to the 2011 presentation with no change to net income or equity previously
reported.


                                                                                                                                                F-7
1ST SECURITY BANK OF WASHINGTON
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash and Cash Equivalents – Cash and cash equivalents include cash and due from banks, and interest bearing balances due from other banks
and the Federal Reserve Bank. Cash and cash equivalents have a maturity of 90 days or less at the time of purchase. As of December 31, 2011
and 2010 , the Bank has cash deposits at other financial institutions in excess of FDIC insured limits. However, as the Bank places these
deposits with major financial institutions and monitors the financial condition of these institutions, management believes the risk of loss to be
minimal.

Securities Available-for-Sale – Securities available-for-sale consist of debt securities that the Bank has the intent and ability to hold for an
indefinite period, but not necessarily to maturity. Such securities may be sold to implement the Bank’s asset/liability management strategies
and in response to changes in interest rates and similar factors. Securities available-for-sale are reported at fair value. Unrealized gains and
losses, net of the related deferred tax effect, are reported as a net amount in a separate component of equity entitled accumulated other
comprehensive income. Unrealized losses that are deemed to be other than temporary are reflected in results of operations. Any declines in the
values of these securities that are considered to be other-than-temporary-impairment (“ OTTI ”) and credit-related are recognized in earnings.
Noncredit-related OTTI on securities not expected to be sold is recognized in other comprehensive income. The review for OTTI is conducted
on an ongoing basis and takes into account the severity and duration of the impairment, recent events specific to the issuer or industry, fair
value in relationship to cost, extent and nature of change in fair value, creditworthiness of the issuer including external credit ratings and recent
downgrades, trends and volatility of earnings, current analysts’ evaluations, and other key measures. In addition, the Bank does not intend to
sell the securities and it is more likely than not that we will not be required to sell the securities before recovery of their amortized cost basis. In
doing this, we take into account our balance sheet management strategy and consideration of current and future market conditions. Realized
gains and losses on securities available-for-sale, determined using the specific identification method, are included in results of operations.
Amortization of premium and accretion of discounts are recognized in interest income over the period to maturity.

Federal Home Loan Bank Stock – The Bank, as a member of the Federal Home Loan Bank (“ FHLB ”) system, is required to maintain an
investment in capital stock of the FHLB in an amount equal to the greater of .50% of its outstanding home loans or 4. 50 % of advances from
the FHLB. The Bank’s investment in FHLB stock is carried at par value ($100 per share), which reasonably approximates its fair value. As of
December 31, 2011 and 2010 , $362 and $947, respectively, of FHLB stock was pledged as collateral for FHLB advances.

The Bank’s investment in FHLB stock is carried at par value because the shares can only be redeemed with the FHLB at par. The Bank is
required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages and FHLB
advances. Stock redemptions are at the discretion of the FHLB upon five years’ prior notice for FHLB Class B stock or six months notice for
FHLB Class A stock to the FHLB. FHLB stock is carried at cost and is subject to recoverability testing per the Financial Services – Depository
and Lending topic of the FASB Accounting Standards Codification (“ ASC ”).

Loans Held for Sale – Mortgage loans originated and intended for sale in the secondary market are stated in the aggregate at the lower of cost
or estimated fair value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Gains or losses on
sales of loans are recognized at the time of sale. The gain or loss is the difference between the net sales proceeds and the recorded value of the
loans, including any remaining unamortized net deferred loan origination fees.


                                                                                                                                                    F-8
1ST SECURITY BANK OF WASHINGTON
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Receivable, Net – Loans receivable, net, are stated at the amount of unpaid principal reduced by an allowance for loan losses and net
deferred fees or costs. Interest on loans is calculated using the simple interest method based on the daily balance of the principal amount
outstanding and is credited to income as earned. Loan fees, net of direct origination costs, are deferred and amortized over the life of the loan
using the effective yield method.

Interest on loans is accrued daily based on the principal amount outstanding. Generally, the accrual of interest on loans is discontinued when, in
management’s opinion, the borrower may be unable to meet payments as they become due or when they are past due 90 days as to either
principal or interest (based on contractual terms), unless they are well secured and in the process of collection. All interest accrued but not
collected for loans that are placed on non-accrual status or charged off are reversed against interest income. Subsequent collections on a cash
basis are applied proportionately to past due principal and interest, unless collectability of principal is in doubt, in which case all payments are
applied to principal. Loans are returned to accrual status when the loan is deemed current, and the collectability of principal and interest is no
longer doubtful, or, generally, when the loan is less than 90 days delinquent after a period of six months performance .

The Bank charges fees for originating loans. These fees, net of certain loan origination costs, are deferred and amortized to income, on the
level-yield basis, over the loan term. If the loan is repaid prior to maturity, the remaining unamortized net deferred loan origination fee is
recognized in income at the time of repayment.

Impaired Loans – A loan is considered impaired when it is probable the Bank will be unable to collect all contractual principal and interest
payments due in accordance with the original or modified terms of the loan agreement. Impaired loans are measured based on the estimated fair
value of the collateral less estimated cost to sell if the loan is considered collateral dependent. Impaired loans not considered to be collateral
dependent are measured based on the present value of expected future cash flows.

The categories of non-accrual loans and impaired loans overlap, although they are not coextensive. The Bank considers all circumstances
regarding the loan and borrower on an individual basis when determining whether an impaired loan should be placed on non-accrual status ,
such as the financial strength of the borrower, the collateral value, reasons for delay, payment record, the amount of past due and the number of
days past due. Loans that experience insignificant payment delays and payment shortfalls are generally not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the
amount of shortfall in relation to the principal and interest owed.


                                                                                                                                                F-9
1ST SECURITY BANK OF WASHINGTON
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses – The allowance for loan losses is maintained at a level considered adequate to provide for probable losses on
existing loans based on evaluating known and inherent risks in the loan portfolio. The allowance is reduced by loans charged-off and increased
by provisions charged to earnings and recoveries on loans previously charged-off. The allowance is based on management’s periodic ,
systematic evaluation of factors underlying the quality of the loan portfolio including changes in the size and composition of the loan portfolio,
the estimated value of any underlying collateral, actual loan loss experience, current economic conditions, and detailed analysis of individual
loans for which full collectability may not be assured. This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. While management uses the best information available to make its estimates, future
adjustments to the allowance may be necessary if there is a significant change in economic and other conditions. The appropriateness of the
allowance for loan losses is estimated based on these factors and trends identified by management at the time the financial statements are
prepared.

When available information confirms that specific loans or portions thereof are uncollectible, these amounts are charged-off against the
allowance for loan losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is
significantly delinquent and the borrower has not evidenced the ability or intent to bring the loan current; the Bank has no recourse to the
borrower, or if it does, the borrower has insufficient assets to pay the debt; the estimated fair value of the loan collateral is significantly below
the current loan balance , and there is little or no near-term prospect for improvement.

A provision of loan losses is charged against income and added to the allowance for loan losses based on regular assessment of the loan
portfolio. The allowance for loan losses is allocated to certain loan categories based on the relative risk characteristics, asset classifications ,
and actual loss experience within the loan portfolio. Although management has allocated the allowance for loan losses to various loan portfolio
segments, the allowance is general in nature and is available for the loan portfolio in its entirety.

The ultimate recovery of all loans is susceptible to future market factors beyond the Bank’s control. These factors may result in losses or
recoveries differing significantly from those provided for in the financial statements. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance
based on their judgment about information available to them at the time of their examinations.

Reserve for Unfunded Loan Commitments and Letters of Credit – The reserve for unfunded loan commitments is maintained at a level
believed by management to be sufficient to absorb estimated probable losses related to these unfunded credit facilities. The determination of
the adequacy of the reserve is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of
commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit
facilities. The reserve for unfunded loan commitments is included in other liabilities on the balance sheet , with changes to the balance charged
against noninterest expense.


                                                                                                                                                 F-10
1ST SECURITY BANK OF WASHINGTON
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Premises and Equipment, Net – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives
used to compute depreciation include building and building improvements from 20 to 50 years and furniture, fixtures, and equipment from 2 to
10 years. Leasehold and tenant improvements are amortized using the straight-line method over the lesser of useful life or the life of the related
lease. Depreciation and amortization expense for these assets totaled $ 760 and $ 812 for the years ended December 31, 2011 and 2010 ,
respectively. Gains or losses on dispositions are reflected in results of operations.

SBA Loan Sales – The Bank, on a limited basis, sells or transfers loans, including the guaranteed portion of Small Business Administration
(“SBA”) loans (with servicing retained) for cash proceeds equal to the principal amount of loans, as adjusted to yield interest to the investor
based upon the current market rates. A premium over the adjusted carrying value is received upon the sale of the guaranteed portion of an SBA
loan. The Bank’s investment in an SBA loan is allocated among the sold and retained portions of the loan based on the relative fair value of
each portion at the time of loan origination, adjusted for payments and other activities. Because the portion retained does not carry an SBA
guarantee, part of the gain recognized on the sold portion of the loan may be deferred and amortized as a yield enhancement on the retained
portion in order to obtain a market equivalent yield.

Other Real Estate Owned and Other Repossessed Items – Other real estate owned and other repossessed items consist of properties or assets
acquired through or in lieu of foreclosure, and are recorded initially at fair value less selling costs. Costs relating to development and
improvement of the properties or assets are capitalized while costs relating to holding the properties or assets are expensed. Valuations are
periodically performed by management, and a charge to earnings is recorded if the recorded value of a property exceeds its estimated net
realizable value.

Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank; (2) the transferee obtains the
right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Bank does
not maintain effective control over the transferred assets.


                                                                                                                                               F-11
1ST SECURITY BANK OF WASHINGTON
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Mortgage Servicing Rights – Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of
financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of
the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for
comparable mortgage servicing 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 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 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 Bank 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 an increase to income. Capitalized servicing rights are reported in other assets 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.

Income Taxes – The Bank files a federal income tax return. Deferred federal income taxes result from temporary differences between the tax
basis of assets and liabilities, and their reported amounts in the financial statements. These will result in differences between income for tax
purposes and income for financial reporting purposes in future years. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. Valuation allowances are established to reduce the net recorded amount of
deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized.

As of December 31, 2011 and 2010, the Bank recorded a valuation allowance of $3, 209 and $3,891, respectively, based principally on
uncertainty about the Bank’s ability to generate sufficient future taxable income to realize the related net deferred tax assets. Management will
continue to review the tax criteria related to the recognition of deferred tax assets.

The Financial Accounting Standards Board (“FASB”) issued guidance related to accounting for uncertainty in income taxes. The guidance
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. It is the Bank’s policy to record any penalties or interest arising from federal or state taxes as a component
of income tax expense.

Comprehensive Income (Loss) – Comprehensive income (loss) is comprised of net income and other comprehensive income (loss). Other
comprehensive income (loss) includes items recorded directly to equity, such as unrealized gains and losses on securities available-for-sale.
Comprehensive income is presented within the statement of equity.


                                                                                                                                                 F-12
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The components of other comprehensive income and related tax effect for the years ended December 31, 2011 and 2010 were as follows:

                                                                                                             December 31,        December 31,
                                                                                                                2011                2010
Unrealized gains (losses) arising during the year on securities                                            $           445      $         (122 )
Reclassification adjustment for unrealized ( gains ) losses realized in net income                                     (18 )                  –
Net change in unrealized gains (losses) on available-for-sale securities                                   $           427      $         (122 )


Financial Instruments – In the ordinary course of business, the Bank has entered into agreements for off-balance-sheet financial instruments
consisting of commitments to extend credit and stand-by letters of credit. Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.

Restricted Assets – Federal Reserve regulations require that the Bank maintain reserves in the form of cash on hand and deposit balances with
the Federal Reserve Bank, based on a percentage of deposits. The amounts of such balances for the years ended December 31, 2011 and 2010
were $735 and $ 764 , respectively, included in cash and cash equivalents on the balance sheet.

Marketing and Advertising Costs – The Bank records marketing and advertising costs as expenses as they are incurred. Total marketing and
advertising expense was $ 236 and $ 344 for the years ended December 31, 2011 and 2010 , respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring .
This ASU clarifies guidance within Accounting Standards Codification Topic 310, Receivables—Troubled Debt Restructurings by Creditors ,
of whether a creditor has granted to the borrower a concession during a loan restructuring and clarifies the guidance applicable to evaluating
whether a borrower is experiencing financial difficulties. Both of these evaluations must be performed by a creditor during a loan restructuring
to determine if the restructuring qualifies as a troubled debt restructuring. This ASU also requires additional disclosures included in ASU
2010-20, but deferred from the original adoption date, regarding troubled debt restructurings to be disclosed. The effective date of this ASU is
for the first interim period beginning after June 15, 2011, and is to be applied retrospectively to restructurings occurring on or after January 1,
2011. The adoption of this ASU did not have a material impact on the Bank’s financial statements .


                                                                                                                                              F-13
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In May 2011, the FASB issued ASU No. 2011-03— Reconsideration of Effective Control for Repurchase Agreements impacting FASB ASC
860-40, Transfers and Servicing . Entities that enter into repurchase and similar agreements will be required to account for even more of the
transactions as secured borrowings. The amendment changes the assessment of effective control by focusing on the transferor’s contractual
rights and obligations and removing the criterion to assess its ability to exercise those rights or honor those obligations. This update becomes
effective for the Bank on a prospective basis for new transfers and modifications of existing transactions as of the beginning of the first interim
or annual period beginning on or after December 15, 2011. The Bank is currently evaluating the impact of adopting the new guidance on the
financial statements.

In May 2011, the FASB issued ASU No. 2011-04— Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRS. This update clarifies the methodologies and assumptions to be used by entities applying fair value measures, expands
disclosure of qualitative factors used in determining fair values, and provides guidance on measuring the fair value of financial instruments
included within shareholders’ equity. This update becomes effective for the Bank on a prospective basis for the first interim or annual period
beginning on or after December 15, 2011. This updated guidance will impact financial statement disclosures, but will not have an effect on the
Bank’s financial condition, results of operations, or cash flows.

In May 2011, the FASB issued ASU No. 2011-05— Presentation of Comprehensive Income. This update provides an option to entities
reporting comprehensive income to present the components of net income, other comprehensive income, and total comprehensive income
within a single continuous statement of comprehensive income or in two separate but consecutive statements. This update becomes effective
for Bancorp on a retrospective basis in the first interim or annual period beginning on or after December 15, 2011. This updated guidance will
impact the presentation of the components of comprehensive income, but will not have an effect on Bank’s financial condition, results of
operations, or cash flows.

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting
Assets and Liabilities . The objective of this ASU is to enhance disclosures and provide converged disclosures under U.S. GAAP and IFRS
about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable
master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. This ASU
requires disclosure of both net and gross information for these assets and liabilities. The new guidance will be effective for annual and interim
periods beginning on or after January 1, 2013. This updated guidance will impact the presentation of the components of comprehensive
income, but will not have an effect on Bank's financial condition, results of operations, or cash flows.

In December 2011, the FASB issued Accounting Standard Update No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective
Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting
Standards Update No. 2011-05 (the “ASU”). The objective of this ASU is to defer the effective date of only the changes in ASU No. 2011-05
that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income on the components of net income
and other comprehensive income. This guidance reinstates the requirements for the presentation of reclassifications out of accumulated other
comprehensive income that were in place before the issuance of ASU No. 2011-05. The new guidance will be effective for annual and interim
periods beginning after December 15, 2011. We do not expect that the adoption of this guidance to have a material impact on our financial
statements.


                                                                                                                                              F-14
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 2 – SECURITIES AVAILABLE-FOR-SALE

The carrying amount of securities available-for-sale and their approximate fair values at December 31, 2011 and 2010 were as follows
according to management’s intent:

                                                                                      December 31, 2011
                                                                                             Gross                  Gross
                                                                      Gross                Unrealized             Unrealized            Estimated
                                                  Amortized         Unrealized            Losses (less          Losses (more               Fair
                                                    Cost              Gains               than 1 year)           than 1 year)            Values

Securities available-for-sale
    Federal agency securities                 $        14,202   $            131        $            ( 3)   $                (1 )   $        14,329
    Municipal bonds                                     3,905                101                     ( 1)                     –               4,005
    Mortgage-backed securities                          8,476                101                    (12 )                     –               8,565
Total securities available-for-sale           $        26,583   $            333        $          ( 16 )   $               ( 1)    $        26,899


                                                                                      December 31, 2010
                                                                                             Gross                  Gross
                                                                      Gross                Unrealized             Unrealized            Estimated
                                                  Amortized         Unrealized            Losses (less          Losses (more               Fair
                                                    Cost              Gains               than 1 year)           than 1 year)            Values

Securities available-for-sale
    Federal agency securities                 $         6,175   $                 –     $           (89 )   $                   –   $         6,086
    Municipal bonds                                     1,144                     –                 (41 )                       –             1,103
    Mortgage-backed securities                            434                    19                   –                         –               453
Total securities available-for-sale           $         7,753   $                19     $          (130 )   $                   –   $         7,642


There were five investments with unrealized losses of less than one year as of December 31, 2011 and one investment with an unrealized loss
for more than one year. There were 13 investments with unrealized losses of less than 1 year as of December 31 , 2010 . The unrealized losses
associated with these investments are believed to be caused by changing market conditions that are considered to be temporary and the Bank
has the intent and ability to hold these securities until recovery, and is not likely to be required to sell.

No other-than-temporary impairment write-downs were recorded for the years ended December 31, 2011 and 2010 .


                                                                                                                                                F-15
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 2 – SECURITIES AVAILABLE-FOR-SALE (Continued)

The contractual maturities of securities available-for-sale at December 31, 2011 and 2010 were as follows:

                                                                            December 31, 2011                    December 31, 2010
                                                                          Amortized         Fair               Amortized         Fair
                                                                            Cost           Value                 Cost           Value
No contractual maturity                                                 $            – $           –         $            – $           –
Due in one year or less                                                              –             –                      –             –
Due in one year to five years                                                    5,258         5,345                  2,678         2,658
Due in five years to ten years                                                 11,338         11,489                    872           849
Due in over ten years                                                            9,987        10,065                  4,203         4,135
      Total                                                             $      26,583 $       26,899         $        7,753 $       7,642


The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities are as follows:

                                                                                                         December 31, 2011
                                                                                           Proceeds          Gross Gains             Gross Losses
Available-for-sale securities                                                          $              279 $            18        $                  –

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio was as follows at December 31 :

                                                                                                                   2011                  2010
REAL ESTATE LOANS
   Commercial                                                                                                  $      28,931         $      28,061
   Home equity                                                                                                        14,507                15,655
   Construction and development                                                                                       10,144                 9,805
   One-to-four-family                                                                                                  8,752                13,218
   Multi-family                                                                                                        1,175                 1,159
        Total real estate loans                                                                                       63,509                67,898
CONSUMER LOANS
   Indirect home improvement                                                                                          81,143                94,833
   Recreational                                                                                                       24,471                24,105
   Automobile                                                                                                          5,832                12,645
   Home improvement                                                                                                      934                 1,295
   Other                                                                                                               1,826                 2,887
        Total consumer loans                                                                                         114,206               135,765
COMMERCIAL BUSINESS LOANS                                                                                             43,337                32,841
        Total loans                                                                                                  221,052               236,504
   Allowance for loan losses                                                                                          (4,345 )              (5,905 )
   Deferred fees and discounts, net                                                                                      424                   223
        Total loans receivable, net                                                                            $     217,131         $     230,822



                                                                                                                                                F-16
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

The Bank defined its loan portfolio into three segments that reflect the structure of the lending function, the Bank’s strategic plan and the
manner in which management monitors performance and credit quality. The three loan portfolio segments are: (a) Real Estate (secured) 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 Bank’s loan portfolio segments and
classes:

Real Estate Loans

One-to - Four-Family Real Estate Lending . Loans originated by the Bank secured by first mortgages on one- to four-family residences,
primarily in our market area.

Home Equity Lending . Loans originated by the Bank secured by second mortgages on one-to-four - family residences, primarily in our market
area.

Multi-family and Commercial Real Estate Lending . Loans originated by the Bank primarily secured by income producing properties, including
retail centers, warehouses and office buildings located in our market areas. The Bank also has a limited amount of loans secured by
multi-family residences.

Construction and Development Lending . Loans originated by the Bank for the construction of and secured by commercial real estate and
one-to four-family residences and tracts of land for development.

Consumer Lending

Indirect Home Improvement . Fixture secured loans are originated by the Bank for home improvement 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.

Automobile and Recreational . Loans originated by the Bank secured by boats and automobiles.

Other Consumer Loans . Loans originated by the Bank, including direct home improvement loans , loans on deposits and other consumer loans.

Commercial Business Loans

Commercial Business Lending . Commercial business loans originated by the Bank to local small and mid-sized businesses in our Puget Sound
market area are secured by accounts receivable, inventory or property, plant and equipment. Commercial business loans are made on the basis
of the borrower’s ability to make repayment from the cash flow of the borrower’s business.


                                                                                                                                           F-17
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table details activity in the allowance for loan losses by loan categories:

                                                                                         December 31, 2011
                                                       Real Estate                          Commercial
                                                         Loans            Consumer           Business      Unallocated            Total
Beginning balance                                     $      1,213      $      3,361      $          837 $            494     $       5,905
Provision for loan loss                                        196             2,124                 358             (309 )           2,369
Charge-offs                                                   (636 )          (3,519 )              (684 )              –            (4,839 )
Recoveries                                                       30              880                    –               –               910
       Net charge-offs                                        (606 )          (2,639 )              (684 )              –            (3,929 )
       Ending balance                                 $        803      $      2,846      $          511 $            185     $       4,345


Year-end amount allocated to:
 Loans individually evaluated for impairment          $         140     $           –       $         4    $            –     $         144
 Loans collectively evaluated for impairment                    663             2,846               507               185             4,201
      Ending balance                                  $         803     $       2,846       $       511    $          185     $       4,345

LOANS RECEIVABLES
 Loans individually evaluated for impairment          $       4,393     $          –        $        427   $             –    $      4,820
 Loans collectively evaluated for impairment                 59,116          114,206              42,910                 –         216,232
     Ending balance                                   $      63,509     $    114,206        $     43,337   $             –    $    221,052


                                                                                         December 31, 2010
                                                       Real Estate                          Commercial
                                                         Loans            Consumer           Business       Unallocated           Total
Beginning balance                                     $       2,230     $      3,628      $        1,069 $             478    $       7,405
Provision for loan loss                                         707            2,814                  (57 )             16            3,480
Charge-offs                                                  (1,724 )         (3,794 )              (175 )               –           (5,693 )
Recoveries                                                         –             713                    –                –              713
       Net charge-offs                                       (1,724 )         (3,081 )              (175 )               –           (4,980 )
       Ending balance                                 $       1,213     $      3,361      $          837 $             494    $       5,905

Year -end amount allocated to:
 Loans individually evaluated for impairment          $         685     $           –       $       767    $            –     $       1,452
 Loans collectively evaluated for impairment                    528             3,361                70               494             4,453
      Ending balance                                  $       1,213     $       3,361       $       837    $          494     $       5,905


LOANS RECEIVABLES
 Loans individually evaluated for impairment          $       5,403     $          –        $      4,720   $             –    $     10,123
 Loans collectively evaluated for impairment                 62,495          135,765              28,121                 –         226,381
     Ending balance                                   $      67,898     $    135,765        $     32,841   $             –    $    236,504



                                                                                                                                         F-18
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

Information pertaining to aging analysis of past due loans are summarized as follows:

                                                                     December 31, 2011
                                     Loans Past Due and Still Accruing
                                                          Greater
                                                          Than 90         Total                                           Total Loans
                               30-59       60-89
                               Days         Days            Days         Past Due      Non-Accrual        Current         Receivable
REAL ESTATE
LOANS
  Commercial               $       703    $         –    $           –    $       703   $         –   $      28,228   $         28,931
  Home equity                      149             69                –            218           267          14,022             14,507
  Construction and
      development                    –              –                –              –           623           9,521             10,144
  One-to-four-family                 –              –                –              –           412           8,340              8,752
  Multi-family                       –              –                –              –             –           1,175              1,175
       Total real estate
       loans                       852             69                –            921         1,302          61,286             63,509
CONSUMER
  Indirect home
    improvement                    698           453                 –          1,151           454          79,538             81,143
  Recreational                     144            50                 –            194             1          24,276             24,471
  Automobile                       100            53                 –            153            23           5,656              5,832
  Home improvement                   –            31                 –             31             –             903                934
  Other                             26            10                 –             36            20           1,770              1,826
       Total consumer
loans                              968           597                 –          1,565           498         112,143            114,206
COMMERCIAL
BUSINESS LOANS                       –             –                 –              –           427          42,910             43,337
       Total               $     1,820    $      666     $           –    $     2,486   $     2,227   $     216,339   $        221,052


                                                                     December 31, 2010
                                     Loans Past Due and Still Accruing
                                                          Greater
                                                         Than 90          Total                                           Total Loans
                               30-59       60-89
                               Days         Days            Days         Past Due      Non-Accrual        Current         Receivable
REAL ESTATE
LOANS
  Commercial               $         –    $        –     $           –    $         –   $     1,201   $      26,860   $         28,061
  Home equity                      369           120                62            551           574          14,530             15,655
  Construction and
    development                      –              –                –              –         2,175           7,630              9,805
  One-to-four-family                 –              –                –              –           211          13,007             13,218
  Multi-family                       –              –                –              –             –           1,159              1,159
       Total real estate
loans                              369           120                62            551         4,161          63,186             67,898
CONSUMER
  Indirect home
    improvement                    919           546                 –          1,465           522          92,846             94,833
  Recreational              141        136       –         277          38         23,790        24,105
  Automobile                378        113       –         491          54         12,100        12,645
  Home improvement           19          –       –          19          75          1,201         1,295
  Other                      28         23       –          51           3          2,833         2,887
      Total consumer
loans                      1,485       818       –        2,303        692        132,770       135,765
COMMERCIAL
BUSINESS LOANS                 –         –        –           –       1,387        31,454        32,841
      Total            $   1,854   $   938   $   62   $   2,854   $   6,240   $   227,410   $   236,504


                                                                                                    F-19
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following tables provide additional information about impaired loans held by the Bank segregated between loans for which an allowance
for credit losses has been provided and loans for which no allowance has been provided.

                                                                               December 31, 2011
                                                                                                                                  YTD                  YTD
                              Unpaid                                                                       Adjusted             Average              Interest
                             Principal           Write-            Recorded            Specific            Recorded             Recorded             Income
                             Balance             downs            Investment           Reserve            Investment           Investment           Recognized

WITH NO RELATED
ALLOWANCE
RECORDED
 Commercial              $          950      $       (24 )    $           926      $              –   $           926      $           938      $            43
 Home equity                        243               (2 )                241                     –               241                  217                    5
 Construction and
   development                      623                –                  623                     –               623                  618                   21
 One-to-four-family                 581               (7 )                574                     –               574                  578                   28
 Multi-family                         –                –                    –                     –                 –                    –                    –
 Indirect home
   improvement                           –                –                    –                  –                    –                    –                    –
 Recreational                            –                –                    –                  –                    –                    –                    –
 Automobile                              –                –                    –                  –                    –                    –                    –
 Home improvement                        –                –                    –                  –                    –                    –                    –
 Other                                   –                –                    –                  –                    –                    –                    –
 Commercial business
   loans                            705             (347 )                358                     –               358                  621                    1
        Subtotal loans            3,102             (380 )              2,722                     –             2,722                2,972                   98

WITH AN
ALLOWANCE
RECORDED
 Commercial                              –                –                    –                  –                    –                    –                    –
 Home equity                             –                –                    –                  –                    –                    –                    –
 Construction and
   development                    1,678              (38 )              1,640                (82 )              1,558                1,833                  110
 One-to-four-family                 389                –                  389                (58 )                330                  391                   16
 Multi-family                         –                –                    –                  –                    –                    –                    –
 Indirect home
   improvement                           –                –                    –                  –                    –                    –                    –
 Recreational                            –                –                    –                  –                    –                    –                    –
 Automobile                              –                –                    –                  –                    –                    –                    –
 Home improvement                        –                –                    –                  –                    –                    –                    –
 Other                                   –                –                    –                  –                    –                    –                    –
 Commercial business
   loans                             69                –                   69                 (4 )                 66                   81                    5
        Subtotal loans            2,136              (38 )              2,098               (144 )              1,954                2,305                  131
        Total            $        5,238      $      (418 )    $         4,820      $        (144 )    $         4,676      $         5,277      $           229



                                                                                                                                                             F-20
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

                                                                               December 31, 2010
                                                                                                                                  YTD                  YTD
                              Unpaid                                                                       Adjusted             Average              Interest
                             Principal           Write-            Recorded            Specific            Recorded             Recorded             Income
                             Balance             downs            Investment           Reserve            Investment           Investment           Recognized

WITH NO RELATED
ALLOWANCE
RECORDED
 Commercial              $               –   $            –   $                –   $              –   $                –   $                –   $                –
 Home equity                             –                –                    –                  –                    –                    –                    –
 Construction and
   development                           –                –                    –                  –                    –                    –                    –
 One-to-four-family                      –                –                    –                  –                    –                    –                    –
 Multi-family                            –                –                    –                  –                    –                    –                    –
 Indirect home
   improvement                           –                –                    –                  –                    –                    –                    –
 Recreational                            –                –                    –                  –                    –                    –                    –
 Automobile                              –                –                    –                  –                    –                    –                    –
 Home improvement                        –                –                    –                  –                    –                    –                    –
 Other                                   –                –                    –                  –                    –                    –                    –
 Commercial business
   loans                                 –                –                    –                  –                    –                    –                    –
        Subtotal loans                   –                –                    –                  –                    –                    –                    –

WITH AN
ALLOWANCE
RECORDED
 Commercial                       1,201                   –             1,201               (120 )              1,081                1,504                   31
 Home equity                          –                   –                 –                  –                    –                    –                    –
 Construction and
   development                    4,402             (200 )              4,202               ( 565 )             3,637                4,404                       –
 One-to-four-family                   –                –                    –                   –                   –                    –                       –
 Multi-family                         –                –                    –                   –                   –                    –                       –
 Indirect home
   improvement                           –                –                    –                  –                    –                    –                    –
 Recreational                            –                –                    –                  –                    –                    –                    –
 Automobile                              –                –                    –                  –                    –                    –                    –
 Home improvement                        –                –                    –                  –                    –                    –                    –
 Other                                   –                –                    –                  –                    –                    –                    –
 Commercial business
   loans                          4,870            ( 150 )              4,720               ( 767 )             3,953                5,072                    6
        Subtotal loans           10,473             (350 )             10,123              (1,452 )             8,671               10,980                   37
        Total            $       10,473      $     ( 350 )    $        10,123      $      ( 1,452 )   $         8,671      $        10,980      $            37



                                                                                                                                                             F-21
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

Credit Quality Indicators

As part of the Bank’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 Bank’s market.

The Bank 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 our 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.

    ● 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 Loans

Consumer loans, that represent generally smaller balance, homogenous loans, are evaluated on a pool basis until such time as a loan becomes
past due more than 90 days. Loans that are current or less than 90 days past due are graded “Pass” risk grade 4 loans. Loans that are past due
more than 90 days are classified “Substandard” risk grade 8.


                                                                                                                                                    F-22
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following tables summarize risk rated loan balances by category:

                                                                             December 31, 2011
                                                                           Special
                                         Pass            Watch             Mention       Substandard         Doubtful           Total
REAL ESTATE LOANS
 Commercial                         $      24,640    $      4,291      $           –   $             –   $              –   $     28,931
 Home equity                              14, 240               –                  –               267                  –         14,507
 Construction and development               7,881               –                  –            2, 263                  –         10,144
 One-to-four-family                         7,789               –                  –               963                  –          8,752
 Multi-family                               1,175               –                  –                 –                  –          1,175
        Total real estate loans            55,725           4,291                  –            3,493                   –         63,509
CONSUMER
 Indirect home improvement                 80,689                –                 –              454                   –         81,143
 Recreational                              24,470                –                 –                1                   –         24,471
 Automobile                                 5,809                –                 –               23                   –          5,832
 Home improvement                             934                –                 –                –                   –            934
 Other                                      1,806                –                 –               20                   –          1,826
        Total consumer loans              113,708                –                 –              498                   –        114,206
COMMERCIAL BUSINESS
LOANS                                      42,007               –                973               357                  –         43,337
        Total                       $     211,440    $      4,291      $         973   $         4,348   $              –   $    221,052


                                                                             December 31, 2010
                                                                           Special
                                         Pass            Watch             Mention       Substandard         Doubtful           Total
REAL ESTATE LOANS
 Commercial                         $      25,815    $        950      $           –   $         1,296   $            –     $     28,061
 Home equity                               14,658             423                  –               412              162           15,655
 Construction and development               5,603               –                  –             4,202                –            9,805
 One-to-four-family                        12,281             558                  –               379                –           13,218
 Multi-family                               1,159               –                  –                 –                –            1,159
        Total real estate loans            59,516           1,931                  –             6,289              162           67,898
CONSUMER
 Indirect home improvement                 94,311                –                 –              522                   –         94,833
 Recreational                              24,067                –                 –               38                   –         24,105
 Automobile                                12,591                –                 –               54                   –         12,645
 Home improvement                           1,220                –                 –               75                   –          1,295
 Other                                      2,884                –                 –                3                   –          2,887
        Total consumer loans              135,073                –                 –              692                   –        135,765
COMMERCIAL BUSINESS
LOANS                                      28,216               –                370             4,255                –           32,841
        Total                       $     222,805    $      1,931      $         370   $        11,236   $          162     $    236,504



                                                                                                                                        F-23
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

Troubled Debt Restructured Loans

The Bank had three and two troubled debt restructured loans still on accrual and included in impaired loans at December 31, 2011 and 2010 ,
respectively. In addition, the Bank has three consumer loans on non-accrual. The Bank had no commitments to lend additional funds on
impaired loans.

A summary of troubled debt restructured loans is as follows:

                                                                                                                        December 31,
                                                                                                                     2011           2010
Troubled debt restructured loans still on accrual                                                                $      3,117 $        1,508

Troubled debt restructured loans on nonaccural                                                                               132                   –

Total troubled debt restructured loans                                                                           $          3,249   $        1,508


The following table presents TDR loans that occurred during the year ended December 31, 2011 :

                                                                                                              Increase              Charge-offs
                                                                Number of              Recorded             (Decrease) in             to the
                                                                Contracts             Investment           the Allowance            Allowance
REAL ESTATE
 Home equity                                                                  3   $            132     $                 –      $                  1
 Construction and development                                                 1              1,639                      82                        38
                                                                              4   $          1,771     $                82      $                 39


The recorded investments in the table above are year end balances that are inclusive of all partial pay-downs and charge-offs since the
modification date. Loans modified in a TDR that were fully paid down, charged-off, or foreclosed upon by year end are not reported.

TDRs in the table above were the result of one interest rate modification and three extended payment terms. The Bank has not forgiven any
principal on the above loans. The Bank had no loans modified in a TDR from January 1, 2011 to December 31, 2011 that subsequently
defaulted.

Related Party Loans

Certain directors and executive officers or their related affiliates are customers of and have had banking transactions with the Bank. The
amount of loans outstanding to directors, executive officers, and related business entities with which they are associated was none at December
31, 2011 and 2010 . All loans and commitments included in such transactions were made in compliance with applicable laws on substantially
the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons and do not
involve more than the normal risk of collectability or present any other unfavorable features.


                                                                                                                                                  F-24
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

Related party loan activities are summarized as follows:

                                                                                                                  December 31,
                                                                                                               2011            2010

Beginning balance                                                                                        $              –     $           21
New loans repayments                                                                                                    –                (21 )
        Ending balance                                                                                   $              –     $            –


NOTE 4 – MORTGAGE SERVICING RIGHTS

Mortgage loans serviced for others are not included on the accompanying balance sheets. The unpaid principal balances of mortgage loans
serviced for others were $ 45,783 and $55,169 at December 31, 2011 and 2010 , respectively . The Bank evaluated the fair market value of the
mortgage servicing rights ’ asset at December 31, 2011 . The fair market value was $ 255.

The following summarizes mortgage servicing rights activity for the years ended December 31, 2011 and 2010 :

                                                                                                               2011               2010

Beginning balance                                                                                         $           245     $          340
Additions, net                                                                                                         61                  –
Mortgage servicing rights amortized                                                                                   (87 )              (95 )
Mortgage servicing rights impairment                                                                                  (19 )                –
        Ending balance                                                                                    $           200     $          245


NOTE 5 – PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2011 and 2010 were as follows:

                                                                                                               2011               2010

Land                                                                                                      $        1,767      $      1,767
Buildings                                                                                                          6,443             6,620
Furniture, fixtures, and equipment                                                                                 3,766             3,680
Leasehold improvements                                                                                               867               867
Building improvements                                                                                                983             1,003
Projects in process                                                                                                1,192                98
                                                                                                                  15,018            14,035
Less accumulated depreciation and amortization                                                                    (5,166 )          (4,786 )
        Total                                                                                             $        9,852      $      9,249



                                                                                                                                         F-25
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 5 – PREMISES AND EQUIPMENT (Continued)

The Bank leases premises and equipment under operating leases. Rental expense of leased premises was $224 and $221 for December 31, 2011
and 2010 , respectively, which is included in occupancy expense.

Minimum net rental commitments under noncancelable leases, having an original or remaining term of more than one year for future years,
were as follows:

                               Year Ending
                               December 31,

                                  2012                                                             $          234
                                  2013                                                                        233
                                  2014                                                                        242
                                  2015                                                                        187
                                  2016                                                                        101
                                Thereafter                                                                    246
                                                                                                   $        1,243


Certain leases contain renewal options from five to ten years and escalation clauses based on increases in property taxes and other costs.

NOTE 6 – OTHER REAL ESTATE OWNED ( “ OREO ” ) AND OTHER REPOSSESSED ASSETS

The following table presents the activity related to OREO at December 31 :

                                                                                                                    2011              2010

Beginning balance                                                                                              $        3,701     $       5,484
Additions                                                                                                               2,837             4,031
Capitalized improvements                                                                                                    –                13
Fair value write-downs                                                                                                  ( 594 )            (111 )
Disposition of assets                                                                                                 ( 1,355 )          (5,716 )
         Ending balance                                                                                        $        4,589     $       3,701


At December 31, 2011 , OREO consisted of five properties in Washington, with balances ranging from $ 212 to $1, 490. In 2011 and 2010,
respectively, the Bank recorded a net loss on disposals of OREO in the amount of $7 and $190, and holding costs associated with OREO in the
amount of $138 and $503.


                                                                                                                                             F-26
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 6 – OTHER REAL ESTATE OWNED (“OREO”) AND OTHER REPOSSESSED ASSETS (Continued)

The following table presents the activity related to other repossessed assets at December 31 :

                                                                                                              2011             2010

Beginning balance                                                                                        $          78     $           130
Additions                                                                                                          451                 492
Disposition of assets                                                                                            ( 451 )              (544 )
      Ending balance                                                                                     $          78     $            78


The Bank recorded a loss on other repossessed assets , which is included in noninterest income , for the years ended December 31, 2011 and
2010 of $17 and $38 , respectively.

NOTE 7 – DEPOSITS

Deposits are summarized as follows as of December 31 :

                                                                                                              2011             2010

Interest-bearing checking                                                                                $      20,669     $     19,458
Noninterest-bearing checking                                                                                    19,254           18,547
Savings                                                                                                         11,567           12,961
Money market                                                                                                    99,022           81,470
Certificates of deposits less than $100,000                                                                     36,220           47,469
Certificates of deposits $100,000 and over                                                                      59,686           64,052
       Total                                                                                             $     246,418     $    243,957


Scheduled maturities of time deposits for future years ending were as follows:

                                Year Ending
                                December 31,

                                    2012                                                         $   65,120
                                    2013                                                              7,506
                                    2014                                                              6,968
                                    2015                                                             14,343
                                    2016                                                              1,969
                                  Thereafter                                                              –
                                                                                                 $   95,906



                                                                                                                                       F-27
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 7 – DEPOSITS (Continued)

The Bank pledged a certificate of deposit at FHLB to secure Washington State public deposits of $ 981 at December 31, 2011 . Interest expense
by deposit category for the years ended December 31, 2011 and 2010 was as follows:

                                                                                                                     2011              2010

Interest-bearing checking                                                                                       $           92     $          187
Savings and money market                                                                                                   770                711
Certificates of deposit                                                                                                  1,964              2,770
                                                                                                                $        2,826     $        3,668


The Bank had related-party deposits of approximately $ 396 and $ 330 at December 31, 2011 and 2010 , respectively, which includes deposits
held for directors and executive officers.

NOTE 8 – BORROWINGS

The Bank is a member of the Federal Home Loan Bank (“ FHLB ”) of Seattle, which entitles it to certain benefits including a variety of
borrowing options consisting of a secured credit line that allows both fixed and variable rate advances. The FHLB borrowings at December 31,
2011 and 2010, consisted of a warehouse securities credit line (“ securities line ”), which allows advances with interest rates fixed at the time of
borrowing and a warehouse cash management advance line (“ CMA line ”), which allows daily advances at variable interest rates. Credit
capacity is primarily determined by the value of assets collateralized at the FHLB, funds on deposit at the FHLB, and stock owned by the Bank
. Credit is limited to 9% of the Bank ’ s total assets. The Bank entered into an Advanced, Pledges and Security Agreement with the FHLB of
Seattle for which specific loans are pledged to secure these credit lines. At December 31, 2011 , loans of approximately $51, 471 were pledged
to the FHLB of Seattle. In addition, all FHLB stock owned by the Bank and certain deposits held by the FHLB are collateral for credit lines.

The Bank also maintains a short-term borrowing line with the Federal Reserve Bank (“ FRB ”) with total credit based on eligible collateral. The
Bank can borrow under the Term Auction or Term Facility. As of December 31, 2011 , the Bank had a borrowing capacity of $ 107,735 , of
which none was outstanding. As of December 31 , 2010 , the Bank had a borrowing capacity of $ 96,587 , of which none was outstanding.

Advances on these lines at December 31, 2011 and 2010 were as follows:

                                                                                                                     2011              2010
Federal Home Loan Bank – CMA line (interest at .75% as of December 31, 2010)                                    $             –    $     18,000
Federal Home Loan Bank – Securities lines (interest ranging from 0.20% to 4.57% and 4.42% to 4.57% as
  of December 31, 2011 and 2010, respectively)                                                                           8,900              3,900
                                                                                                                $        8,900     $       21,900



                                                                                                                                               F-28
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 8 – BORROWINGS (Continued)

The maximum and average outstanding and weighted average interest rates on borrowing as of December 31, 2011 and 2010 were as follows:

                                                                                                                  2011                2010
Maximum balance:
 Federal Home Loan Bank advances                                                                              $      30,900       $     18,000
 Federal Reserve Bank                                                                                         $       1,000       $     37,000
Average balance:
 Federal Home Loan Bank advances                                                                              $       5,741       $      4,879
 Federal Reserve Bank                                                                                         $           3       $      2,620
Weighted average interest rate:
 Federal Home Loan Bank advances                                                                                         1.07 %              1.42 %
 Federal Reserve Bank                                                                                                    0.75 %              0.29 %

Scheduled maturities of the borrowings were as follows:

                                  Year Ending
                                  December 31,                                                                Balances        Interest Rates

                                     2012                                                                 $         7,200                1.49 %
                                     2013                                                                               –                   –
                                     2014                                                                               –                   –
                                     2015                                                                           1,700                4.57 %
                                     2016                                                                               –                   –
                                   Thereafter                                                                           –                   –
                                                                                                          $         8,900


NOTE 9 – EMPLOYEE BENEFITS

The Bank has a salary deferral 401(k) Plan covering substantially all of its employees. Employees are eligible to participate in the 401(k) plan
if they are 18 years of age and have been employed by the Bank for at least 30 days. Eligible employees may contribute through payroll
deductions and are 100% vested at all times in their deferral contributions account. The Bank is allowed to make annual matching contributions
at its discretion. There were no contributions for the years ended December 31, 2011 and 2010 .

The Bank previously sponsored a defined benefit pension plan for the benefit of its employees.

On December 31 , 2007, the deferred benefit pension plan was terminated. As of December 31 , 2008, of the benefits considered payable to the
deferred benefit pension plan participants, $3,962 had been disbursed and $22 remained to be disbursed. On November 30, 2010, the remaining
funds were disbursed.


                                                                                                                                              F-29
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 10 – INCOME TAXES

The components of income tax expense for the years ended December 31, 2011 and 2010 were as follows :

                                                                                                                   2011              2010

Provision for income taxes
  Deferred                                                                                                    $          536     $           552
  Current                                                                                                                  –                   –
                                                                                                                         536                 552
Less valuation allowance                                                                                               ( 536 )              (552 )
Total provision for income tax expense                                                                        $            –     $             –


A reconciliation of the effective income tax rate with the federal statutory tax rates as of December 31, 2011 and 2010 were as follows:

                                                                                   2011                                2010
                                                                           Amount                Rate          Amount                Rate
Income tax provision at statutory rate                                   $       525                  34.0 % $       547                    34.0 %
Increase in tax resulting from other items                                        11                   0.7             5                     0.3
Valuation allowance                                                             (536 )               (34.7 )        (552 )                 (34.3 )
                                                                         $         –                     –% $          –                       –%



                                                                                                                                             F-30
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 10 – INCOME TAXES (Continued)

Total deferred tax assets and liabilities at December 31, 2011 and 2010 were as follows:

                                                                                                                    2011                2010
Deferred Tax Assets
 Net operating loss carryforward                                                                               $         2,500      $      3,652
 Allowance for loan losses                                                                                                 617               211
 Other real estate owned                                                                                                   354               161
 Property, plant and equipment                                                                                              62                 –
 Non-accrued loan interest                                                                                                  43               152
 AMT credit carryforward                                                                                                    60                60
 Securities available-for-sale                                                                                               –                38
 Other                                                                                                                       8                17
    Total deferred tax assets                                                                                            3,644             4,291
Deferred Tax Liabilities
 Loan origination costs                                                                                                  ( 227 )            (263 )
 Mortgage servicing rights                                                                                                 ( 62 )            (83 )
 Prepaids                                                                                                                  ( 36 )            (52 )
 Stock dividend – FHLB stock                                                                                                 (2 )             (2 )
 Securities available-for-sale                                                                                           ( 108 )               –
    Total deferred tax liabilities                                                                                       ( 435 )            (400 )
    Less: valuation allowance                                                                                           (3,209 )          (3,891 )
    Net deferred tax assets                                                                                    $              –     $          –


At December 31, 2011, the Bank had net operating loss carryforward of approximately $ 7,353 , which begins to expire in 2024. The Bank files
a U.S. Federal income tax return, which is subject to examinations by tax authorities for years 2008 and later. At December 31, 2011 and 2010 ,
the Bank had no uncertain tax positions. The Bank recognizes interest and penalties in tax expense. At December 31, 2011 and 2010 , the Bank
recognized no interest and penalties .

A valuation allowance must be used to reduce deferred tax assets if it is “ more likely than not ” that some portion of, or all of the deferred tax
assets will not be realized. Both positive and negative evidence must be considered to determine the amount in the valuation allowance. This
information includes, but is not limited to taxable income in prior periods, projected future income, and projected future reversals of deferred
tax items. The Bank must use judgment to determine whether negative evidence is outweighed by positive evidence. The weights given to each
piece of evidence should be according to the ability to objectively verify the evidence. Based on the current economic environment,
management believes that a full valuation allowance is appropriate for both December 31, 2011 and 2010 . The Bank may also be subject to
certain limitations under Section 382 of the Internal Revenue Code that relates to the utilization of the net operating losses and other tax
benefits following an ownership change.


                                                                                                                                               F-31
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 11 – COMMITMENTS AND CONTINGENCIES

Commitments – The Bank 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 balance sheet.

The Bank’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 Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.

A summary of the Bank’s commitments at December 31, 2011 and 2010 were as follows:

                                                                                                                    2011               2010

COMMITMENTS TO EXTEND CREDIT
Real Estate Loans
 Home equity                                                                                                   $       11,621     $       11,973
 Construction development                                                                                               6,252                447
 One-to-four-family                                                                                                     1,223                 76
 Commercial                                                                                                               235                575
   Total real estate loans                                                                                             19,331             13,071
Consumer Loans
 Indirect home improvement                                                                                                814              1,160
 Other                                                                                                                  6,775              7,032
   Total consumer loans                                                                                                 7,589              8,192
Commercial Business Loans                                                                                              31,789             27,128
   Total commitments to extend credit                                                                          $       58,709     $       48,391


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 total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but
may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

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 Bank is committed.

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

The Bank has entered into change of control agreements (the “Agreements”) with its Chief Financial and Chief Operating Officers. The
Agreements, subject to certain requirements, generally remain in effect until canceled by either party upon at least 24 months prior written
notice. Under the Agreements the executive generally will be entitled to a change of control payment from the Bank if they are involuntarily
terminated within six months preceding or 12 months after a change in control (as defined in the 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 Agreements.

Because of the nature of its activities, the Bank is subject to various pending and threatened legal actions, which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the financial position of
the Bank.
In the matter of McClain v 1st Security Bank of Washington , Cause No.: 10-2-10798-1, Charles McClain sued 1st Security Bank of
Washington in December 2010, seeking damages for conversion, 5th Amendment due process violation and breach of fiduciary duty. In his
complaint, the Plaintiff sought actual damages in the amount of $8.8 million, consequential damages of $50 million, and punitive damages of
$35.1 million. 1st Security Bank of Washington counterclaimed against the Plaintiff alleging violations of Civil Rule 11 and malicious
prosecution.

The Plaintiff’s claims arose out of our discovery of a fraudulent internet scheme under which a large amount of money was erroneously
deposited into the Plaintiff’s account at the 1st Security Bank of Washington. The victims of the fraud, Cox Communications, Inc. and Comcast
Cable, Inc., directed electronic payments to Plaintiff’s account thinking that they were paying a mutual vendor, completely unrelated to
Plaintiff. The erroneous deposits were in excess of $4.2 million dollars. We discovered the fraud and at the request of the victims, returned the
funds to the victim’s banks.

Pursuant to Automated Clearing House rules, we received letters of indemnity from both Cox and Comcast, under which those entities agreed
to pay our costs and fees in defending the lawsuit. We vigorously defended the case. On December 31, 2011, both parties had summary
judgment motions pending. On January 27, 2012, the Plaintiff’s motion for summary judgment was denied. Our motion for summary judgment
was granted and all of Plaintiff’s claims were dismissed with prejudice. The only claims remaining in this lawsuit are our counterclaims. We
are evaluating whether we will seek to prosecute our counterclaims against the Plaintiff and are working with Cox and Comcast to determine if
they will pay the legal costs associated therewith. On February 24, 2012, the Plaintiff filed a Notice of Appeal to the Washington State Court of
Appeals, Division I. The basis of the appeal is not known at this time and until the Plaintiff provides us with a legal basis for his appeal, we
cannot determine the likelihood of an unfavorable outcome at the appellate level. We intend to vigorously defend the case, and believe that the
risk of a material loss on appeal in this case to be remote.


                                                                                                                                            F-32
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 12 – SIGNIFICANT CONCENTRATION OF CREDIT RISK

Most of the Bank’s business activity is primarily with customers located in the greater Puget Sound area. The Bank originates real estate and
consumer loans and has concentrations in these areas. Generally loans are secured by deposit accounts, personal property, or real estate. 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.

NOTE 13 – REGULATORY CAPITAL

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth
in the table below) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined).

As of December 31, 2011 and 2010, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action
to be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.


                                                                                                                                             F-33
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 13 – REGULATORY CAPITAL (Continued)

The Bank’s actual capital amounts and ratios are also presented in the table.

                                                                                                                      To be Well Capitalized
                                                                                      For Capital                    Under Prompt Corrective
                                                     Actual                        Adequacy Purposes                    Action Provisions
                                            Amount             Ratio              Amount          Ratio              Amount            Ratio
As of December 31, 2011
 Total Risk-based Capital
    (to Risk-weighted Assets)           $       29,441            12. 29 % $         19,158               8.00 % $       23,947           10.00 %
 Tier I Risk-based Capital
    (to Risk-weighted Assets)           $       26,431            11. 04 % $          9,579               4.00 % $       14,368            6.00 %
 Tier I Leverage Capital
    (to Average Assets)                 $       26,431             9. 30 % $         11,365               4.00 % $       14,206            5.00 %

As of December 31, 2010
 Total Risk-based Capital
    (to Risk-weighted Assets)           $       28,091             11.06 % $         20,326               8.00 % $       25,408           10.00 %
 Tier I Risk-based Capital
    (to Risk-weighted Assets)           $       24,881                 9.79 % $      10,163               4.00 % $       15,245            6.00 %
 Tier I Leverage Capital
    (to Average Assets)                 $       24,881                 9.09 % $      10,954               4.00 % $       13,693            5.00 %

Regulatory capital levels reported above differ from the Bank ’s total capital, computed in accordance with generally accepted accounting
principles (“GAAP”) in the United States as follows:

                                                                                                                          December 31,
                                                                                                                      2011            2010
Equity                                                                                                          $       26, 767 $       24,795
Unrealized (gain) loss on AFS securities                                                                                   (316 )          111
Disallowed servicing assets                                                                                                 (20 )          (25 )
    Total Tier 1 capital                                                                                                 26,431         24,881

Allowance for loan and lease losses for regulatory capital purposes                                                       3,010           3,210
    Total risk-based capital                                                                                    $        29,441   $      28,091



                                                                                                                                               F-34
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 14 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Bank assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair
value of the Bank's financial instruments will change when interest rate levels change and that change may either be favorable or unfavorable
to the Bank. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk.
However, borrowers with fixed interest rate obligations are less likely to prepay in a rising interest rate environment and more likely to prepay
in a falling interest rate environment. Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before
maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors interest rates
and maturities of assets and liabilities, and attempts to minimize interest rate risk by adjusting terms of new loans, and deposits, and by
investing in securities with terms that mitigate the Bank ’s overall interest rate risk.

Accounting guidance regarding fair value measurements defines fair value and establishes a framework for measuring fair value in accordance
with Generally Accepted Accounting Principles (“ GAAP ”). Fair value is the exchange price that would be received for an asset or paid to
transfer a liability in an orderly transaction between market participants on the measurement date. 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.

DETERMINATION OF FAIR MARKET VALUES:

    Securities – Securities available-for-sale are recorded at fair value on a recurring basis. Fair value is determined by obtaining quoted prices
    on nationally recognized securities exchanges (Level 1).

    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 (Level 3).

    Other Real Estate Owned and Other Repossessed Assets – Fair value adjustments to other real estate owned (“ OREO ”) and other
    repossessed assets are recorded at the lower of carrying amount of the loan or fair value 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).


                                                                                                                                                  F-35
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 14 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The following table presents securities available-for-sale measured at fair value on a recurring basis:

                                                                                                            Securities Available -for- Sale
                                                                                         Level 1                Level 2            Level 3                       Total

December 31 , 2011
 Federal agency securities                                                       $                  –        $         14,329    $                   –       $     14,329
 Municipal bonds                                                                                    –                   4,005                        –              4,005
 Mortgage-backed securities                                                                         –                   8,565                        –              8,565
                                                                                 $                  –        $         26,899    $                   –       $     26,899


                                                                                                            Securities Available-for-Sale
                                                                                         Level 1               Level 2            Level 3                        Total

December 31, 2010
 Federal agency securities                                                       $                  –        $          6,086    $                   –       $      6,086
 Municipal bonds                                                                                    –                   1,103                        –              1,103
 Mortgage-backed securities                                                                         –                     453                        –                453
                                                                                 $                  –        $          7,642    $                   –       $      7,642


The following tables present the impaired loans measured at fair value on a nonrecurring basis at December 31, 2011 and 2010 , and the total
valuation allowance or charge-offs on these loans, which represents fair value adjustments as of December 31, 2011 and 2010 .

                                                                                                    Impaired Loans
                                                                                                                                                               Total
                                                              Level 1                    Level 2                 Level 3                 Total               Impairment

December 31, 2011                                     $                  –       $                  –        $         4,820     $          4,820        $               144

December 31, 2010                                     $                  –       $                  –        $        10,123     $         10,123        $          1,452


The following tables present OREO and other repossessed assets measured at fair value on a nonrecurring basis at December 31, 2011 and
2010 , and the total losses on these assets, which represents fair value adjustments and other losses for the years ended December 31, 2011 and
2010.

                                                                                         OREO and Other Repossessed Assets
                                                                                                                                                                Total
                                                               Level 1                    Level 2                    Level 3               Total             Gain (Loss)

December 31, 2011                                         $                  –       $                  –        $       4,667       $           4,667       $       (594 )

December 31, 2010                                         $                  –       $                  –        $       3,779       $           3,779       $       (111 )



                                                                                                                                                                         F-36
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 14 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Fair Values of Financial Instruments – The following methods and assumptions were used by the Bank in estimating the fair values of
financial instruments disclosed in these financial statements:

    Cash and Due from Banks and Interest-Bearing Deposits at Other Financial Institutions – The carrying amounts of cash and short-term
    instruments approximate their fair value.

    Securities Available-for-Sale – Fair values for securities available-for-sale are based on quoted market prices.

    Federal Home Loan Bank Stock – The carrying value of Federal Home Loan Bank stock approximates its fair value.

    Loans Receivable , Net – For variable rate loans that re-price frequently and have no significant change in credit risk, fair values are based
    on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being
    offered for loans with similar terms to borrowers or similar credit quality. Fair values for impaired loans are estimated using discounted
    cash flow analyses or underlying collateral values, where applicable.

    Mortgage Servicing Rights – The fair value is determined by calculating the net present value of expected cash flows using a model that
    incorporates assumptions used in the industry to value such rights.

    Deposits – The fair value of deposits with no stated maturity date is included at the amount payable on demand. Fair values for fixed rate
    certificates of deposit are estimated using a discounted cash flow calculation on interest rates currently offered on similar certificates.

    Borrowings – The carrying amounts of advances maturing within 90 days approximate their fair values. The fair values of long-term
    advances are estimated using discounted cash flow analyses based on the Bank’s current incremental borrowing rates for similar types of
    borrowing arrangements.

    Accrued Interest – The carrying amounts of accrued interest approximate their fair value.

    Off-Balance-Sheet Instruments – The fair value of commitments to extend credit are estimated using the fees currently charged to enter
    into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the customers. Since
    the majority of the Bank’s off-balance-sheet instruments consist of non-fee producing, variable-rate commitments, the Bank has
    determined they do not have a distinguishable fair value.


                                                                                                                                             F-37
1ST SECURITY BANK OF WASHINGTON
 NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010

(Dollars in thousands)

NOTE 14 – FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The estimated fair values of the Bank’s financial instruments were as follows:

                                                                                December 31, 2011                December 31, 2010
                                                                              Carrying         Fair            Carrying         Fair
                                                                              Amount          Value            Amount          Value
Financial Assets
  Cash and due from banks and interest bearing deposits in banks at
    other financial institutions                                          $       19,253   $    19,253     $       35,250   $      35,250
  Securities available-for-sale                                                   26,899        26,899              7,642           7,642
  Federal Home Loan Bank stock                                                     1,797         1,797              1,797           1,797
  Loans receivable, net                                                          217,131       234,351            230,822         233,503
  Accrued interest receivable                                                      1,020         1,020                914             914
  Mortgage servicing rights                                                          200           255                245             286
Financial Liabilities
  Deposits                                                                       246,418       248,643            243,957         245,656
  Borrowings                                                                       8,900         9,130             21,900          22,201
  Accrued interest payable                                                            16            16                 17              17

The estimated fair value of loan commitments at December 31, 2011 and 2010 were considered to be insignificant.

NOTE 15 – SALE OF DEPOSITS AND BRANCH OPERATIONS

The Bank sold two previously closed branch premises in 2010 and recognized a gain on sale of $1,006 . The Bank provided financing for the
sales on the properties and recorded gains on these transactions. Both transactions met the guidelines for full gain recognition, including
exceeding minimum initial investments, market loan terms, and no exceptions to our internal loan policy and no continuing involvement in the
properties by the Bank.



                                                                                                                                       F-38
You should rely only on the information contained in this document or that to which we have referred you. We have not authorized
anyone to provide you with information that is different. This document does not constitute an offer to sell, or the solicitation of an
offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be
unlawful. The affairs of 1st Security Bank of Washington or FS Bancorp, Inc. may change after the date of this prospectus; delivery of
this document and the sales of shares made hereunder does not mean otherwise.

                                                           FS Bancorp, Inc.

                                                     (Proposed Holding Company for
                                                     1st Security Bank of Washington)

                                                               UP TO
                                                         2,817,500 SHARES
                                                (Subject to increase up to 3,240,125 Shares)


                                                              PROSPECTUS


                                                   KEEFE, BRUYETTE & WOODS

                                                       _______________ __, 2012

                                                 Dealer Prospectus Delivery Obligation

         Until _________ __, 2012 all dealers effecting transactions in the registered securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
                                     PART II: INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.     Other Expenses of Issuance and Distribution

                                                                                                                                    Amount(1)
 *   Registrant's Legal Fees and Expenses                                                                                         $    290,000
 *   Registrant's Accounting Fees and Expenses                                                                                         150,000
 *   Conversion Agent and Data Processing Fees                                                                                          50,000
 *   Marketing Agent Fees (1)                                                                                                          386,750
 *   Marketing Agent Expenses (including Legal Fees and Expenses)                                                                       95,000
 *   Appraisal Fees and Expenses                                                                                                        54,500
 *   Printing, Postage, Mailing, Copying and EDGAR                                                                                     246,000
 *   Filing Fees (FINRA, NASDAQ and SEC)                                                                                                55,000
 *   Blue Sky Legal Fees and Expenses                                                                                                   10,000
 *   Business Plan Fees and Expenses                                                                                                    38,500
 *   Stock Certificate Printing                                                                                                          6,000
 *   Transfer Agent Services                                                                                                             7,500
 *   Other                                                                                                                               4,500
     Prior Related Conversion and Offering Expenses                                                                                    853,000

 * Total                                                                                                                          $    2,246,750



* Estimated
(1) FS Bancorp, Inc. has retained Keefe, Bruyette & Woods to assist in the sale of common stock on a best efforts basis in the offerings, and to
    serve as records management agent in connection with the conversion and offering. Fees are estimated at the adjusted maximum of the
    offering range, assuming 70% of the shares are sold in the Subscription Offering (including approximately 10.3% to directors, executive
    officers and tax-qualified employee benefit plans) and 30% are sold in the Community Offering.

Item 14.   Indemnification of Directors and Officers

 In accordance with the Washington Business Corporation Act (“WBCA”) R.C.W. ss. 23B.08.570, Article XIV of the Registrant’s Articles of
Incorporation provides the following:

Indemnification : The Corporation shall indemnify and advance expenses to its directors, officers, agents and employees as follows:

 A.        Directors and Officers . In all circumstances and to the full extent permitted by the WBCA, the Corporation shall indemnify any
person who is or was a director, officer or agent of the Corporation and who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or
informal (including an action by or in the right of the Corporation), by reason of the fact that he is or was an agent of the Corporation, against
expenses, judgments, fines, and amounts paid in settlement and incurred by him in connection with such action, suit or proceeding. However,
such indemnity shall not apply to: (a) acts or omissions of the director or officer in connection with a proceeding by or in the right of the
Corporation in which the director or officer is finally adjudged liable to the Corporation; (b) conduct of the director or officer finally adjudged
to violate RCW Section 23B.08.310 (relating to unlawful distributions by the Corporation) or (c) any transaction with respect to which it was
finally adjudged that such director and officer personally received a benefit in money, property or services to which the director was not legally
entitled. The Corporation may require, in accordance with Section 23B.08.530 of the WBCA as may be amended from time to time, an
indemnified person to furnish the Corporation an undertaking and/or guaranty in a form approved by the Board, prior to advancing expenses to
such indemnified person.


                                                                       II-1
 B.        Implementation . The Board of Directors may take such action as is necessary to carry out these indemnification and expense
advancement provisions. It is expressly empowered to adopt, approve and amend from time to time such bylaws, resolutions, contracts or
further indemnification and expense advancement arrangements as may be permitted by law, implementing these provisions. Such bylaws,
resolutions, contracts or further arrangements shall include, but not be limited to, implementing the manner in which determinations as to any
indemnity or advancement of expenses shall be made.

 C.       Survival of Indemnification Rights . No amendment or repeal of this Article XIV shall apply to or have any effect on any right to
indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal.

 D.         Service for Other Entities . The indemnification and advancement of expenses provided under this Article XIV shall apply to
directors, officers, employees or agents of the Corporation for both (a) service in such capacities for the Corporation and (b) service at the
Corporation’s request as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise. A person is considered to be serving an employee benefit plan at the Corporation’s
request if such person’s duties to the Corporation also impose duties on, or otherwise involve services by, the director to the plan or to
participants in or beneficiaries of the plan.

 E.       Insurance . The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise against liability asserted against him and incurred by him in such
capacity or arising out of his status as such, whether or not the Corporation would have had the power to indemnify him against such liability
under the provisions of this bylaw and the WBCA.

 F.         Other Rights . The indemnification provided by this section shall not be deemed exclusive of any other right to which those
indemnified may be entitled under any other bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in
his official capacity and as to action in another capacity while holding such an office, and shall continue as to a person who has ceased to be a
director, trustee, officer, employee or agent and shall inure to the benefit of the heirs executors, and administrators of such person.

Item 15.    Recent Sales of Unregistered Securities

 Not Applicable.


                                                                       II-2
Item 16.         Exhibits and Financial Statement Schedules:

           The exhibits and financial statement schedules filed as part of this registration statement are as follows:

 (a)        List of Exhibits

            See the Exhibit Index filed as part of this Registration Statement.

           (b)        Financial Statement Schedules

                      No financial statement schedules are filed because the required information is not applicable or is included in the
                      consolidated financial statements or related notes.

Item 17.         Undertakings

The undersigned Registrant hereby undertakes:


 (1)        To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

                      (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

                     (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most
           recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information
           set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the
           total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the
           estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if,
           in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering
           price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

                   (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration
           statement or any material change to such information in the registration statement.

 (2)      That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

 (3)       To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at
the termination of the offering.

 (4)        That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared
effective.


                                                                           II-3
 (5)      That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein:

 (6)        That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial
distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant
to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or
sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will
be considered to offer or sell such securities to such purchaser:

                  (i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed
         pursuant to Rule 424 (§230.424 of this chapter);

                   (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or
         referred to by the undersigned registrant;

                 (iii) The portion of any other free writing prospectus relating to the offering containing material information about the
         undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

                  (iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 (7)         The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of such issue.


                                                                        II-4
                                                                 SIGNATURES

          Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Mountlake Terrace, State of Washington, on February 29 , 2012 .

                                                                        FS BANCORP, INC.


                                                                        By: /s/ Joseph C. Adams
                                                                            Joseph C. Adams, Chief Executive Officer
                                                                            ( Duly Authorized Representative )

          KNOW ALL MEN BY THESE PRESENTS , that each person whose signature appears below constitutes and appoints Joseph C.
Adams and Matthew D. Mullet, or either of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and
re-substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.

         Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons
in the capacities and on the dates indicated.

/s/ Joseph C. Adams                                                            /s/ Ted A. Leech
Joseph C. Adams, CEO and Director                                              Ted A. Leech, Chairman of the Board
(Duly Authorized Representative and Principal
Executive Officer)

Date:   February 29, 2012 .                                                    Date: February 29, 2012 .

/s/ Margaret R. Piesik                                                         /s/ Judith A. Cochrane
Margaret R. Piesik, Director                                                   Judith A. Cochrane, Director

Date:   February 29, 2012 .                                                    Date: February 29, 2012 .

/s/ Joseph P. Zavaglia                                                         /s/ Michael J. Mansfield
Joseph P. Zavaglia, Director                                                   Michael J. Mansfield, Director

Date:   February 29, 2012 .                                                    Date: February 29, 2012 .

/s/ Matthew D. Mullet
Matthew D. Mullet, CFO, Treasurer and Secretary
( Principal Financial and Accounting Officer )

Date:   February 29, 2012 .
                                                         EXHIBIT INDEX

Exhibits :


1.1     Engagement Letter with Keefe, Bruyette & Woods, Inc. *
1.2     Agency Agreement with Keefe, Bruyette & Woods, Inc.
2.0     Plan of Conversion *
3.1     Articles of Incorporation for FS Bancorp, Inc. *
3.2     Bylaws for FS Security Bancorp, Inc. *
4.0     Form of Stock Certificate for FS Bancorp, Inc. *
5.0     Opinion of Harlowe & Falk LLP re: Legality of Securities Being Registered *
8.1     Opinion of Silver, Freedman & Taff L.L.P. re: Federal Tax Matters
8.2     Opinion of Harlowe & Falk LLP re: State Tax Matters *
8.3     Letter of RP Financial, LC. re: Subscription Rights *
10.1    Severance Agreement between 1st Security Bank of Washington and Joseph C. Adams *
        Form of Change of Control Agreement between 1st Security Bank of Washington and each of Matthew D. Mullet, Steven L. Haynes
10.2
        and Drew B. Ness *
10.3    Director Fee Arrangements *
10.4    Letter Agreement regarding Appraisal Services
21.0    Subsidiaries of the Registrant *
23.1    Consent of Harlowe & Falk LLP (included in Exhibit 5.0) *
23.2    Consent of Silver, Freedman & Taff L.L.P. (included in Exhibit 8.1)
23.3    Consent of Harlowe & Falk LLP (included in Exhibits 8.2) *
23.4    Consent of Independent Registered Public Accounting Firm
23.5    Consent of RP Financial, LC. *
24.0    Power of Attorney, included in signature page
99.1    Appraisal Report of RP Financial, LC.
99.2    Subscription Order Form and Instructions *
99.3    Additional Solicitation Material *

* Previously filed.
                                                                                                                                  Exhibit 1.2

                                                               FS Bancorp, Inc.
                                                            up to 2,817,500 Shares
                                                 (subject to increase up to 3,240,125 shares)

                                                            COMMON SHARES
                                                             ($0.01 Par Value)

                                                     Subscription Price $10.00 Per Share

                                                         AGENCY AGREEMENT

                                                             __________, 2011

Keefe, Bruyette & Woods, Inc.
10 South Wacker Drive
Investment Banking Suite 3400
Chicago, Illinois 60606

Ladies and Gentlemen:

         FS Bancorp, Inc. (the “Holding Company”) a Washington corporation and 1 st Security Bank of Washington, a Washington-state
chartered mutual savings bank (the “Bank” and together with the Holding Company, the “1st Security Parties”) (references to the Bank include
the Bank in the mutual or stock holding company form of organization as indicated by the context), hereby confirm their agreement with Keefe,
Bruyette & Woods, Inc. (the “Agent”) as follows:

         Section 1. The Offering. The Bank, in accordance with the plan of conversion as adopted by the Boards of Directors of each of the
1st Security Parties (the “Plan”), intends to convert from the mutual form of organization to the stock holding company form of organization
(the “Conversion”). The Conversion will be accomplished pursuant to Washington state law and federal law and the rules and regulations of
the Washington Department of Financial Institutions (“WDFI”) and the Federal Deposit Insurance Corporation (“FDIC”). Pursuant to the Plan,
the Holding Company will offer and sell up to 2,817,500 shares (subject to increase up to 3,240,125 shares) of its common stock, $0.01 par
value per share (the “Shares” or “Common Shares”), in a subscription offering (the “Subscription Offering”) to (1) depositors of the Bank with
Qualifying Deposits (as defined in the Plan) as of June 30, 2007 (“Eligible Account Holders”), (2) the Holding Company’s tax-qualified
employee benefit plans, including the employee stock ownership plan established by the Bank (the “ESOP”) and the 401(k) Plan, (3) depositors
of the Bank with Qualifying Deposits as of ______________, 2011 (“Supplemental Eligible Account Holders”), and (4) Other Members of the
Bank as defined in the Plan. Subject to the prior subscription rights of the above-listed parties, the Holding Company may offer for sale in a
community offering (the “Community Offering” and when referred to together with or subsequent to the Subscription Offering, the
“Subscription and Community Offering”) the Shares not subscribed for or ordered in the Subscription Offering to members of the general
public to whom a copy of the Prospectus (as hereinafter defined) is delivered with a preference given first to natural persons residing in the
Washington Counties of King, Kitsup, Pierce and Snohomish, and next to cover orders of other persons residing in the Community, and
thereafter to cover orders of other members of the general public. It is anticipated that shares not subscribed for in the Subscription and
Community Offering may be offered to certain members of the general public on a best efforts basis through a selected dealers agreement (the
“Syndicated Community Offering”) (the Subscription Offering, Community Offering and Syndicated Community Offering are collectively
referred to as the “Offering”). It is acknowledged that the purchase of Shares in the Offering is subject to the maximum and minimum
purchase limitations as described in the Plan and that the Holding Company may reject, in whole or in part, any orders received in the
Community Offering or Syndicated Community Offering.
          The Holding Company has filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form
S-1 (File No. 333-177125) (the “Registration Statement”), containing a prospectus relating to the Offering, for the registration of the Shares
under the Securities Act of 1933 (the “1933 Act”), and has filed such amendments thereof and such amended prospectuses as may have been
required to the date hereof. The term “Registration Statement” shall include any documents incorporated by reference therein and all financial
schedules and exhibits thereto, as amended, including post-effective amendments. The prospectus, as amended, on file with the Commission at
the time the Registration Statement initially became effective is hereinafter called the “Prospectus,” except that if any prospectus is filed by the
Holding Company pursuant to Rule 424(b) or (c) of the rules and regulations of the Commission under the 1933 Act (the “1933 Act
Regulations”) differing from the prospectus on file at the time the Registration Statement initially became effective, the term “Prospectus” shall
refer to the prospectus filed pursuant to Rule 424(b) or (c) from and after the time said prospectus is filed with the Commission.

         In accordance with the regulations of the WDFI and the FDIC (the “Conversion Regulations”), the Bank has filed with the WDFI and
the FDIC an Application For Conversion on Form AC (the “Form AC”), including the Prospectus and the Conversion Valuation Appraisal
Report prepared by RP Financial, LC. (the “Appraisal”), and has filed such amendments thereto as may have been required by the WDFI and
the FDIC. The Form AC has received the approval of the WDFI and the non-objection of the FDIC and the related Prospectus has been
authorized for use by the WDFI and the FDIC. In addition, the Company has filed with the Board of Governors of the Federal Reserve System
(the “FRB”) an Application FR Y-3 Application (the “Holding Company Application”) to become a bank holding company under the Bank
Holding Company Act of 1956 (the “BHCA”) and the regulations promulgated thereunder (the “Control Act Regulations”).

          Section 2. Retention of Agent; Compensation; Sale and Delivery of the Shares. Subject to the terms and conditions herein set
forth, the 1st Security Parties hereby appoint the Agent as their exclusive financial advisor and marketing agent (i) to utilize its best efforts to
solicit subscriptions for Common Shares and to advise and assist the Holding Company and the Bank with respect to the sale of the Shares in
the Offering and (ii) to participate in the Offering in the areas of market making and in syndicate formation (if necessary).


                                                                         2
          On the basis of the representations, warranties, and agreements herein contained, but subject to the terms and conditions herein set
forth, the Agent accepts such appointment and agrees to consult with and advise the 1st Security Parties as to the matters set forth in the letter
agreement, dated September 21, 2011, between the Bank and the Agent (a copy of which is attached hereto as Exhibit A ). It is acknowledged
by the 1st Security Parties that the Agent shall not be required to purchase any Shares or be obligated to take any action which is inconsistent
with all applicable laws, regulations, decisions or orders.

         The obligations of the Agent pursuant to this Agreement shall terminate upon termination of the Offering, but in no event later than 45
days after the completion of the Subscription Offering (the “End Date”). All fees or expenses due to the Agent but unpaid will be payable to
the Agent in next day funds at the earlier of the Closing Date (as hereinafter defined) or the End Date. In the event the Offering is extended
beyond the End Date, the 1st Security Parties and the Agent may agree to renew this Agreement under mutually acceptable terms.

         In the event the Holding Company is unable to sell a minimum of 2,082,500 Shares within the period herein provided, this Agreement
shall terminate and the Holding Company shall refund to any persons who have subscribed for any of the Shares the full amount which it may
have received from them plus accrued interest, as set forth in the Prospectus; and none of the parties to this Agreement shall have any
obligation to the other parties hereunder, except as set forth in this Section 2 and in Sections 7, 9 and 10 hereof. In the event the Offering is
terminated for any reason not attributable to the action or inaction of the Agent, the Agent shall be paid the fees due to the date of such
termination pursuant to subparagraphs (a) and (d) below.

         The Agent shall receive the following compensation for its services hereunder:

         (a)       A management fee of $40,000 payable in four consecutive monthly installments commencing in October 2011. Such fees
         shall be deemed to have been earned when due. Should the Offering be terminated for any reason not attributable to the action or
         inaction of Agent, Agent shall have earned and be entitled to be paid fees accruing through the stage at which point the termination
         occurred.

         (b)        A Success Fee of 1.00% shall be paid based on the aggregate Purchase Price of Common Stock sold in the Subscription
         Offering excluding shares purchased by the 1st Security Parties’ officers, directors, or employees (or members of their immediate
         family) plus any ESOP, tax-qualified or stock based compensation plans or similar plan created by the 1 st Security Parties for some or
         all of their directors or employees. In addition, a Success Fee of 2.00% shall be paid on the aggregate Purchase Price of Shares sold in
         the Community Offering. The Management Fee described in 2(a) above will be credited against the Success Fee paid pursuant to this
         paragraph.

         (c)       If any of the Shares remain available after the Subscription Offering and Community Offering, at the request of the Holding
         Company, Agent will seek to form a syndicate of registered broker-dealers to assist in the sale of Shares on a best efforts basis, subject
         to the terms and conditions set forth in a selected dealers agreement to be entered into between the Holding Company and
         Agent. Agent will endeavor to distribute the Shares among dealers in a fashion which best meets the distribution objectives of the
         Holding Company and the Plan. Agent will be paid a fee not to exceed 5.5% of the aggregate Purchase Price of the Shares sold in the
         Syndicated Community Offering. From this fee, Agent will pass onto selected broker-dealers, who assist in the Syndicated
         Community Offering, an amount competitive with gross underwriting discounts charged at such time for comparable amounts of stock
         sold at a comparable price per share in a similar market environment. Fees with respect to purchases affected with the assistance of a
         broker/dealer other than Agent shall be transmitted by Agent to such broker/dealer. The decision to utilize selected broker-dealers will
         be made by Agent upon consultation with the Holding Company.


                                                                        3
         (d)        The Holding Company shall reimburse the Agent for reasonable out-of-pocket expenses, including costs of travel, meals and
         lodging, photocopying, telephone, facsimile and couriers not to exceed $10,000. In addition, the Holding Company will reimburse the
         Agent for fees and expenses of its counsel not to exceed $75,000. In the event of unusual circumstances or delays or a re-solicitation
         in connection with the offering, including in the event of a material delay in the offering that would require an update of the financial
         information in tabular form to reflect a period later than that set forth in the original filing of the Registration Statement, the Agent
         shall be reimbursed for its expenses including any expenses of its counsel up to a maximum of $95,000. The Holding Company will
         bear the expenses of the Offering customarily borne by issuers including, without limitation, regulatory filing fees, SEC, Blue Sky and
         Financial Institution Regulatory Authority (“FINRA”) filing and registration fees; the fees of the Holding Company’s accountants,
         attorneys, appraiser, transfer agent and registrar, printing, mailing and marketing expenses associated with the reorganization; and the
         fees set forth under this Section 2.

          Records Agent Services . The Agent shall also receive a fee of $25,000 for certain records agent services set forth in the letter
agreement, dated September 21, 2011, between the Bank and the Agent (a copy of which is attached hereto as Exhibit B ), $10,000 of which
has already been paid to the Agent and is nonrefundable and the balance of which shall be payable to the Agent upon mailing of the proxy
solicitation and offering materials. The Holding Company will reimburse the Agent, upon request made from time to time, for its reasonable
out-of-pocket expenses incurred in connection with its records agent services not to exceed $25,000. However, in the event of unusual
circumstances, delays or a re-solicitation in connection with the offering, the total expenses paid to the Agent may be increased to an amount
not to exceed $40,000.

         Section 3. Sale and Delivery of Shares. If all conditions precedent to the consummation of the Conversion, including without
limitation, the sale of all Shares required by the Plan to be sold, are satisfied, the Holding Company agrees to issue, or have issued, the Shares
sold in the Offering and to release for delivery certificates for such Shares on the Closing Date against payment to the Holding Company by
any means authorized by the Plan; provided, however, that no funds shall be released to the Holding Company until the conditions specified in
Section 8 hereof shall have been complied with to the reasonable satisfaction of the Agent or its counsel. The release of Shares against
payment therefor shall be made on a date and at a place acceptable to the 1st Security Parties and the Agent as set forth in Section
14. Certificates for shares shall be delivered directly to the purchasers in accordance with their directions as provided by the Holding Company
to the Holding Company’s registrar and transfer agent. The date upon which the Holding Company shall release or deliver the Shares sold in
the Offering, in accordance with the terms herein, is called the “Closing Date.”


                                                                        4
           Section 4. Representations and Warranties of the 1st Security Parties.            The 1st Security Parties, jointly and severally,
represent and warrant to and agree with the Agent as follows:

         (a)       The Registration Statement, which was prepared by the 1st Security Parties and filed with the Commission, has been
         declared effective by the Commission, no stop order has been issued with respect thereto and no proceedings therefor have been
         initiated or, to the knowledge of the 1st Security Parties, threatened by the Commission. At the time the Registration Statement,
         including the Prospectus contained therein (including any amendment or supplement), became effective, at the Applicable Time (as
         defined in Section 4(c) hereof) and at the Closing Date, the Registration Statement complied and will comply in all material respects
         with the requirements of the 1933 Act and the 1933 Act Regulations and the Registration Statement, including the Prospectus
         contained therein (including any amendment or supplement thereto), and any information regarding the 1st Security Parties
         contained in Sales Information (as such term is defined in Section 9 hereof) authorized by the 1st Security Parties for use in
         connection with the Offering, did not contain an untrue statement of a material fact or omit to state a material fact required to be
         stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not
         misleading, and at the time any Rule 424(b) or (c) Prospectus is filed with the Commission and at the Closing Date referred to in
         Section 2 hereof, the Prospectus (including any amendment or supplement thereto) and any information regarding the Holding
         Company contained in Sales Information (as such term is defined in Section 9 hereof) authorized by the Holding Company for use
         in connection with the Offering will contain all statements that are required to be stated therein in accordance with the 1933 Act and
         the 1933 Act Regulations and will not contain an untrue statement of a material fact or omit to state a material fact necessary in
         order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however,
         that the representations and warranties in this Section 4(a) shall not apply to statements or omissions made in reliance upon and in
         conformity with written information furnished to the Holding Company by the Agent or its counsel expressly regarding the Agent
         for use in the Prospectus in the first sentence of the first paragraph under the caption “The Conversion and Stock Offering;
         Marketing Arrangements.”

         (b)       None of the 1st Security Parties has directly or indirectly distributed or otherwise used and will not directly or indirectly
         distribute or otherwise use any prospectus, any “free writing prospectus” (as defined in Rule 405 of the 1933 Act Regulations) or
         other offering material (including, without limitation, content on the Holding Company’s website that may be deemed to be a
         prospectus, free writing prospectus or other offering material) in connection with the offering and sale of the Shares other than any
         Permitted Free Writing Prospectus or the Prospectus or other materials permitted by the 1933 Act and the 1933 Act Regulations
         distributed by the Holding Company and reviewed and approved in advance for distribution by the Agent. The Holding Company
         has not, directly or indirectly, prepared or used and will not directly or indirectly, prepare or use, any Permitted Free Writing
         Prospectus except in compliance with the filing and other requirements of Rules 164 and 433 of the 1933 Act Regulations;
         assuming that such Permitted Free Writing Prospectus is so sent or given after the Registration Statement was filed with the
         Commission (and after such Permitted Free Writing Prospectus was, if required pursuant to Rule 433(d) under the Act, filed with
         the Commission), the sending or giving, by the Agent, of any Permitted Free Writing Prospectus will satisfy the provisions of Rules
         164 and 433 (without reliance on subsections (b), (c) and (d) for Rule 164); and the Holding Company is not an “ineligible issuer”
         (as defined in Rule 405 of the 1933 Act Regulations) as of the eligibility determination date for purposes of Rules 164 and 433 of
         the 1933 Act Regulations with respect to the offering of the Shares or otherwise precluded under Rule 164 from using free writing
         prospectuses in connection with the offering of the Shares.


                                                                      5
(c)       As of the Applicable Time (as defined below), neither (i) the Issuer-Represented General Free Writing Prospectus(es)
issued at or prior to the Applicable Time and the Statutory Prospectus, all considered together (collectively, the “General Disclosure
Package”), nor (ii) any individual Issuer-Represented Limited-Use Free Writing Prospectus, when considered together with the
General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order
to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding
sentence does not apply to statements in or omissions from any Prospectus included in the Registration Statement relating to the
offered Shares or any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished
to the Holding Company by the Agent specifically for use therein. As used in this paragraph and elsewhere in this Agreement:

                          1.   “Applicable Time” means each and every date when a potential purchaser submitted a subscription
               or otherwise committed to purchase Shares.

                          2.    “Statutory Prospectus,” as of any time, means the Prospectus relating to the offered Shares that is
               included in the Registration Statement relating to the offered Shares immediately prior to the Applicable Time,
               including any document incorporated by reference therein.

                          3.     “Issuer-Represented Free Writing Prospectus” means any “issuer free writing prospectus,” as
               defined in Rule 433(h) of the 1933 Act Regulations, relating to the offered Shares in the form filed or required or, if
               not required to be filed, in the form retained in the Holding Company’s records pursuant to Rule 433(g) under the
               1933 Act Regulations. The term does not include any writing exempted from the definition of prospectus pursuant
               to clause (a) of Section 2(a)(10) of the 1933 Act, without regard to Rule 172 or Rule 173 of the 1933 Act
               Regulations.


                                                            6
                          4.     “Issuer-Represented General Free Writing Prospectus” means any Issuer-Represented Free Writing
               Prospectus that is intended for general distribution to prospective investors.

                         5.     “Issuer-Represented Limited-Use Free Writing Prospectus” means any Issuer-Represented Free
               Writing Prospectus that is not an Issuer-Represented General Free Writing Prospectus. The term Issuer-Represented
               Limited-Use Free Writing Prospectus also includes any “bona fide electronic road show,” as defined in Rule 433 of
               the 1933 Act Regulations, that is made available without restriction pursuant to Rule 433(d)(8)(ii) of the 1933 Act
               Regulations or otherwise, even though not required to be filed with the Commission.

                         6.    “Permitted Free Writing Prospectus” means any free writing prospectus as defined in Rule 405 of
               the 1933 Act Regulations that is consented to by the Holding Company, the Bank and the Agent.

(d)       Each Issuer-Represented Free Writing Prospectus, as of its date of first use and at all subsequent times through the
completion of the Offering and sale of the offered Shares or until any earlier date that the Holding Company notified or notifies the
Agent (as described in the next sentence), did not, does not and will not include any information that conflicted, conflicts or will
conflict with the information contained in the Registration Statement, including any document incorporated by reference therein that
has not been superseded or modified. If at any time following the date of first use of an Issuer-Represented Free Writing Prospectus
there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus conflicted
or would conflict with the information contained in the Registration Statement relating to the offered Shares or included or would
include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, the Holding Company has
notified or will notify promptly the Agent so that any use of such Issuer-Represented Free-Writing Prospectus may cease until it is
amended or supplemented and the Holding Company has promptly amended or will promptly amend or supplement such
Issuer-Represented Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission. The foregoing two
sentences do not apply to statements in or omissions from any Issuer-Represented Free Writing Prospectus based upon and in
conformity with written information furnished to the Holding Company by the Agent specifically for use therein.


                                                            7
(e)       The Form AC, which was prepared by the 1 st Security Parties and filed with the WDFI and the FDIC, has been approved
by the WDFI and the FDIC and the related Prospectus and proxy statement to be delivered to members of the Bank have been
authorized for use by the WDFI and the FDIC. No order has been issued by the WDFI or the FDIC preventing or suspending the
use of the Prospectus or the proxy statement, and no action by or before the WDFI or the FDIC to revoke any approval,
authorization or order of effectiveness related to the Offering is pending or, to the best knowledge of the 1 st Security Parties,
threatened. At the time of the approval of the Form AC, including the Prospectus (including any amendment or supplement thereto)
by the WDFI and the FDIC and at all times subsequent thereto until the Closing Date, the Form AC, including the Prospectus
(including any amendment or supplement thereto), complies in all material respects with the Conversion Regulations, except to
the extent waived or otherwise approved by the WDFI or the FDIC. The Form AC, including the Prospectus (including any
amendment or supplement thereto), does not include any untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in this Section 4(e) shall not apply to statements or omissions
made in reliance upon and in conformity with written information furnished to the 1 st Security Parties by the Agent or its counsel
expressly regarding the Agent for use in the Prospectus contained in the Form AC under the caption “The Conversion and Stock
Offering - Marketing Arrangements,” and provided further, however, that nothing has come to the attention of the 1 st Security
Parties that would lead them to believe that the information under such caption contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.

(f)      The Holding Company has filed the Holding Company Application with the FRB and has published notice of such filing,
and the Holding Company Application is accurate and complete in all material respects. The Holding Company has received written
notice from the FRB of its approval of the acquisition of the Bank, such approval remains in full force and effect and no order has
been issued by the FRB or any other applicable regulator suspending or revoking such approval and no proceedings therefor have
been initiated or, to the knowledge of the 1st Security Parties, threatened by the FRB. At the date of such approval, the Holding
Company Application complied in all material respects with the applicable provisions of the BHCA and the regulations
promulgated thereunder, except as the FRB has expressly waived such regulations in writing.

(g)       The 1st Security Parties have filed the Prospectus, the member proxy statement and any supplemental sales literature with
the Commission, the FRB, the WDFI and the FDIC. The Prospectus, the member proxy statement and all supplemental sales
literature, as of the date the Registration Statement became effective and on the Closing Date referred to in Section 2, complied and
will comply in all material respects with the applicable requirements of the 1933 Act Regulations and FDIC regulations and, at or
prior to the time of their first use, will have received all required authorizations of the FRB, the WDFI, the FDIC and Commission
for use in final form. No approval of any other regulatory or supervisory or other public authority is required in connection with the
distribution of the Prospectus, the member proxy statement and any supplemental sales literature that has not been obtained and a
copy of which has been delivered to the Agent. The Holding Company and the Bank have not distributed any offering material in
connection with the Offering except for the Prospectus, the member proxy statement and any supplemental sales material that has
been filed with the Registration Statement and the Form AC and authorized for use by the Commission, the WDFI, the FDIC and
the FRB. The information contained in the supplemental sales material filed as an exhibit to both the Registration Statement and the
Form AC does not conflict in any material respects with information contained in the Registration Statement and the Prospectus.


                                                              8
(h)       The Plan has been adopted by the Boards of Directors of the 1st Security Parties, and the offer and sale of the Shares will
have been conducted in all material respects in accordance with the Plan, the Conversion Regulations, except to the extent waived or
otherwise approved by the FRB, the WDFI or the FDIC, and all other applicable laws, regulations, decisions and orders, including
all terms, conditions, requirements and provisions precedent to the Offering imposed upon the 1st Security Parties by the FRB, the
WDFI, the FDIC or the Commission, and in the manner described in the Prospectus. To the best knowledge of the 1st Security
Parties, no person has sought to obtain review of the final action of the FRB the WDFI or the FDIC in approving the Conversion.

(i)       The Bank has been duly organized and validly existing as a Washington state-chartered savings bank in mutual form of
organization and upon completion of the Conversion will become a duly organized and validly existing Washington state-chartered
savings bank in permanent capital stock form of organization, in both instances duly authorized to conduct its business and own its
property as described in the Registration Statement and the Prospectus; the Bank has obtained all licenses, permits and other
governmental authorizations currently required for the conduct of its business, except those that individually or in the aggregate
would not have a material adverse effect on the conduct of the business, financial condition, results of operations, affairs or
prospects of the 1st Security Parties, taken as a whole (a “Material Adverse Effect”); all such licenses, permits and governmental
authorizations are in full force and effect, and the Bank is in compliance with all laws, rules, regulations and orders applicable to the
operation of its business, except where failure to be in compliance would not have a Material Adverse Effect; the Bank is duly
qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which its ownership of property
or leasing of property or the conduct of its business requires such qualification, unless the failure to be so qualified in one or more of
such jurisdictions would not have a Material Adverse Effect. The Bank does not own equity securities or any equity interest in any
other business enterprise except as described in the Prospectus or as would not be material to the operations of the 1st Security
Parties, taken as a whole. Following completion of the Conversion and the Offerings, the authorized capital stock of the Bank will
consist of 90,000 shares of common stock, par value $0.01 per share (the “Bank Common Stock”), and 10,000 shares of preferred
stock (the “Bank Preferred Stock”) of which 1,000 shares of Bank Common Stock and no shares of Bank Preferred Stock are issued
and outstanding as of the date hereof; no shares of Bank Preferred Common Stock and no shares of Bank Preferred Stock will be
issued prior to the Closing (defined below); the issued and outstanding shares of Bank Common Stock have been duly authorized
and validly issued and are fully paid and non-assessable and owned directly by the Holding Company free and clear of any security
interest, mortgage, pledge, lien, encumbrances or legal or equitable claim; the terms and provisions of the Bank Common Stock
conform to all statements thereto contained in the Prospectus. The Conversion will be effected in all material respects in accordance
with all applicable statutes, regulations, decisions and orders; and, except with respect to the filing of certain post-sale,
post-Conversion reports, and documents in compliance with the 1933 Act Regulations, the Conversion Regulations or letters of
approval, at the Closing Date, all terms, conditions, requirements and provisions with respect to the Conversion imposed by the
Commission, the WDFI, the FDIC and the FRB, will have been complied with by the 1st Security Parties in all material respects or
appropriate waivers will have been obtained and all applicable notice and waiting periods will have been satisfied, waived or
elapsed.


                                                              9
(j)      The Holding Company is duly organized, validly existing and in good standing as a corporation under the laws of the State
of Washington with full corporate power and authority to own, lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus, and the Holding Company is, and at the Closing Date will be, qualified
to do business as a foreign corporation in each jurisdiction in which the conduct of its business requires such qualification, except
where the failure to so qualify would not have a Material Adverse Effect. The Holding Company has obtained all licenses, permits
and other governmental authorizations currently required for the conduct of its business except those that individually or in the
aggregate would not have a Material Adverse Effect; all such licenses, permits and governmental authorizations are in full force and
effect, and the Holding Company is in all material respects complying therewith and with all laws, rules, regulations and orders
applicable to the operation of its business. There are no outstanding warrants or options to purchase any securities of the Holding
Company.

(k)       FS Service Corporation (“Subsidiary”) is the sole subsidiary of the Bank. The Subsidiary is duly organized, validly
existing and in good standing as a corporation under the laws of the State of Washington with full corporate power and authority to
own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus and
is, and at the Closing Date will be, qualified to do business as a foreign corporation in each jurisdiction in which the conduct of its
business requires such qualification, except where the failure to so qualify would not have a Material Adverse Effect. The
Subsidiary has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business
except those that individually or in the aggregate would not have a Material Adverse Effect; all such licenses, permits and
governmental authorizations are in full force and effect, and the Subsidiary is complying therewith and with all laws, rules,
regulations and orders applicable to the operation of its business, except where failure to be in compliance would not have a
Material Adverse Effect. There are no outstanding warrants or options to purchase any securities of the Subsidiary.

(l)      Except as described in the Prospectus there are no contractual encumbrances or restrictions or requirements or material
legal restrictions or requirements required to be described therein, on the ability of any of the 1st Security Parties, (A) to pay
dividends or make any other distributions on its capital stock or to pay any indebtedness owed to another party, (B) to make any
loans or advances to, or investments in, another party or (C) to transfer any of its property or assets to another party. Except as
described in the Prospectus, there are no restrictions, encumbrances or requirements affecting the payment of dividends or the
making of any other distributions on any of the capital stock of the Holding Company.


                                                            10
(m)       The Bank has properly administered all accounts for which it acts as a fiduciary, including but not limited to accounts for
which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance
with the terms of the governing documents and applicable state and federal law and regulation, except where the failure to do so
would not have a Material Adverse Effect. Neither the Bank, nor any of its respective directors, officers or employees has
committed any material breach of trust with respect to any such fiduciary account, and the accountings for each such fiduciary
account are true and correct in all material respects and accurately reflect the assets of such fiduciary account in all material
respects.

(n)       The Bank is a member in good standing of the Federal Home Loan Bank of Seattle (“FHLB-Seattle”). The deposit
accounts of the Bank are insured by the FDIC up to the applicable limits, and upon Consummation of the Conversion, the
liquidation accounts for the benefit of eligible account holders and supplemental eligible account holders will be duly established in
accordance with the requirements of the Conversion Regulations. No proceedings for the termination or revocation of such
insurance are pending or, to the best knowledge of the Holding Company or the Bank, threatened.

(o)      The 1st Security Parties have good and marketable title to all real property and good title to all other assets material to the
business of the 1st Security Parties, taken as a whole, and to those properties and assets described in the Registration Statement and
Prospectus as owned by them, free and clear of all liens, charges, encumbrances or restrictions, except such as are described in the
Registration Statement and Prospectus or as are not material to the business of the 1st Security Parties, taken as a whole; and all of
the leases and subleases material to the business of the 1st Security Parties, taken as a whole, under which the 1st Security Parties
hold properties, including those described in the Registration Statement and Prospectus, are in full force and effect.

(p)       The Holding Company has received an opinion of its special counsel, Silver, Freedman & Taff, L.L.P., with respect to the
federal income tax consequences of the Conversion, and has received an opinion of Harlowe & Falk LLP on the legality of the
securities to be issued and the Washington income tax consequences of the Conversion, copies of which are filed as exhibits to the
Registration Statement; all material aspects of such opinions are accurately summarized in the Registration Statement and the
Prospectus. The facts upon which such opinions are based are truthful, accurate and complete in all material respects. None of 1st
Security Parties has taken or will take any action inconsistent therewith.


                                                            11
(q)       Each of the 1st Security Parties have all such power, authority, authorizations, approvals and orders as may be required to
enter into this Agreement, to carry out the provisions and conditions hereof and to issue and sell the Shares to be sold by the
Holding Company as provided herein and as described in the Prospectus, subject to approval or confirmation by the WDFI, the
FDIC or the FRB of the final Appraisal. The execution, delivery and performance of this Agreement and the consummation of the
transactions herein contemplated have been duly and validly authorized by all necessary corporate action on the part of each of the
1st Security Parties. This Agreement has been validly executed and delivered by each of the 1st Security Parties and, assuming due
execution and delivery by the Agent, is the valid, legal and binding agreement of each of the 1st Security Parties enforceable in
accordance with its terms (except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws relating to or affecting the enforcement of creditors’ rights generally or the rights of creditors of
savings and loan holding companies, the accounts of whose subsidiaries are insured by the FDIC, or by general equity principles,
regardless of whether such enforceability is considered in a proceeding in equity or at law, and except to the extent, if any, that the
provisions of Sections 9 and 10 hereof may be unenforceable as against public policy or pursuant to applicable Federal law and the
rules and regulations of the WDFI, FDIC and FRB).

(r)       None of the 1st Security Parties is in violation of any directive received from the FRB, the WDFI or the FDIC, or any
other agency to make any material change in the method of conducting its business so as to comply in all material respects with all
applicable statutes and regulations (including, without limitation, regulations, decisions, directives and orders of the FRB, the WDFI
or the FDIC) and, except as may be set forth in the Registration Statement, the General Disclosure Package and the Prospectus,
there is no suit or proceeding or charge or action before or by any court, regulatory authority or governmental agency or body,
pending or, to the knowledge of any of the 1st Security Parties, threatened, which might materially and adversely affect the
Offering, or which might result in any Material Adverse Effect.

(s)      The consolidated financial statements, schedules and notes related thereto which are included in the General Disclosure
Package and the Prospectus fairly present the balance sheet, income statement, statement of changes in equity capital and statement
of cash flows of the Bank at the respective dates indicated and for the respective periods covered thereby and comply as to form in
all material respects with the applicable accounting requirements of the 1933 Act Regulations and Title 12 of the Code of Federal
Regulations. Such financial statements, schedules and notes related thereto have been prepared in accordance with generally
accepted accounting principles (“GAAP”) consistently applied through the periods involved, present fairly in all material respects
the information required to be stated therein and are consistent with the most recent financial statements and other reports filed by
the Bank with the WDFI and FDIC, except that accounting principles employed in such regulatory filings conform to the
requirements of the WDFI and FDIC and not necessarily to GAAP. The other financial, statistical and pro forma information and
related notes included in the Prospectus present fairly the information shown therein on a basis consistent with the audited and
unaudited financial statements of the Bank included in the Prospectus, and as to the pro forma adjustments, the adjustments made
therein have been properly applied on the basis described therein.


                                                            12
(t)      The 1st Security Parties carry, or are covered by, insurance in such amounts and covering such risks as the 1st Security
Parties deem reasonably adequate for the conduct of their respective businesses and the value of their respective properties.

(u)       Since the respective dates as of which information is given in the Registration Statement including the Prospectus and
except as disclosed in the General Disclosure Package and the Prospectus: (i) there has not been any material adverse change,
financial or otherwise, in the condition of the 1st Security Parties and their subsidiaries, considered as one enterprise, or in the
earnings, capital, properties, business or prospects of the 1st Security Parties and their subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business; (ii) there has not been any material increase in the long-term debt of any of
the 1st Security Parties or in the principal amount of the 1st Security Parties’ consolidated assets which are classified by any of such
entities as impaired, substandard, doubtful or loss or in loans past due 90 days or more or real estate acquired by foreclosure, by
deed-in-lieu of foreclosure or deemed in-substance foreclosure or any material decrease in equity capital or total assets of any of the
1st Security Parties; nor has any of the 1st Security Parties issued any securities (other than in connection with the incorporation of
the Holding Company) or incurred any liability or obligation for borrowing other than in the ordinary course of business; (iii) there
have not been any material transactions entered into by the 1st Security Parties; (iv) there has been no material adverse change in
any of the 1st Security Parties’ relationship with its insurance carriers, including, without limitation, cancellation or other
termination of any of the 1st Security Parties’ fidelity bond or any other type of insurance coverage; (v) there has been no material
change in management of any of the 1st Security Parties; (vi) none of the 1st Security Parties has sustained any material loss or
interference with its respective business or properties from fire, flood, windstorm, earthquake, accident or other calamity, whether or
not covered by insurance; (vii) none of the 1st Security Parties has defaulted in the payment of principal or interest on any
outstanding debt obligations; (viii) the capitalization, liabilities, assets, properties and business of the 1st Security Parties conform in
all material respects to the descriptions thereof contained in the General Disclosure Package and the Prospectus; and (ix) none of the
1st Security Parties has any material liabilities, contingent or otherwise, except as set forth in the Prospectus.

(v)       None of the 1st Security Parties is (i) in violation of their respective articles, charters, certificates of incorporation,
organizational certificates or bylaws (and none of the 1st Security Parties will not be in violation of its articles of incorporation,
charters, certificates of incorporation, organizational certificates or bylaws upon completion of the Conversion), or (ii) in default
(nor has any event occurred which, with notice or lapse of time or both, would constitute a defect) in the performance or observance
of any obligation, agreement, covenant, or condition contained in any contract, lease, loan agreement, indenture, mortgage, or other
instrument to which it is a party or by which it or any of its property may be bound, or to which any of the property or assets of the
1st Security Parties is subject, except for defaults that would not, individually or in the aggregate, have a Material Adverse Effect,
and there are no contracts or documents of the 1st Security Parties that are required to be filed as exhibits to the Registration
Statement or the Form AC that have not been so filed. The execution and delivery of this Agreement and the consummation of the
transactions herein contemplated will not: (i) conflict with or constitute a breach of, or default under, or result in the creation of any
lien, charge or encumbrance upon any of the assets of any of the 1st Security Parties pursuant to the respective articles of
incorporation, charters or bylaws of the 1st Security Parties or any contract, lease or other instrument in which the 1st Security
Parties has a beneficial interest, or any applicable law, rule, regulation or order; (ii) violate any authorization, approval, judgment,
decree, order, statute, rule or regulation applicable to any of the 1st Security Parties, except for such violations which would not
have a Material Adverse Effect; or (iii) result in the creation of any material lien, charge or encumbrance upon any property of the
1st Security Parties.


                                                              13
(w)       All documents made available or delivered by, or to be made available to or delivered by the 1st Security Parties or their
representatives in connection with the issuance and sale of the Shares, including records of account holders and depositors of the
Bank, or in connection with the Agent’s exercise of due diligence, except for those documents which were prepared by parties other
than the 1st Security Parties or their representatives were on the dates on which they were delivered, or will be on the dates on
which they are to be delivered, true, complete and correct in all material respects.

(x)       Upon consummation of the Conversion, the authorized, issued and outstanding equity capital of the Holding Company will
be within the range set forth in the General Disclosure Package and the Prospectus under the caption “Capitalization,” and no Shares
have been or will be issued and outstanding prior to the Closing Date; the Shares will have been duly and validly authorized for
issuance and, when issued and delivered by the Holding Company pursuant to the Plan against payment of the consideration
calculated as set forth in the Plan and in the Prospectus, will be duly and validly issued, fully paid and non-assessable, except for
shares purchased by the ESOP with funds borrowed from the Holding Company to the extent payment therefor in cash has not been
received by the Holding Company; except to the extent that subscription rights and priorities pursuant thereto exist pursuant to the
Plan, no preemptive rights exist with respect to the Shares; and the terms and provisions of the Shares will conform in all material
respects to the description thereof contained in the Registration Statement and the Prospectus. Upon the issuance of the Shares,
good title to the Shares will be transferred from the Holding Company to the purchasers thereof against payment therefor, subject to
such claims as may be asserted against the purchasers thereof by third-party claimants.

(y)       No default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default, on the
part of any of the 1st Security Parties in the due performance and observance of any term, covenant, agreement, obligation,
representation, warranty or condition of any indenture, mortgage, deed of trust, note, bank loan or credit agreement, lease, license,
Permit or any other instrument or agreement to which the 1st Security Parties or by which any of them or any of their respective
property is bound or affected which, in any such case, could have, individually or in the aggregate with other breaches, violations or
defaults, a Material Adverse Effect; each of such agreements is in full force and effect and is the legal, valid and binding agreement
of the applicable party and the other parties thereto, enforceable, to the knowledge of the 1st Security Parties, in accordance with its
terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the
rights of creditors generally and subject to general principles of equity and no other party to any such agreement has instituted or, to
the knowledge of the 1st Security Parties, threatened any action or proceeding wherein any of the 1st Security Parties or any
subsidiary thereof would or might be alleged to be in default thereunder where such action or proceeding, if determined adversely to
the 1st Security Parties, would have a Material Adverse Effect. There are no contracts or documents that are required to be filed as
exhibits to the Registration Statement or described in the Registration Statement, the Prospectus, or any Permitted Free Writing
Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration
Statement, the Prospectus, and any Permitted Free Writing Prospectus are fairly summarized. No party has sent or received any
notice indicating the termination of or intention to terminate any of the contracts or agreements referred to or described in the
Registration Statement, the Prospectus, or any Permitted Free Writing Prospectus, or filed as an exhibit to the Registration
Statement, and, to the knowledge of the 1st Security Parties, no such termination has been threatened by any party to any such
contract or agreement.


                                                            14
(z)      Subsequent to the date the Registration Statement is declared effective by the Commission and prior to the Closing Date,
except as otherwise may be indicated or contemplated in the Registration Statement, none of the 1st Security Parties has or will have
issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, except borrowings from the
same or similar sources indicated in the Prospectus in the ordinary course of its business.

(aa)      None of the 1st Security Parties maintains any “pension plan,” as defined in the Employee Retirement Income Security Act
of 1974, as amended (“ERISA”), none of the 1st Security Parties maintains a pension plan. In addition, (A) the employee benefit
plans, including employee welfare benefit plans, of the 1st Security Parties (the “Employee Plans”) have been operated in
compliance with the applicable provisions of ERISA, the Internal Revenue Code of 1986, as amended (the “Code”), all regulations,
rulings and announcements promulgated or issued thereunder and all other applicable laws and governmental regulations, (B) no
reportable event under Section 4043(c) of ERISA has occurred with respect to any Employee Plan of the 1st Security Parties for
which the reporting requirements have not been waived by the Pension Benefit Guaranty Corporation, (C) no prohibited transaction
under Section 406 of ERISA, for which an exemption does not apply, has occurred with respect to any Employee Plan of the 1st
Security Parties and (D) all Employee Plans that are group health plans have been operated in compliance with the group health plan
continuation coverage requirements of Section 4980B of the Code, except to the extent such noncompliance, reportable event or
prohibited transaction would not have, individually or in the aggregate, a Material Adverse Effect. There are no pending or, to the
knowledge of the 1st Security Parties, threatened, claims by or on behalf of any Employee Plan, by any employee or beneficiary
covered under any such Employee Plan or by any governmental authority, or otherwise involving such Employee Plans or any of
their respective fiduciaries (other than for routine claims for benefits).


                                                           15
(bb)       No approval of any regulatory or supervisory or other public authority is required in connection with the execution and
delivery of this Agreement or the issuance of the Shares, except for the approval of the Commission, the WDFI, the FDIC and the
FRB, and any necessary qualification, notification, registration or exemption under the securities or blue sky laws of the various
states in which the Shares are to be offered, and except as may be required under the rules and regulations of the FINRA.

(cc)      Moss-Adams LLP, which has certified the audited financial statements of the Bank included in the Prospectus, has
advised the 1st Security Parties in writing that they are, with respect to the 1st Security Parties, independent registered public
accountants within the applicable rules of the Public Company Accounting Oversight Board (United States).

(dd)      RP Financial, LC., which has prepared the Appraisal, has advised the 1 st Security Parties in writing that it is independent
of the 1st Security Parties within the meaning of the Conversion Regulations and is believed by the 1st Security Parties to be
experienced and expert in the valuation and the appraisal of business entities, including savings institutions, and the 1st Security
Parties believe that RP Financial, LC. has prepared the pricing information set forth in the Prospectus in accordance with the
requirements of the Conversion Regulations.

(ee)       The 1st Security Parties have timely filed or extended all required federal, state and local income and franchise tax returns
required to be filed; the 1st Security Parties have timely paid all taxes that have become due and payable in respect of such returns
and no deficiency has been asserted with respect thereto by any taxing authority. The 1st Security Parties have no knowledge of any
tax deficiency which has been or might be assessed against them which. All material tax liabilities have been adequately provided
for in the financial statements of the 1st Security Parties in accordance with GAAP. There are no transfer taxes or other similar fees
or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement by the Holding Company or with the issuance or sale by the Holding Company of the
Shares.

(ff)       Each of the 1st Security Parties is in compliance in all material respects with the applicable financial record-keeping and
reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, and the regulations and rules
thereunder. The Bank has established compliance programs and is in compliance in all material respects with the requirements of
the USA PATRIOT Act and all applicable regulations promulgated thereunder, and, except as disclosed in the Prospectus, there is
no charge, investigation, action, suit or proceeding before any court, regulatory authority or governmental entity or body pending or,
to the knowledge of the 1st Security Parties, threatened regarding the Bank’s compliance with the USA PATRIOT Act or any
regulations promulgated thereunder.

(gg)      All Sales Information (as defined in Section 9(a)) used by the Holding Company in connection with the Conversion that is
required by the WDFI, FDIC and FRB to be filed has been filed with and approved by the WDFI, FDIC and FRB.


                                                            16
(hh)      To the knowledge of the 1st Security Parties, none of the 1st Security Parties or the employees of the 1st Security Parties
has made any payment of funds of the 1st Security Parties as a loan for the purchase of the Shares or made any other payment of
funds prohibited by law, and no funds have been set aside to be used for any payment prohibited by law.

(ii)       The Company and the Bank carries, or is covered by, insurance in such amounts and covering such risks as is adequate
for the conduct of their respective businesses and the value for their respective properties as is customary for companies engaged in
similar industries.

(jj)       None of the 1st Security Parties has: (i) issued any securities within the last 18 months (except for notes to evidence bank
loans and reverse repurchase agreements or other liabilities in the ordinary course of business or as described in the Prospectus); (ii)
had any material dealings within the 12 months prior to the date hereof with any member of the FINRA, or any person related to or
associated with such member, other than discussions and meetings relating to the proposed Offering and routine purchases and sales
of United States government and agency and other securities in the ordinary course of business; (iii) entered into a financial or
management consulting agreement except as contemplated hereunder; and (iv) engaged any intermediary between the Agent and the
Holding Company or the Bank in connection with the offering of the Shares, and no person is being compensated in any manner for
such service.

(kk)      The 1st Security Parties have not relied upon the Agent or its legal counsel for any legal, tax or accounting advice in
connection with the Conversion.

(ll)       The records used by the 1st Security Parties to determine the identities of Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are accurate and complete in all material respects.

(mm)      None of the 1st Security Parties is, and neither intends to conduct business in a manner which would cause it to become,
an “investment company,” an entity “controlled” by an “investment company” or an “investment adviser” within the meaning of the
Investment Company Act of 1940, as amended, or the Investment Advisers Act of 1940, as amended.

(nn)       None of the 1st Security Parties or any properties owned or operated by any of the 1st Security Parties, is in violation of
or liable under any Environmental Law (as defined below), except for such violations or liabilities that, individually or in the
aggregate, would not have a Material Adverse Effect. There are no actions, suits or proceedings, or demands, claims, notices or
investigations (including, without limitation, notices, demand letters or requests for information from any environmental agency)
instituted or pending or, to the knowledge of the 1st Security Parties, threatened relating to the liability of any property owned or
operated by the 1st Security Parties under any Environmental Law. To the knowledge of the 1st Security Parties, there are no events
or circumstances that could form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private
party or governmental body or agency, against or affecting the 1st Security Parties relating to any Environmental Law. For
purposes of this subsection, the term “Environmental Law” means any federal, state, local or foreign law, statute, ordinance, rule,
regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any
regulatory authority relating to (i) the protection, preservation or restoration of the environment (including, without limitation, air,
water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other
natural resource), and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or
dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a
component.


                                                            17
(oo)       The 1st Security Parties maintain a system of internal accounting controls sufficient to provide reasonable assurance that
(A) transactions are executed in accordance with management’s general or specific authorizations, (B) transactions are recorded as
necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain
accountability for assets, (C) access to assets is permitted only in accordance with management’s general or specific authorization,
and (D) the recorded accounts or assets is compared with the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences. The books, records and accounts and systems of internal accounting control of the Holding
Company and its subsidiaries comply in all material respects with the requirements of Section 13(b)(2) of the Securities Exchange
Act of 1934, as amended (the “1934 Act”). The Holding Company has established and maintains “disclosure controls and
procedures” (as defined in Rule 13a-15(e) under the 1934 Act) that are effective in ensuring that the information it will be required
to disclose in the reports it files or submits under the 1934 Act is accumulated and communicated to the Holding Company’s
management (including the Holding Company’s chief executive officer and chief financial officer) in a timely manner and recorded,
processed, summarized and reported within the periods specified in the Commission’s rules and forms. To the knowledge of the 1st
Security Parties, Moss-Adams LLP and the Audit Committee of the Board of Directors have been advised of: (A) any significant
deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely
affect the Holding Company’s and the Bank’s ability to record, process, summarize, and report financial data; and (B) any fraud,
whether or not material, that involves management or other employees who have a significant role in the Holding Company’s or the
Bank’s internal accounting controls.

(pp)      All of the loans represented as assets of the 1st Security Parties in the Prospectus meet or are exempt from all
requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the
requirements of Regulation Z and 12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection, equal credit
opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a Material
Adverse Effect.


                                                           18
          (qq)       There are no affiliations or associations between any member of the FINRA and any of the 1st Security Parties’ officers,
          directors or 5% or greater security holders, except as set forth in the Registration Statement and the Prospectus.

          (rr)     The Holding Company has taken all actions necessary to obtain at the Closing Date a blue sky memorandum from Silver,
          Freedman & Taff, L.L.P.

          (ss)       Any certificates signed by an officer of any of the 1st Security Parties pursuant to the conditions of this Agreement and
          delivered to the Agent or their counsel that refers to this Agreement shall be deemed to be a representation and warranty by such
          West End Party to the Agent as to the matters covered thereby with the same effect as if such representation and warranty were set
          forth herein.

          (tt)       The statistical and market related data contained in any Permitted Free Writing Prospectus, the Prospectus and the
          Registration Statement are based on or derived from sources which the 1st Security Parties believe were reliable and accurate at the
          time they were filed with the Commission. No forward-looking statement (within the meaning of Section 27A of the 1933 Act and
          Section 21E of the 1934 Act) contained in the Registration Statement, the Prospectus, or any Permitted Free Writing Prospectus has
          been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.

          (uu)      At or prior to the Closing, the Company will have filed a Form 8-A/12g for the Securities and Exchange Shares under
          Section 12(g) of the Exchange Act.

          (vv)        The 1st Security Parties are in compliance in all material respects with all presently applicable provisions of the
          Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder
          (“ERISA”); no “reportable event” (as defined in ERISA) has occurred with respect to any “pension plan” (as defined in ERISA) for
          which the 1st Security Parties would have any liability; each of the 1st Security Parties has not incurred and does expect to incur
          liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “pension plan” or (ii) Sections 412 or
          4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the
          “Code”); and each “pension plan” for which the 1st Security Parties would have any liability that is intended to be qualified under
          Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act,
          that would cause the loss of such qualification.

           Section 5. Representations and Warranties of the Agent. The Agent represents and warrants to the Holding Company and the
Bank as follows:

          (a)      The Agent is a corporation and is validly existing in good standing under the laws of the State of New York with full
          power and authority to provide the services to be furnished to the 1st Security Parties hereunder.


                                                                     19
        (b)       The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been
        duly and validly authorized by all necessary action on the part of the Agent, and this Agreement has been duly and validly executed
        and delivered by the Agent and is a legal, valid and binding agreement of the Agent, enforceable in accordance with its terms, except
        as the legality, validity, binding nature and enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium,
        reorganization, conservatorship, receivership or other similar laws relating to or affecting the enforcement of creditors’ rights
        generally, and (ii) general equity principles regardless of whether such enforceability is considered in a proceeding in equity or at law.

        (c)        Each of the Agent and its employees, agents and representatives who shall perform any of the services hereunder shall be
        duly authorized and empowered, and shall have all licenses, approvals and permits necessary to perform such services; and the Agent
        is a registered selling agent in each of the jurisdictions in which the Shares are to be offered by the Holding Company in reliance upon
        the Agent as a registered selling agent as set forth in the blue sky memorandum prepared with respect to the Offering.

        (d)        The execution and delivery of this Agreement by the Agent, the consummation of the transactions contemplated hereby and
        compliance with the terms and provisions hereof will not conflict with, or result in a breach of, any of the terms, provisions or
        conditions of, or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, the
        articles of incorporation or bylaws of the Agent or any agreement, indenture or other instrument to which the Agent is a party or by
        which it or its property is bound.

        (e)      No approval of any regulatory or supervisory or other public authority is required in connection with the Agent’s execution
        and delivery of this Agreement, except as may have been received.

        (f)       There is no suit or proceeding or charge or action before or by any court, regulatory authority or government agency or body
        or, to the knowledge of the Agent, pending or threatened, which might materially adversely affect the Agent’s performance under this
        Agreement.

         Section 6. Covenants of the 1st Security Parties. The Holding Company and the Bank hereby jointly and severally covenant and
agree with the Agent as follows:

        (a)      The Holding Company will not, at any time after the date the Registration Statement is declared effective, file any
        amendment or supplement to the Registration Statement without providing the Agent and its counsel an opportunity to review such
        amendment or supplement or file any amendment or supplement to which amendment or supplement the Agent and its counsel shall
        reasonably object.

        (b)        If at any time following issuance of an Issuer-Represented Free Writing Prospectus there occurred or occurs an event or
        development as a result of which such Issuer Represented Free Writing Prospectus conflicted or would conflict with the information
        contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit
        to state a material fact necessary in order to make the statements therein, in light of the circumstances prevailing at the subsequent
        time, not misleading, the Holding Company has notified or will notify promptly the Agent so that any use of such Issuer-Represented
        Free Writing Prospectus may cease until it is amended or supplemented and the Holding Company has promptly amended or will
        promptly amend or supplement such Issuer-Represented Free Writing Prospectus to eliminate or correct such conflict, untrue
        statement or omission; provided, however, that this covenant shall not apply to any statements or omissions made in reliance upon and
        in conformity with information furnished in writing to the Holding Company by the Agent expressly for use therein.


                                                                       20
(c)       Each of the 1st Security Parties represents and agrees that, unless it obtains the prior consent of the Agent, and the Agent
represents and agrees that, unless it obtains the prior consent of the 1st Security Parties, it has not made and will not make any offer
relating to the offered Shares that would constitute an “issuer free writing prospectus” as defined in Rule 433 of the 1933 Act
Regulations, or that would constitute a “free writing prospectus,” as defined in Rule 405 of the 1933 Act Regulations, required to be
filed with the Commission. Any such free writing prospectus consented to by the 1st Security Parties and the Agent is hereinafter
referred to as a “Permitted Free Writing Prospectus.” The 1st Security Parties represent that it has treated or agrees that it will treat
each Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433 of the 1933 Act Regulations,
and has complied and will comply in all material respects with the requirements of Rule 433 of the 1933 Act Regulations applicable to
any Permitted Free Writing Prospectus, including timely Commission filing where required, legending and record keeping. The 1st
Security Parties need not treat any communication as a free writing prospectus if it is exempt from the definition of prospectus
pursuant to clause (a) of Section 2(a)(10) of the 1933 Act without regard to Rule 172 or 173 of the 1933 Act Regulations.

(d)       The 1st Security Parties will not, at any time after the Form AC is approved by the WDFI and the FDIC and any other
applicable regulator, file any amendment or supplement to such Form AC without providing the Agent and its counsel an opportunity
to review such amendment or supplement or file any amendment or supplement to which amendment or supplement the Agent and its
counsel shall reasonably object.

(e)      The Holding Company will not, at any time after the Holding Company Application is approved by the FRB and any other
applicable regulator, file any amendment or supplement to such Holding Company Application without providing the Agent and its
counsel an opportunity to review such amendment or supplement or file any amendment or supplement to which amendment or
supplement the Agent and its counsel shall reasonably object.

(f)        The 1st Security Parties will use their best efforts to cause any post-effective amendment to the Registration Statement to be
declared effective by the Commission and any post-approval amendment to the Form AC or the Holding Company Application to be
approved by the WDFI, FDIC or FRB, as applicable, or any other applicable regulator and will immediately upon receipt of any
information concerning the events listed below notify the Agent: (i) when the Registration Statement, as amended, has become
effective; (ii) when the Form AC or the Holding Company Application, as amended, has been approved by the WDFI, FDIC or FRB,
as applicable, or any other applicable regulator; (iii) of any comments from the Commission, the WDFI, FDIC or FRB or any other
applicable regulator or any other governmental entity with respect to the Conversion contemplated by this Agreement; (iv) of the
request by the Commission, the WDFI, FDIC or FRB or any other governmental entity for any amendment or supplement to the
Registration Statement, the Form AC, Holding Company Application or for additional information; (v) of the issuance by the
Commission, the WDFI, FDIC or FRB or any other governmental entity of any order or other action suspending the Conversion or the
use of the Registration Statement or the Prospectus or any other filing of the Holding Company or the Bank under the Conversion
Regulations, or other applicable law, or the threat of any such action; (vi) of the issuance by the Commission, the WDFI, FDIC or
FRB or any authority of any stop order suspending the effectiveness of the Registration Statement or of the initiation or threat of
initiation or threat of any proceedings for that purpose; or (vii) of the occurrence of any event mentioned in paragraph (h) below. The
1st Security Parties will make every reasonable effort (i) to prevent the issuance by the Commission, the WDFI, FDIC or FRB or any
other federal or state authority of any such order and, (ii) if any such order shall at any time be issued, to obtain the lifting thereof at
the earliest possible time.


                                                                21
(g)        The 1st Security Parties will deliver to the Agent and to its counsel as many conformed copies of the Registration Statement,
the Form AC or the Holding Company Application, as originally filed and of each amendment or supplement thereto, including all
exhibits, as the Agent may reasonably request.

(h)      The 1st Security Parties will furnish to the Agent, from time to time during the period when the Prospectus (or any later
prospectus related to this offering) is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of such
Prospectus (as amended or supplemented) as the Agent may reasonably request for the purposes contemplated by the 1933 Act, the
1933 Act Regulations, the 1934 Act or the rules and regulations promulgated under the 1934 Act (the “1934 Act Regulations”). The
Holding Company authorizes the Agent to use the Prospectus (as amended or supplemented, if amended or supplemented) in any
lawful manner contemplated by the Plan in connection with the sale of the Shares by the Agent.

(i)       The 1st Security Parties will comply with any and all material terms, conditions, requirements and provisions with respect to
the Offering imposed by the Commission, the FRB or any other applicable regulator or the Conversion Regulations, and by the 1933
Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations to be complied with prior to or subsequent to the Closing
Date and when the Prospectus is required to be delivered, and during such time period the 1st Security Parties will comply, at their
own expense, with all material requirements imposed upon them by the Commission, the WDFI, FDIC or FRB or any other applicable
regulator or the Conversion Regulations, and by the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations,
including, without limitation, Rule 10b-5 under the 1934 Act, in each case as from time to time in force, so far as necessary to permit
the continuance of sales or dealing in the Common Shares during such period in accordance with the provisions hereof and the
Prospectus. The Holding Company will comply in all material respects with all undertakings contained in the Registration Statement.


                                                              22
(j)       If, at any time during the period when the Prospectus is required to be delivered, any event relating to or affecting any of the
1st Security Parties shall occur, as a result of which it is necessary or appropriate, in the opinion of counsel for the Holding Company
and in the reasonable opinion of the Agent’s counsel, to amend or supplement the Registration Statement or Prospectus in order to
make the Registration Statement or Prospectus not misleading in light of the circumstances existing at the time the Prospectus is
delivered to a purchaser, the Holding Company will immediately so inform the Agent and prepare and file, at its own expense, with
the Commission WDFI, FDIC and the FRB or any other applicable regulator, and furnish to the Agent a reasonable number of copies,
of an amendment or amendments of, or a supplement or supplements to, the Registration Statement or Prospectus (in form and
substance reasonably satisfactory to the Agent and its counsel after a reasonable time for review) which will amend or supplement the
Registration Statement or Prospectus so that as amended or supplemented it will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading. For the purpose of this Agreement, the Holding Company will timely furnish
to the Agent such information with respect to the 1st Security Parties as the Agent may from time to time reasonably request.

(k)        The 1st Security Parties will take all necessary actions in cooperating with the Agent and furnish to whomever the Agent
may direct such information as may be required to qualify or register the Shares for offering and sale by the Holding Company or to
exempt such Shares from registration, or to exempt the Holding Company as a broker-dealer and its officers, directors and employees
as broker-dealers or agents under the applicable securities or blue sky laws of such jurisdictions in which the Shares are required under
the Conversion Regulations to be sold or as the Agent and the Holding Company may reasonably agree upon; provided, however, that
the Holding Company shall not be obligated to file any general consent to service of process, to qualify to do business in any
jurisdiction in which it is not so qualified, or to register its directors or officers as brokers, dealers, salesmen or agents in any
jurisdiction. In each jurisdiction where any of the Shares shall have been qualified or registered as above provided, the Holding
Company will make and file such statements and reports in each fiscal period as are or may be required by the laws of such
jurisdiction.

(l)        The liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders will be duly
established and maintained in accordance with the requirements of the Conversion Regulations, and such Eligible Account Holders
and Supplemental Eligible Account Holders who continue to maintain their savings accounts in the Bank will have an inchoate
interest in their pro rata portion of the liquidation account, which shall have a priority superior to that of the holders of the Common
Stock in the event of a complete liquidation of the Bank.


                                                               23
(m)       The Holding Company will not sell or issue, contract to sell or otherwise dispose of, for a period of 90 days after the Closing
Date, without the Agent’s prior written consent, any of its shares of their common stock, other than the Common Shares or other than
in connection with any plan or arrangement described in the Prospectus.

(n)       The Holding Company will register its common stock under Section 12(g) of the 1934 Act. The Holding Company shall
maintain the effectiveness of such registration for not less than three years from the time of effectiveness or such shorter period as may
be required by the WDFI, FDIC or FRB or any other applicable regulator.

(o)       During the period during which the Common Shares are registered under the 1934 Act or for three years from the date
hereof, whichever period is greater, the Holding Company will furnish to its shareholders as soon as practicable after the end of each
fiscal year an annual report of the Holding Company (including a consolidated balance sheet and statements of consolidated income,
shareholders’ equity and cash flows of the Holding Company and its subsidiaries as at the end of and for such year, certified by
independent registered public accountants in accordance with Regulation S-X under the 1933 Act and the 1934 Act) and make
available as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the first fiscal
quarter ending after the effective time of the Registration Statement) financial information of the Holding Company and is subsidiaries
for such quarter in reasonable detail.

(p)       During the period of three years from the date hereof, the Holding Company will furnish to the Agent: (i) as soon as
practicable after such information is publicly available, a copy of each report of the Holding Company furnished to or filed with the
Commission under the 1934 Act or any national securities exchange or system on which any class of securities of the Holding
Company is listed or quoted (including, but not limited to, reports on Forms 10-K, 10-Q and 8-K and all proxy statements and annual
reports to stockholders): (ii) a copy of each other non-confidential report of the Holding Company mailed to its shareholders or filed
with the Commission, the FRB or any other supervisory or regulatory authority or any national securities exchange or system on
which any class of securities of the Holding Company is listed or quoted, each press release and material news items and additional
documents and information with respect to the Holding Company or the Bank as the Agent may reasonably request; and (iii) from
time to time, such other nonconfidential information concerning the Holding Company or the Bank as the Agent may reasonably
request.

(q)      The Holding Company and the Bank will use the net proceeds from the sale of the Shares in the manner set forth in the
Prospectus under the caption “Use of Proceeds.”

(r)        The Holding Company will make generally available to its security holders as soon as practicable, but not later than 60 days
after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the 1933
Act Regulations) covering a twelve-month period beginning not later than the first day of the Holding Company’s fiscal quarter next
following the effective date (as defined in such Rule 158) of the Registration Statement.


                                                               24
(s)       [Reserved]

(t)       The Holding Company will maintain appropriate arrangements for depositing all funds received from persons mailing or
delivering subscriptions for or orders to purchase Shares in the Offering with the Bank, on an interest-bearing basis at the rate
described in the Prospectus until the Closing Date and satisfaction of all conditions precedent to the release of the Holding Company’s
or the Bank’s obligation to refund payments received from persons subscribing for or ordering Shares in the Offering in accordance
with the Plan and as described in the Prospectus or until refunds of such funds have been made to the persons entitled thereto or
withdrawal authorizations canceled in accordance with the Plan and as described in the Prospectus. The Holding Company will
maintain such records of all funds received to permit the funds of each subscriber to be separately insured by the FDIC (to the
maximum extent allowable) and to enable the Holding Company to make the appropriate refunds of such funds in the event that such
refunds are required to be made in accordance with the Plan and as described in the Prospectus.

(u)      The Holding Company will report the use of proceeds of the Offering on its first periodic report filed pursuant to Sections
13(a) and 15(d) of the Exchange Act and on any subsequent periodic reports as may be required pursuant to Rule 463 of the Securities
Act Regulations.

(v)   The Holding Company will promptly take all necessary action to register as a savings and loan holding company under the
BHCA.

(w)       The Holding Company and the Bank will take such actions and furnish such information as are reasonably requested by the
Agent in order for the Agent to ensure compliance with FINRA Rule 5130.

(x)      None of the 1st Security Parties will amend the Plan without the consent of the Agent, which consent shall not be
unreasonably withheld.

(y)       The Holding Company shall assist the Agent, if necessary, in connection with the allocation of the Shares in the event of an
oversubscription and shall provide the Agent with any information necessary to assist the Holding Company in allocating the Shares
in such event and such information shall be accurate and reliable in all material respects.

(z)        Prior to the Closing Date, the Holding Company will inform the Agent of any event or circumstances of which it is aware as
a result of which the Registration Statement and/or Prospectus, as then amended or supplemented, would contain an untrue statement
of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading.

(aa)      The Holding Company will not deliver the Shares until the 1st Security Parties have satisfied or caused to be satisfied each
condition set forth in Section 8 hereof, unless such condition is waived in writing by the Agent.


                                                             25
         (bb)      Subsequent to the date the Registration Statement is declared effective by the Commission and prior to the Closing Date,
         except as otherwise may be indicated or contemplated therein or set forth in an amendment or supplement thereto, none of the 1st
         Security Parties will have: (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money,
         except borrowings from the same or similar sources indicated in the Prospectus in the ordinary course of its business, or (ii) entered
         into any transaction which is material in light of the business and properties of the 1st Security Parties, taken as a whole.

         (cc)      Until the Closing Date, the 1st Security Parties will conduct their businesses in compliance in all material respects with all
         applicable federal and state laws, rules, regulations, decisions, directives and orders, including all decisions, directives and orders of
         the Commission, the FDIC, the WDFI and the FRB.

         (dd)    The facts and representations provided to Silver, Freedman & Taff, L.L.P. by the 1st Security Parties and upon which Silver,
         Freedman & Taff, L.L.P. will base its opinion under Section 8(c)(1) are and will be truthful, accurate and complete.

         (ee)      The 1st Security Parties will not distribute any offering material in connection with the Offering except for the Prospectus
         and any supplemental sales material that has been filed with the Registration Statement and the Form AC and authorized for use by the
         Commission, the WDFI, FDIC and the FRB or any other applicable regulator. The information contained in any supplemental sales
         material (in addition to the supplemental sales material filed as an exhibit to the Registration Statement and the Form AC) shall not
         conflict with the information contained in the Registration Statement and the Prospectus.

         (ff)     The Holding Company will comply with all applicable provisions of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank
         Wall Street Reform and Consumer Protection Act and all applicable rules, regulations, guidelines and interpretations promulgated
         thereunder by the Commission.

         (gg)      The 1st Security Parties will not, prior to the Closing Time, incur any liability or obligation, direct or contingent, or enter
         into any material transaction, other than in the ordinary course of business consistent with past practice, except as contemplated by the
         Prospectus.

         (hh)     The 1st Security Parties will use all reasonable efforts to comply with, or cause to be complied with, the conditions
         precedent to the several obligations of the Agent specified in Section 8.

          Section 7. Payment of Expenses. Whether or not the Conversion is completed or the sale of the Shares by the Holding Company is
consummated, the 1st Security Parties jointly and severally agree to pay or reimburse the Agent for: (a) all filing fees in connection with all
filings related to the Conversion with the FINRA; (b) any stock issue or transfer taxes which may be payable with respect to the sale of the
Shares; (c) subject to Section 2(d), all expenses of the Conversion, including but not limited to the Agent’s attorneys’ fees and expenses, blue
sky fees, transfer agent, registrar and other agent charges, fees relating to auditing and accounting or other advisors and costs of printing all
documents necessary in connection with the Offering. In the event the Holding Company is unable to sell the minimum number of shares
necessary to complete the Conversion or the Conversion is terminated or otherwise abandoned, the 1st Security Parties shall promptly
reimburse the Agent in accordance with Section 2(d) hereof.


                                                                        26
         Section 8. Conditions to the Agent’s Obligations. The obligations of the Agent hereunder, as to the Shares to be delivered at the
Closing Date, are subject, to the extent not waived in writing by the Agent, to the condition that all representations and warranties of the 1st
Security Parties herein are, at and as of the commencement of the Offering and at and as of the Closing Date, true and correct in all material
respects, the condition that the 1st Security Parties shall have performed all of its obligations hereunder to be performed on or before such
dates, and to the following further conditions:

        (a)       At the Closing Date, the 1st Security Parties shall have conducted the Conversion in all material respects in accordance with
        the Plan, the Conversion Regulations (except to the extent waived or otherwise approved by the WDFI, FDIC, FRB and any other
        applicable regulator), and all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and
        provisions precedent to the Conversion imposed upon them by the FRB or any other applicable regulator.

        (b)        The Registration Statement shall have been declared effective by the Commission and the Form AC and Holding Company
        Application shall have been approved by the WDFI and the FDIC, and the Holding Company Application shall have been approved
        by the FRB, in each case not later than 5:30 p.m. on the date of this Agreement, or with the Agent’s consent at a later time and date;
        and at the Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued under the
        1933 Act or proceedings therefore initiated or threatened by the Commission or any state authority, and no order or other action
        suspending the authorization of the Prospectus or the consummation of the Conversion shall have been issued or proceedings therefore
        initiated or, to the 1st Security Parties’ knowledge, threatened by the Commission, the FRB, the WDFI, the FDIC or any other state
        authority.

        (c)      At the Closing Date, the Agent shall have received the favorable opinion, dated as of the Closing Date and addressed to the
        Agent and for its benefit, of Silver, Freedman & Taff, L.L.P., special counsel for the Holding Company and the Bank, in form and
        substance as attached hereto as Exhibit C .

        (d)       At the Closing Date, the Agent shall have received the favorable opinion, dated as of the Closing Date and addressed to the
        Agent and for its benefit, of Luse Gorman Pomerenk & Schick, PC, special counsel for the Agent, in form and substance as attached
        hereto as Exhibit D .

        (e)       A blue sky memorandum from Silver, Freedman & Taff, L.L.P. relating to the Offering, including Agent’s participation
        therein, shall have been furnished prior to the mailing of the Prospectus to the Holding Company with a copy thereof addressed to
        Agent or upon which Silver, Freedman & Taff, L.L.P. shall state the Agent may rely. The blue sky memorandum will relate to the
        necessity of obtaining or confirming exemptions, qualifications or the registration of the Shares under applicable state securities law.


                                                                       27
(f)         At the Closing Date, the Agent shall receive a certificate of the Chief Executive Officer and the Chief Financial Officer of
each of the 1st Security Parties in form and substance reasonably satisfactory to the Agent’s Counsel, dated as of such Closing Date, to
the effect that: (i) they have carefully examined the Prospectus and, in their opinion, at the time the Prospectus became authorized for
final use, the Prospectus did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) since the date the
Prospectus became authorized for final use, no event has occurred which should have been set forth in an amendment or supplement to
the Prospectus which has not been so set forth, including specifically, but without limitation, any material adverse change in the
condition, financial or otherwise, or in the earnings, capital, properties or business of the 1st Security Parties and the conditions set
forth in this Section 8 have been satisfied; (iii) since the respective dates as of which information is given in the Registration
Statement, the General Disclosure Package and the Prospectus, there has been no material adverse change in the condition, financial or
otherwise, or in the earnings, capital, properties or business of the 1st Security Parties independently, or of the 1st Security Parties
considered as one enterprise, whether or not arising in the ordinary course of business; (iv) the representations and warranties in
Section 4 are true and correct with the same force and effect as though expressly made at and as of the Closing Date; (v) the 1st
Security Parties complied in all material respects with all agreements and satisfied all conditions on their part to be performed or
satisfied at or prior to the Closing Date and will comply in all material respects with all obligations to be satisfied by them after the
Closing Date; (vi) no stop order suspending the effectiveness of the Registration Statement has been initiated or, to the best knowledge
of the 1st Security Parties, threatened by the Commission or any state authority; (vii) no order suspending the Conversion, the
Offering or the use of the Prospectus has been issued and no proceedings for that purpose are pending or, to the best knowledge of the
1st Security Parties, threatened by the FRB, the WDFI, FDIC or any state authority; and (viii) to the best knowledge of the 1st
Security Parties, no person has sought to obtain review of the final action of the WDFI, FDIC, FRB or any other applicable regulator
approving the Conversion.

(g)       None of the 1st Security Parties shall have sustained, since the date of the latest financial statements included in the
Registration Statement, the General Disclosure Package and Prospectus, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth in the Registration Statement and the Prospectus, and since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there shall not have been any Material Adverse Effect that is in
the Agent’s reasonable judgment sufficiently material and adverse as to make it impracticable or inadvisable to proceed with the
Offering or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus.


                                                              28
(h)        Prior to and at the Closing Date: (i) in the reasonable opinion of the Agent, there shall have been no material adverse change
in the financial condition, results of operations or business of the 1st Security Parties considered as one enterprise, from that as of the
latest dates as of which such condition is set forth in the Prospectus, other than transactions referred to or contemplated therein; (ii)
none of the 1st Security Parties shall have received from the WDFI, FDIC or the FRB any direction (oral or written) to make any
material change in the method of conducting their business with which it has not complied (which direction, if any, shall have been
disclosed to the Agent) or which materially and adversely would affect the financial condition, results of operations or business of the
1st Security Parties taken as a whole; (iii) none of the 1st Security Parties shall have been in default (nor shall an event have occurred
which, with notice or lapse of time or both, would constitute a default) under any provision of any agreement or instrument relating to
any outstanding indebtedness; (iv) no action, suit or proceeding, at law or in equity or before or by any federal or state co mmission,
board or other administrative agency, not disclosed in the Prospectus, shall be pending or, to the knowledge of the 1st Security Parties,
threatened against the any of the 1st Security Parties or affecting any of their properties wherein an unfavorable decision, ruling or
finding would materially and adversely affect the financial condition, results of operations or business of the 1st Security Parties taken
as a whole; and (v) the Shares shall have been qualified or registered for offering and sale or exempted therefrom under the securities
or blue sky laws of the jurisdictions as the Agent shall have reasonably requested and as agreed to by the 1st Security Parties.

(i)        Concurrently with the execution of this Agreement, the Agent shall receive a letter from Moss-Adams LLP, dated as of the
date hereof and addressed to the Agent: (i) confirming that Moss-Adams LLP is a firm of independent registered public accountants
within the applicable rules of the Public Company Accounting Oversight Board (United States) and stating in effect that in its opinion
the consolidated financial statements and related notes of the Bank as of June 30, 2011 and December 31, 2010 and 2009, and for the
six months ended June 30, 2011 and 2010 each of the years in the two-year period ended December 31, 2010, and covered by their
opinion included in the Prospectus, and any other more recent unaudited financial statements included in the Prospectus comply as to
form in all material respects with the applicable accounting requirements and related published rules and regulations of the FRB and
any other applicable regulator and the 1933 Act; (ii) stating in effect that, on the basis of certain agreed upon procedures (but not an
audit in accordance with standards of the Public Company Accounting Oversight Board (United States)) consisting of a reading of the
latest available consolidated financial statements of the Bank prepared by the Bank, a reading of the minutes of the meetings of the
Boards of Directors of each of the 1st Security Parties and consultations with officers of the Bank responsible for financial and
accounting matters, nothing came to their attention which caused them to believe that: (A) the audited consolidated financial
statements and any unaudited interim financial statements included in the Prospectus are not in conformity with the 1933 Act,
applicable accounting requirements of the FRB, WDFI and FDIC and accounting principles generally accepted in the United States of
America applied on a basis substantially consistent with that of the audited consolidated financial statements included in the
Prospectus; or (B) during the period from the date of the latest consolidated financial statements included in the Prospectus to a
specified date not more than three business days prior to the date of the Prospectus, except as has been described in the Prospectus,
there was any increase in long-term debt of the Bank, other than normal deposit fluctuations for the Bank; or (C) there was any
decrease in the total assets, total loans, the allowance for loan losses, total deposits or total equity of the Bank at the date of such letter
as compared with amounts shown in the latest balance sheet included in the Prospectus; and (iii) stating that, in addition to the audit
referred to in their opinion included in the Prospectus and the performance of the procedures referred to in clause (ii) of this subsection
(h), they have compared with the general accounting records of the Bank, which are subject to the internal controls of the Bank, the
accounting system and other data prepared by the Bank, directly from such accounting records, to the extent specified in such letter,
such amounts and/or percentages set forth in the Prospectus as the Agent may reasonably request; and they have found such amounts
and percentages to be in agreement therewith (subject to rounding).


                                                                 29
(j)         At the Closing Date, the Agent shall receive a letter dated the Closing Date, addressed to the Agent, confirming the
statements made by Moss-Adams LLP in the letter delivered by it pursuant to subsection (i) of this Section 8, the “specified date”
referred to in clause (i) of subsection (h) to be a date specified in the letter required by this subsection (h) which for purposes of such
letter shall not be more than three business days prior to the Closing Date.

(k)       At the Closing Date, the Holding Company shall receive a letter from RP Financial, LC., dated the Closing Date (i)
confirming that said firm is independent of the 1st Security Parties and is experienced and expert in the area of corporate appraisals
within the meaning of the Conversion Regulations, (ii) stating in effect that the Appraisal prepared by such firm complies in all
material respects with the applicable requirements of Title 12 of the Code of Federal Regulations, and (iii) further stating that its
opinion of the aggregate pro forma market value of the Holding Company including the Bank, as most recently updated, remains in
effect.

(l)       At or prior to the Closing Date, the Agent shall receive: (i) a copy of the letters from the WDFI and the FDIC approving the
Form AC, from the FRB approving the Holding Company Application and authorizing the use of the Prospectus; (ii) confirmation
that the Commission declared the Registration Statement effective; (iii) a certificate from the WDFI evidencing the good standing of
the Bank; (v) a certificate from the FDIC evidencing the Bank’s insurance of accounts; (vi) a certificate from the FHLB-Seattle
evidencing the Bank’s membership therein; (vii) a certificate from the Washington Secretary of State evidencing the good standing of
the Company and (viii) such other documents and certificates as the Agent may reasonably request.

(m)        Subsequent to the date hereof, there shall not have occurred any of the following; (i) a suspension or limitation in trading in
securities generally on the New York Stock Exchange (the “NYSE”) or in the over-the-counter market, or quotations halted generally
on the Nasdaq Stock Market, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities
have been required by either of such exchanges or the Nasdaq Stock Market or by order of the Commission or any other governmental
authority; (ii) a general moratorium on the operations of commercial banks, or federal savings and loan associations or a general
moratorium on the withdrawal of deposits from commercial banks or federal savings and loan associations declared by federal or state
authorities; (iii) the engagement by the United States in hostilities which have resulted in the declaration, on or after the date hereof, of
a national emergency or war or a material decline in the price of equity or debt securities, if the effect of such declaration or decline, in
the Agent’s reasonable judgment, makes it impracticable or inadvisable to proceed with the Offering or the delivery of the Shares on
the terms and in the manner contemplated in the Registration Statement and the Prospectus.


                                                                30
(n)       At or prior to the Closing Date, counsel to the Agent shall have been furnished with such documents and opinions as they
may reasonably require for the purpose of enabling them to pass upon the sale of the Shares as herein contemplated and related
proceedings or in order to evidence the occurrence or completeness of any of the representations or warranties, or the fulfillment of
any of the conditions, herein contained; and all proceedings taken by the 1st Security Parties in connection with the sale of the Shares
as herein contemplated shall be satisfactory in form and substance to the Agent or its counsel.

(o)       All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are
reasonably satisfactory in form and substance to the Agent or to counsel for the Agent. Any certificate signed by an officer of any of
the 1st Security Parties and delivered to the Agent or to counsel for the Agent shall be deemed a representation and warranty by such
West End Party to the Agent as to the statements made therein.

Section 9. Indemnification.

(a)        The Holding Company and the Bank jointly and severally agree to indemnify and hold harmless the Agent, its officers and
directors, employees and agents, and each person, if any, who controls the Agent within the meaning of Section 15 of the 1933 Act or
Section 20(a) of the 1934 Act, against any and all loss, liability, claim, damage or expense whatsoever (including, but not limited to,
settlement expenses), joint or several, that the Agent or any of them may suffer or to which the Agent and any such persons may
become subject under all applicable federal or state laws or otherwise, and to promptly reimburse the Agent and any such persons
upon written demand for any expense (including all fees and disbursements of counsel) incurred by the Agent or any of them in
connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the
extent such losses, claims, damages, liabilities or actions: (i) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any amendment or supplement thereto), the General Disclosure
Package, any Issuer-Represented Limited-Use Free Writing Prospectus, any Issuer Represented General Free Writing Prospectus,
preliminary or final Prospectus (or any amendment or supplement thereto), the Form AC (or any amendment or supplement thereto),
the Holding Company Application (or any amendment or supplement thereto) or any instrument or document executed by the 1st
Security Parties or based upon written information supplied by the Holding Company filed in any state or jurisdiction to register or
qualify any or all of the Shares or to claim an exemption therefrom or provided to any state or jurisdiction to exempt the 1st Security
Parties as a broker-dealer or its officers, directors and employees as broker-dealers or agents, under the securities laws thereof
(collectively, the “Blue Sky Application”), or any document, advertisement, oral statement or communication (“Sales Information”)
prepared, made or executed by or on behalf of the 1st Security Parties with its consent and based upon written or oral information
furnished by or on behalf of the 1st Security Parties, whether or not filed in any jurisdiction, in order to qualify or register the Shares
or to claim an exemption therefrom under the securities laws thereof; (ii) arise out of or are based upon the omission or alleged
omission to state in any of the foregoing documents or information a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) arise from any theory of
liability whatsoever relating to or arising from or based upon the Registration Statement (or any amendment or supplement thereto),
preliminary or final Prospectus (or any amendment or supplement thereto), the General Disclosure Package, any Issuer-Represented
Limited-Use Free Writing Prospectus, any Issuer–Represented General Free Writing Prospectus, the Form AC (or any amendment or
supplement thereto) the Holding Company Application (or any amendment or supplement thereto), any Blue Sky Application or Sales
Information or other documentation distributed in connection with the Conversion; provided, however, that no indemnification is
required under this paragraph (a) to the extent such losses, claims, damages, liabilities or actions arise out of or are based upon any
untrue material statement or alleged untrue material statement in, or material omission or alleged material omission from, the
Registration Statement (or any amendment or supplement thereto), preliminary or final Prospectus (or any amendment or supplement
thereto), the General Disclosure Package, any Issuer-Represented Limited-Use Free Writing Prospectus, any Issuer-Represented
General Free Writing Prospectus, the Form AC, the Holding Company Application, any Blue Sky Application or Sales Information
made in reliance upon and in conformity with information furnished in writing to the Holding Company, by the Agent or its counsel
regarding the Agent, and provided, that it is agreed and understood that the only information furnished in writing to the Holding
Company, by the Agent regarding the Agent is set forth in the Prospectus in the first sentence of the first paragraph under the caption
“The Conversion and Stock Offering; Marketing Arrangements;” and, provided further, that such indemnification shall be limited to
the extent prohibited by the Commission, the FDIC, the WDFI and the FRB.


                                                               31
(b)        The Agent agrees to indemnify and hold harmless the 1st Security Parties, their directors and officers and each person, if
any, who controls the Holding Company or the Bank within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934
Act against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement expenses), joint or
several, which they, or any of them, may suffer or to which they, or any of them may become subject under all applicable federal and
state laws or otherwise, and to promptly reimburse the 1st Security Parties, and any such persons upon written demand for any
expenses (including reasonable fees and disbursements of counsel) incurred by them, or any of them, in connection with investigating,
preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims,
damages, liabilities or actions: (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment or supplement thereto), the Form AC (or any amendment or supplement
thereto), the Holding Company Application, the preliminary or final Prospectus (or any amendment or supplement thereto), any Blue
Sky Application or Sales Information, (ii) are based upon the omission or alleged omission to state in any of the foregoing documents
a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or (iii) arise from any theory of liability whatsoever relating to or arising from or based upon the
Registration Statement (or any amendment or supplement thereto), preliminary or final Prospectus (or any amendment or supplement
thereto), the Form AC (or any amendment or supplement thereto), the Holding Company Application, or any Blue Sky Application or
Sales Information or other documentation distributed in connection with the Offering; provided, however, that the Agent’s obligations
under this Section 9(b) shall exist only if and only to the extent that such untrue statement or alleged untrue statement was made in, or
such material fact or alleged material fact was omitted from, the Registration Statement (or any amendment or supplement thereto),
the preliminary or final Prospectus (or any amendment or supplement thereto), the Form AC (or any amendment or supplement
thereto), the Holding Company Application, any Blue Sky Application or Sales Information in reliance upon and in conformity with
information furnished in writing to the Holding Company or the Bank, by the Agent or its counsel regarding the Agent, and provided,
that it is agreed and understood that the only information furnished in writing to the Holding Company or the Bank, by the Agent
regarding the Agent is set forth in the Prospectus in the first sentence of the first paragraph under the caption “The Conversion and
Stock Offering; Marketing Arrangements.”


                                                              32
(c)       Each indemnified party shall give prompt written notice to each indemnifying party of any action, proceeding, claim
(whether commenced or threatened), or suit instituted against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve it from any liability which it may have on account of this Section 9 or otherwise. An
indemnifying party may participate at its own expense in the defense of such action. In addition, if it so elects within a reasonable
time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume
defense of such action with counsel chosen by it and approved by the indemnified parties that are defendants in such action, unless
such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them that
are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such
action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter
in connection with such action, proceeding or claim, other than reasonable costs of investigation. In no event shall the indemnifying
parties be liable for the fees and expenses of more than one separate firm of attorneys (and any special counsel that said firm may
retain) for each indemnified party in connection with any one action, proceeding or claim or separate but similar or related actions,
proceedings or claims in the same jurisdiction arising out of the same general allegations or circumstances.


                                                              33
         Section 10. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification
provided for in Section 9 is due in accordance with its terms but is for any reason held by a court to be unavailable from the 1st Security Parties
or the Agent, the 1st Security Parties and the Agent shall contribute to the aggregate losses, claims, damages and liabilities (including any
investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding, but
after deducting any contribution received by the 1st Security Parties or the Agent from persons other than the other parties thereto, who may
also be liable for contribution) in such proportion so that the Agent is responsible for that portion represented by the percentage that the fees
paid to the Agent pursuant to Section 2 of this Agreement (not including expenses) bears to the gross proceeds received by the Holding
Company from the sale of the Shares in the Offering, and the 1st Security Parties shall be responsible for the balance. If, however, the
allocation provided above is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only such relative fault of the 1st Security Parties on the one hand and
the Agent on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions,
proceedings or claims in respect thereto), but also the relative benefits received by the 1st Security Parties on the one hand and the Agent on the
other from the Offering (before deducting expenses). The relative fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied
by the 1st Security Parties on the one hand or the Agent on the other and the parties’ relative intent, good faith, knowledge, access to
information and opportunity to correct or prevent such statement or omission. The 1st Security Parties and the Agent agree that it would not be
just and equitable if contribution pursuant to this Section 10 were determined by pro-rata allocation or by any other method of allocation which
does not take into account the equitable considerations referred to above in this Section 10. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions, proceedings or claims in respect thereof) referred to above in this
Section 10 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action, proceeding or claim. It is expressly agreed that the Agent shall not be liable for any loss, liability,
claim, damage or expense or be required to contribute any amount pursuant to Section 9(b) or this Section 10 which in the aggregate exceeds
the amount paid (excluding reimbursable expenses) to the Agent under this Agreement. It is understood that the above stated limitation on the
Agent’s liability is essential to the Agent and that the Agent would not have entered into this Agreement if such limitation had not been agreed
to by the parties to this Agreement. No person found guilty of any fraudulent misrepresentation (within the meaning of Section 11(f) of the
1933 Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. The obligations of
the 1st Security Parties under this Section 10 and under Section 9 shall be in addition to any liability which the Holding Company and the
Agent may otherwise have. For purposes of this Section 10, each of the Agent’s and the 1st Security Parties’ officers and directors and each
person, if any, who controls the Agent or any of the 1st Security Parties within the meaning of the 1933 Act and the 1934 Act shall have the
same rights to contribution as the Agent on the one hand, or, the 1st Security Parties on the other hand. Any party entitled to contribution,
promptly after receipt of notice of commencement of any action, suit, claim or proceeding against such party in respect of which a claim for
contribution may be made against another party under this Section 10, will notify such party from whom contribution may be sought, but the
omission to so notify such party shall not relieve the party from whom contribution may be sought from any other obligation it may have
hereunder or otherwise than under this Section 10.


                                                                        34
          Section 11. Termination. The Agent may terminate this Agreement by giving the notice indicated below in Section 12 at any time
after this Agreement becomes effective as follows:

        (a)        If any domestic or international event or act or occurrence has materially disrupted the United States securities markets such
        as to make it, in the Agent’s reasonable opinion, impracticable to proceed with the offering of the Shares; or if trading on the NYSE
        shall have suspended (except that this shall not apply to the imposition of NYSE trading collars imposed on program trading); or if the
        United States shall have become involved in a war or major hostilities or escalation thereof; or if a general banking moratorium has
        been declared by a state or federal authority which has a material effect on the 1st Security Parties on a consolidated basis; or if a
        moratorium in foreign exchange trading by major international banks or persons has been declared; or if there shall have been a
        material adverse change in the financial condition, results of operations or business of any of the 1st Security Parties, or if any of the
        1st Security Parties shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or
        other calamity or malicious act, whether or not said loss shall have been insured; or, if there shall have been a material adverse change
        in the financial condition, results of operations or business of the 1st Security Parties taken as a whole.

        (b)       In the event the Holding Company fails to sell the required minimum number of the Shares by the date when such sales must
        be completed, in accordance with the provisions of the Plan or as required by the Conversion Regulations, and applicable law, this
        Agreement shall terminate upon refund by the Holding Company to each person who has subscribed for or ordered any of the Shares
        the full amount which it may have received from such person, together with interest as provided in the Prospectus, and no party to this
        Agreement shall have any obligation to the other hereunder, except as set forth in Sections 2(a) and (d), 6, 8 and 9 hereof.

        (c)       If any of the conditions specified in Section 8 shall not have been fulfilled when and as required by this Agreement, unless
        waived in writing, or by the Closing Date, this Agreement and all of the Agent’s obligations hereunder may be cancelled by the Agent
        by notifying the Holding Company of such cancellation in writing or by electronic mail at any time at or prior to the Closing Date, and
        any such cancellation shall be without liability of any party to any other party except as otherwise provided in Sections 2(a), 2(d), 6, 8
        and 9 hereof.

        (d)      If the Agent elects to terminate this Agreement as provided in this Section, the 1st Security Parties shall be notified promptly
        by telephone or electronic mail, confirmed by letter.

         Any of the 1st Security Parties may terminate this Agreement in the event the Agent is in material breach of the representations and
warranties or covenants contained in Section 5 and such breach has not been cured within a reasonable time period after the West End Party has
provided the Agent with notice of such breach.


                                                                        35
         This Agreement may also be terminated by mutual written consent of the parties hereto.

          Section 12. Notices. All communications hereunder, except as herein otherwise specifically provided, shall be mailed in writing and
if sent to the Agent shall be mailed, delivered or telegraphed and confirmed to Keefe, Bruyette & Woods, Inc., 10 South Wacker Drive,
Investment Banking Suite 3400, Chicago, Illinois 60606, Attention: Patricia McJoynt (with a copy to Luse Gorman Pomerenk & Schick, PC,
5335 Wisconsin Avenue, NW, Suite 780, Washington, D.C. 20815, Attention: Steven Lanter, Esq.) and, if sent to the 1st Security Parties, shall
be mailed, delivered or telegraphed and confirmed to the Bank at 6920 220 th Street, SW, Suite 300, Mountlake Terrace, Washington 98043,
Attention: Joe Adams (with a copy to Silver, Freedman & Taff, L.L.P., 3299 K Street, N.W., Suite 100, Washington, D.C. 20007, Attention:
Michael Sadow, Esq.).

         Section 13. Parties. The 1st Security Parties shall be entitled to act and rely on any request, notice, consent, waiver or agreement
purportedly given on behalf of the Agent when the same shall have been given by the undersigned. The Agent shall be entitled to act and rely
on any request, notice, consent, waiver or agreement purportedly given on behalf of the 1st Security Parties, when the same shall have been
given by the undersigned or any other officer of any of the 1st Security Parties. This Agreement shall inure solely to the benefit of, and shall be
binding upon, the Agent, the 1st Security Parties and their respective successors and assigns, and no other person shall have or be construed to
have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained.

          Section 14. Closing. The closing for the sale of the Shares (the “Closing”) shall take place on the Closing Date at such location as
mutually agreed upon by the Agent and the Holding Company and the Bank. At the Closing, the 1st Security Parties shall deliver to the Agent
in next day funds the commissions, fees and expenses due and owing to the Agent as set forth in Sections 2 and 7 hereof and the opinions and
certificates required hereby and other documents deemed reasonably necessary by the Agent shall be executed and delivered to effect the sale
of the Shares as contemplated hereby and pursuant to the terms of the Prospectus.

          Section 15. Partial Invalidity. In the event that any term, provision or covenant herein or the application thereof to any circumstance
or situation shall be invalid or unenforceable, in whole or in part, the remainder hereof and the application of said term, provision or covenant
to any other circumstances or situation shall not be affected thereby, and each term, provision or covenant herein shall be valid and enforceable
to the full extent permitted by law.

          Section 16. Governing Law and Construction. This Agreement shall be governed by and construed in accordance with the laws of
the State of New York without regard to principles of conflicts of law.

         Section 17. Counterparts. This Agreement may be executed in separate counterparts, each of which so executed and delivered shall
be an original, but all of which together shall constitute but one and the same instrument.


                                                                        36
         Section 18. Entire Agreement. This Agreement, including schedules and exhibits hereto, which are integral parts hereof and
incorporated as though set forth in full, constitutes the entire agreement between the parties pertaining to the subject matter hereof superseding
any and all prior or contemporaneous oral or prior written agreements, proposals, letters of intent and understandings, and cannot be modified,
changed, waived or terminated except by a writing which expressly states that it is an amendment, modification or waiver, refers to this
Agreement and is signed by the party to be charged. No course of conduct or dealing shall be construed to modify, amend or otherwise affect
any of the provisions hereof.

         Section 19. Survival. The respective indemnities, agreements, representations, warranties and other statements of the 1st Security
Parties and the Agent, as set forth in this Agreement, shall remain in full force and effect, regardless of any termination or cancellation of this
Agreement or any investigation (or any statement as to the results thereof) made by or on behalf of the Agent or any of the Agent’s officers or
directors or any person controlling the Agent, or the 1st Security Parties, or any of their respective officers or directors or any person
controlling the 1st Security Parties, and shall survive termination of this Agreement and receipt or delivery of any payment for the Shares.

        Section 20. Waiver of Trial by Jury. Each of the Agent and the 1st Security Parties waives all right to trial by jury in any action,
proceeding, claim or counterclaim (whether based on contract, tort or otherwise) related to or arising out of this Agreement.

         This agreement is made solely for the benefit of and will be binding upon the parties hereto and their respective successors and the
directors, officer and controlling persons and no other person will have any right or obligation hereunder.

                                                    [Remainder of page intentionally blank]


                                                                        37
         If the foregoing correctly sets forth the arrangement among the 1st Security Parties and the Agent, please indicate acceptance thereof
in the space provided below for that purpose, whereupon this letter and the Agent’s acceptance shall constitute a binding agreement.

Very truly yours,

1 st SECURITY BANK                                                         FS BANCORP, INC.
 OF WASHINGTON

By Its Authorized Representative:                                          By Its Authorized Representative:




Joseph C. Adams                                                            Joseph C. Adams
President and Chief Executive Officer                                      President and Chief Executive Officer




Accepted as of the date first above
written

KEEFE, BRUYETTE & WOODS, INC.

By its Authorized Representative


Managing Director


                                                                      38
                                                        Exhibit C to Agency Agreement

Form of Opinion of Silver, Freedman & Taff, L.L.P., to be addressed to the Agent.

(i)       The Holding Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the
State of Washington.

(ii)      The Holding Company has corporate power and authority to own, lease and operate its properties and to conduct its business as
described in the Registration Statement, Prospectus and any Permitted Free Writing Prospectus.

(iii)     The Bank has been organized and is validly existing as a Washington-chartered savings bank in mutual form and immediately
following the completion of the Conversion will be organized and validly existing as a Washington-chartered savings bank in stock form, in
both instances duly authorized to conduct its business and own its property as described in the Registration Statement and the Prospectus and in
any Permitted Free Writing Prospectus. All of the outstanding capital stock of the Bank is duly authorized, validly issued, fully-paid and is
non-assessable and will be owned by the Company free and clear of any liens, encumbrances, claims or other restrictions.

(iv)    The Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of
Washington.

(v)       The deposit accounts of the Bank are insured by the FDIC up to the maximum amount allowed under law and no proceedings for the
termination or revocation of such insurance are pending or to such counsel’s knowledge, threatened. The description of the liquidation account
as set forth in the Prospectus under the caption “The Conversion and Stock Offering; Effects of the Conversion – Depositors’ Rights If We
Liquidate,” to the extent that such information constitutes matters of law and legal conclusions, has been reviewed by such counsel and is
accurate in all material respects.

(vi)       The authorized equity capital of the Holding Company consists of 45,000,000 shares of common stock and 5,000,000 shares of
preferred stock. Immediately following the consummation of the Conversion, the authorized, issued and outstanding Common Shares of the
Holding Company will be consistent with that set forth in the Prospectus under the caption “Capitalization,” and no shares of capital stock of
the Holding Company have been issued prior to the Closing Date; the Common Shares have been duly and validly authorized for issuance, and
when issued and delivered by the Holding Company pursuant to the Plan against payment of the consideration calculated as set forth in the
Plan, the Registration Statement and the Prospectus, will be duly and validly issued and fully paid and non-assessable, except for shares
purchased by the ESOP with funds borrowed from the Holding Company to the extent payment therefore in cash has not been received by the
Holding Company; except to the extent that subscription rights and priorities pursuant thereto exist pursuant to the Plan, the issuance of the
Shares is not subject to preemptive rights (other than subscription rights as provided in the Plan). The Shares will not, when issued, be subject
to any preemptive rights, liens, charges, encumbrances or other claims created by the Holding Company.


                                                                      C-1
(vii)      The 1st Security Parties have full corporate power and authority to enter into this Agreement and to consummate the transactions
contemplated thereby and by the Plan. The execution and delivery of this Agreement and the consummation of the transactions contemplated
thereby have been duly and validly authorized, executed and delivered by the 1st Security Parties; and this Agreement is a legal, valid and
binding obligation of the 1st Security Parties, enforceable against the 1st Security Parties, in accordance with its terms, except as the
enforceability thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, conservatorship, receivership or other similar
laws now or hereafter in effect relating to or affecting the enforcement of creditors’ rights generally or the rights of creditors of federally
chartered savings institutions or their holding companies as applicable, (ii) general equitable principles, (iii) laws relating to the safety and
soundness of insured depository institutions, and (iv) applicable law or public policy with respect to the indemnification and/or contribution
provisions contained herein and except that no opinion need be expressed as to the effect or availability of equitable remedies or injunctive
relief (regardless of whether such enforceability is considered in a proceeding in equity or at law).

(viii)     The WDFI’s and the FDIC’s approvals of the Plan remain in full force and effect; the Form AC and Plan comply in all material
respects with the regulations of the WDFI and FDIC (other than the financial statements, notes to financial statements, stock valuation
information and other financial, tabular and statistical data included therein, as to which no opinion need be rendered). Such counsel has been
advised by the WDFI and FDIC staff and Commission staff that no order has been issued by the WDFI and FDIC or the Commission and, to
the knowledge of such counsel, no order has been issued by any state authority, to prevent the Conversion or the offer, sale or issuance of the
Shares, or to suspend the Offering or the use of the Prospectus, and no action for such purposes has been instituted or, to the knowledge of such
counsel, threatened by the WDFI, FDIC, FRB, the Commission, or any other state or federal authority; and, no person has sought to obtain
regulatory or judicial review of the final action of the WDFI or FDIC approving the Plan, the Form AC, or of the FRB approving the Holding
Company Application or the Prospectus or to otherwise prevent the Conversion or the offer, sale or issuance of the Shares.

(ix)      The Plan has been duly adopted by the required vote of the directors of each of the 1st Security Parties and, based solely on the report
of the inspector of election, by the required vote of the Bank’s members.

(x)        All conditions imposed by the WDFI, the FDIC in connection with its approval of the Conversion and of the FRB in its approval of
the Holding Company Application have been satisfied,, other than any post-closing filings and submissions, and no further approval,
registration, authorization, consent or other order of any federal regulatory agency is required in connection with the execution and delivery of
this Agreement, the consummation of the Conversion and the issuance of the Shares, except as may be required under the securities or blue sky
laws of various jurisdictions (as to which no opinion need be rendered) and except as may be required under the rules and regulations of the
FINRA (as to which no opinion need be rendered).

(xi)      The Registration Statement is effective under the 1933 Act; any required filing of the Prospectus and any Permitted Free Writing
Prospectus pursuant to Rule 424(b) or Rule 433 has been made within the time period required by Rule 424(b) or Rule 433, and no stop order
proceedings with respect thereto have been instituted or, are pending or threatened under the 1933 Act.


                                                                       C-2
(xii)       At the time the Form AC, including the Prospectus contained therein, was approved by the WDFI and received the non-objection of
the FDIC, the Form AC, including the Prospectus contained therein, complied as to form in all with the requirements of the Conversion
Regulations except as waived or otherwise approved by the WDFI or FDIC (other than the financial statements, the notes thereto, and other
tabular, financial, statistical and appraisal data included therein, as to which no opinion need be rendered).

(xiii)     At the time that the Registration Statement, including the Prospectus, became effective, (A) the Registration Statement (as amended
or supplemented, if so amended or supplemented) (other than the financial statements, the notes thereto, and other tabular, financial, statistical
and appraisal data included therein, as to which no opinion need be rendered), complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations, and (B) the Prospectus (other than the financial statements, the notes thereto, and
other tabular, financial, statistical and appraisal data included therein, as to which no opinion need be rendered) complied as to form in all
material respects with the requirements of the 1933 Act and the 1933 Act Regulations.

(xiv)     The terms and provisions of the shares of common stock of the Holding Company conform, in all material respects, to the
description thereof contained in the Registration Statement, the General Disclosure Package and Prospectus, and the form of certificate used to
evidence the Shares complies with the laws of the State of Washington.

(xv)        No action, suit or proceeding at law or in equity is pending or threatened against or affecting any of the 1st Security Parties or any of
their properties before or by any court or governmental official, commission, board or other administrative agency, authority or body, or any
arbitrator, wherein an unfavorable decision, ruling or finding would have a material adverse effect on the consummation of the transactions
contemplated by the Agreement or which is required to be disclosed in the Registration Statement or the Prospectus and is not so disclosed.

(xvi)      None of the 1st Security Parties are required to be registered as an “investment company” or an entity “controlled” by an “investment
company”, as such terms are defined in the Investment Company Act of 1940, as amended and, upon completion of the Conversion and the
Offering and the sale of the Shares and the application of the net proceeds therefrom, neither the Holding Company nor the Bank will be
required to be registered as an investment company or an entity controlled by an investment company under the Investment Company Act of
1940.

(xvii)   To such counsel’s knowledge, none of the 1st Security Parties is in violation of any written directive from the WDFI or the FDIC to
make any material change in the method of conducting its respective business.

(xviii)    There are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or
referred to in the Form AC, the Registration Statement, the General Disclosure Package or the Prospectus or required to be filed as exhibits to
the Form AC and the Registration Statement that are not so filed or described as required. The description in the Form AC, the Registration
Statement, the General Disclosure Package and the Prospectus summarizing such documents and exhibits are accurate in all material respects
and fairly present, in all material respects, the information required to be shown.


                                                                        C-3
(xix)    To such counsel’s knowledge, the Conversion has been effected by the Holding Company and the Bank in all material respects in
accordance with the Conversion Regulations and the WDFI’s and FDIC’s approvals issued thereunder, except to the extent that either the
WDFI or the FDIC shall have specifically waived the Conversion Regulations or any conditions or requirements contained in their approvals.

(xx)        To such counsel’s knowledge, none of the 1st Security Parties is currently in violation of its articles of incorporation, Charter or
Bylaws or in default or violation of any obligation, agreement, covenant, instrument or condition contained in any agreement filed as an exhibit
to the Registration Statement, except for such defaults or violations which would not have a Material Adverse Effect. The execution, delivery
and performance of this Agreement, the incurrence of the obligations herein set forth and the consummation of the transactions contemplated
herein will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the any of the 1st Security Parties pursuant to any contract, indenture, mortgage, loan agreement,
note, lease or other instrument filed as an exhibit to the Registration Statement; and such action will not result in any violation of the provisions
of the articles of incorporation, Charter or Bylaws of any of the 1st Security Parties, or result in any violation of or conflict with any applicable
federal or state law, act, regulation (except that no opinion with respect to the securities and Blue Sky laws of various jurisdictions or the rules
or regulations of the FINRA need be rendered).

(xxi)     The information in the Prospectus under the captions “Our Policy Regarding Dividends,” “How We Are Regulated,” “Taxation,”
“The Conversion and Stock Offering,” “Restrictions on Acquisition of FS Bancorp, Inc. and 1 st Security Bank of Washington” and
“Description of Capital Stock of FS Bancorp, Inc.,” to the extent that such information constitutes matters of law, summaries of legal matters,
documents or proceedings, or legal conclusions, has been reviewed by such counsel and is correct in all material respects. The descriptions in
the Prospectus summarizing statutes or regulations are accurate summaries in all materials respects and fairly present, in all material respects,
the information required to be shown.

(xxii)      The Holding Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a Material Adverse Effect.


                                                                        C-4
In addition, such counsel shall state that during the preparation of the Form AC, the Holding Company Application, the Registration Statement
and the Prospectus, they participated in conferences with management of, the independent public and internal accountants for, and other
representatives of, the Holding Company and the Bank. Based upon such conferences and such review of corporate records of the Holding
Company and the Bank as such counsel conducted in connection with the preparation of the information contained in the Registration
Statement, the Prospectus, any Permitted Free Writing Prospectus and the Proxy Statement nothing has come to their attention that would lead
them to believe that the Registration Statement (except for the financial statements and schedules, notes to financial statements, stock valuation
information or other financial or statistical data included therein or omitted therefrom, as to which counsel need make no statement), at the time
it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus (except for financial statements and schedules, notes to financial
statements, stock valuation information or other financial or statistical data included therein or omitted therefrom, as to which counsel need
make no statement), at the time the Registration Statement became effective or at the Closing Time, or that the General Disclosure Package as
of the Applicable Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they were made, not misleading.

In rendering such opinion, such counsel may rely, to the extent such counsel deems such reliance necessary or appropriate, on certificates of
public officials, certificates or opinions of other counsel reasonably satisfactory to the Agent, and as to matters of fact, officers’
certificates. Such counsel’s opinion need refer only to matters of federal law and Washington law and, with respect to enforceability, New
York law, and may add other qualifications and explanations of the basis of their opinion as may be reasonably acceptable to the Agent.


                                                                        C-5
                                                        Exhibit D to Agency Agreement

Form of Opinion of Luse Gorman Pomerenk & Schick, PC, to be addressed to the Agent.

(i)      The Holding Company has been incorporated and is validly existing as a corporation in good standing under the laws of the State of
Washington.

(ii)      The Bank has been organized and is validly existing as a Washington-chartered savings bank in mutual form.

(iii)      The Common Shares have been duly and validly authorized for issuance, and when issued and delivered by the Holding Company
pursuant to the Plan against payment of the consideration calculated as set forth in the Plan, the Registration Statement and the Prospectus, will
be duly and validly issued and fully paid and non-assessable, except for shares purchased by the ESOP with funds borrowed from the Holding
Company to the extent payment therefore in cash has not been received by the Holding Company; except to the extent that subscription rights
and priorities pursuant thereto exist pursuant to the Plan, the issuance of the Shares is not subject to preemptive rights (other than subscription
rights as provided in the Plan). The Shares will not, when issued, be subject to any preemptive rights, liens, charges, encumbrances or other
claims created by the Holding Company.

(v)      The Registration Statement is effective under the 1933 Act; any required filing of the Prospectus and any Permitted Free Writing
Prospectus pursuant to Rule 424(b) or Rule 433 has been made within the time period required by Rule 424(b) or Rule 433, and no stop order
proceedings with respect thereto have been instituted or, to the knowledge of such counsel, are pending or threatened under the 1933 Act.

(vi)      The terms and provisions of the shares of common stock of the Holding Company conform, in all material respects, to the description
thereof contained in the Registration Statement, the General Disclosure Package and Prospectus, and the form of certificate used to evidence
the Shares complies with the laws of the State of Washington.

(vii)    To such counsel’s knowledge, the Conversion has been effected by the 1st Security Parties in all material respects in accordance with
the Conversion Regulations and the FRB approvals issued thereunder.


                                                                       D-1
In addition, such counsel shall state that during the preparation of the Form AC, the Holding Company Application, the Registration Statement
and the Prospectus, they participated in conferences with management of, the independent public and internal accountants for, and other
representatives of, the 1st Security Parties. Based upon such conferences and such review of corporate records of the 1st Security Parties as
such counsel conducted in connection with the preparation of the information contained in the Registration Statement, the Prospectus, any
Permitted Free Writing Prospectus and the Proxy Statement nothing has come to their attention that would lead them to believe that the
Registration Statement (except for the financial statements and schedules, notes to financial statements, stock valuation information or other
financial or statistical data included therein or omitted therefrom, as to which counsel need make no statement), at the time it became effective,
contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus (except for financial statements and schedules, notes to financial statements, stock
valuation information or other financial or statistical data included therein or omitted therefrom, as to which counsel need make no statement),
at the time the Registration Statement became effective or at the Closing Time, or that the General Disclosure Package as of the Applicable
Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made, not misleading.

In rendering such opinion, such counsel may rely, to the extent such counsel deems such reliance necessary or appropriate, on certificates of
public officials, the opinion of Silver, Freedman & Taff, L.L.P. set forth in Exhibit C to the Agency Agreement, and as to matters of fact,
officers’ certificates. Such counsel’s opinion need refer only to matters of federal law, and, with respect to enforceability, New York law, and
may add other qualifications and explanations of the basis of their opinion as may be reasonably acceptable to the Agent.

                                                                       D-2
                                                                                                                                  Exhibit 8.1

                                                              LAW OFFICES

                                              SILVER, FREEDMAN & TAFF, L.L.P.
                        A LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS

                                                          3299 K STREET N.W.
                                                               SUITE 100
                                                        WASHINGTON, D.C. 20007
                                                         PHONE: (202) 295-4500                       WRITER'S DIRECT DIAL NUMBER
                                                                                                             (202) 295-4503
                                                           FAX: (202) 337-5502
                                                           WWW.SFTLAW.COM

                                                             September 15, 2011

Board of Trustees
1st Security Bank of Washington
6920 220 th Street, SW
Mountlake Terrace, WA 98043

                  RE:      Federal Income Tax Opinion Relating To The Conversion Of 1st Security Bank of Washington From A
                           State-Chartered Mutual Savings Bank To A State-Chartered Stock Savings Bank Under Section 368(a)(1)(F)
                           of the Internal Revenue Code of 1986, As Amended

Gentlemen:

In accordance with your request set forth hereinbelow is the opinion of this firm relating to the federal income tax consequences of the
conversion of 1st Security Bank of Washington (“Mutual”) from a Washington-chartered mutual savings bank to a Washington-chartered stock
savings bank (“Stock Bank”) pursuant to the provisions of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the
“Code”).

Capitalized terms used herein which are not expressly defined herein shall have the meaning ascribed to them in the Plan of Conversion
adopted by the Board of Trustees of Mutual on July 10, 2008, as amended on September 15, 2011 (the “Plan”).

The following assumptions have been made in connection with our opinions hereinbelow:

1.      The Conversion is implemented in accordance with the terms of the Plan and all conditions precedent contained in the Plan shall be
performed or waived prior to the consummation of the Conversion.

2.         No amount or a de minimus amount (i.e. substantially less than 1%) of the savings accounts and deposits of Mutual, as of the
Eligibility Record Date or the Supplemental Eligibility Record Date, will be excluded from participating in the liquidation account of Stock
Bank. To the best of the knowledge of the management of Mutual there is not now, nor will there be at the time of the Conversion, any plan or
intention, on the part of the depositors in Mutual to withdraw their deposits following the Conversion. Deposits withdrawn immediately prior
to or immediately subsequent to the Conversion (other than maturing deposits) are considered in making these assumptions.
September 15, 2011
Page 2

3.         Holding Company and Stock Bank each have no plan or intention to redeem or otherwise acquire any of the Conversion Stock to be
issued in the proposed transaction.

4.        Immediately following the consummation of the proposed transaction, Stock Bank will possess the same assets and liabilities as
Mutual held immediately prior to the proposed transaction, plus substantially all of the net proceeds from the sale of its stock to Holding
Company except for assets used to pay expenses of the Conversion. The liabilities transferred to Stock Bank were incurred by Mutual in the
ordinary course of business.

5.       No cash or property will be given to deposit account holders in lieu of Subscription Rights or an interest in the liquidation account of
Stock Bank.

6.        Following the Conversion, Stock Bank will continue to engage in its business in substantially the same manner as Mutual engaged in
business prior to the Conversion, and it has no plan or intention to sell or otherwise dispose of any of its assets, except in the ordinary course of
business.

7.       There is no plan or intention for Stock Bank to be liquidated or merged with another corporation following the consummation of the
Conversion.

8.       The fair market value of each savings account plus an interest in the liquidation account of Stock Bank will, in each instance, be
approximately equal to the fair market value of each savings account of Mutual plus the interest in the residual equity of Mutual surrendered in
exchange therefor.

9.        Holding Company has no plan or intention to sell or otherwise dispose any of the stock of Stock Bank received by it in the proposed
transaction.

10.        Both Stock Bank and Holding Company have no plan or intention, either currently or at the time of Conversion, to issue additional
shares of common stock following the proposed transaction, other than shares that may be issued to employees and/or directors pursuant to
certain stock option and stock incentive plans or that may be issued to employee benefit plans.

11.        Assets used to pay expenses of the Conversion and all distributions (except for regular, normal interest payments and other payments
in the normal course of business made by Mutual immediately preceding the transaction) will in the aggregate constitute less than 1% of the net
assets of Mutual (excluding customary and normal expenses relating solely to capital raising by Holding Company). All expenses relating to
capital raising shall be paid from the proceeds of the sale of Conversion Stock.
September 15, 2011
Page 3

12.     All distributions to deposit account holders in their capacity as deposit account holders (except for regular, normal interest payments
made by Mutual), will, in the aggregate, constitute less than 1% of the fair market value of the net assets of Mutual.

13.      At the time of the proposed transaction, the fair market value of the assets of Mutual on a going concern basis (including intangibles)
will equal or exceed the amount of its liabilities plus the amount of liabilities to which such assets are subject. Mutual will have a positive
regulatory net worth at the time of the Conversion.

14.       Mutual’s Eligible Account Holders and Supplemental Eligible Account Holders will pay expenses of the Conversion solely
attributable to them, if any.

15.     The liabilities of Mutual assumed by Stock Bank plus the liabilities, if any, to which the transferred assets are subject were incurred by
Mutual in the ordinary course of its business and are associated with the assets being transferred.

16.      There will be no purchase price advantage for Mutual’s deposit account holders who purchase Conversion Stock.

17.       None of the compensation to be received by any deposit account holder-employees of Mutual or Holding Company will be separate
consideration for, or allocable to, any of their deposits in Mutual. No interest in the liquidation account of Stock Bank will be received by any
deposit account holder-employees as separate consideration for, or will otherwise be allocable to, any employment agreement, and the
compensation paid to each deposit account holder-employee, during the twelve-month period preceding or subsequent to the Conversion, will
be for services actually rendered and will be commensurate with amounts paid to the third parties bargaining at arm’s-length for similar
services. No shares of Conversion Stock will be issued to or purchased by any deposit account holder-employee of Mutual or Holding
Company at a discount or as compensation in the proposed transaction.

18.       No creditors of Mutual or the depositors in their role as creditors, have taken any steps to enforce their claims against Mutual by
instituting bankruptcy or other legal proceedings, in either a court or appropriate regulatory agency, that would eliminate the proprietary
interests of the Members prior to the Conversion of Mutual including depositors as the equity holders of Mutual.

19.     The proposed transaction does not involve the payment to Stock Bank or Mutual of financial assistance from federal agencies within
the meaning of Notice 89-102, 1989-40 C.B. 1.

20.     On a per share basis, the purchase price of Conversion Stock will be equal to the fair market value of such stock at the time of the
completion of the proposed transaction.
September 15, 2011
Page 4

                                                                     OPINION

Based solely on the assumptions set forth hereinabove and our analysis and examination of applicable federal income tax laws, rulings,
regulations, and judicial precedents, we are of the opinion that if the transaction is undertaken in accordance with the above assumptions:

(1)         The Conversion will constitute a reorganization within the meaning of Section 368(a)(1)(F) of the Code. Neither Mutual nor Stock
Bank will recognize any gain or loss as a result of the transaction (Rev. Rul. 80-105, 1980-1 C.B. 78). Mutual and Stock Bank will each be a
party to a re organization within the meaning of Section 368(b) of the Code.

(2)         Stock Bank will recognize no gain or loss upon the receipt of money and other property, if any, in the Conversion, in exchange for
its shares. (Section 1032(a) of the Code).

(3)        No gain or loss will be recognized by Holding Company upon the receipt of money for Conversion Stock. (Section 1032(a) of the
Code).

(4)      The basis of Mutual’s assets in the hands of Stock Bank will be the same as the basis of those assets in the hands of Mutual
immediately prior to the transaction. (Section 362(b) of the Code).

(5)       Stock Bank’s holding period of the assets of Mutual will include the period during which such assets were held by Mutual prior to
the Conversion. (Section 1223(2) of the Code).

(6)       The creation of the liquidation account on the records of Stock Bank will have no effect on Mutual’s or Stock Bank’s taxable
income, deductions, or additions to the reserve for bad debts.

(7)         No income will be recognized by Holding Company on the distribution of Subscription Rights unless the issuance of the
Subscription Rights results in gain to recipients thereof. It is more likely than not that no income will be recognized by Holding Company on
the distribution of Subscription Rights.

(8)        It is more likely than not that the fair market value of the Subscription Rights is zero. Thus, it is more likely than not that no gain
will be recognized by Eligible Account Holders, Supplemental Account Holders or Other Members upon their receipt of Subscription
Rights. Gain, if any, realized by the aforesaid account holders and Other Members will not exceed the fair market value of the Subscription
Rights received. If gain is recognized by account holders and Other Members upon the distribution to them of Subscription Rights, the
Holding Company could also recognize income on the distribution of Subscription Rights. No gain will be recognized by the recipients of
Subscription Rights or Holding Company upon the exercise of Subscription Rights.
September 15, 2011
Page 5

(9)          A depositor’s basis in his deposit accounts of Stock Bank will be the same as the basis of his deposit accounts in Mutual. (Section
1012 of the Code). The basis of the interest in the liquidation account of Stock Bank received by Eligible Account Holders and Supplemental
Eligible Account Holders will be equal to the cost of such property, i.e. , the fair market value of the proprietary interest in Mutual, which in
this transaction we believe to have no fair market or ascertainable value.

(10)        The basis of Conversion Stock to its shareholders will be the purchase price thereof. (Section 1012 of the Code).

(11)         A shareholder’s holding period for Conversion Stock acquired through the exercise of the Subscription Rights shall begin on the
date on which the Subscription Rights are exercised. (Section 1223(6) of the Code). The holding period for the Conversion Stock purchased
pursuant to the Direct Community Offering or Syndicated Community Offering will commence on the date following the date on which such
stock is purchased. (Rev. Rul. 70-598, 1970-2 C.B. 168).

(12)        Regardless of any book entries that are made for the establishment of a liquidation account, the reorganization will not diminish the
accumulated earnings and profits of Mutual available for the subsequent distribution of dividends, within the meaning of Section 316 of the
Code. Section 1.312-11(b) and (c) of the Regulations. Stock Bank will succeed to and take into account the earnings and profits, or deficit in
earnings and profits, of Mutual as of the date of Conversion.

(13)        The reasoning in support of our opinions in paragraph 7 and 8 is set forth herein below. We understand that the Subscription
Rights will be granted at no cost to recipients, will be legally non-transferable, will be of short duration, and will only entitle recipients to
purchase Conversion Stock at fair market value, being the same price to be paid by the general public in the Direct Community Offering or
Syndicated Community Offering. We also note that the Internal Revenue Service has not in the past concluded that subscription rights in like
transactions have any value. In addition, we are relying on a letter from RP Financial, LC to you stating its belief that the Subscriptions Rights
do not have any ascertainable value at the time of distribution or at the time the rights are exercised in the Subscription Offering. Based on the
foregoing, we believe it is more likely than not that the Subscription Rights have no value.

 The above opinions are effective to the extent that Mutual is solvent. Based upon our review of the financial statements of Mutual and related
financial information provided to us by Mutual, we have concluded that Mutual is solvent as of the date hereof. No opinion is expressed about
the tax treatment of the transaction if Mutual is not solvent, which determination is made at the end of the tax year in which the transaction is
consummated.
September 15, 2011
Page 6

No opinion is expressed as to the tax treatment of the transaction under the provisions of any of the other sections of the Code and Income Tax
Regulations which may also be applicable thereto, including without limitation, whether the transaction results in any restrictions or limitations
on the future use of the pre-change losses of Mutual, or to the tax treatment of any conditions existing at the time of, or effects resulting from,
the transaction which are not specifically covered by the opinions set forth above.

We hereby consent to the filing of this opinion as an exhibit to regulatory filings and applications seeking approval of the Conversion from the
Division and the FDIC, and to Holding Company’s Registration Statement as filed with SEC.

                                                                         Respectfully submitted,

                                                                         SILVER, FREEDMAN & TAFF, L.L.P.

                                                                         /s/ Barry P. Taff, P.C.
                                                                                                                                    Exhibit 10.4


RP ®        FINANCIAL, LC.
Serving the Financial Services Industry since 1988



                                                                                                  August 17, 2011
                                                                                                  AMENDED February 24, 2012



Matthew Mullet, Chief Financial Officer
1st Security Bank of Washington
6920 220th Street SW, Suite 300
Mountlake Terrace, Washington 98043-2172

Dear Mr. Mullet:

        This letter sets forth the agreement between 1st Security Bank of Washington, Mountlake Terrace, Washington (the “Bank”), and RP
® Financial, LC (“RP Financial”) for independent appraisal services in connection with the stock to be issued concurrent with the Bank’s
proposed mutual-to-stock conversion transaction. The specific appraisal services to be rendered by RP Financial are described below.

Description of Appraisal Services

          Prior to preparing the valuation report, RP Financial will conduct a financial due diligence, including on-site interviews of senior
management and reviews of financial and other documents and records, to gain insight into the Bank’s operations, financial condition,
profitability, market area, risks and various internal and external factors which impact the pro forma value of the Bank.

         RP Financial will prepare a written detailed valuation report of the Bank that will be fully consistent with applicable regulatory
guidelines and standard pro forma valuation practices. In this regard, the applicable regulatory guidelines are those set forth in the Office of
Thrift Supervision’s (“OTS”) October 21, 1994 “Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations
Converting from Mutual to Stock Form of Organization,” which have been endorsed by the Federal Deposit Insurance Corporation (“FDIC”)
and various state banking agencies.

         The appraisal report will include an in-depth analysis of the Bank’s financial condition and operating results, as well as an assessment
of the Bank’s interest rate risk, credit risk and liquidity risk. The appraisal report will describe the Bank’s business strategies, market area,
prospects for the future and the intended use of proceeds both in the short term and over the longer term. A peer group analysis relative to
publicly-traded savings institutions will be conducted for the purpose of determining appropriate valuation adjustments relative to the group.




Washington Headquarters
1100 North Glebe Road, Suite 600                                                                                        Direct:   (703) 647-6549
Arlington, VA 22201                                                                                                 Telephone:    (703) 528-1700
www.rpfinancial.com                                                                                                   Fax No.:    (703) 528-1788
E-Mail: joren@rpfinancial.com                                                                                    Toll-Free No.:   (866) 723-0594
Matthew Mullet
February 24, 2012
Page 2



          We will review pertinent sections of the applications and offering documents to obtain necessary data and information for the
appraisal, including the impact of key deal elements on the appraised value, such as dividend policy, use of proceeds and reinvestment rate, tax
rate, offering expenses, characteristics of stock plans and charitable foundation contribution (if applicable). The appraisal report will conclude
with a midpoint pro forma market value that will establish the range of value, and reflect the offering price per share determined by the Bank’s
Board of Directors. The appraisal report may be periodically updated prior to the commencement of the offering and the appraisal is required
to be updated just prior to the closing of the offering.

          RP Financial agrees to deliver the valuation appraisal and subsequent updates, in writing, to the Bank at the above address in
conjunction with the filing of the regulatory application. Subsequent updates will be filed promptly as certain events occur which would
warrant the preparation and filing of such valuation updates. Further, RP Financial agrees to perform such other services as are necessary or
required in connection with the regulatory review of the appraisal and respond to the regulatory comments, if any, regarding the valuation
appraisal and subsequent updates. RP Financial will also prepare the pro forma presentations for inclusion in the prospectus, reflecting the
original appraisal and subsequent updates, as appropriate.

Fee Structure and Payment Schedule

        The Bank agrees to pay RP Financial a fixed fee of $37,500 for preparation and delivery of the original appraisal report, plus
reimbursable expenses. Payment of these fees shall be made according to the following schedule:

               $5,000 upon execution of this letter of agreement engaging RP Financial’s appraisal services;

               $32,500 upon delivery of the completed original appraisal report; and,

               $5,000 for each valuation update that may be required, provided that the transaction is not delayed for reasons described
                  below; and,

               Should a new complete appraisal be required due to an excessive delay in the process, a new appraisal will be prepared for a
                  fixed fee of $12,500, not including additional expenses.

         The Bank will reimburse RP Financial for out-of-pocket expenses incurred in preparation of the valuation. Such out-of-pocket
expenses will likely include travel, printing, shipping, computer and data services. RP Financial will agree to limit reimbursable expenses to
$3,000 in conjunction with this engagement, exclusive of travel related expenses, which will be billed separately. The reimbursable expenses
will be subject to written authorization from the Bank to exceed such level.

         In the event the Bank shall, for any reason, discontinue the proposed stock offering prior to delivery of the completed documents set
forth above and payment of the respective progress payment fees, the Bank agrees to compensate RP Financial according to RP Financial’s
standard billing rates for consulting services based on accumulated and verifiable time expenses, not to exceed the respective fee caps noted
above, after giving full credit to the initial retainer fee. RP Financial’s standard billing rates range from $75 per hour for research associates to
$350 per hour for managing directors.
Matthew Mullet
February 24, 2012
Page 3



         If during the course of the proposed transaction, unforeseen events occur so as to materially change the nature or the work content of
the services described in this contract, the terms of said contract shall be subject to renegotiation by the Bank and RP Financial. Such
unforeseen events shall include, but not be limited to, major changes in the conversion regulations, appraisal guidelines or processing
procedures as they relate to appraisals, major changes in management or procedures, operating policies or philosophies, and excessive delays or
suspension of processing of applications by the regulators such that completion of the transaction requires the preparation by RP Financial of a
new appraisal.

Representations and Warranties

         The Bank and RP Financial agree to the following:

              1.    The Bank agrees to make available or to supply to RP Financial such information with respect to its business and financial
condition as RP Financial may reasonably request in order to provide the aforesaid valuation. Such information heretofore or hereafter
supplied or made available to RP Financial shall include: annual financial statements, periodic regulatory filings and material agreements, debt
instruments, off balance sheet assets or liabilities, commitments and contingencies, unrealized gains or losses and corporate books and
records. All information provided by the Bank to RP Financial shall remain strictly confidential (unless such information is otherwise made
available to the public), and if the stock offering is not consummated or the services of RP Financial are terminated hereunder, RP Financial
shall upon request promptly return to the Bank the original and any copies of such information.

              2.     The Bank hereby represents and warrants to RP Financial that any information provided to RP Financial does not and will
not, to the best of the Bank’s knowledge, at the times it is provided to RP Financial, contain any untrue statement of a material fact or fail to
state a material fact necessary to make the statements therein not false or misleading in light of the circumstances under which they were made.

               3.      (a) The Bank agrees that it will indemnify and hold harmless RP Financial, any affiliates of RP Financial, the respective
directors, officers, agents and employees of RP Financial or their successors and assigns who act for or on behalf of RP Financial in connection
with the services called for under this agreement (hereinafter referred to as “RP Financial”), from and against any and all losses, claims,
damages and liabilities (including, but not limited to, all losses and expenses in connection with claims under the federal securities laws)
attributable to (i) any untrue statement or alleged untrue statement of a material fact contained in the financial statements or other information
furnished or otherwise provided by the Bank to RP Financial, either orally or in writing; (ii) the omission or alleged omission of a material fact
from the financial statements or other information furnished or otherwise made available by the Bank to RP Financial; or (iii) any action or
omission to act by the Bank, or the Bank’s respective officers, Directors, employees or agents which action or omission is willful or
negligent. The Bank will be under no obligation to indemnify RP Financial hereunder if a court determines that RP Financial was negligent or
acted in bad faith with respect to any actions or omissions of RP Financial related to a matter for which indemnification is sought
hereunder. Any time devoted by employees of RP Financial to situations for which indemnification is provided hereunder, shall be an
indemnifiable cost payable by the Bank at the normal hourly professional rate chargeable by such employee.
Matthew Mullet
February 24, 2012
Page 4

               (b)     RP Financial shall give written notice to the Bank of such claim or facts within thirty days of the assertion of any claim
or discovery of material facts upon which RP Financial intends to base a claim for indemnification hereunder. In the event the Bank elects,
within ten business days of the receipt of the original notice thereof, to contest such claim by written notice to RP Financial, RP Financial will
be entitled to be paid any amounts payable by the Bank hereunder within five days after the final determination of such contest either by
written acknowledgement of the Bank or a final judgment (including all appeals therefrom) of a court of competent jurisdiction. If the Bank
does not so elect, RP Financial shall be paid promptly and in any event within thirty days after receipt by the Bank of the notice of the claim.

           (c)      The Bank shall pay for or reimburse the reasonable expenses, including attorneys’ fees, incurred by RP Financial in advance
of the final disposition of any proceeding within thirty days of the receipt of such request if RP Financial furnishes the Bank: (1) a written
statement of RP Financial’s good faith belief that it is entitled to indemnification hereunder; and (2) a written undertaking to repay the advance
if it ultimately is determined in a final adjudication of such proceeding that it or he is not entitled to such indemnification. The Bank may
assume the defense of any claim (as to which notice is given in accordance with 3(b)) with counsel reasonably satisfactory to RP Financial, and
after notice from the Bank to RP Financial of its election to assume the defense thereof, the Bank will not be liable to RP Financial for any
legal or other expenses subsequently incurred by RP Financial (other than reasonable costs of investigation and assistance in discovery and
document production matters). Notwithstanding the foregoing, RP Financial shall have the right to employ their own counsel in any action or
proceeding if RP Financial shall have concluded that a conflict of interest exists between the Bank and RP Financial which would materially
impact the effective representation of RP Financial. In the event that RP Financial concludes that a conflict of interest exists, RP Financial
shall have the right to select counsel reasonably satisfactory to the Bank which will represent RP Financial in any such action or proceeding
and the Bank shall reimburse RP Financial for the reasonable legal fees and expenses of such counsel and other expenses reasonably incurred
by RP Financial. In no event shall the Bank be liable for the fees and expenses of more than one counsel, separate from its own counsel, for all
indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same
allegations or circumstances. The Bank will not be liable under the foregoing indemnification provision in respect of any compromise or
settlement of any action or proceeding made without its consent, which consent shall not be unreasonably withheld.

          (d)       In the event the Bank does not pay any indemnified loss or make advance reimbursements of expenses in accordance with
the terms of this agreement, RP Financial shall have all remedies available at law or in equity to enforce such obligation.

         It is understood that, in connection with RP Financial’s above-mentioned engagement, RP Financial may also be engaged to act for the
Bank in one or more additional capacities, and that the terms of the original engagement may be incorporated by reference in one or more
separate agreements. The provisions of Paragraph 3 herein shall apply to the original engagement, any such additional engagement, any
modification of the original engagement or such additional engagement and shall remain in full force and effect following the completion or
termination of RP Financial’s engagement(s). This agreement constitutes the entire understanding of the Bank and RP Financial concerning the
subject matter addressed herein, and such contract shall be governed and construed in accordance with the laws of the Commonwealth of
Virginia. This agreement may not be modified, supplemented or amended except by written agreement executed by both parties.
Matthew Mullet
February 24, 2012
Page 5

         The Bank and RP Financial are not affiliated, and neither the Bank nor RP Financial has an economic interest in, or is held in common
with, the other and has not derived a significant portion of its gross revenues, receipts or net income for any period from transactions with the
other.

                                                           * * * * * * * * * * *

           Please acknowledge your agreement to the foregoing by signing as indicated below and returning to RP Financial a signed copy of this
letter, together with the initial retainer fee of $5,000.

                                                                        Sincerely,

                                                                        /s/ James J. Oren
                                                                        James J. Oren
                                                                        Director


Agreed To and Accepted
                           /s/Matthew Mullet
By:
                           Chief Financial Officer

Upon Authorization by the Board of Directors For:     1st Security Bank of Washington
                                                      Mountlake Terrace, Washington


Date Executed:       February 24, 2012
                                                                                                                                Exhibit 23.4

                                   CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated February 27, 2012, with respect to the
balance sheets of 1 st Security Bank of Washington as of December 31, 2011 and 2010, and the related statements of income, equity,
comprehensive income, and cash flows for the years then ended, which is included in Amendment No. 1 to the Registration Statement (Form
S-1, No. 333-177125) of FS Bancorp, Inc. and related Prospectus for the registration of between 2,082,500 and 3,240,125 shares of common
stock.


/s/ Moss Adams LLP

Bellingham, Washington
February 27, 2012
                                      Exhibit 99.1

 PRO FORMA VALUATION REPORT

         FS BANCORP, INC.
    M ountlake Terrace, Washington

PROPOSED HOLDING COMPANY FOR:
   1st S ecurity Bank of Washington

            Dated As Of:
          February 17, 2012




             Prepared By:

         RP ® Financial, LC.
        1100 North Glebe Road
               Suite 600
       Arlington, Virginia 22201
RP ® FINANCIAL, LC.
Advisory | Planning | Valuation

                                                                                        February 17, 2012

Board of Directors
1st Security Bank of Washington
6920 220th Street SW, Suite 300
Mountlake Terrace, Washington 98043-2172

Members of the Board of Directors:

         At your request, we have completed and hereby provide an independent appraisal (“Appraisal”) of the estimated pro forma market
value of the common stock which is to be offered in connection with the plan of conversion described below. This Appraisal is furnished
pursuant to the conversion regulations issued by the Office of Thrift Supervision (“OTS”) and reissued by the Office of the Comptroller of the
Currency (“OCC”), and applicable interpretations thereof. Such Valuation Guidelines are relied upon by the Federal Reserve Board (“FRB”),
the Federal Deposit Insurance Corporation (“FDIC”) and the Washington Department of Financial Institutions (“DFI”) in the absence of
separate written valuation guidelines. Specifically, this Appraisal has been prepared in accordance with the “Guidelines for Appraisal Reports
for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization” as set forth by the OTS, and
applicable regulatory interpretations thereof.

Description of Plan of Conversion

          The Board of Trustees of 1st Security Bank of Washington (“1st Security” or the “Bank”) adopted a plan of conversion on July 10,
2008. On August 18, 2011, the board of directors voted to move forward with the plan of conversion. Pursuant to the plan of conversion, the
Bank will convert from the mutual savings bank form of organization to a stock savings bank form and become a wholly owned subsidiary of
FS Bancorp (“FS Bancorp” or the “Company”) a newly formed Washington corporation. The Company will own all of the outstanding shares
of the Bank. FS Bancorp will offer shares of common stock to eligible depositors of 1st Security, to certain newly-formed stock benefit plans
for officers, trustees and employees and others. Following the completion of the offering, FS Bancorp will be a bank holding company, and its
primary regulator will be the Federal Reserve.

          Pursuant to the plan of conversion, the Company will offer its stock in a subscription offering to Eligible Account Holders of the
Bank, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders, and Other Members. To the extent that shares
remain available for purchase after satisfaction of all subscriptions received in the subscription offering, the shares may be offered for sale in a
direct or syndicated community offering.

          At this time, no other activities are contemplated for FS Bancorp other than the ownership of the Bank, a loan to the newly-formed
ESOP and reinvestment of the proceeds that are retained by the Company. In the future, FS Bancorp may acquire or organize other operating
subsidiaries, diversify into other banking-related activities, pay dividends to shareholders and/or repurchase its stock, although there are no
specific plans to undertake such activities at the present time.




Washington Headquarters
Three Ballston Plaza                                                                                                   Telephone: (703) 528-1700
1100 North Glebe Road, Suite 600                                                                                         Fax No.: (703) 528-1788
Arlington, VA 22201                                                                                                 Toll-Free No.: (866) 723-0594
www.rpfinancial.com                                                                                                 E-Mail: mail@rpfinancial.com
Board of Directors
February 17, 2012
Page 2

RP ® Financial, LC.

         RP ® Financial, LC. (“RP Financial”) is a financial consulting firm serving the financial services industry nationwide that, among
other things, specializes in financial valuations and analyses of business enterprises and securities, including the pro forma valuation for
savings institutions converting from mutual-to-stock form. The background and experience of RP Financial is detailed in Exhibit V-1. For its
appraisal services, RP Financial is being compensated on a fixed fee basis for the original appraisal and for any subsequent updates, and such
fees are payable regardless of the valuation conclusion or the completion of the conversion offering transaction. We believe that we are
independent of the Company, the Bank, and the other parties engaged by the Bank or the Company to assist in the stock conversion process.

Valuation Methodology

          In preparing the Appraisal, we have reviewed FS Bancorp’s and the Bank’s regulatory applications, including the prospectus as filed
with the as filed with the FRB, the Washington Department of Financial Institutions and the Securities and Exchange Commission (“SEC”).
We have conducted a financial analysis of the Bank, that has included due diligence related discussions with 1st Security’s management; Moss
Adams LLP, the Bank’s independent auditor; Silver, Freedman & Taff, L.L.P., 1st Security’s conversion counsel; and Keefe Bruyette &
Woods, Inc., which has been retained as the financial and marketing advisor in connection with the stock offering. All conclusions set forth in
the Appraisal were reached independently from such discussions. In addition, where appropriate, we have considered information based on
other available published sources that we believe are reliable. While we believe the information and data gathered from all these sources are
reliable, we cannot guarantee the accuracy and completeness of such information.

         We have investigated the competitive environment within which 1st Security operates and have assessed the Bank’s relative strengths
and weaknesses. We have monitored all material regulatory and legislative actions affecting financial institutions, generally, and analyzed the
potential impact of such developments on 1st Security and the industry as a whole; to the extent we were aware of such matters. We have
analyzed the potential effects of the stock conversion on the Bank’s operating characteristics and financial performance as they relate to the pro
forma market value of FS Bancorp. We have reviewed the economy and demographic characteristics of the primary market area in which the
Bank currently operates. We have compared 1st Security’s financial performance and condition with publicly-traded thrift institutions
evaluated and selected in accordance with the Valuation Guidelines, as well as all publicly-traded thrifts and thrift holding companies. We have
reviewed conditions in the securities markets in general and the market for thrifts and thrift holding companies, including the market for new
issues. We have excluded from such analyses thrifts subject to announced or rumored acquisition, and/or institutions that exhibit other unusual
characteristics.
Board of Directors
February 17, 2012
Page 3

          The Appraisal is based on 1st Security’s representation that the information contained in the regulatory applications and additional
information furnished to us by the Bank and its independent auditors, legal counsel, investment bankers and other authorized agents are
truthful, accurate and complete. We did not independently verify the financial statements and other information provided by the Bank, or its
independent auditors, legal counsel, investment bankers and other authorized agents nor did we independently value the assets or liabilities of
the Bank. The valuation considers 1st Security only as a going concern and should not be considered as an indication of the Bank’s liquidation
or control value.

          Our appraised value is predicated on a continuation of the current operating environment for the Bank and the Company and for all
thrifts and their holding companies. Changes in the local, state and national economy, the federal and state legislative and regulatory
environments for financial institutions and mutual holding companies, the stock market, interest rates, and other external forces (such as natural
disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the value of
thrift stocks as a whole or the Bank’s value alone. It is our understanding that 1st Security intends to remain an independent institution and
there are no current plans for selling control as a converted institution. To the extent that such factors can be foreseen, they have been factored
into our analysis.

          The estimated pro forma market value is defined as the price at which the Company’s stock, immediately upon completion of the
offering, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having
reasonable knowledge of relevant facts.

Valuation Conclusion

         It is our opinion that, as of February 17, 2012, the estimated aggregate pro forma market value of the shares to be issued immediately
following the conversion equaled $24,500,000 at the midpoint, equal to 2,450,000 shares offered at a per share value of $10.00. Pursuant to
conversion guidelines, the 15% offering range indicates a minimum value of $20,825,000 and a maximum value of $28,175,000. Based on the
$10.00 per share offering price determined by the Board, this valuation range equates to total shares outstanding of 2,082,500 at the minimum
and 2,817,500 at the maximum. In the event the appraised value is subject to an increase, the aggregate pro forma market value may be
increased up to a supermaximum value of $32,401,250 without a resolicitation. Based on the $10.00 per share offering price, the
supermaximum value would result in total shares outstanding of 3,240,125.

Limiting Factors and Considerations

         The valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares
of the common stock. Moreover, because such valuation is determined in accordance with applicable regulatory guidelines and is necessarily
based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given
that persons who purchase shares of common stock in the conversion will thereafter be able to buy or sell such shares at prices related to the
foregoing valuation of the estimated pro forma market value thereof. The appraisal reflects only a valuation range as of this date for the pro
forma market value of FS Bancorp immediately upon issuance of the stock and does not take into account any trading activity with respect to
the purchase and sale of common stock in the secondary market on the date of issuance of such securities or at anytime thereafter following the
completion of the public stock offering.
Board of Directors
February 17, 2012
Page 4

         The valuation prepared by RP Financial in accordance with applicable regulatory guidelines was based on the consolidated financial
condition and operations of FS Bancorp as of or for the periods ended December 31, 2011, the date of the financial data included in the
prospectus.

         RP Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by RP
Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities. RP Financial maintains a policy
which prohibits RP Financial, its principals or employees from purchasing stock of its financial institution clients.

          The valuation will be updated as provided for in the conversion regulations and guidelines. These updates will consider, among other
things, any developments or changes in the financial performance and condition of FS Bancorp, management policies, and current conditions in
the equity markets for thrift stocks, both existing issues and new issues. These updates may also consider changes in other external factors
which impact value including, but not limited to: various changes in the federal and state legislative and regulatory environments for financial
institutions, the stock market and the market for thrift stocks, and interest rates. Should any such new developments or changes be material, in
our opinion, to the valuation of the shares, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any
such adjustments will be explained in the update at the date of the release of the update. The valuation will also be updated at the completion of
FS Bancorp’s stock offering.

                                                                                                                    Respectfully submitted,
                                                                                                                    RP ® FINANCIAL, LC.

                                                                                                                    /s/ James J. Oren
                                                                                                                    James J. Oren
                                                                                                                    Director
RP ® Financial, LC.

                                                         TABLE OF CONTENTS
                                                    1st Security Bank of Washington
                                                    Mountlake Terrace, Washington

                                                                                        PAGE
  DESCRIPTION                                                                         NUMBER

CHAPTER ONE                             OVERVIEW AND FINANCIAL ANALYSIS

  Introduction                                                                         I.1
  Strategic Overview                                                                   I.1
  Plan of Conversion                                                                   I.3
  Balance Sheet Trends                                                                 I.3
  Income and Expense Trends                                                            I.7
  Interest Rate Risk Management                                                        I.10
  Lending Activities and Strategy                                                      I.11
  Asset Quality                                                                        I.17
  Funding Composition and Strategy                                                     I.17
  Subsidiaries                                                                         I.18
  Legal Proceedings                                                                    I.18

CHAPTER TWO                             MARKET AREA

  Introduction                                                                         II.1
  National Economic Factors                                                            II.2
  Interest Rate Environment                                                            II.3
  Market Area Demographics                                                             II.5
  Summary of Local Economy                                                             II.7
  Employment Sectors                                                                   II.8
  Unemployment Data and Trends                                                         II.9
  Market Area Deposit Characteristics/Competition                                      II.9
  Market Area Counties Deposit Competitors                                             II.11
  Summary                                                                              II.12

CHAPTER THREE                           PEER GROUP ANALYSIS

  Peer Group Selection                                                                 III.1
  Financial Condition                                                                  III.6
  Income and Expense Components                                                        III.9
  Loan Composition                                                                     III.12
  Credit Risk                                                                          III.14
  Interest Rate Risk                                                                   III.14
  Summary                                                                              III.17
RP ® Financial, LC.

                                                     TABLE OF CONTENTS
                                                 1st Security Bank of Washington
                                                 Mountlake Terrace, Washington
                                                            (continued)

                                                                                     PAGE
  DESCRIPTION                                                                      NUMBER

CHAPTER FOUR                           VALUATION ANALYSIS

  Introduction                                                                       IV.1
  Appraisal Guidelines                                                               IV.1
  RP Financial Approach to the Valuation                                             IV.1
  Valuation Analysis                                                                 IV.2
      1. Financial Condition                                                         IV.2
      2. Profitability, Growth and Viability of Earnings                             IV.4
      3. Asset Growth                                                                IV.6
      4. Primary Market Area                                                         IV.6
      5. Dividends                                                                   IV.8
      6. Liquidity of the Shares                                                     IV.9
      7. Marketing of the Issue                                                      IV.9
               A. The Public Market                                                  IV.9
               B. The New Issue Market                                               IV.14
               C. The Acquisition Market                                             IV.17
      8. Management                                                                  IV.17
      9. Effect of Government Regulation and Regulatory Reform                       IV.18
  Summary of Adjustments                                                             IV.18
  Valuation Approaches                                                               IV.18
      1. Price-to-Earnings (“P/E”)                                                   IV.20
      2. Price-to-Book (“P/B”)                                                       IV.22
      3. Price-to-Assets (“P/A”)                                                     IV.22
  Comparison to Recent Offerings                                                     IV.23
  Valuation Conclusion                                                               IV.23
RP ® Financial, LC.

                                                            LIST OF TABLES
                                                     1st Security Bank of Washington
                                                     Mountlake Terrace, Washington

TABLE
NUMBE
  R                   DESCRIPTION                                                      PAGE

   1.1       Historical Balance Sheets                                                 I.4
   1.2       Historical Income Statements                                              I.8

   2.1       Summary Demographic/Economic Information                                  II.6
   2.2       Primary Market Area Employment Sectors                                    II.8
   2.3       Market Area Unemployment Trends                                           II.9
   2.4       Deposit Summary                                                           II.10
   2.5       Market Area Counties Deposit Competitors                                  II.11

   3.1       Peer Group of Publicly-Traded Thrifts                                     III.3
   3.2       Balance Sheet Composition and Growth Rates                                III.7
   3.3       Inc as a % of Average Assets and Yields, Costs, Spreads                   III.10
   3.4       Loan Portfolio Composition and Related Information                        III.13
   3.5       Credit Risk Measures and Related Information                              III.15
   3.6       Interest Rate Risk Measures and Net Interest Income Volatility            III.16

   4.1       Market Area Unemployment Rates                                            IV.8
   4.2       Pricing Characteristics and After-Market Trends                           IV.15
   4.3       Market Pricing Comparatives                                               IV.16
   4.4       Valuation Adjustments                                                     IV.18
   4.5       Derivation of Core Earnings                                               IV.20
   4.6       Public Market Pricing                                                     IV.21
RP ® Financial, LC.                                                                               OVERVIEW AND FINANCIAL ANALYSIS
                                                                                                                               I.1

                                               I. OVERVIEW AND FINANCIAL ANALYSIS

Introduction

         Headquartered in Mountlake Terrace, Snohomish County, Washington, 1st Security has operated since 2004 as a
Washington-chartered mutual savings bank, having functioned previously as a credit union. At December 31, 2011, 1st Security had $283.8
million in assets, $246.4 million in deposits and total equity of $26.8 million, equal to 9.43% of total assets. 1st Security is a member of the
Federal Home Loan Bank (“FHLB”) system, and its deposits are insured up to the regulatory maximums by the Federal Deposit Insurance
Corporation (“FDIC”). The Bank serves the Seattle-Tacoma-Bellevue metropolitan area through its main office in Mountlake Terrace and six
branch offices, all of which are located in the greater Seattle-Tacoma region. The Bank’s offices are located in four different counties, as shown
in a map provided in Exhibit I-1. 1st Security’s audited financial statements are included by reference as Exhibit I-2.

Strategic Overview

         1 st Security has been serving the greater Puget Sound area, along Interstate 5 (the “I-5 corridor”) since 1936, and was originally
chartered as a credit union. In 2000, after serving Select Employee Groups (“SEGs”) for 64 years, 1st Security implemented an expansion plan
and completed three mergers with other credit unions. On April 1, 2004, 1st Security converted from a credit union to a mutual savings bank
with the goal of becoming more competitive with commercial banks and thrifts in the local market area. Management also wanted to broaden
the products and services offered and eventually be able to raise capital for expansion purposes. In recent years, the Bank has worked through
certain regulatory matters which have led to enforcement actions, and all such regulatory issues have been addressed and the enforcement
actions have been terminated. The Bank’s general business strategies for the future include expanding the size and scope of operations,
pursuing efficiencies in internal operations, emphasizing lower cost core deposits to manage funding costs, continuing to improve asset quality,
leveraging the increased equity base and improving earnings.
RP ® Financial, LC.                                                                              OVERVIEW AND FINANCIAL ANALYSIS
                                                                                                                              I.2

          The loan portfolio contains a significant balance of indirect home improvement (“replacement-contracting”) loans. This type of
lending was a core strategy for many years prior to the charter conversion to a mutual savings bank in 2004. The Bank also historically was
very active in automobile lending, however in recent periods such lending has been de-emphasized. As a replacement for automobile lending,
the Bank has expanded the loan portfolio in the areas of commercial real estate and commercial business loans. Going forward, the Bank has
identified several different opportunities that will continue to modify the profile of the loan portfolio and enhance earnings. First, the Bank
plans to explore the enhancement the replacement contracting business program by expanding its relationships into California. Second, the
Bank plans to take advantage of some of the market dislocation that has occurred over the past several years and offer construction loans in the
primary market area on a selective basis to local contractors and individual borrowers. Third, the Bank is developing a residential mortgage
banking program to increase non-interest income. In addition, the Bank has begun to originate 1-4 family residential mortgages after having
outsourced this function to a third party for a number of years.

          1st Security’s deposit base is diversified among all major deposit types, with money market accounts and time deposits comprising the
largest portion of the deposit base. Borrowings are utilized to supplement the deposit funds as well as assist in managing funding costs and
interest rate risk. Such borrowings have typically been limited mostly to FHLB advances with fixed rate terms. While lending has been a
continuous focus for the Bank, in recent years the cash and investments portfolio has fluctuated with loan demand and funding sources. The
cash and investment portfolio currently includes balances of investments such as U.S. agencies, mortgage backed securities and municipal
bonds.

         The additional equity from the stock offering will provide for a stronger balance sheet to pursue the strategic plan of the Bank. For
example, interest rate risk and funding costs will be reduced by an enhanced interest-earning assets to interest-bearing liabilities (“IEA/IBL”)
ratio. The new equity will enable the Bank to consider expansion opportunities as well, such as the establishment or acquisition of additional
banking offices in current or nearby markets. The projected use of proceeds is highlighted below.

             ●    The Company. The Company is expected to retain up to 50% of the net conversion proceeds. At present, funds at the holding
                  company level are expected to be initially invested primarily into short-term investment grade securities or a deposit at the
                  Bank. Over time, the funds may be utilized for various corporate purposes, which may include acquisitions, additional equity
                  investments in the Bank, repurchases of common stock, and the payment of regular and/or special cash dividends.

             ●    The Bank. A minimum of 50% of the net conversion proceeds will be infused into the Bank. Cash proceeds (i.e., net
                  proceeds less deposits withdrawn to fund stock purchases) infused into the Bank will initially be invested in short term
                  securities and over time become part of general funds, pending deployment into loans and investment securities.
RP ® Financial, LC.                                                                               OVERVIEW AND FINANCIAL ANALYSIS
                                                                                                                               I.3

Plan of Conversion

         On July 10, 2008, the Board of Directors of the Bank adopted a plan of conversion, incorporated herein by reference, in which the
Bank will convert from a Washington-chartered mutual savings bank to a Washington-chartered stock savings bank and become a
wholly-owned subsidiary of FS Bancorp, Inc. (“FS Bancorp” or the “Company”), a newly formed Washington corporation. On August 18,
2011, the Board of Directors voted to move forward with the plan of conversion. FS Bancorp will offer 100% of its common stock to
qualifying depositors of the Bank in a subscription offering and, if necessary, to members of the general public through a community offering
and/or a syndicated community offering. Going forward, FS Bancorp will own 100% of the Bank’s stock, and the Bank will initially be the
Company’s sole subsidiary. A portion of the net proceeds received from the sale of common stock will be used to purchase all of the then to be
issued and outstanding capital stock of the Bank and the balance of the net proceeds will be retained by the Company.

          At this time, no other activities are contemplated for the Company other than the ownership of the Bank, extending a loan to the
newly-formed employee stock ownership plan (the “ESOP”) and reinvestment of the proceeds that are retained by the Company. In the future,
FS Bancorp may acquire or organize other operating subsidiaries, diversify into other banking-related activities, pay dividends or repurchase its
stock, although there are no specific plans to undertake such activities at the present time.

Balance Sheet Trends

         Table 1.1 shows the Bank’s historical balance sheet data since year end 2007. Between year-end 2007 and December 31, 2011, assets
grew by a net of 1.9% on an annual basis, with such funds invested in cash and equivalents and investment securities, which was mostly offset
by a decline in loans receivable. After reaching a high of $292.3 million at December 31, 2010, assets trended lower in 2011, as lower loan
demand and fewer quality lending opportunities resulted in a decline in the loan portfolio. Available liquidity, along with loan repayments and
prepayments, was used to reduce borrowings. Most of the asset growth achieved during the five year period shown occurred between 2008 and
2010, as additional balance sheet funds were gained from increases in deposits and borrowings. Total loans declined in fiscal 2008 as the Bank
completed a loan securitization transaction, whereby approximately $50 million of the Bank’s portfolio of long-term fixed rate residential loans
were securitized and sold. During fiscal 2011, deposits became an increasing portion of funding liabilities, as borrowings declined. Equity
declined at a 4.1% annual rate as losses recorded from fiscal 2007 to 2009 were only partially offset by the net income recorded in fiscal years
2010 and 2011. A summary of 1st Security’s key operating ratios for the past three and one-half years is presented in Exhibit I-3.
RP ® Financial, LC.                                                                                                          OVERVIEW AND FINANCIAL ANALYSIS
                                                                                                                                                          I.4

                                                                               Table 1.1
                                                   1st Security Bank of Washington, Mountlake Terrace, Washington
                                                                     Historical Balance Sheet Data
                                                                                                                                                                        12/31/07
                                                                                                                                                                           -
                                                                                                                                                                       12/31/11
                                                                                                                                                                       Annual.
                                                                                                                                                                       Growth
                                                                                                                                                                         Rate
                                                                              As of December 31,

                                   2007                     2008                          2009                       2010                           2011
                             Amount       Pct(1)      Amount         Pct(1)         Amount         Pct(1)      Amount          Pct(1)         Amount       Pct(1)        Pct
                              ($000)       (%)         ($000)         (%)            ($000)         (%)         ($000)          (%)            ($000)       (%)          (%)
Total Amount
of:
 Assets                  $ 263,066         100.00 %   $ 255,368       100.00 % $ 281,836            100.00 %   $ 292,334        100.00 % $ 283,793          100.00 %           1.91 %
 Loans Receivable
(net)                         237,807       90.40 %       222,974      87.31 %       231,441         82.12 %       230,822       78.96 %       217,131       76.51 %       -2.25 %
 Cash and Equivalents           5,898        2.24 %        14,457       5.66 %        28,534         10.12 %        35,250       12.06 %        19,253        6.78 %       34.42 %
 Investment Securities          4,621        1.76 %         2,834       1.11 %           603          0.21 %         7,642        2.61 %        26,899        9.48 %       55.33 %
 FHLB Stock                     1,797        0.68 %         1,797       0.70 %         1,797          0.64 %         1,797        0.61 %         1,797        0.63 %       -0.01 %
 Other Real Estate
Owned                              0         0.00 %            0        0.00 %         5,484          1.95 %         3,701        1.27 %         4,589        1.62 %           NM
 Mortgage Servicing
Rights                            198        0.08 %           461       0.18 %           340          0.12 %           245        0.08 %           200        0.07 %        0.25 %
 Fixed Assets                  11,302        4.30 %        10,643       4.17 %         9,721          3.45 %         9,249        3.16 %         9,852        3.47 %       -3.38 %
 Other Assets                   1,442        0.55 %         2,201       0.86 %         3,916          1.39 %         3,628        1.24 %         4,072        1.43 %       29.62 %

Deposits                 $ 208,863          79.40 %   $ 216,056        84.61 % $ 230,985             81.96 %   $ 243,957         83.45 % $ 246,418           86.83 %           4.22 %
FHLB Advances,
Other Borrowed Funds           19,800        7.53 %         9,400       3.68 %        25,900          9.19 %        21,900        7.49 %         8,900        3.14 %       -18.12 %
Other Liabilities               2,714        1.03 %         2,050       0.80 %         1,636          0.58 %         1,682        0.58 %         1,708        0.60 %       -10.93 %

Equity                   $     31,689       12.05 %   $    27,862      10.91 % $      23,315          8.27 %   $    24,795        8.48 % $      26,767        9.43 %        -4.13 %
 Accumulated other
Comprehensive
 Gain/(Loss)             $         6         0.00 % ($        16 )      -0.01 % $        11           0.00 % ($       111 )       -0.04 % $       316         0.11 %

Loans/Deposits                             113.86 %                   103.20 %                      100.20 %                     94.62 %                     88.11 %

Offices Open                      12                          12                          8                             6                           6


(1) Ratios are as a percent of ending assets.
Source: Audited and unaudited financial statements; RP Financial calculations.
RP ® Financi