FS Bancorp, Inc. (Form: S-1, Received: 10/03/2011 06:04:26)

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 _________ __, 2011. 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 _________ __, 2013. 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

	Minimum		Maximum		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)	$	331,000	$	421,000	$	473,000
Estimated Other Expenses (2)	$	1,679,000	$	1,679,000	$	1,679,000
Estimated Net Proceeds to FS Bancorp, Inc.	$	18,815,000	$	26,075,000	$	30,249,250
Estimated Net Proceeds Per Share	$	9.03	$	9.25	$	9.34

(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, the maximum commission payable to participating members would be $1.1 million, $1.5 million and $1.8 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

________ __, 2011

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		47
Management’s Discussion and Analysis of Financial Condition and Results of Operations		48
Business of FS Bancorp, Inc.		69
Business of 1st Security Bank of Washington		69
Management		97
How We Are Regulated		106
Taxation		117
The Conversion and Stock Offering		118
Restrictions on Acquisition of FS Bancorp, Inc. and 1st Security Bank of Washington		140
Description of Capital Stock of FS Bancorp, Inc.		143
Transfer Agent and Registrar		145
Experts		145
Legal and Tax Opinions		145
Where You Can Find More Information		145
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 118, 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 to the public in this offering					Shares to be sold to the employee stock ownership plan (2)					Shares proposed to be sold to directors and officers					Total shares of common stock to be outstanding after the offering
	Amount		% (1)			Amount		% (1)			Amount		% (1)			Amount		%

Minimum		1,839,900		88.4	%		166,600		8.0	%		76,000		3.7	%		2,082,500		100.0	%
Midpoint		2,178,000		88.9	%		196,000		8.0	%		76,000		3.1	%		2,450,000		100.0	%
Maximum		2,516,100		89.3	%		225,400		8.0	%		76,000		2.7	%		2,817,500		100.0	%
Maximum, as adjusted		2,904,915		89.7	%		259,210		8.0	%		76,000		2.3	%		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, 1st Security Bank of Washington will be a Washington state-chartered stock savings bank and the wholly owned subsidiary of FS Bancorp.

At the time of our conversion to a mutual savings bank in 2004, we operated 14 branch locations in the Puget Sound area, along with our Mountlake Terrace headquarters, and had 132 employees. Our assets at December 31, 2004 totaled $261.4 million. Since then, in an effort to address a number of operational deficiencies facing 1st Security Bank of Washington, primarily related to differences between operating a credit union and operating a bank, we restructured the board of trustees (hereafter referred to throughout this document as the board of directors) and added a number of seasoned bankers to the organization. In 2008, we determined that a number of 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 and a consolidation of our branch network. We initiated a number of these measures in 2009. At June 30, 2011, we maintained six branch locations, along with our headquarters, had approximately 79 full time equivalent employees, total assets of $272.8 million and total deposits of $241.5 million. This compared to 12 branch locations, along with our headquarters, 112 full-time equivalent employees, total assets of $255.4 million and total deposits of $216.1 million, at December 31, 2008.

Since January 2006, 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 September 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.

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. Going forward, an emphasis will be placed on diversifying our lending products, such as commercial real estate, commercial business and residential construction lending, while maintaining the size of our consumer loan portfolio. We also intend to reintroduce in-house originations of residential mortgage loans, 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.”

Operating Strategy

●

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 currently intend to open a branch in the Capitol Hill area of Seattle within the next 12 months, although no specific location has been identified at this time.

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 18.

The Conversion and Stock Offering

We do not have public 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:

	Depositors

	1st Security Bank of Washington

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

	Shareholders
		100%
	FS Bancorp, Inc.
		100%
	1st Security Bank of Washington

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 ________ __, 2011.

(4)

Depositors with us as of the close of business on ________ __, 2011 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, 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.”

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 anticipate adding one branch in the Capitol Hill area of Seattle, Washington during the next 12 months although no specific site has been identified at this time; 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 September 2, 2011, 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.

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), Tennessee (two companies) and Montana, Michigan, Indiana, Illinois, Louisiana 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.

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)

Riverview Bancorp, Inc. (RVSB)	Vancouver, WA	$	886
Timberland Bancorp, Inc. (TSBK)	Hoquiam, WA		735
LSB Financial Corp. (LSBI)	Lafayette, IN		360
First Advantage Bancorp (FABK)	Clarksville, TN		350
Eagle Bancorp Montana (EBMT)	Helena, MT		331
Louisiana Bancorp, Inc. (LABC)	Metairie, LA		320
Jacksonville Bancorp, Inc. (JXSB)	Jacksonville, IL		305
Athens Bancshares, Inc. (AFCB)	Athens, TN		283
First Federal of Northern Michigan (FFNM)	Alpena, MI		219
FFD Financial Corp. (FFDF)	Dover, OH		211

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 June 30, 2011. Core earnings represent 1st Security Bank of Washington’s earnings, adjusted for non-operating items and adjusted to reflect a normalized assumed tax rate. 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 June 30, 2011, stock price information as September 2, 2011 as reflected in RP Financial’s appraisal report, dated September 2, 2011, 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 3.8% on a price-to-reported earnings basis, a premium of 59.8% on a price-core earnings basis, a discount of 14.2% on a price-to-book value basis, and a discount of 17.6% on a price-to-tangible book value basis.

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

FS Bancorp, Inc.
Minimum of offering range		11.86	x		21.37	x		49.26	%		49.26	%
Midpoint of offering range		14.11	x		25.68	x		53.88	%		53.88	%
Maximum of offering range		16.43	x		30.19	x		57.90	%		57.90	%
Maximum of offering range, as adjusted		19.16	x		35.62	x		61.88	%		61.88	%

Valuation of peer group companies using stock market prices as of September 2, 2011
Average		17.08	x		18.89	x		67.44	%		70.29	%
Median		17.27	x		19.71	x		69.11	%		72.48	%

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.”

●

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 July 1, 2010 to September 2, 2011, 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 July 1, 2010 and September 2, 2011

		Change from Initial Trading Date Offering Price
Transaction (Ticker Symbol)	IPO Date	After One Day (%)			After One Week (%)			After One Month (%)			Through September 2, 2011 (%)

IF Bancorp, Inc. (IROQ)	07/08/11		16.70	%		16.50	%		8.50	%		8.10	%
State Investors Bancorp, Inc. (SIBC)	07/07/11		18.50			16.60			16.00			15.00
First Connecticut Bancorp, Inc. (FBNK)	06/30/11		10.80			11.60			11.10			4.70
Franklin Financial Corp. (FRNK)	04/28/11		19.70			17.70			19.60			11.40
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			(10.00	)
Anchor Bancorp (ANCB)	01/26/11		0.00			0.40			4.50			(20.50	)
Wolverine Bancorp, Inc. (WBKC)	01/20/11		24.50			22.40			35.00			40.00
SP Bancorp, Inc. (SPBC)	11/01/10		(6.00	)		(6.60	)		(8.00	)		13.50
Standard Financial Corp. (STND)	10/07/10		19.00			18.90			29.50			47.50
Madison Bancorp, Inc. (MDSN)	10/07/10		25.00			25.00			25.00			(7.00	)
Century Next Fin. Corp. (CTUY)	10/01/10		25.00			15.00			10.00			45.00
Peoples Fed Bncshres, Inc. (PEOP)	07/07/10		4.00			6.90			4.20			40.00

Average:			13.82	%		12.78	%		13.80	%		14.05	%
Median:			16.70	%		15.00	%		11.10	%		11.40	%

Termination of the Offering

The subscription offering will end at 12:00 Noon, Pacific time, on _________ __, 2011, 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 _________ __, 2013.

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:

	Minimum		Maximum		Maximum, as adjusted


Retained by FS Bancorp	$	7,741,500	$	10,783,500	$	12,532,525
Loan to employee stock ownership plan		1,666,000		2,254,000		2,592,100
Contributed to 1st Security Bank of Washington		9,407,500		13,037,500		15,124,625
Net proceeds from stock offering	$	18,815,000	$	26,075,000	$	30,249,250

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.

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 ________. 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.

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 76,000 shares regardless of the number of shares sold in the offering. This number equals 2.7% 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.

These proposed purchases of common stock by our directors and executive officers (3.7% and 2.7% 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 25.6% and 24.7% 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).

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 $443,000 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.

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

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

Stock options	Directors/ Employees		208,250		281,750		10.0	%		585		792
			458,150		619,850		22.0	%	$	3,084	$	4,173

(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 $2.81 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 3.18% (based on the ten-year Treasury Note rate); and a volatility rate of 15.79% 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.

Share Price		83,300 Shares Awarded at Minimum of Range		98,000 Shares Awarded at Midpoint of Range		112,700 Shares Awarded at Maximum of Range		129,605 Shares Awarded at Maximum of 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	$	1,577	$	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.

Market/ Exercise Price Per Share		Grant-Date Fair Value Per Option		208,250 Options at Minimum of Range		245,000 Options at Midpoint of Range		281,750 Options at Maximum of Range		324,013 Options at Maximum of Range, as adjusted
	(Dollars in thousands, except per share information)
$	8.00	$	2.25	$	469	$	551	$	634	$	729
$	10.00	$	2.81	$	585	$	688	$	792	$	910
$	12.00	$	3.37	$	702	$	826	$	949	$	1,092
$	14.00	$	3.93	$	818	$	963	$	1,107	$	1,273

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.

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 _________ __, 2011, 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.

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 that region 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 $124.7 million or 58.1% of our total loan portfolio as of June 30, 2011, of which $87.2 million (70.0% of total consumer loans) consisted of indirect home improvement loans (some of which were not secured by a lien on the real property), $25.3 million (20.3% of total consumer loans) consisted of recreational loans, predominantly boats, and $8.9 million (7.1% of total consumer loans) consisted of automobile 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.”

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 130 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 $87.2 million, or 40.7% of our gross loan portfolio, as of June 30, 2011, reflecting approximately 11,000 loans with an average balance of approximately $8,000.

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 States of California and Texas. We are in the process of testing these markets with a limited number of contractors/dealers and a limited volume in each state and without increasing current staffing. To the extent we determine to move forward with our indirect home improvement lending program in California and Texas, we will need to add contractors and dealers and will 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 will 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 June 30, 2011, our loan portfolio included $55.3 million of commercial and multi-family real estate loans and commercial business loans, or approximately 25.8% of our total loan portfolio, compared to $18.7 million, or 8.5%, at December 31, 2006. 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.

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 June 30, 2011, we had $558,000 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. As of June 30, 2011, we had approved warehouse lending lines of up to $4.0 million with eight companies, for an aggregate limit of $29.8 million. During the year ended December 31, 2010, we processed approximately 1,300 loans and funded approximately $326.4 million under this program. For the six months ended June 30, 2011, we processed approximately 350 loans and funded approximately $86.2 million. Our mortgage warehouse related gross revenues totaled $671,000 for the year ended December 31, 2010 and $168,000 for the six months ended June 30, 2011.

Following completion of the stock offering, we will be able to increase the maximum warehouse line from $4.0 million to approximately 20% of capital based on our current internal policy limits, or approximately $7.7 million (at the adjusted maximum of the offering range). This will allow us to increase funding capacity for selected existing customers and enable us to attract additional mortgage banking clients for our warehouse lending business, which we are actively pursuing.

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.

Our lending limit may limit our growth.

At June 30, 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 $5.2 million at June 30, 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 have recently hired several new experienced construction lenders. 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 $6.3 million, or 2.9%, of total loans at June 30, 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 is expected to go on-line during 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.

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 effect 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 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 2.3% of total gross loans, and 247.0% of non-performing loans at June 30, 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.

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

During the periods from January 1, 2008 through June 30, 2011, we originated in the aggregate $122.0 million in commercial business and commercial real estate (including multi-family) loans of which $47.6 million, or 39.0%, are included in our gross loan portfolio at June 30, 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 are also reintroducing in-house originations of residential mortgage loans through a mortgage banking program. 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.

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.

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.

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 June 30, 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 six months ended June 30, 2011 and the years ended December 31, 2010 and 2009, our efficiency ratios were 73.0%, 69.9% and 84.3%, respectively. Generally, this means that we spent approximately $0.73, $0.70 and $0.84 during the six months ended June 30, 2011 and the years ended December 31, 2010 and 2009, respectively, to generate $1.00 of income.

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 six months ended June 30, 2011 and for the year ended December 31, 2010 totaled $1.0 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 June 30, 2011, we had approximately $10.7 million of federal and state 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 3.82% for ownership changes occurring in September 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.

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.

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 3.7% and 2.7% 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 will result in ownership by insiders of FS Bancorp in excess of 24.0% 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.”

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.”

SELECTED FINANCIAL AND OTHER DATA

The Financial Condition Data as of December 31, 2010 and 2009 and the Operating Data for the years ended December 31, 2010, 2009 and 2008 presented below are derived from the audited financial statements and related notes included elsewhere in the prospectus. The unaudited financial information presented below as of June 30, 2011 and for the six months ended June 30, 2011 and 2010, reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Historical results are not necessarily indicative of results to be expected in any future period, and results for the six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the year ended December 31, 2011. 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.

	June 30, 2011		December 31,
	June 30, 2011		2010		2009		2008		2007		2006
	(In thousands)
Selected Financial Condition Data:

Total assets	$	272,784	$	292,334	$	281,836	$	255,368	$	263,066	$	256,385
Loans receivable, net (1)		210,184		230,822		231,441		222,974		237,807		218,078
Investment securities available-for-sale, at fair value		11,689		7,642		603		2,834		4,485		15,369
Investment securities, at amortized cost:
Corporate debt securities		-		-		-		-		136		134
Federal Home Loan Bank stock		1,797		1,797		1,797		1,797		1,797		1,797
Deposits		241,475		243,957		230,985		216,056		208,863		204,816
Borrowings		3,900		21,900		25,900		9,400		19,800		13,400
Total equity		25,977		24,795		23,315		27,862		31,689		34,779

	Six Months Ended June 30,				Years Ended December 31,
	2011		2010		2010		2009			2008			2007			2006
	(In thousands)
Selected Operations Data:

Total interest and dividend income	$	8,263	$	8,467	$	17,333	$	16,404		$	16,899		$	17,619		$	16,951
Total interest expense		1,627		1,993		3,886		4,521			5,798			6,942			5,536
Net interest income		6,636		6,474		13,447		11,883			11,101			10,677			11,415
Provision for loan losses		1,030		1,905		3,480		7,067			4,937			578			246
Net interest income after provision for loan losses		5,606		4,569		9,967		4,816			6,164			10,099			11,169
Fees and service charges		1,019		1,196		2,444		2,839			2,667			2,718			2,989
Gain on sale on assets		-		797		1,006		1,398			(306	)		7			1,109
Other noninterest income		82		95		217		252			552			640			815
Total noninterest income		1,101		2,088		3,667		4,489			2,913			3,365			4,913
Total noninterest expense		5,699		5,941		12,032		13,879			12,881			17,322			14,263
Income (loss) before provision for taxes		1,008		716		1,602		(4,574	)		(3,804	)		(3,858	)		1,819
Income tax provision		-		-		-		-			-			271			573
Net income (loss)	$	1,008	$	716	$	1,602	$	(4,574	)	$	(3,804	)	$	(4,129	)	$	1,246

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

	At or For the
	Six Months Ended June 30,						Years Ended December 31,
	2011			2010			2010			2009			2008			2007			2006

Selected Financial Ratios and Other Data:
Performance ratios:
Return on assets (ratio of net income (loss) to average total assets) (1)		0.73	%		0.54	%		0.60	%		(1.75	)%		(1.55	)%		(1.60	)%		0.48	%
Return on equity (ratio of net income (loss) to average equity) (1)		7.88	%		5.92	%		6.54	%		(16.84	)%		(11.95	)%		(11.82	)%		3.65	%
Yield on average interest-earning assets (1)		6.42	%		6.75	%		6.86	%		6.62	%		7.30	%		7.28	%		7.04	%
Rate paid on average interest-bearing liabilities (1)		1.42	%		1.82	%		1.75	%		2.12	%		2.99	%		3.50	%		2.85	%
Interest rate spread information:
Average during period (1)		5.00	%		4.93	%		5.11	%		4.50	%		4.31	%		3.79	%		4.19	%
End of period (1)		5.04	%		5.03	%		4.99	%		4.17	%		4.24	%		3.78	%		4.08	%
Net interest margin (1) (2)		5.15	%		5.16	%		5.32	%		4.79	%		4.80	%		4.41	%		4.74	%
Operating expense to average total assets (1)		4.15	%		4.45	%		4.49	%		5.32	%		5.24	%		6.69	%		5.54	%
Average interest-earning assets to average interest-bearing liabilities		112.13	%		114.40	%		113.98	%		116.01	%		119.50	%		121.83	%		124.06	%
Efficiency ratio (3)		72.95	%		68.24	%		69.86	%		84.29	%		89.41	%		125.15	%		86.26	%

Asset quality ratios:
Non-performing assets to total assets at end of period ( 4)		2.92	%		4.27	%		3.45	%		4.64	%		0.99	%		0.08	%		0.10	%
Non-performing loans to total gross loans (5)		0.91	%		2.65	%		2.66	%		3.12	%		1.09	%		0.08	%		0.10	%
Allowance for loan losses to non-performing loans (5)		246.99	%		100.11	%		93.70	%		99.34	%		225.00	%		1499.45	%		1181.66	%
Allowance for loan losses to gross loans receivable		2.25	%		2.65	%		2.50	%		3.10	%		2.45	%		1.14	%		1.22	%

Capital ratios:
Equity to total assets at end of period		9.52	%		8.63	%		8.48	%		8.27	%		10.91	%		12.05	%		13.57	%
Average equity to average assets		9.31	%		9.07	%		9.13	%		10.40	%		12.95	%		13.50	%		13.27	%

Other data:
Number of full service offices		6			6			6			8			12			12			12
Full-time equivalent employees		79			80			79			84			112			125			130

(1)	Performance ratios for the six month periods ended June 30, 2011 and 2010 are annualized.

(2)	Net interest income divided by average interest earning assets.

(3)	Total non-interest expense as a percentage of net interest income and total other non-interest income.

(4)	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.

(5)	Non-performing loans consists of non-accruing loans and accruing loans more than 90 days past due.

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;

●

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 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 size of our consumer loan portfolio. We also intend to reintroduce 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.”

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 $18.8 million at the minimum of the offering range and $26.1 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:

	Minimum		Maximum		Maximum, as adjusted


Retained by FS Bancorp	$	7,741,500	$	10,783,500	$	12,532,525
Loan to employee stock ownership plan		1,666,000		2,254,000		2,592,100
Contributed to 1st Security Bank of Washington		9,407,500		13,037,500		15,124,625
Net proceeds from stock offering	$	18,815,000	$	26,075,000	$	30,249,250

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.

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.”

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.

CAPITALIZATION

The following table presents the capitalization of 1st Security Bank of Washington at June 30, 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 June 30, 2011			FS Bancorp – Pro Forma Based Upon Sale at $10.00 Per Share
				2,082,500 Shares (Minimum of Range)			2,450,000 Shares (Midpoint of Range)			2,817,500 Shares (Maximum of Range)			3,240,125 Shares (1) (Maximum of Range, as Adjusted)
	(Dollars in thousands)

Deposits (2)	$	241,475		$	241,475		$	241,475		$	241,475		$	241,475
Borrowings		3,900			3,900			3,900			3,900			3,900
Total deposits and borrowings	$	245,375		$	245,375		$	245,375		$	245,375		$	245,375

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		---			18,794			22,420			26,047			30,217
Retained earnings (3)		25,914			25,914			25,914			25,914			25,914
Accumulated other
comprehensive income		63			63			63			63			63

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	$	25,977		$	42,293		$	45,482		$	48,671		$	52,338

Total shareholders’ equity as a percentage of total assets		9.52	%		14.63	%		15.56	%		16.47	%		17.50	%

(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.

1st SECURITY BANK OF WASHINGTON

EXCEEDS ALL

REGULATORY CAPITAL REQUIREMENTS

At June 30, 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 June 30, 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 June 30, 2011.

						Pro Forma at June 30, 2011
	At June 30, 2011					2,082,500 shares Sold at $10.00 per Share (Minimum of Range)						2,450,000 Shares Sold at $10.00 per Share (Midpoint of Range)						2,817,500 Shares Sold at $10.00 per Share (Maximum of Range)						3,240,125 Shares Sold at $10.00 per Share (Maximum of Range, as Adjusted)
	Amount		Percent of Assets (1)			Amount			Percent of Assets			Amount			Percent of Assets			Amount			Percent of Assets			Amount			Percent of Assets
	(Dollars in thousands)
Equity capital under generally accepted accounting principles (“GAAP”)	$	25,977		9.52	%	$	33,719			11.95	%	$	35,240			12.41	%	$	36,761			12.86	%	$	38,510			13.38	%

Tier I leverage	$	25,894		9.37	%	$	33,636			11.77	%	$	35,157			12.23	%	$	36,678			12.68	%	$	38,427			13.18	%
Requirement		11,053		4.00			11,430			4.00			11,502			4.00			11,575			4.00			11,658			4.00
Excess	$	14,841		5.37	%	$	22,206			7.77	%	$	23,655			8.23	%	$	25,103			8.68	%	$	26,769			9.18	%

Tier I risk based	$	25,894		11.31	%	$	33,636			14.57	%	$	35,157			15.20	%	$	36,678			15.84	%	$	38,427			16.56	%
Requirement		9,160		4.00			9,235			4.00			9,250			4.00			9,264			4.00			9,281			4.00
Excess	$	16,734		7.31	%	$	24,401			10.57	%	$	25,907			11.20	%	$	27,414			11.84	%	$	29,146			12.56	%

Total risk based	$	28,781		12.57	%	$	36,523			15.82	%	$	38,044			16.45	%	$	39,565			17.08	%	$	41,314			17.81	%
Risk based requirement		18,320		8.00			18,471			8.00			18,500			8.00			18,529			8.00			18,562			8.00
Excess	$	10,461		4.57	%	$	18,052			7.82	%	$	19,544			8.45	%	$	21,036			9.08	%	$	22,752			9.81	%

Reconciliation of capital infused into 1st Security Bank of Washington:
Net proceeds infused						$	9,407					$	11,223					$	13,038					$	15,125
Common stock acquired by employee stock ownership plan							(1,666	)					(1,960	)					(2,254	)					(2,592	)
Pro forma increase in GAAP and regulatory capital						$	7,741					$	9,263					$	10,784					$	12,533

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

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 $18.8 million and $26.1 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 ____________ __, 2011, and

●

other members, who are depositors of 1st Security Bank of Washington as of the close of business on _______ __, 2011, 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, officers, employees 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 $1.8 million. 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, 2010 and the six months ended June 30, 2011, respectively, 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 2.01% and 1.76%, respectively, which represent the yields on five-year U.S. Government securities at December 31, 2010 and June 30, 2011, respectively. 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 these periods. 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 periods resulting in an after-tax yield of 1.33% and 1.16% for the year ended December 31, 2010 and the six months ended June 30, 2011, respectively. 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.

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 dates and periods indicated 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.

	At or For the Six Months Ended June 30, 2011
	2,082,500 Shares Sold at $10.00 Per Share (Minimum of Range)			2,450,000 Shares Sold at $10.00 Per Share (Midpoint of Range)			2,817,500 Shares Sold at $10.00 Per Share (Maximum of Range)			3,240,125 Shares Sold at $10.00 Per Share (Maximum of Range, as Adjusted) (1)
	(Dollars in thousands)

Pro forma market capitalization:
Gross proceeds of offering	$	20,825		$	24,500		$	28,175		$	32,401
Less expenses		(2,010	)		(2,055	)		(2,100	)		(2,152	)
Estimated net proceeds		18,815			22,445			26,075			30,249
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	$	16,316		$	19,505		$	22,694		$	26,361
Pro forma net income for the six months ended June 30, 2011:
Historical	$	1,008		$	1,008		$	1,008		$	1,008
Pro forma income on net proceeds		95			114			132			153
Less: pro forma employee stock ownership plan adjustment (2)		(55	)		(65	)		(75	)		(86	)
Less: pro forma restricted stock award adjustment (3)		(55	)		(65	)		(75	)		(86	)
Less: pro forma stock option adjustment (4)		(54	)		(63	)		(73	)		(84	)
Pro forma net income	$	939		$	929		$	917		$	905

Per share net income for the six months ended June 30, 2011:
Historical	$	0.52		$	0.45		$	0.39		$	0.34
Pro forma income on net proceeds		0.05			0.05			0.05			0.05
Less: pro forma employee stock ownership plan adjustment (2)		(0.03	)		(0.03	)		(0.03	)		(0.03	)
Less: pro forma restricted stock award adjustment (3)		(0.03	)		(0.03	)		(0.03	)		(0.03	)
Less: pro forma stock option adjustment (4)		(0.03	)		(0.03	)		(0.03	)		(0.03	)
Pro forma net income per share (5)	$	0.48		$	0.41		$	0.35		$	0.30

Offering price as a multiple of pro forma net income per share	$	10.42		$	12.20		$	14.29		$	16.67

Number of shares outstanding for pro forma income per share calculations		1,924,230			2,263,800			2,603,370			2,993,876

(table continued on following page)

(Footnotes on page 46)

	At or For the Six Months Ended June 30, 2011
	2,082,500 Shares Sold at $10.00 Per Share (Minimum of Range)			2,450,000 Shares Sold at $10.00 Per Share (Midpoint of Range)			2,817,500 Shares Sold at $10.00 Per Share (Maximum of Range)			3,240,125 Shares Sold at $10.00 Per Share (Maximum of Range, as Adjusted) (1)
	(Dollars in thousands)

Pro forma shareholders’ equity at June 30, 2011:
Historical	$	25,977		$	25,977		$	25,977		$	25,977
Estimated net proceeds		18,815			22,445			26,075			30,249
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)		(833	)		(980	)		(1,127	)		(1,296	)
Pro forma shareholders’ equity	$	42,293		$	45,482		$	48,671		$	52,338

Pro forma shareholders’ equity per share at June 30, 2011:
Historical	$	12.47		$	10.60		$	9.22		$	8.02
Estimated net proceeds		9.03			9.16			9.25			9.34
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)	$	20.30		$	18.56		$	17.27		$	16.16

Offering price as a percentage of pro forma shareholders’ equity		49.26	%		53.88	%		57.90	%		61.88	%

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

(table continued on following page)

(Footnotes on page 46)

	At or For the Year Ended December 31, 2010
	2,082,500 Shares Sold at $10.00 Per Share (Minimum of Range)			2,450,000 Shares Sold at $10.00 Per Share (Midpoint of Range)			2,817,500 Shares Sold at $10.00 Per Share (Maximum of Range)			3,240,125 Shares Sold at $10.00 Per Share (Maximum of Range, as Adjusted) (1)
	(Dollars in thousands)

Pro forma market capitalization:
Gross proceeds of offering	$	20,825		$	24,500		$	28,175		$	32,401
Less expenses		(2,010	)		(2,055	)		(2,100	)		(2,152	)
Estimated net proceeds		18,815			22,445			26,075			30,249
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	$	16,316		$	19,505		$	22,694		$	26,361
Pro forma net income for the year ended December 31, 2010:
Historical	$	1,602		$	1,602		$	1,602		$	1,602
Pro forma income on net proceeds		216			259			301			350
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)		(107	)		(126	)		(145	)		(167	)
Pro forma net income	$	1,491		$	1,477		$	1,460		$	1,443

Per share net income for the year ended December 31, 2010:
Historical	$	0.83		$	0.70		$	0.61		$	0.53
Pro forma income on net proceeds		0.11			0.11			0.12			0.12
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)		(0.06	)		(0.06	)		(0.06	)		(0.06	)
Pro forma net income per share (5)	$	0.76		$	0.63		$	0.55		$	0.47

Offering price as a multiple of pro forma net income per share	$	13.16		$	15.87		$	18.18		$	21.28

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 46)

	At or For the Year Ended December 31, 2010
	2,082,500 Shares Sold at $10.00 Per Share (Minimum of Range)			2,450,000 Shares Sold at $10.00 Per Share (Midpoint of Range)			2,817,500 Shares Sold at $10.00 Per Share (Maximum of Range)			3,240,125 Shares Sold at $10.00 Per Share (Maximum of Range, as Adjusted) (1)
	(Dollars in thousands)

Pro forma shareholders’ equity at December 31, 2010:
Historical	$	24,795		$	24,795		$	24,795		$	24,795
Estimated net proceeds		18,815			22,445			26,075			30,249
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)		(833	)		(980	)		(1,127	)		(1,296	)
Pro forma shareholders’ equity	$	41,111		$	44,300		$	47,489		$	51,156

Pro forma shareholders’ equity per share at December 31, 2010:
Historical	$	11.91		$	10.12		$	8.80		$	7.65
Estimated net proceeds		9.03			9.16			9.25			9.34
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)	$	19.74		$	18.08		$	16.85		$	15.79

Offering price as a percentage of pro forma shareholders’ equity		50.66	%		55.31	%		59.35	%		63.33	%

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)

(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 8,330, 9,800, 11,270 and 12,961 shares were committed to be released during the six months ended June 30, 2011; and 16,660, 19,600, 22,540 and 25,921 shares were committed to be released during the year ended December 31, 2010, 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, 2010 and 10% of the amount contributed for restricted stock awards is expensed during the six months ended June 30, 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 $2.81 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 ten-year term. 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.

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
Name	Amount		Number of Shares		At the Minimum of Estimated Offering Range			At the Maximum of Estimated Offering 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		25,000		2,500		0.12			0.09
Michael J. Mansfield		100,000		10,000		0.48			0.35
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		100,000		10,000		0.48			0.35
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)	$	760,000		76,000		3.65	%		2.70	% (1)

(1) Difference is the result of rounding.

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.

At the time of our conversion to a mutual savings bank in 2004, we operated 14 branch locations in the Puget Sound area, along with our Mountlake Terrace headquarters, and had 132 employees. Our assets at December 31, 2004 totaled $261.4 million. Since then, in an effort to address a number of operational deficiencies facing the bank, primarily related to the differences between the way a credit union is run and the way a bank operates, we restructured the board of directors and added a number of seasoned bankers to the organization. In 2008, we determined that a number of cost cutting measures were needed to combat the deepening recession and return the institution to profitability, including salary reductions or freezes for a number of our senior officers, reduced employee benefits and a consolidation of our branch network, which commenced in 2009. At June 30, 2011, we maintained six branch locations, along with our headquarters, had approximately 79 full time equivalent employees, total assets of $272.8 million and total deposits of $241.5 million. This compared to 12 branch locations, along with our headquarters, 112 full-time equivalent employees, total assets of $255.4 million and total deposits of $216.1 million, at December 31, 2008.

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 consumer 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. Consumer loans totaled $124.7 million, or 58.1% of total loans as of June 30, 2011. Going forward, we plan to place more emphasis on commercial real estate, commercial business and residential construction lending, while maintaining the size of our consumer loan portfolio. We also intend to reintroduce in-house originations of residential mortgage loans, 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 the primary funding source.

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, other income, 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, estimation of fair value, accounting for the fair value of mortgage servicing rights and accounting for income taxes. 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 collectibility 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.

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 June 30, 2011 and June 30, 2010, respectively, 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 secured lending to small businesses in our market area, as well as residential construction lending.

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 in particular during 2009 and 2010. Our percentage of non-performing loans to total loans was 0.9% at June 30, 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 2.9% at June 30, 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 loan originations to consumers with higher credit scores, generally credit scores over 720, which has led to lower charge-offs in recent periods. Although we intend to grow our loan portfolio, including through 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 sales promotions on savings and checking accounts 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 currently intend to open a branch in the Capitol Hill area of Seattle within the next 12 months, although no specific location has been identified at this time. 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 June 30, 2011 and December 31, 2010

Assets. Total assets decreased $19.6 million, or 6.7%, to $272.8 million at June 30, 2011 from $292.3 million at December 31, 2010, primarily as a result of a $20.6 million, or 8.9%, decrease in loans receivable and a $5.3 million, or 16.0%, decrease in interest-bearing deposits at other financial institutions. The decrease in assets during the period was partially offset by a $4.0 million, or 53.0%, increase in securities available for sale and a $2.2 million, 32.5%, increase in other assets, consisting primarily of other real estate owned.

Loans receivable, net, decreased $20.6 million, or 8.9%, to $210.2 million at June 30, 2011 from $230.8 million at December 31, 2010, primarily as a result of low loan demand in our market area, coupled with loan repayments, foreclosures and repossession of assets. Real estate secured loans decreased $6.5 million, or 9.5%, to $61.4 million at June 30, 2011 from $67.9 million at December 31, 2010, primarily as a result of a $2.4 million, or 8.5%, decrease in commercial real estate loans and a $3.5 million, or 35.7%, decrease in construction and development loans. Consumer loans decreased $11.1 million, or 8.2%, to $124.6 million at June 30, 2011 from $135.8 million at December 31, 2010, including a $7.6 million, or 8.0%, decrease in indirect home improvement loans and a $3.7 million, or 29.4%, decrease in automobile loans. Commercial business loans decreased $4.4 million, or 13.4%, to $28.4 million at June 30, 2011 from $32.8 million at December 31, 2010. The low loan demand has been attributable primarily to the current 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. During the six months ended June 30, 2011, we had net charge-offs of $2.1 million and foreclosed on or repossessed $2.2 million of loans.

Our allowance for loan losses at June 30, 2011 was $4.8 million, or 2.3% of gross loans receivable, compared to $5.9 million, or 2.5% of gross loans receivable, at December 31, 2010. Non-performing loans, consisting of nonaccruing loans and accruing loans more than 90 days delinquent, decreased to $2.0 million at June 30, 2011 from $6.3 million at December 31, 2010. At June 30, 2011, our non-performing loans consisted of $234,000 of one-to four-family loans, $662,000 of home equity loans, $504,000 of consumer loans and $558,000 of commercial business loans. Non-performing loans to total loans decreased to 0.9% at June 30, 2011 from 2.7% at December 31, 2010. Real estate owned and repossessed assets totaled $6.0 million at June 30, 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 June 30, 2011, we also had $1.5 million in restructured loans which were performing in accordance with their revised terms. See “Business of 1st Security Bank of Washington - Asset Quality” for additional information regarding our non-performing loans.

Liabilities. Total liabilities decreased $20.7 million, or 7.7%, to $246.8 million at June 30, 2011, from $267.5 million at December 31, 2010. Deposits decreased $2.5 million, or 1.0%, to $241.5 million at June 30, 2011 from $244.0 million at December 31, 2010. The decrease in deposits was due to a $5.6 million, or 5.0%, decrease in time deposits, a $3.5 million, or 9.2%, decrease interest-bearing and noninterest-bearing checking accounts and an $843,000, or 6.5%, decrease in savings accounts, partially offset by a $7.5 million, or 9.2%, increase in money market accounts. The decrease in deposits primarily was due to the disintermediation of funds back into the equity and residential markets.

Our total borrowings, which consisted of Federal Home Loan Bank advances, decreased $18.0 million, or 82.2%, to $3.9 million at June 30, 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 $1.2 million, or 4.8%, to $26.0 million at June 30, 2011 from $24.8 million at December 31, 2010. The increase primarily was a result of net income of $1.0 million for the six months ended June 30, 2011.

Comparison of Financial Condition at December 31, 2010 and December 31, 2009

Assets. Total assets increased $10.5 million, or 3.7%, to $292.3 million at December 31, 2010 from $281.8 million at December 31, 2009, primarily as a result of a $7.0 million, or 26.9%, increase in interest-bearing deposits at other financial institutions and a $7.0 million, or 1,167%, increase in securities available for sale. The increase in assets during the period was partially offset by a $2.1 million, or 24.2%, decrease in other assets, primarily other real estate owned, a $619,000, or 0.3%, decrease in the loans receivable, and a $472,000, or 4.9%, decrease in premises and equipment. The increases in interest-bearing deposits and securities, which were funded by increased deposits, provided additional on-balance sheet liquidity.

Loans receivable, net, decreased slightly to $230.8 million at December 31, 2010 from $231.4 million at December 31, 2009, due to loan repayments exceeding loan originations by $2.0 million during the year, partially offset by a $1.5 million decrease in the allowance for loan losses, which was the result of net charge-offs of $5.0 million and a $3.5 million provision for loan losses during 2010. Real estate secured loans decreased $3.7 million, or 5.1%, to $67.9 million at December 31, 2010 from $71.6 million at December 31, 2009, primarily as a result of a $7.6 million, or 43.6%, decrease in construction and development loans and a $1.0 million, or 3.6%, decrease in commercial real estate loans, partially offset by a $5.0 million, or 60.5%, increase in one- to four-family loans. Consumer loans decreased $1.5 million, or 1.1%, to $135.8 million at December 31, 2010 from $137.3 million at December 31, 2009, including a $10.7 million, or 45.9%, decrease in automobile loans, partially offset by a $6.1 million, or 33.8%, increase in recreational loans and a $5.0 million, or 5.5%, increase in indirect home improvement loans. Commercial business loans increased $3.1 million, or 10.6%, to $32.8 million at December 31, 2010 from $29.7 million at December 31, 2009.

Our allowance for loan losses at December 31, 2010 was $5.9 million, or 2.5% of gross loans receivable, compared to $7.4 million, or 3.1% of gross loans receivable, at December 31, 2009. Non-performing loans, consisting of nonaccruing loans and accruing loans more than 90 days delinquent, decreased to $6.3 million at December 31, 2010 from $7.5 million at December 31, 2009. At December 31, 2010, non-performing loans consisted of $211,000 of one-to four-family loans, $636,000 of home equity loans, $1.2 million of commercial real estate loans, $2.2 million of construction and development loans, $692,000 of consumer loans and $1.4 million of commercial business loans. Non-performing loans to total loans decreased to 2.7% at December 31, 2010 from 3.1% at December 31, 2009. Real estate owned and repossessed assets totaled $3.8 million at December 31, 2010, compared to $5.6 million at December 31, 2009. This decrease reflected the disposition of foreclosed properties during the year. At December 31, 2010, we also had $1.5 million in restructured loans which were performing in accordance with their revised terms. See “Business of 1st Security Bank of Washington - Asset Quality” for additional information regarding our non-performing loans.

Liabilities. Total liabilities increased $9.0 million, or 3.5%, to $267.5 million at December 31, 2010, compared to $258.5 million at December 31, 2009. Deposits increased $13.0 million, or 5.6%, to $244.0 million at December 31, 2010 from $231.0 million at December 31, 2009. The increase in deposits was primarily due to a $27.9 million, or 52.0%, increase in money market accounts balances due primarily to a money market promotional rate offered in February 2010 and a $4.0 million, or 6.8%, increase in jumbo certificates of deposit due to three separate promotions during the year. These increases were partially offset by a $5.2 million, or 9.8%, decrease in non-jumbo time deposits, a $9.9 million, or 20.6%, decrease interest-bearing and noninterest-bearing checking accounts and a $3.9 million, or 23.1%, decrease in savings accounts. These decreases primarily were due to run-off from branch consolidations.

Our total borrowings, which consisted of Federal Home Loan Bank advances, decreased $4.0 million, or 15.4%, to $21.9 million at December 31, 2010 from $25.9 million at December 30, 2009, primarily due to the increase in deposits and the decision to reduce reliance on non-core funding.

Equity. Total equity increased $1.5 million, or 6.3%, to $24.8 million at December 31, 2010 from $23.3 million at December 31, 2009. The increase primarily was a result of net income of $1.6 million for the 2010 year.

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 June 30, 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			Six Months Ended June 30,
	June 30, 2011			2011								2010
	Yield/ Rate			Average Balance Outstanding			Interest Earned Paid		Yield/ Rate			Average Balance Outstanding			Interest Earned Paid		Yield/ Rate
	(Dollars in thousand)
Interest-earning assets:
Loans receivable, net (1)		7.70	%	$	218,462		$	8,150		7.46	%	$	232,215		$	8,442		7.27	%
Mortgage-backed securities		2.82			429			6		2.80			587			8		2.73
Investment securities		1.45			9,530			78		1.64			---			---		---
Federal Home Loan Bank stock		---			1,797			---		---			1,797			---		---
Other (2)		0.19			27,355			29		0.21			16,119			17		0.21
Total interest-earning assets (1)		6.46			257,573			8,263		6.42			250,718			8,467		6.75

Interest-bearing liabilities:
Savings and money market		0.86			100,471			442		0.88			71,205			330		0.93
Interest-bearing checking		0.61			17,546			53		0.60			20,697			102		0.99
Certificates of deposit		1.97			107,591			1,044		1.94			117,125			1,434		2.45
Borrowings		4.51			4,099			88		4.29			10,137			127		2.51
Total interest-bearing liabilities		1.42			229,707			1,627		1.42			219,164			1,993		1.82

Net interest income							$	6,636							$	6,474
Net interest rate spread		5.04	%							5.00	%							4.93	%
Net earning assets				$	27,866							$	31,554
Net yield on average interest-earning assets		5.18	%							5.15	%							5.16	%
Average interest-earning assets to average interest-bearing liabilities					112.13	%							114.40	%

(1) The average loans receivable, net balances include non-accruing loans.

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

(table continued on next page)

	Years Ended December 31,
	2010								2009								2008
	Average Balance Outstanding			Interest Earned Paid		Yield/ Rate			Average Balance Outstanding			Interest Earned Paid		Yield/ Rate			Average Balance Outstanding			Interest Earned Paid		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1)	$	236,238		$	17,270		7.31	%	$	231,965		$	16,289		7.02	%	$	216,383		$	16,251		7.51	%
Mortgage-backed securities		546			15		2.75			988			38		3.85			3,135			347		11.07
Investment securities		1,390			19		1.37			1,267			52		4.10			4,035			181		4.49
Federal Home Loan Bank stock		1,797			---		---			1,797			---		---			1,797			17		0.95
Other (2)		12,585			29		0.23			11,807			25		0.21			5,999			103		1.72
Total interest-earning assets (1)		252,556			17,333		6.86			247,824			16,404		6.62			231,349			16,899		7.30

Interest-bearing liabilities:
Savings and money market		76,065			711		0.94			74,407			705		0.95			78,100			1,204		1.54
Interest-bearing checking		19,798			187		0.94			20,977			246		1.17			13,644			235		1.72
Certificates of deposit		118,217			2,770		2.34			101,802			3,281		3.22			91,069			3,930		4.32
Borrowings		7,499			218		2.91			16,436			289		1.76			10,779			429		3.98
Total interest-bearing liabilities		221,579			3,886		1.75			213,622			4,521		2.12			193,592			5,798		2.99

Net interest income				$	13,447							$	11,883							$	11,101
Net interest rate spread							5.11	%							4.50	%							4.31	%
Net earning assets	$	30,977							$	34,202							$	37,757
Net yield on average interest-earning assets							5.32	%							4.79	%							4.80	%
Average interest-earning assets to average interest-bearing liabilities		113.98	%							116.01	%							119.50	%

(1) The average loans receivable, net balances include non-accruing loans.

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

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.

	Six Months Ended June 30, 2011 vs. 2010									Years Ended December 31, 2010 vs. 2009									Years Ended December 31, 2009 vs. 2008
	Increase (Decrease) Due To						Total Increase			Increase (Decrease) Due To						Total Increase			Increase (Decrease) Due To						Total Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans receivable	$	(500	)	$	208		$	(292	)	$	300		$	681		$	981		$	1,170		$	(1,132	)	$	38
Mortgage-backed securities		(2	)		---			(2	)		(17	)		(6	)		(23	)		(238	)		(71	)		(309	)
Investment securities		78			---			78			5			(38	)		(33	)		(124	)		(5	)		(129	)
Federal home loan bank stock		---			---			---			---			---			---			---			(17	)		(17	)
Other (1)		12			---			12			2			2			4			100			(178	)		(78	)

Total interest-earning assets	$	(412	)	$	208			(204	)	$	290		$	639		$	929		$	908		$	(1,403	)		(495	)

Interest-bearing liabilities:
Savings and money market		136		$	(24	)	$	112			16		$	(9	)		7			(57	)	$	(442	)	$	(499	)
Interest-bearing checking		(16	)		(33	)		(49	)		(14	)		(46	)		(60	)		126			(115	)		11
Certificates of deposit		(117	)		(273	)		(390	)		529			(1,040	)		(511	)		463			(1,112	)		(649	)
Borrowings		(76	)		37			(39	)		(157	)		86			(71	)		225			(240	)		(15	)

Total interest-bearing liabilities	$	(73	)	$	(293	)		(366	)	$	374		$	(1,009	)		(635	)	$	757		$	(1,909	)	$	(1,152	)

Net change in interest income							$	162								$	1,564								$	657

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

Comparison of Results of Operations for the Six Months Ended June 30, 2011 and June 30, 2010

General . Net income for the six months ended June 30, 2011 was $1.0 million compared to net income of $716,000 for the six months ended June 30, 2010. The increase in net income was attributable to a $162,000, or 2.5%, increase in net interest income, coupled with a $242,000, or 4.1%, decrease in noninterest expense, partially offset by a $987,000, or 47.3%, decrease in noninterest income.

Net Interest Income . Net interest income increased $162,000, or 2.5%, to $6.6 million for the six months ended June 30, 2011, from $6.5 million for the six months ended June 30, 2010. The increase in net interest income was attributable to $366,000 decrease in interest expenses, primarily due to a reduction of our overall cost of funds, partially offset by a reduction in interest income resulting from a decrease in average loans outstanding.

Our net interest margin remained relatively consistent at 5.15% for the six months ended June 30, 2011 compared to 5.16% for the same period of the prior year. The cost of interest-bearing liabilities decreased 40 basis points to 1.42% for the six months ended June 30, 2011 compared to 1.82% for the same period of the prior year primarily due to a lower cost of certificates of deposit, partially offset by higher average balances in savings and money market accounts.

Interest Income . Total interest income for the six months ended June 30, 2011 decreased $204,000, or 2.4%, to $8.3 million, from $8.5 million for the six months ended June 30, 2010. The decrease during the period was primarily attributable to the decline in net loans receivable over the last year, partially offset by a 19 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 six months ended June 30, 2011 and 2010:

	Six Months Ended June 30,

	2011					2010
	Average Balance Outstanding		Yield			Average Balance Outstanding		Yield			Increase/ (Decrease) in Interest Income
	(Dollars in thousands)

Loans receivable, net	$	218,462		7.46	%	$	232,215		7.27	%	$	(292	)
Mortgage-backed securities		429		2.80			587		2.73			(2	)
Investment securities		9,530		1.64			---		---			78
Federal Home Loan Bank stock		1,797		---			1,797		---			---
Other (1)		27,355		0.21			16,119		0.21			12
Total interest-earning assets	$	257,573		6.42	%	$	250,718		6.75	%	$	(204	)

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

Interest Expense . Interest expense decreased $366,000, or 18.4%, to $1.6 million for the six months ended June 30, 2011, from $2.0 million for the six months ended June 30, 2010. As a result of general market rate decreases, the average cost of funds for total interest-bearing liabilities decreased 40 basis points to 1.42% for the six months ended June 30, 2011, compared to 1.82% for the six months ended June 30, 2010. The decrease was primarily due to a decline in rates paid on our certificates of deposits, partially offset by the higher average balances for savings and money market accounts. The average balance of total interest-bearing liabilities increased $10.5 million, or 4.8%, to $229.7 million for the six months ended June 30, 2011, from $219.2 million for the six months ended June 30, 2010.

The following table compares coverage balances, cost of funds and the change in interest expense for the six months ended June 30, 2011 and 2010:

	Six Months Ended June 30,

	2011					2010
	Average Balance Outstanding		Yield			Average Balance Outstanding		Yield			Increase/ (Decrease) in Interest Expense
	(Dollars in thousands)

Savings and money market	$	100,471		0.88	%	$	71,205		0.93	%	$	112
Interest-bearing checking		17,546		0.60			20,697		0.99			(49	)
Certificates of deposit		107,591		1.94			117,125		2.45			(390	)
Borrowings		4,099		4.29			10,137		2.51			(39	)
Total interest-bearing liabilities	$	229,707		1.42	%	$	219,164		1.82	%	$	(366	)

Provision for Loan Losses . In connection with its analysis of the loan portfolio for the six months ended June 30, 2011, management determined that a provision for loan losses of $1.0 million was required for the six months ended June 30, 2011, compared to a provision for loan losses of $1.9 million established for the six months ended June 30, 2010. The $875,000 decrease in the provision primarily relates to the $18.4 million decrease in net loans. Non-performing loans were $2.0 million or 0.9% of total loans at June 30, 2011, compared to $6.2 million, or 2.7% of total loans at June 30, 2010. Management considers the allowance for loan losses at June 30, 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.

The following table details activity and information related to the allowance for loan losses for the six months ended June 30, 2011 and 2010:

	At or For the Six Months Ended June 30,
	2011			2010
	(Dollars in thousands)

Provision for loan losses	$	1,030		$	1,905
Net charge-offs	$	2,099		$	3,085
Allowance for loan losses	$	4,836		$	6,225
Allowance for losses as a percentage of gross loans receivable at the end of this period		2.25	%		2.65	%
Nonaccrual and 90 days or more past due loans	$	1,958		$	6,218
Allowance for loan losses as a percentage of non-performing loans at end of period		246.99	%		100.11	%
Nonaccrual and 90 days or more past due loans as a percentage of total gross loans at the end of the period		0.91	%		2.65	%
Total gross loans	$	214,509		$	234,621

Noninterest Income . Noninterest income decreased $987,000, or 47.3%, to $1.1 million for the six months ended June 30, 2011, from $2.1 million for the six months ended June 30, 2010. The following table provides a detailed analysis of the changes in the components of noninterest income:

	Six Months Ended June 30,

	Six Months Ended June 30				Increase (Decrease)

	2011		2010		Amount			Percent
	(Dollars in thousands)

Service charges and fee income	$	1,019	$	1,196	$	(177	)		(14.8	)%
Gain (loss) on sales of branches		---		797		(797	)		(100.0	)
Other noninterest income		82		95		(13	)		(13.7	)
Total noninterest income	$	1,101	$	2,088	$	(987	)		(47.3	)%

Noninterest income decreased during the six months ended June 30, 2011 primarily as a result of regulatory changes that occurred in August 2010 affecting the amount of non-sufficient fees (“NSF”) we can charge on deposit accounts and the one-time gains associated with the sale of two branches during 2010. The decrease of loans sold in the secondary market contributed to the decrease in service charges and fee income.

Noninterest Expense. Noninterest expense decreased $242,000, or 4.1%, to $5.7 million for the six months ended June 30, 2011, from $5.9 million for the six months ended June 30, 2010. The following table provides an analysis of the changes in the components of noninterest expense:

	At or For the Six Months Ended June, 30				Increase (Decrease)
	2011		2010		Amount			Percent
	(Dollars in thousands)

Salaries and benefits	$	2,706	$	2,657	$	49			1.8	%
Operations		606		655		(49	)		(7.5	)
Occupancy		770		815		(45	)		(5.5	)
Data Processing		417		363		54			14.9
Loan costs		391		712		(321	)		(45.1	)
FDIC insurance		280		257		23			8.9
OREO fair value write-downs		117		1		116			NM
ATM costs		104		130		(26	)		(20.0	)
Marketing and advertising		98		142		(44	)		(31.0	)
Excise taxes		146		118		28			23.7
Professional fees		64		91		(27	)		(29.7	)
Total noninterest expense	$	5,699	$	5,941	$	(242	)		(4.1	)%

NM – Not meaningful.

A $321,000, or 45.1%, decrease in loan costs, which include costs associated with maintaining, managing and disposing of other real estate owned, was the primary reason for the decrease in noninterest expense. Increased write-downs to fair value of our other real estate owned partially offset the decrease in loan costs.

Our efficiency ratio, which is our noninterest expense as a percentage of net interest income and noninterest income, was 73.0% for the six months ended June 30, 2011 compared to 68.2% for the six months ended June 30, 2010. The increase in efficiency ratio was primarily attributable to the decrease in fee income and the increase in expenses. By definition, a lower efficiency ratio would be an indication that we are more efficiently utilizing resources to generate income.

Provision for Income Tax . There was no provision for income tax for the six months ended June 30, 2011 and 2010. Management has established a full valuation allowance related to the net deferred tax assets, based on the weight of available evidence.

Comparison of Results of Operations for the Years Ended December 31, 2010 and 2009

General . Net income for the year ended December 31, 2010 was $1.6 million compared to a net loss of $4.6 million for the year ended December 31, 2009. The increase in net income was attributable to a $1.6 million, or 13.2%, increase in net interest income, coupled with a $3.6 million, or 50.8% decrease in the provision for loan losses and a $1.8 million, or 13.3%, decrease in noninterest expense, partially offset by a $822,000, or 18.3%, decrease in noninterest income.

Net Interest Income . Net interest income increased $1.6 million, or 13.2%, to $13.4 million for the year ended December 31, 2010, from $11.9 million for the year ended December 31, 2009. The increase in net interest income was primarily attributable to the higher volume of and yield earned on our loan portfolio and a decline in the rates paid on deposits, primarily certificates of deposit.

Our net interest margin increased 53 basis points to 5.32% for the year ended December 31, 2010, from 4.79% for the same period of the prior year. The cost of average interest-bearing liabilities decreased 37 basis points to 1.75% for the year ended December 31, 2010 compared to 2.12% for the same period of the prior year primarily due to a lower cost of funds. 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, 2010.

Interest Income . Total interest income for the year ended December 31, 2010 increased $929,000, or 5.7%, to $17.3 million, from $16.4 million for the year ended December 31, 2009. The increase during the period was primarily attributable to the 29 basis point increase in the yield earned on loans receivable and a higher average balance of loans receivable over the prior year.

The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the years ended December 31, 2010 and 2009:

	Year Ended December 31,
	2010					2009
	Average Balance Outstanding		Yield			Average Balance Outstanding		Yield			Increase/ (Decrease) in Interest Income
	(Dollars in thousands)

Loans receivable, net	$	236,238		7.31	%	$	231,965		7.02	%	$	981
Mortgage-backed securities		546		2.75			988		3.85			(23	)
Investment securities		1,390		1.37			1,267		4.10			(33	)
Federal Home Loan Bank stock		1,797		---			1,797		---			---
Cash and due from banks		12,585		0.23			11,807		0.21			4
Total interest-earning assets	$	252,556		6.86	%	$	247,824		6.62	%	$	929

Interest Expense . Interest expense decreased $635,000, or 14.0%, to $3.9 million for the year ended December 31, 2010, from $4.5 million for the year ended December 31, 2009, primarily due to a decline in our cost of funds. The average rate paid on interest-bearing liabilities declined 37 basis points to 1.75% during the year ended December 31, 2010, from 2.12% for the year ended December 31, 2009. The decrease was primarily a result of a decline in rates paid on certificates of deposits. The average balance of total interest-bearing liabilities increased $8.0 million, or 3.7%, to $221.6 million for the year ended December 31, 2010 from $213.6 million for the year ended December 31, 2009, primarily due to higher average balances of certificates of deposit.

The following table details average balances, cost of funds and the change in interest expense for the year ended December 31, 2010 and 2009:

		Years Ended December 31,
		2010					2009
		Average Balance Outstanding		Yield				Average Balance Outstanding		Yield			Increase/ (Decrease) in Interest Expense
	(Dollars in thousands)

Savings and money market		$	76,065		0.94	%		$	74,407		0.95	%	$	7
Interest-bearing checking			19,798		0.94				20,977		1.17			(60	)
Certificates of deposit			118,217		2.34				101,802		3.22			(511	)
Borrowings			7,499		2.91				16,436		1.76			(71	)
Total interest-bearing liabilities		$	221,579		1.75	%		$	213,622		2.12	%	$	(635	)

Provision for Loan Losses . In connection with its analysis of the loan portfolio for the year ended December 31, 2010, management determined that a provision for loan losses of $3.5 million was required for the year ended December 31, 2010, compared to a provision for loan losses of $7.1 million established for the year ended December 31, 2009. The $3.6 million decrease in the provision primarily reflects the decrease in our non-performing loans. Non-performing loans were $6.3 million or 2.7% of total loans at December 31, 2010, compared to $7.5 million, or 3.1% of total loans at December 31, 2009. Management considers the allowance for loan losses at December 31, 2010 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.

The following table details activity and information related to the allowance for loan losses for the year ended December 31, 2010 and 2009:

	At or For the Year Ended December 31,
	2010			2009
	(Dollars in thousands)

Provision for loan losses	$	3,480		$	7,067
Net charge-offs	$	4,980		$	5,260
Allowance for loan losses	$	5,905		$	7,405
Allowance for losses as a percentage of total gross loans receivable at the end of this period		2.50	%		3.10	%
Nonaccrual and 90 days or more past due loans	$	6,302		$	7,454
Allowance for loan losses as a percentage of non-performing loans at end of period		93.7	%		99.3	%
Nonaccrual and 90 days or more past due loans as a percentage of gross loans receivable at the end of the period		2.66	%		3.12	%
Total gross loans	$	236,504		$	238,533

Noninterest Income . Noninterest income decreased $822,000, or 18.3%, to $3.7 million for the year ended December 31, 2010 from $4.5 million for the year ended December 31, 2009. The following table provides a detailed analysis of the changes in the components of noninterest income:

	Year Ended December 31				Increase (Decrease)
	2010		2009		Amount			Percent
	(Dollars in thousands)

Service charges and fee income	$	2,444	$	2,839	$	(395	)		(13.9	)%
Gain on sales of branches		1,006		1,335		(329	)		(24.6	)%
Gain on sales of investments		---		63		(63	)		(100.0	)%
Other noninterest income		217		252		(35	)		(13.9	)%
Total noninterest income	$	3,667	$	4,489	$	(822	)		(18.3	)%

Noninterest income decreased during the year ended December 31, 2010, primarily as a result of lower services charges and fee income resulting from regulatory changes related to NSF fees and fewer gains related to sales of branches and deposits. In 2009, we sold one branch compared to the three branches sold in 2010.

Noninterest Expense . Noninterest expense decreased $1.8 million, or 13.3%, to $12.0 million for the year ended December 31, 2010 from $13.9 million for the year ended December 31, 2009. The following table provides an analysis of the changes in the components of noninterest expense:

	At or For the Year Ended December 31,					Increase (Decrease)
	2010			2009		Amount			Percent
	(Dollars in thousands)

Salaries and benefits	$	5,159		$	6,619	$	(1,460	)		(22.1	)%
Operations		1,579			1,686		(107	)		(6.3	)
Occupancy		1,622			1,863		(241	)		(12.9	)
Data processing		740			755		(15	)		(2.0	)
Loan costs		1,350			917		433			47.2
FDIC insurance		556			560		(4	)		(0.7	)
OREO fair value write-downs, (gain)		(79	)		387		(466	)		(120.4	)
ATM Costs		238			311		(73	)		(23.5	)
Marketing and advertising		344			285		59			20.7
Excise taxes		284			255		29			11.4
Professional fees		239			241		(2	)		(0.8	)
Total noninterest expense	$	12,032		$	13,879	$	(1,847	)		(13.3	)%

Compensation and benefits decreased $1.5 million, or 22.1%, to $5.1 million for the year ended December 31, 2010 from $6.6 million for the same period a year ago as a result of the closure of two branches in 2009 and sale of two branches in August 2009, which resulted in a reduction of employees. At December 31, 2010 we employed 79 full-time equivalent employees compared to 84 at December 31, 2009. Our other real estate owned expenses decreased $466,000 for the year ended December 31, 2010 as a result of the write-down in real estate owned values during the prior year. Declines in operations and occupancy expenses were also related to the branch closings and sales that occurred in 2009.

Our efficiency ratio was 69.9% for the year ended December 31, 2010, compared to 84.3% for the year ended December 31, 2009. The decrease in efficiency ratio was primarily attributable to the decrease in expenses.

Provision (Benefit) for Income Tax . There was no income tax provision for the years ended December 31, 2010 and 2009. Management has established a full valuation allowance related to the deferred tax asset, due to previous years operating losses.

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 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 7 years.

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 or 200 basis points, our policy dictates that our change in net interest income should not change more that 7.5% and 15%, respectively.

The table presented below, as of June 30, 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.

As illustrated in the table, 1st Security Bank of Washington is currently balanced in both a rising and falling rate environment. 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.

	June 30, 2011
Change in Interest Rates in	Net Interest Income
Basis Points	$ Amount		$ Change			% Change
	Dollars in thousands
300bp	$	13,533	$	164			1.22	%
200bp	$	13,485	$	96			0.71	%
100bp	$	13,350	$	(40	)		(0.30	)%
0bp	$	13,390		−			---	%
(100)bp	$	13,849	$	459			3.43	%
(200)bp	$	13,784	$	394			2.94	%
(300)bp	$	13,305	$	(85	)		(0.63	)%

In managing our assets/liability mix, 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.

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 June 30, 2011, our total borrowing capacity was $26.3 million with the Federal Home Loan Bank of Seattle, with unused borrowing capacity of $22.4 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 $90.2 million at June 30, 2011, with the Federal Reserve Bank. As of June 30, 2011, $3.9 million in Federal Home Loan Bank advances were outstanding and no advances were outstanding against the Federal Reserve Bank line of credit. Our board of directors has authorized management to utilize brokered deposits up to 20% of deposits or $48.3 million as of June 30, 2011. Total brokered deposits as of June 30, 2011 were $10.1 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 June 30, 2011, the approved outstanding loan commitments, including unused lines of credit, amounted to $59.1 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2011, totaled $50.7 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 six months ended June 30, 2011, cash and cash equivalents decreased $4.9 million, or 13.9%, from $35.3 million as of December 31, 2010 to $30.3 million as of June 30, 2011. Cash from operating activities of $2.6 million and cash from investing activities of $13.0 million were offset by cash used for financing activities of $20.5 million for the six months ended June 30, 2011. Primary sources of cash included $17.0 million from principal collections. Primary uses of cash included the maturity of $2.5 million of term certificates of deposits, which were intentionally not renewed, and the paying down of $18.0 million of Federal Home Loan Bank advances. Cash and cash equivalents increased $6.7 million, or 23.5%, from $28.5 million as of December 31, 2009 to $35.3 million as of December 31, 2010. Cash from operating activities of $11.6 million and cash from financing activities of $9.0 million were offset by cash used for investing activities of $13.9 million for the year ended December 31, 2010. Primary sources of cash for 2010 included a $13.0 million increase in deposits. Primary uses of cash included originating loans for our portfolio totaling $7.4 million and the purchase of $7.3 million in investments.

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, 2010 and the six months ended June 30, 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.

A summary of our off-balance sheet commitments to extend credit at June 30, 2011, was as follows:

Off-balance sheet loan commitments :

Home equity loans and lines of credit	$	11,791
Real estate secured		1,340
Commercial business loans		38,198
Other		7,798
Total loan commitments	$	59,127

Capital Resources

1st Security Bank of Washington is subject to minimum capital requirements imposed by the FDIC. Based on its capital levels at June 30, 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 June 30, 2011, 1st Security Bank of Washington was considered to be well-capitalized. See “How We Are Regulated - Regulatory Capital Requirements.”

At June 30, 2011, equity totaled $26.0 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:

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

	Ratio			Ratio			Ratio

As of June 30, 2011
Total Risk-based Capital
(to Risk-Weighted Assets)		12.57	%		8.00	%		10.00	%
Tier 1 Risk-based Capital
(to Risk-Weighted Assets)		11.31	%		4.00	%		6.00	%
Tier 1 Leverage Capital
(to Average Assets)		9.37	%		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	%

As of December 31, 2009
Total Risk-based Capital
(to Risk-Weighted Assets)		10.35	%		8.00	%		10.00	%
Tier 1 Risk-based Capital
(to Risk-Weighted Assets)		9.08	%		4.00	%		6.00	%
Tier 1 Leverage Capital
(to Average Assets)		8.36	%		4.00	%		5.00	%

The capital raised in this offering, with net proceeds estimated to be between $18.8 million and $26.1 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.

Recent Accounting Pronouncements

In June 2011, the 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 April 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.

On April 5, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (the “ASU”). The ASU provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (“TDR”). The new guidance will require creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered troubled debt restructurings. The financial reporting implications s of being classified as a TDR are that the creditor is required to: Consider the receivable impaired when calculating the allowance for credit losses; and provide additional disclosures about its troubled debt restructuring activities in accordance with the requirements of recently-issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses . The new guidance will be effective for annual and interim periods beginning after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. We do not expect the adoption of this guidance to have a material impact on our financial statements.

In July 2010, the FASB issued ASU 2010-20, an amendment of Receivables – Disclosures about Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310) . ASU 2010-20 requires new and enhanced disclosure requirements about credit quality of an entity’s financing receivables and its allowance for credit losses. The new and amended disclosure requirements focus on such areas as nonaccrual and past due financing receivables, allowance for credit losses related to financing receivables, impaired loans, credit quality information and loan modifications. The ASU requires an entity to disaggregate new and existing disclosures based on how it develops its allowance for credit losses and how it manages credit exposures. The expanded period-end disclosures became effective for the Bank for the year ended December 31, 2010 (see footnote 3). The expanded disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The new guidance did not have a material impact on our financial statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) , which focuses on Improving Disclosures about Fair Value Measurement . ASU 2010-06 requires new disclosures about transfers in and out of Level 1 and Level 2 fair value measurements and the activity in Level 3 fair value measurements (i.e. purchases, sales, issuances, and settlements). ASU 2010-06 also amended disclosure requirements related to the level of disaggregation of assets and liabilities, as well as disclosures about input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements. The new guidance became effective for interim and annual reporting periods beginning after December 15, 2009. The new guidance did not 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 diversified lender with a focus on the origination of home improvement loans, commercial real estate mortgage loans, commercial business loans and 2 nd 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 size of our consumer loan portfolio. We also intend to reintroduce in-house originations of residential mortgage loans, 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.

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 are also in the process of reintroducing 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.

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

							December 31,
	June 30, 2011						2010						2009						2008						2007						2006
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
Commercial	$	25,675			11.97	%	$	28,061			11.86	%	$	29,099			12.20	%	$	25,872			11.33	%	$	17,309			7.19	%	$	10,454			4.73	%
Multi-family		1,168			0.54			1,159			0.49			409			0.17			408			0.18			972			0.41			592			0.27
One- to four-family		12,833			5.98			13,218			5.59			8,233			3.45			6,969			3.05			60,556			25.15			67,684			30.64
Home equity		15,439			7.20			15,655			6.62			16,448			6.90			18,689			8.19			19,721			8.19			22,600			10.23
Construction and development		6,304			2.94			9,805			4.15			17,390			7.29			23,861			10.45			6,520			2.71			2,601			1.18
Total real estate loans		61,419			28.63			67,898			28.71			71,579			30.01			75,799			33.20			105,078			43.65			103,931			47.05

Consumer Loans:
Indirect home improvement		87,232			40.67			94,833			40.10			89,883			37.68			75,203			32.94			69,559			28.89			62,099			28.11
Recreational		25,341			11.81			24,105			10.19			18,011			7.55			12,165			5.33			11,727			4.87			13,182			5.97
Automobile		8,927			4.16			12,645			5.35			23,359			9.79			30,514			13.37			25,991			10.80			28,473			12.89
Home improvement		1,070			0.50			1,295			0.55			1,725			0.72			2,203			0.96			2,952			1.23			1,005			0.45
Other		2,090			0.97			2,887			1.21			4,277			1.80			6,190			2.71			6,251			2.59			4,561			2.07
Total consumer loans		124,660			58.11			135,765			57.40			137,255			57.54			126,275			55.31			116,480			48.38			109,320			49.49

Commercial business loans		28,430			13.26			32,841			13.89			29,699			12.45			26,218			11.49			19,197			7.97			7,649			3.46

Total gross loans receivable		214,509			100.00	%		236,504			100.00	%		238,533			100.00	%		228,292			100.00	%		240,755			100.00	%		220,900			100.00	%

Less:
Deferred fees and discounts		511						223						313						280						(204	)					(116	)
Allowance for losses		(4,836	)					(5,905	)					(7,405	)					(5,598	)					(2,744	)					(2,706	)
Total loans receivable, net	$	210,184					$	230,822					$	231,441					$	222,974					$	237,807					$	218,078

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

							December 31,
	June 30, 2011						2010						2009						2008						2007						2006
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Fixed-rate loans:
Real estate loans:
Commercial	$	14,223			6.63	%	$	16,333			6.90	%	$	15,729			6.59	%	$	16,449			7.20	%	$	15,852			6.58	%	$	8,959			4.06	%
Multi-family		1,168			0.54			1,159			0.49			409			0.17			405			0.17			968			0.40			592			0.27
One- to four-family		6,305			2.94			6,585			2.79			4,552			1.91			6,159			2.70			57,610			23.93			64,919			29.39
Home equity		2,516			1.17			2,784			1.18			3,839			1.61			5,399			2.36			6,616			2.75			6,812			3.08
Construction and development		1,825			0.85			1,556			0.66			501			0.21			105			0.05			110			0.05			196			0.09
Total real estate loans		26,037			12.13			28,417			12.02			25,030			10.49			28,517			12.48			81,156			33.71			81,478			36.89

Consumer		124,650			58.10			135,752			57.39			137,231			57.53			126,221			55.29			116,329			48.32			108,756			49.23
Commercial business		2,422			1.14			1,049			0.45			870			0.36			454			0.20			165			0.07			---			---
Total fixed-rate loans		153,109			71.37			165,218			69.86			163,131			68.38			155,192			67.97			197,650			82.10			190,234			86.12

Adjustable-rate loans:
Real estate loans:
Commercial		11,452			5.34			11,728			4.96			13,370			5.61			9,423			4.13			1,457			0.61			1,495			0.67
Multi-family		---			---			---			---			---			---			3			0.01			4			0.01			---			---
One- to four-family		6,528			3.04			6,633			2.80			3,681			1.54			810			0.35			2,946			1.22			2,765			1.25
Home equity		12,923			6.03			12,871			5.44			12,609			5.29			13,290			5.83			13,105			5.44			15,788			7.15
Construction and development		4,479			2.09			8,249			3.49			16,889			7.08			23,756			10.40			6,410			2.66			2,405			1.09
Total real estate loans		35,382			16.50			39,481			16.69			46,549			19.52			47,282			20.72			23,922			9.94			22,453			10.16

Consumer		10			0.01			13			0.01			24			0.01			54			0.02			151			0.06			564			0.26
Commercial business		26,008			12.12			31,792			13.44			28,829			12.09			25,764			11.29			19,032			7.90			7,649			3.46
Total adjustable-rate loans		61,400			28.63			71,286			30.14			75,402			31.62			73,100			32.03			43,105			17.90			30,666			13.88

Total gross loans receivable		214,509			100.00	%		236,504			100.00	%		238,533			100.00	%		228,292			100.00	%		240,755			100.00	%		220,900			100.00	%

Less:
Deferred fees and discounts		511						223						313						280						(204	)					(116	)
Allowance for losses		(4,836	)					(5,905	)					(7,405	)					(5,598	)					(2,744	)					(2,706	)
Total loans receivable, net	$	210,184					$	230,822					$	231,441					$	222,974					$	237,807					$	218,078

Loan Maturity and Repricing. The following table sets forth certain information at December 31, 2010 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
	One- to Four Family					Home Equity					Multi-family					Commercial					Construction and Development					Consumer					Commercial Business					Total
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During Years Ending December 31,
2011 (1)	$	393		4.00	%	$	12,875		6.02	%	$	---		---	%	$	6,087		6.57	%	$	6,742		6.01	%	$	2,729		10.41	%	$	27,583		5.24	%	$	56,409		5.89	%
2012		7,064		5.40			---		---			381		6.57			1,520		7.00			1,902		6.00			2,576		9.06			91		6.22			13,534		6.40
2013		10		9.79			6		7.75			---		---			3,591		3.11			---		---			5,215		9.19			506		6.44			9,328		6.70
2014 and 2015		505		6.25			---		---			690		6.00			12,978		5.20			---		---			10,967		8.98			4,661		5.48			29,801		6.67
2016 to 2020		1,613		4.36			352		7.12			13		5.55			3,885		4.96			1,161		6.64			51,554		9.46			---		---			58,578		8.95
2021 to 2025		388		5.95			2,339		8.16			5		6.33			---		---			---		---			51,423		7.27			---		---			54,155		7.30
2026 and following		3,245		5.16			83		7.75			70		5.55			---		---			---		---			11,301		7.50			---		---			14,699		6.98
Total	$	13,218		5.22	%	$	15,655		6.37	%	$	1,159		6.16	%	$	28,061		5.30	%	$	9,805		6.08	%	$	135,765		8.43	%	$	32,841		5.29	%	$	236,504		7.20	%

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

The total amount of loans due after December 31, 2011 which have predetermined interest rates is $156.3 million, while the total amount of loans due after this date which have floating or adjustable interest rates is $23.8 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.

At June 30, 2011, the maximum amount we would lend to any one borrower and the borrower’s related entities was $4.0 million. Our largest loan or lending relationship at June 30, 2011, totaled $4.0 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. Our next largest lending relationship at June 30, 2011, totaled $3.7 million and consisted of two lines of credit to related parties. One of these lines had an outstanding balance of $2.8 million secured by 16 rental homes and the other line had an outstanding balance of $934,000 secured by 6 rental homes. The next three largest lending relationships at June 30, 2011, were as follows: a $3.5 million loan secured by an owner-occupied commercial office building in Kirkland, WA; a $3.4 million loan secured by five commercial retail condominium units located in Seattle, WA, and the personal guarantee of the owners; and a $3.0 million loan used to purchase a participation interest in a $1.8 billion loan secured by the assets of the borrower and guarantor. At June 30, 2011, we had five additional relationships that exceeded $2.0 million. All of the foregoing loans were current at June 30, 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 June 30, 2011, commercial real estate loans (including multi-family residential loans) totaled $26.8 million, or 12.5%, 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.

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 will originate one- to four-family residential mortgage loans through referrals from real estate agents, builders and from existing customers. Walk-in customers have also been an important source of loan originations in the past. 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 June 30, 2011, one- to four-family residential mortgage loans totaled $12.8 million, or 6.0%, 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 complete 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. We intend to initiate the mortgage banking operation during the fourth quarter of 2011. The mortgage banking operation will originate 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.

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 $15.4 million, or 7.2% of the loan portfolio, as of June 30, 2011, $12.9 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 June 30, 2011, our construction and development loans totaled $6.3 million, or 2.9%, of our total loan portfolio and consisted of loans for commercial construction projects. These loans were all performing at June 30, 2011, in accordance with their terms.

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 100% 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 June 30, 2011, included in the $6.3 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.

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 among several 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 June 30, 2011, consumer loans totaled $124.7 million, or 58.1% 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 $87.2 million, or 40.7% of total loans and 70.0% of total consumer loans, at June 30, 2011. Indirect home improvement loans are originated through a network of approximately 130 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 10 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 States of California and Texas. We are in the process of testing these markets with a limited number of contractors and dealers in each state, using our existing personnel. To the extent we determine to move forward with expanding our indirect home improvement lending program into California and Texas, we will need to add contractors and dealers and will 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 will require more processing and underwriting staff and as the portfolio grows, we will require more servicing and collections staff.

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 June 30, 2011, our recreational loan portfolio totaled $25.3 million, or 11.8% of total loans and 20.3% 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 $8.9 million, or 4.2% of our gross loan portfolio, at June 30, 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 $3.2 million as of June 30, 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 higher credit score borrowers. This has resulted in a lower level of loan charge-offs in recent periods. As of June 30, 2011, 64.8% of our consumer loan portfolio was originated with borrowers having a FICO score over 720 at the time of origination, and 93.8% 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.

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. At June 30, 2011, we had approved warehouse lending lines for eight companies with limits of up to $4.0 million, and an aggregate limit of $29.8 million. During the year ended December 31, 2010, we processed approximately 1,300 loans and funded approximately $326.4 million under this program. For the six months ended June 30, 2011, we processed approximately 350 loans and funded approximately $86.2 million, with $6.5 million outstanding at June 30, 2011. Following completion of the stock offering, we will be able to increase the maximum warehouse line from $4.0 million to approximately 20% of capital based on our current internal policy limits, or approximately $7.7 million at the adjusted maximum of the offering range. This will allow us to increase funding capacity for selected existing customers and enable us to attract additional mortgage banking clients for our warehouse lending business, which we are actively pursuing. 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 currently 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 June 30, 2011, our commercial business loan portfolio totaled $28.4 million, or 13.3%, of our gross loan portfolio.

At June 30, 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 June 30, 2011, our largest commercial business lending relationship consisted of three loans, with an aggregate outstanding balance of $4.0 million, to a single borrower secured by commercial real estate. These loans were performing in accordance with their terms at June 30, 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).

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 $66,000 and $163,000, respectively, for the six months ended June 30, 2011 and the year ended December 31, 2010. At June 30, 2011, we were servicing a $48.6 million portfolio of residential mortgage loans. Those servicing rights constituted a $197,000 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 June 30, 2011 was $303,000. See Note 15 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.

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

	Six Months Ended, June 30,						Years Ended December 31,
	2011			2010			2010			2009		2008
	(In thousands)
Originations by type:
Fixed-rate:
One- to four-family	$	---		$	1,202		$	2,378		$	7,331	$	6,668
Home equity		---			---			---			148		647
Multi-family		14			731			759			6		8
Commercial		443			2,028			3,037			3,813		251
Construction and development		---			---			---			404		---
Consumer		14,629			28,772			53,043			63,047		68,042
Commercial business (excluding warehouse lines)		1,725			270			384			476		570
Total fixed-rate		16,811			33,003			59,601			75,225		76,186

Adjustable- rate:
One- to four-family		---			---			1,221			2,582		3,024
Home equity		2,164			1,768			5,266			4,743		5,176
Multi-family		---			---			---			---		---
Commercial		48			3			555			1,122		13,480
Construction and development		---			595			775			3,471		16,131
Consumer		---			---			3			11		6
Commercial business (excluding warehouse lines)		3,763			4,285			15,380			23,853		25,674
Warehouse lines, net		6,501			11,416			11,940			8,199		---
Total adjustable-rate		12,476			18,067			35,140			43,981		63,491
Total loans originated		29,287			51,070			94,741			119,206		139,677

Sales and repayments:
One- to four-family		---			---			---			6,429		6,669
Total loans sold		---			---			---			6,429		6,669
Mortgage-backed securities		---			---			---			---		48,635
Total sales		---			---			---			6,429		55,304
Total principal repayments		51,282			54,982			96,770			102,536		96,836
Total reductions		51,282			54,982			96,770			108,965		152,140
Net increase (decrease)	$	(21,995	)	$	(3,912	)	$	(2,029	)	$	10,241	$	(12,463	)

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.

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 June 30, 2011.

	Loans Delinquent For:
	60-89 Days							90 Days and Over							Total Loans Delinquent 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	$	234		1.82	%		2	$	234		1.82	%
Home equity		4		133		0.86			14		662		4.29			18		795		5.15
Total real estate loans		4		133		0.22			16		896		1.46			20		1,029		1.68

Consumer:
Indirect home improvement		46		391		0.45			43		421		0.48			89		812		0.93
Automobile		8		72		0.81			4		37		0.41			12		109		1.22
Recreational		1		10		0.04			1		1		---			2		11		0.04
Home improvement		---		---		---			2		37		3.46			2		37		3.46
Other		3		14		0.68			5		8		0.39			8		22		1.07
Total consumer loans		58		487		0.39			55		504		0.40			113		991		0.79
Commercial business loans		---		---		---			5		558		1.96			5		558		1.96
Total		62	$	620		0.29	%		76	$	1,958		0.91	%		138	$	2,578		1.20	%

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

	June 30,			December 31,
	2011			2010			2009			2008			2007			2006
Non-accruing loans:	(Dollars in thousands)
Real estate loans :

One- to four-family	$	234		$	211		$	---		$	---		$	---		$	---
Home equity		605			574			40			87			10			22
Commercial		---			1,201			---			---			---			---
Construction and development		---			2,175			6,758			1,953			---			---
Total real estate loans		839			4,161			6,798			2,040			10			22

Consumer loans:
Indirect home improvement		421			522			276			308			117			127
Automobile		37			54			35			62			50			37
Recreational		1			38			119			32			3			29
Home improvement		37			75			3			---			---			---
Other		8			3			60			16			3			14
Total consumer loans		504			692			493			418			173			207
Commercial business loans		558			1,387			---			---			---			---
Total non-accruing loans		1,901			6,240			7,291			2,458			183			229

Accruing loans delinquent more than 90 days:
Home equity		57			62			163			30			---			---
Total accruing loans delinquent more than 90 days		57			62			163			30			---			---

Real estate owned		5,925			3,701			5,484			---			---			---

Repossessed automobiles, recreational vehicles		92			78			130			44			16			26

Total non-performing assets	$	7,975		$	10,081		$	13,068		$	2,532		$	199		$	255

Restructured loans	$	1,508		$	1,508		$	---		$	---		$	---		$	---

Total non-performing assets as a percentage of total assets		2.92	%		3.45	%		4.64	%		0.99	%		0.08	%		0.10	%

For the six months ended June 30, 2011 and the year ended December 31, 2010, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $10,000 and $84,000 respectively. The amounts that were included in interest income on such loans were $4,000 and $97,000 respectively.

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 four real estate owned properties as of June 30, 2011, totaling $5.9 million, consisting of one $1.4 million residential lot development, one $1.6 million commercial lot development, one $1.9 million condo conversion and one $1.0 million commercial building/lot. We currently have purchase and sale agreements on one of the four commercial lots and on one of the eight remaining condos. We had repossessed property totaling $92,000 at June 30, 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 two restructured loans as of June 30, 2011, totaling $1.5 million each of which has been performing in accordance with its restructured terms.

Other Assets Especially Mentioned. At June 30, 2011, there was approximately $1.7 million 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 June 30, 2011, we had classified $13.0 million of our assets. The $13.0 million of classified assets, consisting of $6.0 million in other real estate owned and repossessed property and $7.0 million of substandard and restructured loans, represented 50.4% of equity and 4.8% of total assets as of June 30, 2011. With the exception of the classified loans, management is not aware of any loans as of June 30, 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 $1.7 million of 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.

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 $1.0 million for the six months ended June 30, 2011 and $3.5 million for the year ended December 31, 2010. The allowance for loan losses was $4.8 million or 2.3% of total loans at June 30, 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.

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

						December 31,
	June 30, 2011					2010					2009					2008					2007					2006
	Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans
	(Dollars in thousands)
Allocated at end of period to:

Real estate loans
One- to four-family	$	178		5.98	%	$	170		5.59	%	$	59		3.45	%	$	16		3.05	%	$	347		25.15	%	$	295		30.64	%
Home equity		268		7.20			265		6.62			191		6.90			170		8.19			212		8.19			303		10.23
Multi-family		7		0.54			5		0.49			2		0.17			1		0.18			7		0.41			---		0.27
Commercial		145		11.97			246		11.86			370		12.20			2,513		11.33			48		7.19			17		4.73
Construction or development		713		2.94			670		4.15			1,751		7.29			505		10.45			106		2.71			6		1.18
Total real estate loans		1,311		28.63			1,356		28.71			2,373		30.01			3,205		33.20			720		43.65			621		47.05

Consumer loans
Indirect home improvement		2,370		40.67			2,580		40.10			2,108		37.68			1,188		32.94			1,069		28.89			1,011		28.11
Automobile		270		4.16			405		5.35			931		9.79			583		13.37			435		10.80			402		12.89
Recreational		421		11.81			544		10.19			633		7.55			197		5.33			192		4.87			239		5.97
Home improvement		28		0.50			47		0.55			64		0.72			54		0.96			126		1.23			202		0.45
Other		40		0.97			68		1.21			168		1.80			125		2.71			142		2.59			195		2.07
Total consumer loans		3,129		58.11			3,644		57.40			3,904		57.54			2,147		55.31			1,964		48.38			2,049		49.49

Commercial business loans		396		13.26			905		13.89			1,128		12.45			246		11.49			60		7.97			36		3.46

Total	$	4,836		100.00	%	$	5,905		100.00	%	$	7,405		100.00	%	$	5,598		100.00	%	$	2,744		100.00	%	$	2,706		100.00	%

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.

	Six Months Ended June 30,						Years Ended December 31,
	2011			2010			2010			2009			2008			2007			2006
	(Dollars in thousands)
Balance at beginning of period:	$	5,905		$	7,405		$	7,405		$	5,598		$	2,744		$	2,706		$	2,719

Charge-offs:
Real estate loans
One- to four-family		---			---			32			---			---			---			---
Home equity		117			60			163			160			18			1			18
Commercial		612			---			---			---			---			---			---
Construction		---			1,328			1,529			1,436			843			---			---
Total real estate loans		729			1,388			1,724			1,596			861			1			18
Consumer loans
Indirect home improvement		1,301			1,190			2,490			2,195			1,006			600			355
Automobile		253			370			637			1,380			615			427			292
Recreational		148			292			413			545			93			108			125
Home improvement		15			31			76			35			11			13			67
Other		46			123			178			174			112			61			152
Total consumer loans		1,763			2,006			3,794			4,329			1,837			1,209			991
Commercial business loans		---			74			175			---			---			---			---
Total charge-offs		2,492			3,468			5,693			5,925			2,698			1,210			1,009

Recoveries:
Real estate loans
Home equity		---			---			---			---			60			---			---
Total real estate loans		---			---			---			---			60			---			---
Consumer loans
Indirect home improvement		220			146			351			262			269			214			143
Automobile		120			166			275			305			178			295			390
Recreational		39			61			70			53			36			70			88
Home improvement		1			---			---			1			1			16			6
Other		13			10			17			44			71			129			123
Total consumer loans		393			383			713			665			555			724			750
Commercial business loans		---			---			---			---			---			---			---

Total recoveries		393			383			713			665			615			724			750

Net charge-offs		2,099			3,085			4,980			5,260			2,083			486			259
Additions charged to operations		1,030			1,905			3,480			7,067			4,937			578			246
Reclassification for off-balance sheet contingencies		---			---			---			---			---			(54)			---
Balance at end of period	$	4,836		$	6,225		$	5,905		$	7,405		$	5,598		$	2,744		$	2,706

Net charge-offs during the period to average loans outstanding during the period		0.96	%		1.33	%		2.11	%		2.27	%		1.00	%		0.21	%		0.12	%

Net charge-offs during the period to average non-performing assets		25.68	%		26.83	%		47.40	%		89.36	%		148.57	%		195.18	%		146.33	%

Allowance as a percentage of non- performing loans		246.99	%		100.11	%		93.70	%		99.34	%		225.00	%		1499.45	%		1181.66	%

Allowance as a percentage of gross loans receivable (end of period)		2.25	%		2.65	%		2.50	%		3.10	%		2.45	%		1.14	%		1.22	%

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 June 30, 2011. For the six months ended June 30, 2011 and the year ended December 31, 2010, 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 June 30, 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.

	June 30,				December 31,
	2011				2010				2009				2008
	Book Value		Fair Value		Book Value		Fair Value		Book Value		Fair Value		Book Value		Fair Value
	(Dollars in thousands)
Available-for-sale:
Federal agency securities	$	9,802	$	9,833	$	6,175	$	6,086	$	---	$	---	$	1,475	$	1,472
Municipal Bonds		1,400		1,409		1,144		1,103		---		---		---		---
Mortgage-backed		424		447		434		453		592		603		1,375		1,362
Total available-for-sale		11,626		11,689		7,753		7,642		592		603		2,850		2,834

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

Total securities	$	13,423	$	13,486	$	9,550	$	9,439	$	2,389	$	2,400	$	4,647	$	4,631

The composition and contractual maturities of our investment portfolio at June 30, 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.

	June 30, 2011
	1 year or less					Over 1 year to 5 years					Over 5 to 10 years					Over 10 years					Total Securities
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Fair Value
Securities available-for-sale:
Federal agency securities	$	---		---	%	$	4,527		2.70	%	$	1,845		5.28	%	$	3,430		5.64	%	$	9,802		1.27	%	$	9,833
Municipal Bonds		---		---			---		---			868		4.24			532		4.75			1,400		4.43			1,409
Mortgage-backed		---		---			---		---			---		---			424		2.62			424		2.62			447
				---
Total available-for-sale	$	---		---	%	$	4,527		2.70	%	$	2,713		4.95	%	$	4,386		5.24	%	$	11,626		4.18	%	$	11,689

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 43.9% of the total deposits at June 30, 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 $10.1 million of brokered deposits at June 30, 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.

	Six Months Ended
	June 30,						Years Ended December 31,
	2011			2010			2010			2009			2008
	(Dollars in thousands)

Beginning balance	$	243,957		$	230,985		$	230,985		$	216,056		$	208,863
Net deposits (withdrawals)		(4,021	)		1,319			9,304			10,697			1,824
Interest credited		1,539			1,866			3,668			4,232			5,369
Ending balance	$	241,475		$	234,170		$	243,957		$	230,985		$	216,056

Net increase (decrease)	$	(2,482	)	$	3,185		$	12,972		$	14,929		$	7,193

Percent increase (decrease)		(1.02	)%	1.38		%		5.62	%		6.91	%		3.44	%

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,
	June 30, 2011					2010					2009					2008
			Percent					Percent					Percent					Percent
	Amount		of Total			Amount		of Total			Amount		of Total			Amount		of Total
	(Dollars in thousands)
Transactions and Savings Deposits:

Interest-bearing checking	$	17,303		7.16	%	$	19,458		7.98	%	$	22,764		9.85	%	$	13,928		6.45	%
Noninterest-bearing checking		17,212		7.13			18,547		7.60			25,126		10.88			20,072		9.29
Savings		12,118		5.02			12,961		5.31			16,858		7.30			26,312		12.18
Money market		88,930		36.83			81,470		33.40			53,611		23.21			55,799		25.83

Total transaction and savings deposits		135,563		56.14			132,436		54.29			118,359		51.24			116,111		53.75


Certificates:

0.00 – 1.99%		71,617		29.66			74,366		30.48			38,303		16.58			114		0.05
2.00 – 3.99%		31,051		12.86			33,006		13.53			59,618		25.81			64,901		30.04
4.00 – 5.99%		3,023		1.25			3,720		1.52			14,290		6.19			34,435		15.93
6.00 – 7.99%		---		---			---		---			18		0.01			130		0.06
8.00 – 9.99%		221		0.09			429		0.18			397		0.17			365		0.17
10.00 and over		---		---			---		---			---		---			---		---

Total certificates		105,912		43.86			111,521		45.71			112,626		48.76			99,945		46.25

Total deposits	$	241,475		100.00	%	$	243,957		100.00	%	$	230,985		100.00	%	$	216,056		100.00	%

The following table sets forth the rate and maturity information of our time deposit certificates at June 30, 2011.

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

Certificate accounts maturing
in quarter ending:

September 30, 2011	$	15,621		$	1,394		$	157		$	---		$	181		$	---		$	17,353			16.38	%
December 31, 2011		6,700			1,263			1,583			---			34			---			9,580			9.05
March 31, 2012		6,646			434			293			---			6			---			7,379			6.97
June 30, 2012		8,975			7,374			9			---			---			---			16,358			15.44
September 30, 2012		11,668			133			14			---			---			---			11,815			11.16
December 31, 2012		18,910			1,079			385			---			---			---			20,374			19.24
March 31, 2013		576			423			80			---			---			---			1,079			1.02
June 30, 2013		1,149			81			---			---			---			---			1,230			1.16
September 30, 2013		127			766			128			---			---			---			1,021			0.96
December 31, 2013		192			1,819			203			---			---			---			2,214			2.09
March 31, 2014		206			322			171			---			---			---			699			0.66
June 30, 2014		339			432			---			---			---			---			771			0.73
Thereafter		508			15,531			---			---			---			---			16,039			15.14

Total	$	71,617		$	31,051		$	3,023		$	---		$	221		$	---		$	105,912			100.00	%

Percent of total		67.62	%		29.32	%		2.85	%		---	%		0.21	%		---	%		100.00	%

The following table indicates the amount of our jumbo certificates of deposit by time remaining until maturity as of June 30, 2011. Jumbo certificates of deposit are certificates in amounts of $100,000 or more.

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

Certificates of deposit less than $100,000	$	14,705	$	5,375	$	10,785	$	13,789	$	44,654

Certificates of deposit of $100,000 or more		2,648		4,205		12,952		41,453		61,258

Total certificates of deposit	$	17,353	$	9,580	$	23,737	$	55,242	$	105,912

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 June 30, 2011, our deposit with the Federal Reserve Bank of San Francisco and vault cash exceeded our reserve requirements.

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 $26.3 million. At June 30, 2011, our outstanding advances from the Federal Home Loan Bank of Seattle totaled $3.9 million. At June 30, 2011, we also had $90.2 million in 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.

	Six Months Ended June 30,						Years Ended December 31,
	2011			2010			2010			2009			2008
	(Dollars in thousands)
Maximum balance:
Federal Home Loan Bank advances	$	21,900		$	15,900		$	18,000		$	11,900		$	30,400
Fed Funds Purchased	$	---		$	---		$	---		$	600		$	897
Federal Reserve Bank	$	---		$	15,000		$	37,000		$	30,000		$	---

Average balances:
Federal Home Loan Bank advances	$	4,099		$	5,535		$	4,879		$	6,417		$	10,796
Fed Funds Purchased	$	---		$	---		$	---		$	5		$	4
Federal Reserve Bank	$	---		$	4,602		$	2,620		$	9,977		$	---

Weighted average interest rate:
Federal Home Loan Bank advances		4.29	%		4.37	%		1.42	%		4.41	%		3.97	%
Fed Funds Purchased		---	%		---	%		---	%		1.27	%		3.37	%
Federal Reserve Bank		---	%		0.26	%		0.29	%		0.25	%		---	%

	June 30, 2011			December 31,
	June 30, 2011			2010			2009			2008
	(Dollars in thousands)
Balance outstanding at end of period:
Federal Home Loan Bank advances	$	3,900		$	21,900		$	5,900		$	9,400
Fed Funds Purchased		---			---			---			---
Federal Reserve Bank		---			---			20,000			---
Total borrowings	$	3,900		$	21,900		$	25,900		$	9,400

Weighted average interest rate of:
Federal Home Loan Bank advances		4.49	%		1.42	%		4.41	%		3.00	%
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 June 30, 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, 2010, 1st Security Bank of Washington’s share of deposits in our market areas was approximately 0.7%.

Employees

At June 30, 2011, we had 78 full-time employees and 2 part-time employees. Our employees are not represented by any collective bargaining group. We consider our employee relations to be good.

Properties

At June 30, 2011, we had our administrative offices and 6 full-service banking offices with an aggregate net book value of $8.9 million. The following table sets forth certain information concerning our offices at June 30, 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.

Location

Square

Footage

Owned or
Leased

Lease

Expiration Date

Net Book Value at
June 30, 2011

(In thousands)

Canyon Park

2,997

Leased

May 2015 (1)

22020 17 th Ave SE, Suite 100

Bothell, WA 98021

Edmonds

1,500

Owned

---

319

620 Edmonds Way

Edmonds, WA 98020

Lynnwood

3,000

Leased

June 2020

236

19002 33 rd Ave W

Lynnwood, WA 98036

Mountlake Terrace (Admin)

39,535

Owned

---

3,436

6920 220 th St SW

Mountlake Terrace, WA 98043

Poulsbo

3,498

Owned

---

2,988

21650 Market Place

Poulsbo, WA 98370

Puyallup

2,474

Owned

---

1,503

307 W Stewart St

Puyallup, WA 98371

Overlake

2,331

Leased

June 2016 (2)

394

14808 NE 24 th St, Suite D

Redmond, WA 98052

(1) Lease provides for one five-year renewal.

(2) Lease provides for two five-year renewals.

We anticipate adding one branch in the Capitol Hill area of Seattle, Washington during the next 12 months, although no specific site has been identified or secured at this time.

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 Securit y Bank of Washington at June 30, 2011 was $217,000. 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.

On December 2, 2010, Charles McClain filed a civil lawsuit against 1st Security Bank of Washington in Snohomish County Superior Court located in Everett, Washington, for our refusal to provide him access to funds improperly deposited in his joint account at 1st Security Bank of Washington.

As a result of an internet scam, more than $4.0 million of fraudulently obtained funds were deposited into Mr. McClain’s joint account at 1st Security Bank of Washington. We discovered the fraud almost immediately and refused Mr. McClain access to the funds. The funds were returned to Comcast and Cox, the entities upon whom the fraud was perpetrated, pursuant to their request for such funds in exchange for an agreement by them to indemnify 1st Security Bank of Washington for its legal costs and any potential liability. Mr. McClain is claiming actual damages in the amount of $8.8 million, plus interest, consequential damages of $50.0 million, and punitive damages of $35.1 million. Our litigation counsel has advised us that the risk of liability approaching those amounts is extremely remote. The pending lawsuit is at the discovery phase with no trial date having been set. Counsel has prepared a motion for summary judgment seeking dismissal of all claims. On August 26, 2011, however, Mr. McClain petitioned for bankruptcy protection, resulting in an automatic stay of all proceedings. At this time, the Snohomish County Superior Court can take no action, including ruling on a motion to dismiss the case.

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	32	Chief Financial Officer, Treasurer and Secretary

(1) As of June 30, 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.

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.

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

Name	Age (1)	Positions Held With 1st Security Bank of Washington	Director Since (2)	Term of Office Expires

Ted A. Leech	63	Chairman of the Board	2005	2013
Joseph C. Adams	52	Chief Executive Officer and Director	2005	2012
Judith A. Cochrane	64	Director	2006	2013 (3)
Michael J. Mansfield	54	Director	2008	2014
Margaret R. Piesik	61	Director	2006	2014
Joseph P. Zavalgia	63	Director	2011	2013

(1) As of June 30, 2011.

(2) Includes service as a director of 1st Security Bank of Washington’s predecessor, Washington’s Credit Union.

(3) Upon the expiration of her term as a director, it is expected that Ms. Cochrane will be elected for a two year term.

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.

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, 2010 except for Mr. Adams, our Chief Executive Officer, whose compensation is presented in the Summary Compensation table under the caption “Executive Compensation” below.

Name	Fees Earned or Paid in Cash		All Other 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)		---		---		---
Michele L. Rozinek (2)		24,000		---		24,000
Kay Cummings (3)		18,000		---		18,000
Joel S. Summer (3)		10,000		---		10,000

(1) Appointed to the board of directors during 2011.

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

(3) Service on the board of directors terminated during 2010.

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, 2010, the board of directors held ten 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.

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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. During 2010, the Audit Committee was comprised of Directors Leech (Chair) and Cummings. This committee met 13 times in 2010. 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.

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. During 2010, the Governance and Nomination Committee was comprised of Directors Piesik (Chair), Rozinek (who resigned from the Board in 2011) and Leech. This committee met six times in 2010. 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. During 2010, the Compensation Committee was comprised of Directors Cochrane (Chair), Leech and Piesik. This committee met five times in 2010. 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 32, 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 61, 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.

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Drew B. Ness , age 46, 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.

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, 2010 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, 2010, whose total compensation for 2010 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 Principal Position	Year	Salary		Bonus		All Other Compensation		Total

Joseph C. Adams Chief Executive Officer	2010	$	247,000	$	---	$	---	$	247,000

T. Bradford Canfield (1) Chief Financial Officer	2010	$	245,000	$	---	$	---	$	245,000

Steven L. Haynes Chief Loan Officer	2010	$	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, 2010, 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 2010, 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 2010. 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.

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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.

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.

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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.

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 2010, 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 collectibility or present other unfavorable features. We had no loans to directors and executive officers and their related persons at June 30, 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.

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

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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.

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

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

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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.

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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:

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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 six months ended June 30, 2011 and the year ended December 31, 2010 were $280,000 and $556,000, respectively. 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.

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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 June 30, 2011 was $794,000.

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 four quarters ended June 30, 2011, these payments averaged 1.015 basis points (annualized) of assessable deposits.

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.

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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, must 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 aggregate amount 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 June 30, 2011, 1st Security Bank of Washington’s aggregate loans in excess of the supervisory loan-to-value ratios were zero.

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.

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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.

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 June 30, 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 June 30, 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, 2010. 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.

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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.

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 June 30, 2011, 1st Security Bank of Washington had a Tier 1 leverage capital ratio to average assets of 9.4%. 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 June 30, 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 June 30, 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.

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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.

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.

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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.

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.

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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 June 30, 2011, 1st Security Bank of Washington had a net operating loss carryforward for federal income tax purposes in the amount of $8.0 million.

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 1.5% 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 $18.8 million and $26.1 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.

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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.”

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

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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.

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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.

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:

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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.

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 _________ __, 2011, 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 _________ __, 2011, as applicable, or (2) the amount of the qualifying deposit in the deposit account on June 30, 2007 or _________ __, 2011, 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.

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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.

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.

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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.

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 $40,500 (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.

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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.

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), Montana (one company), Tennessee (two companies) and Michigan, Indiana, Illinois, Louisiana 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.

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.

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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)

Riverview Bancorp, Inc. (RVSB)	Vancouver, WA	$	886
Timberland Bancorp, Inc. (TSBK)	Hoquiam, WA		735
LSB Financial Corp. (LSBI)	Lafayette, IN		360
First Advantage Bancorp (FABK)	Clarksville, TN		350
Eagle Bancorp Montana (EBMT)	Helena, MT		331
Louisiana Bancorp, Inc. (LABC)	Metairie, LA		320
Jacksonville Bancorp, Inc. (JXSB)	Jacksonville, IL		305
Athens Bancshares, Inc. (AFCB)	Athens, TN		283
First Federal of Northern Michigan (FFNM)	Alpena, MI		219
FFD Financial Corp. (FFDF)	Dover, OH		211

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

FS Bancorp, Inc.
Minimum of offering range		11.86	x		21.37	x		49.26	%		49.26	%
Midpoint of offering range		14.11	x		25.68	x		53.88	%		53.88	%
Maximum of offering range		16.43	x		30.19	x		57.90	%		57.90	%
Maximum of offering range, as adjusted		19.16	x		35.62	x		61.88	%		61.88	%

Valuation of peer group companies using stock market prices as of September 2, 2011
Average		17.08	x		18.89	x		67.44	%		70.29	%
Median		17.27	x		19.71	x		69.11	%		72.48	%

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After Market Trading Activity

Initial Stock Offerings - Standard Conversions

Completed Closing Dates between July 1, 2010 and September 2, 2011

		Change from Initial Trading Date Offering Price
Transaction (Ticker Symbol)	IPO Date	After One Day (%)			After One Week (%)			After One Month (%)			Through September 2, 2011 (%)

IF Bancorp, Inc. (IROQ)	07/08/11		16.70	%		16.50	%		8.50	%		8.10	%
State Investors Bancorp, Inc. (SIBC)	07/07/11		18.50			16.60			16.00			15.00
First Connecticut Bancorp, Inc. (FBNK)	06/30/11		10.80			11.60			11.10			4.70
Franklin Financial Corp. (FRNK)	04/28/11		19.70			17.70			19.60			11.40
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			(10.00	)
Anchor Bancorp (ANCB)	01/26/11		0.00			0.40			4.50			(20.50	)
Wolverine Bancorp, Inc. (WBKC)	01/20/11		24.50			22.40			35.00			40.00
SP Bancorp, Inc. (SPBC)	11/01/10		(6.00	)		(6.60	)		(8.00	)		13.50
Standard Financial Corp. (STND)	10/07/10		19.00			18.90			29.50			47.50
Madison Bancorp, Inc. (MDSN)	10/07/10		25.00			25.00			25.00			(7.00	)
Century Next Fin. Corp. (CTUY)	10/01/10		25.00			15.00			10.00			45.00
Peoples Fed Bncshres, Inc. (PEOP)	07/07/10		4.00			6.90			4.20			40.00

Average:			13.82	%		12.78	%		13.80	%		14.05	%
Median:			16.70	%		15.00	%		11.10	%		11.40	%

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.

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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.

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”);

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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 _________ __, 2011 (“Supplemental Eligible Account Holders”); and

●

depositors of 1st Security Bank of Washington, as of the close of business on _______, 2011, 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 _________ __, 2011 (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 _________ __, 2011, unless extended for the full 45 day period to __________ __, 2011, 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 _________ __, 2013. Subscription rights which have not been exercised prior to _________ __, 2011 (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 _________ __, 2011, 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 _________ __, 2011. 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. Institutional investors will pay Keefe, Bruyette &Woods, Inc., in its capacity as sole book running manager, for shares purchased in the syndicated offering on the settlement date through the services of the Depository Trust Company on a delivery versus payment basis.

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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 _________ __, 2013. 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:

$250,000 or 25,000 shares of common stock;

one-tenth of one percent of the total offering of shares of common stock; or

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:

$250,000 or 25,000 shares of common stock;

one-tenth of one percent of the total offering of shares of common stock; or

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:

$250,000 or 25,000 shares of common stock; or

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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 $85,000. 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 $10,000 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.

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Procedure for Purchasing Shares in the Subscription Offering

To ensure that each purchaser receives a prospectus at least 48 hours before _________ __, 2011 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 _________ __, 2011 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, ________ __, 2011, or the Other Members Record Date, _______ __, 2011, 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.

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.”

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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, 2010 and 2009 and the related statements of operations, equity and comprehensive income (loss), 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 ).

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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.

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RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.1

I. OVERVIEW AND FINANCIAL ANALYSIS

Introduction

1st Security is a Washington-chartered mutual savings bank headquartered in Mountlake Terrace, Snohomish County, Washington. 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 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”). At June 30, 2011, 1st Security had $272.8 million in assets, $241.5 million in deposits and total equity of $26.0 million, equal to 9.52% of total assets. 1st Security’s audited financial statements are included by reference as Exhibit I-2.

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.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.2

Strategic Overview

The Bank 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 the same 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. Accordingly, the Bank has upgraded its systems, delivery channels, policies and procedures and personnel in key positions.

Over the past several years, the Bank has been working through certain regulatory matters which have led to enforcement actions. The Bank believes that the identified compliance deficiencies have been addressed and that such regulatory enforcement actions will be terminated in the near term future. The Bank’s general business strategies for the future include expanding the loan and deposit customer base, pursuing efficiencies in both internal operations and the branch office network, emphasizing lower cost core deposits to manage funding costs, and continuing to maintain high asset quality, leverage the increased capital base and improve earnings.

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 change 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 in new states. 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 planning to boost non-interest operating income by developing a mortgage banking program. Finally, the Bank will once again begin to originate 1-4 family residential mortgages after having outsourced this function to a third party for the past several years.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.3

Similar to many savings banks, time deposits constitute the largest portion of the deposit base, with borrowings utilized to a limited extent 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 and municipal bonds.

1st Security’s earnings are largely dependent upon net interest income, non-interest income. In recent periods, income has been negatively impacted by asset quality deterioration which required an increase in provisions for loan losses and reserve levels. The Bank’s relatively high operating expenses are due primarily to the high costs associated with the indirect lending program. Recent actions taken to improve profitability have included closing or selling unprofitable branches.

The equity from the stock offering will reduce certain risks and increase liquidity, earnings, growth capacity and the overall financial strength at 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 capital 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.

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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.4

Balance Sheet Trends

Table 1.1 shows the Bank’s historical balance sheet data since year end 2006. Total assets peaked at $292.3 million at December 31, 2010, but have declined since then as management used loan repayments and prepayments to pay down borrowings in light of low loan demand. Most of the asset growth achieved during the four and a half year period shown occurred between 2008 and 2010, funded by deposit and borrowings growth. Between year-end 2006 and June 30, 2011, assets grew by only 1.4% annually, with such funds invested in cash and equivalents and investment securities which was mostly offset by a decline in loans receivable. Total loans declined primarily as a result of a loan securitization transaction completed in fiscal 2008, whereby approximately $50 million of the Bank’s portfolio of long-term fixed rate residential loans were securitized and sold. Balance sheet funding trended towards an increasing proportion of deposits, as both borrowings and equity declined. Equity declined at a 6.3% annual rate due to losses recorded from fiscal 2007 to 2009. A summary of 1st Security’s key operating ratios for the past three and one-half years is presented in Exhibit I-3.

1st Security has recorded a steady decline in the loans to assets ratio since 2007, with the ratio dropping from 90.4% at December 31, 2007 to 77.1% as of June 30, 2011. The decline is attributable to the previously mentioned loan securitization transaction, and a combination of low loan demand and a slowdown in origination activity during the real estate declines and economic downturn that has occurred during this period. The decline in loans has been replaced by an increase in short-term, low yielding investment securities (included in “cash and equivalents” in Table 1.1). The Bank experienced an increase in OREO beginning in 2009 and OREO balances have held steady since that time, amounting to 2.1% of assets at June 30, 2011. Other assets consisted of fixed assets, mortgage servicing rights, and other miscellaneous items, which have remained in the range of 5.0% and 6.0% of total assets since 2006.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.5

Table 1.1

1st Security Bank of Washington, Mountlake Terrace, Washington

Historical Balance Sheet Data


																																		12/31/06-
																																		06/30/11
	As of December 31,																												At June 30,					Annual.
	2006						2007					2008						2009					2010						2011					Growth Rate
	Amount			Pct(1)			Amount		Pct(1)			Amount			Pct(1)			Amount		Pct(1)			Amount			Pct(1)			Amount		Pct(1)			Pct
	($000)			(%)			($000)		(%)			($000)			(%)			($000)		(%)			($000)			(%)			($000)		(%)			(%)
Total Amount of:
Assets	$	256,385			100.00	%	$	263,066		100.00	%	$	255,368			100.00	%	$	281,836		100.00	%	$	292,334			100.00	%	$	272,784		100.00	%		1.39	%
Loans Receivable (net)		218,078			85.06	%		237,807		90.40	%		222,974			87.31	%		231,441		82.12	%		230,822			78.96	%		210,184		77.05	%		-0.82	%
Cash and Equivalents		7,158			2.79	%		5,898		2.24	%		14,457			5.66	%		28,534		10.12	%		35,250			12.06	%		30,341		11.12	%		37.84	%
Investment Securities		15,503			6.05	%		4,621		1.76	%		2,834			1.11	%		603		0.21	%		7,642			2.61	%		11,689		4.29	%		-6.08	%
FHLB Stock		1,797			0.70	%		1,797		0.68	%		1,797			0.70	%		1,797		0.64	%		1,797			0.61	%		1,797		0.66	%		0.00	%
Other Real Estate Owned		0			0.00	%		0		0.00	%		0			0.00	%		5,484		1.95	%		3,701			1.27	%		5,925		2.17	%	NM
Mortgage Servicing Rights		264			0.10	%		198		0.08	%		461			0.18	%		340		0.12	%		245			0.08	%		197		0.07	%		-6.30	%
Fixed Assets		8,955			3.49	%		11,302		4.30	%		10,643			4.17	%		9,721		3.45	%		9,249			3.16	%		9,040		3.31	%		0.21	%
Other Assets		4,630			1.81	%		1,442		0.55	%		2,201			0.86	%		3,916		1.39	%		3,628			1.24	%		3,611		1.32	%		-5.37	%
Deposits	$	204,816			79.89	%	$	208,863		79.40	%	$	216,056			84.61	%	$	230,985		81.96	%	$	243,957			83.45	%	$	241,475		88.52	%		3.73	%
FHLB Advances, Other Borrowed Funds		13,400			5.23	%		19,800		7.53	%		9,400			3.68	%		25,900		9.19	%		21,900			7.49	%		3,900		1.43	%		-23.99	%
Other Liabilities		3,391			1.32	%		2,714		1.03	%		2,050			0.80	%		1,636		0.58	%		1,682			0.58	%		1,432		0.52	%		-17.43	%

Equity	$	34,779			13.57	%	$	31,689		12.05	%	$	27,862			10.91	%	$	23,315		8.27	%	$	24,795			8.48	%	$	25,977		9.52	%		-6.28	%
Accumulated other Comprehensive Gain/(Loss)	($	1,032	)		-0.40	%	$	6		0.00	%	($	16	)		-0.01	%	$	11		0.00	%	($	111	)		-0.04	%	$	63		0.02	%

Loans/Deposits					106.48	%				113.86	%					103.20	%				100.20	%					94.62	%				87.04	%

Offices Open		12						12					12						8					6						6

(1) Ratios are as a percent of ending assets.

Source: Audited and unaudited financial statements; RP Financial calculations.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.6

The intent of the Bank’s investment policy is to provide adequate liquidity and to generate a favorable return within the context of supporting 1st Security’s overall credit and interest rate risk objectives. Given the Bank’s historical lending focus, the investment securities portfolio was typically modest in size through fiscal 2009, ranging from a high of 6.75% of assets at year end 2006 to a low of 0.85% of assets at December 31, 2009. Since that date the investment portfolio has expanded as the Bank has experienced an increase in investable funds due to the decline in the loan portfolio, and sought to improve earning asset yields in the prevailing low interest rate environment. Concurrent with the increase in the investment securities portfolio through June 30, 2011 has been an increase in cash and short-term overnight funds. As of June 30, 2011, investment securities consisted of: U.S. federal agency securities ($9.8 million), municipal bonds ($1.4 million) and mortgage-backed securities ($0.4 million), all of which were held as available-for-sale (“AFS”). Beyond these investments, the Bank held $1.8 million of FHLB stock at June 30, 2011. Cash and cash equivalents, utilized for daily operations, totaled $30.3 million at that date. The level of cash and investments maintained by the Bank has also been affected by available liquidity from changes to the balances of borrowings and deposits that have occurred since in recent periods. Exhibit I-4 provides historical detail of the Bank’s investment portfolio.

The Bank’s seven office locations (the headquarters office and six full-service depository branch locations), include four owned offices and three leased offices. The headquarters office in Mountlake Terrace is a 35,000 square foot, three story building with a net book value of approximately $3.4 million at June 30, 2011. There are no retail deposit services at this location. This office, along with investment in the other branch offices (including land, buildings, and furniture, fixtures and equipment), totaled $9.0 million, or 3.31% of assets as of June 30, 2011. This represents a notable level of investment in fixed assets, reducing the level of interest earning assets on the balance sheet.

1st Security’s funding has been derived primarily from deposits since 2006, with the deposits/assets ratio ranging from 79.4% to 88.5% during the period shown in Table 1.1. From year end 2006 through June 30, 2011, the Bank’s deposits decreased at an annual rate of 3.7%, with deposits increasing steadily between fiscal 2007 and fiscal 2010. Even though deposits have remained more or less flat during the first six months of 2011, they replaced borrowings as a funding source and had peaked at 88.5% of assets by June 30, 2011. In comparison to the deposit base of a traditional savings institution, 1st Security maintains a relatively high concentration of deposits in core transaction and savings account deposits. Core deposits comprised 56.1% of the Bank’s deposits at June 30, 2011, versus 53.8% of total deposits at year end 2008.

1st Security has borrowed funds to support asset size and manage funding costs and interest rate risk throughout the period of time shown in Table 1.1. Borrowings peaked at $25.9 million, or 9.2% of assets, at December 31, 2009, and have since been paid down to $3.9 million, or 1.4% of assets. Much of the paydown occurred during the first six months of 2011 with the Bank using excess liquidity to reduce the balance. Borrowings are generally limited to fixed-rate, fixed-maturity instruments and have also included short-term overnight FHLB advances at certain times.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.7

Since year end 2006, net losses and the adjustment for accumulated other comprehensive income translated into an annual equity shrinkage rate of 6.28%. The decline in assets and profitability recorded during the first six months of 2011 resulted in an increase in the equity-to-assets ratio from 8.48% at year end 2010 to 9.52% at June 30, 2011. All of the Bank’s equity is tangible, and the Bank maintained surpluses relative to all of its regulatory capital requirements at June 30, 2011. The net stock proceeds will strengthen the Bank’s equity position and support growth opportunities. The pro forma return of equity (“ROE”) is expected to initially decline given the increased equity position.

Income and Expense Trends

Table 1.2 presents the Bank’s income and expense trends over the past five and one-half years. Losses were incurred in fiscal years 2007 through 2009, while the net results have improved in recent periods as evidenced by the net income of $1.6 million recorded for fiscal 2010 and $1.9 million, or 0.69% of average assets, for the trailing twelve months ended June 30, 2011. The largest loss recorded during this period was a $4.6 million loss in fiscal 2009. Reported income has been affected to varying degrees by net gains or losses on sale, such as gains or loss on the sale of loans and branch offices. Net interest income and operating expenses represent the primary components of the Bank’s income statement. Other revenues for the Bank largely are derived from customer service fees on loans and deposits and other charges for bank services. Loan loss provisions drove the losses between fiscal 2008 and 2009, having been incurred to address issues in the consumer lending operations (which typically require establishment of reserves for expected loan chargeoffs), and, in 2008, an adverse classification of a single construction/land development loan.

The Bank’s net interest income to average assets ratio declined slightly from a high of 5.04% in fiscal 2010 to 4.96% for the twelve months ended June 30, 2011, with this ratio supported by the higher yielding loan portfolio, and a deposit base with a high proportion of lower cost core deposit funds. The decline in the net interest income ratio during the past six months is attributable to declining asset yields and loan shrinkage. Since fiscal 2006, the net interest income ratio has improved from 4.40% to 4.96% for the twelve months ended June 30, 2011, as although the income on earning assets declined by 28 basis points (from 6.53% to 6.25% of average assets), the Bank’s cost of funds declined by a greater 85 basis points due to the recent low interest rate environment. The Bank’s interest rate spreads and yields and costs for the past three and one-half years are set forth in Exhibits I-3 and I-5.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.8

Table 1.2

1st Security Bank of Washington

Historical Income Statements


																															12 Months Ended
	For the Fiscal Year Ended December 31,																														June 30,
	2006						2007						2008						2009						2010						2011
	Amount			Pct(1)			Amount			Pct(1)			Amount			Pct(1)			Amount			Pct(1)			Amount			Pct(1)			Amount			Pct(1)
	($000)			(%)			($000)			(%)			($000)			(%)			($000)			(%)			($000)			(%)			($000)			(%)

Interest Income	$	16,951			6.53	%	$	17,619			6.83	%	$	16,899			6.89	%	$	16,404			6.28	%	$	17,333			6.49	%	$	17,129			6.25	%
Interest Expense		(5,536	)		-2.13	%		(6,942	)		-2.69	%		(5,798	)		-2.36	%		(4,521	)		-1.73	%		(3,886	)		-1.46	%	($	3,520	)		-1.28	%
Net Interest Income	$	11,415			4.40	%	$	10,677			4.14	%	$	11,102			4.52	%	$	11,883			4.55	%	$	13,447			5.04	%	$	13,609			4.96	%
Provision for Loan Losses		(246	)		-0.09	%		(578	)		-0.22	%		(4,937	)		-2.01	%		(7,067	)		-2.70	%		(3,480	)		-1.30	%	($	2,605	)		-0.95	%
Net Interest Income after Provisions	$	11,169			4.30	%	$	10,099			3.91	%	$	6,164			2.51	%	$	4,816			1.84	%	$	9,967			3.73	%	$	11,004			4.01	%

Other Income	$	3,319			1.28	%	$	3,358			1.30	%	$	3,025			1.23	%	$	3,091			1.18	%	$	2,661			1.00	%	$	2,471			0.90	%
Operating Expense		(14,263	)		-5.49	%		(13,326	)		-5.16	%		(12,882	)		-5.25	%		(13,879	)		-5.31	%		(12,032	)		-4.51	%	($	11,790	)		-4.30	%
Net Operating Income	$	224			0.09	%	$	131			0.05	%	($	3,692	)		-1.50	%	($	5,972	)		-2.28	%	$	596			0.22	%	$	1,685			0.61	%

Gain(Loss) on Sale of Branch & Other Assets	($	13	)		0.00	%	($	25	)		-0.01	%	$	0			0.00	%	$	1,335			0.51	%	$	1,006			0.38	%	$	209			0.08	%
Gain(Loss) on Sale of Investment Securities	$	0			0.00	%	$	0			0.00	%	$	0			0.00	%	$	63			0.02	%	$	0			0.00	%	$	0			0.00	%
Gain(Loss) on Sale of Loans		1,122			0.43	%		32			0.01	%		15			0.01	%		0			0.00	%		0			0.00	%		0			0.00	%
Other Non-Operating Items		485			0.19	%		(3,721	)		-1.44	%		194			0.08	%		0			0.00	%		0			0.00	%		0			0.00	%
Investment Security Impairment		0			0.00	%		(275	)		-0.11	%		(321	)		-0.13	%		0			0.00	%		0			0.00	%		0			0.00	%
Total Non-Operating Income/(Expense)	$	1,594			0.61	%	($	3,989	)		-1.55	%	($	112	)		-0.05	%	$	1,398			0.53	%	$	1,006			0.38	%	$	209			0.08	%

Net Income Before Tax	$	1,819			0.70	%	($	3,858	)		-1.49	%	($	3,804	)		-1.55	%	($	4,574	)		-1.75	%	$	1,602			0.60	%	$	1,894			0.69	%
Income Tax Provision (Benefit)		(573	)		-0.22	%		(271	)		-0.11	%		0			0.00	%		0			0.00	%		0			0.00	%	$	0			0.00	%
Net Income (Loss)	$	1,246			0.48	%	($	4,129	)		-1.60	%	($	3,804	)		-1.55	%	($	4,574	)		-1.75	%	$	1,602			0.60	%	$	1,894			0.69	%

Adjusted Earnings
Net Income	$	1,246			0.48	%	($	4,129	)		-1.60	%	($	3,804	)		-1.55	%	($	4,574	)		-1.75	%	$	1,602			0.60	%	$	1,894			0.69	%
Add(Deduct): Net Gain/(Loss) on Sale		(1,594	)		-0.61	%		3,989			1.55	%		112			0.05	%		(1,398	)		-0.53	%		(1,006	)		-0.38	%	($	209	)		-0.08	%
Tax Effect (2)		542			0.21	%		(1,356	)		-0.53	%		(38	)		-0.02	%		475			0.18	%		342			0.13	%	$	71			0.03	%
Adjusted Earnings	$	194			0.07	%	($	1,496	)		-0.58	%	($	3,730	)		-1.52	%	($	5,497	)		-2.10	%	$	938			0.35	%	$	1,756			0.64	%

Expense Coverage Ratio		80.0	%					80.1	%					86.2	%					85.6	%					111.8	%					115.4	%
Efficiency Ratio		96.8	%					94.9	%					91.2	%					92.7	%					74.7	%					73.3	%
Effective Tax Rate (Benefit)		31.5	%					7.0	%					0.0	%					0.0	%					0.0	%					0.0	%

(1)	Ratios are as a percent of average assets
(2)	Assumes a 34% effective tax rate for federal & state income taxes.

Source: Audited & unaudited financial statements & RP Financial calculations

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.9

Non-interest operating income (“other income”) has contributed significantly to the Bank’s bottom line since 2006, but has steadily decreased both in dollar terms and as a percent of average assets, totaling $2.5 million, or 0.90% of average assets for the 12 months ended June 30, 2011. Non-interest operating income is dependent upon the level of banking activities, with fees and charges on transaction deposit accounts constituting the primary source of non-interest income for the Bank. The contribution realized from service fees and charges to non-interest operating income is supported by the Bank’s relatively high concentration of deposits maintained in transaction accounts. The level of non-interest income has declined in recent periods in part due to regulatory changes that occurred in mid-2010 that affected the level of non-sufficient fees that can be charged on deposit accounts, along with the overall reduction in loan origination activity, as the Bank is no longer generating as much fee income. Thus, the ratio of non-interest income to average assets has declined to 0.90% of average assets for the 12 months ended June 30, 2011 versus 1.30% of average assets generated during fiscal 2007.

Operating expenses represent the other major component of the Bank’s income statement, and ranged from a high of 5.49% of average assets during 2006 to a low of 4.30% of average assets for the twelve months ended June 30, 2011. Overall, the Bank’s operating expenses are relatively high in comparison to industry norms and reflect in part the staffing and operating costs associated with the consumer loan operations, which require a significant number of employees to support. The Bank also recently added staffing to implement the construction lending and residential mortgage lending programs. Since 2006, however, operating expenses have been reduced by closing or consolidating branch offices, which has reduce the level of employees and related costs. Some upward pressure will be placed on the Bank’s expenses and expense ratio following the stock offering, due to expenses associated with operating as a publicly-traded company, including expenses related to the stock benefit plans. At the same time, the increase in equity realized from the stock offering will increase the Bank’s capacity to leverage operating expenses through pursuing a more aggressive growth strategy.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.10

Because the net interest income ratio has increased and the operating expense ratio has declined since fiscal 2006, the Bank’s expense coverage ratio (net interest income divided by operating expenses) has increased to 1.15x from 0.80x over the past four and a half years. In addition, 1st Security’s efficiency ratio (operating expenses / (net interest income + other operating income)) of 73.3% during the 12 months ended June 30, 2011 was much more favorable than the 96.8% efficiency ratio recorded in fiscal 2006. The reduction in the efficiency ratio is an indication of strengthening core earnings. Going forward, the Bank believes the efficiency ratio could further improve with continued efforts to control operating expenses and reinvestment of the offering proceeds.

As noted earlier, loan loss provisions were elevated during 2008 and 2009 and remained elevated in 2010 and to date due to an increase in non-performing loans. For trailing twelve months ended June 30, 2011, loan loss provisions were $2.6 million, which is lower than the $7.1 million in fiscal 2009 but substantially higher than the level of $0.3 million recorded in 2006, before the financial crisis started. As of June 30, 2011, 1st Security maintained an allowance for loan losses of $4.8 million, equal to 2.5x non-accruing loans and 2.25% of gross loans receivable. Exhibit I-6 sets forth the Bank’s allowance for loan loss activity during the past two and one-half years.

Non-operating items have had a varying impact on the Bank’s income statement in recent years. Net gains on loan sales, restructuring costs, and the sale of branches have accounted for most of the non-operating activity since 2006. For the trailing twelve months ended June 30, 2011, non-operating items were limited to gains on the sale of branches and totaled only $0.2 million, or 0.08% of average assets. Importantly, any non-operating or non-recurring items will be excluded from the Bank’s income statement for the trailing twelve months ended June 30, 2011 in the calculation of adjusted net income for valuation purposes.

The Bank’s tax expense has been zero since fiscal 2008 as a result of prior period adjustments. As result of the net losses incurred in fiscal years 2007 through 2009, 1st Security had a net deferred tax asset of approximately $3.5 million as of June 30, 2011, of which there was a 100% reserve established at that date. The Bank’s marginal effective statutory tax rate approximates 34%, and this is the rate utilized to calculate the net reinvestment benefit from the offering proceeds. While the net deferred tax asset is fully reserved on the balance sheet, the Bank expects to review this status in connection with the December 31, 2011 fiscal year audit. There is a possibility that a portion of the deferred tax asset reserve may be reversed, resulting in an increase to the Bank’s equity account. This would imply that the Bank would then be subject to income taxes for financial reporting purposes. However, due to the uncertainty of this scenario, both in timing and amount, we have not included any impact of a reversal of all or a portion of the deferred tax valuation allowance in our pro forma valuation analysis.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.11

Interest Rate Risk Management

The Bank’s balance sheet is liability-sensitive in the shorter-term and, thus, the net interest margin will typically be adversely affected during periods of rising and higher interest rates, as well as in the interest rate environment that prevailed during 2006 and the first half of 2007 in which the yield curve was inverted due to short-term interest rates increasing to levels that exceed the yields earned on longer-term Treasury bonds. As of June 30, 2011 the interest rate risk analysis provided by a third party indicated that a 2.0% instantaneous and sustained increase in interest rates would result in a 0.71% increase in the Bank’s net interest income (see Exhibit I-7).

The Bank pursues a number of strategies to manage interest rate risk, particularly with respect to seeking to limit the repricing mismatch between interest rate sensitive assets and liabilities. The Bank manages interest rate risk from the asset side of the balance sheet by maintaining high liquidity, originating adjustable rate mortgages and other floating rate loans, and diversifying into shorter-term types of lending, such as the home renovation, other consumer and construction lending. As of June 30, 2011, loans with adjustable rates comprised approximately 28.6% of net loans receivable (see Exhibit I-8). On the liability side of the balance sheet, management of interest rate risk has been pursued by maintaining a high concentration of deposits in lower cost and less interest-rate sensitive transaction and savings accounts. Transaction and savings accounts comprised 56.1% of the Bank’s deposits at June 30, 2011. The infusion of stock proceeds will serve to further limit the Bank’s interest rate risk exposure, as most of the net proceeds will be redeployed into interest-earning assets and the increase in the Bank’s capital will lessen the proportion of interest rate sensitive liabilities funding assets.

Lending Activities and Strategy

Historically, the Bank’s primary emphasis was the origination of consumer loans (primarily “replacement-contracting” loans and automobile secured loans), 1-4 family residential first mortgages, and 2 nd mortgage/home equity loan products. The consumer loans were originated on an “indirect” basis, using home contractors or automobile dealers as loan sources. More recently, while maintaining the indirect replacement-contracting consumer lending program, the Bank has shifted away from automobile lending. With regard to commercial lending, the Bank intends to continue to originate non-mortgage commercial business loans and commercial real estate loans. 1st Security also plans to grow its portfolio of construction loans, and will bring 1-4 family residential mortgage originations back in-house. To implement the construction and residential mortgage lending strategies, the Bank recently hired experienced management in these areas. This strategy is expected to improve overall profitability, stability of earnings, increase the products per customer and increase the assets per employee (given the larger average loan size relative to indirect fixture secured and automobile loans). Details of the Bank’s loan portfolio composition are shown in Exhibit I-9, while Exhibit I-10 provides details of the Bank’s loan portfolio by contractual maturity date.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.12

Indirect Consumer Lending

Indirect consumer loans (indirect home renovation loans) represent the largest portion of the loan portfolio and have traditionally been the mainstay of the Bank’s lending strategy as a continuation of a lending operation from its days as a credit union. Such loans totaled $87.2 million, or 40.7% of total loans as of June 30, 2011. Indirect home renovation loans are originated through a network of approximately 150 home improvement contractors located in Washington, Oregon, Idaho, and Montana. Approximately 20 dealers are responsible for 50% of the loan volume, and the home renovation contractors are currently concentrated in the areas of replacement windows, siding, HVAC systems and roofing. These loans are originated by the dealers using loan applications provided by 1st Security. The loans are processed through loan origination software by the Bank, with approximately 50% of the loan applications receiving an automatic approval based on the information provided. A borrower’s FICO score is utilized as an important indicator of credit risk, and the Bank has emphasized originations of loans to higher credit score borrowers over the past 2-3 years. This has led to a lower level of loan chargeoffs in recent periods. Home renovation loans are generally secured by a lien against the property where the goods are installed and carry terms of up to 10 years with fixed rates of interest. The average loan balance was $13,000 as of June 30, 2011.

The decline in home prices experienced in the Bank’s market area over the past couple of years has resulted in a lower level of demand for home renovation loans, as homeowners are less likely to invest in existing homes if the amount owed on the property exceeds the current fair value. Thus, the Bank has experienced a modest decline in the balances of such loans, and going forward, the Bank intends to build new relationships with contractors doing business in California and Texas to replace a portion of the lost volume resulting from the slowdown in the Pacific Northwest economy. The Bank will test those markets with a selected number of contractors, and should this expanded market for home renovation lending be deemed attractive, the Bank intends to add additional loan sources in those states. Terms and conditions of loans to be originated in California and Texas will be similar to loans currently originated.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.13

Other Consumer Lending

1st Security also offers non-mortgage consumer loans secured by automobiles, boats, RVs, loans secured by deposits, and unsecured consumer loans. Automobile loans represent a prior lending focus whereby indirect loans were originated through a dealer network throughout the Northwest for new and used cars. However, this practice has been ceased, and auto loans are currently only originated at branch office locations. Thus, the balance of auto loans has declined substantially in recent years, and totaled $8.9 million as of June 30, 2011. Such balances are expected to continue to decline over the near term future. Auto loans currently originated by the branches generally carry fixed rates and terms of up to seven years. Recreational vehicle loans (boat and RV loans) represent a secondary consumer lending focus of the Bank, with the balances increasing in recent periods as a replacement for the reduction in auto loans. As of June 30, 2011, boat and RV loans equaled $25.3 million, or 11.8% of total loans. Boat and RV loans are originated directly to the owner of the security, and carry terms of up to 15 years and fixed rates. 1st Security originates a small number of other consumer loans, including home improvement, loans on deposit and other consumer loans, which totaled $3.1 million as of June 30, 2011. These loans generally carry fixed as well and terms up to five years.

Commercial Business Lending

1st Security originates commercial business loans to small- and mid-sized businesses local to the Bank’s Puget Sound market area, including loans to fund working capital that are secured by accounts receivable, inventory or property, plant and equipment. These loans may be fixed-rate but are usually adjustable-rate loans indexed to either the prime rate of interest or the LIBOR rate, plus a margin. Due to the current interest rate environment, these loans are generally originated with a floor of approximately 5.50%. Loan fees are generally charged at origination depending on the credit quality and account relationships of the borrower. The Bank structures some commercial business loans as lines of credit with terms of 12 months and interest only during the term, while other loans may reprice on an annual basis and amortize over a two to five year period. Loan-to-value ratios for these types of loans are generally limited to 80%. The typical business loan customer has annual revenue of up to $25 million.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.14

A portion of the commercial business loan portfolio consists of “warehouse lines of credit lending” to local mortgage banking companies, a business line that was commenced in 2010. The Bank currently maintains lines of credit totaling $6.5 million as of June 30, 2011 to a total of eight mortgage banking companies who use the funds to fund loan commitments. Outstanding balances as of June 30, 2011 were approximately $3.5 million. The mortgage bankers then sell the loans in the secondary market and repay the loans made by the Bank. These warehouse lines are secured by the underlying residential mortgage loans and carry variable rates based on prime with a floor of 5.5%. Following completion of the Conversion, the Bank’s legal lending limit will be increased, allowing the Bank to provide additional financing to the mortgage banking companies.

Commercial Real Estate and Multi Family Lending

1st Security originates real estate loans to a variety of commercial businesses, along with a modest amount of loans secured by multi-family property. These loans are generally priced at a higher rate of interest, have larger balances and involve a greater risk profile than 1-4 residential mortgage loans. Payments on commercial real estate loans are usually dependent on successful operations and management of the property. The Bank will generally require and obtain loan guarantees from financially capable borrowers.

Both fixed- and adjustable-rate commercial real estate mortgage loans are offered, secured by a wide variety of commercial properties located primarily across the Puget Sound region, including retail centers, warehouses, office buildings, and some multi-family residences. Loans originated are generally adjustable rate loans with balloon payments due after five to ten years. The loan interest rates are generally indexed to the prime rate of interest or a short-term LIBOR rate. Terms to maturity extend from 10 to 25 years. Commercial real estate loans are originated at loan-to-value ratios (“LTV”) generally not above 80%. In addition, personal guarantees are obtained from the primary borrowers on substantially all credits.

The Bank enhanced its commercial lending team in 2008 with personnel that are experienced in commercial real estate lending in the Puget Sound region, including lenders that maintain borrower relationships that assist in building the Bank’s commercial real estate loan portfolio. 1st Security has maintained a portfolio balance of such loans of approximately 12% of total loans since that time. The Chief Lending Officer has over 23 years of commercial lending experience in the northwestern U.S. region.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.15

2 nd Mortgage/Home Equity Lending

1st Security has been active in 2 nd mortgage and home equity lending in the geographic footprint served by the branches, and currently these loans are sourced by the branch offices. This lending activity is expected to continue, recognizing the risk in this type of lending given that home values have declined and remain precarious. Home equity lines of credit generally have adjustable rates tied to the prime rate of interest with terms of up to 20 years and maximum combined LTV ratios of up to 90%, including any underlying first mortgage. These loans totaled $12.9 million, or 83.7% of total second position loans at June 30, 2011. The Bank also maintains a smaller portfolio of fixed rate, fixed term 2 nd mortgage loans, which are underwritten as amortizing loans with terms of up to 20 years. These loans equaled $2.5 million as of June 30, 2011. Historically the Bank has priced these loans competitively in the local market area.

Residential Real Estate Lending

1st Security historically engaged in the origination of first mortgage loans secured by traditional 1-4 family residential owner-occupied property, with such loans both retained in portfolio and selectively sold into the secondary market, generally on a servicing retained basis. In mid-2007, the Bank shifted from in-house originations to a private label outsourcing arrangement whereby the Bank refers loan customers to the third party originator and receives a fee for the referral. The third party originator then processed the entire loan application, performed the underwriting, and funded the loan, while 1st Security had the option to invest in the loan. This origination structure allowed the Bank to devote additional internal resources to commercial and consumer lending. The private label outsourcing arrangement also allowed the Bank’s name to remain active in the local residential lending market.

Going forward, the Bank intends to establish a mortgage banking operation within the Bank by reintroducing in-house originations of residential mortgage loans, primarily for sale into the secondary market. To achieve this goal, the Bank intends to hire residential lending specialists with regional market area experience who will focus their efforts on generating mortgage loans. New originations will carry primarily fixed rates with 15 to 30 year terms and will conform to secondary market guidelines that enable their sale. The loans will be originated with maximum LTVs of 90%, although LTVs over 80% will require private mortgage insurance. The majority of fixed-rate production will be sold in the secondary market such as Wells Fargo, U.S. Bancorp or Citibank on a servicing retained basis. The Bank expects to realize gains of approximately 1.5% on the sale of these mortgages. A minor portion of the fixed rate loan originations may be placed into portfolio by the Bank based on cashflow needs and loan portfolio balance targets.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.16

Construction/Land Loans

Historically, 1st Security has originated construction loans secured by commercial real estate and, to a lesser extent, one- to four-family residences, along with loans secured by tracts of land for development. This type of lending has been modest over the last several years as the real estate markets have declined, demand for new construction declined and many builders experienced cash flow problems; as of June 30, 2011 construction/land loans totaled $6.3 million, or 2.9% of loans. Credit risk is managed by limiting lending activities within the primary market area and to known builders and developers in the regional market area. These loans are also attractive due to the relatively short average duration and attractive yields. Representing a lending initiative for the Bank, 1st Security intends to increase the volumes of the residential construction lending program and has hired a team of four construction lenders who ran a successful construction lending operation at another local institution. This team has expertise in acquisition, development and construction (“ADC”) lending in the Puget Sound market. The Bank is implementing this strategy to take advantage of what it sees as unmet demand for quality construction and ADC loans after many other banks abandoned this segment because of previous overexposure.

Residential construction loans to be originated will include loans to builders for speculative construction loans along with loans to the ultimate homeowner for construction of their primary residence. These loans will consist of generally have variable rates of interest, terms of up to 2 years (but most typically 9-12 months) and LTV ratios up to 75%. Construction loans are generally interest-only during the construction period. At the end of the construction period, the loans are paid off by the borrower, or may convert to permanent financing. LTVs range from 80% to 100%.

Exhibit I-11 provides a summary of the Bank’s lending activities since fiscal 2008. Lending volumes have fluctuated over this time period, with total originations falling from a high of $139.7 million during 2008 to $72.9 million for the trailing twelve months ended June 30, 2011. Within the loan categories, indirect consumer loans accounted for the majority of the loan volume, followed by commercial business loans and warehouse lines of credit. Originations of real estate mortgages has been very low during this period. No loans were purchased during this period, and no loans have been sold since fiscal 2009.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.17

Asset Quality

Asset quality issues at 1st Security have been centered around the real estate portfolio, but the quality of the real estate portfolio has improved significantly in recent periods. At June 30, 2011, the Bank recorded total NPLs of $1.9 million, down from $6.2 million at December 31, 2010. As shown in Exhibit I-12, the Bank’s portfolio of NPLs consisted of approximately equal proportions of home equity lines of credit (31.8%), consumer loans (26.5%), and commercial business loans (29.4%). Previous problems in the construction and commercial real estate portfolios had been resolved by June 30, 2011. Non-performing assets, which includes NPLs, accruing loans past due 90 days or more, OREO, and restructured loans, peaked at $13.1 million, or 4.6% of assets at year end 2009, and had declined to approximately $8.0 million, or 2.9% by June 30, 2011, with the majority comprised of OREO totaling $5.9 million. The Bank’s policy is to charge off non-performing consumer loans immediately; otherwise, the level of non-performing loans would be higher historically.

1st Security has established detailed asset classification policies and procedures which are consistent with regulatory guidelines. Detailed asset classifications are reviewed quarterly by senior management and the Board. Pursuant to these procedures, when needed, the Bank establishes additional valuation allowances to cover anticipated losses in classified or non-classified assets. At June 30, 2011, the Bank maintained valuation allowances of $4.8 million, equal to 2.25% of net loans receivable and 2.5x non-accruing loans.

Funding Composition and Strategy

Deposits have consistently accounted for the major portion of the Bank’s IBL and at June 30, 2011 deposits equaled 98.4% of total IBL. Exhibit I-13 sets forth the Bank’s deposit composition for the past two and one-half years and Exhibit I-14 provides the interest rate and maturity composition of the certificate of deposit (“CD”) portfolio at June 30, 2011. Transaction and savings account deposits constitute the largest portion of the Bank’s deposit base, with the proportion of such deposits increasing since 2008 due to much lower rates on longer-term CDs. Transaction, money market and savings account deposits equaled $135.5 million, or 56.1% of total deposits, at June 30, 2011, versus $116.1 million, or 53.7% of total deposits, at December 31, 2008. The largest portion of the core deposit base consists of money market accounts, which totaled $88.9 million, or 36.8% of total deposits.

RP ® Financial, LC.

OVERVIEW AND FINANCIAL ANALYSIS

I.18

The balance of the Bank’s deposits consists of CDs, with 1st Security’s current CD composition reflecting a higher concentration of short-term CDs (maturities of one year or less). As of June 30, 2011, the CD portfolio totaled $105.9 million, or 43.9% of total deposits, and 47.8% of the CDs were scheduled to mature in one year or less. As of June 30, 2011, jumbo CDs (balances exceeding $100,000) amounted to $61.3 million, or 58% of total CDs. The Bank maintained $10.1 million of brokered CDs as of June 30, 2011. As noted above, the balances of CDs in recent years has been affected by offering rates, which increases the attractiveness of those deposits relative to lower yielding transaction and savings account deposits.

Borrowings have served as an alternative funding source for the Bank to facilitate management of funding costs and interest rate risk. 1st Security maintained $3.9 million of FHLB advances at June 30, 2011 with a weighted average rate of 4.49%, which consisted of advances that had fixed interest rates with maturity dates extending out several years. Exhibit I-15 provides further detail of the Bank’s borrowings activities during the past three and one-half years. The overall level of borrowings has declined during 2011, reflecting the previously described increase in deposit funds and the reduction in the asset base in 2011.

Subsidiaries

1st Security currently has one inactive subsidiary, with an investment of $4,900 as of June 30, 2008.

Legal Proceedings

The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition of the Bank.

RP ® Financial, LC.

MARKET AREA
II.1

II. MARKET AREA

Introduction

1st Security conducts operations out of the main office and six branch offices in the Puget Sound region of Washington State. The main office is located in Mountlake Terrace, in Snohomish County, Washington, north of the city of Seattle. The branches extend to King and Pierce Counties to the south and Kitsap Counties to the west. A map of the branch office network is presented in Exhibit I-1, while descriptions of the office facilities are contained in Exhibit II-1.

The primary market area for business operations is the Seattle-Tacoma-Bellevue, WA Metropolitan Statistical Area (the “Seattle MSA”), while Kitsap County is part of the Bremerton-Silverdale Metropolitan Statistical Area (the “Bremerton-Silverdale MSA”). The overall region is typically known as the “Puget Sound” region. The population of the Seattle MSA 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 Seattle MSA has a well-developed urban area in the western portion of the state along Puget Sound, with the central and eastern portions remaining undeveloped, rural and mountainous.

In recent years, the economy in the Bank’s operating markets has experienced a downturn, reflecting the impact of the nationwide recession. Unemployment rates have increased, and real estate prices have diminished from peak levels. However, long-term growth trends are still favorable as the market area continues to maintain a highly educated and motivated workforce, and the Puget Sound region remains a desirable place to live. Future growth opportunities for 1st Security depend on the growth and stability of the regional economy, demographic growth trends, and the nature and intensity of the competitive environment. These factors have been briefly examined in the following pages to help determine the growth potential that exists for the Bank and the relative economic health of 1st Security’s market area. The growth potential and the stability provided by the market area have a direct bearing on the market value of the Bank.

RP ® Financial, LC.

MARKET AREA
II.2

National Economic Factors

The business potential of a financial institution is partially dependent on the future operating environment and growth opportunities for the banking industry and the economy as a whole. The national economy experienced a severe downturn during 2008 and 2009, as the fallout of the housing crisis caused the wider economy to falter, with most significant indicators of economic activity declining by substantial amounts. The overall economic recession was the worst since the great depression of the 1930s. Approximately 8 million jobs were lost during the recession, as consumers cut back on spending, causing a reduction in the need for many products and services. Total personal wealth declined notably due to the housing crisis and the drop in real estate values. As measured by the nation’s gross domestic product (“GDP”), the recession officially ended in the fourth quarter of 2009, after the national GDP expanded for two consecutive quarters (1.6% annualized growth in the third quarter of 2009 and 5.0% annualized growth in fourth quarter of 2009). The economic expansion has continued since that date, with GDP growth of 2.8% for calendar year 2010 and1.8% for the first quarter of 2011. The initial estimate of second quarter GDP growth showed that the economy expanded at a meager 1.3% annual rate, however. Notably, a large portion of GDP growth during 2009 and into 2010 has been generated through federal stimulus programs, bringing into question the sustainability of the recovery without government support.

The economic recession caused the inflation rate to decrease notably during 2009. Inflation averaged 3.85% for all of 2008 and a negative 0.34% for all of 2009, indicating a deflationary period. There was a decline in prices during eight of the 12 months during 2009. Reflecting a measure of recovery of the economy, the national annualized inflation rate was 1.64% for 2010 and an annualized rate of 2.8% for the first half of 2011. The national unemployment rate also revealed a modest recovery over the past 12 months. The reduction in employment during the recession led to fears of a prolonged period of economic stagnation, as consumers were unwilling or unable to increase spending. The unemployment rate totaled 9.2% as of June 2011, a slight decline from 9.4% as of December 2010, but still high compared to recent historical levels. There remains significant uncertainty about the near term future, particularly in terms of the speed at which the economy will recover, the impact of the housing crisis on longer term economic growth, and the near-term future performance of the real estate industry, including both residential and commercial real estate prices, all of which have the potential to impact future economic growth. The current and projected size of government spending and deficits also has the ability to impact the longer-term economic performance of the country.

The northwestern section of the United States is not immune to national economic trends as the regional residential and commercial real estate markets have felt the impact of the nationwide recession, with lowered housing prices and an almost complete shutdown of the construction industry. In particular, job losses in rural areas such as served by the Bank have caused a notable portion of loan delinquencies and foreclosures.

RP ® Financial, LC.

MARKET AREA
II.3

The major stock exchange indices have reflected the recent improvement in the downturn in the national economy, reporting significant volatility and an upward trend over the past 12 months. As an indication of the changes in the nation’s stock markets over the last 12 months, as of June 30, 2011, the Dow Jones Industrial Average closed at 12,414.34, an increase of 27.0% from June 30, 2010, while the NASDAQ Composite Index stood at 2,773.52, an increase of 31.5% over the same time period. The Standard & Poors 500 Index totaled 1,320.64 as of June 30, 2011, an increase of 28.1% from June 30, 2010.

Regarding factors that most directly impact the banking and financial services industries, in the past year the number of housing foreclosures have reached historical highs, median home values have declined by double digits in most areas of the country, and the housing construction industry has been decimated. These factors have led to substantial losses at many financial institutions, and subsequent failures of institutions. Despite efforts by the federal and state governments to limit the impact of the housing crisis, there remain concerns about a “double-dip” housing recession, whereby another wave of foreclosures occur. Therefore, the Bank will employ strict, prudent underwriting for such loans being placed into its portfolio, and will work to aggressively resolve substandard credits.

Interest Rate Environment

In terms of interest rates, through the first half of 2004, in a reaction to try to avoid a significant slowdown of the economy, the Federal Reserve lowered key market interest rates to historical lows not seen since the 1950s, with the federal funds rate equal to 1.00% and the discount rate equal to 2.00%. Beginning in June 2004, the Fed began slowly, but steadily increasing the federal funds and overnight interest rates in order to ward off any possibility of inflation. Through June 2006, the Fed had increased interest rates a total of 17 times, and as of June 2006, the Fed Funds rate was 5.25%, up from 1.00% in early 2004, while the Discount Rate stood at 6.25%, up from 2.00% in early 2004. The Fed then held these two interest rates steady until mid-2007, at which time the downturn in the economy was evident, and the Fed began reacting to the increasingly negative economic news. Beginning in August 2007 and through December 2008, the Fed decreased market interest rates a total of 12 times in an effort to stimulate the economy, both for personal and business spending.

RP ® Financial, LC.

MARKET AREA
II.4

As of January 2009, the Discount Rate had been lowered to 0.50%, and the Federal Funds rate target was 0.00% to 0.25%. These historically low rates were intended to enable a faster recovery of the housing industry, while at the same time lower business borrowing costs, and such rates have remained in effect through early 2010. In February 2010, the Fed increased the discount rate to 0.75%, reflecting a slight change to monetary strategy. The effect of the interest rate decreases since mid-2008 has been most evident in short term rates, which decreased more than longer term rates, increasing the slope of the yield curve. This low interest rate environment has been maintained as part of a strategy to stimulate the economy by keeping both personal and business borrowing costs as low as possible. The strategy has achieved its goals, as borrowing costs for residential housing have been at historical lows, and the prime rate of interest remains at a low level. As of June 30, 2011, one- and ten-year U.S. government bonds were yielding 0.19% and 3.18%, respectively, compared to 0.32% and 2.97%, respectively, as of June 30, 2010. This has had a positive impact on the net interest margins of many financial institutions, as they rely on a spread between the yields on longer term assets and the costs of shorter term funding sources. However, institutions who originate substantial volumes of prime-based loans have given up some of this pickup in yield as the prime rate declined from 5.00% as of June 30, 2008 to 3.25% as of June 30, 2011.

Based on the consensus outlook of 53 economists surveyed by The Wall Street Journal in July 2011, economic growth is expected to bounce back in the second half of 2011 to annualized growth rate of 3.1% and remain around 3.0% through 2012. Most of the economists expect that the unemployment rate will decrease in 2011, but the pace of job growth will only serve to bring the unemployment rate down slowly. On average, the economists expect that the unemployment rate will be 8.8% by the end of 2011 and 8.1% by the end of 2012, with the economy adding around 2.2 million jobs over the next twelve months. On average, the economists did not expect the Federal Reserve to begin raising its target rate until the first half of 2012 and the yield on the 10-year Treasury would reach 3.55% by December 2011 and 4.24% by the end of 2012. Inflation pressures were forecasted to recede going into 2012, as the price of oil was expected to settle around $100 a barrel. The economists also forecasted home prices would decline 2.4% in 2011, as measured by the Federal Housing Finance Agency index. Housing starts were forecasted to tick up through 2012, but remain at historically depressed levels. Historical interest rate data is presented in Exhibit II-2.

RP ® Financial, LC.

MARKET AREA
II.5

Market Area Demographics

Table 2.1 presents information regarding the demographic and economic trends for the Bank’s market area from 2000 to 2010 and projected through 2015, with additional data shown in Exhibit II-3. Data for the nation, the state of Washington and the Seattle MSA are included for comparative purposes. The size and scope of the market area is evidenced by the demographic data, which shows that as of 2010 the total population of the Seattle MSA was 3.46 million, approximately 51% of the state population. Most of the population base is concentrated along the western border of the region, against Puget Sound, resulting in a relatively urban market area for 1st Security. Between 2000 and 2010 the annual population growth rate of the Seattle MSA was slightly lower than the state rate and higher than the national rate, indicating a moderately growing area, with the more “suburban” counties of Pierce and Snohomish reporting higher growth rates and Kitsap County reporting the slowest growth rate, 0.6%, for the Bank’s market area. The slower growth in King County reflects the more developed characteristic of western King County, which is one of the older regions in the state. In most comparative areas, growth in households has paralleled trends with respect to population, as household growth rates for Kitsap County increased at a 0.8% annual rate compared to higher rates for the other counties.

The 2010 median household income and per capita income levels in King and Snohomish Counties were higher than the state and national averages, while Pierce County and Kitsap County reported income levels slightly below the Washington state average. Additional data regarding market area income levels is presented in Exhibit II-3. King and Snohomish Counties contain a larger percentage of higher income white-collar professional employment. For example, the King County (the highest income levels) median household income was 124% of the state average and 138% of the national average. Household income distribution patterns provide support for earlier statements regarding the nature of the Bank’s market as approximately 69% of King County households had income levels in excess of $50,000 annually in 2009 while the ratio was 60% for the state of Washington and 55% for the national average. In 2009, the city of Seattle was ranked as the seventh most educated city in the country, with a large concentration of residents that hold college degrees. Seattle’s relatively high income coupled with high education levels for a major city, results in King County placing among the 100 wealthiest counties in the United States, which will favorably influence demand for the products and services offered by financial services providers operating in the market.

RP ® Financial, LC.

MARKET AREA
II.6

Table 2.1

1st Security Bank of Washington

Summary Demographic/Economic Information


										Growth			Growth
	Year									Rate			Rate
	2000			2010			2015				2000-2010			2010-2015
										(%)			(%)
Population(000)
United States		281,422			311,213			323,209			1.0	%		0.8	%
Washington		5,894			6,756			7,176			1.4	%		1.2	%
Seattle MSA		3,044			3,462			3,672			1.3	%		1.2	%
King County		1,737			1,937			2,054			1.1	%		1.2	%
Pierce County		701			813			861			1.5	%		1.2	%
Snohomish County		606			713			758			1.6	%		1.2	%
Kitsap County		232			247			251			0.6	%		0.3	%

Households(000)
United States		105,480			116,761			121,360			1.0	%		0.8	%
Washington		2,271			2,612			2,778			1.4	%		1.2	%
Seattle MSA		1,197			1,370			1,456			1.4	%		1.2	%
King County		711			797			847			1.2	%		1.2	%
Pierce County		261			304			323			1.6	%		1.2	%
Snohomish County		225			268			286			1.8	%		1.3	%
Kitsap County		86			93			95			0.8	%		0.4	%

Median Household Income($)
United States	$	42,164		$	54,442		$	61,189			2.6	%		2.4	%
Washington	$	45,770		$	60,311		$	68,768			2.8	%		2.7	%
Seattle MSA	$	51,488		$	69,015		$	80,645			3.0	%		3.2	%
King County	$	53,383		$	75,693		$	88,138			3.6	%		3.1	%
Pierce County	$	45,197		$	57,879		$	65,288			2.5	%		2.4	%
Snohomish County	$	53,219		$	68,912		$	79,010			2.6	%		2.8	%
Kitsap County	$	46,848		$	60,066		$	66,635			2.5	%		2.1	%

Per Capita Income($)
United States	$	21,587		$	26,739		$	30,241			2.2	%		2.5	%
Washington	$	22,973		$	28,691		$	33,252			2.2	%		3.0	%
Seattle MSA	$	26,332		$	33,821		$	39,415			2.5	%		3.1	%
King County	$	29,521		$	38,562		$	45,291			2.7	%		3.3	%
Pierce County	$	20,948		$	25,542		$	29,389			2.0	%		2.8	%
Snohomish County	$	23,417		$	30,372		$	34,880			2.6	%		2.8	%
Kitsap County	$	22,317		$	26,450		$	30,570			1.7	%		2.9	%

2010 HH Income Dist.(%)	$	25,000		$	50,000		$	100,000		$	100,000	+
United States		20.8	%		24.7	%		35.7	%		18.8	%
Washington		17.5	%		22.8	%		39.2	%		20.5	%
Seattle MSA		14.0	%		19.1	%		39.9	%		27.0	%
King County		13.6	%		17.2	%		38.3	%		31.1	%
Pierce County		17.3	%		23.9	%		41.9	%		16.9	%
Snohomish County		11.8	%		19.3	%		42.6	%		26.4	%
Kitsap County		16.1	%		24.2	%		41.7	%		18.0	%

Source: SNL Financial, LC.

RP ® Financial, LC.

MARKET AREA
II.7

Summary of Local Economy

The Puget Sound region dominates the economy of the Pacific Northwest. Key employment sectors include aerospace, military, information technology, clean technology, biotechnology, education, logistics, international trade and tourism. The region is well known for the long-term presence of The Boeing Corporation and Microsoft, two major industry leaders. The workforce is generally highly educated. Washington’s geographic proximity to the Pacific Rim and a deepwater port have made it a center for international trade as well, which contributes significantly to the regional economy (one in three jobs in Washington is tied to foreign exports). The Washington ports handle 6% of all U. S. exports and 7% of all U.S. imports, and the top five trading partners with Washington include Japan, Canada, China, Korea and Ireland. 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 (Fort Lewis Army Base and McChord Air Force Base), 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.

RP ® Financial, LC.

MARKET AREA
II.8

Real Estate Trends in the Puget Sound

After a period of rapid growth of residential and commercial real estate, the Seattle MSA has the highest portion of troubled loans in the country. A partner at Foresight Analytics attributes the Seattle area’s sharp drop-off in loan performance to the market entering its economic downturn behind other parts of the country. Additionally, a sizeable amount of new construction hit the Puget Sound area market just as the local economy really weakened. In mid-2008, the Seattle area ranked 39 th among metropolitan areas in troubled loans and in the second quarter of 2009, the Seattle MSA had the nation’s highest rate of delinquent loans at 32.7%, double the national delinquency rate of 16.3%.

Contributing to the sharp rise in delinquent loans was a spike in troubled residential real estate development loans, as the Seattle MSA leads the nation with just under 45% of residential land and construction loans delinquent, which is nearly double the national rate of 24.2%. However, outside of single-family loans, the Seattle MSA market is more in line with the rest of the country. Foresight Analytics ranks the Seattle MSA 16 th in commercial mortgage delinquencies, with 4.8% of commercial mortgages delinquent, which compares with a national delinquency rate of 4.1%.

Given the high level of delinquent loans haunting the Washington-based banks, financial institution failures can be expected. It is likely that the overbuilt nature of the real estate market in some areas will impact the Bank.

Employment Sectors

Employment data, presented in Table 2.2 on the next page indicates that similar to many larger, developed areas of the country, services are the most prominent sector for the state of Washington and the four market area counties, comprising approximately 34% of total employment. Additional detail is presented in Exhibit II-4. The next largest component of the economy of the market area, on average, is government, at 20.8%, reflecting the military bases throughout the Bank’s market area. Wholesale and retail trade, at 13.5% on average, was another large component of the market area, reflecting the trade employment in the ports of the Puget Sound region. Government employment was highest in Kitsap and Pierce Counties, reflecting the military bases previously mentioned, with such employment related to the presence of Boeing. Manufacturing employment is highest in Snohomish County, the location of Boeing’s largest manufacturing and assembly plant, while information-related employment is highest in King County, due to the impact of Microsoft and other information technology employers. King County’s levels of employment in the different sectors resembled that of the economy of Washington, which was provided for comparative purposes. This data indicates that Bank’s market area has a relatively diversified economic base, such that a downturn in any one industry will likely not have a large impact on the regional economy. This diversification provides a level of stability that is a positive factor for financial institutions such as 1st Security.

RP ® Financial, LC.

MARKET AREA
II.9

Table 2.2

1st Security Bank of Washington

Primary Market Area Employment Sectors

(Percent of Labor Force)(1)


	Washington			Snohomish			King			Pierce			Kitsap
Employment Sector	State			County			County			County			County
	(% of Total Employment)

Services		35.1	%		31.2	%		37.8	%		34.2	%		33.8	%
Manufacturing		7.3	%		16.9	%		7.4	%		4.4	%		1.6	%
Wholesale/Retail Trade		13.5	%		14.3	%		13.1	%		13.6	%		12.9	%
Government		16.5	%		14.1	%		11.9	%		24.8	%		32.2	%
Finance/Insurance/Real Esate		9.0	%		8.7	%		10.3	%		8.7	%		7.8	%
Construction		5.8	%		7.4	%		5.1	%		6.7	%		5.4	%
Arts/Entertainment/Rec.		2.4	%		2.2	%		2.8	%		1.9	%		2.5	%
Transportation/Utility		3.0	%		1.7	%		3.5	%		3.4	%		1.3	%
Agriculture		2.2	%		0.7	%		0.2	%		0.5	%		0.5	%
Other		5.1	%		2.8	%		7.8	%		1.7	%		2.1	%
Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
(1) As of 2009
Source: REIS DataSource.

Unemployment Data and Trends

Table 2.3 provides unemployment data which shows that the unemployment rates in the Bank’s four county market area and the state of Washington have all increased over the last 12 months, compared to a decrease for the nation as a whole. While King and Kitsap Counties reported unemployment rates lower than the national and state unemployment rates, Snohomish and Pierce counties exceeded the state rate, indicating additional weakness to those sections of the market area. The lower unemployment rates in Kitsap and King Counties are reflective of the somewhat more favorable position of the local economies in those areas.

RP ® Financial, LC.

MARKET AREA
II.10

Table 2.3

1st Security Bank of Washington

Market Area Unemployment Trends

	July 2010			July 2011
Region	Unemployment			Unemployment

United States		9.5	%		9.1	%
Washington		8.6	%		9.0	%
Seattle MSA		8.6	%		9.1	%
Snohomish County		9.4	%		10.0	%
King County		8.1	%		8.6	%
Pierce County		9.0	%		9.6	%
Kitsap County		7.1	%		7.7	%

Source: U.S. Bureau of Labor Statistics.

Market Area Deposit Characteristics/Competition

Table 2.4 displays deposit market trends and deposit market share for commercial banks and savings institutions in the market area from June 30, 2006 to June 30, 2010. Deposit growth trends are important indicators of a market area’s current and future prospects for growth. The table indicates that commercial banks hold a large portion of the statewide deposit base, 88.2% as of June 30, 2010. Since June 30, 2006, commercial banks have increased their deposits at a greater rate than savings institutions, 6.5% on an annual basis versus an annualized net decline of 13.4% for savings institutions.

Within the Bank’s four county market area, the table indicates that annualized deposit growth rates in the Bank’s market range from a low of 0.1% per year over the last four years in Kitsap County to a high of 3.5% for Pierce County. Similar to statewide figures, commercial banks hold in excess of 85% of total financial institution deposits in all four market area counties. The county deposit growth rate figures indicate that all market area counties except for Kitsap County are increasing at rates close to the state average except for Kitsap County. In all four market area counties, savings institutions experienced decreases in deposit balances and market share, primarily due to the failure of Washington Mutual, a large thrift that failed in 2009.

RP ® Financial, LC.

MARKET AREA
II.11

Table 2.4

1st Security Bank of Washington

Deposit Summary


	As of June 30,
	2006							2010							Deposit
			Market			No. of				Market			No. of		Growth Rate
	Deposits		Share			Branches		Deposits		Share			Branches		2006-2010
	(Dollars in Thousands)														(%)

Washington	$	99,586,000		100.0	%		1,871	$	109,218,692		100.0	%		1,891		2.3	%
Commercial Banks		76,640,000		77.0	%		1,484		96,341,512		88.2	%		1,703		5.9	%
Savings Institutions		22,946,000		23.0	%		387		12,877,180		11.8	%		188		-13.4	%

Snohomish County	$	8,075,408		100.0	%		180	$	8,842,804		100.0	%		186		2.3	%
Commercial Banks		5,786,884		71.7	%		141		7,589,894		85.8	%		169		7.0	%
Savings Institutions		2,288,524		28.3	%		39		1,252,910		14.2	%		17		-14.0	%
1st Security Bank		53,574		0.7	%		5		103,785		1.2	%		3		18.0	%

King County	$	47,373,091		100.0	%		526	$	51,453,127		100.0	%		540		2.1	%
Commercial Banks		36,355,822		76.7	%		389		45,710,792		88.8	%		485		5.9	%
Savings Institutions		11,017,269		23.3	%		137		5,742,335		11.2	%		55		-15.0	%
1st Security Bank		64,569		0.1	%		4		78,875		0.2	%		2		5.1	%

Pierce County	$	8,126,385		100.0	%		199	$	9,322,735		100.0	%		200		3.5	%
Commercial Banks		6,526,293		80.3	%		156		8,819,650		94.6	%		184		7.8	%
Savings Institutions		1,600,092		19.7	%		43		503,085		5.4	%		16		-25.1	%
1st Security Bank		48,055		0.6	%		3		28,826		0.3	%		1		-12.0	%

Kitsap County	$	2,289,660		100.0	%		74	$	2,301,538		100.0	%		66		0.1	%
Commercial Banks		1,807,605		78.9	%		61		2,138,457		92.9	%		61		4.3	%
Savings Institutions		482,055		21.1	%		13		163,081		7.1	%		5		-23.7	%
1st Security Bank		9,006		0.4	%		1		23,606		1.0	%		1		27.2	%

Source: FDIC.

Since June 30, 2006, 1st Security has recorded increases in deposits in three of the four market area counties, with annual increases ranging from 5.1% in King County to 27.2% in Kitsap County. The Bank’s deposits declined in Pierce County, due to the closure of certain offices in that county between 2006 and 2011. The Bank’s market shares of deposits ranged from 0.3% in Pierce County to a high of 1.2% in Snohomish County.

Market Area Counties Deposit Competitors

As detailed in the data showing competitor deposits (see Table 2.5), significant competitors for the Bank consist of large nationwide and superregional banks, including Bank of America, Wells Fargo and JPMorgan Chase, all of which maintain a strong presence in the regional market. This factor, however, allows 1st Security to position itself as a community bank, locally owned and managed.

RP ® Financial, LC.

MARKET AREA
II.12

As of June 30, 2010, 1st Security maintained relatively small deposit market shares in the Seattle MSA counties, representative of the overall large size of the deposit base and indicating that future deposit gains and market share gains are possible. In the smaller markets such as Kitsap County, the Bank still reported a relatively small market share of 1.0% (however, the Bank only has one office location in Kitsap County).

Table 2.5

1st Security Bank of Washington

Market Area Counties Deposit Competitors


	Snohomish County, WA	Bank of America (16.3%)
		JPMorgan Chase Bank (10.7%)
		Union Bank NA (10.4%)
		Cascade Bank (9.1%)
		1st Security (1.2%)

	King County, WA	Bank of America (29.9%)
		Wells Fargo (12.6%)
		US Bank NA (11.5%)
		JPMorgan Chase Bank (9.4%)
		1st Security (0.2%)

	Pierce County, WA	Columbia State Bank (18.1%)
		Wells Fargo (14.6%)
		Keybank NA (14.3%)
		Bank of America, NA (13.4%)
		1st Security (0.3%)

	Kitsap County, WA	Kitsap Bank (22.5%)
		Bank of America, NA (21.0%)
		JPMorgan Chase Bank (12.3%)
		Wells Fargo (9.0%)
		1st Security (1.0%)
	Source: FDIC.

RP ® Financial, LC.

MARKET AREA
II.13

Summary

The overall condition of the primary market area can be characterized as positive, with growth potential in all four market area counties based on regional population and economic projections. The overall total population base within the Bank’s market area provides the potential for additional banking customers. In addition, income levels are relatively high and growing in line with national averages, indicating an increasing amount of personal wealth for residents. Considering these local demographic and economic trends and the number of formidable competitors in the market area, the competition for deposits is expected to remain substantial, precipitating the need for 1st Security to pay competitive deposit rates, provide high quality service and to continue to provide electronic banking capabilities to increase local market share.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III. 1

III. PEER GROUP ANALYSIS

This chapter presents an analysis of 1st Security’s operations versus a group of comparable savings institutions (the “Peer Group”). The Peer Group was selected from the universe of all publicly-traded savings institutions in a manner consistent with the regulatory valuation guidelines. The basis of the pro forma market valuation of 1st Security is derived from the pricing ratios of the Peer Group institutions, incorporating valuation adjustments for key differences relative to the Peer Group. Since no Peer Group can be exactly comparable to 1st Security, key areas examined for differences are: financial condition; profitability, growth and viability of earnings; asset growth; primary market area; dividends; liquidity of the shares; marketing of the issue; management; and effect of government regulations and regulatory reform.

Peer Group Selection

The Peer Group selection process is governed by the general parameters set forth in the regulatory valuation guidelines. Accordingly, the Peer Group is comprised of only those publicly-traded savings institutions whose common stock is either listed on a national exchange (NYSE or AMEX), or is NASDAQ-listed, since trading activity for such stocks is regularly reported and generally more frequent than for non-publicly traded and closely-held institutions. Institutions that are not listed on a national exchange or on NASDAQ are inappropriate, since the trading activity for thinly-traded or closely-held stocks is typically highly irregular in terms of frequency and price and thus may not be a reliable indicator of market value. We have also excluded from the Peer Group those companies under acquisition or subject to rumored acquisition, mutual holding companies, and recent conversions, because their pricing ratios are distorted and/or have limited trading history. A recent listing of the universe of all publicly-traded savings institutions is included as Exhibit III-1.

Ideally, the Peer Group, which must have at least 10 members to comply with the regulatory valuation guidelines, should be comprised of locally- or regionally-based institutions with comparable resources, strategies and financial characteristics. There are approximately 140 publicly-traded institutions nationally and, thus, it is typically the case that the Peer Group will be comprised of institutions with relatively comparable characteristics. Valuation adjustments will be applied to account for the differences that exist between the converting institution and the Peer Group. Since 1st Security will be a fully public company upon completion of the offering, we considered only fully public companies to be viable candidates for inclusion in the Peer Group.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.2

From the universe of publicly-traded thrifts, we selected ten institutions with characteristics similar to those of 1st Security. In the selection process, we applied two “screens” to the universe of all public companies that were eligible for consideration:

Screen #1 Washington institutions with assets less than $1 billion (In-state Peers). Two companies met the criteria for Screen #1 and both were included in the Peer Group.

Screen #2 Other institutions with assets less than $400 million and positive core earnings, excluding those in the northeast and mid-Atlantic regions of the country (National Peers). The northeast and mid-Atlantic regions of the U.S. were excluded because the economic downturn was not as severe in these areas, and this has influenced the pricing ratios of public thrifts operating in these areas. The remaining eight companies met the criteria for Screen #2.

Exhibit III-1 provides financial and public market pricing characteristics of all publicly-traded thrifts, while Exhibit III-2 provides financial and public market pricing characteristics of the Peer Group selection screens. Table 3.1 shows the general characteristics of each of the 10 Peer Group companies and Exhibit III-3 provides summary demographic and deposit market share data for the primary market areas served by each of the Peer Group companies. While there are expectedly some differences between the Peer Group companies and 1st Security, we believe that the Peer Group companies, on average, provide a good basis for valuation subject to valuation adjustments. The following sections compare the Bank’s financial condition, income and expense trends, loan composition, credit risk and interest rate risk to that of the Peer Group using the most recent publicly available financial information.

A summary description of the key comparable characteristics of each of the Peer Group companies relative to 1st Security’s characteristics is detailed below.

Athens Bancshares, Inc. of TN . Athens Bancshares conducts operations out of 7 offices in southeastern Tennessee, serving suburban areas north of Chattanooga. Athens reported the second highest GAAP equity to assets of all Peer Group members, and operates with a similar level of loans receivable as the Bank. Athens recorded a very high level of non-interest income relative to the Bank and the Peer Group.

Eagle Bancorp of MT . Eagle Bancorp operates out of 6 offices in southwestern Montana. Eagle maintains a relatively high level of MBS and relatively low level of cash and equivalents relative to the Bank and the Peer Group, and, like Athens, recorded a high capital ratio. Eagle funds operations with a higher proportion of borrowings, on average, than the Peer Group. Earnings at Eagle were derived from significant levels of non-operating income, and although Eagle’s NPAs/assets ratio was lower than the Bank’s the Bank recorded higher reserve levels.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.3

Table 3.1
Peer Group of Publicly-Traded Thrifts
September 2, 2011

				Operating	Total				Fiscal	Conv.	Stock		Market
Ticker	Financial Institution	Exchange	Primary Market	Strategy(1)	Assets(2)			Offices	Year	Date	Price		Value
											($)		($Mil)
RVSB	Riverview Bancorp, Inc. of WA	NASDAQ	Vancouver, WA	Thrift	$	886		17	03-31	10/97	$	2.61	$	59
TSBK	Timberland Bancorp, Inc. of WA	NASDAQ	Hoquiam, WA	Thrift	$	735		22	09-30	01/98	$	5.05	$	36
LSBI	LSB Financial Corp. of Lafayette IN	NASDAQ	Lafayette, IN	Thrift	$	360		5	12-31	02/95	$	13.30	$	21
FABK	First Advantage Bancorp of TN	NASDAQ	Clarksville, TN	Thrift	$	350		5	12-31	11/07	$	12.70	$	52
EBMT	Eagle Bancorp Montana of MT	NASDAQ	Helena, MT	Thrift	$	331		6	06-30	04/10	$	10.46	$	41
LABC	Louisiana Bancorp, Inc. of LA	NASDAQ	Metairie, LA	Thrift	$	320		3	12-31	07/07	$	16.03	$	55
JXSB	Jacksonville Bancorp Inc. of IL	NASDAQ	Jacksonville, IL	Thrift	$	305		7	12-31	07/10	$	13.70	$	26
AFCB	Athens Bancshares, Inc. of TN	NASDAQ	Athens, TN	Thrift	$	283		7	12-31	01/10	$	12.70	$	35
FFNM	First Federal of Northern Michigan of MI	NASDAQ	Alpena, MI	Thrift	$	219		8	12-31	04/05	$	3.75	$	11
FFDF	FFD Financial Corp. of Dover OH	NASDAQ	Dover, OH	Thrift	$	211	M	5	06-30	04/96	$	15.00	$	15

NOTES:	(1)	Operating strategies are: Thrift=Traditional Thrift, M.B.=Mortgage Banker, R.E.=Real Estate Developer, Div.=Diversified and Ret.=Retail Banking.
	(2)	Most recent quarter end available (E=Estimated and P=Pro Forma).

Source: SNL Financial, LC.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.4

FFD Financial Corp. of Dover OH . FFD Financial operates out of 5 offices in Dover, which is located in central Ohio between Columbus and Pittsburgh, Pennsylvania. With $211 million in assets, FFD is the smallest Peer Group member. It recorded the highest asset growth and the lowest equity/assets ratio in the Peer Group. FFD has a similar strategy of originating commercial business loans, and its portfolio of commercial business loans was equal in proportion to the Bank’s. Asset quality at FFD was slightly favorable relative to the Peer Group and the Bank.

First Advantage Bancorp of TN . First Advantage operates out of 5 offices in north central Tennessee. First Advantage recorded the highest not worth among all Peer Group members (19.3% vs. a median of 12.5% for the Peer group). Like Eagle, First Advantage maintains a greater wholesale leveraging strategy than the other Peer Group members by using borrowings to fund investments. The loan portfolio for First Advantage had significantly higher ratios of construction loans than the Peer Group and the Bank, but First Advantage also recorded substantially below average NPA/Assets ratios.

First Fed of Northern Michigan . First Fed operates 8 offices in northern Michigan. Reflecting the relatively poor economic conditions in that part of the country, First Fed reported the lowest earnings of all Peer Group members and asset quality measures that were less favorable, on average, than the Peer Group and the Bank. Like the other Peer Group members, First Fed’s loan portfolio mix was more reflective a traditional thrift than the Bank’s.

Jacksonville Bancorp, Inc. of IL . Jacksonville is a 7-office institution with a market area in the suburbs west of Springfield, in central Illinois. Jacksonville has a relatively low loans-to-deposits ratio, and has been reinvesting funds into MBS. Jacksonville recorded the highest reported and core earnings of all the Peer Group members, which is largely a function of non-interest sources of income. Jacksonville also recorded the highest consumer loan ratio of all the Peer Group members, although at 5.2% it is much lower than the ratio of 45.7% recorded by the Bank. Jacksonville’s asset quality measures were moderately better than the Bank’s and the Peer Group average.

LSB Financial Corp. of IN . LSB operates out of 5 offices in an around Lafayette, a town in central Indiana northwest of Indianapolis. LSB has the highest loans to assets ratio among Peer Group members, with a loan portfolio consisting primarily of 1-4 family residential and commercial real estate/multi-family residential mortgages. LSB maintains the second highest ratio of non-residential mortgages in the Peer Group, with the higher risk of this portfolio reflected in the highest loan loss provisions and second highest NPA/Assets ratio of all Peer Group members. LSB’s earnings were comparable to Peer Group averages.

Louisiana Bancorp, Inc. of LA . Louisiana Bancorp is the southernmost member of the Peer Group and operates out of three offices in the New Orleans/Metairie area of Louisiana. Louisiana Bancorp’s balance sheet is characterized by wholesale funding (it maintains the highest borrowings level among all the Peer Group companies), which has largely been reinvested into MBS and investments (it maintains the highest ratio of MBS & investments). The loans to assets ratio is among the lowest at 57.9%. Nevertheless, Louisiana Bancorp recorded stronger than average earnings due to very low loss provisions and low operating expenses, which is reflective of its low loan ratio and focus on purchasing low risk MBS and investment securities. This strategy of low risk investments has also resulted in more favorable asset quality measures for all the Peer Group companies.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.5

Riverview Bancorp. Inc. of WA . Riverview is the largest Peer Group member and operates out of 17 offices in the Vancouver area of southwest Washington State. Riverview reported relatively high ratios of loans/assets deposit funding, along with the highest level of intangible assets of all Peer Group members. Riverview was less profitable than the Peer Group, on average, due to higher loan loss provisions and operating expenses. Riverview reported the lowest investment in 1-4 family mortgage loans but had the highest concentration of commercial real estate/multi-family mortgages, resulting in the highest risk-weighted assets-to-assets ratio. Riverview’s asset quality ratios on balance were somewhat less favorable than the Peer Group and the Bank’s averages.

Timberland Bancorp, Inc. of WA . Timberland recorded the second largest asset base in the Peer Group and operates from 22 offices in Seattle, Olympia, and southern suburbs of Seattle. Timberland maintained the highest ratio of cash and equivalents, which serves to offset their relatively high ratios of commercial real estate/multi-family residential mortgages and construction loans relative to the Peer Group. However, earnings at Timberland have been negatively impacted by relatively higher levels of loan loss reserves and operating expenses compared to the Peer Group. Timberland also recorded the least favorable asset quality among all of the Peer Group members, with NPAs/Assets exceeding 8.0% versus an average of 3.2% for all the Peer Group members.

In aggregate, the median Peer Group company maintained a higher ratio of tangible equity than the industry average (13.4% of assets versus 10.1% for all non-MHC public companies), generated a similar core earnings ratio (0.37% ROAA versus 0.31% for all non-MHC public companies), and earned a slightly lower core ROE (2.77% ROE versus 3.02% for all non-MHC public companies). Overall, the Peer Group’s average P/B ratio and average P/Core earnings multiple were below the respective averages for all non-MHC publicly-traded thrifts.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.6

	All Fully-Conv.
	Publicly-Traded			Peer Group

Financial Characteristics (Medians)
Assets ($Mil)	$	902		$	400
Market capitalization ($Mil)	$	59.7		$	35.1
Tangible Equity/assets (%)		10.10	%		13.35	%
Core Return on average assets (%)		0.31	%		0.37	%
Core Return on average equity (%)		3.02	%		2.77	%

Pricing Ratios (Medians) (1)
Price/earnings (x)		14.61	x		17.27	x
Price/book (%)		79.54	%		69.11	%
Price/assets (%)		8.06	%		7.94	%

(1) Based on market prices as of September 2, 2011.

Ideally, the Peer Group companies would be comparable to 1st Security in terms of all of the selection criteria, but the universe of publicly-traded thrifts does not provide for an appropriate number of such companies. However, in general, the companies selected for the Peer Group were fairly comparable to 1st Security, as will be highlighted in the following comparative analysis.

Financial Condition

Table 3.2 shows comparative balance sheet measures for 1st Security and the Peer Group, reflecting the expected similarities and some differences given the selection procedures outlined above. The Bank’s and the Peer Group’s ratios reflect balances as of June 30, 2011, unless indicated otherwise for the Peer Group companies. 1st Security’s tangible equity-to-assets ratio of 9.5% was below the Peer Group’s median tangible equity to assets ratio of 11.4%. The Bank’s pro forma capital position will increase with the addition of stock proceeds, providing the Bank with an equity-to-assets ratio that will exceed the Peer Group’s ratio. The increase in the Bank’s pro forma capital position will be favorable from a risk perspective and in terms of future earnings potential that could be realized through leverage and lower funding costs. At the same time, the Bank’s higher pro forma capitalization will initially depress return on equity. Both 1st Security’s and the Peer Group’s capital ratios reflected capital surpluses with respect to the regulatory capital requirements, with the Peer Group’s ratios currently exceeding the Bank’s ratios. On a pro forma basis, the Bank’s regulatory surpluses will become more significant.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.7

Table 3.2
Balance Sheet Composition and Growth Rates
Comparable Institution Analysis
As of June 30, 2011

		Balance Sheet as a Percent of Assets
		Cash &			MBS &												Borrowed			Subd.			Net			Goodwill			Tng Net
		Equivalents			Invest			BOLI			Loans			Deposits			Funds			Debt			Worth			& Intang			Worth

1st Security Bank of WA
June 30, 2011			11.1	%		5.0	%		0.0	%		77.1	%		88.5	%		1.4	%		0.0	%		9.5	%		0.0	%		9.5	%

All Public Companies
Averages			6.2	%		21.4	%		1.5	%		65.9	%		73.5	%		12.5	%		0.5	%		12.4	%		0.7	%		11.7	%
Medians			4.7	%		19.7	%		1.6	%		67.8	%		73.2	%		11.1	%		0.0	%		11.5	%		0.1	%		10.6	%

State of WA
Averages			12.5	%		10.6	%		1.5	%		68.6	%		75.0	%		10.7	%		0.5	%		13.1	%		1.1	%		12.0	%
Medians			13.0	%		10.7	%		1.8	%		66.6	%		75.9	%		8.1	%		0.0	%		12.2	%		0.8	%		11.8	%

Comparable Group
Averages			6.1	%		17.6	%		1.3	%		69.9	%		75.3	%		9.5	%		0.4	%		13.8	%		0.5	%		13.3	%
Medians			4.7	%		18.2	%		1.6	%		70.3	%		78.8	%		7.1	%		0.0	%		12.5	%		0.1	%		11.4	%

Comparable Group
AFCB	Athens Bancshares, Inc. of TN		6.4	%		15.8	%		3.2	%		71.3	%		77.4	%		3.5	%		0.0	%		17.7	%		0.1	%		17.6	%
EBMT	Eagle Bancorp Montana of MT		2.9	%		31.7	%		2.1	%		56.6	%		63.2	%		18.4	%		1.6	%		15.9	%		0.0	%		15.9	%
FFDF	FFD Financial Corp. of Dover OH (1)		7.3	%		4.0	%		0.0	%		85.7	%		83.8	%		6.6	%		0.0	%		8.9	%		0.0	%		8.9	%
FABK	First Advantage Bancorp of TN		5.4	%		20.5	%		0.1	%		69.8	%		64.3	%		15.2	%		0.0	%		19.3	%		0.0	%		19.3	%
FFNM	First Federal of N. Michigan of MI		1.8	%		24.4	%		0.6	%		66.4	%		71.3	%		16.8	%		0.0	%		11.0	%		0.2	%		10.8	%
JXSB	Jacksonville Bancorp Inc. of IL		1.8	%		34.5	%		1.4	%		57.4	%		84.2	%		1.4	%		0.0	%		12.7	%		0.9	%		11.8	%
LSBI	LSB Financial Corp. of Lafayette IN		3.7	%		4.2	%		1.9	%		87.0	%		84.4	%		5.0	%		0.0	%		10.1	%		0.0	%		10.1	%
LABC	Louisiana Bancorp, Inc. of LA		4.0	%		36.3	%		0.0	%		57.9	%		59.9	%		20.4	%		0.0	%		18.4	%		0.0	%		18.4	%
RVSB	Riverview Bancorp, Inc. of WA		10.0	%		1.8	%		1.8	%		76.5	%		83.9	%		0.3	%		2.6	%		12.2	%		2.9	%		9.3	%
TSBK	Timberland Bancorp, Inc. of WA		18.0	%		2.4	%		1.9	%		70.9	%		80.2	%		7.6	%		0.0	%		11.7	%		0.8	%		10.9	%

		Balance Sheet Annual Growth Rates																					Regulatory Capital
					MBS, Cash &									Borrows.			Net			Tng Net
		Assets			Investments			Loans			Deposits			&Subdebt			Worth			Worth			Tangible			Core			Reg.Cap.

1st Security Bank of WA
June 30, 2011			-2.07	%		40.59	%		-7.69	%		2.72	%		-79.37	%		8.03	%		8.03	%		11.31	%		11.31	%		12.57	%

All Public Companies
Averages			1.41	%		7.71	%		-0.47	%		3.49	%		-17.49	%		1.96	%		1.65	%		10.89	%		10.83	%		18.90	%
Medians			0.36	%		6.47	%		-2.88	%		1.76	%		-12.19	%		1.66	%		1.61	%		9.91	%		9.91	%		17.33	%

State of WA
Averages			-4.05	%		25.17	%		-10.49	%		-2.38	%		-29.97	%		13.03	%		15.38	%		12.47	%		12.47	%		18.84	%
Medians			-2.82	%		20.47	%		-7.61	%		-1.95	%		-30.06	%		1.34	%		1.61	%		12.47	%		12.47	%		17.10	%

Comparable Group
Averages			0.44	%		12.08	%		0.29	%		2.43	%		-12.11	%		7.36	%		4.22	%		12.64	%		12.64	%		19.16	%
Medians			1.03	%		10.04	%		1.09	%		2.84	%		-8.34	%		1.59	%		1.04	%		13.61	%		13.61	%		16.60	%

Comparable Group
AFCB	Athens Bancshares, Inc. of TN		0.51	%		-3.05	%		1.79	%		0.16	%		8.20	%		0.01	%		0.16	%		13.61	%		13.61	%		20.97	%
EBMT	Eagle Bancorp Montana of MT		1.64	%		-4.92	%		5.68	%		5.68	%		-8.74	%		0.10	%		0.10	%		16.78	%		16.78	%	NA
FFDF	FFD Financial Corp. of Dover OH (1)		5.76	%		43.75	%		2.27	%		7.51	%		-7.93	%		3.47	%		3.47	%	NA			NA			NA
FABK	First Advantage Bancorp of TN		1.56	%		-9.34	%		6.76	%		3.30	%		-6.12	%		-0.46	%		-0.46	%		14.08	%		14.08	%		19.57	%
FFNM	First Federal of N. Michigan of MI		-3.54	%		23.52	%		-11.56	%		-1.09	%		-14.80	%		2.41	%		3.78	%		10.04	%		10.04	%		16.53	%
JXSB	Jacksonville Bancorp Inc. of IL		2.75	%		7.54	%		0.40	%		-2.25	%		49.39	%		48.61	%	NM				9.75	%		9.75	%		15.66	%
LSBI	LSB Financial Corp. of Lafayette IN		-4.94	%		17.08	%		-6.17	%		1.02	%		-56.10	%		5.31	%		5.31	%		9.90	%		9.90	%		14.60	%
LABC	Louisiana Bancorp, Inc. of LA		-2.30	%		-15.05	%		9.01	%		2.38	%		-5.77	%		-12.35	%		-12.35	%		14.31	%		14.31	%		30.21	%
RVSB	Riverview Bancorp, Inc. of WA		2.57	%		48.71	%		-3.00	%		3.81	%		-52.63	%		25.71	%		36.88	%	NA			NA			NA
TSBK	Timberland Bancorp, Inc. of WA		0.35	%		12.55	%		-2.22	%		3.79	%		-26.57	%		0.76	%		1.04	%	NA			NA				16.60	%

(1) Financial information is for the quarter ending March 31, 2011.

Source: SNL Financial, LC. and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.8

The interest-earning asset compositions for the Bank and the Peer Group were somewhat similar, with loans constituting the bulk of interest-earning assets for both. The Bank’s loans-to-assets ratio of 77.1% modestly exceeded the Peer Group ratio of 70.3%. Some of the difference was reflected in the Peer Group’s higher proportion of MBS and investments to assets, as measured at 18.2% versus 5.0% for the Bank. The Bank made up the remainder by of the difference by recording a higher ratio of cash and equivalents (11.1% of assets) than the Peer Group (4.7% of assets). Overall, 1st Security’s and the Peer Group’s ratios of interest-earning assets to assets were 93.2% and 94.8%, respectively.

1st Security’s and the Peer Group’s funding liabilities reflected similar funding strategies. Both the Bank and the Peer Group relied primarily on deposits for funding, with deposits representing 88.5% and 78.8% of assets, respectively. The Peer Group relied more heavily on borrowings (7.1% of assets) than the Bank (1.4% of assets). The Bank’s total interest-bearing liabilities of 89.9% exceeded the Peer Group median of 85.6% due to the Bank’s lower equity-to-assets ratio. Following the increase in capital provided by the net proceeds of the stock offering, the Bank’s ratio of interest-bearing liabilities as a percent of assets will be lower than the Peer Group’s ratio.

A key measure of balance sheet strength for a thrift institution is its IEA/IBL ratio. Presently, the Bank’s IEA/IBL ratio of 103.7% is lower than the Peer Group’s ratio of 110.2%, which indicates that the Bank currently has lower earnings power than the Peer Group. The additional capital realized from stock proceeds will provide 1st Security with additional capital and an IEA/IBL ratio that exceeds the Peer Group ratio, as stock proceeds will be deployed into interest-earning assets increase and the asset base will increase, thereby lowering the ratio of interest bearing liabilities.

Table 3.2 also displays annual growth rates for key balance sheet items. 1st Security’s and the Peer Group’s growth rates are for the 12 month period from June 30, 2010 to June 30, 2011. During this period, the Bank recorded modest asset shrinkage of 2.7% versus slight asset growth of 1.0% recorded by the Peer Group. In practical terms, however, neither the Bank nor the Peer Group experienced significant changes in total assets during this period. Growth rate differences within the balance sheet were more significant. The Bank experienced a reallocation of assets from loans to MBS, cash and investments, as limited loan demand and economic conditions warranted such reinvestment of cash flows. The Peer Group experienced a similar trend, but was able to achieve low loan growth. Funding trends were very similar for the Bank and Peer Group, as both used deposit inflows to pay down borrowings, with the Bank’s borrowings declining to a greater extent than the Peer Group’s.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.9

1st Security recorded higher equity growth than the Peer Group due to higher earnings and the lack of capital strategies such as dividend payments and stock repurchases. The increase in equity realized from stock proceeds will likely depress the Bank’s equity growth rate initially following the stock offering. Dividend payments and stock repurchases, pursuant to regulatory limitations and guidelines could also potentially slow the Bank’s equity growth rate in the longer term following the stock offering.

Income and Expense Components

Table 3.3 displays statements of operations for the Bank and the Peer Group, with the income ratios based on earnings for the twelve months ended June 30, 2011, unless otherwise indicated for the Peer Group companies. 1st Security reported net income of 0.69% of average assets compared to median net income of 0.57% for the Peer Group. The higher net interest income, higher non-interest operating income and lower taxes recorded by the Bank more than offset its higher loss provisions and higher operating expenses relative to the Peer Group.

The Bank’s stronger net interest income ratio was realized through maintenance of a higher interest income ratio of 6.25% versus 4.92% for the Peer Group. 1st Security’s higher interest income ratio was supported by its very large proportion of consumer loans, which resulted in a weighted average asset yield of 6.80% versus 5.26% yielded by the more traditional loan portfolios of the Peer Group. Interest expense ratios were nearly equal at 1.28% and 1.26% for the Bank and the Peer Group, respectively, as reflected in their nearly equal cost of funds. Overall, 1st Security recorded net interest income of 4.96% versus 3.61% for the Peer Group.

In another key area of core earnings strength, the Bank’s advantage in net interest income was nearly erased by its higher operating expenses of 4.30% versus a median of 3.29% for the Peer Group. The Bank’s relatively high operating expense are attributable in large part to the consumer lending program, which carries higher administrative costs to operate, and to a relatively high cost branch network. On a post-offering basis, the Bank’s operating expenses can be expected to increase with the addition of stock benefit plans and certain expenses that result from being a publicly-traded company, with such expenses already impacting the Peer Group’s operating expenses. At the same time, 1st Security’s capacity to leverage operating expenses will be greater than the Peer Group’s leverage capacity following the increase in capital realized from the infusion of net stock proceeds.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.10

Table 3.3
Income as Percent of Average Assets and Yields, Costs, Spreads
Comparable Institution Analysis
For the 12 Months Ended June 30, 2011

					Net Interest Income															Other Income
														Loss			NII												Total
		Net												Provis.			After			Loan			R.E.			Other			Other
		Income			Income			Expense			NII			on IEA			Provis.			Fees			Oper.			Income			Income

1st Security Bank of WA
June 30, 2011			0.69	%		6.25	%		1.28	%		4.96	%		0.95	%		4.01	%		0.00	%		0.00	%		0.90	%		0.90	%

All Public Companies
Averages			0.10	%		4.43	%		1.38	%		3.05	%		0.65	%		2.41	%		0.02	%		-0.09	%		0.85	%		0.78	%
Medians			0.41	%		4.42	%		1.36	%		3.07	%		0.37	%		2.61	%		0.00	%		-0.01	%		0.65	%		0.59	%

State of WA
Averages			-0.26	%		4.89	%		1.48	%		3.42	%		1.08	%		2.34	%		0.05	%		-0.35	%		1.22	%		0.92	%
Medians			0.14	%		4.84	%		1.66	%		3.47	%		0.95	%		2.30	%		0.01	%		-0.36	%		0.94	%		0.89	%

Comparable Group
Averages			0.54	%		4.89	%		1.30	%		3.59	%		0.50	%		3.10	%		0.00	%		-0.03	%		0.80	%		0.76	%
Medians			0.57	%		4.92	%		1.26	%		3.61	%		0.41	%		3.14	%		0.00	%		0.00	%		0.92	%		0.83	%

Comparable Group
AFCB	Athens Bancshares, Inc. of TN		0.59	%		5.18	%		1.34	%		3.84	%		0.72	%		3.13	%		0.00	%		0.00	%		1.59	%		1.59	%
EBMT	Eagle Bancorp Montana of MT		0.73	%		4.52	%		1.23	%		3.28	%		0.29	%		3.00	%		-0.10	%		-0.04	%		0.55	%		0.40	%
FFDF	FFD Financial Corp. of Dover OH (1)		0.70	%		5.15	%		1.53	%		3.62	%		0.43	%		3.19	%		0.00	%		0.00	%		0.24	%		0.24	%
FABK	First Advantage Bancorp of TN		0.54	%		5.10	%		1.27	%		3.83	%		0.39	%		3.43	%		0.00	%		0.00	%		0.43	%		0.43	%
FFNM	First Federal of N. Michigan of MI		0.06	%		4.97	%		1.26	%		3.71	%		0.25	%		3.47	%		0.00	%		0.00	%		0.95	%		0.95	%
JXSB	Jacksonville Bancorp Inc. of IL		1.00	%		4.60	%		1.14	%		3.46	%		0.31	%		3.15	%		0.12	%		0.00	%		1.04	%		1.16	%
LSBI	LSB Financial Corp. of Lafayette IN		0.49	%		4.93	%		1.34	%		3.59	%		1.00	%		2.59	%		0.00	%		-0.14	%		0.90	%		0.77	%
LABC	Louisiana Bancorp, Inc. of LA		0.74	%		4.81	%		1.74	%		3.08	%		0.02	%		3.05	%		0.00	%		-0.10	%		0.37	%		0.27	%
RVSB	Riverview Bancorp, Inc. of WA		0.38	%		4.92	%		0.86	%		4.06	%		0.62	%		3.44	%		0.00	%		-0.05	%		0.94	%		0.89	%
TSBK	Timberland Bancorp, Inc. of WA		0.14	%		4.72	%		1.26	%		3.47	%		0.95	%		2.52	%		-0.02	%		0.00	%		0.94	%		0.93	%

		G&A/Other Exp.						Non-Op. Items						Yields, Costs, and Spreads
																							MEMO:		MEMO:
		G&A			Goodwill			Net			Extrao.			Yield			Cost			Yld-Cost			Assets/		Effective
		Expense			Amort.			Gains			Items			On Assets			Of Funds			Spread			FTE Emp.		Tax Rate

1st Security Bank of WA
June 30, 2011			4.30	%		0.00	%		0.08	%		0.00	%		6.80	%		1.45	%		5.35	%	$	3,453		0.00	%

All Public Companies
Averages			2.92	%		0.06	%		0.10	%		0.00	%		4.75	%		1.59	%		3.16	%	$	5,867		29.76	%
Medians			2.86	%		0.00	%		0.06	%		0.00	%		4.70	%		1.58	%		3.19	%	$	4,965		30.31	%

State of WA
Averages			3.50	%		0.01	%		0.11	%		0.00	%		5.31	%		1.69	%		3.62	%	$	6,912		29.73	%
Medians			3.43	%		0.01	%		0.08	%		0.00	%		5.19	%		1.80	%		3.74	%	$	7,001		32.25	%

Comparable Group
Averages			3.31	%		0.02	%		0.24	%		0.00	%		5.23	%		1.53	%		3.70	%	$	3,504		29.56	%
Medians			3.29	%		0.00	%		0.21	%		0.00	%		5.26	%		1.49	%		3.73	%	$	3,368		31.14	%

Comparable Group
AFCB	Athens Bancshares, Inc. of TN		3.91	%		0.03	%		0.00	%		0.00	%		5.55	%		1.66	%		3.90	%	$	3,015		24.01	%
EBMT	Eagle Bancorp Montana of MT		3.02	%		0.00	%		0.67	%		0.00	%		4.95	%		1.48	%		3.47	%	NM			30.47	%
FFDF	FFD Financial Corp. of Dover OH (1)		2.73	%		0.00	%		0.36	%		0.00	%		5.30	%		1.70	%		3.61	%	NM			34.26	%
FABK	First Advantage Bancorp of TN		3.39	%		0.00	%		0.34	%		0.00	%		5.33	%		1.59	%		3.74	%	$	4,075		32.62	%
FFNM	First Federal of N. Michigan of MI		4.27	%		0.13	%		0.05	%		0.00	%		5.36	%		1.42	%		3.93	%	$	2,576	NM
JXSB	Jacksonville Bancorp Inc. of IL		3.20	%		0.00	%		0.22	%		0.00	%		4.92	%		1.31	%		3.61	%	$	2,932		25.50	%
LSBI	LSB Financial Corp. of Lafayette IN		2.96	%		0.00	%		0.33	%		0.00	%		5.21	%		1.49	%		3.72	%	$	3,955		33.88	%
LABC	Louisiana Bancorp, Inc. of LA		2.41	%		0.00	%		0.16	%		0.00	%		4.91	%		2.18	%		2.72	%	$	5,003		31.14	%
RVSB	Riverview Bancorp, Inc. of WA		3.80	%		0.01	%		0.03	%		0.00	%		5.57	%		0.98	%		4.59	%	$	3,721		32.25	%
TSBK	Timberland Bancorp, Inc. of WA		3.43	%		0.02	%		0.19	%		0.00	%		5.17	%		1.43	%		3.74	%	$	2,753		21.94	%

(1) Financial information is for the quarter ending March 31, 2011.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.11

When viewed together, net interest income and operating expenses provide considerable insight into a thrift’s earnings strength, since those sources of income and expenses are typically the most prominent components of earnings and are generally more predictable than losses and gains realized from the sale of assets or other non-recurring activities. In this regard, as measured by their expense coverage ratios (net interest income divided by operating expenses), the Bank’s earnings were nearly equal to the Peer Group’s, based on respective expense coverage ratios of 1.15x for 1st Security and 1.10x for the Peer Group. A ratio less than 1.00x indicates that an institution depends on non-interest operating income to achieve profitable operations.

Sources of non-interest operating income provided a marginally greater contribution to the Bank’s earnings (0.90%), representing a slight advantage over the Peer Group (0.83%). Taking non-interest operating income into account in comparing the Bank’s and the Peer Group’s earnings, 1st Security’s and the Peer Group’s efficiency ratios (operating expenses, net of amortization of intangibles, as a percent of the sum of non-interest operating income and net interest income) were nearly the same at 73.4% (Bank) and 74.1% (Peer Group).

Recurring loan loss provisions had a larger impact on the Bank’s earnings, with loan loss provisions established by the Bank and the Peer Group equaling 0.95% and 0.41% of average assets, respectively. The impact of loan loss provisions on the Bank’s and the Peer Group’s earnings, particularly when taking into consideration the prevailing credit market environment for mortgage based lenders, were indicative of asset quality factors facing the overall thrift industry in the current operating environment, and are indicative of the higher risk loan portfolio profile maintained by the Bank.

For the 12 months ended June 30, 2011, the Bank and the Peer Group reported net non-operating gains of 0.08% and 0.21% of average assets, respectively. The Bank’s gains were attributable to a branch sale that occurred during the 12 month period. Typically, gains and losses generated from non-operating items are viewed as non-recurring in nature, particularly to the extent that such gains and losses result from the sale of investments or other assets that are not considered to be part of an institution’s core operations. Comparatively, to the extent that gains have been derived through selling fixed rate loans into the secondary market, such gains may be considered to be an ongoing activity for an institution and, therefore, warrant some consideration as a core earnings factor for an institution. However, loan sale gains are still viewed as a more volatile source of income than income generated through the net interest margin and non-interest operating income. Extraordinary items were not a factor in either the Bank’s or the Peer Group’s earnings.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.12

Reporting profitable operations, the Peer Group reported an average effective tax rate of 31.1%, while the net loss recorded by 1st Security in past periods resulted in tax loss carryforwards for the Bank, thus the Bank recorded no taxes during the twelve months ended June 30, 2011. As indicated in the prospectus, the Bank’s effective marginal tax rate is assumed to equal 34.0% when calculating the after tax return on conversion proceeds.

Loan Composition

Table 3.4 presents data related to the Bank’s and the Peer Group’s loan portfolio compositions (including the investment in MBS). The Bank’s loan portfolio composition reflected that of a non-traditional thrift strategy, with a much lower concentration of 1-4 family permanent mortgage loans and MBS than maintained by the Peer Group (10.5% of assets versus a median of 37.4% for the Peer Group). The Peer Group reported higher ratios of both MBS and 1-4 family loans than the Bank. Loans serviced for others equaled 17.8% and 35.9% of the Bank’s and the Peer Group’s assets, respectively, thereby indicating a greater influence of loan servicing income on the Peer Group’s earnings.

Diversification into higher risk and higher yielding types of lending was significantly greater for the Bank than the Peer Group companies on average. Consumer loans represented the most significant area of lending diversification for the Bank (45.7% of assets), followed by commercial business loans (10.4% of assets) and non-residential mortgages (9.8% of assets). The Peer Group’s lending diversification consisted primarily of commercial real estate/multi-family loans (26.3% of assets), followed by construction/land loans (4.8% of assets) and commercial business loans (4.1% of assets). 1st Security’s higher concentration of assets in loans and greater diversification into higher risk types of loans translated into a higher risk weighted assets-to-assets ratio for the Bank (84.0% versus 70.2% for the Peer Group).

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.13

Table 3.4
Loan Portfolio Composition and Related Information
Comparable Institution Analysis
As of June 30, 2011

		Portfolio Composition as a Percent of Assets
					1-4			Constr.			5+Unit			Commerc.						RWA/			Serviced		Servicing
	Institution	MBS			Family			& Land			Comm RE			Business			Consumer			Assets			For Others		Assets
		(%)			(%)			(%)			(%)			(%)			(%)			(%)			($000)		($000)

1st Security Bank of WA			0.16	%		10.36	%		2.31	%		9.84	%		10.42	%		45.70	%		83.95	%	$	48,550	$	0

All Public Companies
Averages			13.02	%		33.76	%		3.68	%		22.90	%		4.52	%		1.92	%		63.56	%	$	737,798	$	6,714
Medians			10.95	%		32.83	%		2.58	%		22.22	%		3.30	%		0.47	%		63.85	%	$	39,360	$	99

State of WA
Averages			8.66	%		28.50	%		7.45	%		30.20	%		2.63	%		1.00	%		68.94	%	$	136,142	$	745
Medians			8.19	%		27.46	%		5.28	%		30.32	%		2.77	%		0.58	%		72.03	%	$	120,000	$	364

Comparable Group
Averages			7.64	%		27.60	%		6.04	%		30.17	%		5.05	%		1.79	%		69.61	%	$	137,319	$	860
Medians			5.98	%		31.37	%		4.76	%		26.29	%		4.09	%		0.97	%		70.21	%	$	116,970	$	763

Comparable Group
AFCB	Athens Bancshares, Inc. of TN		2.96	%		33.78	%		7.10	%		23.52	%		4.06	%		3.59	%		68.40	%	$	89,850	$	0
EBMT	Eagle Bancorp Montana of MT		8.96	%		29.86	%		4.21	%		16.87	%		3.16	%		2.86	%		64.57	%	$	343,750	$	2,142
FFDF	FFD Financial Corp. of Dover OH (1)		3.00	%		32.88	%		1.12	%		40.02	%		10.43	%		2.84	%		78.99	%	$	98,930	$	732
FABK	First Advantage Bancorp of TN		12.21	%		18.45	%		15.16	%		27.82	%		8.55	%		0.82	%		74.02	%	$	1,320	$	0
FFNM	First Federal of N. Michigan of MI		11.39	%		34.40	%		3.35	%		24.75	%		3.77	%		0.66	%		64.82	%	$	148,340	$	969
JXSB	Jacksonville Bancorp Inc. of IL		14.83	%		19.13	%		0.83	%		22.19	%		7.70	%		5.15	%		67.62	%	$	147,200	$	794
LSBI	LSB Financial Corp. of Lafayette IN		0.70	%		36.28	%		5.30	%		42.24	%		4.11	%		0.42	%		74.26	%	$	113,940	$	1,042
LABC	Louisiana Bancorp, Inc. of LA		20.73	%		35.91	%		0.13	%		22.03	%		0.12	%		0.21	%		48.36	%	$	14,170	$	93
RVSB	Riverview Bancorp, Inc. of WA		0.20	%		14.96	%		10.23	%		46.74	%		5.77	%		0.26	%		83.04	%	$	120,000	$	364
TSBK	Timberland Bancorp, Inc. of WA		1.46	%		20.38	%		12.99	%		35.54	%		2.77	%		1.11	%		72.03	%	$	295,690	$	2,463

(1) Financial information is for the quarter ending March 31, 2011.

Source:

SNL Financial LC. and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.14

Credit Risk

Overall, based on a comparison of credit quality measures, the Bank’s credit risk exposure was considered to be somewhat less favorable than the Peer Group’s, with the Bank’s higher ratio of NPAs/Assets offset in part by higher reserves. As shown in Table 3.5, the Bank’s non-performing assets/assets and non-performing loans/loans ratios equaled 2.92% and 0.91%, respectively, versus comparable measures of 2.12% and 2.22% for the Peer Group. The Bank’s and Peer Group’s general loss reserves as a percent of non-performing loans equaled 247.0% and 72.0%, respectively. Loss reserves maintained as percent of net loans receivable equaled 2.25% for the Bank, versus 1.68% for the Peer Group. Net loan charge-offs were higher at the Bank, based on ratios of 1.86% and 0.29% of net loans receivable, respectively. As noted in the Loan Composition discussion, the Bank’s higher concentration of loans and greater diversification into higher risk types of loans translated into a higher risk weighted assets-to-assets ratio in comparison to the Bank’s ratio, resulting in an implied higher risk loan portfolio.

Interest Rate Risk

Table 3.6 reflects various key ratios highlighting the relative interest rate risk exposure of the Bank versus the Peer Group. In terms of balance sheet composition, 1st Security’s interest rate risk characteristics were considered to be somewhat less favorable than the Peer Group’s. For example, the Bank’s equity-to-assets and IEA/IBL ratios were lower than the comparable Peer Group ratios, thereby implying more dependence on the yield-cost spread to sustain the net interest margin for the Bank. At the same time, the Bank’s higher level of non-interest earning assets represented a slight disadvantage for the Bank with respect to managing interest rate risk. On a pro forma basis, the infusion of stock proceeds can be expected to provide the Bank with at least comparable and probably more favorable balance sheet interest rate risk characteristics than currently maintained by the Peer Group, particularly with respect to the increases that will be realized in Bank’s equity-to-assets and IEA/IBL ratios.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.15

Table 3.5
Credit Risk Measures and Related Information
Comparable Institution Analysis
As of June 30, 2011 or Most Recent Date Available

					NPAs &												Rsrves/
		REO/			90+Del/			NPLs/			Rsrves/			Rsrves/			NPAs &			Net Loan		NLCs/
Institution		Assets			Assets			Loans			Loans			NPLs			90+Del			Chargoffs		Loans
		(%)			(%)			(%)			(%)			(%)			(%)			($000)		(%)

1st Security Bank of WA			2.17	%		2.92	%		0.91	%		2.25	%		246.99	%		60.64	%	$	3,993		1.86	%

All Public Companies
Averages			0.59	%		3.92	%		4.77	%		1.80	%		61.03	%		49.70	%	$	1,346		0.66	%
Medians			0.23	%		2.71	%		3.40	%		1.48	%		41.45	%		35.65	%	$	459		0.31	%

State of WA
Averages			1.69	%		7.50	%		7.79	%		2.17	%		38.12	%		22.75	%	$	3,056		2.35	%
Medians			1.93	%		6.82	%		7.94	%		2.21	%		27.85	%		21.17	%	$	3,452		2.48	%

Comparable Group
Averages			0.83	%		3.23	%		3.06	%		1.68	%		86.98	%		58.66	%	$	561		0.56	%
Medians			0.29	%		2.12	%		2.22	%		1.68	%		71.99	%		51.51	%	$	242		0.29	%

Comparable Group
AFCB	Athens Bancshares, Inc. of TN		0.23	%		2.71	%		3.39	%		2.20	%		65.00	%		59.33	%	$	145		0.29	%
EBMT	Eagle Bancorp Montana of MT		0.36	%		1.24	%		1.55	%		0.95	%		61.25	%		43.69	%	$	6		0.01	%
FFDF	FFD Financial Corp. of Dover OH (1)		0.00	%		1.53	%		1.71	%		1.18	%		78.98	%		76.87	%	$	493		1.07	%
FABK	First Advantage Bancorp of TN		0.04	%		0.92	%		1.25	%		1.58	%		126.73	%		121.24	%	$	223		0.37	%
FFNM	First Federal of N. Michigan of MI		2.11	%		4.71	%		3.62	%		1.48	%		40.98	%		21.25	%	$	422		1.12	%
JXSB	Jacksonville Bancorp Inc. of IL		0.18	%		1.27	%		1.86	%		1.77	%		95.30	%		81.68	%	$	260		-0.30	%
LSBI	LSB Financial Corp. of Lafayette IN		0.04	%		5.92	%		6.36	%		2.20	%		34.51	%		33.02	%	$	194		0.24	%
LABC	Louisiana Bancorp, Inc. of LA		0.35	%		0.57	%		0.37	%		0.92	%		249.57	%		94.73	%	$	0		0.00	%
RVSB	Riverview Bancorp, Inc. of WA		3.07	%		5.10	%		2.58	%		2.32	%		89.66	%		35.59	%	$	459		0.27	%
TSBK	Timberland Bancorp, Inc. of WA		1.93	%		8.35	%		7.94	%		2.21	%		27.85	%		19.20	%	$	3,408		2.53	%

(1) Financial information is for the quarter ending March 31, 2011.

Source:

Audited and unaudited financial statements, corporate reports and offering circulars, and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.16

Table 3.6
Interest Rate Risk Measures and Net Interest Income Volatility
Comparable Institution Analysis
As of June 30, 2011 or Most Recent Date Available

		Balance Sheet Measures
								Non-Earn.			Quarterly Change in Net Interest Income
		Equity/			IEA/			Assets/
	Institution	Assets			IBL			Assets			6/30/2011		3/31/2011		12/31/2010		9/30/2010		6/30/2010		3/31/2010
		(%)			(%)			(%)			(change in net interest income is annualized in basis points)

1st Security Bank of WA			9.5	%		103.7	%		6.8	%		-17		-60		30		30		8		54

All Public Companies			11.6	%		107.6	%		6.6	%		4		0		1		0		1		6
State of WA			11.9	%		106.3	%		8.4	%		1		1		12		-1		2		-6

Comparable Group
Averages			13.3	%		110.2	%		6.4	%		5		4		6		4		10		12
Medians			11.4	%		108.5	%		6.4	%		0		5		2		4		11		12

Comparable Group
AFCB	Athens Bancshares, Inc. of TN		17.6	%		115.6	%		6.5	%		-2		9		28		2		9		21
EBMT	Eagle Bancorp Montana of MT		15.9	%		109.6	%		8.9	%		-2		17		-5		12		0	NA
FFDF	FFD Financial Corp. of Dover OH (1)		8.9	%		107.4	%		2.9	%	NA			-15		18		1		5		35
FABK	First Advantage Bancorp of TN		19.3	%		120.4	%		4.3	%		9		10		11		5		13		12
FFNM	First Federal of N. Michigan of MI		10.8	%		105.1	%		7.4	%		20		0		5		16		15		27
JXSB	Jacksonville Bancorp Inc. of IL		11.8	%		109.5	%		6.3	%		27		13		-4		11		23		-1
LSBI	LSB Financial Corp. of Lafayette IN		10.1	%		106.1	%		5.1	%		0		17		-7		19		18		17
LABC	Louisiana Bancorp, Inc. of LA		18.4	%		122.2	%		1.8	%		-6		-5		-3		-5		1		-4
RVSB	Riverview Bancorp, Inc. of WA		9.3	%		101.9	%		11.6	%		-5		-6		13		-22		20		-3
TSBK	Timberland Bancorp, Inc. of WA		10.9	%		104.1	%		8.7	%		0		1		-2		-3		-7		1

(1) Financial information is for the quarter ending March 31, 2011.

NA=Change is greater than 100 basis points during the quarter.

Source:

RP ® Financial, LC.	PEER GROUP ANALYSIS
	III.17

To analyze interest rate risk associated with the net interest margin, we reviewed quarterly changes in net interest income as a percent of average assets for 1st Security and the Peer Group. In general, the relative fluctuations in the Bank’s net interest income to average assets ratio were considered to be higher than the Peer Group which supports the conclusion that 1st Security maintains a higher degree of interest rate risk exposure in the net interest margin. The stability of the Bank’s net interest margin should be enhanced by the infusion of stock proceeds, as the increase in capital will reduce the level of interest rate sensitive liabilities funding 1st Security’s assets.

Summary

Based on the above analysis, RP Financial concluded that the Peer Group forms a reasonable basis for determining the pro forma market value of the Bank. Such general characteristics as asset size, capital position, interest-earning asset composition, funding composition, core earnings measures, loan composition, credit quality and exposure to interest rate risk all tend to support the reasonability of the Peer Group from a financial standpoint. Those areas where differences exist will be addressed in the form of valuation adjustments to the extent necessary.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.1

IV. VALUATION ANALYSIS

Introduction

This chapter presents the valuation analysis and methodology, prepared pursuant to the regulatory valuation guidelines, and valuation adjustments and assumptions used to determine the estimated pro forma market value of the common stock to be issued in conjunction with the Bank’s conversion transaction.

Appraisal Guidelines

The regulatory written appraisal guidelines reissued by the OCC specify the market value methodology for estimating the pro forma market value of an institution pursuant to a mutual-to-stock conversion. Pursuant to this methodology: (1) a peer group of comparable publicly-traded institutions is selected; (2) a financial and operational comparison of the subject company to the peer group is conducted to discern key differences; and (3) a valuation analysis in which the pro forma market value of the subject company is determined based on the market pricing of the peer group as of the date of valuation, incorporating valuation adjustments for key differences. In addition, the pricing characteristics of recent conversions, both at conversion and in the aftermarket, must be considered.

RP Financial Approach to the Valuation

The valuation analysis herein complies with such regulatory approval guidelines. Accordingly, the valuation incorporates a detailed analysis based on the Peer Group, discussed in Chapter III, which constitutes “fundamental analysis” techniques. Additionally, the valuation incorporates a “technical analysis” of recently completed stock conversions, including closing pricing and aftermarket trading of such offerings. It should be noted that these valuation analyses cannot possibly fully account for all the market forces which impact trading activity and pricing characteristics of a particular stock on a given day.

The pro forma market value determined herein is a preliminary value for the Company’s to-be-issued stock. Throughout the conversion process, RP Financial will: (1) review changes in 1st Security’s operations and financial condition; (2) monitor 1st Security’s operations and financial condition relative to the Peer Group to identify any fundamental changes; (3) monitor the external factors affecting value including, but not limited to, local and national economic conditions, interest rates, and the stock market environment, including the market for thrift stocks; and (4) monitor pending conversion offerings (including those in the offering phase), both regionally and nationally. If material changes should occur during the conversion process, RP Financial will evaluate if updated valuation reports should be prepared reflecting such changes and their related impact on value, if any. RP Financial will also prepare a final valuation update at the closing of the offering to determine if the prepared valuation analysis and resulting range of value continues to be appropriate.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.2

The appraised value determined herein is based on the current market and operating environment for the Bank and for all thrifts. Subsequent changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or major world events), which may occur from time to time (often with great unpredictability) may materially impact the market value of all thrift stocks, including 1st Security’s value, or 1st Security’s value alone. To the extent a change in factors impacting the Bank’s value can be reasonably anticipated and/or quantified, RP Financial has incorporated the estimated impact into the analysis.

Valuation Analysis

A fundamental analysis discussing similarities and differences relative to the Peer Group was presented in Chapter III. The following sections summarize the key differences between the Bank and the Peer Group and how those differences affect the pro forma valuation. Emphasis is placed on the specific strengths and weaknesses of the Bank relative to the Peer Group in such key areas as financial condition, profitability, growth and viability of earnings, asset growth, primary market area, dividends, liquidity of the shares, marketing of the issue, management, and the effect of government regulations and/or regulatory reform. We have also considered the market for thrift stocks, in particular new issues, to assess the impact on value of the Bank coming to market at this time.

1. Financial Condition

The financial condition of an institution is an important determinant in pro forma market value because investors typically look to such factors as liquidity, equity, asset composition and quality, and funding sources in assessing investment attractiveness. The similarities and differences in the Bank’s and the Peer Groups’ financial strengths are noted as follows:

■

Overall A/L Composition . Loans funded by retail deposits were the primary components of both 1st Security’s and the Peer Group’s balance sheets. The Bank’s interest-earning asset composition exhibited a higher concentration of loans and a substantially higher degree of diversification into higher risk and higher yielding types of loans (primarily consumer loans). In comparison to the Peer Group, the Bank’s interest-earning asset composition provided for a higher yield earned on interest-earning assets and a higher risk weighted assets-to-assets ratio. 1st Security’s funding composition indicated a higher proportion of deposits and a lower proportion of borrowings than the comparable Peer Group ratios, resulting in a lower cost of funds than the Peer Group. As a percent of assets, 1st Security maintained a somewhat lower level of interest-earning assets and higher level of interest-bearing liabilities compared to the Peer Group’s ratios, which resulted in a higher IEA/IBL ratio for the Peer Group compared to the Bank. After factoring in the impact of the net stock proceeds, the Bank’s IEA/IBL ratio will be more in line with the Peer Group’s ratio. On balance, RP Financial concluded that asset/liability composition was a neutral factor in our adjustment for financial condition.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.3

■

Credit Quality. The Bank’s ratio of REO was higher than the Peer Group average, while total NPAs as a percent of total assets were lower than the comparable Peer Group average. Loss reserves as a percent loans and reserve coverage ratios were higher for 1st Security. Net loan charge-offs were higher for 1st Security, while the Bank’s risk weighted assets-to-assets ratio was higher than the Peer Group ratio. 1st Security reported higher loan diversification into higher risk loans (commercial business and consumer) than the Peer Group. The perceived credit risk in 1st Security’s loan portfolio was deemed to be higher than the Peer Group based on loan composition. Overall, RP Financial concluded that credit quality was a moderately negative factor in our adjustment for financial condition.

■

Balance Sheet Liquidity . 1st Security operated with a somewhat lower level of cash and investment securities relative to the Peer Group (16.1% of assets versus 23.7% for the Peer Group). Following the infusion of stock proceeds, the Bank’s cash and investments ratio is expected to increase as the proceeds will be initially deployed into investments. The Bank’s future borrowing capacity was considered to be greater than the Peer Group, given the lower level of borrowings currently maintained. Overall, RP Financial concluded that balance sheet liquidity was a neutral factor in our adjustment for financial condition.

■

Funding Liabilities . 1st Security’s interest-bearing funding composition reflected a higher concentration of deposits and a lower concentration of borrowings relative to the comparable Peer Group ratios. 1st Security’s funding costs were lower than the Peer Group average. The Bank maintained a modest balance of brokered deposits. Total interest-bearing liabilities as a percent of assets were higher for the Bank compared to the Peer Group’s ratio, which was attributable to 1st Security’s lower equity position. Following the stock offering, the increase in the Bank’s equity position should provide 1st Security with a lower ratio of interest-bearing liabilities as a percent of assets. Overall, RP Financial concluded that funding liabilities were a neutral factor in our adjustment for financial condition.

■

Equity . The Peer Group currently operates with a higher equity-to-assets ratio than the Bank. Following the stock offering, 1st Security’s pro forma equity position is expected to exceed the Peer Group’s equity-to-assets ratio. The increase in the Bank’s pro forma capital position will result in a greater leverage potential for the Bank and reduce the level of interest-bearing liabilities utilized to fund assets. At the same time, the Bank’s equity ratio will likely result in a lower ROE. On balance, RP Financial concluded that equity strength was a neutral factor in our adjustment for financial condition.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.4

On balance, 1st Security’s pro forma financial condition was comparable to the Peer Group’s after considering the above factors and, thus, no valuation adjustment was applied for the Bank’s financial condition.

2. Profitability, Growth and Viability of Earnings

Earnings are a key factor in determining pro forma market value, as the level and risk characteristics of an institution’s earnings stream and the prospects and ability to generate future earnings heavily influence the multiple that the investment community will pay for earnings. The major factors considered in the valuation are described below.

■

Reported Earnings . For the 12 months ended June 30, 2011, 1st Security reported net income of $1,894,000, or 0.69% of average assets, versus average and median net income of 0.54% and 0.57% of average assets for the Peer Group. The Bank recorded higher levels of net interest income, non-interest operating income and operating expenses, resulting in a higher core earnings stream. Funding costs were similar between the Bank and the Peer Group. 1st Security’s higher reported net income ratio was largely due to the absence of a tax liability in the income statement, a result of the deferred tax asset that is fully reserved on the balance sheet. Non-operating items had only a minimal impact on the Peer Group’s earnings (a 0.08% of average assets gain). Reinvestment and leveraging of stock proceeds into interest-earning assets will serve to increase the Bank’s bottom line income, with the benefit of reinvesting proceeds expected to be somewhat offset by higher operating expenses associated with operating as a publicly-traded company. The Bank’s higher reserve coverage ratios, which have been established due to higher provisions in the most recent three years, have impacted the income statement through higher loan loss provisions. However, the Peer Group can also be expected to experience expenses related to loan loss provisions and problem assets. On balance, RP Financial concluded that the Bank’s reported earnings were a slightly negative factor in our adjustment for profitability, growth and viability of earnings.

■

Core Earnings . As noted above, 1st Security’s income statement was impacted by the lack of a tax liability and from a limited level of non-operating gains. The Peer Group reported a higher level of non-operating gains (0.24% of average assets on average). In comparison to the Peer Group, the Bank operates with a higher net interest income ratio, a higher yield/cost spread, a higher operating expense ratio and a higher level of non-interest operating income. For valuation purposes, we assumed core net income would include the impact of an expected tax burden, should the deferred tax valuation allowance be removed (in whole or in part) from the balance sheet. Thus, we determined that the Bank’s core net income for the 12 months ended June 30, 2011 approximated $1.1 million, utilizing a 34% effective tax rate. The Bank’s ratios for net interest income and operating expenses translated into an expense coverage ratio that was more favorable than the Peer Group’s ratio (equal to 1.15x for the Bank and 1.08x for the Peer Group). Similarly, the Bank’s efficiency ratio of 73.4% was more favorable than the Peer Group’s efficiency ratio of 76.6%. Total loss provisions had a larger impact on the Bank’s income statement, and as noted above, the current levels of NPAs and/or the reserve coverage ratios for both the Bank and Peer Group will remain as a potential negative factor in future earnings as additional loan loss reserves may be incurred.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.5

Overall, the core earnings potential of the Bank will be impacted by the expected earnings benefits the Bank should realize from the redeployment of stock proceeds into interest-earning assets and the expenses associated with the ESOP and operations as a publicly-traded company. Based on the current core earnings rate of the Bank, RP Financial concluded that this was a moderately downward factor in our adjustment for profitability, growth and viability of earnings.

■

Interest Rate Risk . Quarterly changes in the Bank’s and the Peer Group’s net interest income to average assets ratios indicated that a higher degree of volatility was associated with the Bank’s net interest income ratios. Other measures of interest rate risk, such as equity and IEA/IBL ratios were less favorable for the Bank compared to the Peer Group thereby indicating a higher dependence on the yield-cost spread to sustain net interest income. On a pro forma basis, the infusion of stock proceeds can be expected to provide the Bank with equity-to-assets and IEA/ILB ratios that will be more in line with the Peer Group ratios, as well as enhance the stability of the Bank’s net interest income ratio through the reinvestment of stock proceeds into interest-earning assets. On balance, RP Financial concluded that interest rate risk was a slightly negative factor in our adjustment for profitability, growth and viability of earnings.

■

Credit Risk . Loan loss provisions were a larger factor in the Bank’s most recent 12 month earnings stream (0.95% of average assets versus 0.50% of average assets for the Peer Group). In terms of future exposure to credit quality related losses, 1st Security maintained a higher concentration of assets in loans, and lending diversification into higher risk types of loans was greater for the Bank. The risk weighed assets-to-assets ratio was also higher for the Bank. Credit quality measures on balance were somewhat favorable for 1st Security, in terms of NPA ratios and reserve coverage ratios. Taking these factors into consideration, RP Financial concluded that credit risk was a moderately negative factor in our adjustment for profitability, growth and viability of earnings.

■

Earnings Growth Potential . The Bank maintained a higher interest rate spread than the Peer Group, which would tend to provide for a higher level of net interest income ratio going forward based on the prevailing interest rate environment. The infusion of stock proceeds will provide 1st Security with slightly greater growth potential through leverage than currently maintained by the Peer Group. The Bank’s higher operating expense ratio is viewed as an unfavorable characteristic to sustain earnings during periods when net interest income ratios come under pressure as the result of adverse changes in interest rates. Overall, earnings growth potential was considered to be a slightly negative factor in our adjustment for profitability, growth and viability of earnings.

■

Return on Equity . For the most recent 12 month period, the Bank’s ROE on a reported basis (7.60%) was higher than the Peer Group’s ROE, although reported earnings were greatly enhanced by the lack of a tax liability. Based on a core earnings estimate of $1.1 million, the Bank’s core ROE for the 12 months ended June 30, 2011 was 4.46% which also was above the Peer Group average. Following the increase in equity that will be realized from the infusion of net stock proceeds into the Bank, 1st Security’s pro forma ROE on a core earnings basis can be expected to be lower than the Peer Group’s ratio. Accordingly, this was a moderately negative factor in the adjustment for profitability, growth and viability of earnings.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.6

On balance, 1st Security’s pro forma core earnings strength was considered to be less favorable than the Peer Group’s and, thus a moderate downward valuation adjustment was applied for profitability, growth and viability of earnings.

3. Asset Growth

1st Security’s assets decreased at an annual rate of 2.07% during the most recent 12 month period, while the Peer Group’s assets increased at an annual rate of 0.44% on average over the same time period. The Bank’s slightly asset shrinkage reflected a continuation of fluctuation in assets recorded over the past four and one-half fiscal years, as assets increased in fiscal 2007, 2009 and 2010, and decreased in fiscal 2008 and for the most recent 12 month period. Six of the 10 Peer Group companies reported increases in assets, with loans receivable increasing slightly, on average and cash and investments increasing at a faster pace. For 1st Security, loans decreased while cash and investments increased substantially. On a pro forma basis, 1st Security’s tangible equity-to-assets ratio is expected to exceed the Peer Group’s tangible equity-to-assets ratio, indicating a moderate amount of additional leverage capacity for the Bank. On balance, we concluded that a slightly upward valuation adjustment was warranted for asset growth.

4. Primary Market Area

The general condition of an institution’s market area has an impact on value, as future success is in part dependent upon opportunities for profitable activities in the local markets served. 1st Security serves a portion of the Seattle-Tacoma metropolitan area through six office locations in four counties. The market area served is mainly urban and suburban in nature with a total population of the four county market area of 3.7 million. The strength of the region’s economy hinges primarily on a diversified mix of high tech, government, manufacturing and services industries. In recent years, the economies in the Bank’s operating markets have experienced a downturn similar to the rest of the nation, with increases in unemployment, home values, home loan delinquencies, bankruptcies and other adverse reactions to the lower level of economic activity. The region also experienced somewhat of a “bubble economy” in the areas of land development and construction. However, the Pacific Northwest region typically lags the nation in terms of an economic cycle, and thus the expectations are that the Bank’s market area will take longer to recover from the current economic downturn. The demographic characteristics of the Bank’s market areas have also fostered a highly competitive banking environment, in which the Bank competes against other community banks as well as institutions with a regional or national presence.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.7

The Peer Group companies operate in a mix of urban, suburban and rural markets, with four of the Peer Group markets having relatively large population bases in large metropolitan areas, although the Bank’s home office county of Snohomish has a larger population base than all Peer Group members. The remaining six P eer Group members are headquartered in counties with relatively small populations . Thus, the markets served by the Peer Group companies, on average, reflect lower population bases for potential customers. In addition, the Bank’s home office county recorded greater historical population growth from 2000 to 2010 that all but two of the Peer Group companies, with such trends expected to continue through 2015. 1st Security’s home office county also recorded higher per capita income compared to all of the Peer Group members, with the Snohomish County per capita income well above the state of Washington average. The average and median deposit market shares maintained by the Peer Group companies was well above the Bank’s market share of deposits in Snohomish County, an indication of the larger size of the Bank’s market area in terms of population and economic activity. T he degree of competition faced by the Peer Group companies was viewed to be similar to that faced by 1st Security, while the growth potential in the markets served by the Peer Group companies was viewed to be somewhat less favorable. Summary demographic and deposit market share data for the Bank and the Peer Group companies is provided in Exhibit III-3. As shown in Table 4.1, July 2011 unemployment rates for six of the markets served by the Peer Group companies were lower than the comparable unemployment rate for Snohomish County. On balance, we concluded that a slight downward adjustment was appropriate for the Bank’s market area.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.8

Table 4.1

Market Area Unemployment Rates

1st Security and the Peer Group Companies(1)

		July 2011
	County	Unemployment

1st Security Bank- WA	Snohomish		10.0	%

Peer Group Average			9.4	%

Athens Bancshares Corp. – TN	McMinn		11.6	%
Eagle Bancorp Montana - MT	Lewis and Clark		5.8
FFD Financial Corp. - OH	Tuscawaras		9.1
First Advantage Bancorp - TN	Montgomery		9.5
First Federal of N. Michigan – MI	Alpena		10.8
Jacksonville Bancorp, Inc. – IL	Morgan		8.8
LSB Financial Corp. - IN	Tippecanoe		8.1
Louisiana Bancorp, Inc. – LA	Jefferson		7.2
Riverview Bancorp, Inc. - WA	Clark		10.1
Timberland Bancorp, Inc. - WA	Gray’s Harbor		12.6

(1) Unemployment rates are not seasonally adjusted.
Source: U.S. Bureau of Labor Statistics.

5. Dividends

At this time the Bank has not established a dividend policy. Future declarations of dividends by the Board of Directors will depend upon a number of factors, including investment opportunities, growth objectives, financial condition, profitability, tax considerations, minimum capital requirements, regulatory limitations, stock market characteristics and general economic conditions.

Five of the 10 Peer Group companies pay regular cash dividends, with implied dividend yields ranging from 1.57% to 4.53%. The average dividend yield on the stocks of the Peer Group institutions equaled 1.26% as of September 2, 2011. As of September 2, 2011, 63% of all publicly-traded thrifts had adopted cash dividend policies (see Exhibit IV-1), exhibiting an average yield of 3.17%. The dividend paying thrifts generally maintain higher than average profitability ratios, facilitating their ability to pay cash dividends.

The Bank has not established a definitive dividend policy prior to converting. The Bank will have the capacity to pay a dividend comparable to the Peer Group’s average dividend yield based on pro forma capitalization. On balance, we concluded that no adjustment was warranted for this factor.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.9

6. Liquidity of the Shares

The Peer Group is by definition composed of companies that are traded in the public markets. All ten of the Peer Group members trade on the NASDAQ. Typically, the number of shares outstanding and market capitalization provides an indication of how much liquidity there will be in a particular stock. The market capitalization of the Peer Group companies ranged from $10.8 million to $58.7 million as of September 2, 2011, with average and median market values of $35.1 million and $35.4 million, respectively. The shares issued and outstanding to the public shareholders of the Peer Group members ranged from 1.0 million to 22.5 million, with average and median shares outstanding of 5.1 million and 3.2 million, respectively. The Bank’s stock offering is expected to have a pro forma market value and number of shares outstanding that will be less than the average and median market values indicated for the Peer Group companies. Like the Peer Group companies, the Bank’s stock is expected to be quoted on the NASDAQ Capital Market following the stock offering. Overall, we anticipate that the Bank’s public stock will have a similar trading market as the Peer Group companies on average and, therefore, concluded that no adjustment was necessary for this factor.

7. Marketing of the Issue

We believe that three separate markets exist for thrift stocks, including those coming to market such as 1st Security (1) the after-market for public companies, in which trading activity is regular and investment decisions are made based upon financial condition, earnings, capital, ROE, dividends and future prospects; (2) the new issue market in which converting thrifts are evaluated on the basis of the same factors, but on a pro forma basis without the benefit of prior operations as a fully-converted publicly-held company and stock trading history; and (3) the acquisition market for thrift franchises in Washington. All three of these markets were considered in the valuation of the Bank’s to-be-issued stock.

A. The Public Market

The value of publicly-traded thrift stocks is easily measurable, and is tracked by most investment houses and related organizations. Exhibit IV-1 provides pricing and financial data on all publicly-traded thrifts. In general, thrift stock values react to market stimuli such as interest rates, inflation, perceived industry health, projected rates of economic growth, regulatory issues and stock market conditions in general. Exhibit IV-2 displays historical stock market trends for various indices and includes historical stock price index values for thrifts and commercial banks. Exhibit IV-3 displays historical stock price indices for thrifts only.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.10

In terms of assessing general stock market conditions, the performance of the overall stock market has been mixed in recent quarters. The broader stock market started 2011 on an upswing, fueled by reports of manufacturing activity picking up in December. Weaker than expected job growth reflected in the December employment report pulled stocks lower to close out the first week in 2011. A favorable fourth quarter earnings report by J.P. Morgan and data confirming strength in the manufacturing sector helped stocks to rebound in mid-January, with the DJIA moving to its highest close since June 2008. The positive trend in the broader stock market was sustained in late-January, which was followed by a one day sell-off as political unrest in Egypt rattled markets around the world. The DJIA ended up 2.7% for the month of January, which was its strongest January in 14 years. Stocks continued to trade higher through the first two weeks of February, as the DJIA closed higher for eight consecutive trading sessions. Strong manufacturing data for January, merger news and some favorable fourth quarter earnings reports helped to sustain the rally in the broader stock market. News that Egypt’s President resigned further boosted stocks heading into mid-February. A strong report on manufacturing activity in the Mid-Atlantic region lifted the DJIA to a fresh two and one-half year high in mid-February, which was followed by a sell-off as stocks tumbled worldwide on worries over escalating violence in Libya. Stocks recovered in late-February, as oil prices stabilized. Volatility was evident in the broader stock market in early-March, as investors reacted to some strong economic reports mixed with concerns about Middle East tensions and surging oil prices. The DJIA closed below 12000 in the second week of March, as financial markets around the world were shaken by escalating turmoil in the Middle East and surprisingly downbeat economic news out of China. Stocks climbed to close out the second week of March, as some companies benefited from expectations that the rebuilding efforts in Japan following the earthquake and tsunami would positively impact their earnings. Announcements by some large banks of intentions to increase dividends, gains in energy companies and encouraging earnings news coming out of the technology sector contributed to gains in the broader market heading into late-March. Telecom stocks led the market higher in late-March, based on expectations of more consolidation in that sector. Overall, the DJIA gained 6.4% in the first quarter, which was its best first quarter performance in twelve years.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.11

Stocks started out the second quarter of 2011 with gains, as investors were heartened by the March employment report which showed signs of stronger job creation and the lowest unemployment rate in two years. Investors exercised caution in early-April ahead of the potential shutdown of the U.S. Government, which provided for a narrow trading range in the broader stock market. Worries about the high cost of raw materials undercutting growth prospects and some favorable economic reports translated into a mixed stock market performance in mid-April. Strong first quarter earnings reports posted by some large technology stocks helped to lift the DJIA to a multi-year high going into the second half of April. Stocks rose following the Federal Reserve’s late-April meeting, based on indications that the Federal Reserve would not be increasing rates anytime soon. Disappointing earnings reports and lackluster economic data pressure stocks lower ahead of the April employment report. Stronger than expected job growth reflected in April employment data, along with a pick-up in deal activity, helped stocks to rebound heading into mid-May. Worries about Greece’s debt problems and a slowdown in the global economic recovery pulled stocks lower in mid-May. A general downward trend prevailed in the broader stock market during the second half of May 2011 into the first half of June, as the Dow Jones Industrial Average (“DJIA”) declined for six consecutive weeks. Mounting evidence that the economic recovery was losing steam and renewed concerns about a possible Greek default were noted factors contributing to the sell-off in the broader stock market. Stocks rebounded heading into the second half of June, as worries over Greece’s debt crisis eased following a pledge by European leaders to head off a debt default by Greece. More signs of progress regarding Greece’s debt crisis and an accord reached by Bank of America with investors that purchased mortgage-backed securities issued by Countrywide helped the DJIA to close out a volatile second quarter on a four day winning streak. Overall, the DJIA ended up 1.8% for the second quarter.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.12

The rally in the broader stock market continued at the start of the third quarter of 2011, as the DJIA approached a new high for 2011 amid indications the U.S. economy was possibly regaining momentum following a surprising jump in June manufacturing activity. Stocks reversed course following the disappointing employment report for June, which raised fresh doubt about the strength of the U.S. economy. Deepening concerns about the euro-zone debt crisis and the fiscal and economic woes of the U.S. further depressed stocks heading into mid-July. Volatility was evident in the broader stock market heading into the second half of July, as investors weighed generally favorable second earnings reports against threatened debt defaults in the U.S. and Europe. Stocks closed out July posting their biggest weekly drop in over a year on continuing debt-ceiling worries. Signs of a weakening global economy accelerated the selloff in the broader stock market at the beginning of August. The downgrade of the U.S.’s credit rating sparked a global selloff on August 8 th , pushing the DJIA to its sharpest one-day decline since the financial crisis in 2008. Stocks rebounded the following day on hopes that the Federal Reserve would take some action to avert a meltdown in the financial markets. Significant volatility continued to prevail in the stock market throughout the week, with the DJIA swinging higher or lower by over 400 points for four consecutive trading days. Stocks concluded the volatile week closing higher, which was supported by a favorable report for July retail sales. Volatile trading continue over the last two full weeks of trading in August, with the DJIA closing lower for the fourth consecutive week ended August 19 th while rebounding modestly for the first time in August during the week ended August 26 th. For the week ended September 2, 2011 the market continued to show volatility, with the DJIA declining by 1.3% for the week, however on three of the five trading days the DJIA experienced a change of more than 100 points. As of September 2, 2011, the DJIA closed at 11240.26, an increase of 8.9% from one year ago and a decrease of 2.9% year-to-date, and the NASDAQ closed at 2480.33, an increase of 12.7% from one year ago and a decrease of 6.5% year-to-date. The Standard & Poor’s 500 Index closed at 1173.97 on September 2, 2011, an increase of 7.7% from one year ago and a decrease of 6.7% year-to-date.

The market for thrift stocks has been somewhat uneven in recent quarters, but in general has underperformed the broader stock market. Thrift stocks rallied along with the broader stock market at the start of 2011, as investors were encouraged by data that suggested the economic recovery was strengthening. A strong fourth quarter earnings report posted by J.P. Morgan supported gains in the financial sector in mid-January, which was followed by a downturn heading into late-January as some large banks reported weaker than expected earnings. Thrift stocks traded higher along with the broader stock market into mid-February, as financial stocks benefitted from some favorable fourth quarter earnings reports coming out of the financial sector. Financial stocks also benefitted from a rally in mortgage insurer stocks, which surged on a government proposal to shrink the size of FHA. Thrift stocks faltered along with the broader market heading into late-February, as investors grew wary of mounting violence in Libya. A report that December home prices fell to new lows in eleven major metropolitan areas further contributed to the pullback in thrift prices. Thrift prices rebounded along with the broader market in late-February. Higher oil prices and profit taking pressured thrift stocks lower in early-March. News that Bank of America was planning to increase its dividend lifted financial stocks in general in the second week of March, which was followed by a downturn amid a pullback in the broader stock market. Thrift stocks advanced on announced plans by some large banks to increase their dividends following the Federal Reserve’s completion of its “stress test”, which was followed by a slight pullback in thrift stocks heading into late-March. Home sales data for February showing sharp drop-offs in new and existing home sales contributed to decline in thrift prices. An upward revision to fourth quarter GDP helped thrift stocks to rebound slightly in late-March.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.13

The favorable employment report for March 2011 helped thrift stocks advance along with the broader stock at the start of the second quarter of 2011. Financial stocks outpaced the broader market in early-April, based on improving conditions for the larger banks and then eased lower on growing concerns about the potential shutdown of the U.S. Government. Mixed first quarter earnings reports, which included lower first quarter revenues reported by nation’s largest banks, pressured thrift stocks lower going into the second half of April. The Federal Reserve’s announcement that it will keep interest rates low for the foreseeable future helped to lift thrift stocks in late-April. Thrift stocks lagged the broader stock market heading into mid-May, as weak housing data continued to weigh on the sector. Most notably, home prices fell 3% in the first quarter of 2011, the steepest drop since 2008. Moody’s continued negative outlook on the American banking system weighed on thrift stocks as well in mid-May. After trading in a narrow range during the second half of May 2011, bank and thrift stocks led the broader market lower in early-June as economic data suggested that the recovery was losing momentum. A drop-off in home sales in April hurt the thrift sector as well. Thrift stocks edged higher in mid-June, following a report that housing starts rose in May. Concerns about the economic outlook depressed thrift stocks heading into late-June, which was followed by a late-June and early-July rally. Thrift stocks participated in the rally led by bank stocks on news of Bank of America’s mortgage-backed securities settlement and the Federal Reserve a higher-than-expected interchange fee cap.

The thrift sector paralleled trends in the boarder stock at start of the third quarter of 2011, initially rallying on upbeat economic data showing an unexpected increase in June manufacturing activity followed by a pullback on the disappointing employment for June. Second quarter earnings reports for thrifts were generally better compared to the year period, which along with U.S. debt worries, provided for a narrow range for thrift stocks through mid-July. Thrift stocks followed the broader market lower in-late July, which was largely related to the ongoing debt stalemate in Washington. Financial stocks plunged following the downgrade of the U.S.’s credit rating, as fears about the health of the U.S. banking system returned to the market. The volatility that prevailed in the broader stock market during the week that followed the downgrade of U.S. debt was particularly evident in the financial sector, with bank and thrift stocks underperforming the broader stock market. Notably, bank and thrift stocks diverged from the broader stock market at the end of the week, as a weak reading for consumer sentiment pressured bank and thrift stocks lower. Into the latter half of August, the overall market experienced periodic relief from the sharp declines that occurred early on in the month as volatility appeared to be decreasing. The initial recovery from the losses experienced early in the month was very sharp, a typical characteristic of oversold market conditions. The overall market experienced moderate fluctuations heading into the first week of September. On September 2, 2011, the SNL Index for all publicly-traded thrifts closed at 453.20, a decrease of 14.8% from one year ago and a decrease of 23.5% year-to-date.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.14

B. The New Issue Market

In addition to thrift stock market conditions in general, the new issue market for converting thrifts is also an important consideration in determining the Bank’s pro forma market value. The new issue market is separate and distinct from the market for seasoned thrift stocks in that the pricing ratios for converting issues are computed on a pro forma basis, specifically: (1) the numerator and denominator are both impacted by the conversion offering amount, unlike existing stock issues in which price change affects only the numerator; and (2) the pro forma pricing ratio incorporates assumptions regarding source and use of proceeds, effective tax rates, stock plan purchases, etc. which impact pro forma financials, whereas pricing for existing issues are based on reported financials. The distinction between pricing of converting and existing issues is perhaps no clearer than in the case of the price/book (“P/B”) ratio in that the P/B ratio of a converting thrift will typically result in a discount to book value whereas in the current market for existing thrifts the P/B ratio may reflect a premium to book value. Therefore, it is appropriate to also consider the market for new issues, both at the time of the conversion and in the aftermarket.

As shown in Table 4.2, three standard conversions and one second-step conversions have been completed during the past three months. The recently completed standard conversion offerings are the most relevant to 1st Security. All three of these offerings closed their offerings at the supermaximum of the offering range. The average closing pro forma price/tangible book ratio of these three recent standard conversion offerings equaled 66.5%, and on average, these offerings reflected price appreciation of 11.5% after the first week of trading. As of September 2, 2011, the three recent standard conversion offerings reflected a 9.3% increase in price on average.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.15

Table 4.2

Pricing Characteristics and After-Market Trends

Recent Conversions Completed in Last 3 Months

Institutional Information			Pre-Conversion Data												Offering Information											Contribution to					Insider Purchases
			Financial Info.					Asset Quality																		Char. Found.					% Off Incl. Fdn.+Merger Shares
														Excluding Foundation														% of			Benefit Plans
	Conversion				Equity/			NPAs/			Res.				Gross		%			% of			Exp./					Public Off.						Recog.			Stk			Mgmt.&
Institution	Date	Ticker	Assets		Assets			Assets			Cov.				Proc.		Offer			Mid.			Proc.			Form		Excl. Fdn.			ESOP			Plans			Option			Dirs.
			($Mil)		(%)			(%)			(%)				($Mil.)		(%)			(%)			(%)					(%)			(%)			(%)			(%)			(%)(2)

Standard Conversions
IF Bancorp, Inc. - IL*	7/8/11	IROQ-NASDAQ	$	409		9.15	%		1.04	%		73	%		$	45.0		100	%		132	%		3.7	%		C/S		0%/7	%		8.0	%		4.0	%		10.0	%		4.4	%
State Investors Bancorp, Inc. - LA*	7/7/11	SIBC-NASDAQ	$	214		10.03	%		1.03	%		75	%		$	29.1		100	%		132	%		3.9	%	NA		NA				8.0	%		4.0	%		10.0	%		6.8	%
First Connecticut Bancorp, Inc. - CT*	6/30/11	FBNK-NASDAQ	$	1,455		6.60	%		1.49	%		96	%		$	171.9		100	%		132	%		2.0	%		C/S		0%/4	%		8.0	%		4.0	%		10.0	%		1.2	%
Averages - Standard Conversions:			$	693		8.59	%		1.19	%		82	%		$	82.0		100	%		132	%		3.2	%	N.A.		N.A.				8.0	%		4.0	%		10.0	%		4.1	%
Medians - Standard Conversions:			$	409		9.15	%		1.04	%		75	%		$	45.0		100	%		132	%		3.7	%	N.A.		N.A.				8.0	%		4.0	%		10.0	%		4.4	%

Second Step Conversions
Naugatuck Valley Fin. Corp., - CT*	6/30/11	NVSL-NASDAQ	$	564		9.30	%		3.13	%		39	%		$	33.4		60	%		108	%		5.4	%	N.A.		N.A.				6.0	%		3.2	%		7.9	%		1.6	%

Averages - All Conversions:			$	529		8.77	%		1.67	%		71	%		$	69.8		90	%		126	%		3.8	%	N.A.		N.A.				7.5	%		3.8	%		9.5	%		3.5	%
Medians - All Conversions:			$	487		9.23	%		1.27	%		74	%		$	39.2		100	%		132	%		3.8	%	N.A.		N.A.				8.0	%		4.0	%		10.0	%		3.0	%

Institutional Information						Pro Forma Data																				Post-IPO Pricing Trends
						Pricing Ratios(3)(6)									Financial Charac.											Closing Price:
			Initial																							First					After					After
	Conversion		Div.						Core						Core						Core			IPO		Trading		%			First		%			First		%			Thru		%
Institution	Date	Ticker	Yield			P/TB			P/E			P/A			ROA			TE/A			ROE			Price		Day		Chge			Week(4)		Chge			Month(5)		Chge			9/2/11		Chge
			(%)			(%)			(x)			(%)			(%)			(%)			(%)			($)		($)		(%)			($)		(%)			($)		(%)			($)		(%)

Standard Conversions
IF Bancorp, Inc. - IL*	7/8/11	IROQ-NASDAQ		0.00	%		63.4	%		22.4	x		10.7	%		0.5	%		17.0	%		2.8	%	$	10.00	$	11.67		16.7	%	$	11.65		16.5	%	$	10.85		8.5	%	$	10.81		8.1	%
State Investors Bancorp, Inc. - LA*	7/7/11	SIBC-NASDAQ		0.00	%		63.3	%		42.1	x		12.2	%		0.3	%		19.3	%		1.5	%	$	10.00	$	11.85		18.5	%	$	11.66		16.6	%	$	11.60		16.0	%	$	11.50		15.0	%
First Connecticut Bancorp, Inc. - CT*	6/30/11	FBNK-NASDAQ		0.00	%		72.9	%		121.1	x		11.2	%		0.1	%		15.3	%		0.6	%	$	10.00	$	11.08		10.8	%	$	11.16		11.6	%	$	11.11		11.1	%	$	10.47		4.7	%
Averages - Standard Conversions:				0.00	%		66.5	%		61.9	x		11.4	%		0.3	%		17.2	%		1.6	%	$	10.00	$	11.53		15.3	%	$	11.49		14.9	%	$	11.19		11.9	%	$	10.93		9.3	%
Medians - Standard Conversions:				0.00	%		63.4	%		42.1	x		11.2	%		0.3	%		17.0	%		1.5	%	$	10.00	$	11.67		16.7	%	$	11.65		16.5	%	$	11.11		11.1	%	$	10.81		8.1	%

Second Step Conversions
Naugatuck Valley Fin. Corp., - CT*	6/30/11	NVSL-NASDAQ		0.00	%		69.2	%		30.48			9.5	%		0.3	%		13.7	%		2.3	%	$	8.00	$	7.90		-1.3	%	$	7.80		-2.5	%	$	8.15		1.9	%	$	7.58		-5.3	%

Averages - All Conversions:				0.00	%		67.2	%		54.0	x		10.9	%		0.3	%		16.3	%		1.8	%	$	9.50	$	10.63		11.2	%	$	10.57		10.6	%	$	10.43		9.4	%	$	10.09		5.6	%
Medians - All Conversions:				0.00	%		66.3	%		36.3	x		10.9	%		0.3	%		16.1	%		1.9	%	$	10.00	$	11.38		13.8	%	$	11.41		14.1	%	$	10.98		9.8	%	$	10.64		6.4	%

Note: * - Appraisal performed by RP Financial; BOLD = RP Fin. Did the business plan, “NT” - Not Traded; “NA” - Not Applicable, Not Available; C/S-Cash/Stock.

(1)	Non-OTS regulated thrift.	(5)	Latest price if offering is more than one week but less than one month old.	(9)	Former credit union.
(2)	As a percent of MHC offering for MHC transactions.	(6)	Mutual holding company pro forma data on full conversion basis.
(3)	Does not take into account the adoption of SOP 93-6.	(7)	Simultaneously completed acquisition of another financial institution.
(4)	Latest price if offering is less than one week old.	(8)	Simultaneously converted to a commercial bank charter.		September 2, 2011

RP ® Financial, LC.

VALUATION ANALYSIS

IV.16

Shown in Table 4.3 are the current pricing ratios for the four companies that have completed fully-converted offerings during the past three months, all of which are traded on NASDAQ. The current average P/TB ratio of the three publicly-traded recent standard conversions equaled 72.53%, based on closing stock prices as of September 2, 2011.

C. The Acquisition Market

Also considered in the valuation was the potential impact on 1st Security’s stock price of recently completed and pending acquisitions of other thrift institutions operating in Washington. As shown in Exhibit IV-4, there were five Washington thrift acquisitions completed from the beginning of 2000 through September 2, 2011, although there have been no such acquisitions announced since 2007. To the extent that acquisition speculation may impact the Bank’s offering, we have largely taken this into account in selecting companies for the Peer Group which operate in markets that have experienced a comparable level of acquisition activity as the Bank’s market and, thus, are subject to the same type of acquisition speculation that may influence 1st Security’s stock. However, since converting thrifts are subject to a three-year regulatory moratorium from being acquired, acquisition speculation in 1st Security’s stock would tend to be less compared to the stocks of the Peer Group companies.

In determining our valuation adjustment for marketing of the issue, we considered trends in both the overall thrift market, the new issue market including the new issue market for thrift conversions and the local acquisition market for thrift stocks. Taking these factors and trends into account, RP Financial concluded that a slight downward adjustment was appropriate in the valuation analysis for purposes of marketing of the issue.

8. Management

The Bank’s management team appears to have experience and expertise in all of the key areas of the Bank’s operations. Exhibit IV-5 provides summary resumes of the Bank’s Board of Directors and senior management. The Board and senior management have been effective in implementing an operating strategy that can be well managed by the Bank’s present organizational structure. The Bank currently does not have any senior management positions that are vacant.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.17

Table 4.3

Market Pricing Comparatives

Prices As of September 2, 2011


		Market				Per Share Data
		Capitalization				Core			Book
		Price/		Market		12 Month			Value/		Pricing Ratios(3)
Financial Institution		Share(1)		Value		EPS(2)			Share			P/E			P/B			P/A		P/TB			P/Core
		($)		($Mil)		($)			($)		(x)			(%)			(%)			(%)			(x)

All Public Companies		$	9.92	$	242.30	($	0.05	)	$	13.11		17.83	x		76.05	%		9.47	%		81.46	%		19.48	x
Converted Last 3 Months (no MHC)		$	10.09	$	81.44	$	0.26		$	14.22		27.53	x		70.78	%		11.56	%		70.79	%		26.59	x

Converted Last 3 Months (no MHC)
FBNK	First Connecticut Bancorp, Inc. of CT	$	10.47	$	187.20	$	0.08		$	13.72	NM				76.31	%		11.67	%		76.31	%	NM
IROQ	IF Bancorp, Inc. of IL		10.81		52.01		0.45			15.78		18.96	x		68.50	%		11.61	%		68.50	%		24.02	x
NVSL	Naugatuck Valley Fin. Corp. of CT		7.58		53.08		0.26			11.57		36.10	x		65.51	%		8.96	%		65.57	%		29.15	x
SIBC	State Investors Bancorp, Inc. of LA		11.50		33.47		0.24			15.80	NM				72.78	%		14.01	%		72.78	%	NM

		Dividends(4)								Financial Characteristics(6)
		Amount/					Payout			Total		Equity/			Tang Eq/			NPAs/			Reported						Core
Financial Institution		Share		Yield			Ratio(5)			Assets		Assets			Assets			Assets			ROA			ROE			ROA			ROE
		($)		(%)			(%)			($Mil)		(%)			(%)			(%)			(%)			(%)			(%)			(%)

All Public Companies		$	0.21		1.97	%		28.72	%	$	2,613		11.87	%		11.19	%		3.92	%		0.09	%		0.68	%		0.01	%		-0.21	%
Converted Last 3 Months (no MHC)		$	0.03		0.40	%		14.29	%	$	721		15.08	%		15.08	%		1.74	%		0.33	%		2.81	%		0.29	%		3.48	%

Converted Last 3 Months (no MHC)
FBNK	First Connecticut Bancorp, Inc. of CT	$	0.00		0.00	%		0.00	%	$	1,604		15.29	%		15.29	%		1.39	%		0.20	%	NM				0.09	%	NM
IROQ	IF Bancorp, Inc. of IL		0.00		0.00	%		0.00	%		448		16.95	%		16.95	%		1.36	%		0.61	%	NM				0.48	%	NM
NVSL	Naugatuck Valley Fin. Corp. of CT		0.12		1.58	%		57.14	%		593		8.83	%		8.81	%		2.93	%		0.25	%		2.81	%		0.31	%		3.48	%
SIBC	State Investors Bancorp, Inc. of LA		0.00		0.00	%		0.00	%		239		19.25	%		19.25	%		1.28	%		0.24	%	NM				0.29	%	NM

(1)	Average of High/Low or Bid/Ask price per share.
(2)	EPS (estimate core basis) is based on actual trailing 12 month data, adjusted to omit non-operating items on a tax-effected basis.
(3)	P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/Core = Price to core earnings.
(4)	Indicated 12 month dividend, based on last quarterly dividend declared.
(5)	Indicated 12 month dividend as a percent of trailing 12 month estimated core earnings.
(6)	ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing 12 month common earnings and average common equity and total assets balances.
(7)	Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual operating characteristics.

Source: SNL Financial, LC. and RP® Financial, LC. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.

Copyright (c) 2011 by RP ® Financial, LC.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.18

Similarly, the returns, equity positions and other operating measures of the Peer Group companies are indicative of well-managed financial institutions, which have Boards and management teams that have been effective in implementing competitive operating strategies. Therefore, on balance, we concluded no valuation adjustment relative to the Peer Group was appropriate for this factor.

9. Effect of Government Regulation and Regulatory Reform

In summary, as a fully-converted OCC regulated institution, 1st Security will operate in substantially the same regulatory environment as the Peer Group members -- all of whom are adequately capitalized institutions and are operating with no apparent restrictions. Exhibit IV-6 reflects the Bank’s pro forma regulatory capital ratios. On balance, no adjustment has been applied for the effect of government regulation and regulatory reform.

Summary of Adjustments

Overall, based on the factors discussed above, we concluded that the Bank’s pro forma market value should reflect the following valuation adjustments relative to the Peer Group:

Table 4.4

Valuation Adjustments

1st Security Bank of Washington

Key Valuation Parameters:		Valuation Adjustment

Financial Condition		No Adjustment
Profitability, Growth and Viability of Earnings		Moderate Downward
Asset Growth		Slight Upward
Primary Market Area		Slight Downward
Dividends		No Adjustment
Liquidity of the Shares		No Adjustment
Marketing of the Issue		Slight Downward
Management		No Adjustment
Effect of Govt. Regulations and Regulatory Reform		No Adjustment

Valuation Approaches

In applying the accepted valuation methodology promulgated by the OCC and adopted by the FRB, i.e., the pro forma market value approach, we considered the three key pricing ratios in valuing the Bank’s to-be-issued stock -- price/earnings (“P/E”), price/book (“P/B”), and price/assets (“P/A”) approaches -- all performed on a pro forma basis including the effects of the stock proceeds. In computing the pro forma impact of the conversion and the related pricing ratios, we have incorporated the valuation parameters disclosed in the Bank’s prospectus for the effective tax rate, stock benefit plan assumptions and expenses (summarized in Exhibits IV-7 and IV-8).

RP ® Financial, LC.

VALUATION ANALYSIS

IV.19

In our estimate of value, we assessed the relationship of the pro forma pricing ratios relative to the Peer Group and recent conversion offerings.

RP Financial’s valuation placed an emphasis on the following:

●

P/E Approach . The P/E approach is generally the best indicator of long-term value for a stock. Given the similarities between the Bank’s and the Peer Group’s earnings composition and overall financial condition, the P/E approach was carefully considered in this valuation. At the same time, recognizing that (1) the earnings multiples will be evaluated on a pro forma basis for the Bank; and (2) the Peer Group on average has had the opportunity to realize the benefit of reinvesting and leveraging the offering proceeds, we also gave weight to the other valuation approaches.

●

P/B Approach . P/B ratios have generally served as a useful benchmark in the valuation of thrift stocks, particularly in the context of an initial public offering, as the earnings approach involves assumptions regarding the use of proceeds. RP Financial considered the P/B approach to be a valuable indicator of pro forma value, taking into account the pricing ratios under the P/E and P/A approaches. We have also modified the P/B approach to exclude the impact of intangible assets (i.e., price/tangible book value or “P/TB”), in that the investment community frequently makes this adjustment in its evaluation of this pricing approach.

●

P/A Approach . P/A ratios are generally a less reliable indicator of market value, as investors typically assign less weight to assets and attribute greater weight to book value and earnings. Furthermore, this approach as set forth in the regulatory valuation guidelines does not take into account the amount of stock purchases funded by deposit withdrawals, thus understating the pro forma P/A ratio. At the same time, the P/A ratio is an indicator of franchise value, and, in the case of highly capitalized institutions, high P/A ratios may limit the investment community’s willingness to pay market multiples for earnings or book value when ROE is expected to be low.

The Bank will adopt Statement of Position (“SOP”) 93-6, which will cause earnings per share computations to be based on shares issued and outstanding excluding unreleased ESOP shares. For purposes of preparing the pro forma pricing analyses, we have reflected all shares issued in the offering, including all ESOP shares, to capture the full dilutive impact, particularly since the ESOP shares are economically dilutive, receive dividends and can be voted. However, we did consider the impact of the adoption of SOP 93-6 in the valuation.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.20

Based on the application of the three valuation approaches, taking into consideration the valuation adjustments discussed above, RP Financial concluded that as of September 2, 2011, the pro forma market value of the Bank’s full conversion offering equaled $24,500,000 at the midpoint, equal to 2,450,000 shares at $10.00 per share. The $10.00 per share price was determined by the 1st Security board of directors.

1. Price-to-Earnings (“P/E”) . The application of the P/E valuation method requires calculating the Bank’s pro forma market value by applying a valuation P/E multiple to the pro forma earnings base. In attempting to apply this technique, we considered both reported earnings and a recurring earnings base, that is, earnings adjusted to exclude any one-time non-operating items, plus the estimated after-tax earnings benefit of the reinvestment of the net proceeds. The Bank reported net income of $1,894,000 for the 12 months ended June 30, 2011. 1st Security’s income statement for the latest fiscal year included gains on the sale of former branch offices in the amount of $209,000. This income was excluded from the core earnings calculation. In addition, as described in Section One, as result of the net losses incurred in fiscal years 2007 through 2009, 1st Security had a net deferred tax asset of approximately $3.5 million as of June 30, 2011, of which there was a 100% reserve established at that date. The Bank’s marginal effective statutory tax rate approximates 34%, and this is the rate utilized to calculate the net reinvestment benefit from the offering proceeds. While the net deferred tax asset is fully reserved on the balance sheet, the Bank expects to review this status in connection with the December 31, 2011 fiscal year audit. There is a possibility that a portion of the deferred tax asset reserve may be reversed, resulting in an increase to the Bank’s equity account. This would imply that the Bank would then be subject to income taxes for financial reporting purposes. For valuation purposes, we assumed core net income would include the impact of an expected tax burden, should the deferred tax valuation allowance be removed (in whole or in part) from the balance sheet. As shown below, on a tax affected basis, assuming an effective marginal tax rate of 34.0% for the earnings adjustments, the Bank’s core earnings were determined to equal $1,112,000 for the 12 months ended June 30, 2011. (Note: see Exhibit IV-9 for the adjustments applied to the Peer Group’s earnings in the calculation of core earnings).

RP ® Financial, LC.

VALUATION ANALYSIS

IV.21

Table 4.5

Derivation of Core Earnings

1st Security Bank of Washington

		Amount
		($000)

Net income (loss), 12 Mths Ended 6/30/2011		$	1,894
Less: Gain on sale of Branch Offices (1)			(138	)
Less: Tax Impact at 34%			(644	)

Core earnings estimate		$	1,112

(1)	Tax effected at 34.0%.

Based on the Bank’s reported and estimated core earnings and incorporating the impact of the pro forma assumptions discussed previously, the Bank’s pro forma reported and core P/E multiples at the $24.5 million midpoint value equaled 14.11 times and 25.68 times, respectively, which provided for a discount of 17.39% and a premium of 35.94% relative to the Peer Group’s average reported and core P/E multiples of 17.08 times and 18.89 times, respectively (see Table 4.6). In comparison to the Peer Group’s median reported and core earnings multiples which equaled 17.27 times and 19.71 times, respectively, the Bank’s pro forma reported and core P/E multiples at the midpoint value indicated a discount of 18.30% and a premium of 30.29%, respectively. At the top of the super range, the Bank’s reported and core P/E multiples equaled 19.16 times and 35.62 times, respectively. In comparison to the Peer Group’s average reported and core P/E multiples, the Bank’s P/E multiples at the top of the super range reflected a premium of 12.18% and a premium of 88.57%, respectively. In comparison to the Peer Group’s median reported and core P/E multiples, the Bank’s P/E multiples at the top of the super range reflected premiums of 10.94% and 80.72%, respectively.

2. Price-to-Book (“P/B”) . The application of the P/B valuation method requires calculating the Bank’s pro forma market value by applying a valuation P/B ratio, as derived from the Peer Group’s P/B ratio, to the Bank’s pro forma book value. Based on the $24.5 million midpoint valuation, the Bank’s pro forma P/B and P/TB ratios both equaled 53.88% (see Table 4.6). In comparison to the average P/B and P/TB ratios for the Peer Group of 67.44% and 70.29%, the Bank’s ratios reflected a discount of 20.11% on a P/B basis and a discount of 23.35% on a P/TB basis. In comparison to the Peer Group’s median P/B and P/TB ratios of 69.11% and 72.48%, the Bank’s pro forma P/B and P/TB ratios at the midpoint value reflected discounts of 22.04% on a P/B basis and 25.66% on a P/TB basis. At the top of the super range, the Bank’s P/B and P/TB ratios both equaled 61.88%. In comparison to the Peer Group’s average P/B and P/TB ratios, the Bank’s P/B and P/TB ratios at the top of the super range reflected discounts of 8.24% and 11.96%, respectively. In comparison to the Peer Group’s median P/B and P/TB ratios, the Bank’s P/B and P/TB ratios at the top of the super range reflected discounts of 10.46% and 14.62%, respectively. RP Financial considered the resulting discounts under the P/B approach to be reasonable, given the nature of the calculation of the P/B ratio.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.22

Table 4.6
Public Market Pricing
1st Security Bank of Washington and the Comparables
As of September 2, 2011

		Market				Per Share Data
		Capitalization				Core			Book
		Price/		Market		12 Month			Value/		Pricing Ratios(3)
		Share(1)		Value		EPS(2)			Share		P/E			P/B			P/A			P/TB			P/Core
		($)		($Mil)		($)			($)		(x)			(%)			(%)			(%)			(x)

1st Security Bank of Washington
Superrange		$	10.00	$	32.40	$	0.28		$	16.16		19.16	x		61.88	%		10.83	%		61.88	%		35.62	x
Maximum		$	10.00	$	28.18	$	0.33			17.27		16.43	x		57.90	%		9.54	%		57.90	%		30.19	x
Midpoint		$	10.00	$	24.50	$	0.39			18.56		14.11	x		53.88	%		8.38	%		53.88	%		25.68	x
Minimum		$	10.00	$	20.83	$	0.47			20.30		11.86	x		49.26	%		7.20	%		49.26	%		21.37	x

All Non-MHC Public Companies(7)
Averages		$	10.30	$	270.74	($	0.09	)	$	14.14		16.62	x		71.78	%		8.78	%		76.57	%		18.97	x
Medians		$	10.76	$	59.66	$	0.32		$	13.66		15.01	x		73.23	%		8.12	%		76.67	%		18.64	x

All Non-MHC State of WA(7)
Averages		$	6.83	$	347.62	($	0.40	)	$	13.11		16.70	x		53.76	%		6.91	%		60.77	%		17.91	x
Medians		$	5.05	$	58.65	($	0.13	)	$	9.99		16.70	x		50.55	%		6.62	%		55.31	%		17.91	x

Comparable Group Averages
Averages		$	10.53	$	35.05	$	0.47		$	15.03		17.08	x		67.44	%		9.48	%		70.29	%		18.89	x
Medians		$	12.70	$	35.36	$	0.44		$	16.86		17.28	x		69.11	%		7.94	%		72.48	%		19.71	x

Peer Group
AFCB	Athens Bancshares, Inc. of TN	$	12.70	$	35.13	$	0.61		$	18.16		20.82	x		69.93	%		12.40	%		70.48	%		20.82	x
EBMT	Eagle Bancorp Montana of MT	$	10.46	$	40.99	$	0.24		$	13.39		17.15	x		78.12	%		12.38	%		78.12	%	NM
FFDF	FFD Financial Corp. of Dover OH	$	15.00	$	15.18	$	0.93		$	18.50		10.56	x		81.08	%		7.21	%		81.08	%		16.13	x
FABK	First Advantage Bancorp of TN	$	12.70	$	51.90	$	0.27		$	16.58		27.61	x		76.60	%		14.81	%		76.60	%	NM
FFNM	First Fed of N. Michigan of MI	$	3.75	$	10.82	$	0.02		$	8.34	NM				44.96	%		4.94	%		45.84	%	NM
JXSB	Jacksonville Bancorp, Inc. of IL	$	13.70	$	26.45	$	1.34		$	20.06		8.73	x		68.30	%		8.68	%		73.46	%		10.22	x
LSBI	LSB Fin. Corp. of Lafayette IN	$	13.30	$	20.67	$	0.64		$	23.38		11.47	x		56.89	%		5.74	%		56.89	%		20.78	x
LABC	Louisiana Bancorp, Inc. of LA	$	16.03	$	55.11	$	0.60		$	17.13		22.90	x		93.58	%		17.21	%		93.58	%		26.72	x
RVSB	Riverview Bancorp, Inc. of WA	$	2.61	$	58.65	$	0.14		$	4.80		17.40	x		54.38	%		6.62	%		71.51	%		18.64	x
TSBK	Timberland Bancorp, Inc. of WA	$	5.05	$	35.58	($	0.13	)	$	9.99	NM				50.55	%		4.84	%		55.31	%	NM

		Dividends(4)								Financial Characteristics(6)
		Amount/					Payout			Total		Equity/			Tang. Eq./			NPAs/			Reported						Core
		Share		Yield			Ratio(5)			Assets		Assets			Assets			Assets			ROA			ROE			ROA			ROE
		($)		(%)			(%)			($Mil)		(%)			(%)			(%)			(%)			(%)			(%)			(%)

1st Security Bank of Washington
Superrange		$	0.00		0.00	%		0.00	%	$	299		17.50	%		17.50	%		2.65	%		0.57	%		3.23	%		0.30	%		1.74	%
Maximum		$	0.00		0.00	%		0.00	%		295		16.47	%		16.47	%		2.68	%		0.58	%		3.52	%		0.32	%		1.92	%
Midpoint		$	0.00		0.00	%		0.00	%		292		15.56	%		15.56	%		2.71	%		0.59	%		3.82	%		0.33	%		2.10	%
Minimum		$	0.00		0.00	%		0.00	%		289		14.63	%		14.63	%		2.74	%		0.61	%		4.15	%		0.34	%		2.30	%

All Non-MHC Public Companies(7)
Averages		$	0.21		1.91	%		28.63	%	$	2,773		11.62	%		10.97	%		3.70	%		0.06	%		0.48	%		-0.03	%		-0.44	%
Medians		$	0.16		1.45	%		0.00	%	$	902		11.37	%		10.10	%		2.65	%		0.41	%		3.36	%		0.31	%		3.02	%

All Non-MHC State of WA(7)
Averages		$	0.05		0.34	%		13.79	%	$	3,317		13.14	%		12.13	%		7.50	%		-0.14	%		-1.38	%		-0.21	%		-1.95	%
Medians		$	0.00		0.00	%		0.00	%	$	886		12.18	%		12.18	%		6.82	%		0.00	%		0.00	%		-0.12	%		-1.06	%

Comparable Group Averages
Averages		$	0.17		1.26	%		21.20	%	$	400		13.80	%		13.35	%		3.23	%		0.52	%		4.01	%		0.37	%		2.77	%
Medians		$	0.10		0.79	%		19.11	%	$	326		12.44	%		11.47	%		2.12	%		0.57	%		3.64	%		0.35	%		2.93	%

Peer Group
AFCB	Athens Bancshares, Inc. of TN	$	0.20		1.57	%		32.79	%	$	283		17.73	%		17.61	%		2.71	%		0.60	%		3.37	%		0.60	%		3.37	%
EBMT	Eagle Bancorp Montana of MT	$	0.29		2.77	%		47.54	%	$	331		15.85	%		15.85	%		1.24	%		0.72	%		4.51	%		0.28	%		1.78	%
FFDF	FFD Financial Corp. of Dover OH	$	0.68		4.53	%		47.89	%	$	211		8.89	%		8.89	%		1.53	%		0.70	%		7.79	%		0.46	%		5.10	%
FABK	First Advantage Bancorp of TN	$	0.20		1.57	%		43.48	%	$	350		19.34	%		19.34	%		0.92	%		0.54	%		2.79	%		0.32	%		1.64	%
FFNM	First Fed of N. Michigan of MI	$	0.00		0.00	%		0.00	%	$	219		10.99	%		10.80	%		4.71	%		0.07	%		0.61	%		0.03	%		0.24	%
JXSB	Jacksonville Bancorp, Inc. of IL	$	0.30		2.19	%		19.11	%	$	305		12.70	%		11.92	%		1.27	%		1.00	%		8.72	%		0.85	%		7.44	%
LSBI	LSB Fin. Corp. of Lafayette IN	$	0.00		0.00	%		0.00	%	$	360		10.10	%		10.10	%		5.92	%		0.48	%		5.08	%		0.27	%		2.80	%
LABC	Louisiana Bancorp, Inc. of LA	$	0.00		0.00	%		0.00	%	$	320		18.39	%		18.39	%		0.57	%		0.74	%		3.90	%		0.64	%		3.34	%
RVSB	Riverview Bancorp, Inc. of WA	$	0.00		0.00	%		0.00	%	$	886		12.23	%		9.59	%		5.10	%		0.39	%		3.28	%		0.37	%		3.06	%
TSBK	Timberland Bancorp, Inc. of WA	$	0.00		0.00	%	NM			$	735		11.74	%		11.01	%		8.35	%		0.00	%		0.00	%		-0.12	%		-1.06	%

(1)	Average of High/Low or Bid/Ask price per share.
(2)	EPS (estimate core basis) is based on actual trailing 12 month data, adjusted to omit non-operating items on a tax-effected basis, and is shown on a pro forma basis where appropriate.
(3)	P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/Core = Price to core earnings.
(4)	Indicated 12 month dividend, based on last quarterly dividend declared.
(5)	Indicated 12 month dividend as a percent of trailing 12 month estimated core earnings.
(6)	ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing 12 month common earnings and average common equity and total assets balances.
(7)	Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual operating characteristics.

Source: Corporate reports, offering circulars, and RP Financial, LC. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.

Copyright (c) 2011 by RP ® Financial, LC.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.23

3. Price-to-Assets (“P/A”) . The P/A valuation methodology determines market value by applying a valuation P/A ratio to the Bank’s pro forma asset base, conservatively assuming no deposit withdrawals are made to fund stock purchases. In all likelihood there will be deposit withdrawals, which results in understating the pro forma P/A ratio which is computed herein. At the $24.5 million midpoint of the valuation range, the Bank’s value equaled 8.38% of pro forma assets. Comparatively, the Peer Group companies exhibited an average P/A ratio of 9.48%, which implies a discount of 11.60% has been applied to the Bank’s pro forma P/A ratio. In comparison to the Peer Group’s median P/A ratio of 7.94%, the Bank’s pro forma P/A ratio at the midpoint value reflects a premium of 5.54%.

Comparison to Recent Offerings

As indicated at the beginning of this chapter, RP Financial’s analysis of recent conversion offering pricing characteristics at closing and in the aftermarket has been limited to a “technical” analysis and, thus, the pricing characteristics of recent conversion offerings can not be a primary determinate of value. Particular focus was placed on the P/TB approach in this analysis, since the P/E multiples do not reflect the actual impact of reinvestment and the source of the stock proceeds (i.e., external funds vs. deposit withdrawals). As discussed previously, there have been three recently completed standard conversion offerings, IF Bancorp, Inc. of IL, State Investors Bancorp, Inc. of LA and First Connecticut Bancorp, Inc. of CT. In comparison to the average closing pro forma P/TB ratio of these offerings, 66.5%, the Bank’s P/TB ratio of 53.88% at the midpoint value reflects an implied discount of 18.98%. At the top of the superrange, the Bank’s pro forma P/TB ratio of 61.88% reflects an implied discount of 6.95% relative to the average closing pro forma P/TB ratio. The three recent standard conversions that are traded on NASDAQ reported an average P/TB ratio, based on closing stock prices as of September 2, 2011, of 72.53%.

RP ® Financial, LC.

VALUATION ANALYSIS

IV.24

Valuation Conclusion

Based on the foregoing, it is our opinion that, as of September 2, 2011, 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% valuation 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. The pro forma valuation calculations relative to the Peer Group are shown in Table 4.6 and are detailed in Exhibit IV-7 and Exhibit IV-8.

EXHIBITS

RP ® Financial, LC.

LIST OF EXHIBITS

Exhibit
Number		Description

	I-1	Map of Branch Office Network

	I-2	Audited Financial Statements

	I-3	Key Operating Ratios

	I-4	Investment Portfolio Composition

	I-5	Yields and Costs

	I-6	Loan Loss Allowance Activity

	I-7	Interest Rate Risk Analysis

	I-8	Fixed Rate and Adjustable Rate Loans

	I-9	Loan Portfolio Composition

	I-10	Contractual Maturity By Loan Type

	I-11	Loan Origination Activity

	I-12	Non-Performing Assets

	I-13	Deposit Composition

	I-14	CDs by Rate and Maturity

	I-15	Borrowings Activity

	II-1	Description of Office Facilities

	II-2	Historical Interest Rates

	II-3	Market Area Demographic/Economic Information

	II-4	Market Area Employment by Sector

LIST OF EXHIBITS (continued)

Exhibit
Number		Description

III-1		General Characteristics of Publicly-Traded Institutions

III-2		Public Market Pricing of Publicly-Traded Institutions – Northwest Region
		< $400-Million in

III-3		Peer Group Summary Demographic and Deposit Market Share Data

IV-1		Stock Prices: September 2, 2011

IV-2		Historical Stock Price Indices

IV-3		Historical Thrift Stock Indices

IV-4		Market Area Acquisition Activity

IV-5		Director and Senior Management Summary Resumes

IV-6		Pro Forma Regulatory Capital Ratios

IV-7		Pro Forma Analysis Sheet

IV-8		Pro Forma Effect of Conversion Proceeds

IV-9		Peer Group Core Earnings Analysis

V-1		Firm Qualifications Statement

EXHIBIT I-1

1st Security Bank of Washington

Map of Branch Office Network

Office Locations

Certain mapping and direction data © 2009 NAVTEQ. All rights reserved. The Data for areas of Canada includes information taken with permission from Canadian authorities, including: © Her Majesty the Queen in Right of Canada, © Queen’s Printer for Ontario. NAVTEQ and NAVTEQ ON BOARD are trademarks of NAVTEQ. © 2009 Tele Atlas North America, Inc. All rights reserved. Tele Atlas and Tele Atlas North America are trademarks of Tele Atlas, Inc. © 2009 by Applied Geographic Systems. All rights reserved.

EXHIBIT I-2

1st Security Bank of Washington

Audited Financial Statements

[Incorporated by Reference]

Exhibit I-3

1st Security Bank of Washington

Key Operating Ratios

	Six Months Ended June 30,						Years Ended December 31,
	2011			2010			2010			2009			2008			2007			2006

Selected Financial Ratios and Other Data:
Performance ratios (1) :
Return on assets (ratio of net income (loss) to average total assets)		0.37	%		0.27	%		0.60	%		(1.75	)%		(1.55	)%		(1.60	)%		0.48	%
Return on equity (ratio of net income (loss) to average equity)		3.94	%		2.96	%		6.54	%		(16.84	)%		(11.95	)%		(11.82	)%		3.65	%
Yield on average interest-earning assets		6.42	%		6.75	%		6.86	%		6.62	%		7.30	%		7.28	%		7.04	%
Rate paid on average interest-bearing liabilities		1.42	%		1.82	%		1.75	%		2.12	%		2.99	%		3.50	%		2.85	%
Interest rate spread information:
Average during period		5.00	%		4.93	%		5.11	%		4.50	%		4.31	%		3.79	%		4.19	%
End of period		5.04	%		4.73	%		4.64	%		4.20	%		4.58	%		3.78	%		4.19	%
Net interest margin (2)		5.15	%		5.16	%		5.32	%		4.79	%		4.80	%		4.41	%		4.74	%
Operating expense to average total assets		4.15	%		4.47	%		4.49	%		5.32	%		5.24	%		6.69	%		5.54	%
Average interest-earning assets to average interest-bearing liabilities		112.13	%		114.40	%		113.98	%		116.01	%		119.50	%		121.83	%		124.06	%
Efficiency ratio (3)		72.95	%		68.24	%		69.86	%		84.29	%		89.41	%		125.15	%		86.26	%

Asset quality ratios:
Non-performing assets to total assets at end of period (4)		2.92	%		4.27	%		3.45	%		4.64	%		0.99	%		0.08	%		0.10	%
Non-performing loans to total gross loans (4)		0.91	%		2.67	%		2.66	%		3.12	%		1.09	%		0.08	%		0.10	%
Allowance for loan losses to non-performing loans (4)		246.99	%		100.11	%		93.70	%		99.34	%		225.00	%		1499.45	%		1181.66	%
Allowance for loan losses to loans receivable, net		2.30	%		2.72	%		2.56	%		3.20	%		2.51	%		1.15	%		1.24	%

Capital ratios:
Equity to total assets at end of period		9.52	%		8.63	%		8.48	%		8.27	%		10.91	%		12.05	%		13.57	%
Average equity to average assets		9.31	%		9.07	%		9.13	%		10.40	%		12.95	%		13.50	%		13.27	%

Other data:
Number of full service offices		6			6			6			8			12			12			12
Full-time equivalent employees		79			80			79			84			112			125			130

(1)	Performance ratios for the six month periods ended June 30, 2011 and 2010 are annualized as appropriate.
(2)	Net interest income divided by average interest earning assets .
(3)	Total non-interest expense as a percentage of net interest income and total other non-interest income, excluding net securities transactions.
(4)	Non-performing assets consists of non-accruing loans accruing loans more than 90 days past due, foreclosed real estate and other repossessed assets.

Exhibit I-4

1st Security Bank of Washington

Investment Portfolio Composition

	June 30, 2011				December 31,
	June 30, 2011				2010				2009				2008
	Book Value		Fair Value		Book Value		Fair Value		Book Value		Fair Value		Book Value		Fair Value
	(Dollars in thousands)
Available-for-sale:
Federal agency securities	$	9,802	$	9,833	$	6,175	$	6,086	$	-	$	-	$	1,475	$	1,472
Municipal Bonds		1,400		1,409		1,144		1,103		-		-		-		-
Mortgage-backed		424		447		434		453		592		603		1,375		1,362
Total available-for-sale		11,626		11,689		7,753		7,642		592		603		2,850		2,834

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

Total securities available-for-sale	$	13,423	$	13,486	$	9,550	$	9,439	$	2,389	$	2,400	$	4,647	$	4,631

Exhibit I-5

1st Security Bank of Washington

Yields and Costs


	At June 30, 2011			Six Months Ended June 30,
	At June 30, 2011			2011								2010
	Yield/ Rate			Average Balance Outstanding			Interest Earned Paid		Yield/ Rate			Average Balance Outstanding			Interest Earned Paid		Yield/ Rate
	(Dollars in thousand)
Interest-earning assets:
Loans receivable, net (1)		7.70	%	$	218,462		$	8,150		7.46	%	$	232,215		$	8,442		7.27	%
Mortgage-backed securities		2.82			429			6		2.80			587			8		2.73
Investment securities		1.45			9,530			78		1.64			---			---		---
Federal Home Loan Bank stock		---			1,797			---		---			1,797			---		---
Other		0.19			27,355			29		0.21			16,119			17		0.21
Total interest-earning assets (1)		6.46			257,573			8,263		6.42			250,718			8,467		6.75

Interest-bearing liabilities:
Savings and money market		0.86			100,471			442		0.88			71,205			330		0.93
Interest-bearing checking		0.61			17,546			53		0.60			20,697			102		0.99
Certificates of deposit		1.97			107,591			1,044		1.94			117,125			1,434		2.45
Borrowings		4.51			4,099			88		4.29			10,137			127		2.51
Total interest-bearing liabilities		1.42			229,707			1,627		1.42			219,164			1,993		1.82

Net interest income							$	6,636							$	6,474
Net interest rate spread		5.04	%							5.00	%							4.93	%
Net earning assets				$	27,866							$	31,554
Net yield on average interest-earning assets		5.18	%							5.15	%							5.16	%
Average interest-earning assets to average interest-bearing liabilities					112.13	%							114.40	%

(1)	The average loans receivable, net balances include non-accruing loans.

Exhibit I-5(continued)

1st Security Bank of Washington

Yields and Costs

	Years Ended December 31,
	2010								2009								2008
	Average Balance Outstanding			Interest Earned Paid		Yield/ Rate			Average Balance Outstanding			Interest Earned Paid		Yield/ Rate			Average Balance Outstanding			Interest Earned Paid		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:

Loans receivable, net (1)	$	236,238		$	17,270		7.31	%	$	231,965		$	16,289		7.02	%	$	216,383		$	16,251		7.51	%
Mortgage-backed securities		546			15		2.75			988			38		3.85			3,135			347		11.07
Investment securities		1,390			19		1.37			1,267			52		4.10			4,035			181		4.49
Federal Home Loan Bank stock		1,797			---		---			1,797			---		---			1,797			17		0.95
Other		12,585			29		0.23			11,807			25		0.21			5,999			103		1.72
Total interest-earning assets (1)		252,556			17,333		6.86			247,824			16,404		6.62			231,349			16,899		7.30

Interest-bearing liabilities:
Savings and money market		76,065			711		0.94			74,407			705		0.95			78,100			1,204		1.54
Interest-bearing checking		19,798			187		0.94			20,977			246		1.17			13,644			235		1.72
Certificates of deposit		118,217			2,770		2.34			101,802			3,281		3.22			91,069			3,930		4.32
Borrowings		7,499			218		2.91			16,436			289		1.76			10,779			429		3.98
Total interest-bearing liabilities		221,579			3,886		1.75			213,622			4,521		2.12			193,592			5,798		2.99

Net interest income				$	13,447							$	11,883							$	11,101
Net interest rate spread							5.11	%							4.50	%							4.31	%
Net earning assets	$	30,977							$	34,202							$	37,757
Net yield on average interest-earning assets							5.32	%							4.79	%							4.80	%
Average interest-earning assets to average interest-bearing liabilities		113.98	%							116.01	%							119.50	%

(1)	The average loans receivable, net balances include non-accruing loans.

Exhibit I-6

1st Security Bank of Washington

Loan Loss Allowance Activity


	Six Months Ended June 30,						Years Ended December 31,
	2011			2010			2010			2009			2008			2007			2006
	(Dollars in thousands)
Balance at beginning of period:	$	5,905		$	7,405		$	7,405		$	5,598		$	2,744		$	2,706		$	2,719

Charge-offs:
Real estate loans
One- to four-family		---			---			32			---			---			---			---
Home equity		117			60			163			160			18			1			18
Commercial		612			---			---			---			---			---			---
Construction		---			1,328			1,529			1,436			843			---			---
Total real estate loans		729			1,388			1,724			1,596			861			1			18
Consumer loans
Indirect home improvement		1,301			1,190			2,490			2,195			1,006			600			355
Automobile		253			370			637			1,380			615			427			292
Recreational		148			292			413			545			93			108			125
Home improvement		15			31			76			35			11			13			67
Other		46			123			178			174			112			61			152
Total consumer loans		1,763			2,006			3,794			4,329			1,837			1,209			991
Commercial business loans		---			74			175			---			---			---			---
Total charge-offs		2,492			3,468			5,693			5,925			2,698			1,210			1,009

Recoveries:
Real estate loans
Home equity		---			---			---			---			60			---			---
Total real estate loans		---			---			---			---			60			---			---
Consumer loans
Indirect home improvement		220			152			351			262			269			214			143
Automobile		120			170			275			305			178			295			390
Recreational		39			52			70			53			36			70			88
Home improvement		1			---			---			1			1			16			6
Other		13			9			17			44			71			129			123
Total consumer loans		393			383			713			665			555			724			750
Commercial business loans		---			---			---			---			---			---			---

Total recoveries		393			383			713			665			615			724			750

Net charge-offs		2,099			3,085			4,980			5,260			2,083			486			259
Additions charged to operations		1,030			1,905			3,480			7,067			4,937			578			246
Reclassification for off-balance sheet contingencies		---			---			---			---			---			(54	)		---
Balance at end of period	$	4,836		$	6,225		$	5,905		$	7,405		$	5,598		$	2,744		$	2,706

Net charge-offs during the period to average loans outstanding during the period		0.96	%		1.33	%		2.11	%		2.27	%		1.00	%		0.21	%		0.12	%

Net charge-offs during the period to average non-performing assets		25.68	%		26.83	%		47.40	%		89.36	%		148.57	%		195.18	%		146.33	%

Allowance as a percentage of non- performing loans		246.99	%		100.11	%		93.70	%		99.34	%		225.00	%		1499.45	%		1181.66	%

Allowance as a percentage of loans receivable, net (end of period)		2.30	%		2.72	%		2.56	%		3.20	%		2.51	%		1.15	%		1.24	%

Exhibit I-7

1st Security Bank of Washington

Interest Rate Risk Analysis

	June 30, 2011
Change in
Interest
Rates in	Net Interest Income
Basis
Points	$ Amount		$ Change			% Change
	Dollars in thousands
200bp	$	13,485	$	96			0.71	%
100bp	$	13,350	$	(40	)		(0.30	)%
0bp	$	13,390		−			---
(100)bp	$	13,849	$	459			3.43	%

Exhibit I-8

1st Security Bank of Washington

Fixed Rate and Adjustable Rate Loans


	June 30, 2011						2010						2009						December 31, 2008						2007						2006
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Fixed-rate loans:
Real estate loans:
Commercial	$	14,223			6.63	%	$	16,333			6.90	%	$	15,729			6.59	%	$	16,449			7.20	%	$	15,852			6.58	%	$	8,959			4.06	%
Multi-family		1,168			0.54			1,159			0.49			409			0.17			405			0.17			968			0.40			592			0.27
One- to four-family		6,305			2.94			6,585			2.79			4,552			1.91			6,159			2.70			57,610			23.93			64,919			29.39
Home equity		2,516			1.17			2,784			1.18			3,839			1.61			5,399			2.36			6,616			2.75			6,812			3.08
Construction and development		1,825			0.85			1,556			0.66			501			0.21			105			0.05			110			0.05			196			0.09
Total real estate loans		26,037			12.13			28,417			12.02			25,030			10.49			28,517			12.48			81,156			33.71			81,478			36.89

Consumer		124,650			58.10			135,752			57.39			137,231			57.53			126,221			55.29			116,329			48.32			108,756			49.23
Commercial business		2,422			1.14			1,049			0.45			870			0.36			454			0.20			165			0.07			-			---
Total fixed-rate loans		153,109			71.37			165,218			69.86			163,131			68.38			155,192			67.97			197,650			82.10			190,234			86.12

Adjustable-rate loans:
Real estate loans:
Commercial		11,452			5.34			11,728			4.96			13,370			5.61			9,423			4.13			1,457			0.61			1,495			0.67
Multi-family		---			---			---			---			---			---			3			0.01			4			0.01			---			---
One- to four-family		6,528			3.04			6,633			2.80			3,681			1.54			810			0.35			2,946			1.22			2,765			1.25
Home equity		12,923			6.03			12,871			5.44			12,609			5.29			13,290			5.83			13,105			5.44			15,788			7.15
Construction and development		4,479			2.09			8,249			3.49			16,889			7.08			23,756			10.40			6,410			2.66			2,405			1.09
Total real estate loans		35,382			16.50			39,481			16.69			46,549			19.52			47,282			20.72			23,922			9.94			22,453			10.16

Consumer		10			0.01			13			0.01			24			0.01			54			0.02			151			0.06			564			0.26
Commercial business		26,008			12.12			31,792			13.44			28,829			12.09			25,764			11.29			19,032			7.90			7,649			3.46
Total adjustable-rate loans		61,400			28.63			71,286			30.14			75,402			31.62			73,100			32.03			43,105			17.90			30,666			13.88

Total gross loans receivable		214,509			100.00	%		236,504			100.00	%		238,533			100.00	%		228,292			100.00	%		240,755			100.00	%		220,900			100.00	%

Less:
Deferred fees and discounts		511						223						313						280						(204	)					(116	)
Allowance for losses		(4,836	)					(5,905	)					(7,405	)					(5,598	)					(2,744	)					(2,706	)
Total loans receivable, net	$	210,184					$	230,822					$	231,441					$	222,974					$	237,807					$	218,078

Exhibit I-9

1st Security Bank of Washington

Loan Portfolio Composition

							December 31,
	June 30, 2011						2010						2009						2008						2007						2006
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
Commercial	$	25,675			11.97	%	$	28,061			11.86	%	$	29,099			12.20	%	$	25,872			11.33	%	$	17,309			7.19	%	$	10,454			4.73	%
Multi-family		1,168			0.54			1,159			0.49			409			0.17			408			0.18			972			0.41			592			0.27
One- to four-family		12,833			5.98			13,218			5.59			8,233			3.45			6,969			3.05			60,556			25.15			67,684			30.64
Home equity		15,439			7.20			15,655			6.62			16,448			6.90			18,689			8.19			19,721			8.19			22,600			10.23
Construction and development		6,304			2.94			9,805			4.15			17,390			7.29			23,861			10.45			6,520			2.71			2,601			1.18
Total real estate loans		61,419			28.63			67,898			28.71			71,579			30.01			75,799			33.20			105,078			43.65			103,931			47.05

Consumer Loans:
Indirect home improvement		87,232			40.67			94,833			40.10			89,883			37.68			75,203			32.94			69,559			28.89			62,099			28.11
Recreational		25,341			11.81			24,105			10.19			18,011			7.55			12,165			5.33			11,727			4.87			13,182			5.97
Automobile		8,927			4.16			12,645			5.35			23,359			9.79			30,514			13.37			25,991			10.80			28,473			12.89
Home improvement		1,070			0.50			1,295			0.55			1,725			0.72			2,203			0.96			2,952			1.23			1,005			0.45
Other		2,090			0.97			2,887			1.21			4,277			1.80			6,190			2.71			6,251			2.59			4,561			2.07
Total consumer loans		124,660			58.11			135,765			57.40			137,255			57.54			126,275			55.31			116,480			48.38			109,320			49.49

Commercial business loans		28,430			13.26			32,841			13.89			29,699			12.45			26,218			11.49			19,197			7.97			7,649			3.46

Total gross loans receivable		214,509			100.00	%		236,504			100.00	%		238,533			100.00	%		228,292			100.00	%		240,755			100.00	%		220,900			100.00	%

Less:
Deferred fees and discounts		511						223						313						280						(204	)					(116	)
Allowance for losses		(4,836	)					(5,905	)					(7,405	)					(5,598	)					(2,744	)					(2,706	)
Total loans receivable, net	$	210,184					$	230,822					$	231,441					$	222,974					$	237,807					$	218,078

Exhibit I-10

1st Security Bank of Washington

Contractual Maturity by Loan Type

	Real Estate
	One- to Four Family					Home Equity					Multi-family					Commercial					Construction and Development					Consumer					Commercial Business					Total
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During Years Ending December 31,
2011 (1)	$	393		4.00	%	$	12,875		6.02	%	$	---		---	%	$	6,087		6.57	%	$	6,742		6.01	%	$	2,729		10.41	%	$	27,583		5.24	%	$	56,409		5.89	%
2012		7,064		5.40			---		---			381		6.57			1,520		7.00			1,902		6.00			2,576		9.06			91		6.22			13,534		6.40
2013		10		9.79			6		7.75			---		---			3,591		3.11			---		---			5,215		9.19			506		6.44			9,328		6.70
2014 and 2015		505		6.25			---		---			690		6.00			12,978		5.20			---		---			10,967		8.98			4,661		5.48			29,801		6.67
2016 to 2020		1,613		4.36			352		7.12			13		5.55			3,885		4.96			1,161		6.64			51,554		9.46			---		---			58,578		8.95
2021 to 2025		388		5.95			2,339		8.16			5		6.33			---		---			---		---			51,423		7.27			---		---			54,155		7.30
2026 and following		3,245		5.16			83		7.75			70		5.55			---		---			---		---			11,301		7.50			---		---			14,699		6.98
Total	$	13,218		5.22	%	$	15,655		6.37	%	$	1,159		6.16	%	$	28,061		5.30	%	$	9,805		6.08	%	$	135,765		8.43	%	$	32,841		5.29	%	$	236,504		7.20	%

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

Exhibit I-11

1st Security Bank of Washington

Loan Origination Activity


	Six Months Ended, June 30,						Years Ended December 31,
	2011			2010			2010			2009		2008
	(In thousands)
Originations by type:
Fixed-rate:
One- to four-family	$	---		$	1,202		$	2,378		$	7,331	$	6,668
Home equity		---			---			---			148		647
Multi-family		14			731			759			6		8
Commercial		443			2,028			3,037			3,813		251
Construction and development		-			---			---			404		---
Consumer		14,629			28,772			53,043			63,047		68,042
Commercial business (excluding warehouse lines)		1,725			270			384			476		570
Total fixed-rate		16,811			33,003			59,601			75,225		76,186

Adjustable- rate:
One- to four-family		---			---			1,221			2,582		3,024
Home equity		2,164			1,768			5,266			4,743		5,176
Multi-family		---			---			---			---		---
Commercial		48			3			555			1,122		13,480
Construction and development		---			595			775			3,471		16,131
Consumer		---			---			3			11		6
Commercial business (excluding warehouse lines)		3,763			4,285			15,380			23,853		25,674
Warehouse lines, net		6,501			11,416			11,940			8,199		---
Total adjustable-rate		12,476			18,067			35,140			43,981		63,491
Total loans originated		29,287			51,070			94,741			119,206		139,677

Sales and repayments:
One- to four-family		---			---			---			6,429		6,669
Total loans sold		---			---			---			6,429		6,669
Mortgage-backed securities		---			---			---			---		48,635
Total sales		---			---			---			6,429		55,304
Total principal repayments		51,282			54,982			96,770			102,536		96,836
Total reductions		51,282			54,982			96,770			108,965		152,140
Net increase (decrease)	$	(21,995	)	$	(3,912	)	$	(2,029	)	$	10,241	$	(12,463	)

Exhibit I-12

1st Security Bank of Washington

Non-Performing Assets

	June 30,			December 31,
	2011			2010			2009			2008			2007			2006
Non-accruing loans:	(Dollars in thousands)
Real estate loans:
One- to four-family	$	234		$	211		$	---		$	---		$	---		$	---

Home equity		605			574			40			87			10			22

Commercial		---			1,201			---			---			---			---

Construction and development		---			2,175			6,758			1,953			---			---
Total real estate loans		839			4,161			6,798			2,040			10			22

Consumer loans:
Indirect home improvement		421			522			276			308			117			127
Automobile		37			54			35			62			50			37
Recreational		1			38			119			32			3			29
Home improvement		37			75			3			---			---			---
Other		8			3			60			16			3			14
Total consumer loans		504			692			493			418			173			207
Commercial business loans		558			1,387			---			---			---			---
Total non-accruing loans		1,901			6,240			7,291			2,458			183			229

Accruing loans delinquent more than 90 days:
Home equity		57			62			163			30			---			---
Total accruing loans delinquent more than 90 days		57			62			163			30			---			---

Real estate owned		5,925			3,701			5,484			---			---			---

Repossessed automobiles, recreational vehicles		92			78			130			44			16			26

Total non-performing assets	$	7,975		$	10,081		$	13,068		$	2,532		$	199		$	255

Restructured loans	$	1,538		$	1,538		$	---		$	---		$	---		$	---

Total non-performing assets as a percentage of total assets		2.92	%		3.45	%		4.64	%		0.99	%		0.08	%		0.10	%

Exhibit I-13

1st Security Bank of Washington

Deposit Composition


						December 31,
	June 30, 2011					2010					2009					2008
	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
	(Dollars in thousands)
Transactions and Savings Deposits:

Interest-bearing checking	$	17,303		7.16	%	$	19,458		7.98	%	$	22,764		9.86	%	$	13,928		6.45	%
Noninterest-bearing checking		17,212		7.13			18,547		7.58			25,126		10.88			20,072		9.29
Savings		12,118		5.02			12,961		5.31			16,858		7.30			26,312		12.18
Money market		88,930		36.83			81,470		33.40			53,611		23.21			55,799		25.83

Total transaction and savings deposits		135,563		56.14			132,436		54.27			118,359		51.25			116,111		53.75

Certificates:

0.00 – 1.99%		71,617		29.66			74,366		30.49			38,303		16.58			114		0.05
2.00 – 3.99%		31,051		12.86			33,006		13.53			59,618		25.81			64,901		30.04
4.00 – 5.99%		3,023		1.25			3,720		1.53			14,290		6.18			34,435		15.93
6.00 – 7.99%		---		---			---		---			18		0.01			130		0.06
8.00 – 9.99%		221		0.09			429		0.18			397		0.17			365		0.17
10.00 and over		---		---			---		---			---		---			---		---

Total certificates		105,912		43.86			111,521		45.73			112,626		48.75			99,945		46.25

Total deposits	$	241,475		100.00	%	$	243,957		100.00	%	$	230,985		100.00	%	$	216,056		100.00	%

Exhibit I-14

1st Security Bank of Washington

CDs by Rate and Maturity


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

Certificate accounts maturing in quarter ending:

September 30, 2011	$	15,621		$	1,394		$	157		$	---		$	181		$	---		$	17,353			16.38	%
December 31, 2011		6,700			1,263			1,583			---			34			---			9,580			9.05
March 31, 2012		6,646			434			293			---			6			---			7,379			6.97
June 30, 2012		8,975			7,374			9			---			---			---			16,358			15.44
September 30, 2012		11,668			133			14			---			---			---			11,815			11.16
December 31, 2012		18,910			1,079			385			---			---			---			20,374			19.24
March 31, 2013		576			423			80			---			---			---			1,079			1.02
June 30, 2013		1,149			81			---			---			---			---			1,230			1.16
September 30, 2013		127			766			128			---			---			---			1,021			0.96
December 31, 2013		192			1,819			203			---			---			---			2,214			2.09
March 31, 2014		206			322			171			---			---			---			699			0.66
June 30, 2014		339			432			---			---			---			---			771			0.73
Thereafter		508			15,531			---			---			---			---			16,039			15.14

Total	$	71,617		$	31,051		$	3,023		$	---		$	221		$	---		$	105,912			100.00	%

Percent of total		67.62	%		29.32	%		2.85	%		---	%		0.21	%		---	%		100.00	%

Exhibit I-15

1st Security Bank of Washington

Borrowing Activity

	Six Months Ended June 30,						Years Ended December 31,
	2011			2010			2010			2009			2008
	(Dollars in thousands)
Maximum balance:
Federal Home Loan Bank advances	$	21,900		$	15,900		$	23,900		$	11,900		$	30,400
Fed Funds Purchased	$	---		$	---		$	---		$	600		$	897
Federal Reserve Bank	$	---		$	15,000		$	37,000		$	30,000		$	---

Average balances:
Federal Home Loan Bank advances	$	4,099		$	5,535		$	4,879		$	6,404		$	10,796
Fed Funds Purchased	$	---		$	---		$	---		$	5		$	4
Federal Reserve Bank	$	---		$	4,602		$	2,620		$	10,027		$	---

Weighted average interest rate:
Federal Home Loan Bank advances		4.29	%		4.37	%		4.31	%		4.13	%		3.97	%
Fed Funds Purchased		---	%		---	%		---	%		1.27	%		3.37	%
Federal Reserve Bank		---	%		0.26	%		0.29	%		0.25	%		---	%

	June 30, 2011			December 31,
	June 30, 2011			2010			2009			2008
	(Dollars in thousands)
Balance outstanding at end of period:
Federal Home Loan Bank advances	$	3,900		$	21,900		$	5,900		$	9,400
Fed Funds Purchased		---			---			---			---
Federal Reserve Bank		---			---			20,000			---
Total borrowings	$	3,900		$	21,900		$	25,900		$	9,400

Weighted average interest rate of:
Federal Home Loan Bank advances		4.49	%		1.42	%		4.41	%		3.00	%
Fed Funds Purchased		---			---			---			---
Federal Reserve Bank		---			---			0.25	%		---

Exhibit II-1

1st Security Bank of Washington

Description of Office Facilities

Location

Square

Footage

Owned or
Leased

Lease

Expiration Date

Net Book Value at
June 30, 2011

(In thousands)

Canyon Park

2,997

Leased

May 2015 (1)

22020 17 th Ave SE, Suite 100

Bothell, WA 98021

Edmonds

1,080

Owned

---

319

620 Edmonds Way

Edmonds, WA 98020

Lynnwood

3,000

Leased

June 2020

236

19002 33 rd Ave W

Lynnwood, WA 98036

Mountlake Terrace (Admin)

39,535

Owned

---

3,436

6920 220 th St SW

Mountlake Terrace, WA 98043

Poulsbo

2,223

Owned

---

2,988

21650 Market Place

Poulsbo, WA 98370

Puyallup

2,474

Owned

---

1,503

307 W Stewart St

Puyallup, WA 98371

Overlake

2,331

Leased

June 2016 (2)

394

14808 NE 24 th St, Suite D

Redmond, WA 98052

(1) Lease provides for one five-year renewal.

(2) Lease provides for two five-year renewals.

Exhibit II-2

Historical Interest Rates (1)


		Prime			90 Day			One Year			10 Year
Year/Qtr. Ended		Rate			T-Bill			T-Bill			T-Bond

2003:	Quarter 1		4.25	%		1.14	%		1.19	%		3.83	%
	Quarter 2		4.00	%		0.90	%		1.09	%		3.54	%
	Quarter 3		4.00	%		0.95	%		1.15	%		3.96	%
	Quarter 4		4.00	%		0.95	%		1.26	%		4.27	%

2004:	Quarter 1		4.00	%		0.95	%		1.20	%		3.86	%
	Quarter 2		4.00	%		1.33	%		2.09	%		4.62	%
	Quarter 3		4.75	%		1.70	%		2.16	%		4.12	%
	Quarter 4		5.25	%		2.22	%		2.75	%		4.24	%

2005:	Quarter 1		5.75	%		2.80	%		3.43	%		4.51	%
	Quarter 2		6.00	%		3.12	%		3.51	%		3.98	%
	Quarter 3		6.75	%		3.55	%		4.01	%		4.34	%
	Quarter 4		7.25	%		4.08	%		4.38	%		4.39	%

2006:	Quarter 1		7.75	%		4.63	%		4.82	%		4.86	%
	Quarter 2		8.25	%		5.01	%		5.21	%		5.15	%
	Quarter 3		8.25	%		4.88	%		4.91	%		4.64	%
	Quarter 4		8.25	%		5.02	%		5.00	%		4.71	%

2007:	Quarter 1		8.25	%		5.04	%		4.90	%		4.65	%
	Quarter 2		8.25	%		4.82	%		4.91	%		5.03	%
	Quarter 3		7.75	%		3.82	%		4.05	%		4.59	%
	Quarter 4		7.25	%		3.36	%		3.34	%		3.91	%

2008:	Quarter 1		5.25	%		1.38	%		1.55	%		3.45	%
	Quarter 2		5.00	%		1.90	%		2.36	%		3.99	%
	Quarter 3		5.00	%		0.92	%		1.78	%		3.85	%
	Quarter 4		3.25	%		0.11	%		0.37	%		2.25	%

2009:	Quarter 1		3.25	%		0.21	%		0.57	%		2.71	%
	Quarter 2		3.25	%		0.19	%		0.56	%		3.53	%
	Quarter 3		3.25	%		0.14	%		0.40	%		3.31	%
	Quarter 4		3.25	%		0.06	%		0.47	%		3.85	%

2010:	Quarter 1		3.25	%		0.16	%		0.41	%		3.84	%
	Quarter 2		3.25	%		0.18	%		0.32	%		2.97	%
	Quarter 3		3.25	%		0.16	%		0.27	%		2.53	%
	Quarter 4		3.25	%		0.12	%		0.29	%		3.30	%

2011:	Quarter 1		3.25	%		0.09	%		0.30	%		3.47	%
	Quarter 2		3.25	%		0.03	%		0.19	%		3.18	%
	September 2, 2011		3.25	%		0.02	%		0.10	%		2.02	%

(1) End of period data.

Source: SNL Financial, LC.

EXHIBIT II-3

1st Security Bank of Washington

Market Area Demographic/Economic Information

Demographic Summary: US

	Base 2000		Current 2010		Projected 2015		% Change 2000 - 2010			% Change 2010 - 2015
Total Population (actual)		281,421,906		311,212,863		323,209,391		10.59			3.85
0-14 Age Group (%)		21.41		20.08		20.13		3.73			4.12
15-34 Age Group (%)		28.10		27.22		26.97		7.13			2.89
35-54 Age Group (%)		29.43		28.03		26.02		5.33			(3.60	)
55-69 Age Group (%)		12.01		15.54		17.31		43.07			15.64
70+ Age Group (%)		9.05		9.12		9.57		11.52			8.98
Median Age (actual)		35.30		37.00		37.30		4.82			0.81

Female Population (actual)		143,368,343		158,066,879		164,008,125		10.25			3.76
Male Population (actual)		138,053,563		153,145,984		159,201,266		10.93			3.95

Population Density (#/ sq miles)		79.52		88.00		91.40		10.59			3.85

Diversity Index (actual)		54.60		61.00		63.40		11.72			3.93
Black (%)		12.32		12.47		12.47		11.95			3.92
Asian (%)		3.64		4.52		4.93		37.44			13.25
White (%)		75.14		71.93		70.71		5.86			2.10
Hispanic (%)		12.55		16.23		17.80		43.08			13.90
Pacific Islander (%)		0.14		0.16		0.16		26.20			2.93
American Indian/Alaska Native (%)		0.88		0.94		0.95		18.14			4.63
Multiple races (%)		2.43		2.99		3.22		36.35			11.72
Other (%)		5.46		6.99		7.55		41.57			12.29

Population 25+ w/ Education Attainment (actual)		182,211,639		205,370,648	NA			12.71		NA
< 9th Grade (%)		7.55		6.26	NA			(6.48	)	NA
Some High School (%)		12.05		8.49	NA			(20.61	)	NA
High School Graduate (%)		28.63		29.55	NA			16.35		NA
Some College (%)		21.05		19.91	NA			6.61		NA
Associate Degree (%)		6.32		7.75	NA			38.19		NA
Bachelors Degree (%)		15.54		17.67	NA			28.15		NA
Graduate Degree (%)		8.86		10.36	NA			31.85		NA

Total Households (actual)		105,480,101		116,761,140		121,359,604		10.69			3.94
< $25K Households (%)		28.67		20.78		17.21		(19.76	)		(13.94	)
$25-49K Households (%)		29.34		24.73		19.96		(6.70	)		(16.10	)
$50-99K Households (%)		29.70		35.65		38.10		32.90			11.08
$100-$199K Households (%)		9.92		15.35		20.29		71.27			37.39
$200K+ Households (%)		2.37		3.48		4.43		62.64			32.30

< 25K Disposable Inc. Households (%)	NA			25.14	NA		NA			NA
$25-49K Disposable Inc. Households (%)	NA			31.81	NA		NA			NA
$50-99K Disposable Inc. Households (%)	NA			32.05	NA		NA			NA
$100-199K Disposable Inc. Households (%)	NA			9.07	NA		NA			NA
$200K+ Disposable Inc. Households (%)	NA			1.92	NA		NA			NA

Average Household Income ($)		56,644		70,173		79,340		23.88			13.06
Median Household Income ($)		42,164		54,442		61,189		29.12			12.39
Per Capita Income ($)		21,587		26,739		30,241		23.87			13.10

< $35K Net Worth HHs (%)	NA			34.96	NA		NA			NA
$35-99K Net Worth HHs (%)	NA			16.38	NA		NA			NA
$100-249K Net Worth HHs (%)	NA			19.13	NA		NA			NA
$250-499K Net Worth HHs (%)	NA			12.97	NA		NA			NA
$500K+ Net Worth HHs (%)	NA			16.56	NA		NA			NA

Median Household Net Worth ($)	NA			93,084	NA		NA			NA
Average Household Net Worth ($)	NA			418,865	NA		NA			NA

Total Owner Occupied Housing Units (actual)		69,815,753		76,868,769		80,072,859		10.10			4.17
< $100K in Value HUs (%)		44.57		27.39		21.82		(32.34	)		(17.01	)
$100-199K in Value HUs (%)		35.18		34.48		31.82		7.91			(3.86	)
$200-299K in Value HUs (%)		11.17		17.08		18.53		68.27			13.06
$300-499K in Value HUs (%)		6.12		12.49		15.57		124.59			29.83
$500-749K in Value HUs (%)		1.71		5.07		6.11		226.81			25.56
$750-999K in Value HUs (%)		0.60		2.10		3.25		283.43			61.43
$1M+ in Value HUs (%)		0.64		1.39		2.89		140.29			115.95

Renter Occupied Housing Units (actual)		35,664,348		39,892,371		41,286,745		11.86			3.50
Vacant Occupied Housing Units (actual)		10,424,540		15,846,596		18,246,660		52.01			15.15

Unemployment Rate (%)		5.8		10.8		8.8		107.37			(15.44	)

Source: ESRI

Demographic data is provided by ESRI based primarily on US Census data. For non-census year data, ESRI uses samples and projections to estimate the demographic data. SNL performs calculations on the underlying data provided by ESRI for some of the data presented on this page.

Demographic Summary: Washington

	Base 2000		Current 2010		Projected 2015		% Change 2000 - 2010			% Change 2010 - 2015
Total Population (actual)		5,894,121		6,756,150		7,175,641		14.63			6.21
0-14 Age Group (%)		21.29		19.60		19.69		5.53			6.65
15-34 Age Group (%)		28.15		27.61		27.39		12.43			5.34
35-54 Age Group (%)		30.90		28.58		26.42		6.01			(1.80	)
55-69 Age Group (%)		11.41		15.89		17.57		59.53			17.48
70+ Age Group (%)		8.24		8.32		8.94		15.71			14.04
Median Age (actual)		35.30		37.10		37.30		5.10			0.54

Female Population (actual)		2,959,821		3,394,873		3,606,961		14.70			6.25
Male Population (actual)		2,934,300		3,361,277		3,568,680		14.55			6.17

Population Density (#/ sq miles)		88.57		101.50		107.80		14.63			6.21

Diversity Index (actual)		42.00		50.60		53.80		20.48			6.32
Black (%)		3.23		3.61		3.75		28.12			10.46
Asian (%)		5.47		6.92		7.68		45.00			17.94
White (%)		81.81		77.68		75.99		8.84			3.90
Hispanic (%)		7.49		10.61		11.91		62.41			19.23
Pacific Islander (%)		0.41		0.47		0.47		33.49			5.80
American Indian/Alaska Native (%)		1.58		1.66		1.65		20.26			5.58
Multiple races (%)		3.62		4.34		4.63		37.40			13.34
Other (%)		3.88		5.32		5.81		56.88			16.17

Population 25+ w/ Education Attainment (actual)		3,827,507		4,503,749	NA			17.67		NA
< 9th Grade (%)		4.32		4.25	NA			15.86		NA
Some High School (%)		8.60		6.37	NA			(12.83	)	NA
High School Graduate (%)		24.91		24.75	NA			16.90		NA
Some College (%)		26.41		24.03	NA			7.07		NA
Associate Degree (%)		8.03		9.83	NA			44.02		NA
Bachelors Degree (%)		18.41		19.83	NA			26.71		NA
Graduate Degree (%)		9.32		10.94	NA			38.17		NA

Total Households (actual)		2,271,398		2,611,662		2,777,964		14.98			6.37
< $25K Households (%)		24.73		17.52		13.69		(18.55	)		(16.90	)
$25-49K Households (%)		29.66		22.77		17.55		(11.76	)		(18.00	)
$50-99K Households (%)		33.05		39.20		38.77		36.39			5.21
$100-$199K Households (%)		10.39		17.39		25.74		92.37			57.48
$200K+ Households (%)		2.17		3.13		4.25		65.82			44.36

< 25K Disposable Inc. Households (%)	NA			20.46	NA		NA			NA
$25-49K Disposable Inc. Households (%)	NA			29.81	NA		NA			NA
$50-99K Disposable Inc. Households (%)	NA			36.81	NA		NA			NA
$100-199K Disposable Inc. Households (%)	NA			10.96	NA		NA			NA
$200K+ Disposable Inc. Households (%)	NA			1.96	NA		NA			NA

Average Household Income ($)		58,653		73,128		84,725		24.68			15.86
Median Household Income ($)		45,770		60,311		68,768		31.77			14.02
Per Capita Income ($)		22,973		28,691		33,252		24.89			15.90

< $35K Net Worth HHs (%)	NA			32.38	NA		NA			NA
$35-99K Net Worth HHs (%)	NA			15.34	NA		NA			NA
$100-249K Net Worth HHs (%)	NA			18.47	NA		NA			NA
$250-499K Net Worth HHs (%)	NA			15.11	NA		NA			NA
$500K+ Net Worth HHs (%)	NA			18.70	NA		NA			NA

Median Household Net Worth ($)	NA			112,030	NA		NA			NA
Average Household Net Worth ($)	NA			447,397	NA		NA			NA

Total Owner Occupied Housing Units (actual)		1,467,009		1,674,990		1,784,225		14.18			6.52
< $100K in Value HUs (%)		21.05		8.30		5.87		(55.01	)		(24.67	)
$100-199K in Value HUs (%)		45.69		24.97		16.22		(37.61	)		(30.81	)
$200-299K in Value HUs (%)		19.28		26.94		24.70		59.48			(2.32	)
$300-499K in Value HUs (%)		10.11		23.96		30.85		170.71			37.17
$500-749K in Value HUs (%)		2.43		10.56		10.75		396.74			8.44
$750-999K in Value HUs (%)		0.75		3.25		7.31		394.18			139.52
$1M+ in Value HUs (%)		0.69		2.03		4.30		237.39			125.73

Renter Occupied Housing Units (actual)		804,389		936,672		993,739		16.45			6.09
Vacant Occupied Housing Units (actual)		179,677		258,462		290,566		43.85			12.42

Unemployment Rate (%)		6.2		9.9		8.3		85.86			(12.37	)

Source: ESRI

% Change values are calculated using the underlying actual data.

Demographic Summary: Snohomish, WA

	Base 2000		Current 2010		Projected 2015		% Change 2000 - 2010			% Change 2010 - 2015
Total Population (actual)		606,024		712,514		757,883		17.57			6.37
0-14 Age Group (%)		22.90		21.16		21.26		8.64			6.87
15-34 Age Group (%)		27.66		26.97		26.91		14.64			6.15
35-54 Age Group (%)		32.62		30.51		28.15		9.96			(1.84	)
55-69 Age Group (%)		10.21		14.59		16.31		68.05			18.91
70+ Age Group (%)		6.61		6.77		7.36		20.40			15.63
Median Age (actual)		34.60		36.30		36.30		4.91			0.00

Female Population (actual)		302,815		357,116		380,586		17.93			6.57
Male Population (actual)		303,209		355,398		377,297		17.21			6.16

Population Density (#/ sq miles)		290.09		341.10		362.80		17.57			6.37

Diversity Index (actual)		32.90		45.30		49.20		37.69			8.61
Black (%)		1.67		2.55		2.87		79.31			19.79
Asian (%)		5.78		8.55		9.72		73.82			20.98
White (%)		85.63		79.55		77.44		9.23			3.55
Hispanic (%)		4.72		7.99		9.26		99.12			23.21
Pacific Islander (%)		0.28		0.37		0.37		55.13			5.03
American Indian/Alaska Native (%)		1.36		1.48		1.48		28.23			6.19
Multiple races (%)		3.36		4.35		4.69		52.24			14.75
Other (%)		1.92		3.15		3.43		93.17			15.77

Population 25+ w/ Education Attainment (actual)		388,997		468,863	NA			20.53		NA
< 9th Grade (%)		2.60		2.63	NA			22.23		NA
Some High School (%)		8.22		6.15	NA			(9.78	)	NA
High School Graduate (%)		25.91		26.45	NA			23.06		NA
Some College (%)		29.73		26.21	NA			6.28		NA
Associate Degree (%)		9.09		10.85	NA			43.74		NA
Bachelors Degree (%)		17.55		19.33	NA			32.79		NA
Graduate Degree (%)		6.90		8.37	NA			46.14		NA

Total Households (actual)		224,852		268,239		286,226		19.30			6.71
< $25K Households (%)		17.89		11.80		8.64		(21.30	)		(21.92	)
$25-49K Households (%)		28.13		19.25		13.72		(18.34	)		(23.96	)
$50-99K Households (%)		39.73		42.59		40.28		27.88			0.91
$100-$199K Households (%)		12.54		23.43		33.41		122.90			52.19
$200K+ Households (%)		1.72		2.93		3.95		103.66			44.11

< 25K Disposable Inc. Households (%)	NA			14.12	NA		NA			NA
$25-49K Disposable Inc. Households (%)	NA			27.98	NA			1,153.58		NA
$50-99K Disposable Inc. Households (%)	NA			42.41	NA		NA			NA
$100-199K Disposable Inc. Households (%)	NA			13.64	NA		NA			NA
$200K+ Disposable Inc. Households (%)	NA			1.85	NA		NA			NA

Average Household Income ($)		62,386		79,981		91,618		28.20			14.55
Median Household Income ($)		53,219		68,912		79,010		29.49			14.65
Per Capita Income ($)		23,417		30,372		34,880		29.70			14.84

< $35K Net Worth HHs (%)	NA			25.83	NA		NA			NA
$35-99K Net Worth HHs (%)	NA			15.17	NA		NA			NA
$100-249K Net Worth HHs (%)	NA			19.76	NA		NA			NA
$250-499K Net Worth HHs (%)	NA			18.16	NA		NA			NA
$500K+ Net Worth HHs (%)	NA			21.08	NA		NA			NA

Median Household Net Worth ($)	NA			156,028	NA		NA			NA
Average Household Net Worth ($)	NA			487,194	NA		NA			NA

Total Owner Occupied Housing Units (actual)		152,382		180,654		193,143		18.55			6.91
< $100K in Value HUs (%)		9.12		6.62		5.09		(13.89	)		(17.78	)
$100-199K in Value HUs (%)		48.02		11.54		7.28		(71.51	)		(32.59	)
$200-299K in Value HUs (%)		29.57		29.54		18.56		18.43			(32.81	)
$300-499K in Value HUs (%)		10.88		36.56		45.81		298.58			33.95
$500-749K in Value HUs (%)		1.74		11.74		12.85		698.87			17.01
$750-999K in Value HUs (%)		0.34		2.70		7.40		836.66			192.77
$1M+ in Value HUs (%)		0.34		1.29		3.01		353.29			148.82

Renter Occupied Housing Units (actual)		72,470		87,585		93,083		20.86			6.28
Vacant Occupied Housing Units (actual)		11,353		18,045		23,607		58.94			30.82

Unemployment Rate (%)		5.0		8.9		7.5		112.57			(12.28	)

Source: ESRI

% Change values are calculated using the underlying actual data.

Demographic Summary: King, WA

	Base 2000		Current 2010		Projected 2015		% Change 2000 - 2010			% Change 2010 - 2015
Total Population (actual)		1,737,034		1,936,894		2,053,695		11.51			6.03
0-14 Age Group (%)		18.79		17.68		17.66		4.90			5.89
15-34 Age Group (%)		29.90		28.24		28.41		5.33			6.66
35-54 Age Group (%)		32.70		30.85		28.40		5.20			(2.38	)
55-69 Age Group (%)		10.81		15.35		17.02		58.38			17.54
70+ Age Group (%)		7.80		7.88		8.51		12.55			14.61
Median Age (actual)		35.70		37.80		37.90		5.88			0.26

Female Population (actual)		872,577		972,845		1,031,604		11.49			6.04
Male Population (actual)		864,457		964,049		1,022,091		11.52			6.02

Population Density (#/ sq miles)		817.04		911.00		966.00		11.51			6.03

Diversity Index (actual)		47.30		56.40		59.90		19.24			6.21
Black (%)		5.40		6.01		6.23		23.90			10.03
Asian (%)		10.81		13.88		15.58		43.15			19.03
White (%)		75.73		70.05		67.44		3.14			2.07
Hispanic (%)		5.48		8.23		9.39		67.44			20.96
Pacific Islander (%)		0.52		0.61		0.61		31.98			6.17
American Indian/Alaska Native (%)		0.92		0.93		0.92		12.85			4.73
Multiple races (%)		4.06		4.80		5.11		31.79			13.05
Other (%)		2.56		3.73		4.11		62.35			16.88

Population 25+ w/ Education Attainment (actual)		1,188,740		1,341,522	NA			12.85		NA
< 9th Grade (%)		3.42		3.44	NA			13.31		NA
Some High School (%)		6.31		4.70	NA			(15.94	)	NA
High School Graduate (%)		19.17		18.26	NA			7.48		NA
Some College (%)		23.62		20.83	NA			(0.48	)	NA
Associate Degree (%)		7.51		8.43	NA			26.61		NA
Bachelors Degree (%)		26.62		28.24	NA			19.70		NA
Graduate Degree (%)		13.33		16.10	NA			36.29		NA

Total Households (actual)		710,916		797,056		846,777		12.12			6.24
< $25K Households (%)		19.98		13.55		9.67		(23.99	)		(24.14	)
$25-49K Households (%)		26.51		17.15		11.96		(27.46	)		(25.91	)
$50-99K Households (%)		34.79		38.26		35.11		23.29			(2.51	)
$100-$199K Households (%)		14.92		24.57		34.73		84.64			50.18
$200K+ Households (%)		3.81		6.48		8.53		90.89			39.89

< 25K Disposable Inc. Households (%)	NA			15.84	NA		NA			NA
$25-49K Disposable Inc. Households (%)	NA			23.11	NA			742.10		NA
$50-99K Disposable Inc. Households (%)	NA			40.14	NA		NA			NA
$100-199K Disposable Inc. Households (%)	NA			16.92	NA		NA			NA
$200K+ Disposable Inc. Households (%)	NA			3.99	NA		NA			NA

Average Household Income ($)		71,101		92,740		108,808		30.43			17.33
Median Household Income ($)		53,383		75,693		88,138		41.79			16.44
Per Capita Income ($)		29,521		38,562		45,291		30.63			17.45

< $35K Net Worth HHs (%)	NA			29.64	NA		NA			NA
$35-99K Net Worth HHs (%)	NA			14.32	NA		NA			NA
$100-249K Net Worth HHs (%)	NA			15.72	NA		NA			NA
$250-499K Net Worth HHs (%)	NA			14.26	NA		NA			NA
$500K+ Net Worth HHs (%)	NA			26.07	NA		NA			NA

Median Household Net Worth ($)	NA			144,117	NA		NA			NA
Average Household Net Worth ($)	NA			633,686	NA		NA			NA

Total Owner Occupied Housing Units (actual)		425,436		471,278		500,866		10.78			6.28
< $100K in Value HUs (%)		6.74		4.23		3.07		(30.45	)		(22.95	)
$100-199K in Value HUs (%)		34.39		11.65		6.56		(62.46	)		(40.15	)
$200-299K in Value HUs (%)		30.08		22.31		15.81		(17.86	)		(24.68	)
$300-499K in Value HUs (%)		20.00		32.38		34.80		79.37			14.21
$500-749K in Value HUs (%)		5.49		18.93		17.92		282.29			0.62
$750-999K in Value HUs (%)		1.78		6.02		13.14		274.21			131.81
$1M+ in Value HUs (%)		1.52		4.47		8.70		226.32			106.73

Renter Occupied Housing Units (actual)		285,480		325,778		345,911		14.12			6.18
Vacant Occupied Housing Units (actual)		31,321		58,439		61,667		86.58			5.52

Unemployment Rate (%)		4.5		7.7		6.5		95.25			(12.49	)

Source: ESRI

% Change values are calculated using the underlying actual data.

Demographic Summary: Pierce, WA

	Base 2000		Current 2010		Projected 2015		% Change 2000 - 2010			% Change 2010 - 2015
Total Population (actual)		700,820		812,577		860,874		15.95			5.94
0-14 Age Group (%)		22.65		20.61		20.80		5.51			6.90
15-34 Age Group (%)		28.76		28.58		28.28		15.24			4.80
35-54 Age Group (%)		30.39		28.35		26.16		8.16			(2.23	)
55-69 Age Group (%)		10.87		14.86		16.62		58.50			18.48
70+ Age Group (%)		7.33		7.60		8.15		20.18			13.62
Median Age (actual)		34.10		35.60		35.70		4.40			0.28

Female Population (actual)		352,263		409,045		433,658		16.12			6.02
Male Population (actual)		348,557		403,532		427,216		15.77			5.87

Population Density (#/ sq miles)		417.43		484.00		512.80		15.95			5.94

Diversity Index (actual)		44.30		51.30		53.90		15.80			5.07
Black (%)		6.95		7.02		7.00		17.10			5.61
Asian (%)		5.08		5.90		6.34		34.82			13.70
White (%)		78.39		75.33		74.17		11.43			4.31
Hispanic (%)		5.51		8.44		9.70		77.54			21.73
Pacific Islander (%)		0.85		0.95		0.95		30.21			6.28
American Indian/Alaska Native (%)		1.42		1.53		1.56		24.90			7.76
Multiple races (%)		5.11		6.01		6.40		36.32			12.77
Other (%)		2.20		3.25		3.58		71.21			16.92

Population 25+ w/ Education Attainment (actual)		442,665		528,814	NA			19.46		NA
< 9th Grade (%)		3.36		3.05	NA			8.38		NA
Some High School (%)		9.77		7.04	NA			(13.94	)	NA
High School Graduate (%)		29.78		30.12	NA			20.84		NA
Some College (%)		28.42		25.99	NA			9.25		NA
Associate Degree (%)		8.08		10.56	NA			56.26		NA
Bachelors Degree (%)		13.68		15.35	NA			34.07		NA
Graduate Degree (%)		6.92		7.89	NA			36.21		NA

Total Households (actual)		260,800		304,467		323,465		16.74			6.24
< $25K Households (%)		24.19		17.28		13.52		(16.59	)		(16.90	)
$25-49K Households (%)		30.99		23.91		18.06		(9.94	)		(19.73	)
$50-99K Households (%)		34.39		41.92		42.77		42.31			8.39
$100-$199K Households (%)		8.90		15.28		23.34		100.45			62.33
$200K+ Households (%)		1.53		1.61		2.31		22.91			51.81

< 25K Disposable Inc. Households (%)	NA			19.99	NA		NA			NA
$25-49K Disposable Inc. Households (%)	NA			32.28	NA			1,659.74		NA
$50-99K Disposable Inc. Households (%)	NA			37.81	NA		NA			NA
$100-199K Disposable Inc. Households (%)	NA			8.88	NA		NA			NA
$200K+ Disposable Inc. Households (%)	NA			1.02	NA		NA			NA

Average Household Income ($)		54,972		66,677		76,622		21.29			14.92
Median Household Income ($)		45,197		57,879		65,288		28.06			12.80
Per Capita Income ($)		20,948		25,542		29,389		21.93			15.06

< $35K Net Worth HHs (%)	NA			33.95	NA		NA			NA
$35-99K Net Worth HHs (%)	NA			15.86	NA		NA			NA
$100-249K Net Worth HHs (%)	NA			19.03	NA		NA			NA
$250-499K Net Worth HHs (%)	NA			15.59	NA		NA			NA
$500K+ Net Worth HHs (%)	NA			15.57	NA		NA			NA

Median Household Net Worth ($)	NA			100,911	NA		NA			NA
Average Household Net Worth ($)	NA			367,197	NA		NA			NA

Total Owner Occupied Housing Units (actual)		165,598		192,241		204,923		16.09			6.60
< $100K in Value HUs (%)		20.31		7.85		5.68		(55.10	)		(22.98	)
$100-199K in Value HUs (%)		58.26		28.31		16.19		(43.59	)		(39.05	)
$200-299K in Value HUs (%)		13.72		33.99		31.91		187.59			0.05
$300-499K in Value HUs (%)		6.03		20.10		31.26		286.95			65.79
$500-749K in Value HUs (%)		1.11		6.60		7.42		593.06			19.92
$750-999K in Value HUs (%)		0.22		2.19		5.19		1,047.81			152.96
$1M+ in Value HUs (%)		0.36		0.96		2.37		213.56			162.16

Renter Occupied Housing Units (actual)		95,202		112,226		118,542		17.88			5.63
Vacant Occupied Housing Units (actual)		16,260		26,072		31,536		60.34			20.96

Unemployment Rate (%)		6.5		12.0		10.1		113.24			(12.84	)

Source: ESRI

% Change values are calculated using the underlying actual data.

Demographic Summary: Kitsap, WA

	Base 2000		Current 2010		Projected 2015		% Change 2000 - 2010			% Change 2010 - 2015
Total Population (actual)		231,969		247,319		251,360		6.62			1.63
0-14 Age Group (%)		22.07		19.34		19.35		(6.60	)		1.71
15-34 Age Group (%)		26.77		27.38		27.44		9.04			1.85
35-54 Age Group (%)		31.99		27.94		25.36		(6.88	)		(7.74	)
55-69 Age Group (%)		11.40		17.03		18.59		59.27			10.97
70+ Age Group (%)		7.77		8.32		9.26		14.15			13.09
Median Age (actual)		35.70		37.70		37.60		5.60			(0.27	)

Female Population (actual)		114,459		122,447		124,492		6.98			1.67
Male Population (actual)		117,510		124,872		126,868		6.26			1.60

Population Density (#/ sq miles)		585.78		624.60		634.80		6.62			1.63

Diversity Index (actual)		34.30		37.90		39.70		10.50			4.75
Black (%)		2.87		2.74		2.67		1.90			(1.08	)
Asian (%)		4.39		4.78		4.97		15.89			5.72
White (%)		84.27		82.94		82.25		4.94			0.78
Hispanic (%)		4.14		5.34		5.99		37.55			13.97
Pacific Islander (%)		0.78		0.78		0.78		6.70			1.35
American Indian/Alaska Native (%)		1.62		1.66		1.68		9.49			2.28
Multiple races (%)		4.64		5.31		5.66		21.90			8.41
Other (%)		1.43		1.79		2.00		33.54			13.74

Population 25+ w/ Education Attainment (actual)		148,704		164,369	NA			10.53		NA
< 9th Grade (%)		2.18		2.23	NA			12.95		NA
Some High School (%)		7.05		5.38	NA			(15.67	)	NA
High School Graduate (%)		25.42		24.55	NA			6.75		NA
Some College (%)		30.97		28.08	NA			0.24		NA
Associate Degree (%)		9.05		11.36	NA			38.80		NA
Bachelors Degree (%)		17.00		18.32	NA			19.11		NA
Graduate Degree (%)		8.33		10.08	NA			33.71		NA

Total Households (actual)		86,416		93,321		95,148		7.99			1.96
< $25K Households (%)		22.50		16.09		12.49		(22.79	)		(20.82	)
$25-49K Households (%)		31.01		24.21		18.19		(15.68	)		(23.38	)
$50-99K Households (%)		34.86		41.72		42.17		29.22			3.07
$100-$199K Households (%)		9.82		16.11		24.47		77.10			54.86
$200K+ Households (%)		1.81		1.88		2.68		12.02			45.32

< 25K Disposable Inc. Households (%)	NA			19.05	NA		NA			NA
$25-49K Disposable Inc. Households (%)	NA			32.69	NA			1,715.80		NA
$50-99K Disposable Inc. Households (%)	NA			37.48	NA		NA			NA
$100-199K Disposable Inc. Households (%)	NA			9.60	NA		NA			NA
$200K+ Disposable Inc. Households (%)	NA			1.18	NA		NA			NA

Average Household Income ($)		57,892		68,589		79,076		18.48			15.29
Median Household Income ($)		46,848		60,066		66,635		28.21			10.94
Per Capita Income ($)		22,317		26,450		30,570		18.52			15.58

< $35K Net Worth HHs (%)	NA			31.08	NA		NA			NA
$35-99K Net Worth HHs (%)	NA			15.11	NA		NA			NA
$100-249K Net Worth HHs (%)	NA			19.52	NA		NA			NA
$250-499K Net Worth HHs (%)	NA			16.01	NA		NA			NA
$500K+ Net Worth HHs (%)	NA			18.28	NA		NA			NA

Median Household Net Worth ($)	NA			120,365	NA		NA			NA
Average Household Net Worth ($)	NA			409,989	NA		NA			NA

Total Owner Occupied Housing Units (actual)		58,279		62,483		63,813		7.21			2.13
< $100K in Value HUs (%)		20.76		6.26		4.03		(67.66	)		(34.27	)
$100-199K in Value HUs (%)		52.21		28.58		15.61		(41.31	)		(44.22	)
$200-299K in Value HUs (%)		14.88		29.83		27.06		114.88			(7.37	)
$300-499K in Value HUs (%)		8.87		19.25		30.20		132.71			60.20
$500-749K in Value HUs (%)		2.23		10.05		10.08		383.15			2.40
$750-999K in Value HUs (%)		0.71		4.18		8.00		534.47			95.33
$1M+ in Value HUs (%)		0.33		1.84		5.02		491.75			179.27

Renter Occupied Housing Units (actual)		28,137		30,838		31,335		9.60			1.61
Vacant Occupied Housing Units (actual)		6,228		9,126		11,223		46.53			22.98

Unemployment Rate (%)		6.0		9.1		7.6		78.11			(16.21	)

Source: ESRI

% Change values are calculated using the underlying actual data.

EXHIBIT II-4

1st Security Bank of Washington
Market Area Employment Data by Sector

CA25N Total full-time and part-time employment by NAICS industry 1/
Bureau of Economic Analysis

Fips	Area	LineCode	Description	2006		2007		2008		2009
53000	Washington		Employment by place of work (number of jobs)
53000	Washington	10	Total employment		3796256		3924717		3957397		3826315
53000	Washington		By type
53000	Washington	20	Wage and salary employment		3080441		3154787		3190631		3053450
53000	Washington	40	Proprietors employment		715815		769930		766766		772865
53000	Washington	50	Farm proprietors employment		30089		34673		34699		34522
53000	Washington	60	Nonfarm proprietors employment 2/		685726		735257		732067		738343
53000	Washington		By industry
53000	Washington	70	Farm employment		73585		74835		81862		85042
53000	Washington	80	Nonfarm employment		3722671		3849882		3875535		3741273
53000	Washington	90	Private employment		3117932		3240026		3249059		3110993
53000	Washington	100	Forestry, fishing, and related activities		38057		37946		37471		37867
53000	Washington	200	Mining		6080		6541		7174		7962
53000	Washington	300	Utilities		5035		5116		5521		5699
53000	Washington	400	Construction		263070		279311		268459		223603
53000	Washington	500	Manufacturing		300974		310531		307369		280888
53000	Washington	600	Wholesale trade		138603		142365		143533		136087
53000	Washington	700	Retail trade		403892		407545		402933		382284
53000	Washington	800	Transportation and warehousing		112540		116622		115478		109355
53000	Washington	900	Information		108853		113462		116527		114740
53000	Washington	1000	Finance and insurance		149727		156044		160405		163586
53000	Washington	1100	Real estate and rental and leasing		174634		185403		183176		179197
53000	Washington	1200	Professional, scientific, and technical services		247353		270712		280267		274503
53000	Washington	1300	Management of companies and enterprises		34964		36030		36167		33644
53000	Washington	1400	Administrative and waste management services		195377		202261		195836		179429
53000	Washington	1500	Educational services		63537		64480		67039		67569
53000	Washington	1600	Health care and social assistance		349308		361738		373702		383507
53000	Washington	1700	Arts, entertainment, and recreation		84657		88787		91679		91311
53000	Washington	1800	Accommodation and food services		245227		252948		254747		242668
53000	Washington	1900	Other services, except public administration		196044		202184		201576		197094
53000	Washington	2000	Government and government enterprises		604739		609856		626476		630280
53000	Washington	2001	Federal, civilian		69335		68733		70075		72866
53000	Washington	2002	Military		77001		77285		81110		81107
53000	Washington	2010	State and local		458403		463838		475291		476307
53000	Washington	2011	State government		146217		147837		151634		151380
53000	Washington	2012	Local government		312186		316001		323657		324927


Legend / Footnotes:
1/ The estimates of employment for 2001-2006 are based on the 2002 North American Industry Classification System (NAICS). The estimates for 2007 forward are based on the 2007 NAICS.
2/ Excludes limited partners.
Last updated: April 21, 2011

CA25N Total full-time and part-time employment by NAICS industry 1/
Bureau of Economic Analysis

Fips	Area	LineCode	Description	2006		2007		2008		2009
53061	Snohomish		Employment by place of work (number of jobs)
53061	Snohomish	10	Total employment		316283		339900		340272		326310
53061	Snohomish		By type
53061	Snohomish	20	Wage and salary employment		257541		276537		277421		263179
53061	Snohomish	40	Proprietors employment		58742		63363		62851		63131
53061	Snohomish	50	Farm proprietors employment		1326		1526		1518		1511
53061	Snohomish	60	Nonfarm proprietors employment 2/		57416		61837		61333		61620
53061	Snohomish		By industry
53061	Snohomish	70	Farm employment		1996		2118		2147		2139
53061	Snohomish	80	Nonfarm employment		314287		337782		338125		324171
53061	Snohomish	90	Private employment		270045		293465		292590		278029
53061	Snohomish	100	Forestry, fishing, and related activities		1374		1297		1301		1194
53061	Snohomish	200	Mining		391		440		488		568
53061	Snohomish	300	Utilities		129		156		170		163
53061	Snohomish	400	Construction		28680		32168		29581		24271
53061	Snohomish	500	Manufacturing		51507		56424		57783		55002
53061	Snohomish	600	Wholesale trade		8856		9804		9706		9531
53061	Snohomish	700	Retail trade		37703		39512		39827		37189
53061	Snohomish	800	Transportation and warehousing		5192		5697		5584		5369
53061	Snohomish	900	Information		5889		6647		6247		5708
53061	Snohomish	1000	Finance and insurance		13047		13852		13937		13991
53061	Snohomish	1100	Real estate and rental and leasing		13955		15011		14696		14310
53061	Snohomish	1200	Professional, scientific, and technical services		15100		17298		17740		17319
53061	Snohomish	1300	Management of companies and enterprises		1532		1673		1673		1681
53061	Snohomish	1400	Administrative and waste management services		15498		17728		16777		15199
53061	Snohomish	1500	Educational services		3682		3816		3762		4008
53061	Snohomish	1600	Health care and social assistance		24913		26673		27833		28548
53061	Snohomish	1700	Arts, entertainment, and recreation		6279		6800		7140		7188
53061	Snohomish	1800	Accommodation and food services		19854		21184		21051		19900
53061	Snohomish	1900	Other services, except public administration		16464		17285		17294		16890
53061	Snohomish	2000	Government and government enterprises		44242		44317		45535		46142
53061	Snohomish	2001	Federal, civilian		2344		2338		2322		2348
53061	Snohomish	2002	Military		7359		7098		6894		6750
53061	Snohomish	2010	State and local		34539		34881		36319		37044
53061	Snohomish	2011	State government		5398		5315		5530		5551
53061	Snohomish	2012	Local government		29141		29566		30789		31493


Legend / Footnotes:
1/ The estimates of employment for 2001-2006 are based on the 2002 North American Industry Classification System (NAICS). The estimates for 2007 forward are based on the 2007 NAICS.
2/ Excludes limited partners.
Last updated: April 21, 2011

CA25N Total full-time and part-time employment by NAICS industry 1/
Bureau of Economic Analysis

Fips	Area	LineCode	Description	2006		2007		2008		2009
53033	King		Employment by place of work (number of jobs)
53033	King	10	Total employment		1480374		1524600		1542584		1479629
53033	King		By type
53033	King	20	Wage and salary employment		1222588		1246921		1265008		1198521
53033	King	40	Proprietors employment		257786		277679		277576		281108
53033	King	50	Farm proprietors employment		1377		1603		1599		1591
53033	King	60	Nonfarm proprietors employment 2/		256409		276076		275977		279517
53033	King		By industry
53033	King	70	Farm employment		2055		2264		2422		2429
53033	King	80	Nonfarm employment		1478319		1522336		1540162		1477200
53033	King	90	Private employment		1307729		1350558		1364775		1300849
53033	King	100	Forestry, fishing, and related activities		3498		3474		3542		3427
53033	King	200	Mining		1416		1657		1860		2251
53033	King	300	Utilities		1019		839		961		1038
53033	King	400	Construction		89082		94642		93131		75334
53033	King	500	Manufacturing		118858		121609		119401		110054
53033	King	600	Wholesale trade		68513		69796		70925		66363
53033	King	700	Retail trade		137905		135374		134582		127455
53033	King	800	Transportation and warehousing		54126		55835		55076		51468
53033	King	900	Information		77784		81468		85516		85621
53033	King	1000	Finance and insurance		71803		73403		74890		74770
53033	King	1100	Real estate and rental and leasing		77447		80477		80005		78019
53033	King	1200	Professional, scientific, and technical services		135546		147214		153919		148128
53033	King	1300	Management of companies and enterprises		25131		25835		25795		23887
53033	King	1400	Administrative and waste management services		88624		91905		89310		79007
53033	King	1500	Educational services		29753		30160		31678		31723
53033	King	1600	Health care and social assistance		123886		127074		131689		135704
53033	King	1700	Arts, entertainment, and recreation		38982		41022		42394		42167
53033	King	1800	Accommodation and food services		94075		96615		97481		93251
53033	King	1900	Other services, except public administration		70281		72159		72620		71182
53033	King	2000	Government and government enterprises		170590		171778		175387		176351
53033	King	2001	Federal, civilian		21394		21356		21627		22136
53033	King	2002	Military		7110		6989		7293		7440
53033	King	2010	State and local		142086		143433		146467		146775
53033	King	2011	State government		55592		55866		56929		57378
53033	King	2012	Local government		86494		87567		89538		89397


Legend / Footnotes:
1/ The estimates of employment for 2001-2006 are based on the 2002 North American Industry Classification System (NAICS). The estimates for 2007 forward are based on the 2007 NAICS.
2/ Excludes limited partners.
Last updated: April 21, 2011

CA25N Total full-time and part-time employment by NAICS industry 1/
Bureau of Economic Analysis

Fips	Area	LineCode	Description	2006		2007		2008		2009
53053	Pierce		Employment by place of work (number of jobs)
53053	Pierce	10	Total employment		374825		391072		393176		382995
53053	Pierce		By type
53053	Pierce	20	Wage and salary employment		310724		322578		325121		314495
53053	Pierce	40	Proprietors employment		64101		68494		68055		68500
53053	Pierce	50	Farm proprietors employment		1182		1336		1334		1328
53053	Pierce	60	Nonfarm proprietors employment 2/		62919		67158		66721		67172
53053	Pierce		By industry
53053	Pierce	70	Farm employment		1802		1866		1862		1877
53053	Pierce	80	Nonfarm employment		373023		389206		391314		381118
53053	Pierce	90	Private employment		288255		302560		299266		286061
53053	Pierce	100	Forestry, fishing, and related activities		1120		1033		1031		1008
53053	Pierce	200	Mining		374		440		469		513
53053	Pierce	300	Utilities		693		741		808		847
53053	Pierce	400	Construction		30161		32907		30641		25755
53053	Pierce	500	Manufacturing		20497		20658		19909		16906
53053	Pierce	600	Wholesale trade		12000		12882		12913		12417
53053	Pierce	700	Retail trade		41064		42819		41771		39561
53053	Pierce	800	Transportation and warehousing		13094		13255		12900		12342
53053	Pierce	900	Information		4288		4263		4215		3828
53053	Pierce	1000	Finance and insurance		13047		14045		14576		15106
53053	Pierce	1100	Real estate and rental and leasing		17300		18738		18320		18299
53053	Pierce	1200	Professional, scientific, and technical services		15564		16831		16960		17001
53053	Pierce	1300	Management of companies and enterprises		1254		1281		1480		1265
53053	Pierce	1400	Administrative and waste management services		19218		20262		19320		18215
53053	Pierce	1500	Educational services		6883		6953		7016		6992
53053	Pierce	1600	Health care and social assistance		39081		40717		41808		43105
53053	Pierce	1700	Arts, entertainment, and recreation		6859		7126		7374		7370
53053	Pierce	1800	Accommodation and food services		24230		25147		25355		23794
53053	Pierce	1900	Other services, except public administration		21528		22462		22400		21737
53053	Pierce	2000	Government and government enterprises		84768		86646		92048		95057
53053	Pierce	2001	Federal, civilian		10534		10288		10824		11748
53053	Pierce	2002	Military		29551		31091		34489		36606
53053	Pierce	2010	State and local		44683		45267		46735		46703
53053	Pierce	2011	State government		11636		11856		12291		12093
53053	Pierce	2012	Local government		33047		33411		34444		34610


Legend / Footnotes:
1/ The estimates of employment for 2001-2006 are based on the 2002 North American Industry Classification System (NAICS). The estimates for 2007 forward are based on the 2007 NAICS.
2/ Excludes limited partners.
Last updated: April 21, 2011

CA25N Total full-time and part-time employment by NAICS industry 1/
Bureau of Economic Analysis

Fips	Area	LineCode	Description	2006		2007		2008		2009
53035	Kitsap		Employment by place of work (number of jobs)
53035	Kitsap	10	Total employment		127200		128084		128551		124816
53035	Kitsap		By type
53035	Kitsap	20	Wage and salary employment		101873		101206		101837		97957
53035	Kitsap	40	Proprietors employment		25327		26878		26714		26859
53035	Kitsap	50	Farm proprietors employment		528		615		613		610
53035	Kitsap	60	Nonfarm proprietors employment 2/		24799		26263		26101		26249
53035	Kitsap		By industry
53035	Kitsap	70	Farm employment		598		669		671		672
53035	Kitsap	80	Nonfarm employment		126602		127415		127880		124144
53035	Kitsap	90	Private employment		86318		87639		87302		83956
53035	Kitsap	100	Forestry, fishing, and related activities		471		469		472		461
53035	Kitsap	200	Mining		150		181		186		236
53035	Kitsap	300	Utilities		159		177		216		224
53035	Kitsap	400	Construction		8034		8485		8056		6678
53035	Kitsap	500	Manufacturing		2267		2019		2022		1982
53035	Kitsap	600	Wholesale trade		2008		1927		1943		1749
53035	Kitsap	700	Retail trade		15589		15352		15320		14375
53035	Kitsap	800	Transportation and warehousing		1379		1408		1465		1440
53035	Kitsap	900	Information		1944		1881		1843		1694
53035	Kitsap	1000	Finance and insurance		3551		3750		3826		3853
53035	Kitsap	1100	Real estate and rental and leasing		5777		6052		5947		5829
53035	Kitsap	1200	Professional, scientific, and technical services		7559		8169		8231		8497
53035	Kitsap	1300	Management of companies and enterprises		212		225		207		176
53035	Kitsap	1400	Administrative and waste management services		5837		5498		5263		4858
53035	Kitsap	1500	Educational services		1760		1748		1840		1827
53035	Kitsap	1600	Health care and social assistance		12396		12927		13210		13462
53035	Kitsap	1700	Arts, entertainment, and recreation		2938		3094		3130		3074
53035	Kitsap	1800	Accommodation and food services		7666		7506		7499		7133
53035	Kitsap	1900	Other services, except public administration		6621		6771		6626		6408
53035	Kitsap	2000	Government and government enterprises		40284		39776		40578		40188
53035	Kitsap	2001	Federal, civilian		15036		14772		14958		15563
53035	Kitsap	2002	Military		11742		11496		12196		11232
53035	Kitsap	2010	State and local		13506		13508		13424		13393
53035	Kitsap	2011	State government		2282		2240		2293		2295
53035	Kitsap	2012	Local government		11224		11268		11131		11098


Legend / Footnotes:
1/ The estimates of employment for 2001-2006 are based on the 2002 North American Industry Classification System (NAICS). The estimates for 2007 forward are based on the 2007 NAICS.
2/ Excludes limited partners.
Last updated: April 21, 2011

EXHIBIT III-1
1st Security Bank of Washington
General Characteristics of Publicly-Traded Institutions

RP FINANCIAL, LC.
Financial Services Industry Consultants
1100 North Glebe Road, Suite 1100
Arlington, Virginia 22201
(703) 528-1700

Exhibit III-l

Characteristics of Publicly-Traded Thrifts

September 2, 2011

			Primary	Operating	Total					Fiscal		Conv.		Stock		Market
Ticker	Financial Institution	Exchg.	Market	Strat (1)	Assets (2)			Offices		Year		Date		Price		Value
					($Mil)									($)		($Mil)

California Companies

BOFI	Bofi Holding, Inc. Of CA (3)	NASDAQ	San Diego, CA	Thrift		1,940			1		06-30		03/05		14.08		147
PROV	Provident Fin. Holdings of CA (3)	NASDAQ	Riverside, CA	M.B.		1,315			14		06-30		06/96		8.25		94
KFFG	Kaiser Federal Fin Group of CA (3)	NASDAQ	Covina, CA	Thrift		902	M		9		06-30		11/10		11.91		114
FPTB	First PacTrust Bancorp of CA (3)	NASDAQ	Chula Vista, CA	Thrift		882			9		12-31		08/02		11.37		131
BYFC	Broadway Financial Corp. of CA (3)	NASDAQ	Los Angeles, CA	Thrift		447			5		12-31		01/96		1.48		3

Florida Companies

BKU	BankUnited, Inc. (3)	NYSE		Thrift		10,846			0				/		22.97		2,234
BBX	BankAtlantic Bancorp Inc of FL (3)	NYSE	FortLauderdaleFL	M.B.		3,864			101		12-31		11/83		0.77		60

Mid-Atlantic Companies

HCBK	Hudson City Bancorp, Inc of NJ (3)	NASDAQ	Paramus, NJ	Thrift		51,781			135		12-31		06/05		5.77		3,039
NYB	New York Community Bcrp of NY (3)	NYSE	Westbury, NY	Thrift		40,601			281		12-31		11/93		12.07		5,280
AF	Astoria Financial Corp. of NY (3)	NYSE	Lake Success, NY	Thrift		17,120			85		12-31		11/93		9.16		902
ISBC	Investors Bcrp MHC of NJ(43.0)	NASDAQ	Short Hills, NJ	Thrift		10,206			83		06-30		10/05		13.20		1,488
NWBI	Northwest Bancshares Inc of PA (3)	NASDAQ	Warren, PA	Thrift		8,088			172		06-30		12/09		11.23		1,160
PFS	Provident Fin. Serv. Inc of NJ (3)	NYSE	Jersey City, NJ	Thrift		6,794	M		83		12-31		01/03		11.44		687
BNCL	Beneficial Mut MHC of PA(43.7)	NASDAQ	Philadelphia, PA	Thrift		4,712			65		12-31		07/07		7.26		586
FFIC	Flushing Fin. Corp. of NY (3)	NASDAQ	Lake Success, NY	Thrift		4,323			19		12-31		11/95		10.61		334
WSFS	WSFS Financial Corp. of DE (3)	NASDAQ	Wilmington, DE	Div.		4,152			38		12-31		11/86		33.62		289
DCOM	Dime Community Bancshars of NY (3)	NASDAQ	Brooklyn, NY	Thrift		4,093			25		12-31		06/96		11.00		385
TRST	TrustCo Bank Corp NY of NY (3)	NASDAQ	Glenville, NY	Thrift		4,070			133		12-31		/		4.37		338
PBNY	Provident NY Bncrp, Inc. of NY (3)	NASDAQ	Montebello, NY	Thrift		2,976			37		09-30		01/04		6.03		229
KRNY	Kearny Fin Cp MHC of NJ (25.1)	NASDAQ	Fairfield, NJ	Thrift		2,904			40		06-30		02/05		8.20		556
ORIT	Oritani Financial Corp of NJ (3)	NASDAQ	Twnship of WA NJ	Thrift		2,587			23		06-30		06/10		12.01		667
NFBK	Northfield Bcp MHC of NY(43.4)	NASDAQ	Avenel, NY	Thrift		2,308			19		12-31		11/07		12.15		515
OCFC	OceanFirst Fin. Corp of NJ (3)	NASDAQ	Toms River, NJ	Thrift		2,239			23		12-31		07/96		11.25		212
ESBF	ESB Financial Corp. of PA (3)	NASDAQ	Ellwood City, PA	Thrift		1,968			24		12-31		06/90		10.77		160
ROMA	Roma Fin Corp MHC of NJ (26.2)	NASDAQ	Robbinsville, NJ	Thrift		1,892			27		12-31		07/06		8.19		248
PVSA	Parkvale Financial Corp of PA (3)	NASDAQ	Monroeville, PA	Thrift		1,801	M		47		06-30		07/87		17.80		99
ABBC	Abington Bancorp, Inc. of PA (3)	NASDAQ	Jenkintown, PA	Thrift		1,177			20		12-31		06/07		7.86		159
CSBK	Clifton Svg Bp MHC of NJ(35.8)	NASDAQ	Clifton, NJ	Thrift		1,135			12		03-31		03/04		9.50		248
ESSA	ESSA Bancorp, Inc. of PA (3)	NASDAQ	Stroudsburg, PA	Thrift		1,103			18		09-30		04/07		10.76		134
FXCB	Fox Chase Bancorp, Inc. of PA (3)	NASDAQ	Hatboro, PA	Thrift		1,088			11		12-31		06/10		12.20		178
CBNJ	Cape Bancorp, Inc. of NJ (3)	NASDAQ	Cape My Ct Hs, NJ	Thrift		1,068			17		12-31		02/08		7.60		101
BFED	Beacon Federal Bancorp of NY (3)	NASDAQ	East Syracuse NY	Thrift		1,041			8		12-31		10/07		13.50		86
SVBI	Severn Bancorp, Inc. of MD (3)	NASDAQ	Annapolis, MD	Thrift		937			4		12-31		/		3.03		31
OSHC	Ocean Shore Holding Co. of NJ (3)	NASDAQ	Ocean City, NJ	Thrift		860			10		12-31		12/09		11.05		81
HARL	Harleysville Svgs Fin Cp of PA (3)	NASDAQ	Harleysville, PA	Thrift		858			8		09-30		08/87		14.10		53
THRD	TF Fin. Corp. of Newtown PA (3)	NASDAQ	Newtown, PA	Thrift		692			14		12-31		07/94		21.14		60
CARV	Carver Bancorp, Inc. of NY (3)	NASDAQ	New York, NY	Thrift		678			9		03-31		10/94		0.69		2
MLVF	Malvern Fed Bncp MHC PA (44.6)	NASDAQ	Paoli, PA	Thrift		674			9		09-30		05/08		7.45		45
FSBI	Fidelity Bancorp, Inc. of PA (3)	NASDAQ	Pittsburgh, PA	Thrift		667			13		09-30		06/88		9.48		29
ONFC	Oneida Financial Corp. of NY (3)	NASDAQ	Oneida, NY	Thrift		658			13		12-31		07/10		8.77		63
BCSB	BCSB Bancorp, Inc. of MD (3)	NASDAQ	Baltimore, MD	Thrift		630			18		09-30		04/08		12.40		40
COBK	Colonial Financial Serv. of NJ (3)	NASDAQ	Bridgeton, NJ	Thrift		601			9		12-31		07/10		12.05		50
GCBC	Green Co Bcrp MHC of NY (44.1)	NASDAQ	Catskill, NY	Thrift		548			14		06-30		12/98		18.84		78
MGYR	Magyar Bancorp MHC of NJ (44.7)	NASDAQ	NW Brunswick, NJ	Thrift		526			6		09-30		01/06		3.56		21
ESBK	Elmira Svgs Bank, FSB of NY (3)	NASDAQ	Elmira, NY	Thrift		500			11		12-31		03/85		15.85		31
PBIP	Prudential Bncp MHC PA (25.5)	NASDAQ	Philadelphia, PA	Thrift		498			7		09-30		03/05		5.18		52
LSBK	Lake Shore Bnp MHC of NY(39.4)	NASDAQ	Dunkirk, NY	Thrift		483			10		12-31		04/06		10.00		59
BFSB	Brooklyn Fed MHC of NY (28.2)	NASDAQ	Brooklyn, NY	Thrift		470			5		09-30		04/05		0.79		10
ALLB	Alliance Bancorp, Inc. of PA (3)	NASDAQ	Broomall, PA	Thrift		467			9		12-31		01/11		10.16		56
NECB	NE Comm Bncrp MHC of NY (44.6)	NASDAQ	White Plains, NY	Thrift		444			7		12-31		07/06		6.62		85
STND	Standard Financial Corp. of PA (3)	NASDAQ	Monroeville, PA	Thrift		438			12		09-30		10/10		14.75		51
PBHC	Pathfinder BC MHC of NY (36.3)	NASDAQ	Oswego, NY	Thrift		419			14		12-31		11/95		9.10		23
WSB	WSB Holdings, Inc. of Bowie MD (3)	NASDAQ	Bowie, MD	Thrift		390			5		12-31		08/88		2.47		20

RP FINANCIAL, LC.
Financial Services Industry Consultants
1100 North Glebe Road, Suite 1100
Arlington, Virginia 22201
(703) 528-1700

Exhibit III-l

Characteristics of Publicly-Traded Thrifts

September 2, 2011


Ticker	Financial Institution	Exchg.	Primary Market	Operating Strat(l)	Total Assets(2)			Offices		Fiscal Year	Conv. Date	Stock Price		Market Value
					($Mil)							($)		($Mil)
Mid-Atlantic Companies (continued)

OBAF	OBA Financial Serv. Inc of MD (3)	NASDAQ	Germantown, MD	Thrift		356	M		5	06-30	01/10	14.30		66
MSBF	MSB Fin Corp MHC of NJ (40.3)	NASDAQ	Millington, NJ	Thrift		349	M		5	06-30	01/07		5.19		27
FFCO	FedFirst Financial Corp of PA (3)	NASDAQ	Monessen, PA	Thrift		346			9	12-31	09/10		13.49		40
CMSB	CMS Bancorp Inc of W Plains NY (3)	NASDAQ	White Plains, NY	Thrift		248			6	09-30	04/07		8.10		15
WVFC	WVS Financial Corp. of PA (3)	NASDAQ	Pittsburgh, PA	Thrift		247	M		6	06-30	11/93		9.00		19

Mid-West Companies

FBC	Flagstar Bancorp, Inc. of MI (3)	NYSE	Troy, MI	Thrift		13,017	M		176	12-31	04/97		0.59		327
TFSL	TFS Fin Corp MHC of OH (26.4)	NASDAQ	Cleveland, OH	Thrift		10,879			39	09-30	04/07		8.35		2,575
CFFN	Capitol Federal Fin Inc. of KS (3)	NASDAQ	Topeka, KS	Thrift		9,603			47	09-30	12/10		10.48		1,755
ABCW	Anchor BanCorp Wisconsin of WI (3)	NASDAQ	Madison, WI	M.B.		3,395	M		57	03-31	07/92		0.59		13
FPFC	First Place Fin. Corp. of OH (3)	NASDAQ	Warren, OH	Thrift		3,153	J		47	06-30	01/99		0.85		14
BKHU	Bank Mutual Corp of WI (3)	NASDAQ	Milwaukee, WI	Thrift		2,523			80	12-31	10/03		2.89		134
UCFC	United Community Fin. of OH (3)	NASDAQ	Youngstown, OH	Thrift		2,102			38	12-31	07/98		1.14		35
FDEF	First Defiance Fin. Corp of OH (3)	NASDAQ	Defiance, OH	Thrift		2,046			33	12-31	10/95		12.96		126
WSBF	Waterstone Fin MHC of WI (26.2)	NASDAQ	Wauwatosa, WI	Thrift		1,723			10	12-31	10/05		2.60		81
BFIN	BankFinancial Corp. of IL (3)	NASDAQ	Burr Ridge, IL	Thrift		1,663			21	12-31	06/05		7.24		153
MFSF	MutualFirst Fin. Inc. of IN (3)	NASDAQ	Muncie, IN	Thrift		1,447	M		33	12-31	12/99		7.52		53
PULB	Pulaski Fin Cp of St. Louis MO (3)	NASDAQ	St. Louis, MO	Thrift		1,332			12	09-30	12/98		6.50		68
NASB	NASB Fin, Inc. of Grandview MO (3)	NASDAQ	Grandview, MO	Thrift		1,257			9	09-30	09/85		10.21		80
HFFC	HF Financial Corp. of SD (3)	NASDAQ	Sioux Falls, SD	Thrift		1,191			33	06-30	04/92		8.27		58
CITZ	CFS Bancorp, Inc of Munster IN (3)	NASDAQ	Munster, IN	Thrift		1,144	M		22	12-31	07/98		5.23		57
CASH	Meta Financial Group of IA (3)	NASDAQ	Storm Lake, IA	Thrift		1,074			12	09-30	09/93		18.32		57
HFBC	HopFed Bancorp, Inc. of KY (3)	NASDAQ	Hopkinsville, KY	Thrift		1,062			18	12-31	02/98		7.40		54
HMNF	HMN Financial, Inc. of MN (3)	NASDAQ	Rochester, MN	Thrift		807			15	12-31	06/94		2.00		9
PVFC	PVF Capital Corp. of Solon OH (3)	NASDAQ	Solon, OH	R.E.		777	M		18	06-30	12/92		1.55		40
CHEV	Cheviot Fin Cp MHC of OH (38. 5)	NASDAQ	Cincinnati, OH	Thrift		597			6	12-31	01/04		8.62		76
FCLF	First Clover Leaf Fin Cp of IL (3)	NASDAQ	Edwardsville, IL	Thrift		567			4	12-31	07/06		6.40		50
CZWI	Citizens Comm Bncorp Inc of WI (3)	NASDAQ	Eau Claire, WI	Thrift		552			27	09-30	11/06		5.44		28
FSFG	First Savings Fin. Grp. of IN (3)	NASDAQ	Clarkaville, IN	Thrift		524			12	09-30	12/08		15.40		36
UCBA	United Comm Bncp MHC IN (40.7)	NASDAQ	Lawrenceburg, IN	Thrift		476	M		9	06-30	03/06		5.81		46
LPSB	LaPorte Bancrp MHC of IN (45.0)	NASDAQ	La Porte, IN	Thrift		461			8	12-31	10/07		9.00		41
IROQ	IF Bancorp, Inc. of IL (3)	NASDAQ	Watseka, IL	Thrift		448	P		5	06-30	07/11		10.81		52
FCAP	First Capital, Inc. of IN (3)	NASDAQ	Corydon, IN	Thrift		445			13	12-31	01/99		18.41		51
FFFD	North Central Bancshares of LA (3)	NASDAQ	Fort Dodge, IA	Div.		443			11	12-31	03/96		17.25		23
WAYN	Wayne Savings Bancshares of OH (3)	NASDAQ	Wooster, OH	Thrift		412			11	03-31	01/03		8.40		25
RIVR	River Valley Bancorp of IN (3)	NASDAQ	Madison, IN	Thrift		400			10	12-31	12/96		16.10		24
LSBI	LSB Fin. Corp. of Lafayette IN (3)	NASDAQ	Lafayette, IN	Thrift		360			5	12-31	02/95		13.30		21
WBKC	Wolverine Bancorp, Inc. of MI (3)	NASDAQ	Midland, MI	Thrift		306			5	12-31	01/11		14.00		35
JXSB	Jacksonville Bancorp Inc of IL (3)	NASDAQ	Jacksonville, IL	Thrift		305			7	12-31	07/10		13.70		26
CFBK	Central Federal Corp. of OH (3)	NASDAQ	Fairlawn, OH	Thrift		278			4	12-31	12/98		0.75		3
KFFB	KY Fst Fed Bp MHC of KY (39.3)	NASDAQ	Hazard, KY	Thrift		229	M		4	06-30	03/05		8.09		63
FFNM	First Fed of N. Michigan of MI (3)	NASDAQ	Alpena, MI	Thrift		219			8	12-31	04/05		3.75		11
FFDF	FFD Financial Corp of Dover OH (3)	NASDAQ	Dover, OH	Thrift		211	M		5	06-30	04/96		15.00		15
PFED	Park Bancorp of Chicago IL (3)	NASDAQ	Chicago, IL	Thrift		208			5	12-31	08/96		2.92		3
FBSI	First Bancshares, Inc. of MO (3)	NASDAQ	Mntn Grove, MO	Thrift		204	M		11	06-30	12/93		6.95		11

New England Companies

PBCT	Peoples United Financial of CT (3)	NASDAQ	Bridgeport, CT	Div.		25,323			340	12-31	04/07		11.40		4,047
BHLB	Berkshire Hills Bancorp of MA (3)	NASDAQ	Pittsfield, MA	Thrift		3,225			44	12-31	06/00		19.24		322
BRKL	Brookline Bancorp, Inc. of MA (3)	NASDAQ	Brookline, MA	Thrift		3,114			20	12-31	07/02		7.82		462
EBSB	Meridian Fn Serv MHC MA (41.4)	NASDAQ	East Boston, MA	Thrift		1,924			25	12-31	01/08		11.88		264
RCKB	Rockville Fin New, Inc. of CT (3)	NASDAQ	Vrn Rockville CT	Thrift		1,747			22	12-31	03/11		9.50		280
UBNK	United Financial Bncrp of MA (3)	NASDAQ	W Springfield MA	Thrift		1,610			24	12-31	12/07		14.17		228
FBNK	First Connecticut Bncorp of CT (3)	NASDAQ	Farmington, CT	Thrift		1,604	P		19	12-31	06/11		10.47		187
WFD	WestField Fin. Inc. of MA (3)	NASDAQ	WestField, MA	Thrift		1,241	M		11	12-31	01/07		6.90		192
HIFS	Hingham Inst. for Sav. of MA (3)	NASDAQ	Hingham, MA	Thrift		1,067			10	12-31	12/88		46.94		100
NHTB	NH Thrift Bancshares of NH (3)	NASDAQ	Newport, NH	Thrift		1,031			27	12-31	05/86		12.81		74
SIFI	SI Financial Group, Inc. of CT (3)	NASDAQ	Willimantic, CT	Thrift		949			21	12-31	01/11		9.43		100

RP FINANCIAL, LC.
Financial Services Industry Consultants
1100 North Glebe Road, Suite 1100
Arlington, Virginia 22201
(703) 528-1700

Exhibit III-l
Characteristics of Publicly-Traded Thrifts
September 2, 2011


			Primary	Operating	Total					Fiscal	Conv.		Stock		Market
Ticker	Financial Institution	Exchg.	Market	Strat(l)	Assets(2)			Offices		Year	Date		Price		Value
					($Mil)								($)		($Mil)
New England Companies (continued)

NVSL	Naugatuck Valley Fin Crp of CT (3)	NASDAQ	Naugatuck, CT	Thrift		593	P		10	12-31		06/11		7.58		53
CBNK	Chicopee Bancorp, Inc. of MA (3)	NASDAQ	Chicopee, MA	Thrift		580			8	12-31		07/06		14.00		82
HBNK	Hampden Bancorp, Inc. of MA (3)	NASDAQ	Springfield, MA	Thrift		575	M		9	06-30		01/07		12.58		86
PEOP	Peoples Fed Bancshrs Inc of MA (3)	NASDAQ	Brighton, MA	Thrift		538			6	09-30		07/10		14.00		100
CEBK	Central Bncrp of Somerville MA (3)	NASDAQ	Somerville, MA	Thrift		497			11	03-31		10/86		17.50		29
PSBH	PSB Hldgs Inc MHC of CT (42.9)	NASDAQ	Putnam, CT	Thrift		477	M		8	06-30		10/04		5.06		33
NFSB	Newport Bancorp, Inc. of RI (3)	NASDAQ	Newport, RI	Thrift		454			6	12-31		07/06		13.05		46
MFLR	Mayflower Bancorp, Inc. of MA (3)	NASDAQ	Middleboro, MA	Thrift		247	M		8	04-30		12/87		8.35		17

North-West Companies

WFSL	Washington Federal, Inc. of WA (3)	NASDAQ	Seattle, WA	Thrift		13,323			163	09-30		11/82		13.92		1,537
FFNW	First Fin NW, Inc of Renton WA (3)	NASDAQ	Renton, WA	Thrift		1,151			1	12-31		10/07		4.63		87
RVSB	Riverview Bancorp, Inc. of WA (3)	NASDAQ	Vancouver, WA	Thrift		886			17	03-31		10/97		2.61		59
TSBK	Timberland Bancorp, Inc. of WA (3)	NASDAQ	Hoquiam, WA	Thrift		735			22	09-30		01/98		5.05		36
ANCB	Anchor Bancorp of Aberdeen, WA (3)	NASDAQ	Aberdeen, wa	Thrift		490	M		15	06-30		01/11		7.95		19

South-East Companies

FFCH	First Fin. Holdings Inc. of SC (3)	NASDAQ	Charleston, SC	Thrift		3,222			67	09-30		11/83		5.82		96
CSBC	Citizens South Bnkg Corp of NC (3)	NASDAQ	Gastonia, NC	Thrift		1,118			21	12-31		10/02		4.15		48
FRNK	Franklin Financial Corp. of VA (3)	NASDAQ	Glen Allen, VA	Thrift		1,101	P		9	09-30		04/11		11.14		159
HBOS	Heritage Fin Group, Inc of GA (3)	NASDAQ	Albany, GA	Thrift		964			16	12-31		11/10		10.89		95
CHFN	Charter Fin Corp MHC GA (49.0)	NASDAQ	West Point, GA	Thrift		956			17	09-30		09/10		8.46		157
ACFC	Atlantic Coast Fin. Corp of GA (3)	NASDAQ	Waycross, GA	Thrift		802			12	12-31		02/11		2.69		7
HBCP	Home Bancorp Inc. Lafayette LA (3)	NASDAQ	Lafayette, LA	Thrift		700	M		18	12-31		10/08		14.11		113
FFBH	First Fed. Bancshares of AR (3)	NASDAQ	Harrison, AR	Thrift		616			18	12-31		05/96		6.00		116
JFBI	Jefferson Bancshares Inc of TN (3)	NASDAQ	Morristown, TN	Thrift		578	M		12	06-30		07/03		2.83		19
CFFC	Community Fin. Corp. of VA (3)	NASDAQ	Staunton, VA	Thrift		523			11	03-31		03/88		3.07		13
OFED	Oconee Fed Fn Cp MHC SC (35.0)	NASDAQ	Seneca, SC	Thrift		377	M		5	06-30		01/11		10.95		70
FABK	First Advantage Bancorp of TN (3)	NASDAQ	Clarksville, TN	Thrift		350			5	12-31		11/07		12.70		52
LABC	Louisiana Bancorp, Inc. of LA (3)	NASDAQ	Metairie, LA	Thrift		320			3	12-31		07/07		16.03		55
AFCB	Athens Bancshares, Inc. of TN (3)	NASDAQ	Athens, TN	Thrift		283			7	12-31		01/10		12.70		35
SIBC	State Investors Bancorp of LA (3)	NASDAQ	Metairie, LA	Thrift		239	P		4	12-31		07/11		11.50		33
HFBL	Home Federal Bancorp Inc of LA (3)	NASDAQ	Shreveport, LA	Thrift		233			5	06-30		12/10		13.30		41

South-West Companies

VPFG	Viewpoint Financial Group of TX (3)	NASDAQ	Plano, TX	Thrift		2,964			24	12-31		07/10		11.34		395
OABC	OmniAmerican Bancorp Inc of TX (3)	NASDAQ	Fort Worth, TX	Thrift		1,328			16	12-31		01/10		13.83		161
SPBC	SP Bancorp, Inc. of Plano, TX (3)	NASDAQ	Plano, TX	Thrift		266			8	12-31		11/10		11.35		20

Western Companies (Excl CA)

TBNK	Territorial Bancorp, Inc of HI (3)	NASDAQ	Honolulu, HI	Thrift		1,488	M		25	12-31		07/09		19.06		221
EBMT	Eagle Bancorp Montanta of MT (3)	NASDAQ	Helena, MT	Thrift		331			6	06-30		04/10		10.46		41

Other Areas

NOTES:	(1)	Operating strategies are: Thrift-Traditional Thrift, M.B.-Mortgage Banker, R.E.-Real Estate Developer, Div.-Diversified, and Ret.-Retail Banking.
	(2)	Most recent quarter end available (E-Estimated, and P-Pro Forma)

Source: SNL Financial, LC.

Date of Last Update: 09/02/11

EXHIBIT III-2

1st Security Bank of Washington

Public Market Pricing of Publicly-Traded Institutions – Northwest Region
< $400-Million in Assets

RP FINANCIAL, LC.
Financial Services Industry Consultants
1100 North Glebe Road, Suite 1100
Arlington, Virginia 22201
(703) 528-1700

Exhibit III-2

Market Pricing Comparatives

Prices As of September 2, 2011


	Market		Per share Data
	Capitalization		Core	Book	Pricing Ratios(3)					Dividends(4)			Financial Characteristics(6)
	Price/	Market	12-Mth	Value/						Amount/		Payout	Total	Equity/	Tng Eq/	NPAs/	Reported		Core
Financial Institution	Share(1)	Value	EPS(2)	Share	P/E	P/B	P/A	P/TB	P/CORE	Share	Yield	Ratio(5)	Assets	Assets	Assets	Assets	ROA	ROE	ROA	ROE
	($)	($Mil)	($)	($)	(x)	(%)	(%)	(%)	(x)	($)	(%)	(%)	($Mil)	(%)	(%)	(%)	(%)	(%)	(%)	(%)

All Public Companies	9.92	242.30	-0.05	13.11	17. 83	76.05	9.47	81.46	19.48	0.21	1.97	28.72	2,613	11.87	11.19	3.92	0.09	0.68	0.01	-0.21
Special Selection Grouping(8)	6.83	347.62	-0.40	13.11	16.70	53.76	6.91	60.77	17.91	0.05	0.34	13.79	3,317	13.14	12.13	7.50	-0.14	-1.38	-0.21	-1.95

Comparable Group

Special Comparative Group(8)
ANCB Anchor Bancorp of Aberdeen, WA	7.95	19.49	-2.26	24.37	NM	32.62	3.97	32.62	NM	0.00	0.00	NM	490	12.18	12.18	NA	-1.10	-10.44	-1.15	-10.92
FFNW First Fin NW, Inc of Renton WA	4.63	87.07	-0.54	9.53	NM	48.58	7.56	48.58	NM	0.00	0.00	NM	1,151	15.56	15.56	11.28	-0.72	-4.96	-0.83	-5.70
RVSB Riverview Bancorp, Inc. of WA	2.61	58.65	0.14	4.80	17.40	54.38	6.62	71.51	18.64	0.00	0.00	0.00	886	12.23	9.59	5.10	0.39	3.28	0.37	3.06
TSBK Timberland Bancorp, Inc. of WA	5.05	35.58	-0.13	9.99	NM	50.55	4.84	55.31	NM	0.00	0.00	NM	735	11.74	11.01	8.35	0.00	0.00	-0.12	-1.06
WFSL Washington Federal, Inc. of WA	13.92	1537.30	0.81	16.84	16.00	82.66	11.54	95.80	17.19	0.24	1.72	27.59	13,323	13.96	12.28	5.28	0.71	5.21	0.66	4.85

(1)	Average of High/Low or Bid/Ask price per share.
(2)	EPS (estimate core basis) is based on actual trailing twelve month data, adjusted to omit non-operating items on a tax effected basis.
(3)	P/E = Price to earnings, P/B = Price to book, P/A = Price to assets, P/TB = Price to tangible book value, and P/CORE = Price to estimated core earnings.
(4)	Indicated twelve month dividend, based on last quarterly dividend declared.
(5)	Indicated dividend as a percent of trailing twelve month estimated core earnings.
(6)	ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month earnings and average equity and assets balances.
(7)	Excludes from averages those companies the subject of actual or rumored acquisition activities or unusual operating characteristics.
(8)	Includes North-West Companies,

Source:

SNL Financial, LC. and RP Financial, LC. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.

RP FINANCIAL, LC.
Financial Services Industry Consultants
1100 North Glebe Road, Suite 1100
Arlington, Virginia 22201
(703) 528-1700

Exhibit III-2

Market Pricing Comparatives

Prices As of September 2, 2011


	Market		Per Share Data
	Capitalization		Core	Book	Pricing Ratios(3)					Dividends(4)			Financial Characteristics(6)
	Price/	Market	12-Mth	Value/						Amount/		Payout	Total	Equity/	Tng Eq/	NPAs/	Reported		Core
Financial Institution	Share(1)	Value	EPS(2)	Share	P/E	P/B	P/A	P/TB	P/CORE	Share	Yield	Ratio(5)	Assets	Assets	Assets	Assets	ROA	ROE	ROA	ROE
	($)	($Mil)	($)	($)	(x)	(%)	(%)	(%)	(x)	($)	(%)	(%)	($Mil)	(%)	(%)	(%)	(%)	(%)	(%)	(%)

All Public Companies	9.92	242.30	-0.05	13.11	17.83	76.05	9.47	81.46	19.48	0.21	1.97	28.72	2,613	11.87	11.19	3.92	0.09	0.68	0.01	-0.21
Special Selection Grouping(8)	8.70	19.04	-0.50	12.88	18.60	67.80	9.85	71.52	21.43	0.17	1.59	25.17	228	11.35	10.82	3.01	-0.10	-2.35	-0.24	-3.64

Comparable Group

Special Comparative Group(8)
CMSB CMS Bancorp Inc of W Plains NY	8.10	15.09	-0.05	11.84	NM	68.41	6.10	68.41	NM	0.00	0.00	0.00	248	8.91	8.91	3.24	0.12	1.38	-0.04	-0.43
FFDF FFD Financial Corp of Dover OH	15.00	15.18	0.93	18.50	10.56	81.08	7.21	81.08	16.13	0.68	4.53	47.89	211	8.89	8.89	1.53	0.70	7.79	0.46	5.10
FBSI First Bancshares, Inc. of MO	6.95	10.78	-2.45	12.58	NM	55.25	5.28	55.51	NM	0.00	0.00	NM	204	9.56	9.52	4.17	-1.80	-17.26	-1.81	-17.40
FFNM First Fed of N. Michigan of MI	3.75	10.82	0.02	8.34	NM	44.96	4.94	45.84	NM	0.00	0.00	0.00	219	10.99	10.80	4.71	0.07	0.61	0.03	0.24
HFBL Home Federal Bancorp Inc of LA	13.30	40.51	0.16	16.80	20.78	79.17	17.36	79.17	NM	0.24	1.80	37.50	233	21.93	21.93	0.08	0.91	4.19	0.23	1.05
KFFB KY Fst Fed Bp MHC of KY (39.3)	8.09	25.27	0.18	7.53	NM	107.44	27.39	143.44	NM	0.40	4.94	NM	229	25.49	20.40	2.85	0.62	2.54	0.59	2.40
MFLR Mayflower Bancorp, Inc. of MA	8.35	17.33	0.40	10.20	13.05	81.86	7.02	81.86	20.88	0.24	2.87	37.50	247	8.58	8.58	NA	0.53	6.34	0.33	3.96
PFED Park Bancorp of Chicago IL	2.92	3.48	-4.73	13.42	NM	21.76	1.67	21.76	NM	0.00	0.00	NM	208	7.69	7.69	8.22	-2.57	-28.94	-2.67	-30.09
SIBC State Investors Bancorp of LA	11.50	33.47	0.24	15.80	NM	72.78	14.01	72.78	NM	0.00	0.00	0.00	239	0.00	0.00	1.28	0.24	NM	0.29	NM
WVFC WVS Financial Corp. of PA	9.00	18.52	0.33	13.78	30.00	65.31	7.49	65.31	27.27	0.16	1.78	53.33	247	11.46	11.46	0.97	0.20	2.19	0.22	2.41

(1)	Average of High/Low or Bid/Ask price per share.
(2)	EPS (estimate core basis) is based on actual trailing twelve month data, adjusted to omit non-operating items on a tax effected basis.
(3)	P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/CORE = Price to estimated core earnings.
(4)	Indicated twelve month dividend, based on last quarterly dividend declared.
(5)	Indicated dividend as a percent of trailing twelve month estimated core earnings.
(6)	ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month earnings and average equity and assets balances.
(7)	Excludes from averages those companies the subject of actual or rumored acquisition activities or unusual operating characteristics.
(8)	Includes Assets less than $250 Million;

Source:

RP FINANCIAL, LC.
Financial Services Industry Consultants
1100 North Glebe Road, Suite 1100
Arlington, Virginia 22201
(703) 528-1700

Exhibit III-2 Market Pricing Comparatives Prices As of September 2, 2011

		Market		Per Share Data
		Capitalization		Core	Book	Pricing Ratios (3)					Dividends(4)			Financial Characteristics (6)
		Price/	Market	12-Mth	Value/						Amount/		Payout	Total	Equity/	Tng Eq/	NPAs/	Reported		Core
Financial Institution		Share(1)	Value	EPS (2)	Share	P/E	P/B	P/A	P/TB	P/CORE	Share	Yield	Ratio (5)	Assets	Assets	Assets	Assets	ROA	ROE	ROA	ROE
		($)	($Mil)	($)	($)	(X)	(%)	(%)	(%)	(x)	($)	(%)	(%)	($Mil)	(%)	(%)	(%)	(%)	(%)	(%)	(%)

All Public Companies		9.92	242.30	-0.05	13.11	17.83	76.05	9.47	81.46	19.48	0.21	1.97	28.72	2,613	11.87	11.19	3.92	0.09	0.68	0.01	-0.21
Special Selection Grouping(8)		10.51	29.79	0.34	14.56	19.68	71.26	9.53	75.16	19.60	0.18	1.82	24.82	403	12.69	12.32	4.19	0.29	1.37	0.25	0.94

Comparable Group

Special Comparative Group(8)
ALLB	Alliance Bancorp, Inc. of PA	10.16	55.62	0.40	15.70	26.05	64.71	11.91	64.71	25.40	0.20	1.97	51.28	467	18.40	18.40	4.59	0.47	3.36	0.48	3.45
AFCB	Athens Bancshares, Inc. of TN	12.70	35.13	0.61	18.16	20.82	69.93	12.40	70.48	20.82	0.20	1.57	32.79	283	17.73	17.61	2.71	0.60	3.37	0.60	3.37
BYFC	Broadway Financial Corp. of CA	1.48	2.58	-1.71	8.27	NM	17.90	0.58	17.90	NM	0.04	2.70	NM	447	6.87	6.87	17.14	-0.59	-8.93	-0.60	-9.20
BFSB	Brooklyn Fed MHC of NY (28.2)	0.79	2.87	-0.24	3.16	NM	25.00	2.17	25.00	NM	0.04	5.06	NM	470	8.66	8.66	24.93	-1.01	-11.78	-0.65	-7.64
CEBK	Central Bncrp of Somerville MA	17.50	29.42	0.04	22.26	NM	78.62	5.92	83.61	NM	0.20	1.14	55.56	497	9.48	9.07	3.49	0.12	1.30	0.01	0.14
CFBK	Central Federal Corp. of OH	0.75	3.10	-1.41	1.26	NM	59.52	1.11	60.98	NM	0.00	0.00	NM	278	4.43	4.39	3.73	-1.87	-34.69	-2.07	-38.21
EBMT	Eagle Bancorp Montanta of MT	10.46	40.99	0.24	13.39	17.15	78.12	12.38	78.12	NM	0.29	2.77	47.54	331	15.85	15.85	1.24	0.72	4.51	0.28	1.78
ESBK	Elmira Svgs Bank, FSB of NY	15.85	31.18	1.25	20.31	8.90	78.04	6.24	115.02	12.68	0.80	5.05	44.94	500	11.71	9.38	0.99	0.70	6.14	0.49	4.31
FFCO	FedFirst Financial Corp of PA	13.49	40.35	0.31	19.99	NM	67.48	11.66	68.97	NM	0.12	0.89	NM	346	17.30	16.99	0.99	0.14	0.85	0.27	1.65
FABK	First Advantage Bancorp of TN	12.70	51.90	0.27	16.58	27.61	76.60	14.81	76.60	NM	0.20	1.57	43.48	350	19.34	19.34	0.92	0.54	2.79	0.32	1.64
FCAP	First Capital, Inc. of IN	18.41	51.29	1.18	17.78	13.74	103.54	11.53	116.37	15.60	0.76	4.13	56.72	445	11.15	10.05	1.97	0.83	7.70	0.73	6.78
IROQ	IF Bancorp, Inc. of IL	10.81	52.01	0.45	15.78	18.96	68.50	11.61	68.50	24.02	0.00	0.00	0.00	448	0.00	0.00	1.36	0.61	NM	0.48	NM
JXSB	Jacksonville Bancorp Inc of IL	13.70	26.45	1.34	20.06	8.73	68.30	8.68	73.46	10.22	0.30	2.19	19.11	305	12.70	11.92	1.27	1.00	8.72	0.85	7.44
LSBI	LSB Fin. Corp. of Lafayette IN	13.30	20.67	0.64	23.38	11.47	56.89	5.74	56.89	20.78	0.00	0.00	0.00	360	10.10	10.10	5.92	0.48	5.08	0.27	2.80
LPSB	LaPorte Bancrp MHC of IN(45.0)	9.00	18.60	0.44	11.49	15.79	78.33	8.95	94.44	20.45	0.00	0.00	0.00	461	11.42	9.66	1.75	0.58	5.12	0.45	3.95
LSBK	Lake Shore Bnp MHC of NY(39.4)	10.00	24.48	0.46	9.95	16.39	100.50	12.29	100.50	21.74	0.28	2.80	45.90	483	12.22	12.22	0.58	0.76	6.32	0.57	4.77
LABC	Louisiana Bancorp, Inc. of LA	16.03	55.11	0.60	17.13	22.90	93.58	17.21	93.58	26.72	0.00	0.00	0.00	320	18.39	18.39	0.57	0.74	3.90	0.64	3.34
MSBF	MSB Fin Corp MHC of NJ (40.3)	5.19	11.08	0.14	7.84	37.07	66.20	7.68	66.20	37.07	0.12	2.31	NM	349	11.60	11.60	8.27	0.20	1.80	0.20	1.80
NECB	NE Comm Bncrp MHC of NY (44.6)	6.62	39.40	0.32	8.40	30.09	78.81	19.07	80.15	20.69	0.12	1.81	54.55	444	24.20	23.89	9.31	0.59	2.61	0.86	3.79
NFSB	Newport Bancorp, Inc. of RI	13.05	45.53	0.54	14.58	23.30	89.51	10.03	89.51	24.17	0.00	0.00	0.00	454	11.21	11.21	0.29	0.43	3.91	0.42	3.77
FFFD	North Central Bancshares of IA	17.25	23.37	1.40	30.01	12.23	57.48	5.28	58.43	12.32	0.04	0.23	2.84	443	0.00	0.00	4.52	0.42	3.85	0.42	3.82
OBAF	OBA Financial Serv. Inc of MD	14.30	65.81	0.17	17.57	NM	81.39	18.49	81.39	NM	0.00	0.00	0.00	356	22.71	22.71	0.97	0.23	1.03	0.21	0.97
OFED	Oconee Fed Fn Cp MHC SC (35.0)	10.95	24.32	0.53	12.50	37.76	87.60	18.44	87.60	20.66	0.40	3.65	NM	377	21.05	21.05	1.31	0.49	2.62	0.90	4.78
PSBH	PSB Hldgs Inc MHC of CT (42.9)	5.06	14.16	0.32	7.19	25.30	70.38	6.93	83.36	15.81	0.16	3.16	NM	477	9.85	8.44	2.18	0.27	2.89	0.43	4.62
PBHC	Pathfinder BC MHC of NY (36.3)	9.10	8.21	0.67	10.52	11.97	86.50	5.41	101.34	13.58	0.12	1.32	15.79	419	7.75	6.90	1.39	0.46	6.03	0.41	5.31
PBIP	Prudential Bncp MHC PA (25.5)	5.18	15.70	-0.03	5.55	NM	93.33	10.43	93.33	NM	0.00	0.00	NM	498	11.18	11.18	2.80	-0.10	-0.90	-0.06	-0.54
RIVR	River Valley Bancorp of IN	16.10	24.38	0.78	18.49	12.58	87.07	6.10	87.36	20.64	0.84	5.22	65.63	400	8.25	8.23	4.92	0.50	6.01	0.30	3.66
SPBC	SP Bancorp, Inc. of Plano, TX	11.35	19.58	-0.05	18.84	19.57	60.24	7.36	60.24	NM	0.00	0.00	0.00	266	12.22	12.22	4.28	0.41	3.80	-0.04	-0.33
STND	Standard Financial Corp. of PA	14.75	51.30	0.93	22.25	22.01	66.29	11.72	75.56	15.86	0.00	0.00	0.00	438	17.68	15.85	0.85	0.55	3.67	0.76	5.10
UCBA	United Comm Bncp MHC IN (40.7)	5.81	18.53	-0.16	6.81	NM	85.32	9.57	91.50	NM	0.44	7.57	NM	476	11.22	10.54	5.02	-0.20	-1.71	-0.26	-2.28
WSB	WSB Holdings, Inc. of Bowie MD	2.47	19.75	-0.06	6.62	NM	37.31	5.06	37.31	NM	0.00	0.00	NM	390	13.56	13.56	10.18	-0.28	-2.15	-0.12	-0.92
WAYN	Wayne Savings Bancshares of OH	8.40	25.23	0.66	13.15	12.17	63.88	6.13	67.25	12.73	0.24	2.86	34.78	412	9.60	9.16	2.54	0.51	5.39	0.48	5.15
WBKC	Wolverine Bancorp, Inc. of MI	14.00	35.11	0.23	25.59	NM	54.71	11.48	54.71	NM	0.00	0.00	0.00	306	20.99	20.99	5.43	0.23	1.37	0.19	1.09

(1)	Average of High/Low or Bid/Ask price per share.
(2)	EPS (estimate core basis) is based on actual trailing twelve month data, adjusted to omit non-operating items on a tax effected basis.
(3)	P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/CORE = Price to estimated core earnings.
(4)	Indicated twelve month dividend, based on last quarterly dividend declared.
(5)	Indicated dividend as a percent of trailing twelve month estimated core earnings.
(6)	ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month earnings and average equity and assets balances.
(7)	Excludes from averages those companies the subject of actual or rumored acquisition activities or unusual operating characteristics.
(8)	Includes Assets $250-$500 Million;

Source:

Exhibit III-3

1st Security Bank of Washington

Peer Group Market Area Comparative Analysis

						Proj.								Per Capita Income					Deposit			Unemployment
		Population				Pop.		2000-2010			2010-2015					% State			Market			Rate
Institution	County	2000		2010		2015		% Change			% Change			Amount		Average			Share(1)			7/31/2011
		(000)		(000)		(000)		(%)			(%)			($)		(%)			(%)			(%)

Athens Bancshares, Inc. of TN	McMinn		49		53		54		7.2	%		3.0	%	$	20,206		82.87	%		19.84	%		11.6	%
Eagle Bancorp of MT	Lewis and Clark		56		62		65		11.2	%		5.5	%		23,233		113.28	%		9.01	%		5.8	%
FFD Financial Corp of Dover OH	Tuscawaras		91		92		92		0.9	%		-0.2	%		20,646		79.57	%		14.12	%		9.1	%
First Advantage Bancorp of TN	Montgomery		135		164		175		21.4	%		7.2	%		22,987		94.27	%		11.54	%		9.5	%
First Federal of Northern MI	Alpena		31		29		28		-6.2	%		-3.2	%		20,569		78.31	%		26.38	%		10.8	%
Jacksonville Bancorp, Inc. of IL	Morgan		37		35		35		-3.3	%		-1.8	%		22,470		79.59	%		26.06	%		8.8	%
LSB Financial Corp. of Lafayette, LA	Tippecanoe		149		169		180		13.2	%		6.7	%		24,477		127.82	%		15.00	%		8.1	%
Louisiana Bancorp, Inc. of LA	Jefferson		455		435		430		-4.4	%		-1.2	%		21,827		113.98	%		1.83	%		7.2	%
Riverview Bancorp, Inc. of WA	Clark		345		438		475		26.9	%		8.5	%		27,004		94.12	%		11.68	%		10.1	%
Timberland Bancorp, Inc. of WA	Grays Harbor		67		72		73		7.3	%		1.3	%		20,370		71.00	%		22.01	%		12.6	%

	Averages:		142		155		161		7.4	%		2.6	%	$	22,379		93.48	%		15.75	%		9.4	%
	Medians:		79		82		82		7.3	%		2.1	%	$	22,149		88.49	%		14.56	%		9.3	%

1st Security	Snohomish		606		713		758		17.6	%		6.4	%	$	30,372		105.86	%		1.39	%		10.0	%

(1) Total institution deposits in headquarters county as percent of total county deposits as of June 30, 2010.

Source: SNL Financial, LC.

EXHIBIT IV-1
1st Security Bank of Washington
Stock Prices: As of September 2, 2011

RP FINANCIAL, LC.
Financial Services Industry Consultants
1100 North Glebe Road, Suite 1100
Arlington, Virginia 222011
(703) 528-1700

Exhibit IV-1A

Weekly Thrift Market Line - Part One

Prices As Of September 2, 2011


	Market Capitalization			Price Change Data						Current Per Share Financials
													Tangible
		Shares	Market	52 Week (1)			% Change From			Trailing	12 Mo.	Book	Book
	Price/	Outst-	Capital-			Last	Last	52 Wks	MostRcnt	12 Mo.	Core	Value/	Value/	Assets/
Financial Institution	Share(1)	anding	ization(9)	High	Low	Week	Week	Ago(2)	YrEnd(2)	EPS(3)	EPS(3)	Share	Share(4)	Share
	($)	(000)	($Mil)	($)	($)	($)	(%)	(%)	(%)	($)	($)	($)	($)	($)

Market Averages. All Public Companies (no MHC)

All Public Companies(117)	10.30	32,745	270.7	13.06	8.57	10.46	-0.45	2.09	-6.50	0.03	-0.09	14.14	13.25	134.44
NYSE Traded Companies(6)	9.50	220,914	1,581.6	14.08	8.65	9.54	-1.31	-28.84	-34.38	0.33	0.49	9.74	7.35	94.05
NASDAQ Listed OTC Companies(111)	10.34	22,291	197.9	13.00	8.57	10.51	-0.40	3.80	-4.95	0.01	-0.12	14.39	13.58	136.68
California Companies(5)	9.42	8,939	97.7	12.17	7.38	9.39	-0.68	11.45	-9.17	0.57	0.09	12.90	12.82	145.61
Florida Companies(2)	11.87	87,692	1,147.0	15.75	10.01	11.26	6.18	-22.14	-23.98	-0.20	0.60	7.76	7.32	80.49
Mid-Atlantic Companies(36)	11.01	47,843	437.8	14.41	9.49	11.20	-1.59	0.59	-11.03	0.14	0.12	14.18	12.76	138.17
Mid-West Companies(33)	8.25	30,230	104.5	10.66	6.71	8.37	0.53	-3.97	-6.11	-0.28	-0.56	13.64	13.01	147.25
New England Companies(17)	13.87	33,805	376.8	16.41	11.14	14.33	-1.63	15.04	0.23	0.70	0.67	15.57	14.09	133.47
North-West Companies(5)	6.83	32,242	347.6	9.22	5.81	6.83	1.19	12.51	2.67	-0.32	-0.40	13.11	12.24	105.13
South-East Companies(14)	9.30	6,843	59.0	11.80	8.00	9.29	0.13	-5.53	-7.70	-0.61	-0.63	14.52	14.39	116.84
South-West Companies(3)	12.17	16,075	192.0	14.16	9.54	12.10	0.77	21.07	6.69	0.48	0.16	15.93	15.92	117.72
Western Companies (Excl CA)(2)	14.76	7,756	131.0	16.55	12.72	15.22	-2.74	13.13	-3.84	0.85	0.64	16.51	16.51	106.43
Thrift Strategy(110)	10.29	30,197	245.8	12.99	8.56	10.46	-0.62	2.23	-5.72	0.02	-0.07	14.15	13.30	131.72
Mortgage Banker Strategy(3)	3.20	37,077	55.7	4.08	2.14	3.14	1.40	5.78	-23.31	-0.55	-1.56	4.30	4.19	107.06
Real Estate Strategy(l)	1.55	25,670	39.8	2.23	1.27	1.45	6.90	-13.41	-14.84	-0.38	-0.58	2.90	2.90	30.28
Diversified Strategy(3)	20.76	121,656	1,453.3	28.08	17.94	20.54	1.36	-1.55	-14.80	1.29	1.16	27.42	24.09	293.50
Companies Issuing Dividends(73)	11.90	39,466	404.6	15.17	9.98	12.15	-1.73	3.37	-8.17	0.59	0.48	14.95	13.78	141.67
Companies Without Dividends(44)	7.76	22,052	57.8	9.69	6.33	7.77	1.60	0.05	-3.85	-0.85	-0.99	12.86	12.41	122.93
Equity/Assets <6%(8)	1.02	18,505	14.8	3.33	0.76	0.98	5.47	-43.65	-33.72	-4.36	-4.73	4.64	4.24	167.40
Equity/Assets 6-12%(55)	10.48	30,698	149.4	13.79	8.61	10.66	-0.44	-0.50	-7.17	0.25	0.06	14.70	13.90	169.94
Equity/Assets >12%(54)	11.36	36,827	433.5	13.59	9.59	11.51	-1.25	10.98	-2.12	0.39	0.39	14.83	13.78	92.44
Converted Last 3 Mths (no MHC)(4)	10.09	8,151	81.4	11.16	9.21	10.10	0.02	10.19	9.98	0.29	0.26	14.22	14.22	87.38
Actively Traded Companies(4)	21.05	32,693	440.7	27.53	16.59	22.40	-2.32	12.99	-8.67	0.93	0.86	21.96	20.96	278.38
Market Value Below $20 Million(17)	4.71	4,750	11.4	7.27	3.82	4.63	3.72	-23.40	-15.20	-2.25	-2.55	10.32	10.16	159.56
Holding Company Structure(111)	9.88	34,228	281.6	12.59	8.25	9.99	-0.39	1.71	-6.63	-0.07	-0.18	13.81	12.94	128.88
Assets Over $1 Billion(55)	10.62	64,738	533.9	14.34	9.27	10.95	-1.55	-5.40	-16.10	0.37	0.22	13.28	11.98	129.35
Assets $500 Million-$l Billion(30)	8.74	7,250	55.1	10.97	6.96	8.74	0.46	4.42	-2.35	-0.85	-0.86	13.44	12.86	133.83
Assets $250-$500 Million(23)	12.13	3,172	35.0	13.68	9.52	12.17	-0.39	17.05	6.61	0.53	0.38	17.27	16.58	150.81
Assets less than $250 Million(9)	8.76	2,066	18.4	10.61	7.25	8.70	3.01	0.40	3.17	-0.40	-0.57	13.47	13.45	124.55
Goodwill Companies(70)	10.14	38,425	368.5	13.41	8.45	10.28	-0.93	0.93	-7.81	-0.04	-0.11	14.07	12.59	140.05
Non-Goodwill Companies(46)	10.75	24,512	128.7	12.72	8.94	10.94	-0.32	5.59	-3.17	0.19	0.01	14.32	14.32	124.82
Acquirors of FSLIC Cases(1)	13.92	110,438	1.537.3	18.53	13.73	14.52	-4.13	-4.07	-17.73	0.87	0.81	16.84	14.53	120.64

(1)	Average of high/low or bid/ask price per share.
(2)	Or since offering price if converted or first listed in the past 52 weeks. Percent change figures are actual year-to-date and are not annualized
(3)	EPS (earnings per share) is based on actual trailing twelve month data and is not shown on a pro forma basis.
(4)	Excludes intangibles (such as goodwill, value of core deposits, etc.).
(5)	ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and assets balances.
(6)	Annualized, based on last regular quarterly cash dividend announcement.
(7)	Indicated dividend as a percent of trailing twelve month earnings.
(8)	Excluded from averages due to actual or rumored acquisition activities or unusual operating characteristics.
(9)	For MHC institutions, market value reflects share price multiplied by public (non-MHC) shares.

*	Parentheses following market averages indicate the number of institutions included in the respective averages. All figures have been adjusted for stock splits, stock dividends, and secondary offerings.

Source:

SNL Financial, LC. and RP Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.

RP FINANCIAL, LC.
Financial Services Industry Consultants
1100 North Glebe Road, Suite 1100
Arlington, Virginia 222011
(703) 528-1700

Exhibit IV-1A (continued)

Weekly Thrift Market Line - Part One

Prices As Of September 2, 2011


	Market Capitalization			Price Change Data						Current Per Share Financials
		Shares	Market	52 Week (1)			% Change From			Trailing	12 Mo.	Book	Book
	Price/	Outst-	Capital-			Last	Last	52 Wks	MostRcnt	12 Mo.	Core	Value/	Value/	Assets/
Financial Institution	Share(1)	anding	ization(9)	High	Low	Week	Week	Ago(2)	YrEnd(2)	EPS(3)	EPS(3)	Share	Share(4)	Share
	($)	(000)	($Mil)	($)	($)	($)	(%)	(%)	(%)	($)	($)	($)	($)	($)

Market Averages. MHC Institutions

All Public Companies(25)	8.11	34,239	107.2	10.23	6.93	8.35	-2.71	-3.68	-5.67	0.19	0s	8.19	7.64	70.80
NASDAQ Listed OTC Companies(25)	8.11	34,239	107.2	10.23	6.93	8.35	-2.71	-3.68	-5.67	0.19	0.13	8.19	7.64	70.80
Mid-Atlantic Companies(15)	8.27	28,522	109.6	10.53	7.02	8.57	-3.57	-4.25	-7.13	0.17	0.16	8.17	7.78	77.16
Mid-West Companies(6)	7.08	61,454	131.9	8.87	6.13	7.12	-0.72	-8.89	-10.57	0.13	-0.06	7.51	6.57	58.10
New England Companies(2)	8.47	14,385	63.2	10.14	6.43	8.88	-2.85	16.86	11.35	0.43	0.41	8.53	7.66	79.75
South-East Companies(2)	9.71	12,470	60.6	12.37	9.20	9.93	-2.47	-4.58	2.28	0.23	0.21	9.98	9.85	55.40
Thrift Strategy(25)	8.11	34,239	107.2	10.23	6.93	8.35	-2.71	-3.68	-5.67	0.19	0.13	8.19	7.64	70.80
Companies Issuing Dividends(17)	8.34	15,374	49.8	10.41	7.06	8.56	-2.56	-3.87	-4.14	0.19	0.19	8.42	7.87	70.75
Companies Without Dividends(8)	7.63	71,970	222.2	9.87	6.67	7.92	-3.00	-3.30	-8.71	0.18	0.02	7.73	7.18	70.89
Equity/Assets 6-12%(15)	7.63	18,063	69.6	9.62	6.30	7.82	-2.28	-4.51	-7.73	0.19	0.10	8.04	7.55	83.46
Equity /Assets >12%(10)	8.90	61,200	169.9	11.26	7.98	9.23	-3.41	-2.30	-2.23	0.19	0.18	8.43	7.78	49.71
Market Value Below $20 Million(1)	0.79	12,883	2.9	3.73	0.36	0.80	-1.25	-77.43	-38.76	-0.37	-0.24	3.16	3.16	36.48
Holding Company Structure(23)	8.23	35,292	111.2	10.33	7.00	8.47	-2.58	-2.64	-5.29	0.20	0.14	8.30	7.73	71.72
Assets Over $l Billion(9)	8.98	86,989	272.6	11.26	8.11	9.63	-5.98	-6.39	-10.00	0.20	0.05	7.60	7.03	60.69
Assets $500 Million-$l Billion(5)	9.39	8,698	38.0	11.34	7.97	9.33	-1.13	0.23	-4.60	0.10	0.01	8.96	8.64	90.46
Assets $250-$500 Million(10)	6.77	7,460	17.7	8.84	5.51	6.85	-1.07	-1.86	-2.04	0.23	0.25	8.34	7.82	73.19
Assets less than $250 Million(1)	8.09	7,741	25.3	10.40	6.51	8.15	-0.74	-19.82	-12.54	0.19	0.18	7.53	5.64	29.54
Goodwill Companies(16)	8.29	47,834	152.0	10.15	7.08	8.70	-3.98	-0.56	-4.61	0.24	0.14	8.02	7.19	66.95
Non-Goodwill Companies(9)	7.74	7,050	17.8	10.39	6.62	7.64	-0.16	-9.92	-7.78	0.09	0.10	8.53	8.53	78.50
MHC Institutions(25)	8.11	34,239	107.2	10.23	6.93	8.35	-2.71	-3.68	-5.67	0.19	0.13	8.19	7.64	70.80

(1)	Average of high/low or bid/ask price per share.
(2)	Or since offering price if converted or first listed in the past 52 weeks. Percent change figures are actual year-to-date and are not annualized
(3)	EPS (earnings per share) is based on actual trailing twelve month data and is not shown on a pro forma basis.
(4)	Excludes intangibles (such as goodwill, value of core deposits, etc.).
(5)	ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and assets balances.
(6)	Annualized, based on last regular quarterly cash dividend announcement.
(7)	Indicated dividend as a percent of trailing twelve month earnings.
(8)	Excluded from averages due to actual or rumored acquisition activities or unusual operating characteristics.
(9)	For MHC institutions, market value reflects share price multiplied by public (non-MHC) shares.

*	Parentheses following market averages indicate the number of institutions included in the respective averages. All figures have been adjusted for stock splits, stock dividends, and secondary offerings.

Source:

RP FINANCIAL, LC.
Financial Services Industry Consultants 1100 North Glebe Road, Suite 1100 Arlington, Virginia 222011 (703) 528-1700

Exhibit IV-1A (continued)

Weekly Thrift Market Line - Part One

Prices As Of September 2, 2011


											Current Per Share Financials
		Market Capitalization			Price Change Data									Tangible
			Shares	Market	52 week (1)			% Change From			Trailing	12 Mo.	Book	Book
		Price/	Outst-	Capital-			Last	Last	52 Wks	MostRcnt	12 Mo.	Core	Value/	Value/	Assets/
Financial Institution		Share(l)	anding	ization(9)	High	Low	Week	Week	Ago(2)	YrEnd(2)	EPS(3)	EPS(3)	Share	Share(4)	Share
		($)	(000)	($Mil)	($)	($)	($)	(%)	(%)	(%)	($)	($)	($)	($)	($)

NYSE Traded Companies
AF	Astoria Financial Corp. of NY*	9.16	98,488	902.2	15.25	9.08	9.51	-3.68	-26.07	-34.15	0.91	0.87	12.98	11.10	173.83
BBX	BankAtlantic Bancorp Inc of FL*	0.77	78,134	60.2	1.59	0.60	0.72	6.94	-29.36	-33.04	-0.91	-0.56	0.33	0.15	49.45
BKU	BankUnited, Inc.*	22.97	97,250	2,233.8	29.90	19.41	21.79	5.42	-14.93	-14.93	0.51	1.76	15.18	14.48	111.53
PBC	Flagstar Bancorp, Inc. of MI*	0.59	554,163	327.0	2.75	0.45	0.64	-7.81	-76.11	-63.80	-0.59	-0.96	1.78	1.78	23.49
NYB	New York Community Bcrp of NY*	12.07	437,414	5,279.6	19.33	11.48	12.50	-3.44	-24.75	-35.97	1.21	0.98	12.71	7.00	92.82
PFS	Provident Fin. Serv. Inc of NJ*	11.44	60,034	686.8	15.66	10.87	12.08	-5.30	-1.80	-24.39	0.86	0.86	15.43	9.57	113.17

NASDAQ Listed OTC Companies
ABBC	Abington Bancorp, Inc. of PA(8)*	7.86	20,246	159.1	13.23	7.58	8.16	-3.68	-22.56	-34.12	0.39	0.39	10.68	10.68	58.12
ALLB	Alliance Bancorp, Inc. of PA*	10.16	5,474	55.6	11.70	8.54	10.86	-6.45	7.51	-8.96	0.39	0.40	15.70	15.70	85.31
ABCW	Anchor BanCorp Wisconsin of WI*	0.59	21,678	12.8	1.90	0.52	0.62	-4.84	-6.35	-50.83	-1.90	-3.53	0.15	0.00	156.60
ANCB	Anchor Bancorp of Aberdeen, WA*	7.95	2,451	19.5	11.28	7.18	7.65	3.92	-20.50	-20.50	-2.16	-2.26	24.37	24.37	200.05
AFCB	Athens Bancshares, Inc. of TN*	12.70	2,766	35.1	14.05	9.56	12.00	5.83	16.51	1.68	0.61	0.61	18.16	18.02	102.45
ACFC	Atlantic Coast Fin. Corp of GA*	2.69	2,629	7.1	12.40	2.22	2.77	-2.89	-78.02	-69.88	-4.68	-5.27	20.57	20.54	304.97
BCSB	BCSB Bancorp, Inc. of MD*	12.40	3,192	39.6	14.25	9.50	12.40	0.00	25.51	9.73	0.23	0.24	16.12	16.10	197.23
BKMU	Bank Mutual Corp of WI*	2.89	46,229	133.6	5.70	2.86	3.10	-6.77	-44.32	-39.54	-2.72	-2.91	5.76	5.74	54.58
BFIN	BankFinancial Corp. of IL*	7.24	21,073	152.6	10.11	7.06	7.80	-7.18	-20.09	-25.74	-0.21	-0.17	11.88	10.60	78.91
BFED	Beacon Federal Bancorp of NY*	13.50	6,359	85.8	14.99	10.00	13.47	0.22	31.32	14.41	0.92	1.00	17.84	17.84	163.75
BNCL	Beneficial Mut MHC of PA(43.7)	7.26	80,718	261.8	9.40	7.15	7.82	-7.16	-14.39	-17.78	-0.26	-0.22	7.73	6.17	58.38
BHLB	Berkshire Hills Bancorp of MA*	19.24	16,721	321.7	24.14	17.50	20.65	-6.83	5.25	-12.98	0.70	1.00	26.61	15.09	192.90
BOFI	Bofi Holding, Inc. Of CA*	14.08	10,436	146.9	16.90	11.44	13.83	1.81	16.65	-9.22	1.94	1.57	13.67	13.67	185.90
BYFC	Broadway Financial Corp. of CA*	1.48	1,745	2.6	3.77	1.41	1.57	-5.73	-38.33	-39.09	-1.66	-1.71	8.27	8.27	256.20
BRKL	Brookline Bancorp, Inc. of MA*	7.82	59,074	462.0	11.68	7.12	7.75	0.90	-16.72	-27.93	0.49	0.50	8.48	7.60	52.72
BFSB	Brooklyn Fed MHC of NY (28.2)	0.79	12,883	2.9	3.73	0.36	0.80	-1.25	-77.43	-38.76	-0.37	-0.24	3.16	3.16	36.48
CITZ	CFS Bancorp, Inc of Munster IN*	5.23	10,868	56.8	6.10	4.27	5.45	-4.04	14.19	0.00	0.30	0.27	10.47	10.46	105.27
CMSB	CMS Bancorp Inc of W Plains NY*	8.10	1,863	15.1	10.65	7.04	7.64	6.02	-23.94	-17.85	0.16	-0.05	11.84	11.84	132.86
CBNJ	Cape Bancorp, Inc. of NJ*	7.60	13,314	101.2	10.40	7.25	8.45	-10.06	-1.30	-10.59	0.87	0.93	10.85	9.13	80.20
CFFN	Capitol Federal Fin Inc. of KS*	10.48	167,498	1,755.4	12.70	10.16	10.57	-0.85	-7.17	-12.01	0.22	0.38	11.55	11.55	57.33
CARV	Carver Bancorp, Inc. of NY*	0.69	2,489	1.7	5.80	0.31	0.65	6.15	-81.40	-63.87	-17.44	-17.43	1.89	-0.02	272.54
CEBK	Central Bncrp of Somerville MA*	17.50	1,681	29.4	20.88	10.28	17.39	0.63	70.73	27.00	0.36	0.04	22.26	20.93	295.80
CFBK	Central Federal Corp. of OH*	0.75	4,128	3.1	2.26	0.45	0.74	1.35	-25.00	47.06	-1.28	-1.41	1.26	1.23	67.29
CHFN	Charter Fin Corp MHC GA (49.0)	8.46	18,592	96.9	11.24	7.50	8.90	-4.94	-18.65	-4.94	0.16	-0.11	7.47	7.20	51.41
CHEV	Cheviot Fin Cp MHC of OH (38.5)	8.62	8,865	29.4	9.50	8.00	8.90	-3.15	4.61	-3.15	0.27	0.21	8.05	6.75	67.36
CBNK	Chicopee Bancorp, Inc. of MA*	14.00	5,867	82.1	14.70	11.08	14.00	0.00	25.56	10.67	0.13	0.10	15.52	15.52	98.86
CZWI	Citizens Comm Bncorp Inc of WI*	5.44	5,123	27.9	6.77	3.51	5.40	0.74	29.52	37.72	-1.43	-1.29	10.33	10.22	107.69
CSBC	Citizens South Bnkg Corp of NC*	4.15	11,506	47.7	5.46	3.00	3.85	7.79	-15.82	-4.38	-0.14	0.17	6.45	6.31	97.17
CSBK	Clifton Svg Bp MHC of NJ(35.8)(8)	9.50	26,138	91.3	12.18	8.08	9.96	-4.62	14.18	-12.12	0.32	0.32	6.93	6.93	43.42
COBK	Colonial Financial Serv. of NJ*	12.05	4,188	50.5	13.09	9.40	11.95	0.84	22.34	-1.23	0.73	0.71	17.15	17.15	143.55
CFFC	Community Fin. Corp. of VA*	3.07	4,362	13.4	4.28	2.72	3.07	0.00	-23.25	-11.78	0.08	0.08	8.67	8.67	119.98
DCOM	Dime Community Bancshars of NY*	11.00	34,957	384.5	15.89	10.40	11.51	-4.43	-13.45	-24.61	1.30	1.34	9.93	8.34	117.08
ESBF	ESB Financial Corp. of PA*	10.77	14,841	159.8	14.35	10.32	11.86	-9.19	-1.82	-20.40	1.05	1.06	12.03	9.18	132.59
ESSA	ESSA Bancorp, Inc. of PA*	10.76	12,411	133.5	13.49	10.44	11.02	-2.36	-7.88	-18.61	0.36	0.32	13.26	13.11	88.84
EBMT	Eagle Bancorp Montanta of MT*	10.46	3,919	41.0	11.81	8.98	10.65	-1.78	14.07	-3.42	0.61	0.24	13.39	13.39	84.48
ESBK	Elmira Svgs Bank, FSB of NY*	15.85	1,967	31.2	18.50	13.14	15.85	0.00	3.19	-13.15	1.78	1.25	20.31	13.78	254.06
FFDF	FFD Financial Corp of Dover OH*	15.00	1,012	15.2	16.49	13.00	15.50	-3.23	4.17	5.34	1.42	0.93	18.50	18.50	208.09
FFCO	FedFirst Financial Corp of PA*	13.49	2,991	40.3	16.50	9.82	13.55	-0.44	37.37	-1.96	0.16	0.31	19.99	19.56	115.65
FSBI	Fidelity Bancorp, Inc. of PA*	9.48	3,063	29.0	12.02	5.05	9.20	3.04	70.50	67.20	0.18	0.49	14.25	13.38	217.92
FABK	First Advantage Bancorp of TN*	12.70	4,087	51.9	13.89	10.60	12.75	-0.39	17.05	4.70	0.46	0.27	16.58	16.58	85.75
FBSI	First Bancshares, Inc. of MO*	6.95	1,551	10.8	9.49	5.12	6.96	-0.14	-18.24	3.58	-2.43	-2.45	12.58	12.52	131.65
FCAP	First Capital, Inc. of IN*	18.41	2,786	51.3	18.82	14.50	18.13	1.54	22.33	10.64	1.34	1.18	17.78	15.82	159.72
FCLF	First Clover Leaf Fin Cp of IL*	6.40	7,864	50.3	7.57	5.27	6.50	-1.54	16.36	-5.60	0.44	0.37	10.01	8.44	72.06
FBNK	First Connecticut Bncorp of CT*	10.47	17,880	187.2	11.50	10.24	10.57	-0.95	4.70	4.70	0.18	0.08	13.72	13.72	89.70
FDEF	First Defiance Fin. Corp of OH*	12.96	9,724	126.0	15.51	9.50	13.69	-5.33	36.42	8.91	1.02	0.55	23.92	17.44	210.38
FFNM	First Fed of N. Michigan of MI*	3.75	2,884	10.8	4.01	2.26	3.69	1.63	45.35	33.93	0.05	0.02	8.34	8.18	75.91
FFBH	First Fed. Bancshares of AR(8)*	6.00	19,303	115.8	19.50	4.70	6.00	0.00	-33.26	-19.89	-0.52	-0.57	4.30	4.30	31.93
FFNW	First Fin NW, Inc of Renton WA*	4.63	18,805	87.1	6.43	3.21	4.30	7.67	12.65	15.75	-0.47	-0.54	9.53	9.53	61.23
FFCH	First Fin. Holdings Inc. of SC*	5.82	16,527	96.2	13.19	5.26	5.59	4.11	-38.41	-49.44	-2.86	-2.74	12.20	11.83	194.93
FPTB	First PacTrust Bancorp of CA*	11.37	11,536	131.2	16.73	9.16	11.53	-1.39	18.19	-14.32	0.54	0.30	13.91	13.91	76.48
FPFC	First Place Fin. Corp. of OH*	0.85	16,974	14.4	3.88	0.52	0.67	26.87	-77.09	-67.43	-2.10	-2.91	10.76	10.24	185.73
FSFG	First Savings Fin. Grp. of IN*	15.40	2,365	36.4	18.49	13.05	15.69	-1.85	15.18	4.05	1.57	1.65	24.52	21.07	221.39
FFIC	Flushing Fin. Corp. of NY*	10.61	31,520	334.4	15.15	10.51	11.21	-5.35	-3.89	-24.21	1.28	1.32	12.85	12.31	137.16

RP FINANCIAL, LC.
Financial Services Industry Consultants 100 North Glebe Road, Suite 1100 Arlington, Virginia 222011 (703) 528-1700

Exhibit IV-1A (continued)

Weekly Thrift Market Line - Part One

Prices As Of September 2, 2011


											Current Per Share Financials
		Market Capitalization			Price Change Data									Tangible
			Shares	Market	52 week (1)			% Change From			Trailing	12 Mo.	Book	Book
		Price/	Outst-	Capital-			Last	Last	52 Wks	MostRcnt	12 Mo.	Core	Value/	Value/	Assets/
Financial Institution		Share(l)	anding	ization(9)	High	Low	Week	Week	Ago(2)	YrEnd(2)	EPS(3)	EPS(3)	Share	Share(4)	Share
		($)	(000)	($Mil)	($)	($)	($)	(%)	(%)	(%)	($)	($)	($)	($)	($)

NASDAQ Listed OTC Companies (continued)
FXCB	Fox Chase Bancorp, Inc. of PA*	12.20	14,559	177.6	14.03	9.30	12.53	-2.63	27.48	2.95	0.28	0.20	14.41	14.41	74.74
FRNK	Franklin Financial Corp. of VA*	11.14	14,303	159.3	12.49	11.09	11.40	-2.28	11.40	11.40	-0.07	0.20	17.44	17.44	76.96
GCBC	Green Co Bcrp MHC of NY (44.1)	18.84	4,146	34.2	19.97	16.28	17.65	6.74	9.22	-3.24	1.28	1.24	11.60	11.60	132.06
HFFC	HF Financial Corp. of SD*	8.27	6,974	57.7	11.24	8.26	8.75	-5.49	-15.01	-23.43	0.10	0.22	13.54	12.92	170.82
HMNF	HMN Financial, Inc. of MN*	2.00	4,388	8.8	4.11	1.50	1.86	7.53	-48.05	-28.83	-5.24	-5.54	9.81	9.81	184.00
HBNK	Hampden Bancorp, Inc. of MA*	12.58	6,799	85.5	13.80	9.81	12.60	-0.16	24.55	11.03	0.28	0.24	13.66	13.66	84.57
HARL	Harleyaville Svgs Fin Cp of PA*	14.10	3,748	52.8	15.74	11.57	14.14	-0.28	-9.03	-4.79	1.50	1.68	15.09	15.09	228.81
HBOS	Heritage Fin Group, Inc of GA*	10.89	8,711	94.9	13.52	9.32	11.76	-7.40	0.83	-12.32	0.14	0.62	14.01	13.51	110.62
HIFS	Hingham Inst. for Sav. of MA*	46.94	2,124	99.7	57.50	37.08	52.10	-9.90	23.72	5.48	5.34	5.34	36.54	36.54	502.16
HBCP	Home Bancorp Inc. Lafayette LA*	14.11	8,035	113.4	16.19	12.86	13.91	1.44	7.55	2.10	0.58	0.66	16.50	16.29	87.18
HFBL	Home Federal Bancorp Inc of LA*	13.30	3,046	40.5	14.00	9.60	13.30	0.00	24.88	15.65	0.64	0.16	16.80	16.80	76.60
HFBC	HopFed Bancorp, Inc. of KY*	7.40	7,345	54.4	9.77	7.01	7.50	-1.33	-16.76	-18.14	0.07	-0.31	12.67	12.58	144.63
HCBK	Hudson City Bancorp, Inc of NJ*	5.77	526,708	3,039.1	13.26	5.38	5.92	-2.53	-51.18	-54.71	-0.41	-0.40	9.28	8.98	98.31
IROQ	IF Bancorp, Inc. of IL*	10.81	4,811	52.0	11.79	10.70	10.86	-0.46	8.10	8.10	0.57	0.45	15.78	15.78	93.10
ISBC	Investors Bcrp MHC of NJ(43.0)	13.20	112,716	660.6	15.09	10.80	14.19	-6.98	20.11	0.61	0.63	0.58	8.34	8.08	90.55
JXSB	Jacksonville Bancorp Inc of IL*	13.70	1,931	26.5	13.98	9.79	13.70	0.00	42.71	27.09	1.57	1.34	20.06	18.65	157.90
JFBI	Jefferson Bancshares Inc of TN*	2.83	6,635	18.8	5.02	2.70	2.99	-5.35	-20.28	-12.65	-3.54	-3.74	8.41	8.10	87.04
KFFB	KY Fst Fed Bp MHC of KY (39.3)	8.09	7,741	25.3	10.40	6.51	8.15	-0.74	-19.82	-12.54	0.19	0.18	7.53	5.64	29.54
KFFG	Kaiser Federal Fin Group of CA*	11.91	9,559	113.8	14.70	9.58	11.93	-0.17	7.69	2.85	0.87	0.87	16.25	15.83	94.36
KRNY	Kearny Fin Cp MHC of NJ (25.1)	8.20	67,851	147.0	10.43	7.99	8.60	-4.65	-8.28	-4.65	0.12	0.14	7.19	5.58	42.80
LSBI	LSB Fin. Corp. of Lafayette IN*	13.30	1,554	20.7	16.36	8.90	13.75	-3.27	37.11	-2.06	1.16	0.64	23.38	23.38	231.57
LPSB	LaPorte Bancrp MHC of IN(45.0)	9.00	4,586	18.6	10.01	7.00	8.20	9.76	27.66	-0.44	0.57	0.44	11.49	9.53	100.59
LSBK	Lake Shore Bnp MHC of NY (39.4)	10.00	5,939	24.5	14.00	7.95	10.00	0.00	25.79	8.34	0.61	0.46	9.95	9.95	81.40
LABC	Louisiana Bancorp, Inc. of LA*	16.03	3,438	55.1	16.66	13.92	15.90	0.82	10.63	9.79	0.70	0.60	17.13	17.13	93.14
MSBF	MSB Fin Corp MHC of NJ (40.3)	5.19	5,173	11.1	7.94	4.23	5.03	3.18	-24.78	-12.03	0.14	0.14	7.84	7.84	67.56
MGYR	Magyar Bancorp MHC of NJ(44.7)	3.56	5,783	9.2	7.00	3.02	3.70	-3.78	3.49	-11.00	-0.02	-0.10	7.68	7.68	91.04
MLVF	Malvern Fed Bncp MHC PA(44.6)	7.45	6,103	20.3	8.99	5.05	7.49	-0.53	2.48	-0.67	-1.19	-1.19	9.98	9.98	110.43
MFLR	Mayflower Bancorp, Inc. of MA*	8.35	2,076	17.3	10.35	6.50	8.29	0.72	0.60	-7.22	0.64	0.40	10.20	10.20	118.92
EBSB	Meridian Fn Serv MHC MA (41.4)	11.88	22,241	112.3	14.30	10.25	12.76	-6.90	10.31	0.76	0.66	0.49	9.87	9.25	86.50
CASH	Meta Financial Group of IA*	18.32	3,117	57.1	34.77	11.90	19.40	-5.57	-45.65	32.95	1.58	2.54	25.04	24.59	344.72
MFSF	MutualFirst Fin. Inc. of IN*	7.52	6,987	52.5	10.50	6.97	7.70	-2.34	7.74	-19.14	0.65	0.31	14.18	13.58	207.13
NASB	NASB Fin, Inc. of Grandview MO*	10.21	7,868	80.3	19.12	9.25	10.09	1.19	-26.28	-39.08	-2.02	-4.78	18.38	18.06	159.76
NECB	NE Comm Bncrp MHC of NY (44.6)	6.62	12,797	39.4	6.90	5.55	6.71	-1.34	9.78	18.21	0.22	0.32	8.40	8.26	34.71
NHTB	NH Thrift Bancshares of NH*	12.81	5,774	74.0	13.79	10.10	12.53	2.23	25.22	2.07	1.34	0.78	14.89	9.94	178.56
NVSL	Naugatuck Valley Fin Crp of CT*	7.58	7,002	53.1	9.09	4.71	7.47	1.47	12.97	12.13	0.21	0.26	11.57	11.56	84.64
NFSB	Newport Bancorp, Inc. of RI*	13.05	3,489	45.5	14.60	11.43	13.75	-5.09	8.75	8.75	0.56	0.54	14.58	14.58	130.10
FFFD	North Central Bancshares of IA*	17.25	1,355	23.4	18.75	12.11	17.41	-0.92	15.00	3.36	1.41	1.40	30.01	29.52	326.66
NFBK	Northfield Bcp MHC of NY (43.4)	12.15	42,371	231.8	14.42	10.51	13.35	-8.99	9.16	-8.78	0.37	0.33	9.40	9.02	54.46
NWBI	Northwest Bancshares Inc of PA*	11.23	103,266	1,159.7	13.36	10.24	11.73	-4.26	0.54	-4.67	0.59	0.60	11.88	10.19	78.32
OBAF	OBA Financial Serv. Inc of MD*	14.30	4,602	65.8	15.10	11.02	14.04	1.85	30.00	3.47	0.18	0.17	17.57	17.57	77.35
OSHC	Ocean Shore Holding Co. of NJ*	11.05	7,297	80.6	13.25	10.35	11.03	0.18	4.25	-3.49	0.72	0.74	14.09	14.09	117.89
OCFC	OceanFirst Fin. Corp of NJ*	11.25	18,846	212.0	14.69	11.24	11.81	-4.74	-1.32	-12.59	1.13	0.99	11.32	11.32	118.81
OFED	Oconee Fed Fn Cp MHC SC (35.0)	10.95	6,348	24.3	13.50	10.90	10.95	0.00	9.50	9.50	0.29	0.53	12.50	12.50	59.38
OABC	OmniAmerican Bancorp Inc of TX*	13.83	11,662	161.3	15.93	11.10	13.89	-0.43	24.26	2.07	0.19	0.12	17.26	17.26	113.88
ONFC	Oneida Financial Corp. of NY*	8.77	7,162	62.8	9.20	7.06	8.51	3.06	13.16	11.72	0.80	0.81	12.31	8.80	91.89
ORIT	Oritani Financial Corp of NJ*	12.01	55,513	666.7	13.47	9.58	12.90	-6.90	23.94	-1.88	0.51	0.52	11.63	11.63	46.61
PSBH	PSB Hldgs Inc MHC of CT (42.9)	5.06	6,529	14.2	5.98	2.60	5.00	1.20	23.41	21.93	0.20	0.32	7.19	6.07	73.00
PVFC	PVF Capital Corp. of Solon OH*	1.55	25,670	39.8	2.23	1.27	1.45	6.90	-13.41	-14.84	-0.38	-0.58	2.90	2.90	30.28
PFED	Park Bancorp of Chicago IL*	2.92	1,193	3.5	5.07	2.12	2.39	22.18	-31.62	-18.89	-4.55	-4.73	13.42	13.42	174.58
PVSA	Parkvale Financial Corp of PA(8)*	17.80	5,583	99.4	22.39	5.75	18.21	-2.25	176.83	93.90	-2.71	1.17	16.50	11.51	322.64
PBHC	Pathfinder BC MHC of NY (36.3)	9.10	2,486	8.2	10.25	6.03	10.08	-9.72	35.01	7.06	0.76	0.67	10.52	8.98	168.36
PEOP	Peoples Fed Bancshrs Inc of MA*	14.00	7,142	100.0	14.91	10.48	13.90	0.72	33.33	7.61	-0.02	0.45	16.44	16.44	75.31
PBCT	Peoples United Financial of CT*	11.40	355,010	4,047.1	14.49	10.50	10.98	3.83	-10.38	-18.63	0.45	0.45	14.63	9.15	71.33
PROV	Provident Fin. Holdings of CA*	8.25	11,419	94.2	8.74	5.30	8.08	2.10	53.06	13.95	1.16	-0.58	12.41	12.41	115.12
PBNY	Provident NY Bncrp, Inc. of NY*	6.03	38,006	229.2	11.09	6.01	6.33	-4.74	-27.09	-42.52	0.46	0.30	11.29	6.93	78.30
PBIP	Prudential Bncp MHC PA (25.5)	5.18	10,023	15.7	8.00	5.17	5.49	-5.65	-27.65	-14.38	-0.05	-0.03	5.55	5.55	49.66
PULB	Pulaski Fin Cp of St. Louis MO*	6.50	10,477	68.1	7.82	6.15	6.60	-1.52	1.56	-14.25	0.67	0.31	8.37	7.99	127.10
RIVR	River Valley Bancorp of IN*	16.10	1,514	24.4	17.13	13.49	16.20	-0.62	5.37	0.63	1.28	0.78	18.49	18.43	264.15
RVSB	Riverview Bancorp, Inc. of WA*	2.61	22,472	58.7	3.34	1.71	2.70	-3.33	45.00	-4.04	0.15	0.14	4.80	3.65	39.41
RCKB	Rockville Fin New, Inc. of CT*	9.50	29,507	280.3	10.87	6.92	9.61	-1.14	21.17	17.87	0.17	0.31	11.26	11.22	59.20
ROMA	Roma Fin Corp MHC of NJ (26.2)	8.19	30,321	68.2	11.25	8.19	9.09	-9.90	-22.07	-22.74	0.18	0.13	7.07	7.01	62.39
SIFI	SI Financial Group, Inc. of CT*	9.43	10,576	99.7	10.53	6.11	9.25	1.95	31.70	-4.07	0.26	0.22	12.29	11.90	89.75
SPBC	SP Bancorp, Inc. of Plano, TX*	11.35	1,725	19.6	12.50	8.71	10.82	4.90	13.50	21.00	0.58	-0.05	18.84	18.84	154.21
SVBI	Severn Bancorp, Inc. of MD*	3.03	10,067	30.5	5.69	2.25	3.08	-1.62	-15.36	-12.17	-0.10	-0.15	7.72	7.69	93.11
STND	Standard Financial Corp. of PA*	14.75	3,478	51.3	17.03	10.90	15.08	-2.19	47.50	6.50	0.67	0.93	22.25	19.52	125.85

RP FINANCIAL, LC.
Financial Services Industry Consultants
1100 North Glebe Road, Suite 1100
Arlington, Virginia 222011
(703) 528-1700

Exhibit IV-1A (continued)
Weekly Thrift Market Line - Part One
Prices As Of September 2, 2011


											Current Per Share Financials
		Market Capitalization			Price Change Data									Tangible
			Shares	Market	52 Week (1)			% Change From			Trailing	12 Mo.	Book	Book
		Price/	Outst-	Capital-			Last	Last	52 Wks	MostRcnt	12 Mo.	Core	Value/	Value/	Assets/
Financial Institution		Share(1)	anding	ization(9)	High	Low	Week	Week	Ago(2)	YrEnd(2)	EPS(3)	EPS(3)	Share	Share(4)	Share
		($)	(000)	($Mil)	($)	($)	($)	(%)	(%)	(%)	($)	($)	($)	($)	($)

NASDAQ Listed OTC Companies (continued)
SIBC	State Investors Bancorp of LA*	11.50	2,910	33.5	12.25	11.20	11.50	0.00	15.00	15.00	0.20	0.24	15.80	15.80	82.08
THRD	TF Fin. Corp. of Newtown PA*	21.14	2,822	59.7	22.86	19.05	21.21	-0.33	3.73	-0.42	1.06	0.79	26.73	25.12	245.06
TFSL	TFS Fin Corp MHC of OH (26.4)	8.35	308,442	678.0	11.07	7.76	8.60	-2.91	-13.83	-7.43	-0.03	-0.03	5.73	5.70	35.27
TBNK	Territorial Bancorp, Inc of HI*	19.06	11,593	221.0	21.29	16.46	19.79	-3.69	12.18	-4.27	1.08	1.04	19.62	19.62	128.38
TSBK	Timberland Bancorp, Inc. of WA*	5.05	7,045	35.6	6.50	3.20	4.96	1.81	29.49	39.89	0.00	-0.13	9.99	9.13	104.33
TRST	TrustCo Bank Corp NY of NY*	4.37	77,367	338.1	6.66	3.93	4.30	1.63	-18.62	-31.07	0.39	0.37	3.48	3.47	52.61
UCBA	United Comm Bncp MHC IN (40.7)	5.81	7,840	18.5	8.13	5.29	6.24	-6.89	-19.86	-19.86	-0.12	-0.16	6.81	6.35	60.71
UCFC	United Community Fin. of OH*	1.14	30,969	35.3	1.62	0.87	1.00	14.00	-6.56	-14.93	-0.84	-1.07	5.91	5.90	67.89
UBNK	United Financial Bncrp of MA*	14.17	16,099	228.1	16.76	12.95	15.13	-6.35	4.65	-7.20	0.65	0.64	14.15	13.61	99.98
VPFG	ViewPoint Financal Group of TX*	11.34	34,839	395.1	14.05	8.82	11.59	-2.16	25.44	-2.99	0.67	0.40	11.68	11.66	85.07
WSB	WSB Holdings, Inc. of Bowie MD*	2.47	7,995	19.7	3.48	2.11	2.40	2.92	2.49	7.39	-0.14	-0.06	6.62	6.62	48.81
WSFS	WSFS Financial Corp. of DE*	33.62	8,604	289.3	50.99	31.20	33.23	1.17	-9.28	-29.13	2.01	1.62	37.62	33.60	482.51
WVFC	WVS Financial Corp. of PA*	9.00	2,058	18.5	13.17	8.37	9.01	-0.11	-12.62	-0.99	0.30	0.33	13.78	13.78	120.22
WFSL	Washington Federal, Inc. of WA*	13.92	110,438	1,537.3	18.53	13.73	14.52	-4.13	-4.07	-17.73	0.87	0.81	16.84	14.53	120.64
WSBF	Waterstone Fin MHC of WI (26.2)	2.60	31,250	21.3	4.10	2.19	2.61	-0.38	-32.11	-20.00	-0.10	-1.00	5.47	5.45	55.15
WAYN	Wayne Savings Bancshares of OH*	8.40	3,004	25.2	9.93	7.52	8.46	-0.71	5.66	-6.46	0.69	0.66	13.15	12.49	137.05
WFD	Westfield Fin. Inc. of MA*	6.90	27,871	192.3	9.45	6.63	7.64	-9.69	-10.16	-25.41	0.11	0.01	7.87	7.87	44.52
WBKC	Wolverine Bancorp, Inc. of MI*	14.00	2,508	35.1	15.18	11.00	14.10	-0.71	40.00	40.00	0.29	0.23	25.59	25.59	121.92

RP FINANCIAL, LC.
Financial Services Industry Consultants
1100 North Glebe Road, Suite 1100
Arlington, Virginia 22201
(703) 528-1700

Exhibit IV-1B
Weekly Thrift Market Line - Part Two
Prices As Of September 2, 2011


	Key Financial Ratios							Asset Quality Ratios			Pricing Ratios					Divident Data(6)
		Tang.												Price/	Price/	Ind.	Divi-
	Equity/	Equity/	Reported Earnings			Core Earnings		NPAS	Resvs/	Resvs/	Price/	Price/	Price/	Tang.	Core	Div./	dend	Payout
Financial Institution	Assets	Assets	ROA(5)	ROE(5)	ROI(5)	ROA(5)	ROE(5)	Assets	NPAS	Loans	Earning	Book	Assets	Book	Earnings	Share	Yield	Ratio(7)
	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(x)	(%)	(%)	(%)	(x)	($)	(%)	(%)

Market Averages. All Public Companies (no MHCs)

All Public Companies (117)	11.96	11.33	0.06	0.48	3.74	-0.03	-0.44	3.70	53.30	1.82	16.62	71.78	8.78	76.57	18.97	0.21	1.91	28.63
NYSE Traded Companies (6)	9.44	7.39	-0.17	-0.47	7.42	-0.18	-2.63	4.91	32.30	2.11	11.11	109.58	8.84	113.25	12.30	0.43	3.43	56.48
NASDAQ Listed OTC Companies (111)	12.10	11.55	0.07	0.53	3.59	-0.02	-0.33	3.63	54.33	1.80	16.89	69.66	8.78	74.84	19.39	0.20	1.83	27.85
California Companies (5)	11.35	11.28	0.65	5.49	9.97	0.25	1.51	6.42	31.41	2.35	12.28	68.48	8.56	68.87	20.19	0.17	2.04	12.64
Florida Companies (2)	7.14	6.68	-0.58	3.75	2.22	0.28	12.94	7.18	24.87	3.15	NM	192.33	11.08	158.63	13.05	0.28	1.22	0.00
Mid-Atlantic Companies (36)	11.91	10.88	0.34	4.82	5.44	0.33	4.72	3.21	45.55	1.55	15.26	76.54	9.21	88.35	16.09	0.28	2.61	35.45
Mid-West Companies (33)	9.83	9.46	-0.41	-5.07	2.46	-0.64	-7.27	4.80	40.33	2.46	12.52	56.92	5.85	59.66	18.80	0.20	1.89	24.79
New England Companies (17)	14.15	13.12	0.44	3.97	4.00	0.44	3.83	1.47	85.89	1.09	21.76	86.18	12.04	96.02	22.14	0.28	2.12	35.13
North-West Companies (5)	12.69	11.68	-0.14	-1.38	-5.06	-0.21	-1.95	7.50	22.75	2.16	16.70	53.76	6.91	60.77	17. 91	0.05	0.34	13.79
South-East Companies (14)	14.42	14.31	-0.23	-5.42	2.33	-0.23	-5.50	2.95	88.36	1.59	25.80	62.57	10.02	63.24	24.88	0.08	0.80	16.25
South-West Companies (3)	13.70	13.69	0.47	3.78	4.13	0.19	1.41	2.84	37.82	1.08	18.25	79.15	10.94	79.21	28.35	0.07	0.59	9.95
Western Companies (Excl CA) (2)	15.57	15.57	0.79	5.04	5.75	0.56	3.57	0.75	42.94	0.60	17.40	87.63	13.61	87.63	18.33	0.33	2.33	40.44
Thrift Strategy (110)	12.20	11.60	0.08	0.41	3.86	0.01	-0.33	3.44	54.51	1.72	16.71	70.40	8.96	76.38	18.94	0.22	1.96	29.33
Mortgage Banker Strategy (3)	3.85	3.69	-0.57	9.76	14.06	-1.16	-4.88	11.10	33.87	4.34	7.11	149.91	3.03	66.48	NM	0.04	0.48	10.34
Real Estate Strategy (1)	9.58	9.58	-1.16	-12.10	-24.52	-1.78	-18.47	9.39	40.93	5.11	NM	53.45	5.12	53.45	NM	0.00	0.00	0.00
Diversified Strategy (3)	12.50	9.99	0.51	3.90	6.03	0.48	3.58	3.26	36.70	1.64	18.10	74.92	9.41	94.36	19.47	0.38	2.40	13.36
Companies Issuing Dividends (73)	12.27	11.44	0.41	3.59	5.37	0.34	2.96	2.65	56.62	1.54	16.22	78.53	9.80	86.77	18.54	0.35	3.12	41.80
Companies Without Dividends (44)	11.47	11.16	-0.50	-5.40	0.33	-0.60	-6.86	5.42	47.96	2.27	18.10	60.78	7.16	59.14	20.58	0.00	0.00	0.00
Equity/Assets <6% (8)	2.53	2.32	-2.10	-21.82	0.00	-2.25	-24.48	11.77	35.93	4.39	NM	62.59	0.77	26.89	NM	0.01	0.39	0.00
Equity/Assets 6-12% (55)	8.91	8.53	-0.04	-0.17	4.48	-0.19	-1.75	4.00	45.39	1.85	13.42	67.75	6.01	72.16	17.24	0.25	2.18	28.63
Equity/Assets >12% (54)	16.46	15.51	0.45	3.08	3.08	0.45	3.08	2.45	63.46	1.43	19.93	77.09	12.78	85.04	20.86	0.21	1.84	28.63
Converted Last 3 Mths (no MHC) (4)	16.29	16.29	0.33	2.81	2.88	0.29	3.48	1.74	51.35	1.20	27.53	70.78	11.56	70.79	26.59	0.03	0.40	14.29
Actively Traded Companies (4)	8.75	8.19	0.13	1.66	6.56	0.10	1.44	3.11	46.63	1.52	12.40	84.36	7.45	89.27	12.99	0.41	2.11	33.96
Market Value Below $20 Million (17)	7.23	7.15	-1.01	-9.11	3.23	-1.18	-10.76	7.28	31.69	2.82	22.31	44.18	3.50	44.89	25.66	0.07	0.70	19.82
Holding Company Structure (111)	12.07	11.43	0.03	0.11	3.53	-0.06	-0.83	3.72	53.97	1.84	16.89	71.27	8.84	75.95	19.26	0.21	1.94	28.94
Assets Over $1 Billion (55)	11.70	10.75	0.18	2.05	4.85	0.07	0.82	3.47	49.68	1.81	14.33	79.77	9.25	86.31	18.08	0.30	2.74	34.12
Assets $500 Million-$1 Billion (30)	11.50	11.03	-0.30	-2.02	0.45	-0.31	-2.25	4.63	40.67	1.81	20.27	62.50	7.80	66.73	20.73	0.11	1.02	25.62
Assets $250-$500 Million (23)	13.16	12.83	0.33	1.41	5.03	0.23	0.53	3.52	64.64	1.95	17.39	68.68	9.28	72.04	18.61	0.18	1.40	23.93
Assets less than $250 Million (9)	11.92	11.89	-0.18	-2.96	4.33	-0.33	-4.39	3.03	82.14	1.57	18.60	63.40	7.90	63.53	21.43	0.15	1.22	25.17
Goodwill Companies (70)	11.10	10.05	0.03	0.60	4.37	0.00	0.18	3.56	50.25	1.80	15.84	72.98	8.10	81.07	17.96	0.26	2.41	34.64
Non-Goodwill Companies (46)	13.40	13.40	0.13	0.63	2.82	-0.03	-1.01	3.92	58.64	1.85	17.96	71.37	9.99	71.37	21.17	0.15	1.20	20.02
Acquirors of FSLIC Cases (1)	13.96	12.28	0.71	5.21	6.25	0.66	4.85	5.28	23.14	1.87	16.00	82.66	11.54	95.80	17.19	0.24	1.72	27.59

(1)	Average of high/low or bid/ask price per share.
(2)	Or since offering price if converted or first listed in the past 52 weeks. Percent change figures are actual year-to-date and are not annualized
(3)	EPS (earnings per share) is based on actual trailing twelve month data and is not shown on a pro forma basis.
(4)	Excludes intangibles (such as goodwill, value of core deposits, etc.).
(5)	ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and assets balances, ROI (return on investment) is current EPS divided by current price.
(6)	Annualized, based on last regular quarterly cash dividend announcement.
(7)	Indicated dividend as a percent of trailing twelve month earnings.
(8)	Excluded from averages due to actual or rumored acquisition activities or unusual operating characteristics.

*	Parentheses following market averages indicate the number of institutions included in the respective averages. All figures have been adjusted for stock splits, stock dividends, and secondary offerings.

Source:

RP FINANCIAL, LC.
Financial Services Industry Consultants
1100 North Glebe Road, Suite 1100
Arlington, Virginia 22201
(703) 528-1700

Exhibit IV-1B (continued)

Weekly Thrift Market Line - Part Two

Prices As Of September 2, 2011


	Key Financial Ratios							Asset Quality Ratios			Pricing Ratios					Dividend Data(6)
		Tang.												Price/	Price/	Ind.	Divi-
	Equity/	Equity/	Reported Earnings			Core Earnings		NPAs	Resvs/	Resvs/	Price/	Price/	Price/	Tang.	Core	Div./	dend	Payout
Financial Institution	Assets	Assets	ROA(5)	ROE(5)	ROI(5)	ROA(5)	ROE(5)	Assets	NPAs	Loans	Earning	Book	Assets	Book	Earnings	Share	Yield	Ratio(7)
	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(X)	(%)	(%)	(%)	(x)	($)	(%)	(%)

Market Averages. MHC Institutions

All Public Companies (25)	12.97	12.15	0.23	1.59	1.62	0.16	0.78	5.09	30.45	1.69	24.40	96.17	12.76	104.07	22.64	0.18	2.26	29.47
NASDAQ Listed OTC Companies (25)	12.97	12.15	0.23	1.59	1.62	0.16	0.78	5.09	30.45	1.69	24.40	96.17	12.76	104.07	22.64	0.18	2.26	29.47
Mid-Atlantic Companies (15)	12.02	11.46	0.18	1.18	1.36	0.19	1.26	6.29	31.59	1.88	23.43	96.08	11.68	102.10	23.98	0.16	1.93	39.30
Mid-West Companies (6)	14.37	12.81	0.21	1.17	0.92	-0.10	-1.99	4.69	26.72	1.50	23.86	95.24	14.51	108.55	20.45	0.22	3.01	0.00
New England Companies (2)	10.63	9.61	0.53	4.87	4.75	0.51	4.85	2.61	22.86	1.00	21.65	95.37	10.33	105.90	20.03	0.08	1.58	0.00
South-East Companies (2)	17.79	17.56	0.39	2.44	2.27	0.35	1.62	1.99	41.09	1.60	37.76	100.43	17.45	102.55	20.66	0.30	3.01	0.00
Thrift Strategy (25)	12.97	12.15	0.23	1.59	1.62	0.16	0.78	5.09	30.45	1.69	24.40	96.17	12.76	104.07	22.64	0.18	2.26	29.47
Companies Issuing Dividends (17)	13.77	12.86	0.27	1.58	1.99	0.27	1.61	5.59	30.14	1.82	26.45	95.27	13.36	103.74	22.70	0.27	3.39	47.16
Companies Without Dividends (8)	11.38	10.74	0.17	1.62	0.92	-0.08	-0.89	4.34	30.91	1.46	18.25	97.98	11.55	104.72	22.49	0.00	0.00	0.00
Equity/Assets 6-12% (15)	10.02	9.52	0.16	1.34	1.46	0.03	0.15	6.29	28.64	1.75	21.97	89.17	9.00	94.84	21.30	0.17	2.28	14.10
Equity/Assets >12% (10)	17.89	16.55	0.36	2.01	1.88	0.36	1.81	3.30	33.17	1.58	29.27	107.84	19.02	119.44	24.98	0.20	2.22	55.10
Market Value Below $20 Million (1)	8.66	8.66	-1.01	-11.78	0.00	-0.65	-7.64	24.93	17.64	6.96	NM	25.00	2.17	25.00	NM	0.04	5.06	0.00
Holding Company Structure (23)	13.05	12.20	0.25	1.70	1.74	0.17	0.83	5.21	30.88	1.71	24.40	96.29	12.86	104.53	22.64	0.19	2.36	29.47
Assets Over $1 Billion (9)	13.18	12.26	0.27	2.14	1.16	0.04	-0.24	4.12	34.51	1.61	23.93	115.62	15.47	125.27	27.94	0.10	1.04	21.62
Assets $500 Million-$l Billion (5)	10.55	10.11	0.15	1.11	-0.94	0.01	-0.09	5.58	33.36	1.54	23.32	100.75	10.84	105.72	15.19	0.30	2.65	54.69
Assets $250-$500 Million (10)	12.77	12.26	0.21	1.30	3.38	0.29	1.86	5.75	28.83	1.84	24.91	77.20	10.09	82.34	21.43	0.17	2.77	29.06
Assets less than $250 Million (1)	25.49	20.40	0.62	2.54	2.35	0.59	2.40	2.85	13.53	0.00	NM	107.44	27.39	143.44	NM	0.40	4.94	0.00
Goodwill Companies (16)	13.77	12.55	0.33	2.52	2.28	0.19	1.06	3.84	35.48	1.57	23.36	103.25	14.39	115.10	22.05	0.17	2.19	22.53
Non-Goodwill Companies (9)	11.37	11.37	0.03	-0.26	0.11	0.10	0.20	7.42	21.11	1.94	26.49	82.01	9.49	82.01	23.67	0.21	2.39	50.29
MHC Institutions (25)	12.97	12.15	0.23	1.59	1.62	0.16	0.78	5.09	30.45	1.69	24.40	96.17	12.76	104.07	22.64	0.18	2.26	29.47

(1)	Average of high/low or bid/ask price per share.
(2)	Or since offering price if converted or first listed in the past 52 weeks. Percent change figures are actual year-to-date and are not annualized
(3)	EPS (earnings per share) is based on actual trailing twelve month data and is not shown on a pro forma basis.
(4)	Excludes intangibles (such as goodwill, value of core deposits, etc.).
(5)	ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing twelve month common earnings and average common equity and assets balances, ROI (return on investment) is current EPS divided by current price.
(6)	Annualized, based on last regular quarterly cash dividend announcement.
(7)	Indicated dividend as a percent of trailing twelve month earnings.
(8)	Excluded from averages due to actual or rumored acquisition activities or unusual operating characteristics.

*	Parentheses following market averages indicate the number of institutions included in the respective averages. All figures have been adjusted for stock splits, stock dividends, and secondary offerings.

Source:

RP FINANCIAL, LC.
Financial Services Industry Consultants 1100 North Glebe Road, Suite 1100 Arlington, Virginia 22201 (703) 528-1700

Exhibit IV-1B (continued)

Weekly Thrift Market Line - Part Two

Prices As Of September 2, 2011


		Key Financial Ratios														Asset Quality Ratios
				Tang.
		Equity/		Equity/		Reported Earnings						Core Earnings				NPAs		Resvs/		Resvs/
Financial Institution		Assets		Assets		ROA(5)		ROE(5)		ROI(5)		ROA(5)		ROE(5)		Assets		NPAs		Loans
		(%)		(%)		(%)		(%)		(%)		(%)		(%)		(%)		(%)		(%)

NYSE Traded Companies
AF	Astoria Financial Corp. of NY*		7.47		6.46		0.49		7.17		9.93		0.47		6.85		2.99		35.75		1.35
BBX	BankAtlantic Bancorp Inc of FL*		0.67		0.30		-1.61	NM		NM			-0.99	NM			14.33		24.87		4.82
BKU	BankUnited, Inc. *		13.61		13.07		0.45		3.75		2.22		1.56		12.94		0.03	NA			1.48
FBC	Flagstar Bancorp, Inc. of MI*		7.58		7.58		-2.39		-28.50	NM			-3.88		-46.38		8.48		25.53		2.83
NYB	New York Community Bcrp of NY*		13.69		8.04		1.28		9.60		10.02		1.04		7.77		1.54		24.86		0.53
PFS	Provident Fin. Serv. Inc of NJ*		13.63		8.92		0.76		5.64		7.52		0.76		5.64		2.08		50.47		1.62

NASDAQ Listed OTC Companies
ABBC	Abington Bancorp, Inc. of PA(8)*		18.38		18.38		0.64		3.70		4.96		0.64		3.70		4.27		8.68		0.66
ALLB	Alliance Bancorp, Inc. of PA*		18.40		18.40		0.47		3.36		3.84		0.48		3.45		4.59		24.69		1.81
ABCW	Anchor BanCorp Wisconsin of WI*		0.10		0.00		-1.07	NM		NM			-1.99	NM			13.94		30.71		5.45
ANCB	Anchor Bancorp of Aberdeen, WA*		12.18		12.18		-1.10		-10.44		-27.17		-1.15		-10.92	NA		NA			2.17
AFCB	Athens Bancshares, Inc. of TN*		17.73		17.61		0.60		3.37		4.80		0.60		3.37		2.71		59.33		2.20
ACFC	Atlantic Coast Fin. Corp of GA*		6.74		6.74		-1.45		-23.82	NM			-1.64		-26.82		7.65		22.31		2.30
BCSB	BCSB Bancorp, Inc. of MD*		8.17		8.16		0.12		1.29		1.85		0.12		1.34		2.29		26.84		1.05
BKMU	Bank Mutual Corp of WI*		10.55		10.52		-4.32		-37.01	NM			-4.62		-39.59		6.30		27.31		2.82
BFIN	BankFinancial Corp. of IL*		15.06		13.65		-0.28		-1.74		-2.90		-0.22		-1.41		4.76		29.02		1.75
BFED	Beacon Federal Bancorp of NY*		10.89		10.89		0.56		5.32		6.81		0.61		5.79		1.34		118.30		2.01
BNCL	Beneficial Mut MHC of PA(43.7)		13.24		10.86		-0.43		-3.34		-3.58		-0.37		-2.83		2.92		37.32		1.88
BHLB	Berkshire Hills Bancorp of MA*		13.79		8.32		0.40		2.94		3.64		0.58		4.20		0.63		176.65		1.30
BOFI	Bofi Holding, Inc. Of CA*		7.35		7.35		1.22		14.66		13.78		0.99		11.87		1.69		23.47		0.55
BYFC	Broadway Financial Corp. of CA*		3.23		3.23		-0.59		-8.93	NM			-0.60		-9.20		17.14		29.03		5.58
BRKL	Brookline Bancorp, Inc. of MA*		16.08		14.66		1.02		5.81		6.27		1.04		5.92		0.65		151.68		1.19
BFSB	Brooklyn Fed MHC of NY (28.2)		8.66		8.66		-1.01		-11.78	NM			-0.65		-7.64		24.93		17.64		6.96
CITZ	CFS Bancorp, Inc of Munster IN*		9.95		9.94		0.29		2.89		5.74		0.26		2.60		7,79		19.40		2.31
CMSB	CMS Bancorp, Inc. of W Plains NY*		8.91		8.91		0.12		1.38		1.98		-0.04		-0.43		3.24		14.66		0.66
CBNJ	Cape Bancorp, Inc. of NJ*		13.53		11.64		1.09		8.49		11.45		1.16		9.07		5.73		21.80		1.73
CFFN	Capitol Federal Fin Inc. of KS*		20.15		20.15		0.40		2.36		2.10		0.69		4.08		0.70		22.04		0.29
CARV	Carver Bancorp, Inc. of NY*		0.69		-0.01		-5.88	NM		NM			-5.88	NM			17.08		20.51		4.23
CEBK	Central Bncrp of Somerville MA*		7.53		7.11		0.12		1.30		2.06		0.01		0.14		3.49		25.46		1.06
CFBK	Central Federal Corp. of OH*		1.87		1.83		-1.87		-34.69	NM			-2.07		-38.21		3.73		77.70		4.44
CHFN	Charter Fin Corp MHC GA (49.0)		14.53		14.08		0.28		2.26		1.89		-0.19		-1.55		2.66		64.46		2.86
CHEV	Cheviot Fin Cp MHC of OH (38.5)		11. 95		10.22		0.53		3.41		3.13		0.41		2.65	NA		NA			0.34
CBNK	Chicopee Bancorp, Inc. of MA*		15.70		15.70		0.13		0.82		0.93		0.10		0.63		1.01		75.44		1.00
CZWI	Citizens Comm Bncorp Inc of WI*		9.59		9.50		-1.27		-13.90		-26.29		-1.15		-12.54		2.65		31.83		1.08
CSBC	Citizens South Bnkg Corp of NC*		6.64		6.50		-0.15		-1.71		-3.37		0.18		2.07		3.38		33.75		1.69
CSBK	Clifton Svg Bp MHC of NJ(35.8)(8)		15.96		15.96		0.74		4.69		3.37		0.74		4.69		0.40		41.92		0.44
COBK	Colonial Financial Serv. of NJ*		11.95		11.95		0.52		4.63		6.06		0.50		4.50		4.84		14.03		1.31
CFFC	Community Fin. Corp. of VA*		7.23		7.23		0.07		0.70		2.61		0.07		0.70		7.95		17.72		1.54
DCOM	Dime Community Bancshars of NY*		8.48		7.22		1.11		13.77		11.82		1.15		14.19		0.87		54.33		0.57
ESBF	ESB Financial Corp. of PA*		9.07		7.08		0.80		9.04		9.75		0.81		9.12		0.83		40.82		1.03
ESSA	ESSA Bancorp, Inc. of PA*		14.93		14.78		0.41		2.65		3.35		0.37		2.36		1.73		43.09		1.10
EBMT	Eagle Bancorp Montanta of MT*		15.85		15.85		0.72		4.51		5.83		0.28		1.78		1.24		43.69		0.95
ESBK	Elmira Svgs Bank, FSB of NY*		7.99		5.57		0.70		6.14		11.23		0.49		4.31		0.99		57.52		0.94
FFDF	FFD Financial Corp of Dover OH*		8.89		8.89		0.70		7.79		9.47		0.46		5.10		1.53		76.87		1.18
FFCO	FedFirst Financial Corp of PA*		17.28		16.98		0.14		0.85		1.19		0.27		1.65		0.99		87.49		1.23
FSBI	Fidelity Bancorp, Inc. of PA*		6.54		6.16		0.08		1.12		1.90		0.22		3.04		3.54		23.97		1.62
FABK	First Advantage Bancorp of TN*		19.34		19.34		0.54		2.79		3.62		0.32		1.64		0.92		121.24		1.58
FBSI	First Bancshares, Inc. of MO*		9.56		9.52		-1.80		-17.26	NM			-1.81		-17.40		4.17		30.44		2.56
FCAP	First Capital, Inc. of IN*		11.13		10.03		0.83		7.70		7.28		0.73		6.78		1.97		51.90		1.55
FCLF	First Clover Leaf Fin Cp of IL*		13.89		11.97		0.61		4.44		6.88		0.51		3.73		3.50		24.27		1.24
FBNK	First Connecticut Bncorp of CT*		15.30		15.30		0.20	NM			1.72		0.09	NM			1.39		70.22		1.33
FDEF	First Defiance Fin. Corp of OH*		11.37		8.55		0.49		3.96		7.87		0.26		2.14		2.35		84.16		2.77
FFNM	First Fed of N. Michigan of MI*		10.99		10.80		0.07		0.61		1.33		0.03		0.24		4.71		21.25		1.48
FFBH	First Fed. Bancshares of AR(8)*		13.47		13.47		-1.62		-21.14		-8.67		-1.77		-23.17		15.13		31.73		7.80
FFNW	First Fin NW, Inc of Renton WA*		15.56		15.56		-0.72		-4.96		-10.15		-0.83		-5.70		11.28		13.08		2.21
FFCH	First Fin. Holdings Inc. of SC*		6.26		6.08		-1.43		-15.39	NM			-1.37		-14.75		2.76		62.46		2.26
FPTB	First PacTrust Bancorp of CA*		18.19		18.19		0.72		4.96		4.75		0.40		2.76		4.82		19.84		1.24
FPFC	First Place Fin. Corp. of OH*		5.79		5.53		-1.10		-13.16	NM			-1.52		-18.23		4.42		32.78		1.78
FSFG	First Savings Fin. Grp. of IN*		11.08		9.67		0.72		6.70		10.19		0.76		7.05	NA		NA			1.25
FFIC	Flushing Fin. Corp. of NY*		9.37		9.01		0.94		10.28		12.06		0.97		10.60		3.56		19.08		0.91
FXCB	Fox Chase Bancorp, Inc. of PA*		19.28		19.28		0.36		1.97		2.30		0.26		1.41		3.04		37.66		1.91


		Pricing Ratios										Dividend Data(6)
								Price/		Price/		Ind.		Divi-
		Price/		Price/		Price/		Tang.		Core		Div./		dend		Payout
Financial Institution		Earning		Book		Assets		Book		Earnings		Share		Yield		Ratio(7)
		(X)		(%)		(%)		(%)		(x)		($)		(%)		(%)

NYSE Traded Companies
AF	Astoria Financial Corp. of NY*		10.07		70.57		5.27		82.52		10.53		0.52		5.68		57.14
BBX	BankAtlantic Bancorp Inc of FL*	NM			233.33		1.56	NM		NM			0.00		0.00	NM
BKU	BankUnited, Inc. *	NM			151.32		20.60		158.63		13.05		0.56		2.44	NM
FBC	Flagstar Bancorp, Inc. of MI*	NM			33.15		2.51		33.15	NM			0.00		0.00	NM
NYB	New York Community Bcrp of NY*		9.98		94.96		13.00		172.43		12.32		1.00		8.29	NM
PFS	Provident Fin. Serv. Inc of NJ*		13.30		74.14		10.11		119.54		13.30		0.48		4.20		55.81

NASDAQ Listed OTC Companies
ABBC	Abington Bancorp, Inc. of PA(8)*		20.15		73.60		13.52		73.60		20.15		0.24		3.05		61.54
ALLB	Alliance Bancorp, Inc. of PA*		26.05		64.71		11.91		64.71		25.40		0.20		1.97		51.28
ABCW	Anchor BanCorp Wisconsin of WI*	NM		NM			0.38	NM		NM			0.00		0.00	NM
ANCB	Anchor Bancorp of Aberdeen, WA*	NM			32.62		3.97		32.62	NM			0.00		0.00	NM
AFCB	Athens Bancshares, Inc. of TN*		20.82		69.93		12.40		70.48		20.82		0.20		1.57		32.79
ACFC	Atlantic Coast Fin. Corp of GA*	NM			13.08		0.88		13.10	NM			0.00		0.00	NM
BCSB	BCSB Bancorp, Inc. of MD*	NM			76.92		6.29		77.02	NM			0.00		0.00		0.00
BKMU	Bank Mutual Corp of WI*	NM			50.17		5.29		50.35	NM			0.04		1.38	NM
BFIN	BankFinancial Corp. of IL*	NM			60.94		9.18		68.30	NM			0.28		3.87	NM
BFED	Beacon Federal Bancorp of NY*		14.67		75.67		8.24		75.67		13.50		0.20		1.48		21.74
BNCL	Beneficial Mut MHC of PA(43.7)	NM			93.92		12.44		117.67	NM			0.00		0.00	NM
BHLB	Berkshire Hills Bancorp of MA*		27.49		72.30		9.97		127.50		19.24		0.64		3.33	NM
BOFI	Bofi Holding, Inc. Of CA*		7.26		103.00		7.57		103.00		8.97		0.00		0.00		0.00
BYFC	Broadway Financial Corp. of CA*	NM			17.90		0.58		17.90	NM			0.04		2.70	NM
BRKL	Brookline Bancorp, Inc. of MA*		15.96		92.22		14.83		102.89		15.64		0.34		4.35		69.39
BFSB	Brooklyn Fed MHC of NY (28.2)	NM			25.00		2.17		25.00	NM			0.04		5.06	NM
CITZ	CFS Bancorp, Inc of Munster IN*		17.43		49.95		4.97		50.00		19.37		0.04		0.76		13.33
CMSB	CMS Bancorp, Inc. of W Plains NY*	NM			68.41		6.10		68.41	NM			0.00		0.00		0.00
CBNJ	Cape Bancorp, Inc. of NJ*		8.74		70.05		9.48		83.24		8.17		0.00		0.00		0.00
CFFN	Capitol Federal Fin Inc. of KS*	NM			90.74		18.28		90.74		27.58		0.30		2.86	NM
CARV	Carver Bancorp, Inc. of NY*	NM			36.51		0.25	NM		NM			0.00		0.00	NM
CEBK	Central Bncrp of Somerville MA*	NM			78.62		5.92		83.61	NM			0.20		1.14		55.56
CFBK	Central Federal Corp. of OH*	NM			59.52		1.11		60.98	NM			0.00		0.00	NM
CHFN	Charter Fin Corp MHC GA (49.0)	NM			113.25		16.46		117.50	NM			0.20		2.36	NM
CHEV	Cheviot Fin Cp MHC of OH (38.5)		31.93		107.08		12.80		127.70	NM			0.48		5.57	NM
CBNK	Chicopee Bancorp, Inc. of MA*	NM			90.21		14.16		90.21	NM			0.00		0.00		0.00
CZWI	Citizens Comm Bncorp Inc of WI*	NM			52.66		5.05		53.23	NM			0.00		0.00	NM
CSBC	Citizens South Bnkg Corp of NC*	NM			64.34		4.27		65.77		24.41		0.04		0.96	NM
CSBK	Clifton Svg Bp MHC of NJ(35.8)(8)		29.69		137.09		21.88		137.09		29.69		0.24		2.53	NM
COBK	Colonial Financial Serv. of NJ*		16.51		70.26		8.39		70.26		16 97		0.00		0.00		0.00
CFFC	Community Fin. Corp. of VA*		38.38		35.41		2.56		35.41		38.38		0.00		0.00		0.00
DCOM	Dime Community Bancshars of NY*		8.46		110.78		9.40		131.89		8.21		0.56		5.09		43.08
ESBF	ESB Financial Corp. of PA*		10.26		89.53		8.12		117.32		10.16		0.40		3.71		38.10
ESSA	ESSA Bancorp, Inc. of PA*		29.89		81.15		12.11		82.07		33.63		0.20		1.86		55.56
EBMT	Eagle Bancorp Montanta of MT*		17.15		78.12		12.38		78.12	NM			0.29		2.77		47.54
ESBK	Elmira Svgs Bank, FSB of NY*		8.90		78.04		6.24		115.02		12.68		0.80		5.05		44.94
FFDF	FFD Financial Corp of Dover OH*		10.56		81.08		7.21		81.08		16.13		0.68		4.53		47.89
FFCO	FedFirst Financial Corp of PA*	NM			67.48		11.66		68.97	NM			0.12		0.89	NM
FSBI	Fidelity Bancorp, Inc. of PA*	NM			66.53		4.35		70.85		19.35		0.08		0.84		44.44
FABK	First Advantage Bancorp of TN*		27.61		76.60		14.81		76.60	NM			0.20		1.57		43.48
FBSI	First Bancshares, Inc. of MO*	NM			55.25		5.28		55.51	NM			0.00		0.00	NM
FCAP	First Capital, Inc. of IN*		13.74		103.54		11.53		116.37		15.60		0.76		4.13		56.72
FCLF	First Clover Leaf Fin Cp of IL*		14.55		63.94		8.88		75.83		17.30		0.24		3.75		54.55
FBNK	First Connecticut Bncorp of CT*	NM			76.31		11.67		76.31	NM			0.00		0.00		0.00
FDEF	First Defiance Fin. Corp of OH*		12.71		54.18		6.16		74.31		23.56		0.00		0.00		0.00
FFNM	First Fed of N. Michigan of MI*	NM			44.96		4.94		45.84	NM			0.00		0.00		0.00
FFBH	First Fed. Bancshares of AR(8)*	NM			139.53		18.79		139.53	NM			0.20		3.33	NM
FFNW	First Fin NW, Inc of Renton WA*	NM			48.58		7.56		48.58	NM			0.00		0.00	NM
FFCH	First Fin. Holdings Inc. of SC*	NM			47.70		2.99		49.20	NM			0.20		3.44	NM
FPTB	First PacTrust Bancorp of CA*		21.06		81.74		14.87		81.74		37.90		0.46		4.05	NM
FPFC	First Place Fin. Corp. of OH*	NM			7.90		0.46		8.30	NM			0.00		0.00	NM
FSFG	First Savings Fin. Grp. of IN*		9.81		62.81		6.96		73.09		9.33		0.00		0.00		0.00
FFIC	Flushing Fin. Corp. of NY*		8.29		82.57		7.74		86.19		8.04		0.52		4.90		40.63
FXCB	Fox Chase Bancorp, Inc. of PA*	NM			84.66		16.32		84.66	NM			0.08		0.66		28.57

RP FINANCIAL, LC.
Financial Services Industry Consultants 1100 North Glebe Road, Suite 1100 Arlington, Virginia 22201 (703) 528-1700

Exhibit IV-1B (continued)
Weekly Thrift Market Line - Part Two
Prices As Of September 2, 2011

		Key Financial Ratios							Asset Quality Ratios			Pricing Ratios					Dividend Data(6)
		Equity/	Tang. Equity/	Reported Earnings			Core Earnings		NPAs	Resvs/	Resvs/	Price/	Price/	Price/	Price/ Tang.	Price/ Core	Ind. Div./	Divi- dend	Payout
Financial Institution		Assets	Assets	ROA(5)	ROE(5)	ROI(5)	ROA(5)	ROE(5)	Assets	NPAs	Loans	Earning	Book	Assets	Book	Earnings	Share	Yield	Ratio (7)
		(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(X)	(%)	(%)	(%)	(x)	($)	(%)	(%)

NASDAQ Listed OTC Companies (continued)
FRNK	Franklin Financial Corp. of VA*	22.66	22.66	-0.09	NM	-0.63	0.26	NM	4.21	28.61	2.71	NM	63.88	14.48	63.88	NM	0.00	0.00	NM
GCBC	Green Co Bcrp MHC of NY (44.1)	8.78	8.78	1.00	11.48	6.79	0.96	11.12	NA	NA	1.66	14.72	162.41	14.27	162.41	15.19	0.70	3.72	54.69
HFFC	HF Financial Corp. of SD*	7.93	7.59	0.06	0.74	1.21	0.12	1.62	3.37	35.70	1.71	NM	61.08	4.84	64.01	37.59	0.45	5.44	NM
HMNF	HMN Financial, Inc. of MN*	5.33	5.33	-2.58	-30.52	NM	-2.73	-32.27	NA	NA	4.40	NM	20.39	1.09	20.39	NM	0.00	0.00	NM
HBNK	Hampden Bancorp, Inc. of MA*	16.15	16.15	0.33	2.03	2.23	0.28	1. 74	2.52	35.01	NA	NM	92.09	14.88	92.09	NM	0.12	0.95	42.86
HARL	Harleysville Svgs Fin Cp of PA*	6.59	6.59	0.65	10.35	10.64	0.73	11.59	NA	NA	0.52	9.40	93.44	6.16	93.44	8.39	0.76	5.39	50.67
HBOS	Heritage Fin Group, Inc of GA*	12.66	12.27	0.15	1. 25	1.29	0.67	5.53	1.82	37.60	1.30	NM	77.73	9.84	80.61	17.56	0.12	1.10	NM
HIFS	Hingham Inst. for Sav. of MA*	7.28	7.28	1.12	15.51	11.38	1.12	15.51	0.92	75.47	0.87	8.79	128.46	9.35	128.46	8.79	1.00	2.13	18.73
HBCP	Home Bancorp Inc. Lafayette LA*	18.93	18.73	0.66	3.52	4.11	0.76	4.01	0.30	189.49	0.90	24.33	85.52	16.18	86.62	21.38	0.00	0.00	0.00
HFBL	Home Federal Bancorp Inc of LA*	21.93	21. 93	0.91	4.19	4.81	0.23	1.05	0.08	408.74	0.63	20.78	79.17	17.36	79.17	NM	0.24	1.80	37.50
HFBC	HopFed Bancorp, Inc. of KY*	8.76	8.70	0.05	0.46	0.95	-0.21	-2.02	2.17	59.81	2.33	NM	58.41	5.12	58.82	NM	0.32	4.32	NM
HCBK	Hudson City Bancorp, Inc of NJ*	9.44	9.16	-0.38	-4.11	-7.11	-0.37	-4.01	1.81	26.95	0.86	NM	62.18	5.87	64.25	NM	0.32	5.55	NM
IROQ	IF Bancorp, Inc. of IL*	16.95	16.95	0.61	NM	5.27	0.48	NM	1.36	50.28	1.15	18.96	68.50	11.61	68.50	24.02	0.00	0.00	0.00
ISBC	Investors Bcrp MHC of NJ(43.0)	9.21	8.95	0.75	7.81	4.77	0.69	7.19	1.71	61.24	1.24	20.95	158.27	14.58	163.37	22.76	0.00	0.00	0.00
JXSB	Jacksonville Bancorp Inc of IL*	12.70	11.92	1.00	8.72	11.46	0.85	7.44	1.27	81.68	1.77	8.73	68.30	8.68	73.46	10.22	0.30	2.19	19.11
JFBI	Jefferson Bancshares Inc of TN*	9.66	9.34	-3.75	-38.44	NM	-3.97	-40.61	4.68	29.18	1.81	NM	33.65	3.25	34.94	NM	0.00	0.00	NM
KFFB	KY Fst Fed Bp MHC of KY (39.3)	25.49	20.40	0.62	2.54	2.35	0.59	2.40	2.85	13.53	NA	NM	107.44	27.39	143.44	NM	0.40	4.94	NM
KFFG	Kaiser Federal Fin Group of CA*	17.22	16.85	0.94	7.02	7.30	0.94	7.02	3.39	38.67	1.61	13.69	73.29	12.62	75.24	13.69	0.24	2.02	27.59
KRNY	Kearny Fin Cp MHC of NJ (25.1)	16.80	13.55	0.30	1.69	1.46	0.35	1.97	NA	NA	0.93	NM	114.05	19.16	146.95	NM	0.20	2.44	NM
LSBI	LSB Fin. Corp. of Lafayette IN*	10.10	10.10	0.48	5.08	8.72	0.27	2.80	5.92	33.02	2.20	11.47	56.89	5.74	56.89	20.78	0.00	0.00	0.00
LPSB	LaPorte Bancrp MHC of IN(45.0)	11.42	9.66	0.58	5.12	6.33	0.45	3.95	1. 75	41.76	1. 25	15.79	78.33	8.95	94.44	20.45	0.00	0.00	0.00
LSBK	Lake Shore Bnp MHC of NY(39.4)	12.22	12.22	0.76	6.32	6.10	0.57	4.77	0.58	43.24	0.44	16.39	100.50	12.29	100.50	21.74	0.28	2.80	45.90
LABC	Louisiana Bancorp, Inc. of LA*	18.39	18.39	0.74	3.90	4.37	0.64	3.34	0.57	94.73	0.92	22.90	93.58	17.21	93.58	26.72	0.00	0.00	0.00
MSBF	MSB Fin Corp MHC of NJ (40.3)	11. 60	11.60	0.20	1.80	2.70	0.20	1.80	8.27	11.29	NA	37.07	66.20	7.68	66.20	37.07	0.12	2.31	NM
MGYR	Magyar Bancorp MHC of NJ(44.7)	8.44	8.44	-0.02	-0.26	-0.56	-0.11	-1.31	8.66	8.09	0.96	NM	46.35	3.91	46.35	NM	0.00	0.00	NM
MLVF	Malvern Fed Bncp MHC PA(44.6)	9.04	9.04	-1.05	-11.34	-15.97	-1.05	-11.34	5.42	27.52	1.90	NM	74.65	6.75	74.65	NM	0.12	1.61	NM
MFLR	Mayflower Bancorp, Inc. of MA*	8.58	8.58	0.53	6.34	7.66	0.33	3.96	NA	NA	0.94	13.05	81.86	7.02	81.86	20.88	0.24	2.87	37.50
EBSB	Meridian Fn Serv MHC MA. (41.4)	11.41	10.77	0.80	6.85	5.56	0.59	5.08	3.03	18.63	0.89	18.00	120.36	13.73	128.43	24.24	0.00	0.00	0.00
CASH	Meta Financial Group of IA*	7.26	7.14	0.46	6.77	8.62	0.74	10.89	1. 92	23.62	1.54	11.59	73.16	5.31	74.50	7.21	0.52	2.84	32.91
MFSF	MutualFirst Fin. Inc. of IN*	6.85	6.58	0.31	3.44	8.64	0.15	1.64	2.67	41.76	1.65	11.57	53.03	3.63	55.38	24.26	0.24	3.19	36.92
NASB	NASF Fin, Inc. of Grandview MO*	11.50	11.33	-1.18	-10.09	-19.78	-2.80	-23.88	8.49	67.33	6.52	NM	55.55	6.39	56.53	NM	0.90	8.81	NM
NECB	NE Comm Bncrp MHC of NY (44.6)	24.20	23.89	0.59	2.61	3.32	0.86	3.79	9.31	18.37	2.02	30.09	78.81	19.07	80.15	20.69	0.12	1. 81	54.55
NHTB	NH Thrift Bancshares of NH*	8.34	5.73	0.77	8.27	10.46	0.45	4.81	0.93	105.67	1.40	9.56	86.03	7.17	128.87	16.42	0.52	4.06	38.81
NVSL	Naugatuck Valley Fin Crp of CT*	13.67	13.66	0.25	2.81	2.77	0.31	3.48	2.93	41.36	1.46	36.10	65.51	8.96	65.57	29.15	0.12	1.58	57.14
NFSB	Newport Bancorp, Inc. of RI*	11.21	11.21	0.43	3.91	4.29	0.42	3.77	0.29	282.96	1.03	23.30	89.51	10.03	89.51	24.17	0.00	0.00	0.00
FFFD	North Central Bancshares of IA*	9.19	9.05	0.42	3.85	8.17	0.42	3.82	4.52	29.33	1.82	12.23	57.48	5.28	58.43	12.32	0.04	0.23	2.84
NFBK	Northfield Bcp MHC of NY(43.4)	17.26	16.68	0.69	3.93	3.05	0.62	3.51	3.20	31.89	2.61	32.84	129.26	22.31	134.70	36.82	0.24	1. 98	64.86
NWBI	Northwest Bancshares Inc of PA*	15.17	13.30	0.75	4.72	5.25	0.76	4.80	2.45	38.37	1.37	19.03	94.53	14.34	110.21	18.72	0.44	3.92	74.58
OBAF	OBA Financial Serv. Inc of MD*	22.71	22.71	0.23	1.03	1.26	0.21	0.97	0.97	63.16	NA	NM	81.39	18.49	81.39	NM	0.00	0.00	0.00
OSHC	Ocean Shore Holding Co. of NJ*	11. 95	11.95	0.63	5.21	6.52	0.64	5.35	0.70	67.43	0.61	15.35	78.42	9.37	78.42	14.93	0.24	2.17	33.33
OCFC	OceanFirst Fin. Corp of NJ*	9.53	9.53	0.95	10.49	10.04	0.83	9.19	2.36	38.19	1.31	9.96	99.38	9.47	99.38	11.36	0.48	4.27	42.48
OFED	Oconee Fed Fn Cp MHC SC (35.0)	21.05	21.05	0.49	2.62	2.65	0.90	4.78	1.31	17.72	0.33	37.76	87.60	18.44	87.60	20.66	0.40	3.65	NM
OABC	OmniAmerican Bancorp Inc of TX*	15.16	15.16	0.18	1.11	1.37	0.12	0.70	3.54	18.37	1.29	NM	80.13	12.14	80.13	NM	0.00	0.00	0.00
ONFC	Oneida Financial Corp. of NY*	13.40	9.96	0.88	6.93	9.12	0.89	7.02	0.88	53.21	1.08	10.96	71.24	9.54	99.66	10.83	0.48	5.47	60.00
ORIT	Oritani Financial Corp of NJ*	24.95	24.95	1.12	4.39	4.25	1.14	4.48	1.40	67.75	1.56	23.55	103.27	25.77	103.27	23.10	0.40	3.33	NM
PSBH	PSB Hldgs Inc MHC of CT (42.9)	9.85	8.44	0.27	2.89	3.95	0.43	4.62	2.18	27.09	1.10	25.30	70.38	6.93	83.36	15.81	0.16	3.16	NM
PVFC	PVF Capital Corp. of Solon OH*	9.58	9.58	-1.16	-12.10	-24.52	-1.78	-18.47	9.39	40.93	5.11	NM	53.45	5.12	53.45	NM	0.00	0.00	NM
PFED	Park Bancorp of Chicago IL*	7.69	7.69	-2.57	-28.94	NM	-2.67	-30.09	8.22	34.03	4.20	NM	21.76	1.67	21.76	NM	0.00	0.00	NM
PVSA	Parkvale Financial Corp of PA(8) *	5.11	3.62	-0.83	-11.94	-15.22	0.36	5.16	2.04	51.69	1.87	NM	107.88	5.52	154.65	15.21	0.08	0.45	NM
PBHC	Pathfinder BC MHC of NY (36.3)	6.25	5.38	0.46	6.03	8.35	0.41	5.31	1.39	68.63	1.38	11.97	86.50	5.41	101.34	13.58	0.12	1.32	15.79
PEOP	Peoples Fed Bancshrs Inc of MA*	21.83	21.83	-0.03	-0.14	-0.14	0.59	3.11	1.17	53.49	0.83	NM	85.16	18.59	85.16	31.11	0.00	0.00	NM
PBCT	Peoples United Financial of CT*	20.51	13.90	0.67	3.03	3.95	0.67	3.03	2.82	25.18	0.99	25.33	77.92	15.98	124.59	25.33	0.63	5.53	NM
PROV	Provident Fin. Holdings of CA*	10.78	10.78	0.97	9.76	14.06	-0.49	-4.88	5.04	46.04	2.76	7.11	66.48	7.17	66.48	NM	0.12	1.45	10.34
PBNY	Provident NY Bncrp, Inc. of NY*	14.42	9.37	0.59	4.11	7.63	0.38	2.68	2.04	48.42	1.74	13.11	53.41	7.70	87.01	20.10	0.24	3.98	52.17
PBIP	Prudential Bncp MHC PA (25.5)	11.18	11.18	-0.10	-0.90	-0.97	-0.06	-0.54	2.80	22.26	1.30	NM	93.33	10.43	93.33	NM	0.00	0.00	NM
PULB	Pulaski Fin Cp of St. Louis MO*	6.59	6.31	0.50	5.98	10.31	0.23	2.77	5.61	34.49	2.32	9.70	77.66	5.11	81.35	20.97	0.38	5.85	56.72
RIVR	River Valley Bancorp of IN*	7.00	6.98	0.50	6.01	7.95	0.30	3.66	4.92	19.49	1.36	12.58	87.07	6.10	87.36	20.64	0.84	5.22	65.63
RVSB	Riverview Bancorp, Inc. of WA*	12.18	9.54	0.39	3.28	5.75	0.37	3.06	5.10	35.59	2.32	17.40	54.38	6.62	71.51	18.64	0.00	0.00	0.00
RCKB	Rockville Fin New, Inc. of CT*	19.02	18.97	0.29	2.16	1.79	0.53	3.93	0.74	117.82	1.06	NM	84.37	16.05	84.67	30.65	0.26	2.74	NM
ROMA	Roma Fin Corp MHC of NJ (26.2)	11.33	11.25	0.31	2.53	2.20	0.22	1.83	NA	NA	1.15	NM	115.84	13.13	116.83	NM	0.32	3.91	NM
SIFI	SI Financial Group, Inc. of CT*	13.69	13.32	0.30	2.73	2.76	0.25	2.31	1. 54	32.65	0.76	36.27	76.73	10.51	79.24	NM	0.12	1.27	46.15
SPBC	SP Bancorp, Inc. of Plano, TX*	12.22	12.22	0.41	3.80	5.11	-0.04	-0.33	4.28	16.31	0.93	19.57	60.24	7.36	60.24	NM	0.00	0.00	0.00
SVBI	Severn Bancorp. Inc. of MD*	8.29	8.26	-0.10	-0.95	-3.30	-0.16	-1.43	13.00	25.52	4.05	NM	39.25	3.25	39.40	NM	0.00	0.00	NM
STND	Standard Financial Corp. of PA*	17.68	15.85	0.55	3.67	4.54	0.76	5.10	0.85	122.45	1.54	22.01	66.29	11. 72	75.56	15.86	0.00	0.00	0.00
SIBC	State Investors Bancorp of LA*	19.25	19.25	0.24	NM	1.74	0.29	NM	1.28	43.53	0.87	NM	72.78	14.01	72.78	NM	0.00	0.00	0.00
THRD	TF Fin. Corp. of Newtown PA*	10.91	10.32	0.43	4.03	5.01	0.32	3.00	NA	NA	1.79	19.94	79.09	8.63	84.16	26.76	0.20	0.95	18.87

RP FINANCIAL, LC.
Financial Services Industry Consultants 1100 North Glebe Road, Suite 1100 Arlington, Virginia 22201 (703) 528-1700

Exhibit IV-1B (continued)
Weekly Thrift Market Line - Part Two
Prices As Of September 2, 2011

		Key Financial Ratios							Asset Quality Ratios			Pricing Ratios					Dividend Data(6)
		Equity/	Tang. Equity/	Reported Earnings			Core Earnings		NPAs	Resvs/	Resvs/	Price/	Price/	Price/	Price/ Tang.	Price/ Core	Ind. Div./	Divi- dend	Payout
Financial Institution		Assets	Assets	ROA(5)	ROE(5)	ROI(5)	ROA(5)	ROE(5)	Assets	NPAs	Loans	Earning	Book	Assets	Book	Earnings	Share	Yield	Ratio (7)
		(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(X)	(%)	(%)	(%)	(X)	($)	(%)	(%)

NASDAQ Listed OTC Companies (continued)
TFSL	TFS Fin Corp MHC of OH (26.4)	16.25	16.18	-0.08	-0.53	-0.36	-0.08	-0.53	3.57	38.81	1.56	NM	145.72	23.67	146.49	NM	0.00	0.00	NM
TBNK	Territorial Bancorp, Inc of HI*	15.28	15.28	0.87	5.57	5.67	0.83	5.36	0.25	42.18	0.24	17.65	97.15	14.85	97.15	18.33	0.36	1. 89	33.33
TSBK	Timberland Bancorp, Inc. of WA*	9.58	8.82	0.00	0.00	0.00	-0.12	-1.06	8.35	19.20	2.21	NM	50.55	4.84	55.31	NM	0.00	0.00	NM
TRST	TrustCo Bank Corp NY of NY*	6.61	6.60	0.77	11.61	8.92	0.73	11.01	1.34	83.79	1.88	11.21	125.57	8.31	125.94	11.81	0.26	5.95	66.67
UCBA	United Comm Bncp MHC IN (40.7)	11.22	10.54	-0.20	-1.71	-2.07	-0.26	-2.28	5.02	20.32	1. 74	NM	85.32	9.57	91.50	NM	0.44	7.57	NM
UCFC	United Community Fin. of OH*	8.71	8.69	-1.18	-13.68	NM	-1.50	-17.43	10.15	21.67	2.96	NM	19.29	1.68	19.32	NM	0.00	0.00	NM
UBNK	United Financial Bncrp of MA*	14.15	13.69	0.66	4.67	4.59	0.65	4.60	0.96	68.36	0.96	21. 80	100.14	14.17	104.11	22.14	0.36	2.54	55.38
VPFG	ViewPoint Financal Group of TX*	13.73	13.71	0.81	6.45	5.91	0.48	3.85	0.69	78.79	1.03	16.93	97.09	13.33	97.26	28.35	0.20	1. 76	29.85
WSB	WSB Holdings, Inc. of Bowie MD*	13.56	13.56	-0.28	-2.15	-5.67	-0.12	-0.92	10.18	23.41	3.51	NM	37.31	5.06	37.31	NM	0.00	0.00	NM
WSFS	WSFS Financial Corp. of DE*	7.80	7.02	0.44	4.81	5.98	0.35	3.87	2.44	55.60	2.10	16.73	89.37	6.97	100.06	20.75	0.48	1.43	23.88
WVFC	WVS Financial Corp. of PA*	11.46	11.46	0.20	2.19	3.33	0.22	2.41	0.97	27.60	NA	30.00	65.31	7.49	65.31	27.27	0.16	1. 78	53.33
WFSL	Washington Federal, Inc. of WA*	13.96	12.28	0.71	5.21	6.25	0.66	4.85	5.28	23.14	1.87	16.00	82.66	11.54	95.80	17.19	0.24	1. 72	27.59
WSBF	Waterstone Fin MHC of WI (26.2)	9.92	9.89	-0.17	-1.81	-3.85	-1. 72	-18.15	10.28	19.19	2.62	NM	47.53	4.71	47.71	NM	0.00	0.00	NM
WAYN	Wayne Savings Bancshares of OH*	9.60	9.16	0.51	5.39	8.21	0.48	5.15	2.54	30.86	1.35	12.17	63.88	6.13	67.25	12.73	0.24	2.86	34.78
WFD	Westfield Fin. Inc. of MA*	17.68	17.68	0.25	1. 32	1.59	0.02	0.12	1.55	36.88	1. 30	NM	87.67	15.50	87.67	NM	0.24	3.48	NM
WBKC	Wolverine Bancorp, Inc. of MI*	20.99	20.99	0.23	1.37	2.07	0.19	1. 09	5.43	61.07	4.00	NM	54.71	11.48	54.71	NM	0.00	0.00	0.00

Exhibit IV-2

Historical Stock Price Indices (1)

								SNL		SNL
						NASDAQ		Thrift		Bank
Year/Qtr. Ended		DJIA		S&P 500		Composite		Index		Index

2003:	Quarter 1		7,992.1		848.2		1,341.2		1,096.2		401.0
	Quarter 2		8,985.4		974.5		1,622.8		1,266.6		476.1
	Quarter 3		9,275.1		996.0		1,786.9		1,330.9		490.9
	Quarter 4		10,453.9		1,112.0		2,003.4		1,482.3		548.6

2004:	Quarter 1		10,357.7		1,126.2		1,994.2		1,585.3		562.2
	Quarter 2		10,435.5		1,140.8		2,047.8		1,437.8		546.6
	Quarter 3		10,080.3		1,114.6		1,896.8		1,495.1		556.0
	Quarter 4		10,783.0		1,211.9		2,175.4		1,605.6		595.1

2005:	Quarter 1		10,503.8		1,180.6		1,999.2		1,516.6		551.0
	Quarter 2		10,275.0		1,191.3		2,057.0		1,577.1		563.3
	Quarter 3		10,568.7		1,228.8		2,151.7		1,527.2		546.3
	Quarter 4		10,717.5		1,248.3		2,205.3		1,616.4		582.8

2006:	Quarter 1		11,109.3		1,294.8		2,339.8		1,661.1		595.5
	Quarter 2		11,150.2		1,270.2		2,172.1		1,717.9		601.1
	Quarter 3		11,679.1		1,335.9		2,258.4		1,727.1		634.0
	Quarter 4		12,463.2		1,418.3		2,415.3		1,829.3		658.6

2007:	Quarter 1		12,354.4		1,420.9		2,421.6		1,703.6		634.4
	Quarter 2		13,408.6		1,503.4		2,603.2		1,645.9		622.6
	Quarter 3		13,895.6		1,526.8		2,701.5		1,523.3		595.8
	Quarter 4		13,264.8		1,468.4		2,652.3		1,058.0		492.9

2008:	Quarter 1		12,262.9		1,322.7		2,279.1		1,001.5		442.5
	Quarter 2		11,350.0		1,280.0		2,293.0		822.6		332.2
	Quarter 3		10,850.7		1,166.4		2,082.3		760.1		414.8
	Quarter 4		8,776.4		903.3		1,577.0		653.9		268.3

2009:	Quarter 1		7,608.9		797.9		1,528.6		542.8		170.1
	Quarter 2		8,447.0		919.3		1,835.0		538.8		227.6
	Quarter 3		9,712.3		1,057.1		2,122.4		561.4		282.9
	Quarter 4		10,428.1		1,115.1		2,269.2		587.0		260.8

2010:	Quarter 1		10,856.6		1,169.4		2,398.0		626.3		301.1
	Quarter 2		9,774.0		1,030.7		2,109.2		564.5		257.2
	Quarter 3		10,788.1		1,141.2		2,368.6		541.0		255.0
	Quarter 4		11,577.5		1,257.6		2,652.9		592.1		290.1

2010:	Quarter 1		12,319.7		1,325.8		2,781.1		578.1		293.1
	Quarter 2		12,414.3		1,320.6		2,773.5		540.8		266.8
	As of Sept. 2, 2011		11,240.3		1,174.0		2,480.3		453.2		211.4

(1) End of period data.

Source: SNL Financial, LC.

Exhibit IV-3

SNL Index Values


	Index Values
	Aug. 31,		July 31,		Dec. 31,		Aug. 31,		Price Appreciation (%)
	2011		2011		2010		2010		1 Month			YTD			LTM

All Pub. Traded Thrifts		478.0		518.4		592.1		522.9		-7.78	%		-19.27	%		-8.57	%
MHC Index		2,658.4		2,740.5		2,668.9		2,515.1		-3.00	%		-0.40	%		5.70	%

Stock Exchange Indexes
NYSE AMEX Thrifts	NA		NA			364.3		313.8	NA			NA			NA
NYSE Thrifts		94.0		101.3		132.2		111.3		-7.18	%		-28.91	%		-15.55	%
OTC Thrifts		1,293.7		1,405.7		1,531.2		1,373.5		-7.97	%		-15.51	%		-5.81	%

Geographic Indexes
Mid-Atlantic Thrifts		1,980.2		2,173.2		2,669.6		2,303.6		-8.88	%		-25.82	%		-14.04	%
Midwestern Thrifts		1,401.6		1,501.8		1,636.7		1,629.6		-6.67	%		-14.36	%		-13.99	%
New England Thrifts		1,495.4		1,588.4		1,665.6		1,455.8		-5.86	%		-10.22	%		2.72	%
Southeastern Thrifts		191.2		204.9		217.3		204.6		-6.67	%		-12.02	%		-6.56	%
Southwestern Thrifts		359.4		375.2		340.0		287.7		-4.22	%		5.71	%		24.91	%
Western Thrifts		49.7		54.8		53.9		45.3		-9.42	%		-7.93	%		9.60	%

Asset Size Indexes
Less than $250M		745.7		781.4		751.8		799.0		-4.57	%		-0.81	%		-6.67	%
$250M to $500M		2,715.8		2,790.8		2,657.7		2,374.5		-2.69	%		2.19	%		14.37	%
$500M to $1B		1,126.9		1,199.4		1,177.5		1,079.2		-6.04	%		-4.30	%		4.42	%
$1B to $5B		1,378.5		1,457.5		1,513.3		1,299.1		-5.42	%		-8.91	%		6.11	%
Over $5B		222.0		244.2		294.2		261.2		-9.08	%		-24.55	%		-15.01	%

Pink Indexes
Pink Thrifts		142.5		145.9		142.6		143.4		-2.37	%		-0.07	%		-0.61	%
Less than $75M		415.7		424.7		412.6		422.7		-2.13	%		0.74	%		-1.67	%
Over $75M		143.2		146.6		143.3		144.0		-2.37	%		-0.12	%		-0.55	%

Comparative Indexes
Dow Jones Industrials		11,613.5		12,143.2		11,577.5		10,014.7		-4.36	%		0.31	%		15.96	%
S&P 500		1,218.9		1,292.3		1,257.6		1,049.3		-5.68	%		-3.08	%		16.16	%

All SNL indexes are market-value weighted; i.e., an institution’s effect on an index is proportionate to that institution’s market capitalization. All SNL thrift indexes, except for the SNL MHC Index, began at 100 on March 30, 1984. The SNL MHC Index began at 201.082 on Dec. 31, 1992, the level of the SNL Thrift Index on that date. On March 30, 1984, the S&P 500 closed at 159.2 and the Dow Jones Industrial stood at 1,164.9.

Mid-Atlantic: DE, DC, MD, NJ, NY, PA, PR; Midwest: IA, IL, IN, KS, KY, MI, MN, MO, ND, NE, OH, SD, WI;

New England: CT, MA, ME, NH, RI, VT; Southeast: AL, AR, FL, GA, MS, NC, SC, TN, VA, WV;

Southwest: CO, LA, NM, OK, TX, UT; West: AZ, AK, CA, HI, ID, MT, NV, OR, WA, WY

Source: SNL Financial.

RP ® Financial, LC.

Exhibit IV-4

Washington State Thrift Acquisitions 2000-Present


						Target Financials at Announcement												Deal Terms and Pricing at Announcement
						Total								NPAs/		Rsrvs/		Deal		Value/										Prem/
Announce	Complete					Assets		E/A		ROAA		ROAE		Assets		NPLs		Value		Share			P/B	P/TB			P/E		P/A	Cdeps
Date	Date	Buyer Short Name		Target Name		($ 000)		(%)		(%)		(%)		(%)		(%)		($M)		($)		(%)		(%)		(x)		(%)		(%)

07/02/2007	02/01/2008	Washington Federal Inc.	WA	First Mutual Bancshares, Inc.	WA		1,056,847		6.85		1.02		15.25		0.19		493.34		189.8		27.050		250.00		250.00		17.01		17.96		21.09
06/04/2006	11/30/2006	Sterling Financial Corp.	WA	FirstBank NW Corp.	WA		846,003		9.35		1.03		11.16		0.14		689.66		169.6		27.159		207.76		272.68		19.26		20.04		23.25
02/12/2006	07/05/2006	Sterling Financial Corp.	WA	Lynnwood Financial Group	WA		435,651		10.22		2.69		26.47		0.00	NA			63.8	NA			143.35		143.35		7.41		14.65		12.51
06/24/2004	10/15/2004	KeyCorp	OH	EverTrust Financial Group, Inc.	WA		770,072		11.76		0.96		7.63		0.56		227.69		195.0		25.602		194.69		194.69		26.95		25.32		23.09
05/19/2003	08/31/2003	Washington Federal Inc.	WA	United Savings & Loan Bank	WA		311,446		13.43		1.10		8.36		0.50		131.91		65.0		1,595.090		155.39		155.39		19.36		20.87		10.98

				Averages:			684,004		10.32		1.36		13.77		0.28		385.65		136.6				190.24		203.22		18.00		19.77		18.18
				Medians:			770,072		10.22		1.03		11.16		0.19		360.52		169.6				194.69		194.69		19.26		20.04		21.09

Source: SNL Financial, LC.

Exhibit IV-5

1st Security Bank of Washington

Director and Senior Management Summary Resumes

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.

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.

Michael J. Mansfield joined the Board of Directors in September 2008. Mr. Mansfield spent 16 years with Deloitte & Touche 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.

Exhibit IV-5 (cont.)

1st Security Bank of Washington

Director and Senior Management Summary Resumes

Exhibit IV-5 (continued)

1st Security Bank of Washington

Director and Senior Management Summary Resumes

Matthew Mullet, age 32, 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, Seattle, 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 61, joined 1st Security Bank of Washington as Chief Lending Officer in November 2005, after a 23 year career at US Bank or USB. His responsibilities currently include commercial, consumer and real estate lending. Mr. Haynes held several senior lending positions at USB in commercial lending- middle-market, national and international and credit review. He left as a Senior Vice President - Commercial Lending. Prior to USB, 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 46, joined 1st Security Bank of Washington as Chief Operating Officer in September 2008. Mr. Ness has 18 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.

Exhibit IV-6

1st Security Bank of Washington

Pro Forma Regulatory Capital Ratios

						Pro Forma at June 30, 2011
	At June 30, 2011					2,082,500 shares Sold at $10.00 per Share (Minimum of Range)						2,450,000 Shares Sold at $10.00 per Share (Midpoint of Range)						2,817,500 Shares Sold at $10.00 per Share (Maximum of Range)						3,240,125 Shares Sold at $10.00 per Share (Maximum of Range, as Adjusted)
	Amount		Percent of Assets (1)			Amount			Percent of Assets			Amount			Percent of Assets			Amount			Percent of Assets			Amount			Percent of Assets
	(Dollars in thousands)
Equity capital under generally accepted accounting principles (“GAAP”)	$	25,977		9.52	%	$	33,719			11.95	%	$	35,240			12.41	%	$	36,761			12.86	%	$	38,510			13.38	%

Tier I leverage	$	25,894		9.37	%	$	33,636			11.77	%	$	35,157			12.23	%	$	36,678			12.68	%	$	38,427			13.18	%
Requirement		11,053		4.00			11,430			4.00			11,502			4.00			11,575			4.00			11,658			4.00
Excess	$	14,841		5.37	%	$	22,206			7.77	%	$	23,655			8.23	%	$	25,103			8.68	%	$	26,769			9.18	%

Tier I risk based	$	25,894		11.31	%	$	33,636			14.57	%	$	35,157			15.20	%	$	36,678			15.84	%	$	38,427			16.56	%
Requirement		9,160		4.00			9,235			4.00			9,250			4.00			9,264			4.00			9,281			4.00
Excess	$	16,734		7.31	%	$	24,401			10.57	%	$	25,907			11.20	%	$	27,414			11.84	%	$	29,146			12.56	%

Total risk based	$	28,781		12.57	%	$	36,523			15.82	%	$	38,044			16.45	%	$	39,565			17.08	%	$	41,314			17.81	%
Risk based requirement		18,320		8.00			18,471			8.00			18,500			8.00			18,529			8.00			18,562			8.00
Excess	$	10,461		4.57	%	$	18,052			7.82	%	$	19,544			8.45	%	$	21,036			9.08	%	$	22,752			9.81	%

Reconciliation of capital infused into 1st Security Bank of Washington:
Net proceeds infused						$	9,407					$	11,223					$	13,038					$	15,125
Common stock acquired by employee stock ownership plan							(1,666	)					(1,960	)					(2,254	)					(2,592	)
Pro forma increase in GAAP and regulatory capital						$	7,741					$	9,262					$	10,784					$	12,533

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

EXHIBIT IV-7

PRO FORMA ANALYSIS SHEET

1st Security Bank of Washington

Prices as of September 2, 2011

			Subject at			Peer Group						Washington Companies						All Public Thrifts
Valuation Pricing Multiples		Symbol	Midpoint			Mean			Median			Mean			Median			Mean			Median
Price-earnings multiple	=	P/E		14.11	x		17.08	x		17.27	x		16.70	x		16.70	x		16.62	x		15.01	x
Price-core earnings multiple	=	P/CE		25.68	x		18.89	x		19.71	x		17.91	x		17.91	x		18.97	x		18.64	x
Price-book ratio	=	P/B		53.88	%		67.44	%		69.11	%		53.76	%		50.55	%		71.78	%		73.23	%
Price-tangible book ratio	=	P/TB		53.88	%		70.29	%		72.48	%		60.77	%		55.31	%		76.57	%		76.67	%
Price-assets ratio	=	P/A		8.38	%		9.48	%		7.94	%		6.91	%		6.62	%		8.78	%		8.12	%

Valuation Parameters						% of			% of Offering
						Offering			+ Foundation
Pre-Conversion Earnings (Y)	$	1,894,000		(12 Mths 6/11)	ESOP Stock as % of Offering (E)		8.0000	%	8.0000	%
Pre-Conversion Core Earnings	$	1,112,100		(12 Mths 6/11)	Cost of ESOP Borrowings (S)		0.00	%
Pre-Conversion Book Value (B)	$	25,977,000		(6/11)	ESOP Amortization (T)		10.00		years
Intangibles	$	0		(6/11)	RRP Stock as % of Offering (M)		4.0000	%	4.00%
Pre-Conv. Tang. Book Value (B)	$	25,977,000		(6/11)	Stock Programs Vesting (N)		5.00		years
Pre-Conversion Assets (A)	$	272,784,000		(6/11)	Fixed Expenses	$	1,764,000
Reinvest. Rate: (5 Yr Treas)@6/11		1.760	%		Subscr/Dir Comm Exp (Mdpnt)	$	291,000		1.30%
Tax rate (TAX)		34.00	%		Total Expenses (Midpoint)	$	2,055,000
A-T Reinvestment Rate(R)		1.162	%		Syndicate Expenses (Mdpnt)	$	0		0.00%
Est. Conversion Expenses (1)(X)		8.39	%		Syndicate Amount	$	0
Insider Purchases	$	735,000			Percent Sold (PCT)		100.00	%
Price/Share	$	10.00			MHC Assets	$	0
Foundation Cash Contrib. (FC)	$	0			Options as % of Offering (O1)		10.0000	%	10.00%
Found. Stk Contrib (% of Total Shrs (FS)		0.0000	%		Estimated Option Value (O2)		28.10	%
Foundation Tax Benefit (Z)	$	0			Option Vesting Period (O3)		5.00		years
Foundation Amount (Mdpt.)	$	0			% of Options taxable (O4)		25.00	%
					Payoff of FHLB Advances (PA)	$	0		@Minimum
					Payoff of FHLB Advances (PA)	$	0		@Mid, Max, Smax
					Weighted Average Rate of Adv.		0.00	%

Calculation of Pro Forma Value After Conversion
1. V=	P/E * (Y)	V=	$	24,500,000
	1 - P/E * PCT * ((1-X-E-M-FC-FS)R - (1-TAX)E/T - (1-TAX)M/N)-(1-(TAXO4))(O1O2)/O3)

1. V=	P/E * (Y)	V=	$	24,500,000
	1 - P/Core E * PCT * ((1-X-E-M-FC-FS)R - (1-TAX)E/T - (1-TAX)M/N)-(1-(TAXO4))(O1O2)/O3)

2. V=	P/B * (B+Z)	V=	$	24,500,000
	1 - P/B * PCT * (1-X-E-M-FC-FS)

2. V=	P/TB * (TB+Z)	V=	$	24,500,000
	1 - P/TB * PCT * (1-X-E-M-FC-FS)

3. V=	P/A * (A+Z+PA)	V=	$	24,500,000
	1 - P/A * PCT * (1-X-E-M-FC-FS)

															Market Value		Market Value
	Shares Issued			Shares Sold			Foundation			Total Shares			Price Per		of Stock Sold		of Stock Issued
Valuation Conclusion	to MHC			to Public			Shares			Issued			Share		in Offering		in Reorganization
Supermaximum		0			3,240,125			0			3,240,125		$	10.00	$	32,401,250	$	32,401,250
Maximum		0			2,817,500			0			2,817,500			10.00		28,175,000	$	28,175,000
Midpoint		0			2,450,000			0			2,450,000			10.00		24,500,000	$	24,500,000
Minimum		0			2,082,500			0			2,082,500			10.00		20,825,000	$	20,825,000

	Shares Issued			Shares Sold			Foundation			Total Shares
Valuation Conclusion	to MHC			to Public			Shares			Issued
Supermaximum		0.000	%		100.000	%		0.000	%		100.000	%
Maximum		0.000	%		100.000	%		0.000	%		100.000	%
Midpoint		0.000	%		100.000	%		0.000	%		100.000	%
Minimum		0.000	%		100.000	%		0.000	%		100.000	%

(1) Estimated offering expenses at midpoint of the offering.

Exhibit IV-8

PRO FORMA EFFECT OF CONVERSION PROCEEDS

1st Security Bank of Washington

At the Minimum of the Range



1.	Market Value of Shares Sold In Offering:	$	20,825,000
	Market Value of Shares Issued to Foundation:		0
	Total Market Value of Company:	$	20,825,000

2.	Offering Proceeds of Shares Sold In Offering	$	20,825,000
	Less: Estimated Offering Expenses		2,010,000
	Net Conversion Proceeds	$	18,815,000

3.	Estimated Additional Equity and Income from Offering Proceeds
	Net Conversion Proceeds	$	18,815,000
	Less: Cash Contribution to Foundation		0
	Less: Non-Cash ESOP Stock Purchases (1)		(1,666,000	)
	Less: Non-Cash MRP Stock Purchases (2)		(833,000	)
	Net Conversion Proceeds Reinvested	$	16,316,000
	Estimated After-Tax Reinvestment Rate		1.16	%
	Earnings from Reinvestment of Proceeds	$	189,527
	Less: Estimated cost of ESOP borrowings(1)		0
	Less: Amortization of ESOP borrowings(1)		(109,956	)
	Less: Stock Programs Vesting (2)		(109,956	)
	Less: Option Plan Vesting (3)		(107,088	)
	Net Earnings Increase	($	137,474	)

						Net
				Before		Earnings			After
4.	Pro Forma Earnings			Conversion		Increase			Conversion

	12 Months ended June 30, 2011 (reported)			$	1,894,000	($	137,474	)	$	1,756,526
	12 Months ended June 30, 2011 (core)			$	1,112,100	($	137,474	)	$	974,626

		Before		Net Equity		Tax Benefit			After
5.	Pro Forma Net Worth	Conversion		Proceeds		of Foundation			Conversion

	June 30, 2011	$	25,977,000	$	16,316,000	$	0		$	42,293,000
	June 30, 2011 (Tangible)	$	25,977,000	$	16,316,000	$	0		$	42,293,000

		Before		Net Cash		Tax Benefit			After
6.	Pro Forma Assets	Conversion		Proceeds		of Foundation			Conversion

	June 30, 2011	$	272,784,000	$	16,316,000	$	0		$	289,100,000

(1)	ESOP stock (8% of offering) amortized over 10 years, amortization expense is tax effected at 34%.
(2)	Stock programs (4% of offering) amortized over 5 years, amortization expense is tax effected at 34%.
(3)	Option valuation based on Black-Scholes model, 5 year vesting, and assuming 25% taxable.

Exhibit IV-8

PRO FORMA EFFECT OF CONVERSION PROCEEDS

1st Security Bank of Washington

At the Midpoint of the Range


1.	Market Value of Shares Sold In Offering:	$	24,500,000
	Market Value of Shares Issued to Foundation:		0
	Total Market Value of Company:	$	24,500,000

2.	Offering Proceeds of Shares Sold In Offering	$	24,500,000
	Less: Estimated Offering Expenses		2,055,000
	Net Conversion Proceeds	$	22,445,000

3.	Estimated Additional Equity and Income from Offering Proceeds
	Net Conversion Proceeds	$	22,445,000
	Less: Cash Contribution to Foundation		0
	Less: Non-Cash ESOP Stock Purchases (1)		(1,960,000	)
	Less: Non-Cash MRP Stock Purchases (2)		(980,000	)
	Net Conversion Proceeds Reinvested	$	19,505,000
	Estimated After-Tax Reinvestment Rate		1.16	%
	Earnings from Reinvestment of Proceeds	$	226,570
	Less: Estimated cost of ESOP borrowings(1)		0
	Less: Amortization of ESOP borrowings(1)		(129,360	)
	Less: Stock Programs Vesting (2)		(129,360	)
	Less: Option Plan Vesting (3)		(125,986	)
	Net Earnings Increase	($	158,136	)

						Net
				Before		Earnings			After
4.	Pro Forma Earnings			Conversion		Increase			Conversion

	12 Months ended June 30, 2011 (reported)			$	1,894,000	($	158,136	)	$	1,735,864
	12 Months ended June 30, 2011 (core)			$	1,112,100	($	158,136	)	$	953,964

		Before		Net Capital		Tax Benefit			After
5.	Pro Forma Net Worth	Conversion		Proceeds		of Foundation			Conversion

	June 30, 2011	$	25,977,000	$	19,505,000	$	0		$	45,482,000
	June 30, 2011 (Tangible)	$	25,977,000	$	19,505,000	$	0		$	45,482,000

		Before		Net Cash		Tax Benefit			After
6.	Pro Forma Assets	Conversion		Proceeds		of Foundation			Conversion

	June 30, 2011	$	272,784,000	$	19,505,000	$	0		$	292,289,000

(1)	ESOP stock (8% of offering) amortized over 10 years, amortization expense is tax effected at 34%.
(2)	Stock programs (4% of offering) amortized over 5 years, amortization expense is tax effected at 34%.
(3)	Option valuation based on Black-Scholes model, 5 year vesting, and assuming 25% taxable.

Exhibit IV-8

PRO FORMA EFFECT OF CONVERSION PROCEEDS

1st Security Bank of Washington

At the Maximum of the Range


1.	Market Value of Shares Sold In Offering:	$	28,175,000
	Market Value of Shares Issued to Foundation:		0
	Total Market Value of Company:	$	28,175,000

2.	Offering Proceeds of Shares Sold In Offering	$	28,175,000
	Less: Estimated Offering Expenses		2,100,000
	Net Conversion Proceeds	$	26,075,000

3.	Estimated Additional Equity and Income from Offering Proceeds
	Net Conversion Proceeds	$	26,075,000
	Less: Cash Contribution to Foundation		0
	Less: Non-Cash ESOP Stock Purchases (1)		(2,254,000	)
	Less: Non-Cash MRP Stock Purchases (2)		(1,127,000	)
	Net Conversion Proceeds Reinvested	$	22,694,000
	Estimated After-Tax Reinvestment Rate		1.16	%
	Earnings from Reinvestment of Proceeds	$	263,614
	Less: Estimated cost of ESOP borrowings(1)		0
	Less: Amortization of ESOP borrowings(1)		(148,764	)
	Less: Stock Programs Vesting (2)		(148,764	)
	Less: Option Plan Vesting (3)		(144,884	)
	Net Earnings Increase	($	178,799	)

						Net
				Before		Earnings			After
4.	Pro Forma Earnings			Conversion		Increase			Conversion

	12 Months ended June 30, 2011 (reported)			$	1,894,000	($	178,799	)	$	1,715,201
	12 Months ended June 30, 2011 (core)			$	1,112,100	($	178,799	)	$	933,301

		Before		Net Capital		Tax Benefit			After
5.	Pro Forma Net Worth	Conversion		Proceeds		of Foundation			Conversion

	June 30, 2011	$	25,977,000	$	22,694,000	$	0		$	48,671,000
	June 30, 2011 (Tangible)	$	25,977,000	$	22,694,000	$	0		$	48,671,000

		Before		Net Cash		Tax Benefit			After
6.	Pro Forma Assets	Conversion		Proceeds		of Foundation			Conversion

	June 30, 2011	$	272,784,000	$	22,694,000	$	0		$	295,478,000

(1)	ESOP stock (8% of offering) amortized over 10 years, amortization expense is tax effected at 34%.
(2)	Stock programs (4% of offering) amortized over 5 years, amortization expense is tax effected at 34%.
(3)	Option valuation based on Black-Scholes model, 5 year vesting, and assuming 25% taxable.

Exhibit IV-8

PRO FORMA EFFECT OF CONVERSION PROCEEDS

1st Security Bank of Washington

At the Supermaximum Value


1.	Market Value of Shares Sold In Offering:	$	32,401,250
	Market Value of Shares Issued to Foundation:		0
	Total Market Value of Company:	$	32,401,250

2.	Offering Proceeds of Shares Sold In Offering	$	32,401,250
	Less: Estimated Offering Expenses		2,152,000
	Net Conversion Proceeds	$	30,249,250

3.	Estimated Additional Equity and Income from Offering Proceeds
	Net Conversion Proceeds	$	30,249,250
	Less: Cash Contribution to Foundation		0
	Less: Non-Cash ESOP Stock Purchases (1)		(2,592,100	)
	Less: Non-Cash MRP Stock Purchases (2)		(1,296,050	)
	Net Conversion Proceeds Reinvested	$	26,361,100
	Estimated After-Tax Reinvestment Rate		1.16	%
	Earnings from Reinvestment of Proceeds	$	306,211
	Less: Estimated cost of ESOP borrowings(1)		0
	Less: Amortization of ESOP borrowings(1)		(171,079	)
	Less: Stock Programs Vesting (2)		(171,079	)
	Less: Option Plan Vesting (3)		(166,617	)
	Net Earnings Increase	($	202,564	)

						Net
				Before		Earnings			After
4.	Pro Forma Earnings			Conversion		Increase			Conversion

	12 Months ended June 30, 2011 (reported)			$	1,894,000	($	202,564	)	$	1,691,436
	12 Months ended June 30, 2011 (core)			$	1,112,100	($	202,564	)	$	909,536

		Before		Net Capital		Tax Benefit			After
5.	Pro Forma Net Worth	Conversion		Proceeds		of Foundation			Conversion

	June 30, 2011	$	25,977,000	$	26,361,100	$	0		$	52,338,100
	June 30, 2011 (Tangible)	$	25,977,000	$	26,361,100	$	0		$	52,338,100

		Before		Net Cash		Tax Benefit			After
6.	Pro Forma Assets	Conversion		Proceeds		of Foundation			Conversion

	June 30, 2011	$	272,784,000	$	26,361,100	$	0		$	299,145,100

(1)	ESOP stock (8% of offering) amortized over 10 years, amortization expense is tax effected at 34%.
(2)	Stock programs (4% of offering) amortized over 5 years, amortization expense is tax effected at 34%.
(3)	Option valuation based on Black-Scholes model, 5 year vesting, and assuming 25% taxable.

EXHIBIT IV-9

1st Security Bank of Washington

Peer Group Core Earnings Analysis

RP ® Financial, LC.

Core Earnings Analysis

Comparable Institution Analysis

For the 12 Months Ended June 30, 2011


										Less:		Estimated
		Net Income			Less: Net			Tax Effect		Extraordinary		Core Income					Estimated
Comparable Group		to Common			Gains(Loss)			@ 34%		Items		to Common			Shares		Core EPS
		($000)			($000)			($000)		($000)		($000)			(000)		($)

AFCB	Athens Bancshares, Inc. of TN	$	1,680		$	0		$	0	$	0	$	1,680			2,766	$	0.61
EBMT	Eagle Bancorp Montana of MT	$	2,410		($	2,206	)	$	750	$	0	$	954			3,919	$	0.24
FFDF	FFD Financial Corp. of Dover OH (1)	$	1,435		($	742	)	$	252	$	0	$	945			1,012	$	0.93
FABK	First Advantage Bancorp of TN	$	1,882		($	1,170	)	$	398	$	0	$	1,110			4,087	$	0.27
FFNM	First Federal of N. Michigan of MI	$	141		($	116	)	$	39	$	0	$	64			2,884	$	0.02
JXSB	Jacksonville Bancorp Inc. of IL	$	3,027		($	680	)	$	231	$	0	$	2,578			1,931	$	1.34
LSBI	LSB Financial Corp. of Lafayette IN	$	1,810		($	1,235	)	$	420	$	0	$	995			1,554	$	0.64
LABC	Louisiana Bancorp, Inc. of LA	$	2,406		($	527	)	$	179	$	0	$	2,058			3,438	$	0.60
RVSB	Riverview Bancorp, Inc. of WA	$	3,264		($	297	)	$	101	$	0	$	3,068			22,472	$	0.14
TSBK	Timberland Bancorp, Inc. of WA	$	(32	)	($	1,364	)	$	464	$	0	($	932	)		7,045	($	0.13	)

(1) Financial information is for the quarter ending March 31, 2011.

Source:

SNL Financial, LC. and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.

EXHIBIT V-1

RP ® Financial, LC.

Firm Qualifications Statement

RP ® FINANCIAL, LC.
Serving the Financial Services Industry Since 1988

FIRM QUALIFICATION STATEMENT

RP ® Financial (“RP ® ) provides financial and management consulting, merger advisory and valuation services to the financial services industry nationwide. We offer a broad array of services, high quality and prompt service, hands-on involvement by principals and senior staff, careful structuring of strategic initiatives and sophisticated valuation and other analyses consistent with industry practices and regulatory requirements. Our staff maintains extensive background in financial and management consulting, valuation and investment banking. Our clients include commercial banks, thrifts, credit unions, mortgage companies, insurance companies and other financial services companies.

STRATEGIC PLANNING SERVICES

RP ® ’s strategic planning services are designed to provide effective feasible plans with quantifiable results. We analyze strategic options to enhance shareholder value, achieve regulatory approval or realize other objectives. Such services involve conducting situation analyses; establishing mission/vision statements, developing strategic goals and objectives; and identifying strategies to enhance franchise and/or market value, capital management, earnings enhancement, operational matters and organizational issues. Strategic recommendations typically focus on: capital formation and management, asset/liability targets, profitability, return on equity and stock pricing. Our proprietary financial simulation models provide the basis for evaluating the impact of various strategies and assessing their feasibility and compatibility with regulations.

MERGER ADVISORY SERVICES

RP ® ’s merger advisory services include targeting potential buyers and sellers, assessing acquisition merit, conducting due diligence, negotiating and structuring merger transactions, preparing merger business plans and financial simulations, rendering fairness opinions, preparing mark-to-market analyses, valuing intangible assets and supporting the implementation of post-acquisition strategies. Our merger advisory services involve transactions of financially healthy companies and failed bank deals. RP ® is also expert in de novo charters and shelf charters. Through financial simulations, comprehensive data bases, valuation proficiency and regulatory familiarity, RP ® ’s merger advisory services center on enhancing shareholder returns.

VALUATION SERVICES

RP ® ’s extensive valuation practice includes bank and thrift mergers, thrift mutual-to-stock conversions, goodwill impairment, insurance company demutualizations, ESOPs, subsidiary companies, merger accounting and other purposes. We are highly experienced in performing appraisals which conform to regulatory guidelines and appraisal standards. RP ® is the nation’s leading valuation firm for thrift mutual-to-stock conversions, with appraised values ranging up to $4 billion.

OTHER CONSULTING SERVICES

RP ® offers other consulting services including evaluating the impact of regulatory changes (TARP, etc.), branching and diversification strategies, feasibility studies and special research. We assist banks/thrifts in preparing CRA plans and evaluating wealth management activities on a de novo or merger basis. Our other consulting services are facilitated by proprietary valuation and financial simulation models.

KEY PERSONNEL (Years of Relevant Experience & Contact Information)

Ronald S. Riggins, Managing Director (30)	(703) 647-6543	rriggins@rpfinancial.com
William E. Pommerening, Managing Director (27)	(703) 647-6546	wpommerening@rpfinancial.com
Gregory E. Dunn, Director (28)	(703) 647-6548	gdunn@rpfinancial.com
James P. Hennessey, Director (25)	(703) 647-6544	jhennessey@rpfinancial.com
James J. Oren, Director (24)	(703) 647-6549	joren@rpfinancial.com
Timothy M. Biddle, Senior Vice President (21)	(703) 647-6552	tbiddle@rpfinancial.com
Janice Hollar, Senior Vice President (29)	(703) 647-6554	jhollar@rpfinancial.com

Washington Headquarters
Rosslyn Center	Telephone: (703) 528-1700
1100 North Glebe Road, Suite 1100	Fax No.: (703) 528-1788
Arlington, VA 22201	Toll-Free No.: (866) 723-0594
www.rpfinancial.com	E-Mail: mail@rpfinancial.com

	Large accelerated filer o	Accelerated filer o
	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

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

		Page

Report of Independent Registered Public Accounting Firm		F-1

Financial Statements

Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010 and 2009		F-2

Statements of Operations for the Six Months Ended June 30, 2011 and 2010 (Unaudited) and the Years Ended December 31, 2010 and 2009		F-3

Statements of Equity and Comprehensive Income (Loss) for the Six Months Ended June 30, 2011 (Unaudited) and the Years Ended December 31, 2010 and 2009		F-4

Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited) and the Years Ended December 31, 2010 and 2009		F-5

Notes to Financial Statements		F-6–F-40

	Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Equity			Total Comprehensive Income (Loss)

Balance, January 1, 2009	$	27,878		$	(16	)	$	27,862
Comprehensive loss:
Net loss		(4,574	)		—			(4,574	)	$	(4,574	)
Other comprehensive income:
Unrealized gain on securities available-for-sale		—			27			27			27
Total comprehensive loss										$	(4,547	)
Balance, December 31, 2009		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	$	1,008		$	—		$	1,008		$	1,008
Other comprehensive income:
Unrealized gain on securities available-for-sale		—			174			174			174
Total comprehensive income										$	1,182
Balance, June 30, 2011 (Unaudited)	$	25,914		$	63		$	25,977

	Six Months Ended		Years Ended December 31,
	June 30, 2011		2010			2009
	(Unaudited)
Unrealized gains (losses) arising from during the year on securities	$	174	$	(122	)	$	90
Reclassification adjustment for unrealized (gains) losses realized in net income, net of tax		—		—			(63	)
Net change in unrealized gains (losses) on available-for-sale securities	$	174	$	(122	)	$	27

	June 30, 2011 (Unaudited)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses (less than 1 year)			Gross Unrealized Losses (greater than 1 Year)		Estimated Fair Values
Securities Available-for-sale
Federal agency securities	$	9,802	$	43	$	(12	)	$	—	$	9,833
Municipal bonds		1,400		28		(19	)		—		1,409
Mortgage-backed securities		424		23		—			—		447
Total securities available-for-sale	$	11,626	$	94	$	(31	)	$	—	$	11,689

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses (less than 1 year)			Gross Unrealized Losses (greater than 1 Year)		Estimated Fair 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


	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Values
Mortgage backed securities	$	592	$	11	$	—	$	603
Total securities available-for-sale	$	592	$	11	$	—	$	603

	June 30, 2011
	(Unaudited)
	Real Estate Loans			Consumer			Commercial Business			Unallocated		Total

Beginning Balance	$	1,213		$	3,361		$	837		$	494	$	5,905
Provision for loan loss		634			748			(529	)		177		1,030
Charge-offs		(729	)		(1,763	)		—			—		(2,492	)
Recoveries		—			393			—			—		393
Net charge-offs		(729	)		(1,370	)		—			—		(2,099	)
Ending balance	$	1,118		$	2,739		$	308		$	671	$	4,836

Period-end amount allocated to:
Loans individually evaluated for impairment	$	639		$	—		$	244		$	—	$	883
Loans collectively evaluated for impairment		479			2,739			64			671		3,953
Ending Balance	$	1,118		$	2,739		$	308		$	289	$	4,836

LOANS RECEIVABLES
Loans individually evaluated for impairment	$	2,639		$	—		$	3,041		$	—	$	5,680
Loans collectively evaluated for impairment		58,780			124,660			25,389			—		208,829
Ending Balance	$	61,419		$	124,660		$	28,430			—	$	214,509

	June 30, 2010
	(Unaudited)
	Real Estate Loans			Consumer			Commercial Business			Unallocated			Total
Beginning Balance	$	2,230		$	3,628		$	1,069		$	478		$	7,405
Provision for loan loss		514			1,700			(90	)		(219	)		1,905
Charge-offs		(1,388	)		(2,006	)		(74	)		—			(3,468	)
Recoveries		—			383			—			—			383
Net charge-offs		(1,388	)		(1,623	)		(74	)		—			(3,085	)
Ending balance	$	1,356		$	3,705		$	905		$	259		$	6,225

Period-end amount allocated to:
Loans individually evaluated for impairment	$	926		$	—		$	839		$	—		$	1,765
Loans collectively evaluated for impairment		430			3,705			66			289			4,490
Ending balance	$	1,356		$	3,705		$	905		$	289		$	6,255
LOANS RECEIVABLES
Loans individually evaluated for impairment	$	5,702		$	—		$	5,180		$	—		$	10,882
Loans collectively evaluated for impairment		60,337			136,968			26,434			—			223,739
Ending balance	$	66,039		$	136,968		$	31,614		$	—		$	234,621

	June 30, 2011

	30-50 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and Accruing		Total Past Due		Non- accrual		Current		Total Loans Receivable
Real estate loans
One- to four-family	$	—	$	—	$	—	$	—	$	234	$	12,599	$	12,833
Home equity		233		133		57		423		605		14,411		15,439
Multi-family		—		—		—		—		—		1,168		1,168
Commercial		—		—		—		—		—		25,675		25,675
Construction and development		—		—		—		—		—		6,304		6,304
Total real estate loans		233		133		57		424		839		60,157		61,419
Consumer
Indirect home improvement		758		391		—		1,149		421		85,662		87,232
Automobile		291		72		—		363		37		8,527		8,927
Recreational		221		10		—		231		1		25,109		25,341
Home improvement		22		—		—		22		37		1,011		1,070
Other		16		14		—		30		8		2,052		2,090
Total consumer loans		1,308		487		—		1,795		504		122,361		124,660
Commercial business loans		—		—		—		—		558		27,872		28,430
Total	$	1,541	$	620	$	57	$	2,218	$	1,901	$	210,390	$	214,509

	December 31, 2010

	30-50 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and Accruing		Total Past Due		Non-accrual		Current		Total Loans Receivable
Real estate loans
One- to four-family	$	—	$	—	$	—	$	—	$	211	$	13,007	$	13,218
Home equity		369		120		62		551		574		14,530		15,655
Multi-family		—		—		—		—		—		1,159		1,159
Commercial		—		—		—		—		1,201		26,860		28,061
Construction and development		—		—		—		—		2,175		7,630		9,805
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
Automobile		378		113		—		491		54		12,100		12,645
Recreational		141		136		—		277		38		23,790		24,105
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

	June 30, 2011
	(Unaudited)
	Unpaid Principal Balance		Write- downs			Recorded Investment		Specific Reserve			Adjusted Recorded Investment		YTD Average Recorded Investment		YTD Interest Income Recognized
Real estate loans
One- to four-family	$	—	$	—		$	—	$	—		$	—	$	—	$	—
Home equity		—		—			—		—			—		—		—
Multi-family		—		—			—		—			—		—		—
Commercial		—		—			—		—			—		—		—
Construction and development		2,639		—			2,639		(639	)		2,000		2,639		—
Total real estate loans		2,639		—			2,639		(639	)		2,000		2,639		—
Consumer
Indirect home improvement		—		—			—		—			—		—		—
Automobile		—		—			—		—			—		—		—
Recreational		—		—			—		—			—		—		—
Home improvement		—		—			—		—			—		—		—
Other		—		—			—		—			—		—		—
Total consumer loans		—		—			—		—			—		—		—
Commercial business loans		3,438		(397	)		3,401		(244	)		2,797		3,341		6
Total	$	6,077	$	(397	)	$	5,680	$	(883	)	$	4,797	$	5,980	$	6

	June 30, 2011
	(Unaudited)
	Pass		Watch		Special Mention		Substandard		Doubtful		Total
Real estate loans
One- to four-family	$	11,874	$	582	$	—	$	377	$	—	$	12,833
Home equity		14,595		278		—		290		276		15,439
Multi-family		1,168		—		—		—		—		1,168
Commercial		19,277		6,398		—		—		—		25,675
Construction and development		3,665		—		612		2,027		—		6,304
Total real estate loans		50,579		7,258		612		2,694		276		61,419

Consumer
Indirect home improvement		86,811		—		—		421		—		87,232
Automobile		8,890		—		—		37		—		8,927
Recreational		25,340		—		—		1		—		25,341
Home improvement		1,033		—		—		37				1,070
Other		2,082		—		—		8		—		2,090
Total consumer loans		124,156		—		—		504		—		124,660

Commercial business loans		25,319		70		1,065		1,976		—		28,430
Total	$	200,054	$	7,328	$	1,677	$	5,174	$	276	$	214,509

	Six Months Ended June 30, 2011		Years Ended December 31,
	Six Months Ended June 30, 2011		2010			2009
		(Unaudited)
Beginning balance	$	—	$	21		$	23
New loans repayments		—		(21	)		(2	)
Ending balance	$	—	$	—		$	21

	Six Months Ended June 30,			Years Ended December 31,
	2011			2010			2009
	(Unaudited)
Beginning balance	$	245		$	340		$	461
Mortgage servicing rights amortized		(48	)		(95	)		(121	)
Ending balance	$	197		$	245		$	340

Periods Ending December 31,	As of June 30, 2011
	(Unaudited)
2011	$	115
2012		234
2013		233
2014		242
2015		187
Thereafter		347
	$	1,358

	For Six Months Ended June 30, 2011			Years Ended December 31,
	For Six Months Ended June 30, 2011			2010			2009
	(Unaudited)

Beginning balance	$	78		$	130		$	44
Additions		263			492			801
Disposition of assets		(249	)		(544	)		(715	)
Ending balance	$	92		$	78		$	130


Periods Ending December 31,	June 30, 2011

	(Unaudited)
2011	$	26,933
2012		55,926
2013		5,544
2014		2,401
2015		14,243
Thereafter		865
	$	105,912

	June 30, 2011 (Unaudited)
Periods Ending December 31	Amount		Rate

2011
2012		2,200		4.42	%
2013		—		—
2014		—		—
2015		1,700		4.57	%
Thereafter		—		—
	$	3,900

	Securities available-for-sale
	Level 1		Level 2		Level 3		Total

June 30, 2011 (Unaudited)
Federal agency securities	$	9,833	$	—	$	—	$	9,833
Municipal bonds		1,409		—		—		1,409
Mortgage-backed securities		447		—		—		447
	$	11,689	$	—	$	—	$	11,689

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
December 31, 2009
Mortgage-backed securities	$	603	$	—	$	—	$	603
	$	603	$	—	$	—	$	603

	Impaired loans
	Level 1		Level 2		Level 3		Total		Total Impairment
June 30, 2011 (Unaudited)	$	—	$	—	$	812	$	812	$	477
December 31, 2010	$	—	$	—	$	5,140	$	5,140	$	1,162
December 31, 2009	$	—	$	—	$	5,707	$	5,707	$	1,747

	OREO and other repossessed assets
	Level 1		Level 2		Level 3		Total		Total Gain (loss)
June 30, 2011 (Unaudited)	$	—	$	92	$	5,925	$	6,017	$	(132	)
December 31, 2010	$	—	$	78	$	3,701	$	3,779	$	41
December 31, 2009	$	—	$	130	$	5,484	$	5,614	$	(452	)

		Amount(1)
*	Registrant's Legal Fees and Expenses	$	290,000
*	Registrant's Accounting Fees and Expenses		100,000
*	Conversion Agent and Data Processing Fees		50,000
*	Marketing Agent Fees (1)		388,000
*	Marketing Agent Expenses (including Legal Fees and Expenses)		85,000
*	Appraisal Fees and Expenses		40,500
*	Printing, Postage, Mailing, Copying and EDGAR		232,000
*	Filing Fees (FINRA, NASDAQ and SEC)		55,000
*	Blue Sky Legal Fees and Expenses		10,000
*	Business Plan Fees and Expenses		30,000
*	Stock Certificate Printing		6,000
*	Transfer Agent Services		7,500
*	Other		5,000
	Prior Related Conversion and Offering Expenses		853,000

*	Total	$	2,152,000

	FS BANCORP, INC.


	By:	/s/ Joseph C. Adams
		Joseph C. Adams, Chief Executive Officer
		( Duly Authorized Representative )

/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:	September 28, 2011.	Date:	September 28, 2011.

/s/ Margaret R. Piesik		/s/ Judith A. Cochrane
Margaret R. Piesik, Director		Judith A. Cochrane, Director

Date:	September 28, 2011.	Date:	September 28, 2011.

/s/ Joseph P. Zavaglia		/s/ Michael J. Mansfield
Joseph P. Zavaglia, Director		Michael J. Mansfield, Director

Date:	September 28, 2011.	Date:	September 28, 2011.

/s/ Matthew D. Mullet
Matthew D. Mullet, CFO, Treasurer and Secretary
( Principal Financial and Accounting Officer )

Date:	September 28, 2011.

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
10.2	Form of Change of Control Agreement between 1st Security Bank of Washington and each of Matthew D. Mullet, Steven L. Haynes 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

By:	/s/ Patricia A. McJoynt
	Patricia A. McJoynt, Managing Director

1 ST SECURITY BANK OF WASHINGTON

By:	/s/ Joe Adams	Date:	09/21/11
	Joe Adams, Director and CEO


By:	/s/ Joseph C. Adams	Joseph C. Adams, Incorporator	09/12/11
	(Signature of Registered Agent)	(Print Name and Title)	(Date)


CORPORATE SECRETARY	CHIEF EXECUTIVE OFFICER

	TRANSFER AGENT

[SEAL]


TEN COM	-as tenants in common
TEN ENT	-as tenants by the entireties
JT TEN	-as joint tenants with right of survivorship and not as tenants in common
UNIF GIFT MIN ACT	-_______Custodian_______ under Uniform Gifts to Minors Act _________
	(Cust) (Minor)	(State)

Dated

			Signature

			Signature
			NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Certificate in every particular, without alteration or enlargement or any change whatever.