FS Bancorp (FSBW) DEF 14ADefinitive proxy

You are cordially invited to attend the annual meeting of shareholders of FS Bancorp, Inc. to be held at the 1st Security Bank Administrative Office, located at 6920 220^th Street SW, Mountlake Terrace, Washington, on Thursday, May 26, 2022 at 2:00 p.m., local time.

The notice of annual meeting of shareholders and proxy statement appearing on the following pages describe the formal business to be transacted at the meeting.  During the meeting, we will also report on our operations.  Directors and officers of FS Bancorp, Inc., as well as a representative of Moss Adams LLP, our independent registered public accounting firm, will be present to respond to appropriate questions of shareholders.

We look forward to seeing you at the meeting.

Notice is hereby given that the annual meeting of shareholders of FS Bancorp, Inc. will be held at the 1st  Security Bank Administrative Office, located at 6920 220^th Street SW, Mountlake Terrace, Washington, on Thursday, May 26, 2022, at 2:00 p.m., local time, for the following purposes:

We will also consider and act upon such other business as may properly come before the meeting, or any adjournment or postponement thereof.  As of the date of this notice, we are not aware of any other business to come before the annual meeting.

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders to Be Held on May 26, 2022.  Our proxy statement and 2021 Annual Report to Shareholders are available at http://investorrelations.fsbwa.com/CorporateProfile.  Directions to attend the annual meeting, where you may vote in person, can be found at http://investorrelations.fsbwa.com/sec-filings/annual-reports.  Please also refer to the instructions on the Important Notice Regarding the Availability of Proxy Materials you received in the mail if you would like to receive a paper or emailed copy of the proxy materials.

The Board of Directors has fixed the close of business on March 25, 2022 as the record date for the annual meeting.  This means that shareholders of record at the close of business on that date are entitled to receive notice of and to vote at the meeting and any adjournment thereof.  To ensure that your shares are represented at the meeting, please take the time to vote your proxy, which is solicited by the Board of Directors.  You may vote via the Internet or by telephone, or by requesting, signing, dating and mailing a proxy card.  The proxy will not be used if you attend and vote at the annual meeting in person.  Regardless of the number of shares you own, your vote is very important.  Please act today.

The Board of Directors of FS Bancorp, Inc. is using this proxy statement to solicit proxies from our shareholders for use at our annual meeting of shareholders.  We first provided access to this proxy statement and the form of proxy to our shareholders on or about April 11, 2022.

The information provided in this proxy statement relates to FS Bancorp, Inc. and its wholly-owned subsidiary, 1st Security Bank of Washington.  FS Bancorp, Inc. may also be referred to as “FS Bancorp” and 1st Security Bank of Washington may also be referred to as “1st Security Bank” or the “Bank.”  References to “we,” “us” and “our” refer to FS Bancorp and, as the context requires, 1st Security Bank.

Our annual meeting will be held as follows:

At the meeting, you will be asked to consider and vote upon the following proposals:

We provided access to our proxy materials beginning on April 11, 2022.  On that day, we mailed the Important Notice Regarding the Availability of Proxy Materials to our shareholders.  The Securities and Exchange Commission ("SEC") allows us to deliver proxy materials to shareholders over the Internet.  We believe that this offers a convenient way for shareholders to review our information.  It also reduces printing expenses and lessens the

We have fixed the close of business on March 25, 2022 as the record date for shareholders entitled to notice of and to vote at our annual meeting.  Only holders of record of FS Bancorp’s common stock on that date are entitled to notice of and to vote at the annual meeting.  You are entitled to one vote for each share of FS Bancorp common stock you own, unless you own more than 10% of FS Bancorp’s outstanding shares.  As provided in our Articles of Incorporation, record holders of common stock who beneficially own in excess of 10% of FS Bancorp’s outstanding shares are not entitled to any vote in respect of the shares held in excess of the 10% limit unless our Board of Directors has granted permission in advance.  On March 25, 2022, there were 8,088,487 shares of FS Bancorp common stock outstanding and entitled to vote at the annual meeting.

Proxies are solicited to provide all shareholders on the voting record date an opportunity to vote on matters scheduled for the annual meeting and described in these materials.  This question provides voting instructions for shareholders of record.  You are a shareholder of record if your shares of FS Bancorp common stock are held in your name.  If you are a beneficial owner of FS Bancorp common stock held by a broker, bank or other nominee (i.e., in “street name”), please see the instructions below under “What if My Shares Are Held in Street Name?”

Shares of FS Bancorp common stock can only be voted if the shareholder is present in person or by proxy at the annual meeting.  To ensure your representation at the annual meeting, we recommend you vote by proxy even if you plan to attend the annual meeting.  You can always change your vote at the meeting if you are a shareholder of record.

Voting instructions are included on the Important Notice Regarding the Availability of Proxy Materials and the proxy card.  Shares of FS Bancorp common stock represented by properly executed proxies will be voted by the individuals named on the form of proxy in accordance with the shareholder’s instructions.  Where properly executed proxies are returned to us with no specific instruction as how to vote at the annual meeting, the persons named in the proxy will vote the shares FOR the election of each of our director nominees, FOR advisory approval of the compensation of our named executive officers as disclosed in this proxy statement, FOR adoption of the FS Bancorp, Inc. Nonqualified 2022 Stock Purchase Plan and FOR ratification of the appointment of Moss Adams LLP as our independent registered public accounting firm.  If any other matters are properly presented at the annual meeting for action, the persons named in the proxy and acting thereunder will have the discretion to vote on these matters in accordance with their best judgment.  We do not currently expect that any other matters will be properly presented for action at the annual meeting.

You may receive more than one proxy depending on how your shares are held.  For example, you may hold some of your shares individually, some jointly with your spouse and some in trust for your children.  In this case, you will receive three separate proxies to vote.

If you are the beneficial owner of shares held in “street name” by a broker, bank or other nominee (“nominee”), the nominee, as the record holder of the shares, is required to vote the shares in accordance with your instructions.  If your common stock is held in street name, you will receive instructions from the nominee that you must follow in order to have your shares voted.  The nominee may allow you to deliver your voting instructions via telephone or the Internet.  Please see the instruction form that accompanies this proxy statement.  If you do not give instructions to the nominee, the nominee may nevertheless vote the shares with respect to discretionary items, but will not be permitted to vote your shares with respect to non-discretionary items, pursuant to current industry practice.  In the case of non-discretionary items, shares not voted will be treated as “broker non-votes.”  The proposal to elect directors and adopt the Nonqualified 2022 Stock Purchase Plan, and the advisory vote on executive compensation are considered non-discretionary items; therefore, you must provide instructions to the nominee in order to have your shares voted with respect to these proposals.

If your shares are held in street name, you will need proof of ownership to be admitted to the annual meeting.  A recent brokerage statement or letter from the record holder of your shares are examples of proof of

We maintain the FS Bancorp, Inc. Employee Stock Ownership Plan (“ESOP”), which owns 5.83% of FS Bancorp’s common stock.  Employees of FS Bancorp and 1st Security Bank participate in the ESOP.  Each ESOP participant may instruct the trustee how to vote the shares of FS Bancorp common stock allocated to his or her account under the ESOP by completing the vote authorization form. If an ESOP participant properly executes a vote authorization form, the ESOP trustee will vote the participant’s shares in accordance with the participant’s instructions.  Allocated shares for which proper voting instructions are not received and unallocated shares held by the ESOP will be voted by the trustee in the same proportion as shares for which the trustee has received voting instructions.  In order to give the trustees sufficient time to vote, all vote authorization forms from ESOP participants must be received by the transfer agent on or before May 23, 2022.

A quorum must be present at the meeting for any business to be conducted.  The presence at the meeting, in person or by proxy, of at least a majority of the shares of FS Bancorp common stock entitled to vote at the annual meeting as of the record date will constitute a quorum.  Proxies received but marked as abstentions or broker non-votes will be included in the calculation of the number of shares considered to be present at the meeting.

If a quorum is not present at the scheduled time of the meeting, a majority of the shareholders present or represented by proxy may adjourn the meeting until a quorum is present.  The time and place of the adjourned meeting will be announced at the time the adjournment is taken, and no other notice will be given unless the adjourned meeting is set to be held 120 days or more after the original meeting.  An adjournment will have no effect on the business that may be conducted at the meeting.

Directors are elected by a plurality of the votes cast, in person or by proxy, at the annual meeting by holders of FS Bancorp common stock.  Accordingly, the two nominees for election as directors who receive the highest number of votes actually cast will be elected.  Pursuant to our Articles of Incorporation, shareholders are not permitted to cumulate their votes for the election of directors.  Votes may be cast for or withheld from each nominee.  Votes that are withheld will have no effect on the outcome of the election because the nominees receiving the greatest number of votes will be elected.  Our Board of Directors unanimously recommends that you vote FOR the election of each of its director nominees.

Advisory (non-binding) approval of the compensation of our named executive officers, as disclosed in this proxy statement, requires the affirmative vote of a majority of the votes cast, in person or by proxy, at the annual meeting.  Abstentions and broker non-votes will have no effect on the outcome of the proposal.  Our Board of Directors unanimously recommends that you vote FOR approval of the compensation of our named executive officers.

Adoption of the FS Bancorp, Inc. Nonqualified 2022 Stock Purchase Plan requires the affirmative vote of a majority of the votes cast, in person or by proxy, at the annual meeting.  Any shareholder represented in person or by proxy at the meeting and entitled to vote on the subject matter may elect to abstain from voting on this proposal.  If so, the abstention will not be counted as a vote cast on the proposal and, therefore, will have no effect on the outcome of the vote on the proposal.  Provided there is a quorum of shareholders present in person or by proxy, shareholders not attending the meeting, in person or by proxy, will also have no effect on the outcome of this proposal.  Broker non-votes do not constitute votes cast and will have no effect on the outcome of the proposal.  Our Board of Directors unanimously recommends that you vote FOR adoption of the Nonqualified 2022 Stock Purchase Plan.

Ratification of the appointment of Moss Adams LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2022 requires the affirmative vote of a majority of the votes cast, in person or by proxy, at the annual meeting.  Abstentions will have no effect on the outcome of the proposal. Our Board of Directors unanimously recommends that you vote FOR the ratification of the appointment of the independent registered public accounting firm.

You may revoke your proxy before it is voted by:

If you plan to attend the annual meeting and wish to vote in person, we will give you a ballot at the annual meeting.  However, if your shares are held in street name, you must bring a validly executed proxy from the nominee indicating that you have the right to vote your shares.

The following table sets forth, as of March 25, 2022, the voting record date, information regarding share ownership of:

Persons and groups who beneficially own in excess of five percent of FS Bancorp’s common stock are required to file with the SEC, and provide us a copy of, reports disclosing their ownership pursuant to the Securities Exchange Act of 1934.  To our knowledge, no other person or entity, other than the ones set forth below, beneficially owned more than five percent of the outstanding shares of FS Bancorp’s common stock as of the close of business on the voting record date.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC.  In accordance with Rule 13d-3 of the Securities Exchange Act, a person is deemed to be the beneficial owner of any shares of common stock if he or she has voting and/or investment power with respect to those shares.  Therefore, the table below includes shares owned by spouses, other immediate family members in trust, shares held in retirement accounts or funds for the benefit of the named individuals, shares held in the ESOP, and other forms of ownership, over which shares the persons named in the table may possess voting and/or investment power.  In addition, in computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to outstanding options that are currently exercisable or exercisable within 60 days after the voting record date are included in the number of shares beneficially owned by the person and are deemed outstanding for the purpose of calculating the person’s percentage ownership.  These shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

As of the voting record date, there were 8,088,487 shares of FS Bancorp common stock outstanding.

Our Board of Directors currently consists of eight members and is divided into three classes. Approximately one-third of the directors are elected annually to serve for a three-year period or until their respective successors are elected and qualified.  The table below sets forth information regarding each director of FS Bancorp and each nominee for director.  The Nominating and Environmental, Social, Governance Committee of the Board of Directors selects nominees for election as directors.  Ted A. Leech and Marina Cofer-Wildsmith currently serve as FS Bancorp directors and have been nominated to each serve a three-year term.  Mark H. Tueffers will retire from the Board effective as of the annual meeting and the Board of Directors will reduce its size from eight to seven directors.

Each nominee has consented to being named in this proxy statement and has agreed to serve if elected.  If a nominee is unable to stand for election, the Board of Directors may either reduce the number of directors to be elected or select a substitute nominee.  If a substitute nominee is selected, the proxy holders will vote your shares for the substitute nominee, unless you have withheld authority.  At this time, we are not aware of any reason why a nominee might be unable to serve if elected.

Set forth below is the present principal occupation and other business experience during at least the last five years of each nominee for election, as well as a brief discussion of the particular experience, qualifications, attributes and skills that led the Board to conclude that the nominee should serve as a director of FS Bancorp.

Ted A. Leech, Board Chair of FS Bancorp and 1st Security Bank, 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 Chairperson of the Audit Committee.

Marina Cofer-Wildsmith has spent 30 years working in nonprofit management and business development. Her background includes serving as Executive Director of Bainbridge Youth Services from 2012 to 2017, business consulting from 2009 to 2012, and Chief Executive Officer of the American Lung Association of Washington and the Northwest from 2003 to 2007.  Other American Lung Association positions held from 1990 to 2003 included program development, marketing and communications.  Key career achievements include leading the Washington Smoke Free Restaurants and Bars Initiative, developing with the U.S. Environmental Protection Agency the air

Set forth below is the present principal occupation and other business experience during at least the last five years of each director continuing in office, as well as a brief discussion of the particular experience, qualifications, attributes and skills that led the Board to conclude that the director should serve on FS Bancorp’s Board of Directors.

Michael J. Mansfield spent 16 years with Deloitte LLP before joining Moss Adams LLP in 1995, where he was a partner for more than 10 years.  During his time with Moss Adams, Mr. Mansfield chaired 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.  Mr. Mansfield is also a minority owner/part-time Chief Financial Officer for two construction companies (Pacific Pile & Marine, L.P. and R Miller, Inc.) and a minority owner in seven other  privately-owned businesses, in addition to serving on the advisory board of two other private companies.  Mr. Mansfield’s 29 years of experience as a public accountant, together with his experience of being part of the management/advisory team of several small- to medium-sized businesses, has provided him with strong leadership, financial and administrative insights that are valuable to FS Bancorp.

Margaret R. 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 from 2004 to 2010, served as the President of Swedish Medical Center Service League.  She was also a co-owner of White Barn Farm, a family-owned organic flower and vegetable farm, until its sale in 2010.  She previously served on the board of the Kirkland Performance Center.  Ms. Piesik is also active in several local service organizations.  Ms. Piesik’s managerial experience, together with her experience serving on several boards and active participation in the local community, brings valuable knowledge and skills to our organization.

Joseph C. Adams is a director and has been the Chief Executive Officer of 1st Security Bank of Washington since July 2004.  He has also served in those capacities for FS Bancorp since its formation in September 2011.  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 of Regulatory Affairs.  As the Director of Regulatory Affairs for Univar USA, the largest chemical distribution company in the United States, Mr. Adams used his environmental law expertise to ensure Univar stayed in compliance with all relevant local, state and federal environmental laws, rules and regulations.  He is a member of the Washington State Bar Association, a Board member of the Central Washington University Foundation and a Board member of the Community Bankers of Washington.  Mr. Adams graduated with Distinction from the University of Hawaii with a Bachelor of Business Administration in Finance.  He also graduated cum laude with a Juris Doctor from the University of Puget Sound School of Law.  In addition, Mr. Adams graduated with honors from the Pacific Coast Banking School in 2007, a master’s level program held at the University of Washington.  Mr. Adams’s 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 well-suited to educating the Board on these matters.

Pamela M. Andrews was an active trial attorney in Seattle for over 35 years, practicing in the areas of professional liability, medical malpractice, nursing home/assisted living, mental healthcare and complex civil litigation.  She also served as the President of her law firm, Andrews Skinner, P.S., for the last 16 years of her practice.  Ms. Andrews was selected as a Fellow of the International Society of Barristers; a Senior Fellow of Litigation Counsel of America; a founding and continuous member of the Bar Register of Preeminent Women Lawyers for the last ten years of her practice and enjoyed a Martindale Hubbell AV rating for 30 years.  Ms. Andrews graduated summa cum laude from the University of Wisconsin-Oshkosh and received her Juris Doctor from the University of Wisconsin-Madison.  She has been active in community animal welfare groups and associations in the Puget Sound and Pacific Northwest region.  Ms. Andrews adds important skills to the Board, including legal, litigation, insurance, human resources, small business experience and operations management.

Joseph P. Zavaglia has been the owner and operator since February 2008 of Zavaglia Consulting, L.L.C., which provides retail banking and small business advisory services to community banks.  He also runs From the Heart of Italy, an Italian cooking school.  Mr. Zavaglia started his career in 1975 and over a period of 45 years has worked in numerous areas of banking, including commercial lending, retail and small business banking, human resources, investments, incentive compensation and executive administration with both large national institutions and community banks.  Upon retiring from his last executive banking position, he served as a board member for nine years and was an employee of Pacific Coast Banking School.  Mr. Zavaglia then worked with the Washington Bankers Association in co-creating four developmental programs and currently serves as an instructor and facilitator for the programs, which are now being offered throughout the United States.  Mr. Zavaglia received his undergraduate degree in Business Management from Seattle University, and his Masters Degree in Education from Western Washington University.  He is also a graduate of Pacific Coast Banking School and formerly held Series 6, 63 and 26 securities licenses and his state insurance license for life and disability.  Giving back to the communities he serves has been his passion.  Mr. Zavaglia served as Chair of the Board of Regents at Seattle University for three years and as a board member for nine additional years, State Board Chair of the March of Dimes for 15 years, Chair of the Italian Studies Board at the University of Washington, Chair of the Deans Advisory Board for Woodring College of Education at Western Washington University for four years.  In 2007, he was inducted into the Athletic Hall of Fame at Seattle University.  In 2012, he received the Distinguished Alumnus award from the Woodring College of Education, and in 2015, was awarded the University Service Award from Seattle University.  Mr. Zavaglia brings strong leadership, management, human resource, and interpersonal skills to our board.

Our common stock is listed on the Nasdaq Global Select Market.  In accordance with Nasdaq requirements, at least a majority of our directors must be independent directors.  The Board has determined that seven of our eight directors (87.5%) are independent, as defined by Nasdaq.  Directors Andrews, Cofer-Wildsmith, Leech, Mansfield, Piesik, Tueffers and Zavaglia are all independent.  Only Joseph C. Adams, who is our Chief Executive Officer, is not independent.

Our goal is to have a diverse mix of directors with the appropriate experience, independence, knowledge, and skills to oversee FS Bancorp and its management team.  As part of our Board refreshment efforts, the Board added Pamela M. Andrews as a director in January 2021.  New directors bring fresh perspectives and valued skill sets.  The directors have an average tenure of 11.5 years, which the Board believes appropriately balances experience and new outlooks.

The Boards of Directors of FS Bancorp and 1st Security Bank conduct their business through board and committee meetings.  During the fiscal year ended December 31, 2021, the Boards of Directors of FS Bancorp and 1st Security Bank each held 10 meetings.  No director of FS Bancorp or the Bank attended fewer than 75% of the total meetings of the boards and committees on which that person served during this period.

The Board of Directors of FS Bancorp has standing Audit, Compensation, and Nominating and Environmental, Social, Governance committees.  The Board has adopted written charters for each of these committees, copies of which are available on our website at www.FSBWA.com under “Investor Relations.”  The directors’ current memberships on the committee is reflected below.  Joseph C. Adams, our Chief Executive Officer, is not a member of any of these committees as they are comprised solely of independent directors.

Audit Committee.  The Audit Committee meets at least quarterly and its primary responsibilities are to (1) 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 (2) work closely with our compliance officer to monitor compliance with all applicable laws and regulations.  The Audit Committee met 10 times during the year ended December 31, 2021.  Please refer to the section entitled, “Audit Committee Matters” for additional information.

Each member of the Audit Committee is “independent” in accordance with the requirements for companies listed on The Nasdaq Stock Market LLC (“Nasdaq”).  In addition, the Board of Directors has determined that Mr. Leech, Mr. Tueffers, and Mr. Mansfield meet the definition of “audit committee financial expert,” as defined by the SEC.

Compensation Committee.  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, Chief Executive Officer evaluation, the review and approval of executive incentive packages and perquisite programs, and overseeing and administering our qualified, tax exempt benefit plans.  Each member of the Committee is “independent,” in accordance with the requirements for companies listed on Nasdaq.  This Committee met nine times during the year ended December 31, 2021.

Nominating and Environmental, Social, Governance Committee.  The Nominating and Environmental, Social, Governance Committee is responsible for (1) reviewing issues and developments related to corporate governance issues, (2) identifying individuals qualified to serve as directors, consistent with Board-approved criteria, (3) recommending to the Board nominees for election or appointment to the Board of Directors and (4) overseeing the environmental and social responsibility activities and practices for FS Bancorp.  Each member of the Committee is “independent,” in accordance with the requirements for companies listed on Nasdaq.  This Committee met nine times during the year ended December 31, 2021.

Only those nominations made by the Nominating and Environmental, Social, Governance Committee or properly presented by shareholders will be voted upon at the annual meeting.  In its deliberations for selecting candidates for nominees as director, the Committee considers:

In searching for qualified director candidates to fill vacancies on the Board, the Committee solicits its current Board of Directors for names of potentially qualified candidates.  Additionally, the Committee may request that members of the Board of Directors pursue their own business contacts for the names of potentially qualified candidates.  The Committee would then consider the potential pool of director candidates, select the candidate it believes best meets the then-current needs of the Board, and conduct a thorough investigation of the proposed candidate’s background to ensure there is no past history that would cause the candidate not to be qualified to serve as one of our directors.  Although the Committee charter does not specifically provide for the consideration of shareholder nominees for directors, the Committee will consider director candidates recommended by a shareholder that are submitted in accordance with our Articles of Incorporation.  Because our Articles of Incorporation provide a process for shareholder nominations, the Committee did not believe it was necessary to provide for shareholder nominations of directors in its charter.  If a shareholder submits a proposed nominee, the Committee would consider the proposed nominee, along with any other proposed nominees recommended by members of our Board of Directors, in the same manner in which the Committee would evaluate its nominees for director.  For a description of the proper procedure for shareholder nominations, see “Shareholder Proposals” in this proxy statement.

Governance Highlights.  To further our commitment and oversight of environmental, social and governance matters, the Governance and Nominating Committee is now the Nominating and Environmental, Social, Governance Committee, and has expanded its purposes.  Highlights of FS Bancorp’s corporate governance include the following:

• independent Board Chair;

• seven of eight directors are independent;

• Board committees are comprised entirely of independent directors;

• independent directors meet in regular executive sessions throughout the year;

• regular Board and committee self-evaluations;

• policies restrict pledging and hedging;

• director and executive officer stock ownership policy;

• alignment of director and shareholder interests; and

• use of clawback provisions in executive pay.

Leadership Structure.  FS Bancorp has separated the roles of Board Chair and Chief Executive Officer.  The Board Chair, who is an independent director, leads the Board and presides at all Board meetings.  The Board believes it is important to have an independent director in a Board leadership position and has had an independent Board Chair since FS Bancorp’s incorporation in 2011.  Having an independent Board Chair enables non-management directors to raise issues and concerns for Board consideration without immediately involving management.  The Board Chair also serves as a liaison between the Board and senior management.

Executive Sessions.  Board meetings are held regularly throughout the year.  At the conclusion of Audit Committee meetings and Board meetings, the independent directors hold executive sessions.

Shareholder Communication.  We are committed to open and ongoing dialog with our shareholders and we regularly seek feedback on a variety of issues, including business strategy, governance, executive compensation and any other topics shareholders wish to discuss.  To this end, each year we engage with our shareholders in a variety of ways in order to obtain their feedback.  In 2021, this engagement process included seven investor conferences (virutal and in-person), quarterly earnings calls and communication between our investor relations team and members of our senior management team and shareholders.  At the investor conferences, senior management had one on one meetings with investors and asked questions similar to the following:

The Board of Directors welcomes communication from our shareholders.  Shareholders may mail communications to the Board of Directors, FS Bancorp, Inc., 6920 220^th Street SW, Mountlake Terrace, Washington 98043 or may email the Chief Financial Officer, Matthew Mullet, at mattm@fsbwa.com.  Shareholders should indicate clearly the director or director(s) to whom the communication is being sent so that each communication may be forwarded appropriately.

Board Involvement in Risk Management Process.  As part of its overall responsibility to oversee the management, business, and strategy of FS Bancorp, 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 policies; 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 registered public accounting firm and meets directly with the firm at various times during the course of the year.

Board Oversight of Information and Cybersecurity.  As a financial institution, cybersecurity presents a significant operational and reputational risk.  Accordingly, we take the protection of customer and business information very seriously.  We have developed a robust information/cyber security program designed to protect the confidentiality, integrity, and availability of business and customer information.  As part of this program, our Chief Information Officer reports to the Audit Committee of the Board of Directors at least quarterly.  Reports include information and cyber security assessment results, business continuity, disaster recovery, and incident response planning and testing, patch management program status, vendor management program status, and independent audit results.  All information security-related policies are reviewed and approved annually by the Audit Committee.

We promote a culture of continuous learning that has resulted in a highly experienced information security team that holds advanced certifications and master’s degrees in cybersecurity.  In addition to our own experienced information security team, we also partner with industry experts for managed security services such as threat

Succession Planning.  The Board believes that one of its primary responsibilites is to oversee the development and retention of senior talent and to ensure that an appropriate succession plan is in place for our Chief Executive Officer and other members of senior management.  The Board, Compensation Committee, Nominating and Environmental, Social, Governance Committee and the Chief Executive Officer regularly review senior management talent and succession planning.  We have an ongoing relationship with a professional firm to assist us in ensuring we have a robust and active plan for succession planning.

Code of Business Conduct and Ethics.  On December 15, 2016, the Board of Directors updated our Code of Business Conduct and Ethics, which is designed to deter wrongdoing and to promote honest and ethical conduct in every respect.  The Code addresses conflicts of interest, the treatment of confidential information, general employee conduct and compliance with applicable laws, rules and regulations.   The Code is applicable to each of our directors, officers, including the principal executive officer and senior financial officers, and employees and requires individuals to maintain the highest standards of professional conduct.  A copy of the Code of Ethics is available on our website at www.FSBWA.com.  We have ethics training for all Board members and staff annually.

Policies Governing Trading in FS Bancorp Securities.  Our Anti-Hedging and Anti-Pledging Policy and Insider Trading Policy prohibit hedging, derivatives, or any other speculative transactions involving FS Bancorp’s stock by all directors, officers, and employees.  In addition, we prohibit our officers, directors, and employees from purchasing or selling our securities while in possession of material, non-public information, or otherwise using such information for their personal benefit and maintain a quarterly black-out window where applicable individuals may not trade, other than in connection with a Rule 10b5-1 plan adopted in compliance with the policy.  These individuals are also restricted from pledging FS Bancorp common stock to secure a loan or holding FS Bancorp’s securities in a margin account, except in exceptional circumstances and as approved in advance by a majority of the disinterested Board of Directors. As of the date of this proxy statement, no exceptions are noted.

Annual Meeting Attendance by Directors.  FS Bancorp encourages, but does not require, its directors to attend the annual meeting of shareholders.  As a result of the COVID-19 pandemic, the only director who attended the 2021 annual meeting of shareholders was Joseph P. Zavaglia.

Workplace Culture.  Our Vision Statement captures our culture: “To Build a Truly Great Place to Work and Bank.”  The order of the words “work” and “bank” are intentional.  We believe if you build a great place to work, it will by its nature become a great place to bank.  There is also tremendous public company data available that shows companies with intentionally great work environments outperform companies with avearage corporate cultures.  Our commitment to building a great workplace culture began in 2009.  Not surprisingly, our financial performance has improved dramatically since we made that culture commitment.  The awards we have received over the years validate our decision to have a “people centric” culture that strives to hire and promote “Smart, Driven, Nice” teammates.  These awards include:

• listed by Hovde Group as one of the High Performing Small Cap Banks; and

• investment grade rated by Kroll at BBB for senior debt and BBB- for subordinated debt.

• 2021 Puget Sound Business Journal Best Workplaces – 5th consecutive year (2017-21); and

Response to COVID Pandemic.  As the COVID-19 pandemic began having widespread impact in the spring of 2020, we once again relied upon our Vision Statement, Core Values and Business Philosophy to determine the best course of action.  The Chief Executive Officer and Chief Financial Officer began having all-staff video calls every other Friday starting March 20, 2020 to keep employees informed as the pandemic worsened.  By the April 3, 2020 all-staff call, the stock market had fallen precipitously, 1st Security Bank friends and family were losing their jobs and there was a tremendous amount of fear regarding health and financial concerns.  As a result, on the April 3^rd all-staff call, the Chief Executive Officer announced, “Operation Safe and Secure 2020.”  The Chief Executive Officer and Chief Financial Officer explained the premise behind the Operation.  They explained that our employees are our most important asset and due to the pandemic, it became imperative to protect that critical asset.  Operation Safe and Secure 2020 had two primary objectives.  The first objective, “Safe,” was to provide for the safety of our employees’ and customers’ health during this time of pandemic.  The second objective, “Secure,” was to protect the financial security of our employees.  Since the pandemic began, 1st Security Bank has had no layoffs or furloughs.  The all-staff calls continued throughout 2021 and into 2022 on a quarterly basis or more frequently as needed.

Diversity.  Our Core Value, “Diversity—we celebrate diversity and support equality for all” was established over a decade ago.  We are striving for diversity in all areas.  Currently, half of our senior executive team and three of our eight directors are women.  The Chief Executive Officer and one other senior executive officer are racial minorities.   In line with our Core Value of diversity, we were the only bank that publicly supported marriage equality in Washington State and the only community bank to sign the amicus brief to the U.S. Supreme Court supporting marriage equality nationally.

We regularly review the diversity of the markets we serve and work to align the diversity of our workforce with our markets.  This analysis allows us to bring diverse perspectives to our Board, staff and business.

Environmental, Social and Governance Criteria.  As discussed previously, our Core Values reflect our commitment to diversity, equality, inclusiveness and social awareness.  A copy of our Core Values, Business Philosophy, Vision and Mission Statements are available on our website at www.FSBWA.com.

1st Security Bank 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 as those of comparable transactions with all customers prevailing at the time, other than those made under the Bank’s employee loan program, which is described below.  Loans to directors and officers are made in accordance with our underwriting guidelines, and do not involve more than the normal risk of collectability or present other unfavorable features.  These loans are reviewed by the Chief Credit Officer and are acted on by 1st Security Bank’s Board of Directors.

The employee loan program applies to a mortgage loan to purchase or refinance a home.  Standard loan terms and underwriting qualifications apply, as do the following benefits: (1) a credit of 1% of the base loan amount will be given to offset our standard loan origination fee; (2) an owner-occupied transaction will also be given an additional credit of $1,195 to offset the processing fee; and (3) the wire transfer fee will be waived.  The table below provides information regarding our directors and executive officers who had indebtedness and principal payable

We recognize that transactions between us and any of our directors or executive officers can present potential or actual conflicts of interest and create the appearance that these decisions are based on considerations other than our best interests.  Therefore, as a general matter and in accordance with our Code of Business Conduct and Ethics, it is our preference to avoid such transactions.  Nevertheless, we recognize that there are situations where such transactions may be in, or may not be inconsistent with, our best interests. Accordingly, the Code requires the Board of Directors or a committee of the Board to review and, if appropriate, to approve or ratify any such transaction.  If a Board member is a participant in the transaction, then that member is required to abstain from the discussion, approval or ratification process.  After its review, the Board or committee will only approve or ratify those transactions that are in, or are not inconsistent with, our best interests, as determined in good faith.

The following table shows the compensation paid to our directors for the year ended December 31, 2021, with the exception of Joseph C. Adams, who is our Chief Executive Officer and whose compensation is included in the section entitled “Executive Compensation.”

Each director of 1st Security Bank is also a director of FS Bancorp.  The directors received no additional compensation for attendance at any meeting of FS Bancorp’s Board of Directors during the year ended December 31, 2021.  The directors are compensated for their service on 1st Security Bank’s Board of Directors.  In 2021, non-employee directors of 1st Security Bank received a retainer of $3,500 per month, except for the Board Chair, who received $4,500 per month, for service on the Board.  Directors also receive the following additional fees: for the committee chairs, an annual retainer of $3,600; Board meeting attendance fees of $750 for each meeting attended in person and $250 for each meeting attended by teleconference; and a committee meeting attendance fee of $500.  As a result of the COVID-19 pandemic, Board meetings were held virtually via web conferencing and were treated as if they had been held in person for purposes of meeting attendance fees.  1st Security Bank’s Compensation Committee recommends to the Board of Directors the amount of fees paid for service on the Board.  Directors are provided or reimbursed for travel and lodging and other customary out-of-pocket expenses incurred in attending board and committee meetings, industry conferences and continuing education seminars.

Stock Ownership Requirements.  Stock ownership guidelines are a key vehicle for aligning the interests of officers and directors with those of our shareholders.  Non-employee directors are required to maintain share ownership in FS Bancorp equal to at least two times their annual cash retainer, excluding committee fees.  Directors who are also employees are governed by the guidelines applicable to officers, which are discussed below.  Once the minimum ownership requirement is met, directors must maintain the required ownership amounts and compliance will be calculated annually.  Each director is required to retain 50% of net after tax shares acquired upon the exercise of stock options or vesting of restricted stock until the stock ownership requirement is met.  Exceptions may apply for donations of stock and for sales or divisions of property in the case of divorce, disability or death, or other limited circumstances.

Directors have three years from their appointment to the Board of Directors to comply with the applicable stock ownership requirement.  Currently, six of our seven non-employee directors have fulfilled the stock ownership requirement and the remaining director is expected to meet the requirement within the required time frame.

This compensation discussion and analysis explains 1st Security Bank’s executive compensation program for the named executive officers listed below.  It also describes the Compensation Committee’s process for making pay decisions, as well as its rationale for specific decisions related to the fiscal year ended December 31, 2021.

Joseph C. Adams                        Chief Executive Officer

Donn C. Costa                             Executive Vice President, Home Lending

Dennis V. O’Leary                      Chief Lending Officer

Our senior executives are integral to executing our strategic plan, driving performance that rewards all of our stakeholders, fostering our culture and achieving other 1st Security Bank objectives.  Our executive compensation program is designed to support these objectives and is built on the following principles:

Our compensation philosophy is supported by the following principal elements of pay:

Each year, we carefully consider the results of our shareholder say-on-pay vote from the preceding year.  Over 97% of the votes cast at the 2021 annual meeting of shareholders supported our executive compensation decisions.  We also take into account the feedback we receive from our shareholders during regular investor meetings, at which we always encourage an open dialogue and actively probe for questions, concerns and perspectives on our strategy and performance, governance, executive compensation and other important business matters.  The shareholders with whom we have connected have been highly supportive of our executive compensation program and its direction; however, some have asked for additional disclosure.  Accordingly, and although FS Bancorp qualifies as a smaller reporting company as defined by the SEC, which allows us to take advantage of scaled-back disclosure requirements, we are including more extensitve narrative in an effort to be more transparent.  We remain committed to keeping an open dialogue with our shareholders to help ensure that we have a regular pulse on investor perspectives and, as we continue to grow, we intend to further enhance our outreach efforts during 2022 and into the future.

We believe the following practices and policies promote sound compensation governance, and are in the best interests of our shareholders and executives.

The Role of the Compensation Committee.  The Compensation Committee, which is comprised of independent directors, oversees the executive compensation program for our named executive officers.  The Committee works very closely with an independent compensation consultant and management to examine the effectiveness of our executive compensation program throughout the year.  The Committee makes all final compensation and equity award decisions regarding our named executive officers, except for the Chief Executive Officer, whose compensation is determined by the independent members of the Board of Directors, based upon recommendations of the Compensation Committee.  The Chief Executive Officer is not present during voting or deliberations on his compensation.

The Role of Management.  Members of our management team attend regular meetings where executive compensation, corporate and individual performance, and competitive compensation levels and practices are discussed and evaluated.  Only the Compensation Committee members are allowed to vote on decisions regarding named executive officer compensation. The Chief Exectuive Officer reviews his recommendations pertaining to all executives’ pay with the Compensation Committee, which provides transparency and oversight.  Decisions on non-named executive officer pay are made by the Chief Exectuive Officer.

The Role of the Independent Consultant. The Compensation Committee engages an independent compensation consultant to provide expertise on competitive pay practices, program design, and an objective assessment of any inherent risks of any programs. Pursuant to authority granted to it under its charter, the Compensation Committee has hired Pearl Meyer & Partners, LLC (“Pearl Meyer”) as its independent consultant. Pearl Meyer is retained by, and reports directly to, the Compensation Committee, and provided no other services to

The Role of Peer Group Companies.  The Compensation Committee strives to set a competitive level of total compensation for each named executive officer as compared with executive officers in similar positions at peer companies.  For purposes of setting 2021 compensation levels, in conjunction with the recommendation of Pearl Meyer, the Compensation Committee took into account publicly-available data from industry compensation surveys and public filings from the group of peer companies listed below.  Industry survey data was data collected from surveys of financial institution holding companies or financial institutions with an asset size ranging from approximately $1-$2 billion.

It is important to note that this market data is not the sole determinant in setting pay levels for our executive officers.  The Compensation Committee also considers corporate and individual performance and the nature of an individual’s role within FS Bancorp, as well as the individual’s experience and contributions to their current role when making its compensation-related decisions.

Base Salary.  Our objective is to provide base salaries that are competitive within the financial services industry and reasonable as compared to our peers.  We also consider the executive’s abilities, experience and tenure and our overall ability to pay.  The Board recognizes that in order to attract and retain highly qualified executives, we have to compete with larger institutions with a greater ability to pay and that to acquire such candidates, we must sometimes offer base salaries higher than survey ranges for peer banks.  The Compensation Committee is charged with final oversight of base pay offered to senior executive candidates and will consider all of the factors described above before approving any out-of-market salary offer.

Base salaries for senior executives are periodically reviewed with the assistance of the independent compensation consultant.  The Compensation Committee may recommend adjustments as appropriate.  The named executive officers did not receive any salary adjustments during 2021.

Annual Incentive Compensation.  The 2021 annual cash incentives provided our named executive officers the opportunity to earn a performance-based award.  Actual award payouts depend on the achievement of quantitative and qualitative performance objectives and can range from 0% to 200% of the target award opportunity. Target award opportunities are expressed as a percentage of base salary as follows:

2021 Results and Award Payouts. For 2021, actual annual incentive award payouts were based on a combination of specific financial results and strategic achievements as assessed by the Compensation Committee.

Financial results for 2021 included the following:

Despite the headwinds from COVID-19, our executive team helped lead us to achieve outstanding financial and operational results, especially in the Home Lending Division, demonstrating disciplined execution, risk mitigation, cost control and our ability to execute well under volatile market conditions.  As a result, the Compensation Committee approved annual incentive awards of two times target (maximum payout opportunity) to each of the named executive officers.

Performance Award and Non-Competition Agreement.  As noted above in the financial results section, FS Bancorp’s earnings were well above those of its peers in 2021 in large part due to the extraordinary financial performance of the home lending team.  The number of offers from mortgage competitors attempting to hire away our best and most experienced people was concerning.  We have never seen signing bonuses at these levels in the decade since 1st Security Bank began offering home loans.  To reward the outstanding performance as well as to protect us against losing key executives in the home lending and commercial real estate areas, we entered into Performance Award and Non-Competition Agreements with our named executive officers.  The agreements provide liquidated damages to FS Bancorp if a named executive officer joins a competitor any time prior to August 2024.

In 2018, our Board of Directors unanimously adopted, and shareholders approved, the FS Bancorp, Inc. 2018 Equity Incentive Plan.  The purposes of the plan are: (1) to promote the long-term growth and profitability of FS Bancorp; (2) to attract and retain individuals of outstanding competence; and (3) to provide participants with incentives that are closely linked to the interests of all shareholders of FS Bancorp.  Stock-based award grants align the interests of executives with those of shareholders.  When FS Bancorp performs well, executives are rewarded along with other shareholders.  We believe that stock-based awards are of great value in recruiting and retaining highly qualified personnel who are in great demand.

During 2021, the Compensation Committee approved equity grants to the named executive officers using a mix of stock options and restricted stock that vest over five years as follows:

401(k) Plan.  1st Security Bank offers a qualified, tax-exempt savings plan to our employees with a cash or deferred feature qualifying under Section 401(k) of the Internal Revenue Code.  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 2021, 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 $19,500.  In addition, participants who have attained age 50 may defer an additional $6,500 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.  During 2021, we matched 100% of participant contributions up to 3% of the participant’s annual salary and 50% of participant contributions on the next 2% of the participant’s annual salary.  We may also make a discretionary profit-sharing contribution under the 401(k) Plan, though no such contribution was made in 2021.  All participant 401(k) contributions and earnings, as well as all matching and profit-sharing contributions and earnings, are fully and immediately vested.

ESOP.  We have adopted a tax-qualified employee stock ownership plan (“ESOP”) for our employees.  Employees who have been credited with at least 1,000 hours of service during a twelve-month period are eligible to participate in the ESOP.  Shares released from the ESOP suspense account will be allocated to each eligible participant’s ESOP account based on the ratio of each such participant’s eligible compensation to the total eligible compensation of all eligible ESOP participants, determined as of December 31.  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 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.

General Benefits and Perquisites.  Our named executive officers only receive typical perquisites such as medical and dental benefits, group term life insurance, and short- and long-term disability protection.  They do not receive any special perquisites such as golf memberships, etc.

Stock Ownership Requirements.  Stock ownership guidelines are a key vehicle for aligning the interests of management with those of our shareholders.  Executive officers must own FS Bancorp common stock, based on the value of FS Bancorp common stock as a multiple of base salary.

Shares counted toward the stock ownership requirement include those held directly or through a broker, shares held in the Employee Stock Ownership Plan, the 401(k) Plan, vested stock options and restricted stock with time-based vesting. Once the minimum ownership requirement is met, officers must maintain the required ownership amounts and compliance will be calculated annually.  Each director and executive officer is required to retain 50% of net after tax shares acquired upon the exercise of stock options or vesting of restricted stock until the stock ownership requirement is met. Exceptions may apply for donations of stock and for sales or divisions of property in the case of divorce, disability or death, or other limited circumstances.

Executive officers have five years from their appointment to comply with the applicable stock ownership requirement.  Each of the named executive officers was in compliance with these guidelines as of December 31, 2021.

Clawback Policy.  We maintain a clawback policy which provides the Board with the authority to withhold and/or recoup bonuses based on the occurrence of one or more of the following:

The foregoing report is provided by the following directors, who constitute the Compensation Committee:

The following table shows information regarding compensation for the years ended December 31, 2021 and 2020 for: (1) Joseph C. Adams, our principal executive officer; and (2) our two next most highly compensated executive officers, who are Donn C. Costa and Dennis V. O’Leary.

The following information with respect to outstanding equity awards as of December 31, 2021 is presented for the named executive officers.

We have entered into agreements with the named executive officers that provide for potential payments upon disability, termination and death.  In addition, our equity plans also provide for potential payments upon termination.  The following table shows, as of December 31, 2021, the value of potential payments and benefits following a termination of employment under a variety of scenarios.

Severance Agreement for Chief Executive Officer.  1st Security Bank entered into a severance agreement with Mr. Adams.  The agreement provides that if (1) the Bank terminates Mr. Adams’ employment other than for cause, (2) Mr. Adams terminates his employment for “good reason” or (3) there is a change in control of the Bank, Mr. Adams would be entitled to receive from the Bank a lump sum payment equal to 24 months of his base compensation.  “Good reason” means any one or more of the following: (1) reduction of Mr. Adams’ salary or elimination of any significant compensation, unless generally applicable to similarly-situated employees; (2) assignment to Mr. Adams without his consent any authorities or duties materially inconsistent with his position as of

Change in Control Agreements.  1st Security Bank entered into change in control agreements with Messrs. Costa and O’Leary.  These agreements provide that if there is a change in control of the Bank during the term of the agreement, the executive will be entitled to a severance payment if the executive suffers an involuntary termination within six months preceding or twelve months following the change in control.  The severance payment will be twelve months of the executive’s then current salary, paid in a lump sum within 45 days of the termination.  “Involuntary termination” means (1) termination of the executive’s employment other than for cause, (2) a reduction of the executive’s base salary, unless generally applicable to all senior officers of the Bank, (3) a material adverse change in the executive’s benefits, contingent benefits or vacation, unless generally applicable to all senior officers of the Bank, (4) a relocation of more than 20 miles from Mountlake Terrace, Washington or (5) a material demotion of the executive, including but not limited to a material diminution of the executive’s title, duties or responsibilities.  Receipt of the severance payment is conditioned upon the executive signing a severance agreement containing a comprehensive release of claims.

Equity Awards.  The 2013 Equity Incentive Plan and the 2018 Equity Incentive Plan provide for acceleration of awards if a recipient of an award terminates service early as a result of death or disability.  The 2013 Equity Incentive Plan also provides that in connection with an actual change in control, all unexercisable options will become fully exercisable and all unvested awards of restricted stock will vest in full.  The 2018 Equity Incentive Plan provides that if a change in control occurs prior to the vesting date of an award that is outstanding on the change in control date, and the participant experiences an involuntary separation from service, other than a termination for cause, during the 365-day period following the change in control date, then the vesting date for such non-vested outstanding award will be accelerated to the date of the participant’s involuntary separation from service.  However, if upon a change in control the successor to FS Bancorp either does not assume the outstanding award or replace it with an award that is determined by the Compensation Committee to be at least equivalent in value to the outstanding award on the change in control date, then the vesting date of such outstanding award will be accelerated to the change in control date.

Under the Dodd-Frank Act, we are required to periodically include in our annual meeting proxy statement and present at the meeting a non-binding shareholder resolution to approve the compensation of our named executive officers, as disclosed in the proxy statement pursuant to the compensation disclosure rules of the SEC.  This proposal, commonly known as a “say-on-pay” proposal, gives shareholders the opportunity to endorse or not endorse the compensation of FS Bancorp’s executives as disclosed in this proxy statement.  The proposal will be presented at the annual meeting in the form of the following resolution:

This vote will not be binding on our Board of Directors or Compensation Committee and may not be construed as overruling a decision by the Board or create or imply any additional fiduciary duty on the Board.  It will also not affect any compensation paid or awarded to any executive.  The Compensation Committee and the Board may, however, consider the outcome of the vote when considering future executive compensation arrangements.

Our executive compensation policies are designed to establish an appropriate relationship between executive pay and the annual and long-term performance of FS Bancorp and 1st Security Bank, to reflect the attainment of short- and long-term financial performance goals, to enhance our ability to attract and retain qualified executive officers, and to align to the greatest extent possible the interests of management and shareholders. Our Board of Directors believes that our compensation policies and procedures achieve these objectives.  The Board of Directors unanimously recommends that you vote FOR approval of the compensation of our named executive officers as disclosed in this proxy statement.

On January 27, 2022, our Board of Directors unanimously adopted, subject to shareholder approval, the FS Bancorp, Inc. Nonqualified 2022 Stock Purchase Plan.  The purpose of the Plan is to provide employees, directors and independent contractors of FS Bancorp, Inc. and designated subsidiaries (collectively, “service providers”) with an opportunity to purchase up to $28,000 worth of FS Bancorp common stock annually through, in the case of employees, base compensation, commissions and bonuses, in the case of directors, director fees, and in the case of independent contractors, cash paid for the performance of services.  FS Bancorp will provide a 25% matching stock purchase (up to $7,000 annually).  All participants will have equal rights and privileges under the Plan.  Substantially all of our approximately 535 employees, seven non-employee directors and one independent contractor are eligible to participate in the Plan.  We intend for the Stock Purchase Plan to offer a convenient means for service providers who might not otherwise purchase and hold our common stock to do so, and for the matching stock purchase feature to provide a meaningful incentive to participate.  We believe that our service providers’ continuing economic interest, as shareholders, in our performance and success will contribute to our long-term success.  The Stock Purchase Plan is not intended to qualify as a Stock Purchase Plan under Section 423 of the Internal Revenue Code of 1986, as amended (“Code Section 423”), the consequences of which are described below under “Federal Income Tax Consequences.”

The following summary is a brief description of the material features of the Stock Purchase Plan. This summary is qualified in its entirety by reference to the Plan, a copy of which is attached to this Proxy Statement as Appendix A.

Administration.  A committee appointed by the Board of Directors will administer the Stock Purchase Plan and have the full authority to construe interpret and apply the terms of the Plan, determine eligibility and adjudicate all disputed claims under the Plan. For purposes of the administration of the Stock Purchase Plan, the committee must be composed solely of non-employee directors. All actions, interpretations and decisions of the committee are final and binding on all persons and will be given the maximum deference permitted by law.  It is expected that the Board of Directors will appoint the Compensation Committee to administer the Plan.

Shares Available under the Plan. A total of 1,000,000 shares of FS Bancorp common stock are initially authorized and reserved for issuance under the Stock Purchase Plan. The number of shares available under the Plan are subject to adjustment as described below under “Adjustments Upon Changes in Capitalization.”

Offerings. The Stock Purchase Plan is implemented by offerings of purchase rights during offering periods determined by the committee and communicated to service providers. The duration of an offering period may be changed by the committee. The provisions of separate offerings need not be identical, but each offering will conform to the Plan.

Eligibility.  Any service provider (employee, director or independent contractor) of FS Bancorp and its subsidiaries who has been continuously employed for at least six consecutive months, and who is providing services on the last day of the month in which this service requirement is met, will be eligible to participate in the Stock Purchase Plan for the offering period beginning with the enrollment date. The committee retains the right to change the eligibility criteria for any plan year, in advance of such plan year.

Participation.  A service provider may become a participant in the Stock Purchase Plan by (1) completing a subscription agreement authorizing stock purchase deductions from compensation that would otherwise be paid to the service provider at least 10 days prior to the enrollment date for the offering period in which the service provider’s participation will begin or (2) following an electronic or other enrollment process determined by the committee. The purchase price of the shares is accumulated by compensation deductions over the offering period. No more than $28,000 worth of FS Bancorp common stock may be purchased by an individual in any calendar year. The Plan does not provide a discount in the stock purchase price, i.e., purchases of FS Bancorp common stock through the Plan are made at the fair market value of the stock at the time of purchase. At any time during the offering, a participant may terminate compensation deductions. However, a participant may not change the rate of compensation deductions during and offering period. In the case of an employee, payroll deductions may be limited

By authorizing compensation deductions during an offering period, eligible service providers will be entitled to purchase shares under the Stock Purchase Plan and to receive the matching stock purchase described below. In connection with offerings made under the Plan, the committee specifies the maximum number of shares each participant may purchase and the maximum aggregate number of shares that may be purchased pursuant to the offering by all participants. If the aggregate number of shares to be purchased upon exercise of rights granted in the offering will exceed the maximum aggregate number of shares available, the committee will make a pro rata allocation of available shares in a uniform and equitable manner.

A service provider may fully withdraw from a given offering by delivering a prescribed notice of withdrawal. Upon withdrawal, the service provider’s accumulated compensation deductions will be returned without interest. A service provider’s withdrawal from an offering will not have any effect upon that service provider’s ability to participate in future offerings under the Plan, which may occur only if the service provider delivers a new subscription agreement with respect to that future offering.

Purchase of Shares; Matching Contributions. As promptly as practical after the exercise date (the 5^th day of the open trading window period first occurring after the end of the offering period), the number of whole shares a participant elects to purchase during the offering period will be purchased and delivered to the participant in accordance with the Plan. FS Bancorp also will purchase, as a matching contribution, on behalf of each participant who elects to purchase FS Bancorp stock during a calendar year, up to 25% of the number of such shares of FS Bancorp common stock that the participant elects to purchase (up to $7,000 worth of FS Bancorp common stock).

Termination of Employment, Etc. Rights granted pursuant to any offering under the Stock Purchase Plan terminate immediately upon cessation of a service provider’s employment or service relationship with FS Bancorp or its subsidiaries for any reason, or if the service provider is no longer eligible to participate. In that case, the service provider’s accumulated compensation deductions will be returned without interest.

Restrictions on Transfer. Rights granted under the Stock Purchase Plan are not transferable and may be exercised only by the person to whom such rights are granted. Any attempt at transfer may be treated as an election to withdraw funds from an offering period.

Adjustments Upon Changes in Capitalization. Subject to any required action by FS Bancorp shareholders, the reserves, as well as the price per share of common stock covered by each option which has not yet been exercised, will be proportionately adjusted for any increase or decrease in the number of issued shares of common stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the common stock, or any other increase or decrease in the number of shares of common stock effected without receipt of consideration by FS Bancorp. Reserves means the number of shares of common stock covered by each option which have not yet been exercised and the number of shares of common stock which have been authorized for issuance under the Stock Purchase Plan but not yet placed under option.

Change in Control. In the event of a proposed sale or all or substantially all of the assets of FS Bancorp, or the merger of FS Bancorp with or into another corporation, each option under the Stock Purchase Plan will be assumed or an equivalent option may be substituted by the successor. Alternatively, the Board of Directors may determine to shorten the offering period.

Duration, Termination and Amendment.  The Stock Purchase Plan will continue in effect for a term of ten years, unless sooner terminated at the sole discretion of the Board of Directors. If the Plan is terminated during an offering prior to an exercise date, FS Bancorp will pay to each participant an amount equal to the balance in the participant’s payroll deduction account without interest as soon as administratively practicable.

The Board of Directors may amend the Stock Purchase Plan at any time. Where necessary to comply with applicable laws and regulations, shareholder approval will be obtained with respect to the amendment. Rights granted before amendment of the Stock Purchase Plan will not be altered or impaired in any material manner by any amendment without consent of the participant to whom such rights were granted, except as necessary to comply with any laws or government regulations or as otherwise specifically provided in the Plan.

The following brief summary of the effect of U.S. federal income taxation upon the participant and FS Bancorp with respect to the shares purchased under the Stock Purchase Plan does not purport to be complete, and does not discuss the income tax laws of any state or foreign country in which a participant may reside.

The Stock Purchase Plan is not intended to be a Stock Purchase Plan within the meaning of Code Section 423. (Generally, under a stock purchase plan that qualifies under Code Section 423, no taxable income will be recognized by a participant, and no deductions will be allowable to FS Bancorp, upon either the grant or the exercise of the purchase rights. Taxable income will not be recognized to the participant until there is a sale or other disposition of the shares acquired under the plan or if the participant dies while still owning the purchased shares.)  As a result of the Stock Purchase Plan being non-qualified, all stock purchases are made with after-tax compensation, any discount that might be provided with respect to the stock purchase price will be treated as taxable compensation, and all matching stock purchases will be treated as currently taxable compensation, subject to income and employment taxes as applicable to the service provider. FS Bancorp will be entitled to a tax deduction equal to the amount reported as taxable compensation by the participant.

The participant will receive basis in the shares purchased under the Stock Purchase Plan equal to the cost of the purchased shares.

If the participant sells or otherwise disposes of the purchased shares within one year after the granting of the stock purchase option under the Stock Purchase Plan, then the participant generally will recognize a short-term capital gain in the year of sale or disposition equal to the amount by which the fair market value of the shares on the purchase date exceeded the purchase price paid for those shares. If the shares are held for more than one year after the date of purchase, the gain or loss will be taxed as a long-term capital gain.

No purchases have been made at this time under the Stock Purchase Plan.  Participation in the Plan is voluntary and depends on each service provider’s election to participate and his or her determination as to the level of contributions to the Plan.  Accordingly, it is not possible to determine the future benefits that will be received under the Stock Purchase Plan.

The Audit Committee operates pursuant to a charter approved by our Board of Directors.  The Audit Committee reports to the Board of Directors and is responsible for overseeing and monitoring our financial accounting and reporting, the system of internal controls established by management and the audit process.  The Audit Committee charter sets out the responsibilities, authority and specific duties of the Audit Committee.  The charter specifies, among other things, the structure and membership requirements of the Audit Committee, as well as the relationship of the Audit Committee to the independent registered public accounting firm, the internal audit department and management of FS Bancorp.

The Audit Committee of the FS Bancorp Board of Directors reports as follows with respect to FS Bancorp’s audited financial statements for the fiscal year ended December 31, 2021:

The foregoing report is provided by the following directors, who constitute the Audit Committee:

The Audit Committee of the Board of Directors has appointed Moss Adams LLP as our independent registered public accounting firm for the year ending December 31, 2022 and that appointment is being submitted to shareholders for ratification.  Although ratification is not required by our Bylaws or otherwise, the Board is submitting the appointment of Moss Adams LLP to our shareholders for ratification as a matter of good corporate practice.  If the appointment is not ratified, the Audit Committee will consider whether it is appropriate to select another registered public accounting firm.  Even if the appointment is ratified, the Audit Committee in its discretion may appoint a different registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of FS Bancorp and our shareholders.  Moss Adams LLP served as our independent registered public accounting firm for the year ended December 31, 2021 and a representative of the firm will be present at the annual meeting to respond to shareholders’ questions and will have the opportunity to make a statement if he or she so desires.

The following table sets forth the aggregate fees billed to us by Moss Adams LLP for professional services rendered for the fiscal years ended December 31, 2021 and 2020.

The Audit Committee pre-approves all audit and permissible non-audit services to be provided by the independent registered public accounting firm and the estimated fees for these services in connection with its annual review of its charter.  In considering non-audit services, the Audit Committee will consider various factors, including but not limited to, whether it would be beneficial to have the service provided by the independent registered public accounting firm and whether the service could compromise the independence of the independent registered public accounting firm.  All of the services provided by Moss Adams LLP in the year ended December 31, 2021 were approved by the Audit Committee.

Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of any registered class of FS Bancorp’s equity securities, to file reports of ownership and changes in ownership with the SEC.  Executive officers, directors and greater than 10% shareholders are required by regulation to furnish us with copies of all Section 16(a) forms they file.  Based solely on our review of the copies of such forms we have received and written representations provided to us by the above-referenced persons, we believe that, during the fiscal year ended December 31, 2021, all filing requirements applicable to our reporting officers, directors and greater than 10% shareholders were properly and timely complied with, with the exception of one transaction on Form 4 that was reported late by Director Andrews.

The Board of Directors is not aware of any business to come before the annual meeting other than those matters described in this proxy statement.  However, if any other matters should properly come before the meeting, it is intended that proxies in the accompanying form will be voted in respect thereof in accordance with the judgment of the person or persons voting the proxies.

We will bear the cost of solicitation of proxies, and will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy materials to the beneficial owners of FS Bancorp's common stock.  In addition to solicitations via the Internet and by mail, our directors, officers and regular employees may solicit proxies personally or by telecopier or telephone without additional compensation.

Our annual report to shareholders, including the Annual Report on Form 10-K, has been mailed to all shareholders of record as of the close of business on the record date.  Any shareholder who has not received a copy of the annual report may obtain a copy by writing to the Secretary, FS Bancorp, Inc., 6920 220^th Street SW, Mountlake Terrace, Washington 98043.  The annual report is not to be treated as part of the proxy solicitation material or as having been incorporated herein by reference.

Proposals of shareholders intended to be presented at next year’s annual meeting of shareholders must be received at the executive office at 6920 220^th Street SW, Mountlake Terrace, Washington 98043, no later than December 12, 2022.  Any such proposals shall be subject to the requirements of the proxy rules adopted under the Securities Exchange Act, and as with any shareholder proposal (regardless of whether included in our proxy materials), our Articles of Incorporation and Bylaws.

Our Articles of Incorporation provide that in order for a shareholder to make nominations for the election of directors or proposals for business to be brought before a meeting, a shareholder must deliver notice of such nominations and/or proposals to the Secretary not less than 30 nor more than 60 days prior to the date of the meeting; provided that if less than 31 days’ notice of the meeting is given to shareholders, such written notice must be delivered not later than the close of the tenth day following the day on which notice of the meeting was mailed to shareholders.  We anticipate that, in order to be timely, shareholder nominations or proposals intended to be made at the annual meeting must be made by April 26, 2022.  As specified in the Articles of Incorporation, the notice with respect to nominations for election of directors must set forth certain information regarding each nominee for election as a director, including the person’s name, age, business address and number of shares of common stock held, a written consent to being named as a nominee and to serving as a director, if elected, and certain other information regarding the shareholder giving such notice.  The notice with respect to business proposals to be brought before the annual meeting must state the shareholder’s name, address and number of shares of common stock held, a brief discussion of the business to be brought before the annual meeting, the reasons for conducting such business at the meeting, and any interest of the shareholder in the proposal.