UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2020              OR

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

For the transition period from   to

Commission File Number:   001‑35589

FS BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

6920 220th Street SW, Mountlake Terrace, Washington  98043

(Address of principal executive offices; Zip Code)

(425) 771‑5299

(Registrant’s telephone number, including area code)

None

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

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

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

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

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

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

Large accelerated filer [   ]	Accelerated filer [ X ]
Non-accelerated filer [   ]	Smaller reporting company [ X ]
Emerging growth company [  ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).    Yes [   ]          No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of April 30, 2020, there were 4,281,541 outstanding shares of the registrant’s common stock.

FS Bancorp, Inc.

Form 10‑Q

Table of Contents

		Page Number
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2020 and December 31, 2019 (Unaudited)	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2020 and 2019 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and 2019 (Unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (Unaudited)	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (Unaudited)	7 - 8
	Notes to Consolidated Financial Statements	9 - 39
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41 - 54
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	54
PART II	OTHER INFORMATION	54
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	58
SIGNATURES		59

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

2

Item 1. Financial Statements

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

	March 31,		December 31,
ASSETS	2020			2019
Cash and due from banks	$	12,928		$	13,175
Interest-bearing deposits at other financial institutions		35,993			32,603
Total cash and cash equivalents		48,921			45,778
Certificates of deposit at other financial institutions		17,926			20,902
Securities available-for-sale, at fair value		156,466			126,057
Loans held for sale, at fair value		115,632			69,699
Loans receivable, net		1,393,070			1,336,346
Accrued interest receivable		6,326			5,908
Premises and equipment, net		28,655			28,770
Operating lease right-of-use (“ROU”) assets		4,692			5,016
Federal Home Loan Bank (“FHLB”) stock, at cost		10,921			8,045
Other real estate owned (“OREO”)		90			168
Bank owned life insurance (“BOLI”), net		35,572			35,356
Servicing rights, held at the lower of cost or fair value		10,626			11,560
Goodwill		2,312			2,312
Core deposit intangible, net		5,281			5,457
Other assets		10,678			11,682
TOTAL ASSETS	$	1,847,168		$	1,713,056
LIABILITIES
Deposits:
Noninterest-bearing accounts	$	285,566		$	273,602
Interest-bearing accounts		1,160,703			1,118,806
Total deposits		1,446,269			1,392,408
Borrowings		159,114			84,864
Subordinated note:
Principal amount		10,000			10,000
Unamortized debt issuance costs		(110)			(115)
Total subordinated note less unamortized debt issuance costs		9,890			9,885
Operating lease liabilities		4,898			5,214
Deferred tax liability, net		2,260			1,971
Other liabilities		23,908			18,472
Total liabilities		1,646,339			1,512,814
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued or outstanding		—			—
Common stock, $.01 par value; 45,000,000 shares authorized; 4,332,196 and 4,459,041 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively		43			44
Additional paid-in capital		84,517			89,268
Retained earnings		114,957			110,715
Accumulated other comprehensive income, net of tax		1,819			788
Unearned shares – Employee Stock Ownership Plan (“ESOP”)		(507)			(573)
Total stockholders’ equity		200,829			200,242
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,847,168		$	1,713,056

See accompanying notes to these consolidated financial statements.

3

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

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

	Three Months Ended
	March 31,
	2020		2019
INTEREST INCOME
Loans receivable, including fees	$	20,740	$	21,109
Interest and dividends on investment securities, cash and cash equivalents, and certificates of deposit at other financial institutions		1,209		1,202
Total interest and dividend income		21,949		22,311
INTEREST EXPENSE
Deposits		3,807		3,710
Borrowings		497		744
Subordinated note		172		168
Total interest expense		4,476		4,622
NET INTEREST INCOME		17,473		17,689
PROVISION FOR LOAN LOSSES		3,686		750
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		13,787		16,939
NONINTEREST INCOME
Service charges and fee income		924		1,658
Gain on sale of loans		5,899		2,397
Earnings on cash surrender value of BOLI		216		215
Other noninterest income		1,852		285
Total noninterest income		8,891		4,555
NONINTEREST EXPENSE
Salaries and benefits		9,547		8,243
Operations		2,403		2,044
Occupancy		1,109		1,112
Data processing		980		1,286
Loss (gain) on sale of OREO		2		(85)
OREO expenses		—		4
Loan costs		500		673
Professional and board fees		681		550
Federal Deposit Insurance Corporation (“FDIC”) insurance		126		248
Marketing and advertising		146		135
Acquisition costs		—		374
Amortization of core deposit intangible		176		190
Impairment of servicing rights		514		23
Total noninterest expense		16,184		14,797
INCOME BEFORE PROVISION FOR INCOME TAXES		6,494		6,697
PROVISION FOR INCOME TAXES		1,327		1,505
NET INCOME	$	5,167	$	5,192
Basic earnings per share	$	1.16	$	1.19
Diluted earnings per share	$	1.14	$	1.15

See accompanying notes to these consolidated financial statements.

4

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)  (Unaudited)

	Three Months Ended
	March 31,
	2020		2019
Net Income	$	5,167	$	5,192
Other comprehensive income:
Securities available-for-sale:
Unrealized holding gain during period		2,364		1,328
Income tax provision related to unrealized holding gain		(508)		(285)
Cash flow hedges:
Unrealized holding loss during period		(1,052)		—
Reclassification for losses included in net income		1		—
Income tax benefit related to unrealized holding loss		226		—
Other comprehensive income, net of tax		1,031		1,043
COMPREHENSIVE INCOME	$	6,198	$	6,235

See accompanying notes to these consolidated financial statements.

5

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

Three Months Ended March 31, 2019 and 2020

								Accumulated
								Other
				Additional				Comprehensive		Unearned		Total
	Common Stock			Paid-in		Retained		(Loss) Income,		ESOP		Stockholders’
	Shares	Amount		Capital		Earnings		Net of Tax		Shares		Equity
BALANCE, January 1, 2019	4,492,478	$	45	$	91,466	$	90,854	$	(1,479)	$	(848)	$	180,038
Net income	—	$	—		—		5,192		—		—	$	5,192
Dividends paid ($0.14 per share)	—	$	—		—		(663)		—		—	$	(663)
Share-based compensation	—	$	—		262		—		—		—	$	262
Common stock repurchased - repurchase plan	(6,036)	$	—		(285)		—		—		—	$	(285)
Stock options exercised, net	2,600	$	—		44		—		—		—	$	44
Other comprehensive income, net of tax	—	$	—		—		—		1,043		—	$	1,043
ESOP shares allocated	—	$	—		255		—		—		66	$	321
BALANCE, March 31, 2019	4,489,042	$	45	$	91,742	$	95,383	$	(436)	$	(782)	$	185,952
BALANCE, January 1, 2020	4,459,041	$	44	$	89,268	$	110,715	$	788	$	(573)	$	200,242
Net income	—	$	—		—		5,167		—		—	$	5,167
Dividends paid ($0.21 per share)	—	$	—		—		(925)		—		—	$	(925)
Share-based compensation	—	$	—		224		—		—		—	$	224
Common stock repurchased	(136,243)	$	(1)		(4,988)		—		—		—	$	(4,989)
Stock options exercised, net	9,398	$	—		(246)		—		—		—	$	(246)
Other comprehensive income, net of tax	—	$	—		—		—		1,031		—	$	1,031
ESOP shares allocated	—	$	—		259		—		—		66	$	325
BALANCE, March 31, 2020	4,332,196	$	43	$	84,517	$	114,957	$	1,819	$	(507)	$	200,829

See accompanying notes to these consolidated financial statements.

6

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

.

	Three Months Ended March 31,
	2020		2019
CASH FLOWS (USED BY) FROM OPERATING ACTIVITIES
Net income	$	5,167	$	5,192
Adjustments to reconcile net incometo net cash from operating activities
Provision for loan losses		3,686		750
Depreciation, amortization and accretion		2,178		2,321
Compensation expense related to stock options and restricted stock awards		224		262
ESOP compensation expense for allocated shares		325		321
Increase in cash surrender value of BOLI		(216)		(215)
Gain on sale of loans held for sale		(5,899)		(2,397)
Origination of loans held for sale		(259,191)		(125,281)
Proceeds from sale of loans held for sale		218,574		132,461
Impairment of servicing rights		514		23
Loss (gain) on sale of OREO		2		(85)
Changes in operating assets and liabilities
Accrued interest receivable		(418)		(51)
Other assets		5,058		(7,953)
Other liabilities		14		1,517
Net cash (used by) from operating activities		(29,982)		6,865
CASH FLOWS (USED BY) FROM INVESTING ACTIVITIES
Activity in securities available-for-sale:
Maturities, prepayments, and calls		12,002		4,659
Purchases		(40,236)		(6,005)
Maturities of certificates of deposit at other financial institutions		2,976		—
Loan originations and principal collections, net		(27,573)		26,997
Purchase of portfolio loans		(32,743)		(321)
Proceeds from sale of portfolio loans		—		538
Proceeds from sale of OREO, net		76		684
Purchase of premises and equipment, net		(583)		(860)
Change in FHLB stock, net		(2,876)		1,730
Net cash (used by) from investing activities		(88,957)		27,422
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES
Net increase in deposits		53,992		47,331
Proceeds from borrowings		203,750		155,306
Repayments of borrowings		(129,500)		(205,725)
Dividends paid on common stock		(925)		(663)
(Disbursements) proceeds from stock options exercised, net		(246)		44
Common stock repurchased		(4,989)		(285)
Net cash from (used by) financing activities		122,082		(3,992)
NET INCREASE IN CASH AND CASH EQUIVALENTS		3,143		30,295
CASH AND CASH EQUIVALENTS, beginning of period		45,778		32,779
CASH AND CASH EQUIVALENTS, end of period	$	48,921	$	63,074
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings	$	4,285	$	4,462
Income taxes		—		—

7

FS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands) (Unaudited)

SUPPLEMENTARY DISCLOSURES OF NONCASHOPERATING,INVESTING AND FINANCING ACTIVITIES
Change in unrealized gain on investment securities, net	$	2,364	$	1,328
Change in unrealized loss on cash flow hedges, net		(1,051)		—
Retention of gross mortgage servicing rights from loan sales		1,185		844
Property taken in settlement of loans		—		92

See accompanying notes to these consolidated financial statements

8

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

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

Financial Statement Presentation - The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10‑Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). It is recommended that these unaudited interim consolidated financial statements be read in conjunction with the Company’s Annual Report on Form 10‑K with all of the audited information and footnotes required by U.S. GAAP for complete financial statements for the year ended December 31, 2019, as filed with the SEC on March 16, 2020. In the opinion of management, all normal adjustments and recurring accruals considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.

The results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or any other future period. The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses, fair value of financial instruments, the valuation of servicing rights, deferred income taxes, and if needed, a deferred tax asset valuation allowance.

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

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

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

Subsequent Events - The Company has evaluated events and transactions subsequent to March 31, 2020 for potential recognition or disclosure.

RECENT ACCOUNTING PRONOUNCEMENTS

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

9

financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the approach under CECL. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU and associated amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has selected a third-party vendor to assist in the implementation of this ASU and has run parallel computations as it continues to evaluate the impact of adoption of the new standard. As part of the implementation, management is also evaluating economic variables and forecast time horizons it believes to be most relevant based on the composition of the loans portfolio to develop a reasonable and supportable forecast, likely to include forecasted levels of employment, gross domestic product, and home price index, depending on the nature of the loan segment, as well as various loss methodologies to estimate expected credit losses.  In addition, management has kept current on evolving interpretations and industry practices related to ASU 2016-13 via webcasts, publications, and conferences. Once adopted, the Company anticipates the allowance for loan losses to increase through a one‑time adjustment to retained earnings, however, until the evaluation is complete the magnitude of the potential increase will be unknown.

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

In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings.  This ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The ASU should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.

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

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. For a cash flow hedge, a change in the method used to assess hedge effectiveness will not result in dedesignation of the hedging relationship if certain criteria are met. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is party to cash

10

flow hedge arrangements where the hedge effectiveness is based on LIBOR.  The Company is currently evaluating the impact of the reference rate reform on the Company’s consolidated financial statements.

Recent Events - On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”.  This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of the novel coronavirus of 2019 (“COVID-19”) pandemic. The guidance provides that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not Troubled Debt Restructurings (“TDRs”). The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ("CARES Act") provided similar guidance around the modification of loans as a result of the COVID-19 pandemic, providing, among other criteria, that modifications made between March 1, 2020, and the earlier of December 31, 2020, or 60 days after the COVID-19 emergency is terminated, on a good faith basis to borrowers who were current as of December 31, 2019, are not TDRs. This includes modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment. Borrowers are considered current under the CARES Act if they are not more than 30 days past due on their contractual payments as of December 31, 2019. Through March 31, 2020, the Bank had applied the interagency statement guidance and modified 66 individual loans with aggregate principal balances totaling $12.5 million.  More of these types of modifications are likely to be executed in the second quarter of 2020.  The majority of these modifications involved short-term extensions and/or interest-only periods. For additional information, see “NOTE 18 - COVID - 19 Pandemic.”

Application of New Accounting Guidance Adopted in 2020

On January 1, 2020, the Company adopted FASB ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.  This ASU contains some technical adjustments related to the fair value disclosure requirements of public companies.  Included in this ASU is the additional disclosure requirement of unrealized gains and losses for the period in recurring level 3 fair value disclosures and the range and weighted average of significant unobservable inputs, among other technical changes. The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements.

NOTE 2 - INVESTMENTS

The following tables present the amortized costs, unrealized gains, unrealized losses, and estimated fair values of securities available-for-sale at March 31, 2020 and December 31, 2019:

	March 31, 2020
							Estimated
	Amortized		Unrealized		Unrealized		Fair
SECURITIES AVAILABLE-FOR-SALE	Cost		Gains		Losses		Values
U.S. agency securities	$	6,991	$	136	$	—	$	7,127
Corporate securities		19,858		144		(151)		19,851
Municipal bonds		31,062		475		(131)		31,406
Mortgage-backed securities		74,503		2,271		(41)		76,733
U.S. Small Business Administration securities		20,684		672		(7)		21,349
Total securities available-for-sale	$	153,098	$	3,698	$	(330)	$	156,466

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	December 31, 2019
							Estimated
	Amortized		Unrealized		Unrealized		Fair
SECURITIES AVAILABLE-FOR-SALE	Cost		Gains		Losses		Values
U.S. agency securities	$	8,986	$	95	$	(15)	$	9,066
Corporate securities		10,525		52		(7)		10,570
Municipal bonds		20,516		604		—		21,120
Mortgage-backed securities		62,745		405		(300)		62,850
U.S. Small Business Administration securities		22,281		191		(21)		22,451
Total securities available-for-sale	$	125,053	$	1,347	$	(343)	$	126,057

At March 31, 2020, the Bank pledged seven securities held at the FHLB of Des Moines with a carrying value of $6.9 million to secure Washington State public deposits of $11.4 million with a $4.1 million collateral requirement by the Washington Public Deposit Protection Commission.  At December 31, 2019, the Bank pledged seven securities held at the FHLB of Des Moines with a carrying value of $7.4 million to secure Washington State public deposits of $10.3 million with a $4.0 million minimum collateral requirement by the Washington Public Deposit Protection Commission.

Investment securities that were in an unrealized loss position at March 31, 2020 and December 31, 2019 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. Management believes that these securities are only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

	March 31, 2020
	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
SECURITIES AVAILABLE-FOR-SALE	Value		Losses		Value		Losses		Value		Losses
Corporate securities	$	7,729	$	(151)	$	—	$	—	$	7,729	$	(151)
Municipal bonds		10,285		(131)		—		—		10,285		(131)
Mortgage-backed securities		4,578		(19)		2,411		(22)		6,989		(41)
U.S. Small Business Administration securities		1,955		(7)		—		—		1,955		(7)
Total	$	24,547	$	(308)	$	2,411	$	(22)	$	26,958	$	(330)

	December 31, 2019
	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
SECURITIES AVAILABLE-FOR-SALE	Value		Losses		Value		Losses		Value		Losses
U.S. agency securities	$	2,977	$	(15)	$	—	$	—	$	2,977	$	(15)
Corporate securities		1,993		(7)		—		—		1,993		(7)
Mortgage-backed securities		12,345		(154)		11,459		(146)		23,804		(300)
U.S. Small Business Administration securities		4,395		(21)		—		—		4,395		(21)
Total	$	21,710	$	(197)	$	11,459	$	(146)	$	33,169	$	(343)

There were 14 investments with unrealized losses of less than one year, and two investments with unrealized losses of more than one year at March 31, 2020. There were 13 investments with unrealized losses of less than one year, and 10 investments with unrealized losses of more than one year at December 31, 2019. The unrealized losses associated with these investments are believed to be caused by changing market conditions that are considered to be temporary and the Company does not intend to sell the securities, and it is not likely to be required to sell these securities prior to maturity. Based on the Company’s evaluation of these securities, no other-than-temporary impairment was recorded for the three months ended March 31, 2020, or for the year ended December 31, 2019.  Additional deterioration in market and

12

economic conditions related to the COVID-19 pandemic, may have an adverse impact on credit quality in the future and result in other-than-temporary impairment charges.

The contractual maturities of securities available-for-sale at March 31, 2020 and December 31, 2019 are listed below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay the obligations; therefore, these securities are classified separately with no specific maturity date.

	March 31, 2020				December 31, 2019
	Amortized		Fair		Amortized		Fair
U.S. agency securities	Cost		Value		Cost		Value
Due after one year through five years	$	992	$	1,068	$	996	$	1,036
Due after five years through ten years		3,999		4,041		3,997		4,027
Due after ten years		2,000		2,018		3,993		4,003
Subtotal		6,991		7,127		8,986		9,066
Corporate securities