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Section 1: 10-Q (10-Q)

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

                                                                                                                                                                                                      
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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 001-35633

Sound Financial Bancorp, Inc.
(Exact Name of Registrant as Specified in its Charter)

Maryland
 
45-5188530
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2400 3rd Avenue, Suite 150, Seattle, Washington
 
98121
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code:  (206) 448-0884

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by checkmark 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    NO

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   YES    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
 
 
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
 
 
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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES     NO
 
Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date.

As of May 7, 2018, there were 2,524,003 shares of the registrant's common stock outstanding. 

 


 
SOUND FINANCIAL BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
Page Number
PART I    FINANCIAL INFORMATION
 
 
 
Item 1.      Financial Statements
 
 
 
Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 (unaudited)
3
 
 
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)
4
 
 
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)
5
 
 
Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2018 and 2017 (unaudited)
6
 
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)
7
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
8
 
 
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
32
 
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
43
 
 
Item 4.    Controls and Procedures
43
 
 
PART II   OTHER INFORMATION
 
 
 
Item 1.    Legal Proceedings
44
 
 
Item 1A. Risk Factors
44
 
 
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
44
 
 
Item 3.    Defaults Upon Senior Securities
44
 
 
Item 4.    Mine Safety Disclosures
44
 
 
Item 5.    Other Information
44
 
 
Item 6.    Exhibits
45
 
 
SIGNATURES
46
 
 
EXHIBITS
47
 
2

Table of Contents
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share amounts)
 
 
 
March 31,
2018
   
December 31,
2017
 
ASSETS
           
Cash and cash equivalents
 
$
64,689
   
$
60,680
 
Available-for-sale securities, at fair value
   
5,268
     
5,435
 
Loans held for sale
   
950
     
1,777
 
Loans
   
559,979
     
548,595
 
Allowance for loan losses
   
(5,328
)
   
(5,241
)
Total loans, net
   
554,651
     
543,354
 
Accrued interest receivable
   
1,962
     
1,977
 
Bank-owned life insurance ("BOLI"), net
   
13,075
     
12,750
 
Other real estate owned ("OREO") and repossessed assets, net
   
638
     
610
 
Mortgage servicing rights, at fair value
   
3,532
     
3,426
 
Federal Home Loan Bank ("FHLB") stock, at cost
   
3,014
     
3,065
 
Premises and equipment, net
   
7,545
     
7,392
 
Other assets
   
4,207
     
4,778
 
Total assets
 
$
659,531
   
$
645,244
 
LIABILITIES
               
Deposits
               
Interest-bearing
 
$
444,918
   
$
442,277
 
Noninterest-bearing demand
   
84,275
     
72,123
 
Total deposits
   
529,193
     
514,400
 
Borrowings
   
56,000
     
59,000
 
Accrued interest payable
   
81
     
77
 
Other liabilities
   
6,605
     
5,972
 
Advance payments from borrowers for taxes and insurance
   
1,106
     
635
 
Total liabilities
   
592,985
     
580,084
 
COMMITMENTS AND CONTINGENCIES (NOTE 7)
               
STOCKHOLDERS' EQUITY
               
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued or outstanding
   
-
     
-
 
Common stock, $0.01 par value, 40,000,000 shares authorized, 2,524,346 and 2,511,127 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
   
25
     
25
 
Additional paid-in capital
   
25,104
     
24,986
 
Unearned shares - Employee Stock Ownership Plan ("ESOP")
   
(453
)
   
(453
)
Retained earnings
   
41,792
     
40,493
 
Accumulated other comprehensive income, net of tax
   
78
     
109
 
Total stockholders' equity
   
66,546
     
65,160
 
Total liabilities and stockholders' equity
 
$
659,531
   
$
645,244
 
 
See notes to condensed consolidated financial statements

3

Table of Contents
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except share and per share amounts)
 
 
 
Three Months Ended March 31,
 
 
 
2018
   
2017
 
INTEREST INCOME
           
Loans, including fees
 
$
7,246
   
$
6,442
 
Interest and dividends on investments, cash and cash equivalents
   
246
     
150
 
Total interest income
   
7,492
     
6,592
 
INTEREST EXPENSE
               
Deposits
   
810
     
703
 
Borrowings
   
213
     
92
 
Total interest expense
   
1,023
     
795
 
Net interest income
   
6,469
     
5,797
 
PROVISION FOR LOAN LOSSES
   
100
     
 
Net interest income after provision for loan losses
   
6,369
     
5,797
 
NONINTEREST INCOME
               
Service charges and fee income
   
460
     
511
 
Earnings on cash surrender value of bank-owned life insurance
   
79
     
81
 
Mortgage servicing income
   
220
     
233
 
Net gain on sale of loans
   
332
     
171
 
Total noninterest income
   
1,091
     
996
 
NONINTEREST EXPENSE
               
Salaries and benefits
   
3,141
     
2,691
 
Operations
   
1,239
     
1,021
 
Regulatory assessments
   
101
     
124
 
Occupancy
   
474
     
373
 
Data processing
   
453
     
407
 
Net loss on OREO and repossessed assets
   
27
     
3
 
Total noninterest expense
   
5,435
     
4,619
 
Income before provision for income taxes
   
2,025
     
2,174
 
Provision for income taxes
   
423
     
760
 
Net income
 
$
1,602
   
$
1,414
 
 
               
Earnings per common share:
               
Basic
 
$
0.65
   
$
0.57
 
Diluted
 
$
0.63
   
$
0.54
 
Weighted-average number of common shares outstanding:
               
Basic
   
2,477,235
     
2,499,502
 
Diluted
   
2,558,418
     
2,596,519
 
 
See notes to condensed consolidated financial statements
 
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Table of Contents
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(In thousands)
 
 
 
Three Months Ended March 31,
 
 
 
2018
   
2017
 
Net income
 
$
1,602
   
$
1,414
 
Available for sale securities:
               
Unrealized gain/(loss) arising during the period
   
(39
)
   
51
 
Income tax benefit/(expense) related to unrealized gains/losses
   
8
     
(17
)
Other comprehensive income/(loss), net of tax
   
(31
)
   
34
 
Comprehensive income
 
$
1,571
   
$
1,448
 
 
See notes to condensed consolidated financial statements
5

Table of Contents

 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2018 and 2017 (unaudited)
(In thousands, except share and per share amounts)
 
 
 
Shares
   
Common
Stock
   
Additional Paid
-in Capital
   
Unearned
ESOP Shares
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income, net of
tax
   
Total
Stockholders'
Equity
 
Balances at December 31, 2016
   
2,498,804
   
$
25
   
$
23,979
   
$
(683
)
 
$
36,873
   
$
81
   
$
60,275
 
Net income
                                   
1,414
             
1,414
 
Other comprehensive income, net of tax
                                           
34
     
34
 
Share-based compensation
                   
144
                             
144
 
Cash dividends paid on common stock ($0.10 per share)
                                   
(250
)
           
(250
)
Restricted stock awards issued
   
576
                                             
-
 
Exercise of options
   
500
             
11
                             
11
 
Balances at March 31, 2017
   
2,499,880
   
$
25
   
$
24,134
   
$
(683
)
 
$
38,037
   
$
115
   
$
61,628
 
 
 
 
Shares
   
Common
Stock
   
Additional Paid-
in Capital
   
Unearned
ESOP Shares
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income, net of
tax
   
Total
Stockholders'
Equity
 
Balances at December 31, 2017
   
2,511,127
   
$
25
   
$
24,986
   
$
(453
)
 
$
40,493
   
$
109
   
$
65,160
 
Net income
                                   
1,602
             
1,602
 
Other comprehensive loss, net of tax
                                           
(31
)
   
(31
)
Share-based compensation
                   
45
                             
45
 
Cash dividends paid on common stock ($0.12 per share)
                                   
(303
)
           
(303
)
Common stock repurchased
   
(5,206
)
                                           
-
 
Exercise of options
   
18,425
             
73
                             
73
 
Balances at March 31, 2018
   
2,524,346
   
$
25
   
$
25,104
   
$
(453
)
 
$
41,792
   
$
78
   
$
66,546
 
 
See notes to condensed consolidated financial statements
 
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Table of Contents
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 
 
 
Three Months Ended March 31,
 
 
 
2018
   
2017
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
1,602
   
$
1,414
 
Adjustments to reconcile net income to net cash from operating activities:
               
Accretion of net discounts on investments
   
10
     
12
 
Provision for loan losses
   
100
     
 
Depreciation and amortization
   
237
     
203
 
Compensation expense related to stock options and restricted stock
   
45
     
144
 
Net change in mortgage servicing rights
   
(106
)
   
3
 
Increase in cash surrender value of BOLI
   
(79
)
   
(81
)
Net change in advances from borrowers for taxes and insurance
   
471
     
528
 
Net gain on sale of loans
   
(332
)
   
(171
)
Proceeds from sale of loans
   
15,800
     
14,044
 
Originations of loans held-for-sale
   
(14,641
)
   
(14,972
)
Net loss on OREO and repossessed assets
   
27
     
3
 
Change in operating assets and liabilities:
               
Accrued interest receivable
   
15
     
62
 
Other assets
   
571
     
482
 
Accrued interest payable
   
4
     
14
 
Other liabilities
   
633
     
1,168
 
Net cash provided by operating activities
   
4,357
     
2,853
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from principal payments, maturities and sales of available-for-sale securities
   
159
     
285
 
FHLB stock redeemed
   
51
     
1,109
 
Net (increase)/decrease in loans
   
(11,485
)
   
10,727
 
Purchase of BOLI
   
(246
)
   
 
Proceeds from sale of OREO and other repossessed assets
   
     
223
 
Purchases of premises and equipment, net
   
(390
)
   
(663
)
Net cash (used)/provided by investing activities
   
(11,911
)
   
11,681
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase in deposits
   
14,793
     
13,091
 
Proceeds from borrowings
   
76,000
     
16,000
 
Repayment of borrowings
   
(79,000
)
   
(45,161
)
Dividends paid on common stock
   
(303
)
   
(250
)
Proceeds from stock option exercises
   
73
     
11
 
Net cash provided/(used) by financing activities
   
11,563
     
(16,309
)
Net change in cash and cash equivalents
   
4,009
     
(1,775
)
Cash and cash equivalents, beginning of period
   
60,680
     
54,582
 
Cash and cash equivalents, end of period
 
$
64,689
   
$
52,807
 
 
               
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for income taxes
 
$
   
$
650
 
Interest paid on deposits and borrowings
   
1,019
     
781
 
 
See notes to condensed consolidated financial statements
 
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 

Note 1 – Basis of Presentation

The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial Bancorp, Inc., and its wholly owned subsidiary, Sound Community Bank.  References in this document to Sound Financial Bancorp refer to Sound Financial Bancorp, Inc. and references to the "Bank" refer to Sound Community Bank. References to "we," "us," and "our" or the "Company" refers to Sound Financial Bancorp and its wholly-owned subsidiary, Sound Community Bank, unless the context otherwise requires.
 
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("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").  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.  Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.  These unaudited financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 27, 2018 ("2017 Form 10-K").  The results for the interim periods are not necessarily indicative of results for a full year.  For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2017, included in the 2017 Form 10-K.  Certain amounts in the prior quarter's consolidated financial statements have been reclassified to conform to the current presentation.  These classifications do not have an impact on previously reported consolidated net income, retained earnings, stockholders' equity or earnings per share.

Note 2 – Accounting Pronouncements Recently Issued or Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) which postponed the effective date of 2014-09. Subsequently, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. This amendment clarifies that an entity should determine if it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The core principle of Topic 606 is that an entity must recognize revenue when it has satisfied a performance obligation of transferring promised goods or services to a customer. These standards were effective for interim and annual periods beginning after December 15, 2017. The Company has analyzed its revenue sources of noninterest income to determine when the satisfaction of the performance obligation occurs and the appropriate recognition of revenue. For further information, see Note 11 - Revenue from Contracts with Customers of this report.  The adoption of these ASUs did not have a material impact on the Company's consolidated financial statements, other than the additional disclosures included in Note 11 of this report.
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments - Overall, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendments in this ASU require an entity to disclose the fair value of financial instruments using the exit price notion. Exit price is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The methods of determining the fair value of assets and liabilities are consistent with our methodologies disclosed in Note 11 - Fair Value Measurements of the Company's 2017 Form 10-K, except for the valuation of loans held-for-investment which was impacted by the adoption of ASU 2016-01. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. As of March 31, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company's loan portfolio is initially fair valued using a segmented approach, using the eight categories as disclosed in Note 4 - Loans. Loans are considered a Level 3 classification.  This ASU also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.  The amendments in this ASU were effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company has used the exit price notion in the fair value disclosure of financial instruments in Note 5 of this report. The adoption of ASU 2016-01 did not have a material impact on the Company's consolidated financial statements.
 
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize, on the balance sheet, the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income. For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in the ASU is permitted. Although an estimate of the impact of the new leasing standard has not yet been determined, once adopted, we expect to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, however, based on current leases the adoption is not expected to have a material impact on the Company's consolidated financial statements.
 
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The measurement of expected credit losses will be based on historical information, current conditions, and reasonable and supportable forecasts that impact the collectability of the reported amount. Available-for-sale securities will bifurcate the fair value mark and establish an allowance for credit losses through the income statement for the credit portion of that mark. The interest portion will continue to be recognized through accumulated other comprehensive income or loss. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 with early adoption permitted after December 15, 2018. The Company has begun the process to implement this new standard by working with a vendor that specializes in this area.  While the Company has not quantified the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses. The Company also expects that once adopted the allowance for loan losses will increase, however, until its evaluation is complete the magnitude of the increase will be unknown.
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  This ASU addresses the appropriate classification of eight specific cash flow issues on the cash flow statement. Debt prepayment costs should be classified as an outflow for financing activities. Settlement of zero-coupon debt instruments divides the interest portion as an outflow for operating activities and the principal portion as an outflow for financing activities. Contingent consideration payments made after a business combination should be classified as outflows for financing and operating activities. Proceeds from the settlement of bank-owned life insurance policies should be classified as inflows from investing activities. Other specific areas are identified in the ASU as to the appropriate classification of the cash inflows or outflows.  The amendments in this ASU were effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not currently have items on its cash flow statement that were impacted by adoption of this ASU and therefore adoption of ASU 2016-15 did not have a material impact on the Company's consolidated financial statements.
 
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20). ASU 2017-08 is intended to amend the amortization period for certain purchased callable debt securities held at a premium. Under ASU 2017-08, the FASB is shortening the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company is reviewing its securities portfolio to assess the impact the adoption of this ASU will have on the Company's consolidated financial statements but does not expect this ASU to have a material impact on the Company's consolidated financial statements.
 
In May 2017, the FASB issued ASU No. 2017-09, Compensation--Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to this ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award is the same after the modification as compared to the original award prior to the modification. The standard was effective for reporting periods beginning after December 15, 2017. The Company has not had any modifications on share-based payment awards and therefore the adoption of ASU No. 2017-09 did not have a material impact on the Company's consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting recognition and presentation requirements in ASC 815 to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities by better aligning the entity's financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU No. 2017-12 is not expected to have a material impact on the Company's consolidated financial statements.

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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
In February 2018, FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU was issued to allow a reclassification from accumulated other comprehensive income to retained earnings from stranded tax effects resulting from the revaluation of the net deferred tax asset ("DTA") to the new corporate tax rate of 21% as a result of the Tax Cuts and Jobs Act of 2017 ("Tax Act"). The ASU is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. The adoption of ASU No. 2018-02 is not expected to have a material impact on the Company's consolidated financial statements.

In March 2018, FASB issued ASU No. 2018-05, Income Taxes (Topic 740). This ASU was issued to provide guidance on the income tax accounting implications of the Tax Act and allows for entities to report provisional amounts for specific income tax effects of the Act for which the accounting under Topic 740 was not yet complete, but a reasonable estimate could be determined. A measurement period of one-year is allowed to complete the accounting effects under Topic 740 and revise any previous estimates reported. Any provisional amounts or subsequent adjustments included in an entity's financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense in the reporting period the amounts are determined. The Company adopted this ASU with the provisional adjustments as reported in the Consolidated Financial Statements on Form 10-K as of December 31, 2017. As of March 31, 2018, the Company did not incur any adjustments to the provisional recognition.

Note 3 – Investments

The amortized cost and fair value of our available-for-sale ("AFS") securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands):
 
 
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
March 31, 2018
                       
Municipal bonds
 
$
3,234
   
$
134
   
$
(28
)
 
$
3,340
 
Agency mortgage-backed securities
   
1,908
     
20
     
-
     
1,928
 
Total
 
$
5,142
   
$
154
   
$
(28
)
 
$
5,268
 
 
                               
December 31, 2017
                               
Municipal bonds
 
$
3,240
   
$
155
   
$
(26
)
 
$
3,369
 
Agency mortgage-backed securities
   
2,030
     
36
     
-
     
2,066
 
Total
 
$
5,270
   
$
191
   
$
(26
)
 
$
5,435
 

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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
The amortized cost and fair value of AFS securities at March 31, 2018, by contractual maturity, are shown below (in thousands).  Expected maturities of AFS securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately.
 
 
 
March 31, 2018
 
 
 
Amortized
Cost
   
Fair
Value
 
Due after one year through five years
 
$
1,582
   
$
1,562
 
Due after five years through ten years
   
153
     
161
 
Due after ten years
   
1,499
     
1,617
 
Mortgage-backed securities
   
1,908
     
1,928
 
Total
 
$
5,142
   
$
5,268
 
 
There were no pledged securities at March 31, 2018 and December 31, 2017.
 
There were no sales of AFS securities during the three months ended March 31, 2018 and 2017.

The following tables summarize the aggregate fair value and gross unrealized loss by length of time of those investments that have been in a continuous unrealized loss position at the dates indicated (in thousands):
 
 
 
March 31, 2018
 
 
 
Less Than 12 Months
   
12 Months or Longer
   
Total
 
 
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Municipal bonds
 
$
-
   
$
-
   
$
1,294
   
$
(28
)
 
$
1,294
   
$
(28
)
Total
 
$
-
   
$
-
   
$
1,294
   
$
(28
)
 
$
1,294
   
$
(28
)
 
 
 
December 31, 2017
 
 
 
Less Than 12 Months
   
12 Months or Longer
   
Total
 
 
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Municipal bonds
 
$
-
   
$
-
   
$
1,302
   
$
(26
)
 
$
1,302
   
$
(26
)
Total
 
$
-
   
$
-
   
$
1,302
   
$
(26
)
 
$
1,302
   
$
(26
)

12

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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
There were no credit losses recognized in earnings during the three months ended March 31, 2018 or 2017 relating to the Company's securities.
 
At March 31, 2018, there were no securities in an unrealized loss position for less than 12 months and there were three municipal securities in an unrealized loss position for over 12 months.  At December 31, 2017, there were no securities in an unrealized loss position for less than 12 months and there were three municipal securities in an unrealized loss position for more than 12 months.  The unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not related to the underlying credit of the issuers or the underlying collateral.  It is expected that these securities will not be settled at a price less than the amortized cost of each investment.  Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because we do not intend to sell the securities in this class and it is not likely that we will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered an other-than-temporary impairment ("OTTI") during the three months ended March 31, 2018 and 2017.

Note 4 – Loans

The composition of the loan portfolio at the dates indicated, excluding loans held-for-sale, was as follows (in thousands):
 
 
 
March 31,
2018
   
December 31,
2017
 
Real estate loans:
           
One- to four- family
 
$
162,294
   
$
157,417
 
Home equity
   
27,638
     
28,379
 
Commercial and multifamily
   
221,255
     
211,269
 
Construction and land
   
60,789
     
61,482
 
Total real estate loans
 
$
471,976
   
$
458,547
 
Consumer loans:
               
Manufactured homes
   
17,480
     
17,111
 
Floating homes
   
29,110
     
29,120
 
Other consumer
   
5,462
     
4,902
 
Total consumer loans
   
52,052
     
51,133
 
Commercial business loans
   
37,854
     
40,829
 
Total loans
   
561,882
     
550,509
 
Deferred fees
   
(1,903
)
   
(1,914
)
Total loans, gross
   
559,979
     
548,595
 
Allowance for loan losses
   
(5,328
)
   
(5,241
)
Total loans, net
 
$
554,651
   
$
543,354
 

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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2018 (in thousands):
 
 
 
One- to
four-
family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
Floating
homes
   
Other
consumer
   
Commercial
business
   
Unallocated
   
Total
 
Allowance for loan losses:
                                                           
Individually evaluated for impairment
 
$
603
   
$
116
   
$
-
   
$
13
   
$
335
   
$
-
   
$
45
   
$
317
   
$
-
   
$
1,429
 
Collectively evaluated for impairment
   
911
     
160
     
1,295
     
362
     
99
     
169
     
41
     
216
     
646
     
3,899
 
Ending balance
 
$
1,514
   
$
276
   
$
1,295
   
$
375
   
$
434
   
$
169
   
$
86
   
$
533
   
$
646
   
$
5,328
 
Loans receivable:
                                                                               
Individually evaluated for impairment
 
$
6,405
   
$
906
   
$
3,147
   
$
130
   
$
459
   
$
-
   
$
195
   
$
1,546
   
$
-
   
$
12,788
 
Collectively evaluated for impairment
   
155,889
     
26,732
     
218,108
     
60,659
     
17,021
     
29,110
     
5,267
     
36,308
     
-
     
549,094
 
Ending balance
 
$
162,294
   
$
27,638
   
$
221,255
   
$
60,789
   
$
17,480
   
$
29,110
   
$
5,462
   
$
37,854
   
$
-
   
$
561,882
 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2017 (in thousands):

 
 
One- to
four-
family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
Floating
homes
   
Other
consumer
   
Commercial
business
   
Unallocated
   
Total
 
Allowance for loan losses:
                                                           
Individually evaluated for impairment
 
$
360
   
$
109
   
$
-
   
$
10
   
$
247
   
$
-
   
$
40
   
$
130
   
$
-
   
$
896
 
Collectively evaluated for impairment
   
881
     
173
     
1,250
     
365
     
97
     
169
     
37
     
237
     
1,136
     
4,345
 
Ending balance
 
$
1,241
   
$
282
   
$
1,250
   
$
375
   
$
344
   
$
169
   
$
77
   
$
367
   
$
1,136
   
$
5,241
 
Loans receivable:
                                                                               
Individually evaluated for impairment
 
$
6,256
   
$
1,028
   
$
1,699
   
$
141
   
$
385
   
$
-
   
$
194
   
$
1,000
   
$
-
   
$
10,703
 
Collectively evaluated for impairment
   
151,161
     
27,351
     
209,570
     
61,341
     
16,726
     
29,120
     
4,708
     
39,829
     
-
     
539,806
 
Ending balance
 
$
157,417
   
$
28,379
   
$
211,269
   
$
61,482
   
$
17,111
   
$
29,120
   
$
4,902
   
$
40,829
   
$
-
   
$
550,509
 

14

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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
The following table summarizes the activity in the allowance for loan losses for the three months ended March 31, 2018 (in thousands):
 
 
 
Beginning
Allowance
   
Charge-offs
   
Recoveries
   
Provision/
(Benefit)
   
Ending
Allowance
 
One- to four- family
 
$
1,241
   
$
-
   
$
-
   
$
273
   
$
1,514
 
Home equity
   
282
     
(7
)
   
4
     
(3
)
   
276
 
Commercial and multifamily
   
1,250
     
-
     
-
     
45
     
1,295
 
Construction and land
   
375
     
-
     
-
     
-
     
375
 
Manufactured homes
   
344
     
-
     
-
     
90
     
434
 
Floating homes
   
169
     
-
     
-
     
-
     
169
 
Other consumer
   
77
     
(14
)
   
4
     
19
     
86
 
Commercial business
   
367
     
-
     
-
     
166
     
533
 
Unallocated
   
1,136
     
-
     
-
     
(490
)
   
646
 
Total
 
$
5,241
   
$
(21
)
 
$
8
   
$
100
   
$
5,328
 
  
The following table summarizes the activity in the allowance for loan losses for the three months ended March 31, 2017 (in thousands):
 
 
 
Beginning
Allowance
   
Charge-offs
   
Recoveries
   
Provision/
(Benefit)
   
Ending
Allowance
 
One- to four- family
 
$
1,542
   
$
-
   
$
-
   
$
(7
)
 
$
1,535
 
Home equity
   
378
     
-
     
27
     
(157
)
   
248
 
Commercial and multifamily
   
1,144
     
(24
)
   
1
     
(8
)
   
1,113
 
Construction and land
   
459
     
-
     
-
     
(46
)
   
413
 
Manufactured homes
   
168
     
-
     
2
     
(22
)
   
148
 
Floating homes
   
132
     
-
     
-
     
5
     
137
 
Other consumer
   
112
     
(5
)
   
15
     
(24
)
   
98
 
Commercial business
   
175
     
-
     
-
     
(21
)
   
154
 
Unallocated
   
712
     
-
     
-
     
280
     
992
 
Total
 
$
4,822
   
$
(29
)
 
$
45
   
$
-
   
$
4,838
 
  
Credit Quality Indicators.  Federal regulations provide for the classification of lower quality loans as substandard, doubtful or loss.  An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged.  Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as doubtful have all the weaknesses of currently existing facts, conditions and values.  Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without establishment of a specific loss reserve is not warranted.
15

Table of Contents
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
When we classify problem loans as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address the risk specifically (if the loan is impaired) or we may allow the loss to be addressed in the general allowance (if the loan is not impaired).  General allowances represent loss reserves which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem loans.  When the Company classifies problem loans as a loss, we charge-off such assets in the period in which they are deemed uncollectible.  Assets that do not currently expose us to sufficient risk to warrant classification as substandard, doubtful or loss, but possess identified weaknesses, are classified as either watch or special mention assets.  Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Federal Deposit Insurance Corporation ("FDIC"), the Bank's federal regulator, and the Washington Department of Financial Institutions ("WDFI"), the Bank's state banking regulator, which can order the establishment of additional loss allowances.  Pass rated loans are loans that are not otherwise classified or criticized.
 
The following table represents the internally assigned grades as of March 31, 2018, by type of loan (in thousands):
 
 
 
One- to
four- family
   
Home
equity
   
Commercial
and multifamily
   
Construction
and land
   
Manufactured
homes
   
Floating
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Grade:
                                                     
Pass
 
$
160,394
   
$
27,028
   
$
213,842
   
$
60,707
   
$
17,167
   
$
29,110
   
$
5,404
   
$
35,906
   
$
549,558
 
Watch
   
-
     
-
     
4,266
     
-
     
-
     
-
     
-
     
488
     
4,754
 
Special Mention
   
-
     
-
     
1,467
     
-
     
-
     
-
     
-
     
1,267
     
2,734
 
Substandard
   
1,900
     
610
     
1,680
     
82
     
313
     
-
     
58
     
193
     
4,836
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
162,294
   
$
27,638
   
$
221,255
   
$
60,789
   
$
17,480
   
$
29,110
   
$
5,462
   
$
37,854
   
$
561,882
 
 
The following table represents the internally assigned grades as of December 31, 2017, by type of loan (in thousands):
 
 
 
One- to
four- family
   
Home
equity
   
Commercial
and multifamily
   
Construction
and land
   
Manufactured
homes
   
Floating
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Grade:
                                                     
Pass
 
$
153,793
   
$
27,493
   
$
199,887
   
$
61,390
   
$
16,877
   
$
29,120
   
$
4,708
   
$
39,089
   
$
532,357
 
Watch
   
244
     
-
     
9,683
     
-
     
-
     
-
     
-
     
827
     
10,754
 
Special Mention
   
137
     
-
     
357
     
-
     
-
     
-
     
-
     
784
     
1,278
 
Substandard
   
3,243
     
886
     
1,342
     
92
     
234
     
-
     
194
     
129
     
6,120
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
157,417
   
$
28,379
   
$
211,269
   
$
61,482
   
$
17,111
   
$
29,120
   
$
4,902
   
$
40,829
   
$
550,509
 

16

Table of Contents
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
Nonaccrual and Past Due Loans.  Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  Loans are automatically placed on nonaccrual once the loan is 90 days past due or sooner if, in management's opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory authorities.
 
The following table presents the recorded investment in nonaccrual loans as of March 31, 2018, and December 31, 2017, by type of loan (in thousands):
 
 
 
March 31,
2018
   
December 31,
2017
 
One- to four- family
 
$
736
   
$
791
 
Home equity
   
452
     
722
 
Commercial and multifamily
   
197
     
201
 
Construction and land
   
82
     
92
 
Manufactured homes
   
200
     
206
 
Other consumer
   
     
8
 
Commercial business
   
126
     
129
 
Total
 
$
1,793
   
$
2,149
 

The following table represents the aging of the recorded investment in past due loans as of March 31, 2018, by type of loan (in thousands):
 
 
 
30-59 Days
Past Due
   
60-89 Days
Past Due
   
90 Days
and Greater
Past Due
   
90 Days and
Greater Past
Due and Still
Accruing
   
Total Past
Due
   
Current
   
Total Loans
 
One- to four- family
 
$
851
   
$
300
   
$
446
   
$
-
   
$
1,597
   
$
160,697
   
$
162,294
 
Home equity
   
305
     
54
     
414
     
-
     
773
     
26,865
     
27,638
 
Commercial and multifamily
   
42
     
-
     
-
     
-
     
42
     
221,213
     
221,255
 
Construction and land
   
-
     
-
     
-
     
-
     
-
     
60,789
     
60,789
 
Manufactured homes
   
41
     
56
     
176
     
-
     
273
     
17,207
     
17,480
 
Floating homes
   
-
     
-
     
-
     
-
     
-
     
29,110
     
29,110
 
Other consumer
   
1
     
-
     
-
     
-
     
1
     
5,461
     
5,462
 
Commercial business
   
223
     
-
     
-
     
-
     
223
     
37,631
     
37,854
 
Total
 
$
1,463
   
$
410
   
$
1,036
   
$
-
   
$
2,909
   
$
558,973
   
$
561,882
 
 
17

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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
The following table represents the aging of the recorded investment in past due loans as of December 31, 2017, by type of loan (in thousands):
 
 
 
30-59 Days
Past Due
   
60-89 Days
Past Due
   
90 Days
and Greater
Past Due
   
90 Days and
Greater Past
Due and Still
Accruing
   
Total Past
Due
   
Current
   
Total Loans
 
One- to four- family
 
$
2,092
   
$
1,819
   
$
727
   
$
-
   
$
4,638
   
$
152,779
   
$
157,417
 
Home equity
   
521
     
5
     
633
     
-
     
1,159
     
27,220
     
28,379
 
Commercial and multifamily
   
313
     
-
     
-
     
-
     
313
     
210,956
     
211,269
 
Construction and land
   
51
     
-
     
92
     
-
     
143
     
61,339
     
61,482
 
Manufactured homes
   
185
     
50
     
197
     
-
     
432
     
16,679
     
17,111
 
Floating homes
   
-
     
-
     
-
     
-
     
-
     
29,120
     
29,120
 
Other consumer
   
15
     
-
     
-
     
-
     
15
     
4,887
     
4,902
 
Commercial business
   
400
     
-
     
-
     
-
     
400
     
40,429
     
40,829
 
Total
 
$
3,577
   
$
1,874
   
$
1,649
   
$
-
   
$
7,100
   
$
543,409
   
$
550,509
 

Nonperforming Loans.  Loans are considered nonperforming when they are placed on nonaccrual and/or when they are considered to be nonperforming troubled debt restructurings ("TDRs") and/or when they are 90 days or greater past due and still accruing interest.  A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company has granted the borrower a concession of some kind.  Nonperforming TDRs include TDRs that do not have sufficient payment history (typically greater than six months) to be considered performing or TDRs that have become 30 or more days past due.

The following table represents the credit risk profile of our loan portfolio based on payment activity as of March 31, 2018, by type of loan (in thousands):
 
 
 
One- to
four-
family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
Floating
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Performing
 
$
161,512
   
$
27,186
   
$
221,058
   
$
60,707
   
$
17,280
   
$
29,110
   
$
5,462
   
$
37,642
   
$
559,957
 
Nonperforming
   
782
     
452
     
197
     
82
     
200
     
-
     
-
     
212
     
1,925
 
Total
 
$
162,294
   
$
27,638
   
$
221,255
   
$
60,789
   
$
17,480
   
$
29,110
   
$
5,462
   
$
37,854
   
$
561,882
 
 
The following table represents the credit risk profile of our loan portfolio based on payment activity as of December 31, 2017, by type of loan (in thousands):
 
 
 
One- to
four-
family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
Floating
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Performing
 
$
156,580
   
$
27,657
   
$
211,068
   
$
61,390
   
$
16,905
   
$
29,120
   
$
4,894
   
$
40,612
   
$
548,226
 
Nonperforming
   
837
     
722
     
201
     
92
     
206
     
-
     
8
     
217
     
2,283
 
Total
 
$
157,417
   
$
28,379
   
$
211,269
   
$
61,482
   
$
17,111
   
$
29,120
   
$
4,902
   
$
40,829
   
$
550,509
 

18

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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
Impaired Loans.  A loan is considered impaired when we determine that we may be unable to collect payments of principal or interest when due under the terms of the loan.  In the process of identifying loans as impaired, we take into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future.  Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired.  The significance of payment delays and shortfalls is considered on a case by case basis, after taking into consideration the totality of circumstances surrounding the loan and the borrower, including payment history.  Impairment is measured on a loan by loan basis for all loans in the portfolio.  All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses.
 
Impaired loans at March 31, 2018 and December 31, 2017, by type of loan were as follows (in thousands):
 
 
 
March 31, 2018
 
 
       
Recorded Investment
       
 
 
Unpaid Principal
Balance
   
Without
Allowance
   
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
 
 
                             
One- to four- family
 
$
6,586
   
$
3,038
   
$
3,367
   
$
6,405
   
$
603
 
Home equity
   
1,008
     
740
     
166
     
906
     
116
 
Commercial and multifamily
   
3,174
     
3,147
     
-
     
3,147
     
-
 
Construction and land
   
135
     
89
     
41
     
130
     
13
 
Manufactured homes
   
490
     
22
     
437
     
459
     
335
 
Other consumer
   
195
     
124
     
71
     
195
     
45
 
Commercial business
   
1,564
     
739
     
807
     
1,546
     
317
 
Total
 
$
13,152
   
$
7,899
   
$
4,889
   
$
12,788
   
$
1,429
 
 
 
 
December 31, 2017
 
 
       
Recorded Investment
       
 
 
Unpaid Principal
Balance
   
Without
Allowance
   
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
 
 
                             
One- to four- family
 
$
6,562
   
$
3,197
   
$
3,059
   
$
6,256
   
$
360
 
Home equity
   
1,149
     
677
     
351
     
1,028
     
109
 
Commercial and multifamily
   
1,722
     
1,699
     
-
     
1,699
     
-
 
Construction and land
   
141
     
100
     
41
     
141
     
10
 
Manufactured homes
   
409
     
23
     
362
     
385
     
247
 
Other consumer
   
194
     
125
     
69
     
194
     
40
 
Commercial business
   
1,017
     
784
     
216
     
1,000
     
130
 
Total
 
$
11,194
   
$
6,605
   
$
4,098
   
$
10,703
   
$
896
 

19

Table of Contents
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
 
 
Income on impaired loans for the three months ended March 31, 2018 and December 31, 2017 by type of loan were as follows (in thousands):
 
 
 
Three Months Ended March 31, 2018
   
Three Months Ended March 31, 2017
 
 
 
Average
Recorded
Investment
   
Interest Income
Recognized
   
Average
Recorded
Investment
   
Interest Income
Recognized
 
 
                       
One- to four- family
 
$
6,341
   
$
73
   
$
4,959
   
$
84
 
Home equity
   
968
     
7
     
965
     
10
 
Commercial and multifamily
   
2,426
     
45
     
1,852
     
27
 
Construction and land
   
136
     
5
     
82
     
1
 
Manufactured homes
   
422
     
10
     
302
     
5
 
Other consumer
   
195
     
3
     
63
     
1
 
Commercial business
   
1,275
     
20
     
505
     
5
 
Total
 
$
11,763
   
$
163
   
$
8,728
   
$
133
 
  
Forgone interest on nonaccrual loans was $2,000 and $4,000 for the three months ended March 31, 2018 and 2017, respectively.  There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual or impaired at March 31, 2018 and December 31, 2017.
 
Troubled debt restructurings.  Loans classified as TDRs totaled $3.7 million at both March 31, 2018 and December 31, 2017, and are included in impaired loans.  The Company has granted, in its TDRs, a variety of concessions to borrowers in the form of loan modifications.  The modifications granted can generally be described in the following categories:
 
Rate Modification:  A modification in which the interest rate is changed.
 
Term Modification:  A modification in which the maturity date, timing of payments or frequency of payments is changed.
 
Payment Modification:  A modification in which the dollar amount of the payment is changed.  Interest only modifications in which a loan is converted to interest only payments for a period of time are included in this category.
 
Combination Modification:  Any other type of modification, including the use of multiple categories above.

There were no loans modified as TDRs or payoffs of any TDRs during the three months ended March 31, 2018 and 2017.
 
There were no post-modification changes for the unpaid principal balance in loans, net of partial charge-offs, that were recorded as a result of the TDRs for the three months ended March 31, 2018 and 2017.  There were no TDRs for which there was a payment default within the first 12 months of modification during the three months ended March 31, 2018 and 2017.