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Section 1: 10-Q (FORM 10-Q)

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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, 2019
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 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 ☒   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 ☒
 
 
 
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 ☒

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, $0.01 par value
SFBC
The NASDAQ Stock Market LLC
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 6, 2019, there were 2,563,828 shares of the registrant’s common stock outstanding. 


Table of Contents

SOUND FINANCIAL BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
 
Page Number
PART I    FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2





SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share amounts)
 
March 31,
2019
 
December 31,
2018
ASSETS
 
 
 
Cash and cash equivalents
$
72,536

 
$
61,810

Available-for-sale securities, at fair value
4,955

 
4,957

Loans held-for-sale
490

 
1,172

Loans held-for-portfolio
584,501

 
619,543

Allowance for loan losses
(5,577
)
 
(5,774
)
Total loans held-for-portfolio, net
578,924

 
613,769

Accrued interest receivable
2,228

 
2,287

Bank-owned life insurance (“BOLI”), net
13,625

 
13,365

Other real estate owned (“OREO”) and repossessed assets, net
1,069

 
575

Mortgage servicing rights, at fair value
3,286

 
3,414

Federal Home Loan Bank (“FHLB”) stock, at cost
1,860

 
4,134

Premises and equipment, net
6,833

 
7,044

Right of use assets
8,136

 

Other assets
3,687

 
4,208

Total assets
$
697,629

 
$
716,735

LIABILITIES
 
 
 
Deposits
 
 
 
Interest-bearing
$
485,033

 
$
457,535

Noninterest-bearing demand
98,648

 
96,066

Total deposits
583,681

 
553,601

Borrowings
25,000

 
84,000

Accrued interest payable
201

 
137

Lease liabilities
8,408

 

Other liabilities
6,089

 
6,681

Advance payments from borrowers for taxes and insurance
1,327

 
689

Total liabilities
624,706

 
645,108

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, 2,563,828 and 2,544,059 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
25

 
25

Additional paid-in capital
25,802

 
25,663

Unearned shares - Employee Stock Ownership Plan (“ESOP”)
(312
)
 
(340
)
Retained earnings
47,252

 
46,165

Accumulated other comprehensive income, net of tax
156

 
114

Total stockholders’ equity
72,923

 
71,627

Total liabilities and stockholders’ equity
$
697,629

 
$
716,735

See notes to condensed consolidated financial statements

3



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,
2019
 
2018
INTEREST INCOME
 
 
 
Loans, including fees
$
8,359

 
$
7,204

Interest and dividends on investments, cash and cash equivalents
414

 
246

Total interest income
8,773

 
7,450

INTEREST EXPENSE
 
 
 
Deposits
1,466

 
810

Borrowings
318

 
213

Total interest expense
1,784

 
1,023

Net interest income
6,989

 
6,427

(RECAPTURE) PROVISION FOR LOAN LOSSES
(200
)
 
100

Net interest income after (recapture) provision for loan losses
7,189

 
6,327

NONINTEREST INCOME
 
 
 
Service charges and fee income
447

 
460

Earnings on cash surrender value of bank-owned life insurance
108

 
79

Mortgage servicing (loss) income
(82
)
 
220

Net gain on sale of loans
535

 
374

Total noninterest income
1,008

 
1,133

NONINTEREST EXPENSE
 
 
 
Salaries and benefits
3,639

 
3,141

Operations
1,634

 
1,239

Regulatory assessments
113

 
101

Occupancy
506

 
474

Data processing
500

 
453

Net loss on OREO and repossessed assets
3

 
27

Total noninterest expense
6,395

 
5,435

Income before provision for income taxes
1,802

 
2,025

Provision for income taxes
358

 
423

Net income
$
1,444

 
$
1,602

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.57

 
$
0.65

Diluted
$
0.56

 
$
0.63

Weighted-average number of common shares outstanding:
 
 
 
Basic
2,507,389

 
2,477,235

Diluted
2,565,914

 
2,558,418

 
See notes to condensed consolidated financial statements 


4



SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
1,444

 
$
1,602

Available for sale securities:
 
 
 
Unrealized holding gains/(losses) arising during the period
53

 
(39
)
Income tax (expense)/benefit related to unrealized gains/losses
(11
)
 
8

Other comprehensive income/(loss), net of tax
42

 
(31
)
Comprehensive income
$
1,486

 
$
1,571

See notes to condensed consolidated financial statements

5



SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders’ Equity
For the Three Months Ended March 31, 2019 and 2018 (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, 2017
2,511,127

 
$
25

 
$
24,986

 
$
(453
)
 
$
40,493

 
$
109

 
$
65,160

Net income
 
 
 
 
 
 
 
 
1,602

 
 
 
1,602

Other comprehensive income, 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
)
 
 
 
 
 
 
 
 
 
 
 

Common stock options exercised
18,425

 
 
 
73

 
 
 
 
 
 
 
73

Balances at March 31, 2018
2,524,346

 
$
25

 
$
25,104

 
$
(453
)
 
$
41,792

 
$
78

 
$
66,546


 
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, 2018
2,544,059

 
$
25

 
$
25,663

 
$
(340
)
 
$
46,165

 
$
114

 
$
71,627

Net income
 
 
 
 
 
 
 
 
1,444

 
 
 
1,444

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
42

 
42

Share-based compensation
 
 
 
 
39

 
 
 
 
 
 
 
39

Restricted stock awards issued
15,925

 
 
 
 
 
 
 
 
 
 
 

Cash dividends paid on common stock ($0.14 per share)
 
 
 
 
 
 
 
 
(357
)
 
 
 
(357
)
Common stock repurchased
(1,488
)
 
 
 
 
 
 
 
 
 
 
 

Common stock options exercised
5,332

 
 
 
32

 
 
 
 
 
 
 
32

Allocation of ESOP shares
 
 
 
 
68

 
28

 
 
 
 
 
96

Balances at March 31, 2019
2,563,828

 
$
25

 
$
25,802

 
$
(312
)
 
$
47,252

 
$
156

 
$
72,923

See notes to condensed consolidated financial statements

6



SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
1,444

 
$
1,602

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Amortization of net discounts on investments
8

 
10

(Recapture) provision for loan losses
(200
)
 
100

Depreciation and amortization
235

 
237

Compensation expense related to stock options and restricted stock
39

 
45

Change in fair value of mortgage servicing rights
324

 
(106
)
Increase in cash surrender value of BOLI
(108
)
 
(79
)
Net change in advances from borrowers for taxes and insurance
637

 
471

Net gain on sale of loans
(211
)
 
(332
)
Proceeds from sale of loans held-for-sale
27,274

 
15,800

Originations of loans held-for-sale
(26,681
)
 
(14,641
)
Net loss on OREO and repossessed assets
3

 
27

Change in operating assets and liabilities:
 
 
 
Accrued interest receivable
59

 
15

Other assets
521

 
571

Accrued interest payable
64

 
4

Other liabilities
(593
)
 
633

Net cash provided by operating activities
2,815

 
4,357

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from principal payments, maturities and sales of available-for-sale securities
11

 
159

Net decrease (increase) in loans
34,983

 
(11,485
)
Purchase of BOLI
(183
)
 
(246
)
Purchases of premises and equipment, net
(24
)
 
(390
)
Net cash provided by (used in) investing activities
34,787

 
(11,962
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in deposits
30,080

 
14,793

Proceeds from borrowings
60,000

 
76,000

Repayment of borrowings
(119,000
)
 
(79,000
)
FHLB stock redeemed
2,273

 
51

ESOP shares released
96

 

Proceeds from common stock option exercises
32

 
73

Dividends paid on common stock
(357
)
 
(303
)
Net cash (used in) provided by financing activities
(26,876
)
 
11,614

Net change in cash and cash equivalents
10,726

 
4,009

Cash and cash equivalents, beginning of period
61,810

 
60,680

Cash and cash equivalents, end of period
$
72,536

 
$
64,689

 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$

 
$

Interest paid on deposits and borrowings
1,720

 
1,019

Noncash net transfer from loans to OREO and repossessed assets
60

 

See notes to condensed consolidated financial statements


7



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 subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc.  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 subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc., 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, 2018, as filed with the SEC on March 14, 2019 (“2018 Form 10-K”).  The results for the interim periods are not necessarily indicative of results for a full year.
Certain amounts in the prior period’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 August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-13, "Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"). This ASU modifies the disclosure requirements on fair value measurements. The following disclosure requirements were removed from FASB Accounting Standards Codification ("ASC") Topic 820 - Fair Value Measurement: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds the following disclosure requirements for Level 3 measurements: (1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.  Amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for any removed or modified disclosures. The
adoption of ASU 2018-13 is not expected to have a material impact on the Company's consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU amends the accounting for share-based payments awards to nonemployees to align with the accounting for employee awards. Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. 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. 2018-07 on January 1, 2019 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 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  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

8



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 on January 1, 2019, did not have a material impact on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU No. 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 adoption of ASU No. 2017-08 on January 1, 2019 did not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Adoption of ASU 2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its 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 is evaluating its current expected loss methodology on the loan and investment portfolios to identify the necessary modifications in accordance with this standard and expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The Company is in the process of compiling historical data that will be used to calculate expected credit losses on the loan portfolio to ensure that it is fully compliant with the ASU at the adoption date and is evaluating the potential impact adoption of this ASU will have on its consolidated financial statements. 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.

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. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements. This ASU amended the new leases standard to give entities another option for transition and to provide lessors with a practical expedient. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The practical expedient provides lessors with an option to not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components. The Company adopted these ASUs on January 1, 2019. See Note 12 - Leases of this report for more information.

9




In March 2019, FASB issued ASU 2019-01, Leases (Topic 842), Codification Improvements. The amendments in this ASU include the following items: (i) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (ii) requiring cash received from lessors from sales-type and direct financing leases to be presented in the cash flow statement within investing activities; and (iii) clarifying interim disclosure requirements. The effective date and transition requirements for the first and second items of this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 and early adoption is permitted. We have adopted the third item of this ASU and provided the required interim disclosures in this report.  The Company does not expect the adoption of items (i) and (ii) of ASU 2019-01 to have a material impact on its consolidated financial statements.


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, 2019
 
 
 
 
 
 
 
Municipal bonds
$
3,213

 
$
152

 
$
(12
)
 
$
3,353

Agency mortgage-backed securities
1,545

 
57

 

 
1,602

Total
$
4,758

 
$
209

 
$
(12
)
 
$
4,955

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Municipal bonds
$
3,218

 
$
122

 
$
(23
)
 
$
3,317

Agency mortgage-backed securities
1,594

 
46

 

 
1,640

Total
$
4,812

 
$
168

 
$
(23
)
 
$
4,957

The amortized cost and fair value of AFS securities at March 31, 2019, 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, 2019
 
Amortized
Cost
 
Fair
Value
Due after one year through five years
$
1,560

 
$
1,559

Due after five years through ten years
460

 
493

Due after ten years
1,193

 
1,301

Mortgage-backed securities
1,545

 
1,602

Total
$
4,758

 
$
4,955

There were no pledged securities at March 31, 2019 and December 31, 2018.
There were no sales of AFS securities during the three months ended March 31, 2019 and 2018.

10



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, 2019
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Municipal bonds
$

 
$

 
$
1,288

 
$
(12
)
 
$
1,288

 
$
(12
)
Total
$

 
$

 
$
1,288

 
$
(12
)
 
$
1,288

 
$
(12
)
 
December 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
$

 
$

 
$
1,283

 
$
(23
)
 
$
1,283

 
$
(23
)
Total
$

 
$

 
$
1,283

 
$
(23
)
 
$
1,283

 
$
(23
)
There were no credit losses recognized in earnings during the three months ended March 31, 2019 or 2018 relating to the Company’s securities.

At both March 31, 2019 and December 31, 2018, the securities portfolio consisted of six agency mortgage-backed securities and eight municipal securities with a fair value of $5.0 million. At both March 31, 2019 and December 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 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. The unrealized losses on these investments are not considered other-than-temporary impairment ("OTTI") as of March 31, 2019, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis


11



Note 4 – Loans
The composition of the loans-held-for portfolio at the dates indicated, excluding loans held-for-sale, was as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
Real estate loans:
 
 
 
One-to-four family
$
151,422

 
$
169,830

Home equity
24,466

 
27,655

Commercial and multifamily
245,488

 
252,644

Construction and land
66,400

 
65,259

Total real estate loans
$
487,776

 
$
515,388

Consumer loans:
 
 
 
Manufactured homes
20,533

 
20,145

Floating homes
39,016

 
40,806

Other consumer
7,126

 
6,628

Total consumer loans
66,675

 
67,579

Commercial business loans
32,046

 
38,804

Total loans held-for-portfolio
586,497

 
621,771

Deferred fees
(1,996
)
 
(2,228
)
Total loans, gross held-for-portfolio
584,501

 
619,543

Allowance for loan losses
(5,577
)
 
(5,774
)
Total loans held-for-portfolio, net
$
578,924

 
$
613,769


12



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, 2019 (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
$
222

 
$
73

 
$

 
$
8

 
$
381

 
$

 
$
68

 
$
223

 
$

 
$
975

Collectively evaluated for impairment
967

 
156

 
1,035

 
988

 
130

 
254

 
52

 
201

 
819

 
4,602

Ending balance
$
1,189

 
$
229

 
$
1,035

 
$
996

 
$
511

 
$
254

 
$
120

 
$
424

 
$
819

 
$
5,577

Loans held-for-portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,596

 
$
473

 
$
520

 
$
126

 
$
502

 
$

 
$
160

 
$
1,171

 
$

 
$
5,548

Collectively evaluated for impairment
148,826

 
23,993

 
244,968

 
66,274

 
20,031

 
39,016

 
6,966

 
30,875

 

 
580,949

Ending balance
$
151,422

 
$
24,466

 
$
245,488

 
$
66,400

 
$
20,533

 
$
39,016

 
$
7,126

 
$
32,046

 
$

 
$
586,497

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, 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
$
228

 
$
25

 
$

 
$
8

 
$
299

 
$

 
$
64

 
$
112

 
$

 
$
736

Collectively evaluated for impairment
1,086

 
177

 
1,638

 
423

 
128

 
265

 
48

 
244

 
1,029

 
5,038

Ending balance
$
1,314

 
$
202

 
$
1,638

 
$
431

 
$
427

 
$
265

 
$
112

 
$
356

 
$
1,029

 
$
5,774

Loans held-for-portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,760

 
$
440

 
$
702

 
$
163

 
$
424

 
$

 
$
157

 
$
1,192

 
$

 
$
5,838

Collectively evaluated for impairment
167,070

 
27,215

 
251,942

 
65,096

 
19,721

 
40,806

 
6,471

 
37,612

 

 
615,933

Ending balance
$
169,830

 
$
27,655

 
$
252,644

 
$
65,259

 
$
20,145

 
$
40,806

 
$
6,628

 
$
38,804

 
$

 
$
621,771


13



The following table summarizes the activity in the allowance for loan losses for the three months ended March 31, 2019 (in thousands):
 
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
(Recapture) provision
 
Ending
Allowance
One-to-four family
$
1,314

 
$

 
$

 
$
(125
)
 
$
1,189

Home equity
202

 

 
3

 
24

 
229

Commercial and multifamily
1,638

 

 

 
(603
)
 
1,035

Construction and land
431

 

 

 
565

 
996

Manufactured homes
427

 

 

 
84

 
511

Floating homes
265

 

 

 
(11
)
 
254

Other consumer
112

 
(20
)
 
20

 
8

 
120

Commercial business
356

 

 

 
68

 
424

Unallocated
1,029

 

 

 
(210
)
 
819

Total
$
5,774

 
$
(20
)
 
$
23

 
$
(200
)
 
$
5,577

 
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 (recapture)
 
Ending
Allowance
One-to-four family
$
1,436

 
$

 
$

 
$
273

 
$
1,709

Home equity
293

 
(7
)
 
4

 
(3
)
 
287

Commercial and multifamily
1,250

 

 

 
45

 
1,295

Construction and land
378

 

 

 

 
378

Manufactured homes
355

 

 

 
90

 
445

Floating homes
169

 

 

 

 
169

Other consumer
80

 
(14
)
 
4

 
19

 
89

Commercial business
372

 

 

 
166

 
538

Unallocated
908

 

 

 
(490
)
 
418

Total
$
5,241

 
$
(21
)
 
$
8

 
$
100

 
$
5,328

 
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 inherent in assets classified substandard with the added characteristic that the weaknesses make collection or liquidation of the assets in full, on the basis of currently existing facts, conditions and

14



values, highly questionable and improbable.  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.
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, both which can order the establishment of additional loss allowances.  Pass rated loans are loans that are not otherwise classified or criticized.
The following table presents the internally assigned grades as of March 31, 2019, 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
$
145,305

 
$
23,878

 
$
239,767

 
$
56,838

 
$
20,166

 
$
39,016

 
$
7,068

 
$
28,799

 
$
560,837

Watch

 

 
1,134

 
6,441

 
2

 

 

 
1,085

 
8,662

Special Mention

 

 
2,459

 
2,994

 

 

 

 
356

 
5,809

Substandard
6,117

 
588

 
2,128

 
127

 
365

 

 
58

 
1,806

 
11,189

Doubtful

 

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

 

Total
$
151,422

 
$
24,466

 
$
245,488

 
$
66,400

 
$
20,533

 
$
39,016

 
$
7,126

 
$
32,046

 
$
586,497

The Bank had $1.8 million in performing loans identified as TDRs at March 31, 2019, that were not classified as special mention or substandard.

15



The following table presents the internally assigned grades as of December 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
$
163,655

 
$
27,150

 
$
246,907

 
$
55,916

 
$
19,860

 
$
40,806

 
$
6,576

 
$
35,876

 
$
596,746

Watch

 

 
1,139

 
5,968

 

 

 

 
689

 
7,796

Special Mention

 

 
2,497

 
3,252

 

 

 

 
367

 
6,116

Substandard
6,175

 
505

 
2,101

 
123

 
285

 

 
52

 
1,872

 
11,113

Doubtful

 

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

 

Total
$
169,830

 
$
27,655

 
$
252,644

 
$
65,259

 
$
20,145

 
$
40,806

 
$
6,628

 
$
38,804

 
$
621,771

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, 2019, and December 31, 2018, by type of loan (in thousands):
 
March 31, 2019
 
December 31, 2018
One-to-four family
$
925

 
$
1,075

Home equity
393

 
360

Commercial and multifamily
353

 
534

Construction and land
83

 
123

Manufactured homes
231

 
214

Commercial business
379

 
235

Total
$
2,364

 
$
2,541


16



The following table presents the aging of the recorded investment in past due loans as of March 31, 2019, by type of loan (in thousands):
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days and Greater Past Due
 
Recorded Investment
> 90 Days and Accruing
 
Total Past
Due
 
Current
 
Total Loans
One-to-four family
$
1,327

 
$
271

 
$
390

 
$

 
$
1,988

 
$
149,434

 
$
151,422

Home equity
274

 
171

 
295

 

 
740

 
23,726

 
24,466

Commercial and multifamily
437

 

 
353

 

 
790

 
244,698

 
245,488

Construction and land
33

 

 
50

 

 
83

 
66,317

 
66,400

Manufactured homes
139

 

 
231

 

 
370

 
20,163

 
20,533

Floating homes

 

 

 

 

 
39,016

 
39,016

Other consumer
19

 
3

 

 

 
22

 
7,104

 
7,126

Commercial business
433

 

 
70

 

 
503

 
31,543

 
32,046

Total
$
2,662

 
$
445

 
$
1,389

 
$

 
$
4,496

 
$
582,001

 
$
586,497


The following table presents the aging of the recorded investment in past due loans as of December 31, 2018, by type of loan (in thousands):
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days and Greater Past Due
 
Recorded Investment
> 90 Days and Accruing
 
Total Past
Due
 
Current
 
Total Loans
One-to-four family
$
1,362

 
$
167

 
$
514

 
$

 
$
2,043

 
$
167,787

 
$
169,830

Home equity
298

 
149

 
284

 

 
731

 
26,924

 
$
27,655

Commercial and multifamily
139

 

 
353

 

 
492

 
252,152

 
$
252,644

Construction and land
650

 

 
50

 

 
700

 
64,559

 
$
65,259

Manufactured homes
78

 
129

 
199

 

 
406

 
19,739

 
$
20,145

Floating homes

 

 

 

 

 
40,806

 
$
40,806

Other consumer
11

 
5

 

 

 
16

 
6,612

 
$
6,628

Commercial business
228

 
177

 
122

 

 
$
527

 
38,277

 
$
38,804

Total
$
2,766

 
$
627

 
$
1,522

 
$

 
$
4,915

 
$
616,856

 
$
621,771

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.

17



The following table presents the credit risk profile of our loan portfolio based on payment activity as of March 31, 2019, 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
$
150,453

 
$
24,073

 
$
245,135

 
$
66,317

 
$
20,302

 
$
39,016

 
$
7,126

 
$
31,492

 
$
583,914

Nonperforming
969

 
393

 
353

 
83

 
231

 

 

 
554

 
2,583

Total
$
151,422

 
$
24,466

 
$
245,488

 
$
66,400

 
$
20,533

 
$
39,016

 
$
7,126

 
$
32,046

 
$
586,497


The following table presents the credit risk profile of our loan portfolio based on payment activity as of December 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
$
168,710

 
$
27,296

 
$
252,110

 
$
65,136

 
$
19,931

 
$
40,806

 
$
6,628

 
$
38,487

 
$
619,104

Nonperforming
1,120

 
359

 
534

 
123

 
214

 

 

 
317

 
2,667

Total
$
169,830

 
$
27,655

 
$
252,644

 
$
65,259

 
$
20,145

 
$
40,806

 
$
6,628

 
$
38,804

 
$
621,771

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.

18



Impaired loans at March 31, 2019 and December 31, 2018, by type of loan were as follows (in thousands):
 
March 31, 2019
 
 
 
Recorded Investment
 
 
 
Unpaid Principal
Balance
 
Without
Allowance
 
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
One-to-four family
$
2,731

 
$
975

 
$
1,622

 
$
2,597

 
$
222

Home equity
553

 
393

 
80

 
473

 
73

Commercial and multifamily
520

 
520

 

 
520

 

Construction and land
126

 
86

 
39

 
125

 
8

Manufactured homes
507

 

 
502

 
502

 
381

Other consumer
160

 

 
160

 
160

 
68

Commercial business
1,171

 
649

 
522

 
1,171

 
223

Total
$
5,768

 
$
2,623

 
$
2,925

 
$
5,548

 
$
975


 
December 31, 2018
 
 
 
Recorded Investment
 
 
 
Unpaid Principal
Balance
 
Without
Allowance
 
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
One-to-four family
$
2,894

 
$
1,085

 
$
1,675

 
$
2,760

 
$
228

Home equity
520

 
359

 
81

 
440

 
25

Commercial and multifamily
702

 
702

 

 
702

 

Construction and land
163

 
123

 
40

 
163

 
8

Manufactured homes
430

 

 
424

 
424

 
299

Other consumer
156

 

 
157

 
157

 
64

Commercial business
1,192

 
659

 
533

 
1,192

 
112

Total
$
6,057

 
$
2,928

 
$
2,910

 
$
5,838

 
$
736



19



The average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2019 and 2018, respectively, by loan types follows (in thousands):
 
Three Months Ended
March 31, 2019
 
Three Months Ended
March 31, 2018
 
Average
Recorded
Investment
 
Interest Income
Recognized
 
Average
Recorded
Investment
 
Interest Income
Recognized
One-to-four family
$
4,427

 
$
38

 
$
6,341

 
$
73

Home equity
751

 
6

 
968

 
7

Commercial and multifamily
1,110

 
7