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, 2016, as filed with the SEC on March 27, 2017 (“2016 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, 2016, included in the 2016 Form 10-K. Certain amounts in the prior quarters’ 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), which creates Topic 606 and supersedes Topic 605, Revenue Recognition. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which postponed the effective date of 2014-09. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net, which amended the principal versus agent implementation guidance set for in ASU 2014-09. Among other things, ASU 2016-08 clarifies that an entity should evaluate whether 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 ASU amends certain aspects of the guidance set forth in the FASB's new revenue standard related to identifying performance obligations and licensing implementation. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new ASU requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in certain narrow areas and adds some practical expedients, but does not change the core revenue recognition principle in Topic 606. This ASU is effective for interim and annual periods beginning after December 15, 2017; early adoption is not permitted. For financial reporting purposes, the ASU allows for either full retrospective adoption, meaning this ASU is applied to all of the periods presented, or modified retrospective adoption, meaning the ASU is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the ASU recognized at the date of initial application. As a financial institution, the Company's largest component of revenue, interest income, is excluded from the scope of this ASU. Accordingly, the adoption of ASU No. 2014-09 is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, the ASU requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 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 ASU also requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for certain provisions. The Company is currently evaluating the impact of this ASU 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
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
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 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted and must be applied using a retrospective transition method to each period presented. The Company does not expect this ASU to 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.
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 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of ASU No. 2017-09 is not expected to have a material impact on the Company’s 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
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
3,251
|
|
|
$
|
184
|
|
|
$
|
(7
|
)
|
|
$
|
3,428
|
|
Agency mortgage-backed securities
|
|
|
2,404
|
|
|
|
51
|
|
|
|
(1
|
)
|
|
|
2,454
|
|
Non-agency mortgage-backed securities
|
|
|
335
|
|
|
|
-
|
|
|
|
(17
|
)
|
|
|
318
|
|
Total
|
|
$
|
5,990
|
|
|
$
|
235
|
|
|
$
|
(25
|
)
|
|
$
|
6,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
3,262
|
|
|
$
|
127
|
|
|
$
|
(36
|
)
|
|
$
|
3,353
|
|
Agency mortgage-backed securities
|
|
|
2,858
|
|
|
|
49
|
|
|
|
(3
|
)
|
|
|
2,904
|
|
Non-agency mortgage-backed securities
|
|
|
362
|
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
347
|
|
Total
|
|
$
|
6,482
|
|
|
$
|
176
|
|
|
$
|
(54
|
)
|
|
$
|
6,604
|
|
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
The amortized cost and fair value of AFS securities at June 30, 2017, 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.
|
|
June 30, 2017
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Due after one year through five years
|
|
$
|
1,338
|
|
|
$
|
1,331
|
|
Due after five years through ten years
|
|
|
414
|
|
|
|
445
|
|
Due after ten years
|
|
|
1,499
|
|
|
|
1,652
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
2,739
|
|
|
|
2,772
|
|
Total
|
|
$
|
5,990
|
|
|
$
|
6,200
|
|
There were no pledged securities at June 30, 2017 and December 31, 2016.
There were no sales of AFS securities during the three or six months ended June 30, 2017 and 2016.
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 (in thousands) at the dates indicated:
|
|
June 30, 2017
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Municipal bonds
|
|
$
|
1,331
|
|
|
$
|
(7
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,331
|
|
|
$
|
(7
|
)
|
Agency mortgage-backed securities
|
|
|
953
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
953
|
|
|
|
(1
|
)
|
Non-agency mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
318
|
|
|
|
(17
|
)
|
|
|
318
|
|
|
|
(17
|
)
|
Total
|
|
$
|
2,284
|
|
|
$
|
(8
|
)
|
|
$
|
318
|
|
|
$
|
(17
|
)
|
|
$
|
2,602
|
|
|
$
|
(25
|
)
|
|
|
December 31, 2016
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Municipal bonds
|
|
$
|
1,313
|
|
|
$
|
(36
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,313
|
|
|
$
|
(36
|
)
|
Agency mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
1,125
|
|
|
|
(3
|
)
|
|
|
1,125
|
|
|
|
(3
|
)
|
Non-agency mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
347
|
|
|
|
(15
|
)
|
|
|
347
|
|
|
|
(15
|
)
|
Total
|
|
$
|
1,313
|
|
|
$
|
(36
|
)
|
|
$
|
1,472
|
|
|
$
|
(18
|
)
|
|
$
|
2,785
|
|
|
$
|
(54
|
)
|
There were no credit losses recognized in earnings during the three and six months ended June 30, 2017 or 2016 relating to the Company’s non-agency mortgage-backed securities.
At June 30, 2017, one agency mortgage-backed security and three municipal securities were in an unrealized loss position for less than 12 months. At December 31, 2016, three municipal securities were in an unrealized loss position for less than 12 months and one agency security was in a loss position for over 12 months. All of the agency mortgage-backed securities in an unrealized loss position at June 30, 2017 and December 31, 2016 were issued or guaranteed by U.S. governmental agencies. 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 and six months ended June 30, 2017 or the year ended December 31, 2016.
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
As of June 30, 2017 and December 31, 2016, one non-agency mortgage-backed security was in an unrealized loss position for over 12 months. The unrealized loss was caused by changes in interest rates causing a decline in the fair value subsequent to the purchase. The contractual terms of this investment do not permit the issuer to settle the security at a price less than par. Management does not intend to sell this non-agency mortgage-backed security and it is unlikely that the Company will be required to sell this security before recovery of its amortized cost basis. Management’s impairment evaluation indicated that this security possesses qualitative and quantitative factors that do not suggest an OTTI. These factors include, but are not limited to: the length of time and extent of the fair value declines, ratings agency down grades, the potential for an increased level of actual defaults, and the extension in duration of the securities. Based upon the results of the evaluation of the quantitative and qualitative factors, the non-agency mortgage-backed security does not reflect OTTI during the three and six months ended June 30, 2017 or the year ended December 31, 2016.
Note 4 – Loans
The composition of the loan portfolio at the dates indicated, excluding loans held-for-sale, was as follows (in thousands):
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Real estate loans:
|
|
|
|
|
|
|
One- to four- family
|
|
$
|
147,848
|
|
|
$
|
152,386
|
|
Home equity
|
|
|
27,996
|
|
|
|
27,771
|
|
Commercial and multifamily
|
|
|
195,486
|
|
|
|
181,004
|
|
Construction and land
|
|
|
52,775
|
|
|
|
70,915
|
|
Total real estate loans
|
|
$
|
424,105
|
|
|
$
|
432,076
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Manufactured homes
|
|
|
16,300
|
|
|
|
15,494
|
|
Floating homes
|
|
|
25,225
|
|
|
|
23,996
|
|
Other consumer
|
|
|
4,639
|
|
|
|
3,932
|
|
Total consumer loans
|
|
|
46,164
|
|
|
|
43,422
|
|
Commercial business loans
|
|
|
25,314
|
|
|
|
26,331
|
|
Total loans
|
|
|
495,583
|
|
|
|
501,829
|
|
Deferred fees
|
|
|
(1,687
|
)
|
|
|
(1,828
|
)
|
Total loans, gross
|
|
|
493,896
|
|
|
|
500,001
|
|
Allowance for loan losses
|
|
|
(4,835
|
)
|
|
|
(4,822
|
)
|
Total loans, net
|
|
$
|
489,061
|
|
|
$
|
495,179
|
|
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 June 30, 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
|
|
$
|
481
|
|
|
$
|
256
|
|
|
$
|
-
|
|
|
$
|
35
|
|
|
$
|
72
|
|
|
$
|
-
|
|
|
$
|
59
|
|
|
$
|
216
|
|
|
$
|
-
|
|
|
$
|
1,119
|
|
Collectively evaluated for impairment
|
|
|
821
|
|
|
|
175
|
|
|
|
1,153
|
|
|
|
317
|
|
|
|
106
|
|
|
|
146
|
|
|
|
39
|
|
|
|
148
|
|
|
|
811
|
|
|
|
3,716
|
|
Ending balance
|
|
$
|
1,302
|
|
|
$
|
431
|
|
|
$
|
1,153
|
|
|
$
|
352
|
|
|
$
|
178
|
|
|
$
|
146
|
|
|
$
|
98
|
|
|
$
|
364
|
|
|
$
|
811
|
|
|
$
|
4,835
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
6,452
|
|
|
$
|
983
|
|
|
$
|
1,735
|
|
|
$
|
128
|
|
|
$
|
298
|
|
|
$
|
-
|
|
|
$
|
59
|
|
|
$
|
335
|
|
|
$
|
-
|
|
|
$
|
9,990
|
|
Collectively evaluated for impairment
|
|
|
141,396
|
|
|
|
27,013
|
|
|
|
193,751
|
|
|
|
52,647
|
|
|
|
16,002
|
|
|
|
25,225
|
|
|
|
4,580
|
|
|
|
24,979
|
|
|
|
-
|
|
|
|
485,593
|
|
Ending balance
|
|
$
|
147,848
|
|
|
$
|
27,996
|
|
|
$
|
195,486
|
|
|
$
|
52,775
|
|
|
$
|
16,300
|
|
|
$
|
25,225
|
|
|
$
|
4,639
|
|
|
$
|
25,314
|
|
|
$
|
-
|
|
|
$
|
495,583
|
|
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, 2016 (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
|
|
$
|
536
|
|
|
$
|
121
|
|
|
$
|
24
|
|
|
$
|
35
|
|
|
$
|
59
|
|
|
$
|
-
|
|
|
$
|
65
|
|
|
$
|
23
|
|
|
$
|
-
|
|
|
$
|
863
|
|
Collectively evaluated for impairment
|
|
|
1,006
|
|
|
|
257
|
|
|
|
1,120
|
|
|
|
424
|
|
|
|
109
|
|
|
|
132
|
|
|
|
47
|
|
|
|
152
|
|
|
|
712
|
|
|
|
3,959
|
|
Ending balance
|
|
$
|
1,542
|
|
|
$
|
378
|
|
|
$
|
1,144
|
|
|
$
|
459
|
|
|
$
|
168
|
|
|
$
|
132
|
|
|
$
|
112
|
|
|
$
|
175
|
|
|
$
|
712
|
|
|
$
|
4,822
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
4,749
|
|
|
$
|
832
|
|
|
$
|
1,582
|
|
|
$
|
83
|
|
|
$
|
312
|
|
|
$
|
-
|
|
|
$
|
62
|
|
|
$
|
616
|
|
|
$
|
-
|
|
|
$
|
8,236
|
|
Collectively evaluated for impairment
|
|
|
147,637
|
|
|
|
26,939
|
|
|
|
179,422
|
|
|
|
70,832
|
|
|
|
15,182
|
|
|
|
23,996
|
|
|
|
3,870
|
|
|
|
25,715
|
|
|
|
-
|
|
|
|
493,593
|
|
Ending balance
|
|
$
|
152,386
|
|
|
$
|
27,771
|
|
|
$
|
181,004
|
|
|
$
|
70,915
|
|
|
$
|
15,494
|
|
|
$
|
23,996
|
|
|
$
|
3,932
|
|
|
$
|
26,331
|
|
|
$
|
-
|
|
|
$
|
501,829
|
|
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 June 30, 2017 (in thousands):
|
|
Beginning
Allowance
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Allowance
|
|
One- to four- family
|
|
$
|
1,535
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(233
|
)
|
|
$
|
1,302
|
|
Home equity
|
|
|
248
|
|
|
|
-
|
|
|
|
2
|
|
|
|
181
|
|
|
|
431
|
|
Commercial and multifamily
|
|
|
1,113
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
1,153
|
|
Construction and land
|
|
|
413
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(61
|
)
|
|
|
352
|
|
Manufactured homes
|
|
|
148
|
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
35
|
|
|
|
178
|
|
Floating homes
|
|
|
137
|
|
|
|
-
|
|
|
|
2
|
|
|
|
7
|
|
|
|
146
|
|
Other consumer
|
|
|
98
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
2
|
|
|
|
98
|
|
Commercial business
|
|
|
154
|
|
|
|
-
|
|
|
|
-
|
|
|
|
210
|
|
|
|
364
|
|
Unallocated
|
|
|
992
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(181
|
)
|
|
|
811
|
|
Total
|
|
$
|
4,838
|
|
|
$
|
(8
|
)
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
4,835
|
|
The following table summarizes the activity in the allowance for loan losses for the six months ended June 30, 2017 (in thousands):
|
|
Beginning
Allowance
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Allowance
|
|
One- to four- family
|
|
$
|
1,542
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(240
|
)
|
|
$
|
1,302
|
|
Home equity
|
|
|
378
|
|
|
|
-
|
|
|
|
28
|
|
|
|
25
|
|
|
|
431
|
|
Commercial and multifamily
|
|
|
1,144
|
|
|
|
(24
|
)
|
|
|
1
|
|
|
|
32
|
|
|
|
1,153
|
|
Construction and land
|
|
|
459
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(107
|
)
|
|
|
352
|
|
Manufactured homes
|
|
|
168
|
|
|
|
(5
|
)
|
|
|
3
|
|
|
|
12
|
|
|
|
178
|
|
Floating homes
|
|
|
132
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
146
|
|
Other consumer
|
|
|
112
|
|
|
|
(7
|
)
|
|
|
17
|
|
|
|
(24
|
)
|
|
|
98
|
|
Commercial business
|
|
|
175
|
|
|
|
-
|
|
|
|
-
|
|
|
|
189
|
|
|
|
364
|
|
Unallocated
|
|
|
712
|
|
|
|
-
|
|
|
|
-
|
|
|
|
99
|
|
|
|
811
|
|
Total
|
|
$
|
4,822
|
|
|
$
|
(36
|
)
|
|
$
|
49
|
|
|
$
|
-
|
|
|
$
|
4,835
|
|
The following table summarizes the activity in the allowance for loan losses for the three months ended June 30, 2016 (in thousands):
|
|
Beginning
Allowance
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Allowance
|
|
One- to four- family
|
|
$
|
1,733
|
|
|
$
|
(7
|
)
|
|
$
|
-
|
|
|
$
|
(13
|
)
|
|
$
|
1,713
|
|
Home equity
|
|
|
597
|
|
|
|
-
|
|
|
|
63
|
|
|
|
(159
|
)
|
|
|
501
|
|
Commercial and multifamily
|
|
|
1,267
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110
|
|
|
|
1,377
|
|
Construction and land
|
|
|
463
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(75
|
)
|
|
|
388
|
|
Manufactured homes
|
|
|
202
|
|
|
|
-
|
|
|
|
3
|
|
|
|
(16
|
)
|
|
|
189
|
|
Floating homes
|
|
|
132
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
132
|
|
Other consumer
|
|
|
101
|
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
(11
|
)
|
|
|
89
|
|
Commercial business
|
|
|
164
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
36
|
|
|
|
171
|
|
Unallocated
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
228
|
|
|
|
278
|
|
Total
|
|
$
|
4,709
|
|
|
$
|
(39
|
)
|
|
$
|
68
|
|
|
$
|
100
|
|
|
$
|
4,838
|
|
The following table summarizes the activity in the allowance for loan losses for the six months ended June 30, 2016 (in thousands):
|
|
Beginning
Allowance
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision
|
|
|
Ending
Allowance
|
|
One- to four- family
|
|
$
|
1,839
|
|
|
$
|
(72
|
)
|
|
$
|
-
|
|
|
$
|
(54
|
)
|
|
$
|
1,713
|
|
Home equity
|
|
|
607
|
|
|
|
-
|
|
|
|
65
|
|
|
|
(171
|
)
|
|
|
501
|
|
Commercial and multifamily
|
|
|
921
|
|
|
|
-
|
|
|
|
-
|
|
|
|
456
|
|
|
|
1,377
|
|
Construction and land
|
|
|
382
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
388
|
|
Manufactured homes
|
|
|
301
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(117
|
)
|
|
|
189
|
|
Floating homes
|
|
|
111
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
132
|
|
Other consumer
|
|
|
77
|
|
|
|
(21
|
)
|
|
|
4
|
|
|
|
29
|
|
|
|
89
|
|
Commercial business
|
|
|
157
|
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
43
|
|
|
|
171
|
|
Unallocated
|
|
|
241
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
|
|
278
|
|
Total
|
|
$
|
4,636
|
|
|
$
|
(122
|
)
|
|
$
|
74
|
|
|
$
|
250
|
|
|
$
|
4,838
|
|
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
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 June 30, 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
|
|
$
|
142,686
|
|
|
$
|
26,794
|
|
|
$
|
184,343
|
|
|
$
|
49,705
|
|
|
$
|
16,122
|
|
|
$
|
25,225
|
|
|
$
|
4,535
|
|
|
$
|
24,730
|
|
|
$
|
474,140
|
|
Watch
|
|
|
544
|
|
|
|
362
|
|
|
|
9,408
|
|
|
|
3,021
|
|
|
|
52
|
|
|
|
-
|
|
|
|
45
|
|
|
|
339
|
|
|
|
13,771
|
|
Special Mention
|
|
|
138
|
|
|
|
-
|
|
|
|
362
|
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
|
|
-
|
|
|
|
106
|
|
|
|
629
|
|
Substandard
|
|
|
4,480
|
|
|
|
840
|
|
|
|
1,373
|
|
|
|
49
|
|
|
|
103
|
|
|
|
-
|
|
|
|
59
|
|
|
|
139
|
|
|
|
7,043
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
147,848
|
|
|
$
|
27,996
|
|
|
$
|
195,486
|
|
|
$
|
52,775
|
|
|
$
|
16,300
|
|
|
$
|
25,225
|
|
|
$
|
4,639
|
|
|
$
|
25,314
|
|
|
$
|
495,583
|
|
The following table represents the internally assigned grades as of December 31, 2016 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
|
|
$
|
148,617
|
|
|
$
|
26,547
|
|
|
$
|
171,678
|
|
|
$
|
67,539
|
|
|
$
|
15,288
|
|
|
$
|
23,996
|
|
|
$
|
3,821
|
|
|
$
|
25,625
|
|
|
$
|
483,111
|
|
Watch
|
|
|
998
|
|
|
|
536
|
|
|
|
8,105
|
|
|
|
3,376
|
|
|
|
78
|
|
|
|
-
|
|
|
|
49
|
|
|
|
326
|
|
|
|
13,468
|
|
Special Mention
|
|
|
139
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
169
|
|
Substandard
|
|
|
2,632
|
|
|
|
688
|
|
|
|
1,221
|
|
|
|
-
|
|
|
|
98
|
|
|
|
-
|
|
|
|
62
|
|
|
|
380
|
|
|
|
5,081
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
152,386
|
|
|
$
|
27,771
|
|
|
$
|
181,004
|
|
|
$
|
70,915
|
|
|
$
|
15,494
|
|
|
$
|
23,996
|
|
|
$
|
3,932
|
|
|
$
|
26,331
|
|
|
$
|
501,829
|
|
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 June 30, 2017 and December 31, 2016, by type of loan (in thousands):
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
One- to four- family
|
|
$
|
720
|
|
|
$
|
2,169
|
|
Home equity
|
|
|
674
|
|
|
|
536
|
|
Commercial and multifamily
|
|
|
211
|
|
|
|
218
|
|
Manufactured homes
|
|
|
75
|
|
|
|
72
|
|
Commercial business
|
|
|
139
|
|
|
|
149
|
|
Total
|
|
$
|
1,819
|
|
|
$
|
3,144
|
|
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 June 30, 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
|
|
$
|
-
|
|
|
$
|
2,197
|
|
|
$
|
540
|
|
|
$
|
-
|
|
|
$
|
2,737
|
|
|
$
|
145,111
|
|
|
$
|
147,848
|
|
Home equity
|
|
|
152
|
|
|
|
118
|
|
|
|
637
|
|
|
|
-
|
|
|
|
907
|
|
|
|
27,089
|
|
|
|
27,996
|
|
Commercial and multifamily
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
195,486
|
|
|
|
195,486
|
|
Construction and land
|
|
|
-
|
|
|
|
-
|
|
|
|
49
|
|
|
|
-
|
|
|
|
49
|
|
|
|
52,726
|
|
|
|
52,775
|
|
Manufactured homes
|
|
|
41
|
|
|
|
63
|
|
|
|
80
|
|
|
|
-
|
|
|
|
184
|
|
|
|
16,116
|
|
|
|
16,300
|
|
Floating homes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,225
|
|
|
|
25,225
|
|
Other consumer
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
4,637
|
|
|
|
4,639
|
|
Commercial business
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
25,310
|
|
|
|
25,314
|
|
Total
|
|
$
|
198
|
|
|
$
|
2,379
|
|
|
$
|
1,306
|
|
|
$
|
-
|
|
|
$
|
3,883
|
|
|
$
|
491,700
|
|
|
$
|
495,583
|
|
The following table represents the aging of the recorded investment in past due loans as of December 31, 2016 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
|
|
$
|
2,476
|
|
|
$
|
161
|
|
|
$
|
1,787
|
|
|
$
|
-
|
|
|
$
|
4,424
|
|
|
$
|
147,962
|
|
|
$
|
152,386
|
|
Home equity
|
|
|
460
|
|
|
|
-
|
|
|
|
494
|
|
|
|
-
|
|
|
|
954
|
|
|
|
26,817
|
|
|
|
27,771
|
|
Commercial and multifamily
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
181,004
|
|
|
|
181,004
|
|
Construction and land
|
|
|
440
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
440
|
|
|
|
70,475
|
|
|
|
70,915
|
|
Manufactured homes
|
|
|
321
|
|
|
|
28
|
|
|
|
62
|
|
|
|
-
|
|
|
|
411
|
|
|
|
15,083
|
|
|
|
15,494
|
|
Floating homes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,996
|
|
|
|
23,996
|
|
Other consumer
|
|
|
26
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
3,905
|
|
|
|
3,932
|
|
Commercial business
|
|
|
149
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
149
|
|
|
|
26,182
|
|
|
|
26,331
|
|
Total
|
|
$
|
3,872
|
|
|
$
|
190
|
|
|
$
|
2,343
|
|
|
$
|
-
|
|
|
$
|
6,405
|
|
|
$
|
495,424
|
|
|
$
|
501,829
|
|
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 June 30, 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
|
|
$
|
145,809
|
|
|
$
|
27,305
|
|
|
$
|
195,275
|
|
|
$
|
52,775
|
|
|
$
|
16,202
|
|
|
$
|
25,225
|
|
|
$
|
4,639
|
|
|
$
|
25,085
|
|
|
$
|
492,315
|
|
Nonperforming
|
|
|
2,039
|
|
|
|
691
|
|
|
|
211
|
|
|
|
-
|
|
|
|
98
|
|
|
|
-
|
|
|
|
-
|
|
|
|
229
|
|
|
|
3,268
|
|
Total
|
|
$
|
147,848
|
|
|
$
|
27,996
|
|
|
$
|
195,486
|
|
|
$
|
52,775
|
|
|
$
|
16,300
|
|
|
$
|
25,225
|
|
|
$
|
4,639
|
|
|
$
|
25,314
|
|
|
$
|
495,583
|
|
The following table represents the credit risk profile of our loan portfolio based on payment activity as of December 31, 2016 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
|
|
$
|
150,170
|
|
|
$
|
27,218
|
|
|
$
|
180,786
|
|
|
$
|
70,915
|
|
|
$
|
15,374
|
|
|
$
|
23,996
|
|
|
$
|
3,932
|
|
|
$
|
26,089
|
|
|
$
|
498,480
|
|
Nonperforming
|
|
|
2,216
|
|
|
|
553
|
|
|
|
218
|
|
|
|
-
|
|
|
|
120
|
|
|
|
-
|
|
|
|
-
|
|
|
|
242
|
|
|
|
3,349
|
|
Total
|
|
$
|
152,386
|
|
|
$
|
27,771
|
|
|
$
|
181,004
|
|
|
$
|
70,915
|
|
|
$
|
15,494
|
|
|
$
|
23,996
|
|
|
$
|
3,932
|
|
|
$
|
26,331
|
|
|
$
|
501,829
|
|
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
Impaired Loans.
A loan is considered impaired when we have determined 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 June 30, 2017 and December 31, 2016 by type of loan were as follows (in thousands):
|
|
June 30, 2017
|
|
|
|
|
|
|
Recorded Investment
|
|
|
|
|
|
|
Unpaid Principal
Balance
|
|
|
Without
Allowance
|
|
|
With
Allowance
|
|
|
Total
Recorded
Investment
|
|
|
Related
Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family
|
|
$
|
6,739
|
|
|
$
|
3,284
|
|
|
$
|
3,168
|
|
|
$
|
6,452
|
|
|
$
|
481
|
|
Home equity
|
|
|
1,096
|
|
|
|
515
|
|
|
|
468
|
|
|
|
983
|
|
|
|
256
|
|
Commercial and multifamily
|
|
|
1,746
|
|
|
|
1,735
|
|
|
|
-
|
|
|
|
1,735
|
|
|
|
-
|
|
Construction and land
|
|
|
127
|
|
|
|
59
|
|
|
|
69
|
|
|
|
128
|
|
|
|
35
|
|
Manufactured homes
|
|
|
313
|
|
|
|
116
|
|
|
|
182
|
|
|
|
298
|
|
|
|
72
|
|
Other consumer
|
|
|
58
|
|
|
|
-
|
|
|
|
59
|
|
|
|
59
|
|
|
|
59
|
|
Commercial business
|
|
|
286
|
|
|
|
-
|
|
|
|
335
|
|
|
|
335
|
|
|
|
216
|
|
Total
|
|
$
|
10,365
|
|
|
$
|
5,709
|
|
|
$
|
4,281
|
|
|
$
|
9,990
|
|
|
$
|
1,119
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Recorded Investment
|
|
|
|
|
|
|
Unpaid Principal
Balance
|
|
|
Without
Allowance
|
|
|
With
Allowance
|
|
|
Total
Recorded
Investment
|
|
|
Related
Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family
|
|
$
|
5,010
|
|
|
$
|
2,454
|
|
|
$
|
2,295
|
|
|
$
|
4,749
|
|
|
$
|
536
|
|
Home equity
|
|
|
913
|
|
|
|
446
|
|
|
|
386
|
|
|
|
832
|
|
|
|
121
|
|
Commercial and multifamily
|
|
|
1,582
|
|
|
|
1,221
|
|
|
|
361
|
|
|
|
1,582
|
|
|
|
24
|
|
Construction and land
|
|
|
83
|
|
|
|
-
|
|
|
|
83
|
|
|
|
83
|
|
|
|
35
|
|
Manufactured homes
|
|
|
326
|
|
|
|
91
|
|
|
|
221
|
|
|
|
312
|
|
|
|
59
|
|
Other consumer
|
|
|
62
|
|
|
|
-
|
|
|
|
62
|
|
|
|
62
|
|
|
|
65
|
|
Commercial business
|
|
|
616
|
|
|
|
143
|
|
|
|
473
|
|
|
|
616
|
|
|
|
23
|
|
Total
|
|
$
|
8,592
|
|
|
$
|
4,355
|
|
|
$
|
3,881
|
|
|
$
|
8,236
|
|
|
$
|
863
|
|
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
Income on impaired loans for the three and six months ended June 30, 2017 and December 31, 2016 by type of loan were as follows (in thousands):
|
|
Three Months Ended
June 30, 2017
|
|
|
Three Months Ended
June 30, 2016
|
|
|
|
Average
Recorded
Investment
|
|
|
Interest Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest Income
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family
|
|
$
|
6,464
|
|
|
$
|
68
|
|
|
$
|
5,539
|
|
|
$
|
72
|
|
Home equity
|
|
|
1,050
|
|
|
|
10
|
|
|
|
993
|
|
|
|
15
|
|
Commercial and multifamily
|
|
|
1,927
|
|
|
|
21
|
|
|
|
4,887
|
|
|
|
66
|
|
Construction and land
|
|
|
105
|
|
|
|
2
|
|
|
|
88
|
|
|
|
1
|
|
Manufactured homes
|
|
|
287
|
|
|
|
5
|
|
|
|
387
|
|
|
|
9
|
|
Other consumer
|
|
|
61
|
|
|
|
1
|
|
|
|
26
|
|
|
|
1
|
|
Commercial business
|
|
|
367
|
|
|
|
6
|
|
|
|
573
|
|
|
|
11
|
|
Total
|
|
$
|
10,261
|
|
|
$
|
113
|
|
|
$
|
12,493
|
|
|
$
|
175
|
|
|
|
Six Months Ended
June 30, 2017
|
|
|
Six Months Ended
June 30, 2016
|
|
|
|
Average
Recorded
Investment
|
|
|
Interest Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest Income
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family
|
|
$
|
5,635
|
|
|
$
|
152
|
|
|
$
|
5,619
|
|
|
$
|
140
|
|
Home equity
|
|
|
920
|
|
|
|
20
|
|
|
|
963
|
|
|
|
27
|
|
Commercial and multifamily
|
|
|
1,662
|
|
|
|
48
|
|
|
|
3,913
|
|
|
|
133
|
|
Construction and land
|
|
|
106
|
|
|
|
3
|
|
|
|
89
|
|
|
|
2
|
|
Manufactured homes
|
|
|
307
|
|
|
|
10
|
|
|
|
378
|
|
|
|
16
|
|
Other consumer
|
|
|
61
|
|
|
|
2
|
|
|
|
19
|
|
|
|
2
|
|
Commercial business
|
|
|
477
|
|
|
|
11
|
|
|
|
420
|
|
|
|
18
|
|
Total
|
|
$
|
9,168
|
|
|
$
|
246
|
|
|
$
|
11,401
|
|
|
$
|
338
|
|
Forgone interest on nonaccrual loans was
$10,000 and
$78,000 for the six months ended June 30, 2017 and 2016, respectively. There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual or impaired at June 30, 2017 or December 31, 2016.
Troubled debt restructurings.
Loans classified as TDRs totaled $4.2 million and $3.4 million at June 30, 2017 and December 31, 2016, respectively, 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.
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
There was one $1.3 million one- to four- family residential loan modified as a TDR during the six months ended June 30, 2017. The following TDR loans paid off during the first six months of 2017: a $125,000 one- to four- family residential loan, a $14,000 manufactured home loan, a zero balance home equity loan and a $359,000 commercial/multifamily loan. There were no new TDRs during the six months ended June 30, 2016.
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 six months ended June 30, 2017 and 2016. There were no TDRs for which there was a payment default within the first 12 months of modification during the six months ended June 30, 2017 or 2016.
The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in TDRs. 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.
Note 5 – Fair Value Measurements
The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether or not recognized or recorded at fair value as of June 30, 2017 and December 31, 2016 (in thousands):
|
|
June 30, 2017
|
|
|
Fair Value Measurements Using:
|
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
59,956
|
|
|
$
|
59,956
|
|
|
$
|
59,956
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Available-for-sale securities
|
|
|
6,200
|
|
|
|
6,200
|
|
|
|
-
|
|
|
|
5,882
|
|
|
|
318
|
|
Loans held-for-sale
|
|
|
720
|
|
|
|
720
|
|
|
|
-
|
|
|
|
720
|
|
|
|
-
|
|
Loans receivable, net
|
|
|
489,061
|
|
|
|
488,065
|
|
|
|
-
|
|
|
|
-
|
|
|
|
488,065
|
|
Accrued interest receivable
|
|
|
1,677
|
|
|
|
1,677
|
|
|
|
1,677
|
|
|
|
-
|
|
|
|
-
|
|
Mortgage servicing rights
|
|
|
3,450
|
|
|
|
3,450
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,450
|
|
FHLB stock
|
|
|
1,705
|
|
|
|
1,705
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,705
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturity deposits
|
|
|
336,908
|
|
|
|
336,908
|
|
|
|
-
|
|
|
|
336,908
|
|
|
|
-
|
|
Time deposits
|
|
|
156,836
|
|
|
|
156,406
|
|
|
|
-
|
|
|
|
156,406
|
|
|
|
-
|
|
Borrowings
|
|
|
25,000
|
|
|
|
25,003
|
|
|
|
-
|
|
|
|
25,003
|
|
|
|
-
|
|
Accrued interest payable
|
|
|
78
|
|
|
|
78
|
|
|
|
-
|
|
|
|
78
|
|
|
|
-
|
|
|
|
December 31, 2016
|
|
|
Fair Value Measurements Using:
|
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,582
|
|
|
$
|
54,582
|
|
|
$
|
54,582
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Available-for-sale securities
|
|
|
6,604
|
|
|
|
6,604
|
|
|
|
-
|
|
|
|
6,257
|
|
|
|
347
|
|
Loans held for sale
|
|
|
871
|
|
|
|
871
|
|
|
|
-
|
|
|
|
871
|
|
|
|
-
|
|
Loans receivable, net
|
|
|
495,179
|
|
|
|
494,289
|
|
|
|
-
|
|
|
|
-
|
|
|
|
494,289
|
|
Accrued interest receivable
|
|
|
1,816
|
|
|
|
1,816
|
|
|
|
1,816
|
|
|
|
-
|
|
|
|
-
|
|
Mortgage servicing rights
|
|
|
3,561
|
|
|
|
3,561
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,561
|
|
FHLB Stock
|
|
|
2,840
|
|
|
|
2,840
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,840
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturity deposits
|
|
|
307,989
|
|
|
|
307,989
|
|
|
|
-
|
|
|
|
307,989
|
|
|
|
-
|
|
Time deposits
|
|
|
159,742
|
|
|
|
159,333
|
|
|
|
-
|
|
|
|
159,333
|
|
|
|
-
|
|
Borrowings
|
|
|
54,792
|
|
|
|
54,805
|
|
|
|
-
|
|
|
|
54,805
|
|
|
|
-
|
|
Accrued interest payable
|
|
|
73
|
|
|
|
73
|
|
|
|
-
|
|
|
|
73
|
|
|
|
-
|
|
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following tables present the balance of assets measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 (in thousands):
|
|
Fair Value at June 30, 2017
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Municipal bonds
|
|
$
|
3,428
|
|
|
$
|
-
|
|
|
$
|
3,428
|
|
|
$
|
-
|
|
Agency mortgage-backed securities
|
|
|
2,454
|
|
|
|
-
|
|
|
|
2,454
|
|
|
|
-
|
|
Non-agency mortgage-backed securities
|
|
|
318
|
|
|
|
-
|
|
|
|
-
|
|
|
|
318
|
|
Mortgage servicing rights
|
|
|
3,450
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,450
|
|
|
|
Fair Value at December 31, 2016
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Municipal bonds
|
|
$
|
3,353
|
|
|
$
|
-
|
|
|
$
|
3,353
|
|
|
$
|
-
|
|
Agency mortgage-backed securities
|
|
|
2,904
|
|
|
|
-
|
|
|
|
2,904
|
|
|
|
-
|
|
Non-agency mortgage-backed securities
|
|
|
347
|
|
|
|
-
|
|
|
|
-
|
|
|
|
347
|
|
Mortgage servicing rights
|
|
|
3,561
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,561
|
|
For the three and six months ended June 30, 2017 and 2016 there were no transfers between Level 1 and Level 2 nor between Level 2 and Level 3.
The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016:
June 30, 2017
|
Financial Instrument
|
|
Valuation Technique
|
|
Unobservable Input(s)
|
|
Range
(Weighted-Average)
|
Mortgage Servicing Rights
|
|
Discounted cash flow
|
|
Prepayment speed assumption
|
|
109-395% (156%)
|
|
|
|
|
Discount rate
|
|
13-15% (13%)
|
Non-agency mortgage-backed
securities
|
|
Discounted cash flow
|
|
Discount rate
|
|
7-9% (8%)
|
December 31, 2016
|
Financial Instrument
|
|
Valuation Technique
|
|
Unobservable Input(s)
|
|
Range
(Weighted-Average)
|
Mortgage Servicing Rights
|
|
Discounted cash flow
|
|
Prepayment speed assumption
|
|
104-396% (152%)
|
|
|
|
|
Discount rate
|
|
13%-15% (13%)
|
Non-agency mortgage-backed
securities
|
|
Discounted cash flow
|
|
Discount rate
|
|
7%-9% (8%)
|
Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustment (and decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). An increase in the weighted average life assumptions will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted-average life will result in an increase of the constant prepayment rate.
The following table provides a reconciliation of assets and liabilities (excluding mortgage servicing rights) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and six months ended June 30, 2017 and 2016 (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Beginning balance, at fair value
|
|
$
|
322
|
|
|
$
|
415
|
|
|
$
|
347
|
|
|
$
|
428
|
|
OTTI impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Sales and principal payments
|
|
|
(5
|
)
|
|
|
(37
|
)
|
|
|
(31
|
)
|
|
|
(52
|
)
|
Change in unrealized loss
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
Ending balance, at fair value
|
|
$
|
318
|
|
|
$
|
379
|
|
|
$
|
318
|
|
|
$
|
379
|
|
Mortgage servicing rights are measured at fair value using significant unobservable input (Level 3) on a recurring basis - additional information is included in Note 6 – Mortgage Servicing Rights.
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following tables present the balance of assets measured at fair value on a nonrecurring basis at the dates indicated (in thousands):
|
|
Fair Value at June 30, 2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
OREO and repossessed assets
|
|
$
|
952
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
952
|
|
Impaired loans
|
|
|
9,990
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,990
|
|
|
|
Fair Value at December 31, 2016
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
OREO and repossessed assets
|
|
$
|
1,172
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,172
|
|
Impaired loans
|
|
|
8,236
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,236
|
|
There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at June 30, 2017 or December 31, 2016.
The following tables provide a description of the valuation technique, observable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at June 30, 2017 and December 31, 2016:
June 30, 2017
|
Financial
Instrument
|
|
Valuation Technique(s)
|
|
Unobservable Input(s)
|
|
Range (Weighted Average)
|
OREO
|
|
Market approach
|
|
Adjustment for differences between comparable
sales
|
|
0-0% (0%)
|
Impaired loans
|
|
Market approach
|
|
Adjustment for differences between comparable
sales
|
|
0-100% (11%)
|
December 31, 2016
|
Financial
Instrument
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range
(Weighted Average)
|
OREO
|
|
Market approach
|
|
Adjusted for difference between comparable
sales
|
|
0-0% (0%)
|
Impaired loans
|
|
Market approach
|
|
Adjusted for difference between comparable
sales
|
|
0-100% (10.5%)
|
A description of the valuation methodologies used for impaired loans and OREO is as follows:
Impaired Loans
- The fair value of collateral dependent loans is based on the current appraised value of the collateral or internally developed models utilizing a calculation of expected discounted cash flows which contain management’s assumptions.
OREO
and Repossessed Assets
– The fair value of OREO and repossessed assets is based on the current appraised value of the collateral.
The following methods and assumptions were used to estimate the fair value of other financial instruments:
Cash and cash equivalents, and accrued interest receivable and payable
- The estimated fair value is equal to the carrying amount.
AFS Securities
– AFS securities are recorded at fair value based on quoted market prices, if available. If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 2 securities include those traded on an active exchange, as well as U.S. government and its agencies securities. Level 3 securities include private label mortgage-backed securities.
Loans Held-for-Sale
- Loans held-for-sale are recorded at the lower of cost or fair value. The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from government sponsored enterprises. At June 30, 2017 and December 31, 2016, loans held-for-sale were carried at cost, as no impairment was required.
Loans
- The estimated fair value for all fixed-rate loans is determined by discounting the estimated cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and maturities. The estimated fair value for variable rate loans is the carrying amount. The fair value for all loans also takes into account projected loan losses as a part of the estimate.
Mortgage Servicing Rights
–The fair value of mortgage servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs.
FHLB stock
- The estimated fair value is equal to the par value of the stock, which approximates fair value.
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
Deposits
- The estimated fair value of deposit accounts (savings, demand deposit, and money market accounts) is the carrying amount. The fair values of fixed-maturity time deposits are estimated by discounting the estimated cash flows using the current rate at which similar time deposits would be issued.
Borrowings
- The fair value of borrowings are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Off-balance sheet financial instruments
- The fair value of the off-balance sheet loan commitments are estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the customers. The estimated fair value of these commitments is not significant.
We assume interest rate risk (the risk that general interest rate levels will change) as a result of our normal operations. As a result, the fair values of our financial instruments will change when interest rate levels change, which may be favorable or unfavorable to us. Management attempts to match maturities of assets and liabilities to the extent necessary or possible to minimize interest rate risk. However, borrowers with fixed-rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed-rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by establishing early withdrawal penalties for time deposits, creating interest rate floors for certain variable rate loans, adjusting terms of new loans and deposits, by borrowing at fixed-rates for fixed-terms and investing in securities with terms that mitigate our overall interest rate risk.
Note 6 – Mortgage Servicing Rights
The unpaid principal balances of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at June 30, 2017 and December 31, 2016, totaled $398.2 million and $410.1 million, respectively, and are not included in the Company’s financial statements. We also service loans for other financial institutions for which a servicing fee is received. The unpaid principal balances of loans serviced for other financial institutions at June 30, 2017 and December 31, 2016, totaled $17.5 million and $13.8 million, respectively, and are not included in the Company’s financial statements.
The key economic assumptions used in determining the fair value of mortgage servicing rights at the dates indicated are as follows:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Prepayment speed (Public Securities Association “PSA” model)
|
|
|
156
|
%
|
|
|
152
|
%
|
Weighted-average life
|
|
7.0
|
years
|
|
7.2
|
years
|
Yield to maturity discount rate
|
|
|
13
|
%
|
|
|
13
|
%
|
The amounts of contractually specified servicing, late and ancillary fees earned and recorded, net of fair value market adjustments to the mortgage servicing rights, is included in mortgage servicing income on the Condensed Consolidated Statements of Income which were $148,000 and $381,000 for the three and six months ended June 30, 2017, respectively, and $132,000 and $223,000 for the three and six months ended June 30, 2016, respectively.
The gross amount of contractually specified servicing, late and ancillary fees earned and recorded in mortgage servicing income were $384,000 and $637,000 for the three and six months ended June 30, 2017, respectively, and $208,000 and $413,000 for the three and six months ended June 30, 2016, respectively.
Note 7 – Commitments and Contingencies
In the normal course of operations, the Company engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.
Note 8 – Borrowings and FHLB Stock
The Company utilizes a loan agreement with the FHLB of Des Moines. The terms of the agreement call for a blanket pledge of a portion of the Company’s mortgage and commercial and multifamily loan portfolio based on the outstanding balance. At June 30, 2017 and December 31, 2016, the amount available to borrow
under this credit facility was $201.2 million and $197.9 million, respectively. At June 30, 2017, the credit facility was collateralized as follows: one- to four- family mortgage loans with an advance equivalent of $100.9 million, commercial and multifamily mortgage loans with an advance equivalent of $102.0 million and home equity loans with an advance equivalent of $15.3 million. At December 31, 2016, the credit facility was collateralized as follows: one- to four- family mortgage loans with an advance equivalent of $107.2 million, commercial and multifamily mortgage loans with an advance equivalent of $94.4 million and home equity loans with an advance equivalent of $15.9 million. The Company had outstanding borrowings under this arrangement of $25.0 million and $54.8 million at June 30, 2017 and December 31, 2016, respectively. Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $16.0 million and $21.0 million at June 30, 2017 and December 31, 2016, respectively, to secure public deposits. The remaining amount available to borrow as of June 30, 2017 and December 31, 2016, was $160.2 million and $122.2 million, respectively.
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB of Des Moines stock based on specific percentages of its outstanding FHLB advances. At June 30, 2017 and December 31, 2016, the Company had an investment of $1.7 million and $2.8 million, respectively, in FHLB of Des Moines stock.
The Company participates in the Federal Reserve Bank Borrower-in-Custody program, which gives the Company access to the discount window. The terms of the program call for a pledge of specific assets. The Company had unused borrowing capacity of $44.6 million and $42.0 million and no outstanding borrowings under this program at June 30, 2017 and December 31, 2016, respectively.
The Company has access to a Fed Funds line of credit from Pacific Coast Banker's Bank. The line has a one-year term maturing on June 30, 2018 and is renewable annually. As of June 30, 2017, the amount available under this line of credit was $2.0 million. There was no balance on this line of credit as of June 30, 2017 and December 31, 2016, respectively.
The Company has access to a Fed Funds line of credit from Zions Bank under a Fed Funds Sweep and Line Agreement. The agreement allows access to a Fed Funds line of up to $9.0 million and requires the Company to maintain cash balances with Zions Bank of $250,000. The agreement has no maturity date. There was no balance on this line of credit as of June 30, 2017 and December 31, 2016, respectively.
The Company has access to an unsecured line of credit from The Independent Bank (TIB). As of June 30, 2017, the amount available under this line of credit was $10.0 million. The line matures on November 1, 2017. There was no balance on this line of credit as of June 30, 2017 and December 31, 2016, respectively.
Note 9 – Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. Unvested share-based awards contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in ASC 260-10-45-60B. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period.
Earnings per share are summarized for the periods presented in the following table (in thousands, except per share data):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
1,303
|
|
|
$
|
1,254
|
|
|
$
|
2,717
|
|
|
$
|
2,360
|
|
Weighted-average number of shares outstanding, basic
|
|
|
2,501
|
|
|
|
2,481
|
|
|
|
2,500
|
|
|
|
2,479
|
|
Effect of potentially dilutive common shares
(1)
|
|
|
96
|
|
|
|
77
|
|
|
|
100
|
|
|
|
73
|
|
Weighted-average number of shares outstanding, diluted
|
|
|
2,597
|
|
|
|
2,558
|
|
|
|
2,600
|
|
|
|
2,552
|
|
Earnings per share, basic
|
|
$
|
0.52
|
|
|
$
|
0.51
|
|
|
$
|
1.09
|
|
|
$
|
0.95
|
|
Earnings per share, diluted
|
|
$
|
0.50
|
|
|
$
|
0.49
|
|
|
$
|
1.04
|
|
|
$
|
0.92
|
|
(1)
Represents the effect of the assumed exercise of stock options and vesting of non-participating restricted shares, based on the treasury stock method.
There were no anti-dilutive securities at either June 30, 2017 or June 30, 2016.
Note 10 – Stock-based Compensation
Stock Options and Restricted Stock
The Company currently has two existing Equity Incentive Plans, a 2008 Equity Inventive Plan (the “2008 Plan”) and a 2013 Equity Incentive Plan (the “2013 Plan”, and together with the 2008 Plan (the “Plans”)), both of which were approved by shareholders. The Plans permit the grant of restricted stock, restricted stock units, stock options, and stock appreciation rights. Under the 2008 Plan, 126,287 shares of common stock were approved for awards for stock options and stock appreciation rights and 50,514 shares of common stock were approved for awards for restricted stock and restricted stock units. Under the 2013 Plan, 141,750 shares of common stock were approved for awards for stock options and stock appreciation rights and 56,700 shares of common stock were approved for awards for restricted stock and restricted stock units.
As of June 30, 2017, on an adjusted basis, awards for stock options totaling 265,799 shares and awards for restricted stock totaling 107,214 shares of Company common stock have been granted, net of any forfeitures, to participants in the Plans. During the three months ended June 30, 2017 and
2016, share-based compensation expense
totaled $144,000 and $126,000, respectively. During the six months ended June 30, 2017 and
2016, share-based compensation expense
totaled $288,000 and $228,000, respectively.
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
Stock Option Awards
The stock option awards granted to date under the 2008 Plan vest in 20 percent annual increments commencing one year from the grant date in accordance with the requirements of the 2008 Plan. The stock option awards granted to date under the 2013 Plan vest in equal annual installments of either two or four years. All of the options granted under the Plans are exercisable for a period of 10 years from the date of grant, subject to vesting. The following is a summary of the Company's stock option award activity during the six months ended June 30, 2017:
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual
Term In Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2017
|
|
|
170,057
|
|
|
$
|
15.41
|
|
|
|
6.44
|
|
|
$
|
2,141,018
|
|
Granted
|
|
|
32,010
|
|
|
|
28.34
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,135
|
)
|
|
|
15.43
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(602
|
)
|
|
|
28.28
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
199,330
|
|
|
|
17.45
|
|
|
|
6.52
|
|
|
|
2,599,263
|
|
Exercisable
|
|
|
131,770
|
|
|
|
15.60
|
|
|
|
5.86
|
|
|
$
|
1,962,055
|
|
Expected to vest, assuming a 0% forfeiture rate over the vesting term
|
|
|
67,560
|
|
|
$
|
21.06
|
|
|
|
7.81
|
|
|
$
|
637,208
|
|
As of June 30, 2017, there was $393,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The cost is expected to be recognized over the remaining weighted-average vesting period of 1.8 years.
The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. The fair value of options granted for the six months ended June 30, 2017 was determined using the following weighted-average assumptions as of the grant date.
Annual dividend yield
|
|
|
1.28
|
%
|
Expected volatility
|
|
|
22.99
|
%
|
Risk-free interest rate
|
|
|
2.20
|
%
|
Expected term
|
|
6.50
|
years
|
Weighted-average grant date fair value per option granted
|
|
$
|
6.62
|
|
The fair value of options granted for the six months ended June 30, 2016 was determined using the following weighted-average assumptions as of the grant date.
Annual dividend yield
|
|
|
1.03
|
%
|
Expected volatility
|
|
|
25.48
|
%
|
Risk-free interest rate
|
|
|
1.64
|
%
|
Expected term
|
|
6.92
|
years
|
Weighted-average grant date fair value per option granted
|
|
$
|
5.78
|
|
Restricted Stock Awards
The fair value of the restricted stock awards is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. The restricted stock awards granted to date under the 2008 Plan provide for vesting in 20% annual increments commencing one year from the grant date. The restricted stock awards granted to date under the 2013 Plan provide for immediate vesting of 33.33% of a recipient’s award with the balance of an individual’s award under the 2013 Plan vesting in two equal annual installments commencing one year from the grant date.
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following is a summary of the Company’s restricted stock award activity during the six months ended June 30, 2017:
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair
Value Per Share
|
|
Non-vested at January 1, 2017
|
|
|
26,138
|
|
|
$
|
18.08
|
|
Granted
|
|
|
576
|
|
|
|
28.34
|
|
Vested
|
|
|
(14,929
|
)
|
|
|
17.61
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Non-vested at June 30, 2017
|
|
|
11,785
|
|
|
|
19.05
|
|
Expected to vest assuming a 0% forfeiture rate over the vesting term
|
|
|
11,785
|
|
|
$
|
19.05
|
|
As of June 30, 2017, there was $171,000 of unrecognized compensation cost related to non-vested restricted stock granted under the Plans. The cost is expected to be recognized over the weighted-average vesting period of 0.78 years. The total fair value of shares vested for the six months ended June 30, 2017 and 2016 was $430,000 and $345,000, respectively.
Employee Stock Ownership Plan
In January 2008, the ESOP borrowed $1.2 million from the Company to purchase common stock of the Company. In August 2012, in conjunction with the Company’s conversion to a full stock company from the mutual holding company structure, the ESOP borrowed an additional $1.1 million from the Company to purchase common stock of the Company. Both loans are being repaid by the Bank through contributions to the ESOP over a period of ten years. The interest rate on the loans is fixed at 4.00% and 2.25%, per annum, respectively. As of June 30, 2017, the remaining balances of the ESOP loans were $136,000 and $590,000, respectively.
Neither the loan balances nor the related interest expense are reflected on the condensed consolidated financial statements.
At June 30, 2017, the ESOP was committed to release 21,443 shares of the Company’s common stock to participants and held 66,800 unallocated shares remaining to be released in future years. The fair value of the 183,469 restricted shares held by the ESOP trust was $5.6 million at June 30, 2017. ESOP compensation expense included in salaries and benefits was $170,000 and $338,000 for the three and six months ended June 30, 2017 and $135,000 and $271,000 for the three and six months ended June 30, 2016, respectively.
Note 11 – Acquisition of Sunwest Bank Branch
On June 30, 2017, the Bank completed its acquisition of the University Place branch from Sunwest Bank (“Sunwest”), located at 4922 Bridgeport Way West, University Place, Washington 98467. This branch acquisition was completed under a Purchase and Assumption Agreement between the Company and Sunwest. Under the terms of the agreement, the Bank paid a deposit premium of $485,000 equal to 3.35% of the assumed deposits and acquired the branch lease, certain personal property and records of the former Sunwest branch.
The branch acquisition was accounted for as a business combination under the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at acquisition date fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.
The estimated fair value of the assets purchased and liabilities assumed in the acquisition of the University Place Branch on June 30, 2017 are presented in the following table:
Fair value of assets acquired:
|
|
June 30,
2017
|
|
Cash and cash equivalents
|
|
$
|
13,671
|
|
Loans
|
|
|
24
|
|
Premises and equipment
|
|
|
312
|
|
Core deposit intangible
|
|
|
155
|
|
Goodwill
|
|
|
312
|
|
Total fair value of assets acquired
|
|
$
|
14,474
|
|
Fair value of liabilities assumed:
|
|
|
|
|
Deposits
|
|
|
14,474
|
|
Total fair value of liabilities assumed
|
|
$
|
14,474
|
|
Note 12 – Subsequent Event
On July 25, 2017, the Company declared a quarterly cash dividend of $0.10 per common share and a special dividend of $0.20 per share, payable August 25, 2017 to shareholders of record at the close of business August 11, 2017.