Attached files

file filename
EX-32 - EXHIBIT 32 - Sound Financial Bancorp, Inc.ex32.htm
EX-31.2 - EXHIBIT 31.2 - Sound Financial Bancorp, Inc.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Sound Financial Bancorp, Inc.ex31_1.htm

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, 2016
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.)

2005 5th Avenue, Suite 200, Seattle, Washington
 
98121
(Address of principal executive offices)
 
(Zip Code)

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

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

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   YES ☒  NO ☐
 
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES ☒   NO ☐
 
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting Company.  See definition of “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Act.

Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☒
   
(Do not check if smaller reporting company)
 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐   NO ☒
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.

As of May 10, 2016, there were 2,481,389 shares of the registrant’s common stock outstanding.
 


SOUND FINANCIAL BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS

   
Page
Number
PART I
FINANCIAL INFORMATION
 
     
Item 1. 
Financial Statements
 
     
3
     
4
     
5
     
6
   
7
     
8
     
Item 2.
30
     
Item 3.
41
     
Item 4.
41
     
PART II 
OTHER INFORMATION
 
     
Item 1.
42
     
Item 1A
42
     
Item 2.
42
     
Item 3.
42
     
Item 4.
42
   
Item 5.
42
     
Item 6.
42
     
SIGNATURES 44
   
45
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share amounts)

   
March 31,
2016
   
December 31,
2015
 
ASSETS
           
Cash and cash equivalents
 
$
49,679
   
$
48,264
 
Available-for-sale securities, at fair value
   
6,286
     
6,696
 
Loans held for sale
   
1,186
     
2,091
 
Loans
   
462,432
     
459,469
 
Allowance for loan losses
   
(4,709
)
   
(4,636
)
Total loans, net
   
457,723
     
454,833
 
Accrued interest receivable
   
1,595
     
1,608
 
Bank-owned life insurance (“BOLI”), net
   
11,830
     
11,746
 
Other real estate owned (“OREO”) and repossessed assets, net
   
832
     
769
 
Mortgage servicing rights, at fair value
   
3,095
     
3,249
 
Federal Home Loan Bank (“FHLB”) stock, at cost
   
1,903
     
2,212
 
Premises and equipment, net
   
5,252
     
5,335
 
Other assets
   
4,157
     
3,957
 
Total assets
 
$
543,538
   
$
540,760
 
LIABILITIES
               
Deposits
               
Interest-bearing
   
393,473
     
389,151
 
Noninterest-bearing demand
   
54,648
     
50,873
 
Total deposits
   
448,121
     
440,024
 
Borrowings
   
31,374
     
40,435
 
Accrued interest payable
   
82
     
72
 
Other liabilities
   
7,316
     
5,140
 
Advance payments from borrowers for taxes and insurance
   
1,091
     
569
 
Total liabilities
   
487,984
     
486,240
 
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, 2,481,389 and 2,469,206 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
   
25
     
25
 
Additional paid-in capital
   
23,110
     
23,002
 
Unearned shares - Employee Stock Ownership Plan (“ESOP”)
   
(911
)
   
(911
)
Retained earnings
   
33,160
     
32,240
 
Accumulated other comprehensive income, net of tax
   
170
     
164
 
Total stockholders’ equity
   
55,554
     
54,520
 
Total liabilities and stockholders’ equity
 
$
543,538
   
$
540,760
 

See notes to condensed consolidated financial statements
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except shares and per share amounts)
 
   
Three Months Ended
March 31,
 
   
2016
   
2015
 
INTEREST INCOME
           
Loans, including fees
 
$
5,952
   
$
5,322
 
Interest and dividends on investments, cash and cash equivalents
   
89
     
55
 
Total interest income
   
6,041
     
5,377
 
INTEREST EXPENSE
               
Deposits
   
688
     
661
 
Borrowings
   
29
     
28
 
Total interest expense
   
717
     
689
 
Net interest income
   
5,324
     
4,688
 
PROVISION FOR LOAN LOSSES
   
150
     
100
 
Net interest income after provision for loan losses
   
5,174
     
4,588
 
NONINTEREST INCOME
               
Service charges and fee income
   
593
     
645
 
Earnings on cash surrender value of bank-owned life insurance
   
84
     
84
 
Mortgage servicing income
   
204
     
255
 
Fair value adjustment on mortgage servicing rights
   
(114
)
   
(178
)
Loss on sale of securities
   
-
     
(31
)
Net gain on sale of loans
   
210
     
396
 
Total noninterest income
   
977
     
1,171
 
NONINTEREST EXPENSE
               
Salaries and benefits
   
2,563
     
2,255
 
Operations
   
972
     
903
 
Regulatory assessments
   
155
     
66
 
Occupancy
   
385
     
325
 
Data processing
   
386
     
403
 
Net loss on OREO and repossessed assets
   
-
     
72
 
Total noninterest expense
   
4,461
     
4,024
 
Income before provision for income taxes
   
1,690
     
1,735
 
Provision for income taxes
   
584
     
527
 
Net income
 
$
1,106
   
$
1,208
 
                 
Earnings per common share:
               
Basic
 
$
0.45
   
$
0.48
 
Diluted
 
$
0.43
   
$
0.46
 
Weighted average number of common shares outstanding:
               
Basic
   
2,477,751
     
2,524,873
 
Diluted
   
2,571,604
     
2,602,161
 
 
See notes to condensed consolidated financial statements
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(In thousands)

   
Three Months Ended March 31,
 
   
2016
   
2015
 
Net income
 
$
1,106
   
$
1,208
 
Available for sale securities:
               
Unrealized holding gains arising during the period, net of taxes of $4 and $25, respectively
   
6
     
(85
)
Reclassification adjustment for net losses realized in earnings, net of tax benefit of $0 and $35, respectively
   
-
     
67
 
Other comprehensive income (loss), net of tax
   
6
     
(18
)
Comprehensive income
 
$
1,112
   
$
1,190
 

See notes to condensed consolidated financial statements
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders’ Equity
For the Three Months Ended March 31, 2016 and 2015 (unaudited)
(In thousands, except number of shares)

   
Shares
   
Common
Stock
   
Additional
Paid-in
Capital
   
Unearned
ESOP Shares
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Gain (Loss),
net of tax
   
Total
Stockholders’
Equity
 
Balances at December 31, 2014
   
2,524,645
   
$
25
   
$
23,552
   
$
(1,140
)
 
$
28,024
   
$
183
   
$
50,644
 
Net income
                                   
1,208
             
1,208
 
Other comprehensive loss, net of tax
                                           
(18
)
   
(18
)
Share-based compensation
                   
103
                             
103
 
Cash dividends on common stock ($0.05 per share)
                                   
(125
)
           
(125
)
Restricted stock awards
   
10,208
                                             
-
 
Common stock forfeited and retired
   
(7,535
)
                                           
-
 
Common stock repurchased
   
(2,500
)
           
(48
)
                           
(48
)
Exercise of stock options
   
1,133
             
11
                             
11
 
Balances at
March 31, 2015
   
2,525,951
   
$
25
   
$
23,618
   
$
(1,140
)
 
$
29,107
   
$
165
   
$
51,775
 

   
Shares
   
Common
Stock
   
Additional
Paid-in
Capital
   
Unearned
ESOP Shares
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Gain (Loss),
net of tax
   
Total
Stockholders’
Equity
 
Balances at December 31, 2015
   
2,469,206
   
$
25
   
$
23,002
   
$
(911
)
 
$
32,240
   
$
164
   
$
54,520
 
Net income
                                   
1,106
             
1,106
 
Other comprehensive income, net of tax
                                           
6
     
6
 
Share-based compensation
                   
102
                             
102
 
Cash dividends on common stock ($0.75 per share)
                                   
(186
)
           
(186
)
Restricted stock awards issued
   
11,606
                                             
-
 
Exercise of stock options
   
577
             
6
                             
6
 
Balances at March 31, 2016
   
2,481,389
   
$
25
   
$
23,110
   
$
(911
)
 
$
33,160
   
$
170
   
$
55,554
 

See notes to condensed consolidated financial statements
 
 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)

   
Three Months Ended March 31,
 
   
2016
   
2015
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
1,106
   
$
1,208 1,208
 
Adjustments to reconcile net income to net cash from operating activities:
               
Accretion of net premium on investments
   
10
     
42
 
Loss on sale of securities
   
-
     
31
 
Provision for loan losses
   
150
     
100
 
Depreciation and amortization
   
195
     
145
 
Compensation expense related to stock options and restricted stock
   
102
     
103
 
Fair value adjustment on mortgage servicing rights
   
114
     
178
 
Additions to mortgage servicing rights
   
(108
)
   
(217
)
Amortization of mortgage servicing rights
   
148
     
177
 
Increase in cash surrender value of BOLI
   
(84
)
   
(84
)
Gain on sale of loans
   
(210
)
   
(396
)
Proceeds from sale of loans
   
13,827
     
21,511
 
Originations of loans held for sale
   
(12,712
)
   
(21,731
)
(Gain) loss on sale and write-downs of OREO and repossessed assets
   
(8
)
   
38
 
Change in operating assets and liabilities:
               
Accrued interest receivable
   
13
     
49
 
Other assets
   
(203
)
   
20
 
Accrued interest payable
   
10
     
9
 
Other liabilities
   
2,176
     
(1,335
)
Net cash (used by) from operating activities
   
4,526
     
(152
)
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from principal payments, maturities and sales of available for sale securities
   
409
     
2,707
 
FHLB stock redeemed
   
309
     
24
 
Net decrease (increase) in loans
   
(2,515
)
   
6,764
 
Proceeds from sale of OREO and other repossessed assets
   
132
     
231
 
Purchases of premises and equipment, net
   
(824
)
   
(194
)
Net cash from (used by) investing activities
   
(2,489
)
   
9,532
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase in deposits
   
8,097
     
8,411
 
Proceeds from borrowings
   
27,500
     
21,000
 
Repayment of borrowings
   
(36,561
)
   
(33,161
)
Dividends paid on common stock
   
(186
)
   
(125
)
Net change in advances from borrowers for taxes and insurance
   
522
     
466
 
Proceeds from stock option exercises
   
6
     
11
 
Repurchase of common stock
   
-
     
(48
)
Net cash used by financing activities
   
(622
)
   
(3,446
)
Net increase  in cash and cash equivalents
   
1,415
     
5,934
 
Cash and cash equivalents, beginning of period
   
48,264
     
29,289
 
Cash and cash equivalents, end of period
 
$
49,679
   
$
35,223
 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for income taxes
 
$
300
   
$
625
 
Interest paid on deposits and borrowings
 
$
707
   
$
680
 
Noncash net transfer from loans to OREO and repossessed assets
 
$
187
   
$
445
 

See notes to condensed consolidated financial statements
 
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” means Sound Financial Bancorp and its wholly-owned subsidiary, Sound Community Bank, unless the context otherwise requires.

These unaudited 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, 2015, as filed with the SEC on March 30, 2016 (“2015 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, 2015, included in the 2015 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 August 2015, the FASB issued ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. The ASU provides guidance not previously included in ASU 2015-03 regarding debt issuance related to line-of-credit arrangements. This ASU allows an entity to present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs over the term of the line-of-credit arrangement, regardless if there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-05 is effective for fiscal years beginning after December 15, 2015. This ASU is not expected to have a material effect on the Company's consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805). The ASU simplifies the accounting for measurement period adjustments. The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period when the adjustment amounts are determined. The acquirer is required to record in the same period's financial statements the effect on earnings from changes in depreciation, amortization, or other income effects resulting from the change to provisional amounts, calculated as if the accounting had been completed at the acquisition date. The acquirer must present separately on the income statement, or disclose in the notes, the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the provisional amount had been recognized at the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. This ASU is not expected to have a material effect on the Company's consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The ASU simplifies accounting for deferred taxes by requiring that all deferred tax assets or liabilities be classified as noncurrent. This replaces the prior guidance which required deferred taxes to be separated into current and noncurrent amounts. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The adoption of ASU No. 2015-17 is not expected to have a material impact on the Company's consolidated financial statements.
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)

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 amendment 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 amendment 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 ASU is permitted. The adoption of ASU 2016-02 is not expected to have a material impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. A contract novation refers to replacing one of the parties to a derivative instrument with a new party. This ASU clarifies that a change in counterparty in a derivative instrument does not, in and of itself, require dedesignation of that hedging relationship and therefore discontinue the application of hedge accounting. ASU 2016-05 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period.  The adoption of ASU 2016-05 is not expected to have a material impact on the Company's consolidated financial statements.

In March 2016, FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in this ASU require entities to recognize 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. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The adoption of ASU No. 2016-08 is not expected to have a material impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation - Stock Compensation. The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The ASU is effective for annual and interim periods beginning after December 15, 2016. The adoption of ASU is being reviewed for any material impact there may be on the Company's consolidated financial statements.
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)

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, 2016
                       
Municipal bonds
 
$
1,912
   
$
193
   
$
-
   
$
2,105
 
Agency mortgage-backed securities
   
3,683
     
105
     
(22
)
   
3,766
 
Non-agency mortgage-backed securities
   
434
     
-
     
(19
)
   
415
 
Total
 
$
6,029
   
$
298
   
$
(41
)
 
$
6,286
 
                                 
December 31, 2015
                               
Municipal bonds
 
$
1,912
   
$
184
   
$
-
   
$
2,096
 
Agency mortgage-backed securities
   
4,088
     
102
     
(18
)
   
4,172
 
Non-agency mortgage-backed securities
   
449
     
-
     
(21
)
   
428
 
Total
 
$
6,449
   
$
286
   
$
(39
)
 
$
6,696
 

The amortized cost and fair value of AFS securities at March 31, 2016, 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.

   
At March 31, 2016
 
   
Amortized
Cost
   
Fair
Value
 
Due in five to ten years
 
$
260
   
$
281
 
Due after ten years
   
5,769
     
6,005
 
Total
 
$
6,029
   
$
6,286
 

There were no pledged securities at March 31, 2016 or December 31, 2015.

For the three months ended March 31, 2016, there were no sales of AFS securities. There were sales of $1.7 million of AFS securities generating gross losses of $31,000 and no gross gains during the three months ended March 31, 2015.
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)

The following tables summarize at the dates indicated the aggregate fair value and gross unrealized loss by length of time of those investments that have been continuously in an unrealized loss position (in thousands):

   
March 31, 2016
 
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Agency mortgage-backed securities
 
$
-
   
$
-
   
$
1,317
   
$
(22
)
 
$
1,317
   
$
(22
)
Non-agency mortgage-backed securities
   
-
     
-
     
415
     
(19
)
   
415
     
(19
)
Total
 
$
-
   
$
-
   
$
1,732
   
$
(41
)
 
$
1,732
   
$
(41
)

   
December 31, 2015
 
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Agency mortgage-backed securities
 
$
-
   
$
-
   
$
1,370
   
$
(18
)
 
$
1,370
   
$
(18
)
Non-agency mortgage-backed securities
   
-
     
-
     
428
     
(21
)
   
428
     
(21
)
Total
 
$
-
   
$
-
   
$
1,798
   
$
(39
)
 
$
1,798
   
$
(39
)

The following table presents the cumulative roll forward of credit losses recognized in earnings during the three months ended March 31, 2016 and 2015 relating to the Company’s non- agency mortgage backed securities (in thousands):

   
Three Months Ended
March 31,
 
   
2016
   
2015
 
Estimated credit losses, beginning balance
 
$
-
   
$
450
 
Additions for credit losses not previously recognized
   
-
     
-
 
Reduction for increases in cash flows
   
-
     
-
 
Reduction of related OTTI due to sales
   
-
     
(450
)
Reduction for realized losses
   
-
     
-
 
Estimated credit losses, ending balance
 
$
-
   
$
-
 
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)

At March 31, 2016, our securities portfolio consisted of 11 agency mortgage-backed securities, one non-agency mortgage-backed security and five municipal securities with a fair value of $6.3 million.  At December 31, 2015, our securities portfolio consisted of 12 agency mortgage-backed securities, one non-agency mortgage-backed securities and five municipal securities with a fair value of $6.7 million.  At March 31, 2016 one of the 11 agency mortgage-backed securities was in an unrealized loss position compared to one of the 12 agency mortgage-backed securities held at December 31, 2015.  All of the agency mortgage-backed securities in an unrealized loss position at March 31, 2016 and December 31, 2015 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”).

As of March 31, 2016 and December 31, 2015, the one non-agency mortgage-backed security was in an unrealized loss position.  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 does 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 months ended March 31, 2016 or the year ended December 31, 2015.
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)

Note 4 – Loans

The composition of the loan portfolio at the dates indicated, excluding loans held for sale, was as follows (in thousands):

   
At March 31, 2016
   
At
December 31, 2015
 
Real estate loans:
           
One- to four- family
 
$
143,104
   
$
141,125
 
Home equity
   
32,022
     
31,573
 
Commercial and multifamily
   
173,353
     
175,312
 
Construction and land
   
57,752
     
57,043
 
Total real estate loans
   
406,231
     
405,053
 
Consumer loans:
               
Manufactured homes
   
14,247
     
13,798
 
Other consumer
   
23,389
     
23,030
 
Total consumer loans
   
37,636
     
36,828
 
Commercial business loans
   
20,230
     
19,295
 
Total loans
   
464,097
     
461,176
 
Deferred fees
   
(1,665
)
   
(1,707
)
Total loans, gross
   
462,432
     
459,469
 
Allowance for loan losses
   
(4,709
)
   
(4,636
)
Total loans, net
 
$
457,723
   
$
454,833
 

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, 2016 (in thousands):

   
One- to
four-
 family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
Other
consumer
   
Commercial
business
   
Unallocated
   
Total
 
Allowance for loan losses:
                                                     
Individually evaluated for impairment
 
$
640
   
$
140
   
$
265
   
$
24
   
$
63
   
$
25
   
$
47
   
$
-
   
$
1,204
 
Collectively evaluated for impairment
   
1,093
     
457
     
1,002
     
439
     
139
     
208
     
117
     
50
     
3,505
 
Ending balance
 
$
1,733
   
$
597
   
$
1,267
   
$
463
   
$
202
   
$
233
   
$
164
   
$
50
   
$
4,709
 
Loans receivable:
                                                                       
Individually evaluated for impairment
 
$
5,465
   
$
937
   
$
4,912
   
$
89
   
$
380
   
$
27
   
$
500
   
$
-
   
$
12,310
 
Collectively evaluated for impairment
   
137,639
     
31,085
     
168,441
     
57,663
     
13,867
     
23,362
     
19,730
     
-
     
451,787
 
Ending balance
 
$
143,104
   
$
32,022
   
$
173,353
   
$
57,752
   
$
14,247
   
$
23,389
   
$
20,230
   
$
-
   
$
464,097
 
 
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 December 31, 2015 (in thousands):

   
One-to-
four
 family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
Other
consumer
   
Commercial
business
   
Unallocated
   
Total
 
Allowance for  loan losses:
                                                     
Individually evaluated for impairment
 
$
647
   
$
110
   
$
36
   
$
18
   
$
63
   
$
-
   
$
8
   
$
-
   
$
882
 
Collectively evaluated for impairment
   
1,192
     
497
     
885
     
364
     
238
     
188
     
149
     
241
     
3,754
 
Ending balance
 
$
1,839
   
$
607
   
$
921
   
$
382
   
$
301
   
$
188
   
$
157
   
$
241
   
$
4,636
 
Loans  receivable:
                                                                       
Individually evaluated for impairment
 
$
5,779
   
$
904
   
$
1,966
   
$
91
   
$
361
   
$
5
   
$
114
   
$
-
   
$
9,220
 
Collectively evaluated for impairment
   
135,346
     
30,669
     
173,346
     
56,952
     
13,437
     
23,025
     
19,181
     
-
     
451,956
 
Ending balance
 
$
141,125
   
$
31,573
   
$
175,312
   
$
57,043
   
$
13,798
   
$
23,030
   
$
19,295
   
$
-
   
$
461,176
 

The following table summarizes the activity in allowance for loan losses during the three months ended March 31, 2016 (in thousands):

   
Beginning
Allowance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending
Allowance
 
One-to four- family
 
$
1,839
   
$
(65
)
 
$
-
   
$
(41
)
 
$
1,733
 
Home equity
   
607
     
-
     
2
     
(12
)
   
597
 
Commercial and multifamily
   
921
     
-
     
-
     
346
     
1,267
 
Construction and land
   
382
     
-
     
-
     
81
     
463
 
Manufactured homes
   
301
     
-
     
2
     
(101
)
   
202
 
Other consumer
   
188
     
(18
)
   
2
     
61
     
233
 
Commercial business
   
157
     
-
     
-
     
7
     
164
 
Unallocated
   
241
     
-
     
-
     
(191
)
   
50
 
Total
 
$
4,636
   
$
(83
)
 
$
6
   
$
150
   
$
4,709
 
 
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 during the three months ended March 31, 2015 (in thousands):

   
Beginning
Allowance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending
Allowance
 
One-to four- family
 
$
1,442
   
$
(21
)
 
$
-
   
$
8
   
$
1,429
 
Home equity
   
601
     
(19
)
   
4
     
(72
)
   
514
 
Commercial and multifamily
   
1,244
     
-
     
-
     
162
     
1,406
 
Construction and land
   
399
     
-
     
-
     
15
     
414
 
Manufactured homes
   
193
     
-
     
3
     
(12
)
   
184
 
Other consumer
   
167
     
(24
)
   
6
     
5
     
154
 
Commercial business
   
108
     
-
     
-
     
(4
)
   
104
 
Unallocated
   
233
     
-
     
-
     
(2
)
   
231
 
Total
 
$
4,387
   
$
(64
)
 
$
13
   
$
100
   
$
4,436
 

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 our banking regulators, which can order the establishment of additional loss allowances.  Pass rated loans are loans that are not otherwise classified or criticized.

The following table represents the internally assigned grades as of March 31, 2016 by type of loan (in thousands):

   
One- to
four- family
   
Home
equity
   
Commercial
and
 multifamily
   
Construction
and land
   
Manufactured
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Grade:
                                               
Pass
 
$
138,973
   
$
30,747
   
$
166,208
   
$
52,883
   
$
14,040
   
$
23,308
   
$
19,408
   
$
445,567
 
Watch
   
1,202
     
586
     
2,764
     
4,869
     
118
     
56
     
433
     
10,028
 
Special Mention
   
1,408
     
-
     
1,423
     
-
     
32
     
-
     
-
     
2,863
 
Substandard
   
1,521
     
689
     
2,958
     
-
     
57
     
25
     
389
     
5,639
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
143,104
   
$
32,022
   
$
173,353
   
$
57,752
   
$
14,247
   
$
23,389
   
$
20,230
   
$
464,097
 
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)

The following table represents the internally assigned grades as of December 31, 2015 by type of loan (in thousands):

   
One- to
four- family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Grade:
                                               
Pass
 
$
136,879
   
$
30,310
   
$
169,072
   
$
55,984
   
$
13,621
   
$
22,967
   
$
18,449
   
$
447,282
 
Watch
   
1,015
     
609
     
4,810
     
1,059
     
96
     
58
     
846
     
8,493
 
Special Mention
   
1,409
     
-
     
1,430
     
-
     
33
     
-
     
-
     
2,872
 
Substandard
   
1,822
     
654
     
-
     
-
     
48
     
5
     
-
     
2,529
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
141,125
   
$
31,573
   
$
175,312
   
$
57,043
   
$
13,798
   
$
23,030
   
$
19,295
   
$
461,176
 

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 provisions.

The following table presents the recorded investment in nonaccrual loans as of March 31, 2016 and December 31, 2015, by type of loan (in thousands):

   
March 31,
2016
   
December 31, 2015
 
One- to four- family
 
$
981
   
$
1,157
 
Home equity
   
352
     
344
 
Manufactured homes
   
13
     
27
 
Other consumer
   
24
     
-
 
Commercial Business
   
7
     
-
 
Total
 
$
1,377
   
$
1,528
 
 
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 March 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
 
$
2,615
   
$
-
   
$
752
   
$
-
   
$
3,367
   
$
139,737
   
$
143,104
 
Home equity
   
295
     
-
     
209
     
-
     
504
     
31,518
     
32,022
 
Commercial and multifamily
   
2,209
     
-
     
-
     
-
     
2,209
     
171,144
     
173,353
 
Construction and land
   
117
     
-
     
-
     
-
     
117
     
57,635
     
57,752
 
Manufactured homes
   
139
     
-
     
13
     
17
     
169
     
14,078
     
14,247
 
Other consumer
   
6
     
1
     
24
     
-
     
31
     
23,358
     
23,389
 
Commercial business
   
157
     
-
     
7
     
-
     
164
     
20,066
     
20,230
 
Total
 
$
5,538
   
$
1
   
$
1,005
   
$
17
   
$
6,561
   
$
457,536
   
$
464,097
 

The following table represents the aging of the recorded investment in past due loans as of December 31, 2015 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
 
$
2,453
   
$
265
   
$
881
   
$
117
   
$
3,716
   
$
137,409
   
$
141,125
 
Home equity
   
352
     
60
     
296
     
-
     
708
     
30,865
     
31,573
 
Commercial and multifamily
   
203
     
-
     
-
     
-
     
203
     
175,109
     
175,312
 
Construction and land
   
65
     
-
     
-
     
-
     
65
     
56,978
     
57,043
 
Manufactured homes
   
103
     
27
     
-
     
-
     
130
     
13,668
     
13,798
 
Other consumer
   
17
     
26
     
-
     
-
     
43
     
22,987
     
23,030
 
Commercial business
   
154
     
8
     
-
     
-
     
162
     
19,133
     
19,295
 
Total
 
$
3,347
   
$
386
   
$
1,177
   
$
117
   
$
5,027
   
$
456,149
   
$
461,176
 
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)

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 who is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession of some kind.  Once a TDR has performed according to its modified terms for six months and the collection of principal and interest under the revised terms is deemed probable, we remove the TDR from nonperforming status. Nonperforming TDRs include TDRs that are not considered performing or TDRs that have become 31 or more days past due.

The following table represents the credit risk profile of our loan portfolio based on payment activity as of March 31, 2016 by type of loan (in thousands):

   
One- to
four-
family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Performing
 
$
141,527
   
$
31,588
   
$
173,353
   
$
57,752
   
$
14,169
   
$
23,365
   
$
20,223
   
$
461,977
 
Nonperforming
   
1,577
     
434
     
-
     
-
     
78
     
24
     
7
     
2,120
 
Total
 
$
143,104
   
$
32,022
   
$
173,353
   
$
57,752
   
$
14,247
   
$
23,389
   
$
20,230
   
$
464,097
 

The following table represents the credit risk profile of our loan portfolio based on payment activity as of December 31, 2015 by type of loan (in thousands):

   
One- to
four-
family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Performing
 
$
139,485
   
$
31,145
   
$
175,312
   
$
57,043
   
$
13,736
   
$
23,030
   
$
19,295
   
$
459,046
 
Nonperforming
   
1,640
     
428
     
-
     
-
     
62
     
-
     
-
     
2,130
 
Total
 
$
141,125
   
$
31,573
   
$
175,312
   
$
57,043
   
$
13,798
   
$
23,030
   
$
19,295
   
$
461,176
 

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(s), including payment history, the amount of any payment shortfall, length and reason for delay, and likelihood of return to stable performance.  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.
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)

The following table presents loans individually evaluated for impairment as of March 31, 2016 by type of loan (in thousands):

   
March 31, 2016
 
         
Recorded Investment
       
   
Unpaid
Principal
Balance
   
Without
Allowance
   
With
Allowance
   
Related
Allowance
 
                         
One- to four- family
 
$
5,583
   
$
2,210
   
$
3,255
   
$
640
 
Home equity
   
1,017
     
360
     
577
     
140
 
Commercial and multifamily
   
4,912
     
2,202
     
2,710
     
265
 
Construction and land
   
89
     
-
     
89
     
24
 
Manufactured homes
   
380
     
82
     
298
     
63
 
Other consumer
   
27
     
2
     
25
     
25
 
Commercial business
   
500
     
-
     
500
     
47
 
Total
 
$
12,508
   
$
4,856
   
$
7,454
   
$
1,204
 

   
December 31, 2015
 
         
Recorded Investment
       
   
Unpaid
Principal
Balance
   
Without
Allowance
   
With
Allowance
   
Related
Allowance
 
                         
One- to four- family
 
$
6,011
   
$
499
   
$
5,280
   
$
647
 
Home equity
   
994
     
162
     
742
     
110
 
Commercial and multifamily
   
1,966
     
1,430
     
536
     
36
 
Construction and land
   
91
     
-
     
91
     
18
 
Manufactured homes
   
366
     
-
     
361
     
63
 
Other consumer
   
5
     
-
     
5
     
-
 
Commercial business
   
114
     
-
     
114
     
8
 
Total
 
$
9,547
   
$
2,091
   
$
7,129
   
$
882
 
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)

The following table presents loans individually evaluated for impairment as of March 31, 2015 by type of loan (in thousands):

   
Three Months Ended
March 31, 2016
   
Three Months Ended
March 31, 2015
 
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
 Income
Recognized
 
                         
One- to four- family
 
$
5,623
   
$
68
   
$
4,155
   
$
47
 
Home equity
   
921
     
12
     
1,224
     
13
 
Commercial and multifamily
   
3,439
     
67
     
2,845
     
29
 
Construction and land
   
90
     
1
     
180
     
1
 
Manufactured homes
   
371
     
7
     
404
     
7
 
Other consumer
   
16
     
1
     
34
     
-
 
Commercial business
   
307
     
7
     
123
     
2
 
Total
 
$
10,767
   
$
163
   
$
8,965
   
$
99
 

Forgone interest on nonaccrual loans was $22,000 and $23,000 for the three months ended March 31, 2016 and 2015, respectively.  There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual, TDR or impaired at March 31, 2016 or December 31, 2015.

Troubled debt restructurings.  Loans classified as TDRs totaled $5.8 million and $6.0 million at March 31, 2016 and December 31, 2015, respectively, and are included in impaired loans.  The Company has granted a variety of concessions to borrowers in the form of loan modifications.  The modifications granted can generally be described in the following categories:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Payment Modification: A modification in which the dollar amount of the payment is changed.  Interest only modifications in which a loan is converted to interest only payments for a period of time are included in this category.

Combination Modification:  Any other type of modification, including the use of multiple categories above.

There were no new TDRs identified during the quarter ending March 31, 2016.  At March 31, 2016, there were no commitments to extend additional credit to borrowers whose loan terms have been modified in TDRs There were no loans modified as TDRs within the previous 12 months for which there was a payment default during the three months ended March 31, 2016 and 2015.
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)

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 March 31, 2016 and December 31, 2015 (in thousands):

   
March 31, 2016
   
Fair Value Measurements Using:
 
   
Carrying
Value
   
Estimated
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
FINANCIAL ASSETS:
                             
Cash and cash equivalents
 
$
49,679
   
$
49,679
   
$
49,679
   
$
-
   
$
-
 
Available for sale securities
   
6,286
     
6,286
     
-
     
5,871
     
415
 
Loans held for sale
   
1,186
     
1,186
     
-
     
1,186
     
-
 
Loans receivable, net
   
457,723
     
455,205
     
-
     
-
     
455,205
 
Accrued interest receivable
   
1,595
     
1,595
     
1,595
     
-
     
-
 
Mortgage servicing rights
   
3,095
     
3,095
     
-
     
-
     
3,095
 
FHLB stock
   
1,903
     
1,903
     
-
     
-
     
1,903
 
FINANCIAL LIABILITIES:
                                       
Non-maturity deposits
   
281,377
     
281,377
     
-
     
281,377
     
-
 
Time deposits
   
166,744
     
165,739
     
-
     
165,739
     
-
 
Borrowings
   
31,374
     
31,366
     
-
     
31,366
     
-
 
Accrued interest payable
   
82
     
82
     
-
     
82
     
-
 

   
December 31, 2015
   
Fair Value Measurements Using:
 
   
Carrying
Value
   
Estimated
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
FINANCIAL ASSETS:
                             
Cash and cash equivalents
 
$
48,264
   
$
48,264
   
$
48,264
   
$
-
   
$
-
 
Available for sale securities
   
6,696
     
6,696
     
-
     
6,268
     
428
 
Loans held for sale
   
2,091
     
2,091
     
-
     
2,091
     
-
 
Loans receivable, net
   
454,833
     
454,854
     
-
     
-
     
454,854
 
Accrued interest receivable
   
1,608
     
1,608
     
1,608
     
-
     
-
 
Mortgage servicing rights
   
3,249
     
3,249
     
-
     
-
     
3,249
 
FHLB Stock
   
2,212
     
2,212
     
-
     
-
     
2,212
 
FINANCIAL LIABILITIES:
                                       
Non-maturity deposits
   
271,639
     
271,639
     
-
     
271,639
     
-
 
Time deposits
   
168,881
     
168,091
     
-
     
168,091
     
-
 
Borrowings
   
40,435
     
40,421
     
-
     
40,421
     
-
 
Accrued interest payable
   
72
     
72
     
-
     
72
     
-
 
 
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 March 31, 2016 and December 31, 2015 (in thousands):

   
Fair Value at March 31, 2016
 
Description
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Municipal bonds
 
$
2,105
   
$
-
   
$
2,105
   
$
-
 
Agency mortgage-backed securities
   
3,766
     
-
     
3,766
     
-
 
Non-agency mortgage-backed securities
   
415
     
-
     
-
     
415
 
Mortgage servicing rights
   
3,095
     
-
     
-
     
3,095
 

   
Fair Value at December 31, 2015
 
Description
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Municipal bonds
 
$
2,096
   
$
-
   
$
2,096
   
$