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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
EX-10.11 - EXHIBIT 10.11 - Sound Financial Bancorp, Inc.ex10_11.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, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to 

COMMISSION FILE NUMBER 001-35633

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

Maryland
 
45-5188530
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

2400 3rd Avenue, Suite 150, Seattle, Washington
 
98121
(Address of principal executive offices)
 
(Zip Code)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES ☒   NO ☐

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

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

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐  NO ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.

As of May 11, 2017, there were 2,499,980 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations
30
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
41
     
Item 4.   
Controls and Procedures
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
     
44
   
45
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share amounts)

   
March 31,
2017
   
December 31,
2016
 
ASSETS
           
Cash and cash equivalents
 
$
52,807
   
$
54,582
 
Available-for-sale securities, at fair value
   
6,359
     
6,604
 
Loans held for sale
   
1,970
     
871
 
Loans
   
489,290
     
500,001
 
Allowance for loan losses
   
(4,838
)
   
(4,822
)
Total loans, net
   
484,452
     
495,179
 
Accrued interest receivable
   
1,754
     
1,816
 
Bank-owned life insurance (“BOLI”), net
   
12,163
     
12,082
 
Other real estate owned (“OREO”) and repossessed assets, net
   
952
     
1,172
 
Mortgage servicing rights, at fair value
   
3,558
     
3,561
 
Federal Home Loan Bank (“FHLB”) stock, at cost
   
1,731
     
2,840
 
Premises and equipment, net
   
6,009
     
5,549
 
Other assets
   
3,621
     
4,127
 
Total assets
 
$
575,376
   
$
588,383
 
LIABILITIES
               
Deposits
               
Interest-bearing
   
409,191
     
403,990
 
Noninterest-bearing demand
   
71,631
     
63,741
 
Total deposits
   
480,822
     
467,731
 
Borrowings
   
25,631
     
54,792
 
Accrued interest payable
   
87
     
73
 
Other liabilities
   
6,042
     
4,874
 
Advance payments from borrowers for taxes and insurance
   
1,166
     
638
 
Total liabilities
   
513,748
     
528,108
 
COMMITMENTS AND CONTINGENCIES (NOTE 7)
               
STOCKHOLDERS' EQUITY
               
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued or Outstanding
   
-
     
-
 
Common stock, $0.01 par value, 40,000,000 shares authorized, 2,499,880 and 2,498,804 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
   
25
     
25
 
Additional paid-in capital
   
24,134
     
23,979
 
Unearned shares - Employee Stock Ownership Plan (“ESOP”)
   
(683
)
   
(683
)
Retained earnings
   
38,037
     
36,873
 
Accumulated other comprehensive income, net of tax
   
115
     
81
 
Total stockholders’ equity
   
61,628
     
60,275
 
Total liabilities and stockholders’ equity
 
$
575,376
   
$
588,383
 

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,
 
   
2017
   
2016
 
INTEREST INCOME
           
Loans, including fees
 
$
6,442
   
$
5,952
 
Interest and dividends on investments, cash and cash equivalents
   
150
     
116
 
Total interest income
   
6,592
     
6,068
 
INTEREST EXPENSE
               
Deposits
   
703
     
688
 
Borrowings
   
92
     
29
 
Total interest expense
   
795
     
717
 
Net interest income
   
5,797
     
5,351
 
PROVISION FOR LOAN LOSSES
   
-
     
150
 
Net interest income after provision for loan losses
   
5,797
     
5,201
 
NONINTEREST INCOME
               
Service charges and fee income
   
511
     
566
 
Earnings on cash surrender value of bank-owned life insurance
   
81
     
84
 
Mortgage servicing income
   
253
     
204
 
Fair value adjustment on mortgage servicing rights
   
(20
)
   
(114
)
Net gain on sale of loans
   
171
     
210
 
Total noninterest income
   
996
     
950
 
NONINTEREST EXPENSE
               
Salaries and benefits
   
2,691
     
2,563
 
Operations
   
1,021
     
972
 
Regulatory assessments
   
124
     
155
 
Occupancy
   
373
     
385
 
Data processing
   
407
     
386
 
Net loss on OREO and repossessed assets
   
3
     
-
 
Total noninterest expense
   
4,619
     
4,461
 
Income before provision for income taxes
   
2,174
     
1,690
 
Provision for income taxes
   
760
     
584
 
Net income
 
$
1,414
   
$
1,106
 
                 
Earnings per common share:
               
Basic
 
$
0.57
   
$
0.45
 
Diluted
 
$
0.54
   
$
0.43
 
Weighted average number of common shares outstanding:
               
Basic
   
2,499,502
     
2,477,751
 
Diluted
   
2,596,519
     
2,571,604
 

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,
 
   
2017
   
2016
 
Net income
 
$
1,414
   
$
1,106
 
Available for sale securities:
               
Unrealized gains on sale of securities arising during the period, net of taxes of $17 and $4, respectively
   
34
     
6
 
Other comprehensive income, net of tax
   
34
     
6
 
Comprehensive income
 
$
1,448
   
$
1,112
 

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, 2017 and 2016 (unaudited)
(In thousands, except share and per share amounts)

   
Shares
   
Common
Stock
   
Additional
Paid-in
Capital
   
Unearned
ESOP Shares
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income,
net of tax
   
Total
Stockholders’
Equity
 
Balances at December 31, 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 ($0.075 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
 

   
Shares
   
Common
Stock
   
Additional
Paid-in
Capital
   
Unearned
ESOP Shares
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income,
net of tax
   
Total
Stockholders’
Equity
 
Balances at December 31, 2016
   
2,498,804
   
$
25
   
$
23,979
   
$
(683
)
 
$
36,873
   
$
81
   
$
60,275
 
Net income
                                   
1,414
             
1,414
 
Other comprehensive income, net of tax
                                           
34
     
34
 
Share-based compensation
                   
144
                             
144
 
Cash dividends on common stock ($0.10 per share)
                                   
(250
)
           
(250
)
Restricted stock awards issued
   
576
                                                 
Exercise of stock options
   
500
             
11
                             
11
 
Balances at March 31, 2017
   
2,499,880
   
$
25
   
$
24,134
   
$
(683
)
 
$
38,037
   
$
115
   
$
61,628
 

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,
  
2017
   
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
1,414
   
$
1,106
 
Adjustments to reconcile net income to net cash from operating activities:
               
Accretion of net premium on investments
   
12
     
10
 
Provision for loan losses
   
-
     
150
 
Depreciation and amortization
   
203
     
195
 
Compensation expense related to stock options and restricted stock
   
144
     
102
 
Fair value adjustment on mortgage servicing rights
   
20
     
114
 
Additions to mortgage servicing rights, net of amortization
   
(17
)
   
40
 
Increase in cash surrender value of BOLI
   
(81
)
   
(84
)
Net gain on sale of loans
   
(171
)
   
(210
)
Proceeds from sale of loans
   
14,044
     
13,827
 
Originations of loans held for sale
   
(14,972
)
   
(12,712
)
Loss on sale and write-downs of OREO and repossessed assets
   
(3
)
   
-
 
Change in operating assets and liabilities:
               
Accrued interest receivable
   
62
     
13
 
Other assets
   
489
     
(203
)
Accrued interest payable
   
14
     
10
 
Other liabilities
   
1,168
     
2,176
 
Net cash from operating activities
   
2,326
     
4,534
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from principal payments, maturities and sales of available for sale securities
   
284
     
409
 
FHLB stock redeemed
   
1,109
     
309
 
Net decrease (increase) in loans
   
10,727
     
(2,515
)
Proceeds from sale of OREO and other repossessed assets
   
223
     
124
 
Purchases of premises and equipment, net
   
(663
)
   
(824
)
Net cash from (used by) investing activities
   
11,680
     
(2,497
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase in deposits
   
13,091
     
8,097
 
Proceeds from borrowings
   
16,000
     
27,500
 
Repayment of borrowings
   
(45,161
)
   
(36,561
)
Dividends paid on common stock
   
(250
)
   
(186
)
Net change in advances from borrowers for taxes and insurance
   
528
     
522
 
Proceeds from stock option exercises
   
11
     
6
 
Net cash used by financing activities
   
(15,781
)
   
(622
)
Net (decrease) increase  in cash and cash equivalents
   
(1,775
)
   
1,415
 
Cash and cash equivalents, beginning of period
   
54,582
     
48,264
 
Cash and cash equivalents, end of period
   
52,807
   
$
49,679
 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for income taxes
 
$
650
   
$
300
 
Interest paid on deposits and borrowings
 
$
781
   
$
707
 
Noncash net transfer from loans to OREO and repossessed assets
 
$
-
   
$
187
 

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” refers to 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, 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 is 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. 2016-12 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 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 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.
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
 
In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  This ASU addresses the appropriate classification of eight specific cash flow issues on the cash flow statement. Debt prepayment costs should be classified as an outflow for financing activities. Settlement of zero-coupon debt instruments divides the interest portion as an outflow for operating activities and the principal portion as an outflow for financing activities. Contingent consideration payments made after a business combination should be classified as outflows for financing and operating activities. Proceeds from the settlement of bank-owned life insurance policies should be classified as inflows from investing activities. Other specific areas are identified in the ASU as to the appropriate classification of the cash inflows or outflows.  The amendments in this ASU 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.

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, 2017
                       
Municipal bonds
 
$
3,255
   
$
139
   
$
(20
)
 
$
3,374
 
Agency mortgage-backed securities
   
2,612
     
52
     
(1
)
   
2,663
 
Non-agency mortgage-backed securities
   
338
     
-
     
(16
)
   
322
 
Total
 
$
6,205
   
$
191
   
$
(37
)
 
$
6,359
 
                                 
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 March 31, 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.

   
March 31, 2017
 
   
Amortized
Cost
   
Fair
Value
 
Due in less than one year
 
$
-
   
$
-
 
Due in one to five years
   
1,344
     
1,323
 
Due after five to ten years
   
414
     
437
 
Due after ten years
   
1,497
     
1,614
 
                 
Mortgage-backed securities
   
2,950
     
2,985
 
Total
 
$
6,205
   
$
6,359
 

There were no pledged securities at March 31, 2017 or December 31, 2016.

For the three months ended March 31, 2017 and 2016, there were no sales of AFS securities.

The following table summarizes the aggregate fair value and gross unrealized loss by length of time those investments have been in a continuous unrealized loss position at March 31, 2017 (in thousands):

   
March 31, 2017
 
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Municipal bonds
 
$
1,323
   
$
(20
)
 
$
-
   
$
-
   
$
1,323
   
$
(20
)
Agency mortgage-backed securities
   
1,056
     
(1
)
   
-
     
-
     
1,056
     
(1
)
Non-agency mortgage-backed securities
   
-
     
-
     
322
     
(16
)
   
322
     
(16
)
Total
 
$
2,379
   
$
(21
)
 
$
322
   
$
(16
)
 
$
2,701
   
$
(37
)
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)

The following table summarizes the aggregate fair value and gross unrealized loss by length of time those investments have been in a continuous unrealized loss position at December 31, 2016 (in thousands):

   
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 months ended March 31, 2017 and 2016 relating to the Company’s non- agency mortgage backed securities.

At March 31, 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 a 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 March 31, 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”).
 
As of March 31, 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 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, 2017 or the year ended December 31, 2016.
 
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):
 
   
March 31,
2017
   
December 31,
2016
 
Real estate loans:
           
One- to four- family
 
$
144,948
   
$
152,386
 
Home equity
   
27,533
     
27,771
 
Commercial and multifamily
   
184,936
     
181,004
 
Construction and land
   
64,151
     
70,915
 
Total real estate loans
   
421,568
     
432,076
 
Consumer loans:
               
Manufactured homes
   
16,038
     
15,494
 
Floating homes
   
23,746
     
23,996
 
Other consumer
   
4,244
     
3,932
 
Total consumer loans
   
44,028
     
43,422
 
Commercial business loans
   
25,307
     
26,331
 
Total loans
   
490,903
     
501,829
 
Deferred fees
   
(1,613
)
   
(1,828
)
Total loans, gross
   
489,290
     
500,001
 
Allowance for loan losses
   
(4,838
)
   
(4,822
)
Total loans, net
 
$
484,452
   
$
495,179
 

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, 2017 (in thousands):

   
One- to
four-
family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
Floating
homes
   
Other
consumer
   
Commercial
business
   
Un-
allocated
   
Total
 
Allowance for loan losses:
                                                           
Individually evaluated for impairment
 
$
722
   
$
92
   
$
24
   
$
22
   
$
40
   
$
-
   
$
60
   
$
7
   
$
-
   
$
967
 
Collectively evaluated for impairment
   
813
     
156
     
1,089
     
391
     
108
     
137
     
38
     
147
     
992
     
3,871
 
Ending balance
 
$
1,535
   
$
248
   
$
1,113
   
$
413
   
$
148
   
$
137
   
$
98
   
$
154
   
$
992
   
$
4,838
 
Loans receivable:
                                                                               
Individually evaluated for impairment
 
$
6,408
   
$
1,092
   
$
2,112
   
$
81
   
$
272
   
$
-
   
$
62
   
$
396
   
$
-
   
$
10,423
 
Collectively evaluated for impairment
   
138,540
     
26,441
     
182,824
     
64,070
     
15,766
     
23,746
     
4,182
     
24,911
     
-
     
480,480
 
Ending balance
 
$
144,948
   
$
27,533
   
$
184,936
   
$
64,151
   
$
16,038
   
$
23,746
   
$
4,244
   
$
25,307
   
$
-
   
$
490,903
 
 
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, 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
 

The following table summarizes the activity in allowance for loan losses during the three months ended March 31, 2017 (in thousands):

   
Beginning
Allowance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending
Allowance
 
One-to four- family
 
$
1,542
   
$
-
   
$
-
   
$
(7
)
 
$
1,535
 
Home equity
   
378
     
-
     
27
     
(157
)
   
248
 
Commercial and multifamily
   
1,144
     
(24
)
   
1
     
(8
)
   
1,113
 
Construction and land
   
459
     
-
     
-
     
(46
)
   
413
 
Manufactured homes
   
168
     
-
     
2
     
(22
)
   
148
 
Floating homes
   
132
     
-
     
-
     
5
     
137
 
Other consumer
   
112
     
(5
)
   
15
     
(24
)
   
98
 
Commercial business
   
175
     
-
     
-
     
(21
)
   
154
 
Unallocated
   
712
     
-
     
-
     
280
     
992
 
Total
 
$
4,822
   
$
(29
)
 
$
45
   
$
-
   
$
4,838
 
 
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, 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
 
Floating homes
   
111
     
-
     
-
     
21
     
132
 
Other consumer
   
77
     
(18
)
   
2
     
40
     
101
 
Commercial business
   
157
     
-
     
-
     
7
     
164
 
Unallocated
   
241
     
-
     
-
     
(191
)
   
50
 
Total
 
$
4,636
   
$
(83
)
 
$
6
   
$
150
   
$
4,709
 

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, 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
 
$
139,558
   
$
26,320
   
$
172,440
   
$
57,868
   
$
15,828
   
$
23,746
   
$
4,135
   
$
24,689
   
$
464,584
 
Watch
   
950
     
363
     
10,743
     
6,283
     
102
     
-
     
47
     
315
     
18,803
 
Special Mention
   
139
     
-
     
364
     
-
     
29
     
-
     
2
     
158
     
692
 
Substandard
   
4,301
     
850
     
1,389
     
-
     
79
     
-
     
60
     
145
     
6,824
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
144,948
   
$
27,533
   
$
184,936
   
$
64,151
   
$
16,038
   
$
23,746
   
$
4,244
   
$
25,307
   
$
490,903
 
 
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, 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 provisions.

The following table presents the recorded investment in nonaccrual loans as of March 31, 2017 and December 31, 2016, by type of loan (in thousands):

   
March 31,
2017
   
December 31,
2016
 
One- to four- family
 
$
733
   
$
2,169
 
Home equity
   
782
     
536
 
Commercial and multifamily
   
215
     
218
 
Manufactured homes
   
47
     
72
 
Commercial business
   
145
     
149
 
Total
 
$
1,922
   
$
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 March 31, 2017 by type of loan (in thousands):

   
30-59 Days
Past Due
   
60-89
Days
Past Due
   
90 Days
and
Greater
Past Due
   
90 Days
and
Greater
Past Due
and Still
Accruing
   
Total Past
Due
   
Current
   
Total
Loans
 
One-to four- family
 
$
1,079
   
$
63
   
$
530
   
$
-
   
$
1,672
   
$
143,276
   
$
144,948
 
Home equity
   
307
     
90
     
594
     
-
     
991
     
26,542
     
27,533
 
Commercial and multifamily
   
-
     
-
     
-
     
-
     
-
     
184,936
     
184,936
 
Construction and land
   
27
     
-
     
-
     
-
     
27
     
64,124
     
64,151
 
Manufactured homes
   
407
     
37
     
46
     
-
     
490
     
15,548
     
16,038
 
Floating homes
   
-
     
-
     
-
     
-
     
-
     
23,746
     
23,746
 
Other consumer
   
7
     
1
     
-
     
-
     
8
     
4,236
     
4,244
 
Commercial business
   
145
     
-
     
-
     
-
     
145
     
25,162
     
25,307
 
Total
 
$
1,972
   
$
191
   
$
1,170
   
$
-
   
$
3,333
   
$
487,570
   
$
490,903
 

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
 
 
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 do not have sufficient payment history (typically greater than six months) to be 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, 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
 
$
142,892
   
$
26,734
   
$
184,721
   
$
64,151
   
$
15,968
   
$
23,746
   
$
4,244
   
$
25,069
   
$
487,525
 
Nonperforming
   
2,056
     
799
     
215
     
-
     
70
     
-
     
-
     
238
     
3,378
 
Total
 
$
144,948
   
$
27,533
   
$
184,936
   
$
64,151
   
$
16,038
   
$
23,746
   
$
4,244
   
$
25,307
   
$
490,903
 

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
 

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 at March 31, 2017 by type of loan (in thousands):

   
March 31, 2017
 
         
Recorded Investment
       
   
Unpaid
Principal
Balance
   
Without
Allowance
   
With
Allowance
   
Related
Allowance
 
                         
One- to four- family
 
$
6,512
   
$
2,801
   
$
3,607
   
$
722
 
Home equity
   
1,092
     
659
     
433
     
92
 
Commercial and multifamily
   
2,117
     
1,753
     
359
     
24
 
Construction and land
   
81
     
-
     
81
     
22
 
Manufactured homes
   
273
     
71
     
201
     
40
 
Floating homes
   
-
     
-
     
-
     
-
 
Other consumer
   
62
     
2
     
60
     
60
 
Commercial business
   
396
     
303
     
93
     
7
 
Total
 
$
10,533
   
$
5,589
   
$
4,834
   
$
967
 

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

   
December 31, 2016
 
         
Recorded Investment
       
   
Unpaid
Principal
Balance
   
Without
Allowance
   
With
Allowance
   
Related
Allowance
 
                         
One- to four- family
 
$
5,010
   
$
2,454
   
$
2,295
   
$
536
 
Home equity
   
913
     
446
     
386
     
121
 
Commercial and multifamily
   
1,582
     
1,221
     
361
     
24
 
Construction and land
   
83
     
-
     
83
     
35
 
Manufactured homes
   
326
     
91
     
221
     
59
 
Floating homes
   
-
     
-
     
-
     
-
 
Other consumer
   
62
     
-
     
62
     
65
 
Commercial business
   
616
     
143
     
473
     
23
 
Total
 
$
8,592
   
$
4,355
   
$
3,881
   
$
863
 
 
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, 2017 and 2016 by type of loan (in thousands):

   
March 31, 2017
   
March 31, 2016
 
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
                         
One- to four- family
 
$
4,959
   
$
84
   
$
5,623
   
$
68
 
Home equity
   
965
     
10
     
921
     
12
 
Commercial and multifamily
   
1,852
     
27
     
3,439
     
67
 
Construction and land
   
82
     
1
     
90
     
1
 
Manufactured homes
   
302
     
5
     
371
     
7
 
Floating homes
   
-
     
-
     
-
     
-
 
Other consumer
   
63
     
1
     
16
     
1
 
Commercial business
   
505
     
5
     
307
     
7
 
Total
 
$
8,728
   
$
133
   
$
10,767
   
$
163
 

Forgone interest on nonaccrual loans was $4,000 and $22,000 for the three months ended March 31, 2017 and 2016, respectively.  There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual, TDR or impaired at March 31, 2017 or December 31, 2016.

Troubled debt restructurings.  Loans classified as TDRs totaled $4.7 million and $3.4 million at March 31, 2017 and December 31, 2016, 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 was one $1.3 million one- to four- family residential TDR loan identified during the quarter ended March 31, 2017 and one $14,000 manufactured house TDR loan that paid off during the period.  At March 31, 2017, 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, 2017 and 2016.
 
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, 2017 and December 31, 2016 (in thousands):

   
March 31, 2017
   
Fair Value Measurements Using:
 
   
Carrying
Value
   
Estimated
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
FINANCIAL ASSETS:
                             
Cash and cash equivalents
 
$
52,807
   
$
52,807
   
$
52,807
   
$
-
   
$
-
 
Available-for-sale  securities
   
6,359
     
6,359
     
-
     
6,037
     
322
 
Loans held for sale
   
1,970
     
1,970
     
-
     
1,970
     
-
 
Loans receivable, net
   
484,452
     
483,245
     
-
     
-
     
483,245
 
Accrued interest receivable
   
1,754
     
1,754
     
1,754
     
-
         
Mortgage servicing rights
   
3,558
     
3,558
     
-
     
-
     
3,558
 
FHLB stock
   
1,731
     
1,731
     
-
     
-
     
1,731
 
FINANCIAL LIABILITIES:
                                       
Non-maturity deposits
   
328,115
     
328,115
     
-
     
328,115
     
-
 
Time deposits
   
152,707
     
150,573
     
-
     
150,573
     
-
 
Borrowings
   
25,631
     
25,635
     
-
     
25,635
     
-
 
Accrued interest payable
   
87
     
87
     
-
     
87
     
-
 

   
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