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EX-32 - EXHIBIT 32 - Sound Financial Bancorp, Inc.ex-32q12020.htm
EX-31.2 - EXHIBIT 31.2 - Sound Financial Bancorp, Inc.ex-312q12020.htm
EX-31.1 - EXHIBIT 31.1 - Sound Financial Bancorp, Inc.ex-311q12020.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, 2020
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
SFBC
The NASDAQ Stock Market LLC

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   YES ☒   NO ☐
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted  pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   YES ☒   NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
 
 
Non-accelerated filer ☐
Smaller reporting company ☒
 
 
 
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐    NO ☒

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 5, 2020, there were 2,594,622 shares of the registrant’s common stock outstanding. 



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


2



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share amounts)
 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
Cash and cash equivalents
$
61,996

 
$
55,770

Available-for-sale securities, at fair value
11,236

 
9,306

Loans held-for-sale
5,923

 
1,063

Loans held-for-portfolio
625,375

 
619,887

Allowance for loan losses
(5,893
)
 
(5,640
)
Total loans held-for-portfolio, net
619,482

 
614,247

Accrued interest receivable
2,205

 
2,206

Bank-owned life insurance (“BOLI”), net
14,147

 
14,183

Other real estate owned (“OREO”) and repossessed assets, net
575

 
575

Mortgage servicing rights, at fair value
2,996

 
3,239

Federal Home Loan Bank (“FHLB”) stock, at cost
1,164

 
1,160

Premises and equipment, net
6,877

 
6,767

Right of use assets
7,384

 
7,641

Other assets
3,651

 
3,696

Total assets
$
737,636

 
$
719,853

LIABILITIES
 
 
 
Deposits
 
 
 
Interest-bearing
$
524,439

 
$
519,434

Noninterest-bearing demand
110,119

 
97,284

Total deposits
634,558

 
616,718

Borrowings
7,500

 
7,500

Accrued interest payable
224

 
226

Lease liabilities
7,766

 
8,010

Other liabilities
7,490

 
8,368

Advance payments from borrowers for taxes and insurance
1,851

 
1,305

Total liabilities
659,389

 
642,127

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, 2,591,494 and 2,567,389 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
25

 
25

Additional paid-in capital
26,776

 
26,343

Unearned shares - Employee Stock Ownership Plan (“ESOP”)
(198
)
 
(227
)
Retained earnings
51,488

 
51,410

Accumulated other comprehensive income, net of tax
156

 
175

Total stockholders’ equity
78,247

 
77,726

Total liabilities and stockholders’ equity
$
737,636

 
$
719,853

See notes to condensed consolidated financial statements

3



SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except share and per share amounts)
 
Three Months Ended March 31,
2020
 
2019
INTEREST INCOME
 
 
 
Loans, including fees
$
8,408

 
$
8,359

Interest and dividends on investments, cash and cash equivalents
238

 
414

Total interest income
8,646

 
8,773

INTEREST EXPENSE
 
 
 
Deposits
1,859

 
1,466

Borrowings
59

 
318

Total interest expense
1,918

 
1,784

Net interest income
6,728

 
6,989

PROVISION (RECAPTURE) FOR LOAN LOSSES
250

 
(200
)
Net interest income after provision (recapture) for loan losses
6,478

 
7,189

NONINTEREST INCOME
 
 
 
Service charges and fee income
494

 
447

Earnings on cash surrender value of bank-owned life insurance
15

 
108

Mortgage servicing income
244

 
242

Fair value adjustment on mortgage servicing rights
(362
)
 
(324
)
Net gain on sale of loans
318

 
535

Total noninterest income
709

 
1,008

NONINTEREST EXPENSE
 
 
 
Salaries and benefits
3,235

 
3,639

Operations
1,394

 
1,634

Regulatory assessments
250

 
113

Occupancy
497

 
506

Data processing
570

 
500

Net loss on OREO and repossessed assets

 
3

Total noninterest expense
5,946

 
6,395

Income before provision for income taxes
1,241

 
1,802

Provision for income taxes
260

 
358

Net income
$
981

 
$
1,444

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.38

 
$
0.57

Diluted
$
0.38

 
$
0.56

Weighted-average number of common shares outstanding:
 
 
 
Basic
2,542,514

 
2,507,389

Diluted
2,587,716

 
2,565,914

 
See notes to condensed consolidated financial statements 

4



SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Net income
$
981

 
$
1,444

Available for sale securities:
 
 
 
Unrealized holding (losses)/gains arising during the period
(23
)
 
53

Income tax benefit/(expense) related to unrealized gains/losses
4

 
(11
)
Other comprehensive (loss)/income, net of tax
(19
)
 
42

Comprehensive income
$
962

 
$
1,486

See notes to condensed consolidated financial statements

5



SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders’ Equity
For the Three Months Ended March 31, 2020 and 2019 (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
Balance, at December 31, 2018
2,544,059

 
$
25

 
$
25,663

 
$
(340
)
 
$
46,165

 
$
114

 
$
71,627

Net income
 
 
 
 
 
 
 
 
1,444

 
 
 
1,444

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
42

 
42

Share-based compensation
 
 
 
 
39

 
 
 
 
 
 
 
39

Restricted stock awards issued
15,925

 
 
 
 
 
 
 
 
 
 
 

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

Common stock options exercised
5,332

 
 
 
32

 
 
 
 
 
 
 
32

Allocation of ESOP shares
 
 
 
 
68

 
28

 
 
 
 
 
96

Balance, at March 31, 2019
2,563,828

 
$
25

 
$
25,802

 
$
(312
)
 
$
47,252

 
$
156

 
$
72,923

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, at December 31, 2019
2,567,389

 
$
25

 
$
26,343

 
$
(227
)
 
$
51,410

 
$
175

 
$
77,726

Net income
 
 
 
 
 
 
 
 
981

 
 
 
981

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
(19
)
 
(19
)
Share-based compensation
 
 
 
 
185

 
 
 
 
 
 
 
185

Restricted stock awards issued
13,600

 
 
 
 
 
 
 
 
 
 
 

Cash dividends paid on common stock ($0.35 per share)
 
 
 
 
 
 
 
 
(903
)
 
 
 
(903
)
Restricted shares forfeited
(180
)
 
 
 
 
 
 
 
 
 
 
 

Common stock options exercised
10,685

 
 
 
182

 
 
 
 
 
 
 
182

Allocation of ESOP shares
 
 
 
 
66

 
29

 
 
 
 
 
95

Balance, at March 31, 2020
2,591,494

 
$
25

 
$
26,776

 
$
(198
)
 
$
51,488

 
$
156

 
$
78,247

 

See notes to condensed consolidated financial statements

6



SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
981

 
$
1,444

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Amortization of net discounts on investments
22

 
8

Provision (recapture) for loan losses
250

 
(200
)
Depreciation and amortization
245

 
235

Compensation expense related to stock options and restricted stock
185

 
39

Change in fair value of mortgage servicing rights
362

 
324

Change in right of use assets amortization
257

 
250

Change in lease liabilities
(244
)
 
(234
)
Increase in cash surrender value of BOLI
(15
)
 
(108
)
Net change in advances from borrowers for taxes and insurance
546

 
637

Net gain on sale of loans
(318
)
 
(211
)
Proceeds from sale of loans held-for-sale
19,003

 
27,258

Originations of loans held-for-sale
(23,721
)
 
(26,681
)
Net loss on OREO and repossessed assets

 
3

Change in operating assets and liabilities:
 
 
 
Accrued interest receivable
1

 
59

Other assets
45

 
521

Accrued interest payable
(2
)
 
64

Other liabilities
(878
)
 
(593
)
Net cash (used in) provided by operating activities
(3,281
)
 
2,815

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of available-for-sale securities
(2,489
)
 

Proceeds from principal payments, maturities and sales of available-for-sale securities
514

 
11

Net decrease (increase) in loans
(5,485
)
 
34,983

Reduction in (purchase of) BOLI
113

 
(183
)
Purchases of premises and equipment, net
(355
)
 
(24
)
Net cash (used in) provided by investing activities
(7,702
)
 
34,787

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in deposits
17,840

 
30,080

Proceeds from borrowings
15,650

 
60,000

Repayment of borrowings
(15,650
)
 
(119,000
)
FHLB stock redeemed (purchased)
(5
)
 
2,273

Allocation of ESOP shares
95

 
96

Dividends paid on common stock
(903
)
 
(357
)
Proceeds from common stock option exercises
182

 
32

Net cash provided by (used in) financing activities
17,209

 
(26,876
)
Net change in cash and cash equivalents
6,226

 
10,726

Cash and cash equivalents, beginning of period
55,770

 
61,810

Cash and cash equivalents, end of period
$
61,996

 
$
72,536

 
 
 
 

7



SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Interest paid on deposits and borrowings
1,920

 
1,720

Loans transferred from loans held-for-portfolio to OREO and repossessed assets

 
60

Leases right of use assets obtained in exchange for operating lease liabilities:
 
 
 
Right of use assets

 
8,136

Lease Liabilities

 
8,408

See notes to condensed consolidated financial statements

8



SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited) 
Note 1 – Basis of Presentation
The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial Bancorp, Inc., and its wholly owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc.  References in this document to Sound Financial Bancorp refer to Sound Financial Bancorp, Inc. and references to the “Bank” refer to Sound Community Bank. References to “we,” “us,” and “our” or the “Company” refers to Sound Financial Bancorp and its wholly-owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc., unless the context otherwise requires.
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”).  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.  Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 12, 2020 (“2019 Form 10-K”).  The results for the interim periods are not necessarily indicative of results for a full year.
Certain amounts in the prior period’s consolidated financial statements have been reclassified to conform to the current presentation.  These classifications do not have an impact on previously reported consolidated net income, retained earnings, stockholders’ equity or earnings per share.

Note 2 – Accounting Pronouncements Recently Issued or Adopted
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provides relief from certain accounting and financial reporting requirements under U.S. GAAP. Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for troubled debt restructurings (TDRs) under ASC 310-40 for loan modifications related to the novel coronavirus of 2019 (COVID-19) pandemic. In addition, on April 7, 2020, a group of banking agencies issued an interagency statement (Interagency Statement) for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are troubled debt restructured loans (TDRs). The interagency statement was originally issued on March 22, 2020, but the Agencies revised it to address the relationship between their TDR accounting and disclosure guidance and the TDR guidance in Section 4013 of the CARES Act. Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019; (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan; and (3) the modifications are executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President or (B) December 31, 2020. The interagency statement indicates that a lender can conclude that a borrower is not experiencing financial difficulty if either (1) short-term (e.g., six months) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or (2) the modification or deferral program is mandated by the federal government or a state government. Accordingly, any loan modification made in response to the COVID-19 pandemic that meets either of these practical expedients would not be considered a TDR. The Company adopted this guidance as discussed in the subsequent events footnote.

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.


9



In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). This ASU simplifies the accounting for income taxes by removing the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items, removing the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and removing the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Disclosure requirements removed from FASB Subtopic 715-20 include the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer, related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, and, for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs and benefit obligation for postretirement health care benefits. Disclosure requirements added to FASB Subtopic 715-20 include the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This ASU is effective for fiscal years ending after December 15, 2020. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements by removing the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds disclosure requirements for Level 3 measurements, including changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.  Amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU 2018-13 on January 1, 2020 did not have a material impact on the Company's consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU amends the accounting for share-based payments awards to nonemployees to align with the accounting for employee awards. Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. Amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU No. 2018-07 on January 1, 2019 did not have a material impact on the Company's consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities by better aligning the entity's financial reporting for hedging relationships with those risk management activities and reduce the complexity of and simplify the application of hedge accounting by preparers. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods,

10



beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU No. 2017-12 on January 1, 2019, did not have a material impact on the Company's consolidated financial statements. In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20). ASU 2017-08 is intended to amend the amortization period for certain purchased callable debt securities held at a premium. Under ASU 2017-08, the FASB is shortening the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of ASU No. 2017-08 on January 1, 2019 did not have a material impact on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20). ASU 2017-08 is intended to amend the amortization period for certain purchased callable debt securities held at a premium. Under ASU 2017-08, the FASB is shortening the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of ASU No. 2017-08 on January 1, 2019 did not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Adoption of ASU 2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. The Company’s adoption of ASU 2017-04 on January 1, 2020 did not have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The 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 FASB issued ASU 2019-10, Financial Instruments- Credit Losses (Topic 326), delaying implementation of ASU 2016-13 for SEC smaller reporting company filers until fiscal year beginning after 2022. The Bank meets the requirements of a smaller reporting company and delayed implementation of ASU 2016-13.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize, on the balance sheet, the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income. For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements. This ASU amended the new leases standard to give entities another option for transition and to provide lessors with a practical expedient. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The practical expedient provides lessors with an option to not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components. The Company adopted these ASUs on January 1, 2019. In March 2019, FASB issued ASU 2019-01, Leases (Topic 842), Codification Improvements. The amendments in this ASU include determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, requiring cash received from lessors from sales-type and direct financing leases to be presented in the cash flow statement within investing activities, and clarifying interim disclosure requirements. The effective date and transition requirements for the first and second items of this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 and early

11



adoption is permitted. We have adopted the third item of this ASU and provided the required interim disclosures in this report.  See Note 12- Leases for further information.

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, 2020
 
 
 
 
 
 
 
Municipal bonds
$
4,173

 
$
137

 
$
(3
)
 
$
4,307

Agency mortgage-backed securities
6,865

 
99

 
(35
)
 
6,929

Total
$
11,038

 
$
236

 
$
(38
)
 
$
11,236

 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
Municipal bonds
$
3,197

 
$
173

 
$

 
$
3,370

Agency mortgage-backed securities
5,888

 
56

 
(8
)
 
5,936

Total
$
9,085

 
$
229

 
$
(8
)
 
$
9,306

The amortized cost and fair value of AFS securities at March 31, 2020, 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, 2020
 
Amortized
Cost
 
Fair
Value
Due within one year
$
1,048

 
$
1,045

Due after one year through five years
491

 
498

Due after five years through ten years
1,440

 
1,474

Due after ten years
1,194

 
1,290

Mortgage-backed securities
6,865

 
6,929

Total
$
11,038

 
$
11,236

There were no pledged securities at March 31, 2020 or December 31, 2019.
There were no sales of AFS securities during the three months ended March 31, 2020 or 2019.

12



The following tables summarize the aggregate fair value and gross unrealized loss by length of time of those investments that have been in a continuous unrealized loss position at the dates indicated (in thousands):
 
March 31, 2020
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Municipal bonds
$
1,276

 
$
(3
)
 
$

 
$

 
$
1,276

 
$
(3
)
Agency mortgage-backed securities
3,835

 
(35
)
 

 

 
3,835

 
(35
)
Total
$
5,111

 
$
(38
)
 
$

 
$

 
$
5,111

 
$
(38
)
 
December 31, 2019
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Municipal bonds
$
3,387

 
$
(8
)
 
$

 
$

 
$
3,387

 
$
(8
)
Total
$
3,387

 
$
(8
)
 
$

 
$

 
$
3,387

 
$
(8
)
There were no credit losses recognized in earnings during the three and three months ended March 31, 2020 or 2019 relating to the Company’s securities.

At March 31, 2020, the securities portfolio consisted of 14 agency mortgage-backed securities and nine municipal securities with a total portfolio fair value of $11.2 million. At December 31, 2019, the securities portfolio consisted of 13 agency mortgage-backed securities and eight municipal securities with a fair value of $9.3 million. At March 31, 2020, there were ten securities in an unrealized loss position for less than 12 months, and no securities in an unrealized loss position for more than 12 months. At December 31, 2019, there were five securities in an unrealized loss position for less than 12 months, and there were no securities in an unrealized loss position for more than 12 months. The unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not related to the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. The unrealized losses on these investments are not considered other-than-temporary impairment ("OTTI") as of March 31, 2020, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis. Additional deterioration in market and economic conditions related to COVID-19 pandemic may, however, have an adverse impact on credit quality in the future and result in OTTI charges.


13



Note 4 – Loans
The composition of the loans-held-for portfolio at the dates indicated, excluding loans held-for-sale, was as follows (in thousands):
 
March 31,
2020
 
December 31,
2019
Real estate loans:
 
 
 
One-to-four family
$
140,525

 
$
149,393

Home equity
20,981

 
23,845

Commercial and multifamily
280,046

 
261,268

Construction and land
72,011

 
75,756

Total real estate loans
513,563

 
510,262

Consumer loans:
 
 
 
Manufactured homes
21,054

 
20,613

Floating homes
46,834

 
43,799

Other consumer
9,259

 
8,302

Total consumer loans
77,147

 
72,714

Commercial business loans
36,559

 
38,931

Total loans held-for-portfolio
627,269

 
621,907

Deferred fees
(1,894
)
 
(2,020
)
Total loans held-for-portfolio, gross
625,375

 
619,887

Allowance for loan losses
(5,893
)
 
(5,640
)
Total loans held-for-portfolio, net
$
619,482

 
$
614,247


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, 2020 (in thousands):
 
Allowance: Individually evaluated for impairment
 
Allowance: Collectively evaluated for impairment
 
Allowance:
Ending balance
 
Loans held for investment: Individually evaluated for impairment
 
Loans held for investment: Collectively evaluated for impairment
 
Loans held for investment:
Ending balance
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
$
206

 
$
923

 
$
1,129

 
$
5,928

 
$
134,597

 
$
140,525

Home equity
25

 
141

 
166

 
358

 
20,623

 
20,981

Commercial and multifamily

 
1,918

 
1,918

 
353

 
279,693

 
280,046

Construction and land
7

 
492

 
499

 
473

 
71,538

 
72,011

Manufactured homes
341

 
141

 
482

 
427

 
20,627

 
21,054

Floating homes

 
318

 
318

 
524

 
46,310

 
46,834

Other consumer
52

 
69

 
121

 
140

 
9,119

 
9,259

Commercial business
155

 
240

 
395

 
1,550

 
35,009

 
36,559

Unallocated

 
865

 
865

 

 

 

 
$
786

 
$
5,107

 
$
5,893

 
$
9,753

 
$
617,516

 
$
627,269


14



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, 2019 (in thousands):
 
Allowance: Individually evaluated for impairment
 
Allowance: Collectively evaluated for impairment
 
Allowance:
Ending balance
 
Loans held for investment: Individually evaluated for impairment
 
Loans held for investment: Collectively evaluated for impairment
 
Loans held for investment:
Ending balance
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
$
205

 
$
915

 
$
1,120

 
$
8,620

 
$
140,773

 
$
149,393

Home equity
25

 
153

 
178

 
335

 
23,510

 
23,845

Commercial and multifamily

 
1,696

 
1,696

 
353

 
260,915

 
261,268

Construction and land
7

 
485

 
492

 
1,215

 
74,541

 
75,756

Manufactured homes
349

 
131

 
480

 
440

 
20,173

 
20,613

Floating homes

 
283

 
283

 
290

 
43,509

 
43,799

Other consumer
54

 
58

 
112

 
143

 
8,159

 
8,302

Commercial business
84

 
247

 
331

 
997

 
37,934

 
38,931

Unallocated

 
948

 
948

 

 

 

Total
$
724

 
$
4,916

 
$
5,640

 
$
12,393

 
$
609,514

 
$
621,907

The following table summarizes the activity in the allowance for loan losses for the three months ended March 31, 2020 (in thousands):
 
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision (Recapture)
 
Ending
Allowance
One-to-four family
$
1,120

 
$

 
$
4

 
$
5

 
$
1,129

Home equity
178

 

 
2

 
(14
)
 
166

Commercial and multifamily
1,696

 

 

 
222

 
1,918

Construction and land
492

 

 

 
7

 
499

Manufactured homes
480

 

 

 
2

 
482

Floating homes
283

 

 

 
35

 
318

Other consumer
112

 
(6
)
 
3

 
12

 
121

Commercial business
331

 

 

 
64

 
395

Unallocated
948

 

 

 
(83
)
 
865

Total
$
5,640

 
$
(6
)
 
$
9

 
$
250

 
$
5,893



 

15




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

 
$

 
$

 
$
(125
)
 
$
1,189

Home equity
202

 

 
3

 
24

 
229

Commercial and multifamily
1,638

 

 

 
(603
)
 
1,035

Construction and land
431

 

 

 
565

 
996

Manufactured homes
427

 

 

 
84

 
511

Floating homes
265

 

 

 
(11
)
 
254

Other consumer
112

 
(20
)
 
20

 
8

 
120

Commercial business
356

 

 

 
68

 
424

Unallocated
1,029

 

 

 
(210
)
 
819

Total
$
5,774

 
$
(20
)
 
$
23

 
$
(200
)
 
$
5,577

 
Credit Quality Indicators.   Federal regulations provide for the classification of lower quality loans as substandard, doubtful or loss.  An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as doubtful have all the weaknesses inherent in assets classified substandard with the added characteristic that the weaknesses make collection or liquidation of the assets in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without establishment of a specific loss reserve is not warranted.
When we classify problem loans as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address the risk specifically (if the loan is impaired) or we may allow the loss to be addressed in the general allowance (if the loan is not impaired).  General allowances represent loss reserves which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem loans. When the Company classifies problem loans as a loss, we charge-off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose us to sufficient risk to warrant classification as substandard, doubtful or loss, but possess identified weaknesses, are classified as either watch or special mention assets.  Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Federal Deposit Insurance Corporation (“FDIC”), the Bank’s federal regulator, and the Washington Department of Financial Institutions (“WDFI”), the Bank’s state banking regulator, both of whom can order the establishment of additional loss allowances.  Pass rated loans are loans that are not otherwise classified or criticized.
The following table presents the internally assigned grades as of March 31, 2020, 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
$
135,714

 
$
20,320

 
$
275,069

 
$
61,744

 
$
20,654

 
$
46,310

 
$
9,214

 
$
33,089

 
$
602,114

Watch

 

 
599

 
5,882

 
122

 

 

 
346

 
6,949

Special Mention

 

 
1,667

 
3,950

 

 

 

 
708

 
6,325

Substandard
4,811

 
661

 
2,711

 
435

 
278

 
524

 
45

 
2,416

 
11,881

Doubtful

 

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

 

Total
$
140,525

 
$
20,981

 
$
280,046

 
$
72,011

 
$
21,054

 
$
46,834

 
$
9,259

 
$
36,559

 
$
627,269


16




The following table presents the internally assigned grades as of December 31, 2019, by type of loan (in thousands):
 
One-to-
four family
 
Home
equity
 
Commercial
and multifamily
 
Construction
and land
 
Manufactured
homes
 
Floating
homes
 
Other
consumer
 
Commercial
business
 
Total
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
138,900

 
$
23,206

 
$
256,139

 
$
68,268

 
$
20,204

 
$
43,509

 
$
8,250

 
$
35,347

 
$
593,823

Watch

 

 
217

 
2,634

 
124

 

 

 
378

 
3,353

Special Mention
2,484

 

 
2,178

 
3,677

 

 

 

 
1,649

 
9,988

Substandard
8,009

 
639

 
2,734

 
1,177

 
285

 
290

 
52

 
1,557

 
14,743

Doubtful

 

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

 

Total
$
149,393

 
$
23,845

 
$
261,268

 
$
75,756

 
$
20,613

 
$
43,799

 
$
8,302

 
$
38,931

 
$
621,907

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, 2020, and December 31, 2019, by type of loan (in thousands):
 
March 31, 2020
 
December 31, 2019
One-to-four family
$
1,820

 
$
2,090

Home equity
285

 
261

Commercial and multifamily
353

 
353

Construction and land
386

 
1,177

Manufactured homes
162

 
226

Floating homes
282

 
290

Commercial business
384

 
260

Total
$
3,672

 
$
4,657


17



The following table presents the aging of the recorded investment in past due loans as of March 31, 2020, 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 Accruing
 
Total Past
Due
 
Current
 
Total Loans
One-to-four family
$
2,985

 
$

 
$
1,416

 
$

 
$
4,401

 
$
136,124

 
$
140,525

Home equity
152

 

 
223

 

 
375

 
20,606

 
20,981

Commercial and multifamily
2,464

 
496

 
353

 

 
3,313

 
276,733

 
280,046

Construction and land
316

 

 
386

 

 
702

 
71,309

 
72,011

Manufactured homes
282

 

 
162

 

 
444

 
20,610

 
21,054

Floating homes

 

 
282

 

 
282

 
46,552

 
46,834

Other consumer
12

 
2

 

 

 
14

 
9,245

 
9,259

Commercial business
195

 
140

 
212

 

 
547

 
36,012

 
36,559

Total
$
6,406

 
$
638

 
$
3,034

 
$

 
$
10,078

 
$
617,191

 
$
627,269


The following table presents the aging of the recorded investment in past due loans as of December 31, 2019, 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 Accruing
 
Total Past
Due
 
Current
 
Total Loans
One-to-four family
$
789

 
$
105

 
$
1,810

 
$

 
$
2,704

 
$
146,689

 
$
149,393

Home equity
81

 
161

 
197

 

 
439

 
23,406

 
$
23,845

Commercial and multifamily
1,742

 

 
353

 

 
2,095

 
259,173

 
$
261,268

Construction and land
3,340

 
1,100

 
50

 

 
4,490

 
71,266

 
$
75,756

Manufactured homes
324

 
43

 
125

 

 
492

 
20,121

 
$
20,613

Floating homes
297

 
250

 
290

 

 
837

 
42,962

 
$
43,799

Other consumer
19

 
2

 

 

 
21

 
8,281

 
$
8,302

Commercial business
226

 

 
162

 

 
$
388

 
38,543

 
$
38,931

Total
$
6,818

 
$
1,661

 
$
2,987

 
$

 
$
11,466

 
$
610,441

 
$
621,907

Nonperforming Loans.  Loans are considered nonperforming when they are placed on nonaccrual.
The following table presents the credit risk profile of our loan portfolio based on payment activity as of March 31, 2020, 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
$
138,705

 
$
20,696

 
$
279,693

 
$
71,625

 
$
20,892

 
$
46,552

 
$
9,259

 
$
36,175

 
$
623,597

Nonperforming
1,820

 
285

 
353

 
386

 
162

 
282

 

 
384

 
3,672

Total
$
140,525

 
$
20,981

 
$
280,046

 
$
72,011

 
$
21,054

 
$
46,834

 
$
9,259

 
$
36,559

 
$
627,269



18



The following table presents the credit risk profile of our loan portfolio based on payment activity as of December 31, 2019, by type of loan (in thousands):
 
One-to-four
family
 
Home
equity
 
Commercial
and
multifamily
 
Construction
and land
 
Manufactured
homes
 
Floating
homes
 
Other
consumer
 
Commercial
business
 
Total
Performing
$
147,303

 
$
23,584

 
$
260,915

 
$
74,579

 
$
20,387

 
$
43,509

 
$
8,302

 
$
38,671

 
$
617,250

Nonperforming
2,090

 
261

 
353

 
1,177

 
226

 
290

 

 
260

 
4,657

Total
$
149,393

 
$
23,845

 
$
261,268

 
$
75,756

 
$
20,613

 
$
43,799

 
$
8,302

 
$
38,931

 
$
621,907

Impaired Loans.  A loan is considered impaired when we determine that we may be unable to collect payments of principal or interest when due under the terms of the loan.  In the process of identifying loans as impaired, we take into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered on a case by case basis, after taking into consideration the totality of circumstances surrounding the loan and the borrower, including payment history.  Impairment is measured on a loan by loan basis for all loans in the portfolio. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses.
Impaired loans at March 31, 2020 and December 31, 2019, by type of loan were as follows (in thousands):
 
March 31, 2020
 
 
 
Recorded Investment
 
 
 
Unpaid Principal
Balance
 
Without
Allowance
 
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
One-to-four family
$
6,056

 
$
4,453

 
$
1,475

 
$
5,928

 
$
206

Home equity
358

 
280

 
78

 
358

 
25

Commercial and multifamily
353

 
353

 

 
353

 

Construction and land
473

 
435

 
38

 
473

 
7

Manufactured homes
433

 
57

 
370

 
427

 
341

Floating homes
524

 
524

 

 
524

 

Other consumer
140

 

 
140

 
140

 
52

Commercial business
1,549

 
429

 
1,121

 
1,550

 
155

Total
$
9,886

 
$
6,531

 
$
3,222

 
$
9,753

 
$
786


 
December 31, 2019
 
 
 
Recorded Investment
 
 
 
Unpaid Principal
Balance
 
Without
Allowance
 
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
One-to-four family
$
8,748

 
$
7,236

 
$
1,384

 
$
8,620

 
$
205

Home equity
335

 
256

 
79

 
335

 
25

Commercial and multifamily
353

 
353

 

 
353

 

Construction and land
1,215

 
1,177

 
38

 
1,215

 
7

Manufactured homes
445

 
46

 
394

 
440

 
349

Floating homes
290

 
290

 

 
290

 

Other consumer
143

 

 
143

 
143