TABLE OF CONTENTS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FORM 10-K
|
☒ | |
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
2018
OR
|
| |
| o | 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)
Sound Financial Bancorp, Inc.
|
(Exact Name of Registrant as Specified in its Charter)
|
Maryland
| 45-5188530
| |
Maryland | | 45-5188530 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
2005 5th
| | |
2400 3rd Avenue, Suite 200,150, Seattle Washington |
| 98121 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s
Registrant's telephone number, including area code: (206) 448-0884
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
Securities Registered Pursuant to Section 12(g) of the Act:
Title of each class
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒x
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting Company.company, or an emerging growth company. See the definition of “large"large accelerated filer,”" accelerated filer," "smaller reporting company" and “smaller reporting company”"emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filero | Accelerated filerx |
| |
Non-accelerated filer o | Non-accelerated filerSmaller reporting company x
|
| |
| Emerging growth company o | Smaller reporting Company ☒
|
| | (Do not check if smaller reporting 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. o
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NO ☒x
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30,
2015,2018, the last business day of the
registrant’sregistrant's most recently completed second fiscal quarter, was approximately
$45.4$82.4 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)
Indicate the number of shares outstanding of each of the
registrant’sregistrant's classes of common stock as of the latest practicable date: As of March
25, 2016,12, 2019, there were
2,481,3892,547,236 shares of the
registrant’sregistrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-K – Portions of the
Registrant’sRegistrant's Proxy Statement for its
20162019 Annual Meeting of Shareholders.
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| | |
| PART I | | |
| | Page |
| Item 1. | Business | |
| Item 1A. | Risk Factors | |
| Item 1B. | Unresolved Staff Comments | |
| Item 2. | Properties | |
| Item 3. | Legal Proceedings | |
| Item 4. | Mine Safety Disclosures | |
| | |
| PART II | | |
| | |
| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| Item 6. | Selected Financial Data | |
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 8. | Financial Statements and Supplementary Data | |
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | |
| Item 9A. | Controls and Procedures | |
| Item 9B. | Other Information | |
| | |
| PART III | | |
| | |
| Item 10. | Directors, Executive Officers and Corporate Governance | |
| Item 11. | Executive Compensation | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
| Item 14. | Principal Accounting Fees and Services | |
| | |
| PART IV | | |
| | |
| Item 15. | Exhibits, Financial Statement Schedules | |
| Item 16. | Form 10-K Summary | |
| | |
| | |
| | |
| | |
| Certifications | | |
| Exhibit 31.1 | | |
| Exhibit 31.2 | | |
| Exhibit 32 | | |
PART I
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook”"believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would”"may," "will," "should," "would" and “could.”"could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to:
changes in economic conditions, either nationally or in our market area;ability to access cost-effective funding;
our ability to attract and retain deposits;
fluctuations in interest rates;
the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of our allowance for loan losses;
the possibilityinability of other-than-temporary impairments of securities held in our securities portfolio;
our abilitykey third-party providers to access cost-effective funding;
perform their obligations to us;
fluctuations in the demand for loans, the number of unsold homes, land and other properties, and fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area;
secondary market conditions for loans and our ability to sell loans in the secondary market;
our ability to attract and retain deposits;
our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all;
legislative or regulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implementing regulations that adversely affect our business, as well as changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including changes related to Basel III;
monetary and fiscal policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the U.S. Government and other governmental initiatives affecting the financial services industry;
results of examinations of Sound Financial Bancorp and Sound Community Bank by their regulators, including the possibility that the regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets, change Sound Community Bank’sBank's regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;
increases in premiums for deposit insurance;
our ability to successfully integrate any assets, liabilities, clients, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all;
our ability to control operating costs and expenses;
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
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difficulties in reducing risks associated with the loans on our balance sheet;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial"denial of service”service" attacks, “hacking”"hacking" and identity theft;
theft, and other attacks on our ability to retain key membersinformation technology systems or on the third-party vendors who perform several of our senior management team;critical processing functions;
costs and effects of litigation, including settlements and judgments;
our ability to implement our business strategies;
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits;
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
our ability to pay dividends on our common stock;
adverse changes in the securities markets;
the inability of key third-party providers to perform their obligations to us;
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;
changes in economic conditions, either nationally or in our market area;
legislative or regulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations that adversely affect our business, as well as changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including changes related to Basel III;
monetary and fiscal policies of the Board of Governors of the Federal Reserve System ("Federal Reserve") and the U.S. Government and other governmental initiatives affecting the financial services industry;
our ability to retain or attract key employees or members of our senior management team;
costs and effects of litigation, including settlements and judgments;
our ability to implement our business strategies;
difficulties in reducing risks associated with the loans on our balance sheet;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
our ability to pay dividends on our common stock;
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
our ability to pay dividends on our common stock;
the possibility of other-than-temporary impairments of securities held in our securities portfolio;
adverse changes in the securities markets; and
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described from time to time in this Form 10-K and our other filings with the U.S. Securities and Exchange Commission (the “SEC”"SEC").
We wish to advise readers not to place undue reliance on any forward-looking statements and that the factors listed above could materially affect our financial performance and could cause our actual results for future periods to differ materially from any such forward-looking statements expressed with respect to future periods and could negatively affect our stock price performance.
We do not undertake and specifically decline any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
References in this document to Sound Financial Bancorp or the Company refer to Sound Financial Bancorp, Inc. and
its predecessor, Sound Financial, Inc., a federal corporation, and references to the
“Bank”"Bank" refer to Sound Community Bank. References to
“we,” “us,”"we," "us," and
“our”"our" means Sound Financial Bancorp and its wholly-owned subsidiary, Sound Community Bank, unless the context otherwise requires.
Sound Financial Bancorp, a Maryland corporation, is a bank holding company for its wholly owned subsidiary, Sound Community Bank. Substantially all of Sound Financial
Bancorp’sBancorp's business is conducted through Sound Community Bank, a Washington state-chartered commercial bank. As a Washington commercial bank, the
Bank’sBank's regulators are the Washington State Department of Financial Institutions
(“WDFI”("WDFI") and the Federal Deposit Insurance Corporation
(“FDIC”("FDIC"). The Federal Reserve is the primary federal regulator for Sound Financial Bancorp.
We also sell insurance products and services for consumer clients through Sound Community Bank’sInsurance Agency, Inc., a wholly owned subsidiary of the Bank.
Sound Community Bank's deposits are insured up to applicable limits by the FDIC. At December 31, 2015,2018, Sound Financial Bancorp had total consolidated assets of $540.8$716.7 million, net loans held for portfolio of $454.8$619.5 million, deposits of $440.0$553.6 million and stockholders’stockholders' equity of $54.5$71.6 million. The shares of Sound Financial Bancorp are traded on The NASDAQ Capital Market under the symbol “SFBC.”"SFBC." Our executive offices are located at 2005 52400 3thrd Avenue, Suite 200,150, Seattle, Washington, 98121.98121 and our telephone number is 206-448-0884. TABLE OF CONTENTS
Our principal business consists of attracting retail and commercial deposits from the general public and investing those funds, along with borrowed funds, in loans secured by first and second mortgages on one- to four-familyfour- family residences (including home equity loans and lines of credit), commercial and multifamily real estate, construction and land, consumer and commercial business loans. Our commercial business loans include unsecured lines of credit and secured term loans and lines of credit secured by inventory, equipment and accounts receivable. We also offer a variety of secured and unsecured consumer loan products, including manufactured home loans, floating homes,home loans, automobile loans, boat loans and recreational vehicle loans. As part of our business, we focus on residential mortgage loan originations, the majoritya portion of which we sell to Fannie Mae.Mae and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives. We sell loans which conform to the underwriting standards of Fannie Mae (“conforming”("conforming") within which we retain the servicing retainedof the loan in order to maintain the direct customer relationship and to continue providing strong customer service to our borrowers. We also originategenerate noninterest income. Residential loans which do not conform to the underwriting standards of Fannie Mae (“non-conforming”("non-conforming") loans to be, are either held in our loan portfolio and for saleor sold with servicing released. We originate and retain a significant amount of commercial real estate loans, including those secured by owner-occupied and nonowner-occupied commercial real estate, multifamily property, manufacturedmobile home parks and construction and land development loans.
We serve the Seattle Metropolitan Statistical Area (“MSA”("MSA"), which includes King County (which includes the city of Seattle, King County, SnohomishSeattle), Pierce County and PierceSnohomish County within the Puget Sound region, and also serve Clallam and Jefferson Counties, on the North Olympic Peninsula of Washington. We serve these markets through our main officeheadquarters in Seattle, fiveeight branch offices, twofive of which are located in the Seattle MSA, two that are located in Clallam County and one that is located in Jefferson County, and aCounty. We also have two loan production officeoffices, one located in the Madison Park neighborhood of Seattle.Seattle and one located in Sequim. Based on the most recent branch deposit data provided by the FDIC, our share of deposits in the Seattle-Tacoma-Bellevue MSA was approximately 0.18%,0.14% in King
County, approximately
0.10%,0.41% in Pierce County
approximately 0.39% and in Snohomish County approximately
0.37%0.33%. In Clallam County and Jefferson County, we have approximately
15.59%16.5% and
3.63%6.8%, respectively, of the deposits in those markets. See
“–"– Competition.
”"
Our market area includes a diverse population of management, professional and sales personnel, office employees,
health care workers, manufacturing and transportation workers, service industry workers and government employees, as well as retired and self-employed individuals. The population has a skilled work force with a wide range of education levels and ethnic backgrounds. Major employment sectors include information and communications technology, financial services, manufacturing, maritime, biotechnology, education, health and social services, retail trades, transportation and professional services. The largest employers headquartered in our market area include U.S. Joint Base Lewis-McChord, Navy Region Northwest, Microsoft, University of Washington, and Providence Health. Other significant employers include Costco, Boeing, Nordstrom, Amazon.com,
Inc., Starbucks, Alaska Air Group and Weyerhaeuser.
Economic conditions
have improved sincein our markets continue to improve over the
end of the economic recession, however, economic growth has been slow and uneven, presenting an unusually challenging environment for banks and their holding companies, including us. Property values, which began improving in 2013, have generally stabilized, although some properties collateralizing our loans are still valued lower than when the related loans were originated.last year. Recent trends in housing prices and unemployment rates in our market areas
generally reflect continuing improvement. For the month of December
2015,2018, the
preliminary Seattle
MSAmetropolitan statistical area (MSA) reported an unemployment rate of
5.0%3.3%, as compared to the national average of
4.8%3.9%, according to the latest available information from the Bureau of Labor Statistics. Home prices in our markets also improved over the past year. Based on information from Case-Shiller, the average home price in the Seattle MSA increased
10.0%4.8% in
2015 from 2014.2018. This compares favorably to the national average home price index increase in
20152018 of
5.4%4.5%.
King County has the largest population of any county in the state of Washington, covers approximately 2,100 square miles, and is located on
the Puget Sound. It has approximately
2.02.2 million residents and a median household income of approximately
$89,600.$82,000. King County has a diversified economic base with many
employers from various industries including shipping and transportation,
(Port of Seattle, Paccar, Inc. and Expeditors International of Washington, Inc.), retail,
(Amazon.com, Inc., Starbucks Corp. and Nordstrom, Inc.) aerospace,
(the Boeing Company) and computer technology
(Microsoft Corp.) and biotech industries. Based on information from the Northwest Multiple Listing Service
(“MLS”("MLS"), the median
home sales price in King County in December
20152018 was
$508,000,$597,000, a
15.0%2.1% increase from December
2014’s2017's median
salehome sales price of
$442,000.$585,000.
Pierce County
has the second largest population of any county in the State of Washington, covers approximately 1,700 square miles and is located along the southwestern Puget
Sound.Sound and borders southern King County. It has approximately
831,900861,000 residents
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and a median household income of approximately $59,200.$61,000. The Pierce County economy is diversified with the presence of military related government employment, (Fort Lewis Army Base and McChord Air Force Base), transportation and shipping employment, (Port of Tacoma), and aerospace related employment (Boeing).employment. Based on information from the MLS, the median salehome sales price in Pierce County in December 20152018 was $252,500$340,000, a 9.8%7.9% increase from December 2014’s2017's median home sales price of $230,000.
$315,000.
Snohomish County
has the third largest population of any county in the state of Washington, covers approximately 2,100 square miles and is located on Puget Sound touching the northern border of King County. It has approximately
757,600789,000 residents and a median household income of approximately
$69,400.$76,000. The economy of Snohomish County is diversified with the presence of military related government employment,
(Everett Homeport Naval Base), aerospace related employment,
(Boeing) and retail trade. Based on information from the MLS, the median
home sales price in Snohomish County as of December
31, 20152018 was
$358,000,$455,000, a
19.3%7.0% increase from December
2014’s2017's median
home sales price of
$300,000.$425,000.
Clallam County, with a population of approximately
72,700, is ranked 18th among the counties in the state of Washington. It75,000, is bordered by the Pacific Ocean and the Strait of Juan de Fuca and covers 1,700 square miles, including the westernmost portion of the continental United States. It has
approximately 35,800 households anda median household income of approximately $47,000. The economy of Clallam County is primarily manufacturing and shipping. The Sequim Dungeness Valley continues to be a growing retirement location. Our offices are in Port Angeles and Sequim, the two largest cities in the county. Based on information from the MLS, the median
home sales price in Clallam County in December
20152018 was
$229,000, a 15.1% increase$270,000, an 8.3% decrease from
2014’sDecember 2017's median
home sales price of
$199,000.$295,000.
Jefferson County, with a population of approximately
30,200, is the 27th largest county in the state of Washington. It31,000, is bordered by Clallam County and the
Strait of Juan de FucaPacific Ocean to the
northwest and
the Hood Canal on the
westeast and covers
2,2001,800 square miles.
The majority of the population lives in the northwestern portion of the county. Our office is located in Port Ludlow which is the third largest community in the county. Port Ludlow ranks 16th of 522 ranked areas in the state of Washington and is the most affluent area of Jefferson County. The economy of Jefferson County is primarily based on tourism, agriculture, lumber, fish processing and ship repair and
ship maintenance.
Port Ludlow isIt has a
popular retirement community and is a well-known portmedian household income of
call for leisure craft sailing between Puget Sound and the San Juan Islands.approximately $49,000. Based on information from the MLS, the average home
sales price in Jefferson County as of December
20152018 was
$150,000,$335,000, a
2.0% increase7.5% decrease from
2014’sDecember 2017's median
home sales price of
$147,000.$362,000.
According to the latest available information from the Bureau of Labor Statistics, King and Snohomish Counties reported an unemployment rate of
4.5%3.3% and
5.0%3.6%, respectively, as of December
2015,2018, as compared to the state and national unemployment rates of
5.8%4.3% and
4.8%3.9%, respectively. The unemployment rates for Clallam,
Pierce and
PierceJefferson Counties
arewere above the state and national rates as of December
2015.2018. The unemployment rate in Clallam County decreased
from 9.3%to 6.9% as of December
2014 to 9.0%2018 from 7.0% as of December
2015,2017, while the unemployment rate in Pierce County decreased
from 7.3%to 5.3% as of December
2014 to 7.2%2018 from 5.4% as of December
2015.2017. The unemployment rate in Jefferson County
decreased to 5.9% as of December
20152018 from 6.2% as of
8.6% remained unchanged from December
2014.2017.TABLE OF CONTENTS
The following table presents information concerning the composition of our loan portfolio, excluding loans held-for-sale, by the type of loan for the dates indicated (dollars in thousands):
| December 31, |
| 2015 | 2014 | 2013 | 2012 | 2011 |
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent |
Real estate loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
One- to four-family | $ | 141,125 | | | 30.61 | % | $ | 133,031 | | | 30.80 | % | $ | 117,739 | | | 30.02 | % | $ | 94,059 | | | 28.71 | % | $ | 94,498 | | | 31.45 | % |
Home equity | | 31,573 | | | 6.85 | | | 34,675 | | | 8.03 | | | 35,155 | | | 8.96 | | | 35,364 | | | 10.80 | | | 39,656 | | | 13.20 | |
Commercial and multifamily | | 175,312 | | | 38.01 | | | 168,952 | | | 39.12 | | | 157,516 | | | 40.17 | | | 133,620 | | | 40.79 | | | 106,016 | | | 35.27 | |
Construction and land | | 57,043 | | | 12.37 | | | 46,279 | | | 10.72 | | | 44,300 | | | 11.30 | | | 25,458 | | | 7.77 | | | 17,805 | | | 5.93 | |
Total real estate loans | | 405,053 | | | 87.84 | | | 382,937 | | | 88.67 | | | 354,710 | | | 90.45 | | | 288,501 | | | 88.07 | | | 257,975 | | | 85.85 | |
Consumer loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Manufactured homes | | 13,798 | | | 2.99 | | | 12,539 | | | 2.90 | | | 13,496 | | | 3.44 | | | 16,232 | | | 4.96 | | | 18,444 | | | 6.14 | |
Floating Homes | | 18,226 | | | 3.95 | | | 11,680 | | | 2.71 | | | 5,551 | | | 1.42 | | | 3,317 | | | 1.01 | | | 6,430 | | | 2.14 | |
Other consumer | | 4,804 | | | 1.05 | | | 5,195 | | | 1.20 | | | 4,733 | | | 1.20 | | | 5,333 | | | 1.63 | | | 10,920 | | | 1.49 | |
Total consumer loans | | 36,828 | | | 7.99 | | | 29,414 | | | 6.81 | | | 23,780 | | | 6.06 | | | 24,882 | | | 7.60 | | | 29,364 | | | 9.77 | |
Commercial business loans
| | 19,295 | | | 4.18 | | | 19,525 | | | 4.52 | | | 13,668 | | | 3.49 | | | 14,193 | | | 4.33 | | | 13,163 | | | 4.38 | |
Total loans | | 461,176 | | | 100.00 | % | | 431,876 | | | 100.00 | % | | 392,158 | | | 100.00 | % | | 327,576 | | | 100.00 | % | | 300,502 | | | 100.00 | % |
Less:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred fees and discounts | | 1,707 | | | | | | 1,516 | | | | | | 1,232 | | | | | | 832 | | | | | | 406 | | | | |
Allowance for loan losses | | 4,636 | | | | | | 4,387 | | | | | | 4,177 | | | | | | 4,248 | | | | | | 4,455 | | | | |
Total loans, net | $ | 454,833 | | | | | $ | 425,973 | | | | | $ | 386,749 | | | | | $ | 322,496 | | | | | $ | 295,641 | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| Real estate loans: | | | | | | | | | | | | | | | | | | | |
| One- to four-family | $ | 169,830 |
| | 27.3 | % | | $ | 157,417 |
| | 28.5 | % | | $ | 152,386 |
| | 30.3 | % | | $ | 141,125 |
| | 30.5 | % | | $ | 133,031 |
| | 30.9 | % |
| Home equity | 27,655 |
| | 4.4 | % | | 28,379 |
| | 5.2 |
| | 27,771 |
| | 5.5 |
| | 31,573 |
| | 6.9 |
| | 34,675 |
| | 8.0 |
|
| Commercial and multifamily | 252,644 |
| | 40.6 | % | | 211,269 |
| | 38.4 |
| | 181,004 |
| | 36.1 |
| | 175,312 |
| | 38.0 |
| | 168,952 |
| | 39.1 |
|
| Construction and land | 65,259 |
| | 10.6 | % | | 61,482 |
| | 11.2 |
| | 70,915 |
| | 14.1 |
| | 57,043 |
| | 12.4 |
| | 46,279 |
| | 10.7 |
|
| Total real estate loans | 515,388 |
| | 82.9 | % | | 458,547 |
| | 83.3 |
| | 432,076 |
| | 86.0 |
| | 405,053 |
| | 87.8 |
| | 382,937 |
| | 88.7 |
|
| Consumer loans: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Manufactured homes | 20,145 |
| | 3.2 | % | | 17,111 |
| | 3.1 |
| | 15,494 |
| | 3.1 |
| | 13,798 |
| | 3.0 |
| | 12,539 |
| | 2.9 |
|
| Floating homes | 40,806 |
| | 6.6 | % | | 29,120 |
| | 5.3 |
| | 23,996 |
| | 4.8 |
| | 18,226 |
| | 4.0 |
| | 11,680 |
| | 2.7 |
|
| Other consumer | 6,628 |
| | 1.1 | % | | 4,902 |
| | 0.9 |
| | 3,932 |
| | 0.8 |
| | 4,804 |
| | 1.0 |
| | 5,195 |
| | 1.2 |
|
| Total consumer loans | 67,579 |
| | 10.9 | % | | 51,133 |
| | 9.3 |
| | 43,422 |
| | 8.7 |
| | 36,828 |
| | 8.0 |
| | 29,414 |
| | 6.8 |
|
| Commercial business loans | 38,804 |
| | 6.2 | % | | 40,829 |
| | 7.4 |
| | 26,331 |
| | 5.3 |
| | 19,295 |
| | 4.2 |
| | 19,525 |
| | 4.5 |
|
| Total loans | 621,771 |
| | 100.00 | % | | 550,509 |
| | 100.0 | % | | 501,829 |
| | 100.0 | % | | 461,176 |
| | 100.0 | % | | 431,876 |
| | 100.0 | % |
| Less: | | | | | | | | | | | | | | | | | | | |
| Deferred fees and discounts | (2,228 | ) | | | | (1,914 | ) | | | | (1,828 | ) | | | | (1,707 | ) | | | | (1,516 | ) | | |
| Allowance for loan losses | (5,774 | ) | | | | (5,241 | ) | | | | (4,822 | ) | | | | (4,636 | ) | | | | (4,387 | ) | | |
| Total loans, net | $ | 613,769 |
| | | | $ | 543,354 |
| | | | $ | 495,179 |
| | | | $ | 454,833 |
| | | | $ | 425,973 |
| | |
The following table shows the composition of our loan portfolio in dollar amounts and in percentages by fixed and adjustable rate loans for the dates indicated (dollars in thousands):
| December 31, |
| 2015 | 2014 | 2013 | 2012 | 2011 |
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent |
Fixed-rate loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
One- to four-family | | 129,762 | | | 28.14 | % | $ | 118,083 | | | 27.34 | % | $ | 103,756 | | | 26.46 | % | $ | 79,020 | | | 24.12 | % | $ | 78,145 | | | 26.00 | % |
Home equity | | 11,042 | | | 2.39 | | | 12,003 | | | 2.78 | | | 13,530 | | | 3.45 | | | 9,605 | | | 2.93 | | | 9,276 | | | 3.09 | |
Commercial and multifamily | | 92,205 | | | 19.99 | | | 103,303 | | | 23.92 | | | 100,031 | | | 25.51 | | | 76,957 | | | 23.49 | | | 45,034 | | | 14.99 | |
Construction and land | | 51,572 | | | 11.18 | | | 39,147 | | | 9.07 | | | 37,668 | | | 9.61 | | | 22,346 | | | 6.82 | | | 17,458 | | | 5.81 | |
Total real estate loans | | 284,581 | | | 61.71 | | | 272,536 | | | 63.11 | | | 254,985 | | | 65.03 | | | 187,928 | | | 57.36 | | | 149,913 | | | 49.89 | |
Manufactured homes | | 13,798 | | | 2.99 | | | 12,539 | | | 2.90 | | | 13,496 | | | 3.44 | | | 16,232 | | | 4.96 | | | 18,444 | | | 6.14 | |
Floating Homes | | 18,226 | | | 3.94 | | | 11,680 | | | 2.70 | | | 5,551 | | | 2.41 | | | 3,317 | | | 1.01 | | | 6,430 | | | 2.14 | |
Other consumer | | 4,082 | | | 0.89 | | | 4,447 | | | 1.04 | | | 3,944 | | | 1.41 | | | 4,450 | | | 1.36 | | | 3,300 | | | 1.10 | |
Commercial business | | 9,392 | | | 2.04 | | | 11,024 | | | 2.55 | | | 5,603 | | | 1.43 | | | 9,268 | | | 2.83 | | | 8,041 | | | 2.67 | |
Total fixed-rate loans | | 330,079 | | | 71.57 | | | 312,226 | | | 72.30 | | | 283,579 | | | 72.32 | | | 221,195 | | | 67.52 | | | 186,128 | | | 61.94 | |
Adjustable-rate loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
One- to four-family | | 11,363 | | | 2.46 | | | 14,948 | | | 3.46 | | | 13,983 | | | 3.57 | | | 15,039 | | | 4.59 | | | 16,353 | | | 5.44 | |
Home equity | | 20,531 | | | 4.45 | | | 22,672 | | | 5.25 | | | 21,625 | | | 5.51 | | | 25,759 | | | 7.86 | | | 30,380 | | | 10.11 | |
Commercial and multifamily | | 83,107 | | | 18.02 | | | 65,649 | | | 15.20 | | | 57,485 | | | 14.66 | | | 56,663 | | | 17.30 | | | 60,982 | | | 20.29 | |
Construction and land | | 5,471 | | | 1.19 | | | 7,132 | | | 1.65 | | | 6,632 | | | 1.69 | | | 3,112 | | | 0.95 | | | 347 | | | 0.12 | |
Total real estate loans | | 120,472 | | | 26.12 | | | 110,401 | | | 25.56 | | | 99,725 | | | 25.43 | | | 100,573 | | | 30.70 | | | 108,062 | | | 35.96 | |
Other consumer | | 722 | | | 0.16 | | | 746 | | | 0.17 | | | 789 | | | 0.20 | | | 883 | | | 0.27 | | | 1,190 | | | 0.40 | |
Commercial business | | 9,903 | | | 2.15 | | | 8,501 | | | 1.97 | | | 8,065 | | | 2.05 | | | 4,925 | | | 1.50 | | | 5,122 | | | 1.70 | |
Total adjustable-rate loans | | 131,097 | | | 28.43 | | | 119,648 | | | 27.70 | | | 108,579 | | | 27.68 | | | 106,381 | | | 32.48 | | | 114,374 | | | 38.06 | |
Total loans | | 461,176 | | | 100.00 | % | | 431,876 | | | 100.00 | % | | 392,158 | | | 100.00 | % | | 327,576 | | | 100.00 | % | | 300,502 | | | 100.00 | % |
Less:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred fees and discounts | | 1,707 | | | | | | 1,516 | | | | | | 1,232 | | | | | | 832 | | | | | | 406 | | | | |
Allowance for loan losses | | 4,636 | | | | | | 4,387 | | | | | | 4,177 | | | | | | 4,248 | | | | | | 4,455 | | | | |
Total loans, net | $ | 454,833 | | | | | $ | 425,973 | | | | | $ | 386,749 | | | | | $ | 322,496 | | | | | $ | 295,641 | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| Fixed-rate loans: | | | | | | | | | | | | | | | | | | | |
| Real estate loans: | | | | | | | | | | | | | | | | | | | |
| One-to-four family | $ | 94,237 |
| | 15.2 | % | | $ | 117,590 |
| | 21.3 | % | | $ | 142,537 |
| | 28.4 | % | | $ | 129,762 |
| | 28.1 | % | | $ | 118,083 |
| | 27.3 | % |
| Home equity | 11,052 |
| | 1.8 |
| | 11,373 |
| | 2.1 |
| | 9,102 |
| | 1.8 |
| | 11,042 |
| | 2.4 |
| | 12,003 |
| | 2.8 |
|
| Commercial and multifamily | 102,907 |
| | 16.5 |
| | 89,094 |
| | 16.2 |
| | 77,285 |
| | 15.4 |
| | 92,205 |
| | 20.0 |
| | 103,303 |
| | 23.9 |
|
| Construction and land | 51,259 |
| | 8.2 |
| | 57,247 |
| | 10.4 |
| | 69,398 |
| | 13.9 |
| | 51,572 |
| | 11.2 |
| | 39,147 |
| | 9.1 |
|
| Total real estate loans | 259,455 |
| | 41.7 |
| | 275,304 |
| | 50.0 |
| | 298,322 |
| | 59.5 |
| | 284,581 |
| | 61.7 |
| | 272,536 |
| | 63.1 |
|
| Manufactured homes | 20,145 |
| | 3.2 |
| | 17,111 |
| | 3.1 |
| | 15,494 |
| | 3.1 |
| | 13,798 |
| | 3.0 |
| | 12,539 |
| | 2.9 |
|
| Floating homes | 40,806 |
| | 6.6 |
| | 29,120 |
| | 5.3 |
| | 23,996 |
| | 4.8 |
| | 18,226 |
| | 4.0 |
| | 11,680 |
| | 2.7 |
|
| Other consumer | 6,090 |
| | 1.0 |
| | 4,316 |
| | 0.8 |
| | 3,297 |
| | 0.6 |
| | 4,082 |
| | 0.9 |
| | 4,447 |
| | 1.0 |
|
| Commercial business | 9,705 |
| | 1.6 |
| | 16,889 |
| | 3.1 |
| | 12,581 |
| | 2.5 |
| | 9,392 |
| | 2.0 |
| | 11,024 |
| | 2.6 |
|
| Total fixed-rate loans | 336,201 |
|
| 54.1 |
| | 342,740 |
| | 62.3 |
| | 353,690 |
| | 70.5 |
| | 330,079 |
| | 71.6 |
| | 312,226 |
| | 72.3 |
|
| Adjustable- rate loans: | | | | | | | | | | | | | | | | | | | |
| Real estate loans: | | | | | | | | | | | | | | | | | | | |
| One-to-four family | 75,593 |
| | 12.2 |
| | 39,827 |
| | 7.2 |
| | 9,849 |
| | 2.0 |
| | 11,363 |
| | 2.5 |
| | 14,948 |
| | 3.5 |
|
| Home equity | 16,603 |
| | 2.7 |
| | 17,007 |
| | 3.1 |
| | 18,669 |
| | 3.7 |
| | 20,531 |
| | 4.4 |
| | 22,672 |
| | 5.3 |
|
| Commercial and multifamily | 149,737 |
| | 24.0 |
| | 122,175 |
| | 22.2 |
| | 103,719 |
| | 20.7 |
| | 83,107 |
| | 18.0 |
| | 65,649 |
| | 15.2 |
|
| Construction and land | 14,000 |
| | 2.3 |
| | 4,235 |
| | 0.8 |
| | 1,517 |
| | 0.3 |
| | 5,471 |
| | 1.2 |
| | 7,132 |
| | 1.6 |
|
| Total real estate loans | 255,933 |
| | 41.2 |
| | 183,244 |
| | 33.3 |
| | 133,754 |
| | 26.7 |
| | 120,472 |
| | 26.1 |
| | 110,401 |
| | 25.6 |
|
| Other consumer | 538 |
| | 0.1 |
| | 585 |
| | 0.1 |
| | 635 |
| | 0.1 |
| | 722 |
| | 0.2 |
| | 746 |
| | 0.2 |
|
| Commercial business | 29,099 |
| | 4.6 |
| | 23,940 |
| | 4.3 |
| | 13,750 |
| | 2.7 |
| | 9,903 |
| | 2.1 |
| | 8,501 |
| | 2.0 |
|
| Total adjustable-rate loans | 285,570 |
| | 45.9 |
| | 207,769 |
| | 37.7 |
| | 148,139 |
| | 29.5 |
| | 131,097 |
| | 28.4 |
| | 119,648 |
| | 27.7 |
|
| Total loans | 621,771 |
| | 100.0 | % | | 550,509 |
| | 100.0 | % | | 501,829 |
| | 100.0 | % | | 461,176 |
| | 100.0 | % | | 431,874 |
| | 100.0 | % |
| Less: | | | | | | | | | | | | | | | | | | | |
| Deferred fees and discounts | (2,228 | ) | | | | (1,914 | ) | | | | (1,828 | ) | | | | (1,707 | ) | | | | (1,516 | ) | | |
| Allowance for loan losses | (5,774 | ) | | | | (5,241 | ) | | | | (4,822 | ) | | | | (4,636 | ) | | | | (4,387 | ) | | |
| Total loans, net | $ | 613,769 |
| | | | $ | 543,354 |
| | | | $ | 495,179 |
| | | | $ | 454,833 |
| | | | $ | 425,971 |
| | |
TABLE OF CONTENTS
The following table illustrates the contractual maturity of our construction and land and commercial business loans at December 31, 20152018 (dollars in thousands). Loans that have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The total amount of loans due after December 31, 2016,2019, which have predetermined interest rates, is $21.2$24.6 million, while the total amount of loans due after such date, which have floating or adjustable interest rates, is $4.9$13.0 million. The table does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
| Construction
and Land | Commercial
Business | Total(1) |
| Amount | Weighted
Average
Rate | Amount | Weighted
Average
Rate | Amount | Weighted
Average
Rate |
2016(2) | $ | 42,978 | | | 5.57 | % | $ | 7,259 | | | 5.05 | % | $ | 50,237 | | | 5.49 | % |
2017 to 2020 | | 10,088 | | | 6.31 | | | 6,331 | | | 4.93 | | | 16,419 | | | 5.78 | % |
2021 and following | | 3,977 | | | 6.85 | | | 5,705 | | | 5.37 | | | 9,682 | | | 5.98 | % |
Total(1) | $ | 57,043 | | | 5.79 | % | $ | 19,295 | | | 5.10 | % | $ | 76,338 | | | 5.62 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Construction and Land | | Commercial Business | | Total |
| | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate |
2019 (1) | $ | 45,844 |
| | 5.80 | % | | $ | 20,641 |
| | 5.96 | % | | $ | 66,485 |
| | 5.85 | % |
| 2020 to 2023 | 16,497 |
| | 6.85 |
| | 10,334 |
| | 5.54 |
| | 26,831 |
| | 6.34 |
|
| 2024 and thereafter | 2,918 |
| | 6.44 |
| | 7,829 |
| | 5.69 |
| | 10,747 |
| | 5.89 |
|
Total (2) | $ | 65,259 |
| | 6.10 | % | | $ | 38,804 |
| | 5.79 | % | | $ | 104,063 |
| | 5.98 | % |
| (1) | Excludes deferred fees and discounts of $383,000. |
| (2)(1) | Includes demand loans, loans having no stated maturity and overdraft loans. |
| |
| (2) | Excludes deferred fees of $538,000. |
Lending Authority.Authority . Our President and Chief Executive Officer(CEO)Officer ("CEO") may approve unsecured loans up to $1,000,000$1.0 million and all types of secured loans up to 30% of our legal lending limit, or approximately $3.5$4.6 million as of December 31, 2015.2018. Our Executive Vice President and Chief Credit Officer (CCO)("CCO") may approve unsecured loans up to $400,000 and secured loans up to 15% of our legal lending limit, or approximately $1.7$2.3 million as of December 31, 2015.2018. Any loans over the President and Chief Executive Officer’sCEO's lending authority or loans otherwisesignificantly outside our general underwriting guidelines must be approved by the Loan Committee. The Loan Committee consistsconsisting of threefour independent directors, the CEO and the CCO. Lending authority is also granted to certain other lending staff at lower amounts, generallyamounts. The Business Banking Team Leader has lending authority of up to 7.5% of our legal lending limit for real estate and other secured loans, and $50,000 for unsecured loans. The Residential Lending Team Leader has lending authority up to 7.5% of our legal lending limit for real estate and other secured loans, provided the loan has no policy exceptions.and $5,000 for unsecured loans.
Largest Borrowing Relationships.Relationships . At December 31, 2015,2018, the maximum amount under federal law that we could lend to any one borrower and the borrower’sborrower's related entities was approximately $11.5$15.5 million. Our five largest relationships totaled $35.3$54.4 million in the aggregate, or 7.7%8.8% of our $461.2$621.8 million grosstotal loan portfolio, at December 31, 2015. The2018. At December 31, 2018, the largest lending relationship was for $9.6totaled $12.2 million inconsisting of three loans to businesses with common ownership and separately two loans to an individual, all collateralized by residential construction properties.multifamily real estate. The second largest relationship consistsconsisted of $6.8 million in loans collateralized by multifamily construction properties. The next three largest lending relationships at December 31, 2015, were: $6.7 million infive loans to businesses with common ownership, were collateralized by multifamily real estate;estate and totaled $11.7 million. The third, fourth and fifth largest relationships consisted of a $6.2$10.5 million commercial business line of credit loan collateralizedparticipation to a third party loan originator secured by one-to-four family real estate;an assignment of promissory notes from their borrowers for residential mortgage loans, a $10.0 million business line of credit loan participation to a third party loan originator secured by an assignment of promissory notes from their borrowers for construction projects, and $6.1two business line of credit loan participations totaling $10.0 million in loans to businessesthird party loan originators with common ownership, collateralized by multifamilyan assignment of promissory notes from their borrowers for construction properties.projects. Undistributed construction loan commitments on these lines of credit were $6.4 million, $4.4 million and $2.6 million, respectively. At December 31, 2015,2018, we had five other lending relationships that exceeded $4.5$6.3 million. All of the foregoing loans in these relationships were performing in accordance with their repayment terms as of December 31, 2015.2018.
One- to Four-Familyto-Four Family Real Estate Lending.Lending. One of our primary lending activities is the origination of loans secured by first mortgages on one- to four-family residences, substantially all of which are secured by property located in our geographic lending area. We originate both fixed-rate and adjustable-rate loans. Over the past two years, the majority ofDuring 2018, our one- to four-familyfixed rate, one-to-four family loan originations were fixed rate.decreased $5.7 million, or 7.8% to $67.8 million compared to $73.6 million in 2017. In 2018, the Bank identified continued demand in the marketplace for one-to-four family, residential adjustable rate mortgage loans ("ARM"), especially jumbo loans (loans above $453,100, the conforming Fannie Mae limit in our market area). As a result, our adjustable rate one-to-four family, residential loan originations increased $8.6 million, or 23.8% to $44.7 million compared to $36.1 million in 2017. In 2018, the average loan amount was $639,000 for adjustable rate, one-to-four family mortgages.
Most of our loans are underwritten using
generally-accepted secondary market
generally-accepted underwriting
guidelines, and are readily saleable to Fannie Mae or other private investors.guidelines. A portion of the one- to four-family loans we originate are retained in our portfolio
whileand the
majorityremaining loans are sold into the secondary market to Fannie Mae
or other private investors. Loans that are sold into the secondary market to Fannie Mae are sold with
the servicing retained
for continued customer contact,to maintain the client relationship
building and to
increasegenerate noninterest income. We also originate a small portion of
non-conforminggovernment guaranteed and jumbo loans for sale servicing released to certain correspondent purchasers. The sale of mortgage loans provides a source of non-interest income through the gain on sale, reduces our interest rate risk, provides a stream of servicing income, enhances liquidity and enables us to originate more loans at our current capital level than if we held
themthe loans in
our loan portfolio. Our pricing strategy for mortgage loans includes establishing interest rates that are competitive with other
local financial institutions and consistent with
TABLE OF CONTENTS
our internal asset and liability management objectives. During the year ended December 31, 2015, we originated $107.4 million of one- to four-family fixed-rate mortgage loans and $4.8 million one- to four-family adjustable rate mortgage (“ARM”) loans. See “- Loan Originations, Purchases, Sales, Repayments and Servicing.” At December 31, 2015, one- to four-family2018, one-to-four family residential mortgage loans (excluding loans held-for-sale) totaled $141.1$169.8 million, or 30.6%,27.3 %, of our gross loan portfolio, of which $129.8$94.2 million were fixed-rate loans and $11.4$75.6 million were ARM loans, compared to $133.0$157.4 million (excluding loans held-for-sale), or 30.8%28.5 % of our gross loan portfolio as of December 31, 2014,2017, of which $118.1$117.6 million were fixed-rate loans and $14.9$39.8 million were ARM loans.
Substantially all of the one- to four-family residential mortgage loans we retain in our portfolio consist of loans that
are “non-conforming” because they do not satisfy acreage limits, income, credit, conforming loan limits (i.e., jumbo mortgages) or various other requirements imposed by Fannie
Mae.Mae or private investors. Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy Fannie Mae credit requirements because of personal and financial reasons (i.e.,
divorce, bankruptcy, length of time employed, etc.), and other aspects, which do not conform to Fannie
Mae’sMae's guidelines. Such borrowers may have higher debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans. We believe that these loans satisfy the needs of borrowers in our market area. As a result, subject to market conditions, we intend to continue to originate these types of loans. We also retain
“jumbo”,jumbo loans which exceed the conforming loan limits and therefore,
are not eligible to be purchased by Fannie Mae. At December 31,
2015, $72.82018, $79.8 million or
51.6%47.0 % of our
one- to four-familyone-to-four family loan portfolio consisted of jumbo loans.
We generally underwrite our one- to four-family loans based on the
applicant’sapplicant's employment and credit history and the appraised value of the subject property. We generally lend up to 80% of the lesser of the appraised value or purchase price for one- to four-family first mortgage loans and non-owner occupied first mortgage loans. For first mortgage loans with a loan-to-value ratio in excess of 80%, we
generallymay require private mortgage insurance or other credit enhancement
in order to
reduce our exposure to 80% or we charge a higher interest rate.help mitigate the risk. Properties securing our one- to four-family loans are
generallytypically appraised by independent fee appraisers who are selected in accordance with criteria approved by the
Board of Directors.Loan Committee. For loans that are less than $250,000, we may use
the Home Value Estimator, an automated valuation model,
developed by Freddie Mac, in lieu of an appraisal. We
typically require title insurance policies on all first mortgage real estate loans originated. Homeowners, liability, fire and, if required, flood insurance policies are also required for
one-to four-familyone-to-four family loans. Our real estate loans generally contain a
“due"due on
sale”sale" clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property. The average balance of our one- to four-family residential loans was approximately
$258,000$317,000 at December 31,
2015.2018.
Fixed-rate loans secured by one- to four-family residences have contractual maturities of up to 30
years; however, at December 31, 2015 we had $1.5 million of one- to four-family loans with an original contractual maturity of 40 years which were originated prior to 2009.years. All of these loans are fully amortizing, with payments due monthly. Our portfolio of fixed-rate loans also includes
$13.4$7.5 million of loans with an initial seven year term and a 30-year amortization period with a borrower refinancing option at a fixed rate at the end of the initial term as long as the loan has met certain performance
criterion.criteria. In addition, we had
$33.9$22.9 million
of one- to four- family loans with a five-year call option at December 31,
2015.2018. Prior to 2012, we originated for portfolio five and seven year balloon reset loans (which are loans that are originated with a fixed interest rate for the initial five or seven years, and thereafter incur one interest rate change based on current market interest rates in which the new rate remains in effect for the remainder of the loan term) based on a 30-year amortization period.
ARM loans are offered with annual adjustments and life-time rate caps that vary based on the product, generally with a maximum annual rate change of 2.0% and a maximum overall rate change of 6.0%. We generally use the rate on one-year
Treasury BillsLIBOR to re-price our ARM loans, however,
$4.7$6.1 million of our ARM loans are to employees
and directors that re-price annually based on a margin of 1%
-1.5% over our average 12 month cost of funds. As a consequence of using caps, the interest rates on ARM loans may not be as rate sensitive as our cost of funds. Furthermore, because loan indexes may not respond perfectly to changes in market interest rates, upward adjustments on loans may occur more slowly than increases in our cost of interest-bearing liabilities, especially during periods of rapidly increasing interest rates. Because of these characteristics, future yields on ARM loans may not be sufficient to offset increases in our cost of funds.
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ARM loans generally pose different credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower’s payment rises, which increases the potential for default. The majority of these loans have been originated within the past several years, when rates were historically low. We continuedcontinue to expandoffer our fully amortizing ARM loans, by offering ARM loans with a fixed interest rate for the first one, three, five or seven years, followed by a periodic adjustable interest rate for the remaining term. Given the recent increase in market environment, however,rates over the productionpast year, the origination of ARM loans has been substantially reducedincreased significantly as borrowers are beginning to favor ARM loans over fixed-rate mortgages. Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by our maximum periodic and lifetime rate adjustments. Moreover, the interest rates on most of our adjustable-rate loans do not adjust within the next year and may not adjust for up to ten years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.
At December 31, 2018, $50.2 million, or 29.6% of our one-to-four family residential portfolio consisted of non-owner occupied loans, compared to $42.4 million or 26.9% of our one-to-four family residential portfolio at December 31, 2017. Loans secured by rental properties represent potentially higher risk and, as a result, we adhere to more stringent underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of the property. Payments on loans secured by rental properties may depend primarily on the tenants’ continuing ability to pay rent to the property owner, the character of the borrower or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, successful operation and management of non-owner occupied properties, including property maintenance standards, may affect repayment. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. We may request that borrowers
favor fixed rate mortgages.and loan guarantors, if any, provide annual financial statements, a budget factoring in a rental income cash flow analysis of the borrower as well as the net operating income of the property, information concerning the borrower’s expertise, credit history and profitability, and the value of the underlying property. These loans are generally secured by a first mortgage on the underlying collateral property along with an assignment of rents and leases. If the borrower has multiple rental property loans with us, the loans are typically not cross collateralized.
In 2016, in order to enable individuals to secure the purchase of a new residence before selling their existing residence, we commenced a loan program designed to allow borrowers to access the equity in their current residence to apply towards the purchase of a new residence. The loan or loans to purchase the new residence are generally originated in an amount in excess of $1.0 million and secured by the borrowers existing and/or new residences, with a maximum combined LTV of up to 80%. These loans provide for repayment upon the earlier of the sale of the current residence or the loan maturity date, which is typically up to 12 months. Upon the sale of the borrower's current residence, we may refinance the new residence using our traditional jumbo mortgage loan underwriting guidelines. During 2018, we originated $4.9 million of loans under this program compared to $15.6 million in 2017. At December 31, 2018, we had $10.2 million of these interest only residential loans in our one- to four-family residential mortgage loan portfolio.
The primary focus of our underwriting guidelines for interest only residential loans is on the value of the collateral rather than the ability of the borrower to repay the loan. As a result, this type of lending exposes us to an increased risk of loss due to the larger loan balance and our inability to sell them to Fannie Mae, similar to the risks associated with jumbo one- to four-family residential loans. In addition, a decline in residential real estate values resulting from a downturn in the Washington housing market may reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowers default on their loans.
Home Equity Lending. We originate home equity loans that consist of fixed-rate fully amortizing loans and variable-rate lines of credit. We typically originate home equity loans in amounts of up to 80%90% of the value of the collateral, minus any senior liens on the property; however, prior to 2010 we originated home equity loans in amounts of up to 100% of the value of the collateral, minus any senior liens on the property. Home equity lines of credit are typically originated for up to $250,000 with an adjustable rate of interest, based on the one-year Treasury Bill rate or the Wall Street Journal Prime rate, plus a margin.Home equity lines of credit generally have up to a twelve-yearthree, five or 12 year draw period, during which time the funds may be paid down and redrawn up to the committed amount. Once the draw period has lapsed, the payment is amortized over either a twelve-year12, 19 or 21 year period based on the loan balance at that time. We charge a $50 annual fee on each home equity line of credit and require monthly interest-only payments on the entire amount drawn amount during the draw period. At December 31, 2015,2018, home equity loans totaled $31.6$27.7 million, or 6.9%4.4% of our grosstotal loan portfolio compared to $34.7$28.4 million, or 8.0%5.2% of our grosstotal loan portfolio at December 31, 2014. Variable-rate2017. Adjustable-rate home equity lines of credit at December 31, 20152018 totaled $20.5$16.6 million, or 4.5%2.7 % of our grosstotal loan portfolio, compared to $22.7$17.0 million, or 5.3%3.1 % of our grosstotal loan portfolio as of December 31, 2014.2017. At December 31, 2015,2018, unfunded commitments on home equity lines of credit totaled $12.0$12.5 million. Our fixed-rate home equity loans
are generally
originated in amounts, together with the amount of the existing first mortgage, of up to 80% of the appraised value of the subject property. These loans may have terms of up to
2015 years and are fully amortizing. At December 31,
2015,2018, fixed-rate home equity loans totaled
$11.0$11.1 million, or
2.4%1.8% of our gross loan portfolio, compared to
$12.0$11.4 million, or
2.8%2.1% of our
grosstotal loan portfolio as of December 31,
2014.2017.
Commercial and Multifamily Real Estate Lending. We offer a variety of commercial and multifamily real estate loans. Most of these loans are secured by owner-occupied and non-owner-occupied commercial income producing properties, including retail centers, multifamily apartment buildings, warehouses, and office buildings, gas station/convenience stores and mobile home parks located in our market area. At December 31, 2015,2018, commercial and multifamily real estate loans totaled $175.3$252.6 million, or 38.0%40.6% of our grosstotal loan portfolio, compared to $169.0$211.3 million, or 39.1%38.4 % of our grosstotal loan portfolio as of December 31, 2014.2017.
Loans secured by commercial and multifamily real estate are generally originated with a variable interest rate, fixed for
a fivean initial three to ten-year term and a 20- to 25-year amortization period. At the end of the initial term,
therethe balance is
a balloon paymentdue in full or the loan re-prices based on an independent index plus a margin
over the applicable index of 1% to 4% for another five years. Loan-to-value ratios on our commercial and multifamily
real estate loans typically do not exceed 80% of the lower of cost or appraised value of the property securing the loan at origination.
Loans secured by commercial and multifamily real estate are generally underwritten based on the net operating income of the property, quality and location of the real estate, the credit history and financial strength of the borrower and the quality of management involved with the property. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt plus an additional coverage requirement. We generally impose a minimum debt
service coverage ratio of
approximately 1.20 for originated loans secured by income producing commercial properties. If the borrower is other than an individual, we
generallytypically require the personal guaranty of the
borrower.principal owners of the borrowing entity. We also generally require an assignment of rents
or leases in order to be assured that the cash flow from the project will be used to repay the debt. Appraisals on properties securing commercial and multifamily
real estate loans are performed by independent state certified licensed fee
appraisers and approved by the Loan Committee.appraisers. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is required to provide
at a minimum, annual financial information. From time to time we also acquire participation interests in commercial and multifamily
real estate loans originated by other financial institutions secured by properties located in our market area.
On a case by case basis, we will consider loan participations where the collateral is located outside of our market area.TABLE OF CONTENTS
Historically, loans secured by commercial and multifamily properties generally involve different credit risks than one- to four-family properties. These loans typically involve larger balances to single borrowers or groups of related borrowers. Because payments on loans secured by commercial and multifamily properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. Repayments of loans secured by non owner occupied properties depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’sborrower's ability to repay the loan may be impaired. Commercial and multifamily real estate loans also expose a lender to greater credit risk than loans secured by one-to four-familyone-to-four family because the collateral securing these loans typically cannot be sold as easily as one-to four-family.one-to-four family. In addition, most of our commercial and multifamily real estate loans are not fully amortizing and contain largeinclude balloon payments upon maturity. Balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. The largest single commercial and multifamily real estate loan at December 31, 2015,2018, totaled $4.0$7.3 million and is collateralized by a multifamily apartmentan office building. At December 31, 20152018, this loan was performing in accordance with its repayment terms.
The following table
displaysprovides information on commercial and multifamily real estate loans by type at December 31,
20152018 and
20142017 (dollars in thousands):
| 2015 | 2014 |
| Amount | Percent | Amount | Percent |
Multifamily residential | $ | 62,419 | | | 35.60 | % | $ | 48,799 | | | 28.88 | % |
Warehouses | | 18,861 | | | 10.76 | | | 23,648 | | | 14.00 | |
Office buildings | | 9,154 | | | 5.22 | | | 8,792 | | | 5.20 | |
Mobile Home Parks | | 6,424 | | | 3.66 | | | 4,734 | | | 2.80 | |
Gas station / Convenience store | | 10,636 | | | 6.07 | | | 9,688 | | | 5.73 | |
Other non-owner occupied commercial real estate | | 28,275 | | | 16.16 | | | 46,555 | | | 27.56 | |
Other owner-occupied commercial real estate | | 39,543 | | | 22.56 | | | 26,736 | | | 15.83 | |
Total | $ | 175,312 | | | 100.00 | % | $ | 168,952 | | | 100.00 | % |
|
| | | | | | | | | | | | | |
| | 2018 | | 2017 |
| | Amount | | Percent | | Amount | | Percent |
| Multifamily residential | $ | 86,307 |
| | 34.1 | % | | $ | 62,879 |
| | 29.8 | % |
| Owner-occupied commercial real estate retail | 9,031 |
| | 3.6 |
| | 7,273 |
| | 3.4 |
|
| Owner-occupied commercial real estate office buildings | 20,262 |
| | 8.0 |
| | 21,189 |
| | 10.0 |
|
Owner-occupied commercial real estate other (1) | 19,851 |
| | 7.9 |
| | 20,972 |
| | 9.9 |
|
| Non Owner-occupied commercial real estate retail | 9,057 |
| | 3.6 |
| | 10,248 |
| | 4.9 |
|
| Non Owner-occupied commercial real estate office buildings | 14,202 |
| | 5.6 |
| | 11,732 |
| | 5.5 |
|
Non owner occupied commercial real estate other (1) | 64,590 |
| | 25.6 |
| | 40,908 |
| | 19.4 |
|
| Warehouses | 12,818 |
| | 5.1 |
| | 17,678 |
| | 8.4 |
|
| Gas station/Convenience store | 8,835 |
| | 3.5 |
| | 9,469 |
| | 4.5 |
|
| Mobile Home Parks | 7,691 |
| | 3.0 |
| | 8,921 |
| | 4.2 |
|
| Total | $ | 252,644 |
| | 100.0 | % | | $ | 211,269 |
| | 100.0 | % |
| |
| (1) | Other commercial real estate loans includes schools, churches, storage facilities, restaurants, etc. |
Construction and Land Lending. We originate construction loans secured by single-family residences and commercial and multifamily real estate. We also originate land acquisition and lotdevelopment loans, which are secured by raw land or developed lots on which the borrower intends to build a residence, and land acquisition and development loans.residence. At December 31, 2015,2018, our construction and land loans totaled $57.0$65.3 million, or 12.4%10.6% of our grosstotal loan portfolio, compared to $46.3$61.5 million, or 10.7%11.2 % of our grosstotal loan portfolio at December 31, 2014.2017. At December 31, 2015,2018, unfunded construction loan commitments totaled $33.0$60.6 million.
Construction loans to individuals and contractors for the construction
and acquisition of personal residences,
including speculative residential construction, totaled
$3.2$23.5 million, or
5.6%36.1 %, of our construction and land portfolio at December 31,
2015. We2018. In addition to custom home construction loans to individuals, we originate
these loans
whetherthat are termed "speculative" which are those loans where the builder does not have, at the time of loan origination, a signed contract with a buyer for the home or
not the collateral property underlying the loan is under contractlot who has a commitment for
sale.permanent financing with either us or another lender. At December 31,
2015,2018, construction loans to contractors for homes that were considered speculative totaled
$33.9$13.2 million, or
59.4%20.3 %, of our construction and land portfolio.
The composition of, and location of underlying collateral securing, our construction and land loan portfolio, excluding loan commitments, at December 31, 20152018 was as follows (in thousands):
| Olympic
Peninsula | Puget Sound | Other | Total |
Commercial and multifamily construction | $ | — | | $ | 10,022 | | $ | — | | $ | 10,022 | |
Residential construction | | 785 | | | 2,381 | | | — | | | 3,166 | |
Land and lot loans | | 4,465 | | | 2,912 | | | 563 | | | 7,940 | |
Speculative residential construction | | 1,544 | | | 32,330 | | | — | | | 33,874 | |
Commercial land developments | | 97 | | | 1,944 | | | — | | | 2,041 | |
Total | $ | 6,891 | | $ | 49,589 | | $ | 563 | | $ | 57,043 | |
|
| | | | | | | | | | | | | | | |
| | Puget Sound | | Olympic Peninsula | | Other | | Total |
| Commercial and multifamily construction | $ | 25,250 |
| | $ | — |
| | $ | 5,183 |
| | $ | 30,433 |
|
| Speculative residential construction | 13,154 |
| | 94 |
| | — |
| | 13,248 |
|
| Land acquisition and development and lot loans | 6,500 |
| | 3,250 |
| | 1,548 |
| | 11,298 |
|
| Residential lot loans | 449 |
| | — |
| | — |
| | 449 |
|
| Residential construction | 9,110 |
| | 709 |
| | 12 |
| | 9,831 |
|
| Total | $ | 54,463 |
| | $ | 4,053 |
| | $ | 6,743 |
| | $ | 65,259 |
|
Our residential construction loans generally provide for the payment of interest only during the construction phase, which is typically
uptwelve to
nineeighteen months. At the end of the construction phase, the construction loan generally either converts to a longer term mortgage loan or is paid off
throughwith a permanent loan from another lender.
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Residential construction loans are made up to the lesser of a maximum loan-to-value ratio of 100% of cost or 80% of appraised value at completion; however, we generally do not originate construction loans which exceed these limits without securing adequate private mortgage insurance or othersome form of credit enhancement to mitigate the higher loan to value.
At December 31,
2015,2018, our largest residential construction loan commitment was for
$2.0$4.2 million,
$1.2$3.8 million of which had been disbursed. This loan was performing according to its
terms.repayment terms at December 31, 2018. The average outstanding residential construction loan balance was approximately
$539,450$445,000 at December 31,
2015.2018. Before making a commitment to fund a
residential construction loan, we require an appraisal of the subject property by an independent
licensedapproved appraiser. During the construction phase, we make periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses.
Typically, disbursements are made in monthly draws during the construction period. Loan proceeds are disbursed after inspection based on the percentage of completion method. We also require general liability,
builder’sbuilder's risk hazard insurance, title insurance, and flood insurance,
(as applicable, for properties located in or to be built in a designated flood hazard
area)area, on all construction loans.
We also originate developed lot and raw land loans to individuals intending to construct a residence in the future on the property. We will generally originate these loans in an amount up to 75% of the lower of the purchase price or appraisal. These lot and land loans are secured by a first lien on the property and have a fixed rate of interest with a maximum amortization of 20 years.
At December 31, 2015, lot and land loans totaled $7.9 million, or 13.9% of our construction and land portfolio.We make land acquisition and development loans to experienced builders or residential lot developers in our market area. The maximum loan-to-value limit applicable to these loans is generally 75% of the appraised market value upon completion of the project. We may not require
any cash equity from the borrower if there is sufficient equity in the land being used as collateral. Development plans are required
from developers prior to making the loan. Our loan officers
are required to personally visit the proposed site of the development and the sites of competing developments. We require that developers maintain adequate insurance coverage. Land acquisition and development loans generally are originated with a loan term up to 24 months, have adjustable rates of interest based on the Wall Street Journal Prime Rate or
the three or five- year
Des Moinesrate charged by the Federal Home Loan Bank
(“FHLB”of Des Moines ("FHLB")
Rate and require interest only payment during the term of the loan. Land acquisition and development loan proceeds are disbursed periodically in increments as construction progresses and as
an inspection by our approved
inspectors warrant.inspector warrants. We also require these loans to be paid on an accelerated basis as the lots are sold, so that we are repaid before all the lots are sold.
At December 31, 2018, land acquisition and development and lot loans totaled $11.3 million, or 17.3% of our construction and land portfolio all of which were lot loans.
We also offer commercial and multifamily construction loans. These loans are underwritten as interest only with terms similar to our permanent commercial real estate loans with special construction financing fortypically up to 1824 months under terms similar to our residential construction loans. Commercial and multifamily construction loans are made up to the lesser of a maximum loan-to-value ratio of 100% of cost or 80% of appraised value at completion. Most of our commercial and multifamily construction loans provide for disbursement of loan funds during the construction period and conversion to a permanent loan when the construction is complete, and either tenant lease-up provisions or prescribed debt service coverage ratios are met. At December 31, 2015,2018, commercial and multifamily construction loans totaled $10.0
$30.4 million, or
17.5%46.6% of our construction and land
portfolio.Construction financing is generally consideredportfolio, compared to involve$19.5 million, or 31.8% of our construction and land portfolio at December 31, 2017. The three largest commercial and multifamily construction loans at December 31, 2018 included a higher degree$6.5 million loan secured by a multifamily residential building, a $5.3 million loan secured by a multifamily residential and mixed use project and a $4.4 million loans secured by a multifamily residential and retail building, all located in Washington.
Our construction and land development loans are based upon estimates of credit risk than longer-term financingcosts in relation to values associated with the completed project. Construction/land lending involves additional risks when compared with permanent residential lending because funds are advanced upon the collateral for the project based on improved, owner-occupied real estate. Construction and development lending containsan estimate of costs that will produce a future value at completion. Because of the uncertainties inherent difficulty in estimating both a property’sconstruction costs, as well as the market value at completion of the completed project and the estimated cost (including interest)effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the project.total funds required to complete a project and the completed project loan-to-value ratio. Changes in the demand, such as for new housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. ThisFor these reasons, this type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. A downturn in housing, or the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of our builders have more than one loan outstanding with us and also have residential mortgage loans for rental properties with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.
In addition, during the term of
somemost of our construction loans,
anno payment from the borrower is required since the accumulated interest
reserve is created at origination and is added to the principal of the loan through
an interest reserve. As a result, these loans often involve the
construction phase.disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If
our appraisal of the
estimatevalue of
value upon completiona completed project proves to be
inaccurate,overstated, we may
be confronted at, or prior to,have inadequate security for the
maturityrepayment of the loan
withupon completion of construction of the project and may incur a
project value which is insufficient to assure full repayment.loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the
end-purchasers’end purchasers' borrowing costs, thereby reducing the
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overall demand for the project. Properties under construction are oftenmay be difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working outresolving problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. Furthermore, in the case of speculative construction loans, to a builder are often associated with homes that are not pre-sold, and thus pose a greater potential risk than construction loans to individuals on their personal residences as there is the added risk associated with identifying an end-purchaser for the finished project. Loans on land under development or held for future constructionLand loans also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can also be significantly impacted by supply and demand. As a result, this typedemand conditions. A downturn in housing, or the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of lending often involves the disbursement of substantial funds with repayment dependent, on the success of the projectour collateral and theour ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor themselves to repay principal and interest.
Consumercollateral upon foreclosure.
Commercial Business Lending. We offer a variety of secured and unsecured consumer loans, including new and used manufactured homes, floating homes, automobiles, boats and recreational vehicle loans, and loans secured by deposit accounts. We also offer unsecured consumer loans. We originate our consumer loans primarily in our market area. All of our consumer loans are originated on a direct basis. At December 31, 2015, our consumer2018, commercial business loans totaled $36.8$38.8 million, or 8.0%6.2% of our grosstotal loan portfolio, compared to $29.4$40.8 million, or 6.8%7.4% of our grosstotal loan portfolio at December 31, 2014.We originate new and used manufactured home loans to borrowers who intend to use the home as a primary residence. The yields on these loans are higher than that on our other residential lending products and the portfolio has performed reasonably well with an acceptable level of risk and loss in exchange for the higher yield. Our weighted average yield on manufactured home loans at December 31, 2015 was 8.0%, compared to 4.6% for one- to four-family mortgages, excluding loans held-for-sale. At December 31, 2015, these loans totaled $13.8 million, or 37.5% of our consumer loans and 3.0% of our gross loan portfolio. For used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $200,000, and with terms typically up to 20 years. On new manufactured homes, loans are generally made up to 80% of the lesser of the appraised value or purchase price up to $200,000, and with terms typically up to 20 years. We generally charge a 1% fee at origination. We underwrite these loans based on our review of creditworthiness of the borrower, including credit scores, and the value of the collateral, for which we hold a security interest under Washington law.
Manufactured home loans are higher risk than loans secured by residential real property, though this risk is reduced if the owner also owns the land on which the home is located. A small portion of our manufactured home loans involve properties on which we also have financed the land for the owner. The primary risk in manufactured home loans is the difficulty in obtaining adequate value for the collateral due to the cost and limited ability to move the collateral. These loans tend to be made to retired individuals and first-time homebuyers. First-time homebuyers of manufactured homes tend to be a higher credit risk than first-time homebuyers of single family residences, due to more limited financial resources. As a result, these loans have a higher probability of default, higher delinquency rates and greater servicing and collateral recovery costs than single family residential loans and other types of consumer loans. We take into account this additional risk as a component of our allowance for loan losses methodology. We attempt to work out delinquent loans with the borrower and, if that is not successful, any repossessed manufactured homes are repossessed and sold. At December 31, 2015, there were three nonperforming manufactured home loan totaling $62,000 and we held one manufactured home valued at $10,000 in the repossessed assets portfolio.
We originate floating home, houseboat and house barge loans typically located on cooperative or condominium moorages. Terms vary from five to 20 years and have a fixed rate of interest. We lend up to 80% of the lesser of the appraised value or purchase price. The primary risk in floating home loans is the unique nature of the collateral and the challenges of relocating such collateral to a location other than where such housing is permitted. The process for securing the deed and/or the condominium or cooperative shares is also unique compared to other types of lending Sound Community Bank participates in. As a result, these loans may have higher collateral recovery costs than for one- to four-family mortgage loans and other types of consumer loans. We take into account these additional risks as a part of our underwriting processes and criteria. At December 31, 2015, floating home loans totaled $18.2 million, or 49.4% of our consumer loan portfolio and 4.0% of our gross loan portfolio.
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The balance of our consumer loans include loans secured by new and used automobiles, new and used boats, motorcycles and recreational vehicles, loans secured by deposits and unsecured consumer loans, all of which, at December 31, 2015, totaled $4.8 million, or 13.0% of our consumer loan portfolio and 1.0%of our gross loan portfolio. Our automobile loan portfolio totaled $475,000 at December 31, 2015, or 1.3% of our consumer loan portfolio and 0.1% of our gross loan portfolio. Automobile loans may be written for a term up to 72 months and have fixed rates of interest. Loan-to-value ratios are up to 100% of the lesser of the purchase price or the National Automobile Dealers Association value for auto loans, including tax, licenses, title and mechanical breakdown and gap insurance.
Loans secured by boats, motorcycles and recreational vehicles typically have terms from five to 20 years depending on the collateral and loan-to-value ratios up to 90%. These loans may be made with fixed or adjustable interest rates. Our unsecured consumer loans have either a fixed rate of interest generally for a maximum term of 48 months, or are revolving lines of credit of generally up to $25,000. At December 31, 2015, unsecured consumer loans totaled $1.2 million and unfunded commitments on our unsecured consumer lines of credit totaled $1.4 million. At that date, the average outstanding balance on these lines was less than $1,000.
Consumer loans (other than our manufactured and floating homes) generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.
Consumer loans generally entail greater risk than do one- to four-family residential mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as manufactured homes, automobiles, boats and recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Commercial Business Lending. At December 31, 2015, commercial business loans totaled $19.3 million, or 4.2% of our gross loan portfolio, compared to $19.5 million, or 4.5% of our gross loan portfolio at December 31, 2014.2017. Substantially all of our commercial business loans have been to borrowers in our market area. Our commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance commercial vehicles and equipment.equipment and loans secured by accounts receivable and/or inventory. Approximately $1.3$1.1 million of our commercial business loans at December 31, 20152018 were unsecured. Our commercial business lending policy includes credit file documentation andan analysis of the borrower’sborrower's background, capacity to repay the loan, the adequacy of the borrower’sborrower's capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’sborrower's past, present and future cash flows is also an important aspect of our credit analysis. We generally require personal guarantees on both our secured and unsecured commercial business loans. Nonetheless, commercial business loans are believed to carry higher credit risk than residential mortgage and commercial real estate loans.
Our interest rates on commercial business loans are dependent on the type of loan. Our secured commercial business loans typically have a loan to value ratio of up to 80% and are term loans ranging from three to seven years. Secured commercial business term loans generally have a fixed rated based on the commensurate FHLB amortizing rate or prime rate as reported in the West Coast edition of the Wall Street Journal plus 1% to 3%. In addition, we typically charge loan fees of 1% to 2% of the principal amount at origination, depending on the credit quality and account relationships of the borrower. Business lines of credit are usually adjustable-rate and are based on the prime rate plus 1% to 3%, and are generally originated with both a floor and ceiling to the interest rate. Our business lines of credit generally have terms ranging from 12 months to 24 months and provide for interest-only monthly payments during the term.
Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers’borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, thisThis collateral ismay consist of accounts receivable, inventory, equipment or real estate. In the case of loans
secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise, may
TABLE OF CONTENTS
be illiquid and may fluctuate in value based on the specific type of business and equipment used.equipment. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which,which, in turn, is often dependent in part upon general economic conditions)conditions.
Consumer Lending. We offer a variety of secured and unsecured consumer loans, including new and used manufactured homes, floating homes, automobiles, boats and recreational vehicle loans, and loans secured by deposit accounts. We also offer unsecured consumer loans. We originate our consumer loans primarily in our market area. All of our consumer loans are originated on a direct basis. At December 31, 2018, our consumer loans totaled $67.6 million, or 10.9% of our total loan portfolio, compared to $51.1 million, or 9.3 % of our total loan portfolio at December 31, 2017.
We typically originate new and used manufactured home loans to borrowers who intend to use the home as a primary residence. The yields on these loans are higher than that on our other residential lending products and the portfolio has performed reasonably well with an acceptable level of risk and loss in exchange for the higher yield. Our weighted-average yield on manufactured home loans at December 31, 2018 was 8.13 %, compared to 4.69 % for one-to-four family mortgages, excluding loans held-for-sale. At December 31, 2018, these loans totaled $20.1 million, or 29.8 % of our consumer loans and 3.2 % of our total loan portfolio. For used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $200,000, and with terms typically up to 20 years. On new manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $200,000, and with terms typically up to 20 years. We generally charge a 1% fee at origination. We underwrite these loans based on our review of creditworthiness of the borrower, including credit scores, and the value of the collateral, for which we hold a security interest under Washington law.
Manufactured home loans are higher risk than loans secured by residential real property, though this risk is reduced if the owner also owns the land on which the home is located. A small portion of our manufactured home loans involve properties on which we also have financed the land for the owner. The primary risk in manufactured home loans is the difficulty in obtaining adequate value for the collateral due to the cost and limited ability to move the collateral. These loans tend to be made to retired individuals and first-time homebuyers. First-time homebuyers of manufactured homes tend to be a higher credit risk than first-time homebuyers of single-family residences, due to more limited financial resources. As a result, these loans may have a higher probability of default and higher delinquency rates than single-family residential loans and other types of consumer loans. We take into account this additional risk as a component of our allowance for loan losses. We attempt to work out delinquent loans with the borrower and, if that is not successful, any past due manufactured homes are repossessed and sold. At December 31, 2018, there were eight nonperforming manufactured home loans totaling $214,000.
We originate floating home, houseboat and house barge loans typically located on cooperative or condominium moorages. Terms vary from five to 20 years and have a fixed rate of interest. We lend up to 90% of the lesser of the appraised value or purchase price. The primary risk in floating home loans is the unique nature of the collateral and the challenges of relocating such collateral to a location other than where such housing is permitted. The process for securing the deed and/or the condominium or cooperative dock is also unique compared to other types of lending we participate in. As a result, these loans may have higher collateral recovery costs than for one- to four-family mortgage loans and other types of consumer loans. We take into account these additional risks as a part of our underwriting criteria. At December 31, 2018, floating home loans totaled $40.8 million, or 60.4 % of our consumer loan portfolio and 6.6% of our total loan portfolio.
The balance of our consumer loans include loans secured by new and used automobiles, new and used boats, motorcycles and recreational vehicles, loans secured by deposits and unsecured consumer loans, all of which, at December 31, 2018, totaled $6.6 million, or 9.8 % of our consumer loan portfolio and 1.1 % of our total loan portfolio. Our automobile loan portfolio totaled $684,000 at December 31, 2018, or 1.0 % of our consumer loan portfolio and 0.1 % of our total loan portfolio. Automobile loans may be written for a term up to 72 months and have fixed rates of interest. Loan-to-value ratios are up to 100% of the lesser of the purchase price or the National Automobile Dealers Association value for used automobiles, including tax, licenses, title and mechanical breakdown and gap insurance.
Loans secured by boats, motorcycles and recreational vehicles typically have terms from five to 20 years depending on the collateral and loan-to-value ratios up to 90%.
These loans may be made with fixed or adjustable interest rates. Our unsecured consumer loans have either a fixed rate of interest generally for a maximum term of 48 months, or are revolving lines of credit of generally up to $25,000. At December 31, 2018, unsecured consumer loans totaled $1.0 million and unfunded commitments on our unsecured consumer lines of credit totaled $1.1 million. At that date, the average outstanding balance on these lines was less than $1,000.
Consumer loans (other than our manufactured and floating homes) generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing client base by increasing the number of client relationships and providing additional marketing opportunities.
Consumer loans generally entail greater risk than do one- to four-family residential mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as manufactured homes, automobiles, boats and recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower's continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Loan Originations, Purchases, Sales, Repayments and Servicing
We originate both fixed-rate and adjustable-rate loans. Our ability to originate loans, however, is dependent upon
customerclient demand for loans in our market area. Over the past
fewseveral years, we have continued to originate residential and consumer loans, and increased our emphasis on commercial and multifamily
real estate, construction and land, and commercial business lending. Demand is affected by competition and the interest rate environment. During the past few years, we, like many other financial institutions, have experienced significant prepayments on loans due to the
prevailing low interest rate environment
prevailing in the United States. In periods of economic uncertainty, the ability of financial institutions, including us, to originate large dollar volumes of real estate loans may be substantially reduced or restricted, with a resultant decrease in interest income. If a proposed loan exceeds our internal lending limits, we may originate the loan on a participation basis with another financial institution. From time to time, we also participate with other financial institutions on loans they originate.
We did not sell commercial loan participations to other financial institutions in 2018. In
2015, 20142017 and
2013,2016, we sold commercial loan participations
with other financial institutions in the amount of
$6.9 million, $5.5$3.1 million and
$2.7$3.0 million, respectively. We underwrite loan purchases and participations to the same standards as an internally-originated loan. We
did not purchase anyhad no purchases of commercial business loan participations
in 2015. In 2014 and 2013, we purchased commercial loan participations withfrom other financial institutions in
the amount of $166,0002018. We purchased two commercial business loan participations from other financial institutions totaling $15.5 million in 2017 and
$5.3$2.7 million
respectively.in 2016.
We do not
actively engage in originating
“alt A” loans,negative amortization or option adjustable rate
or subprime loans and have no established program to originate or purchase these loans. We do offer interest-only one- to
four- familyfour-family loans to well-qualified borrowers and at December 31,
2015,2018, we held
$7.5$10.2 million of such loans in our loan portfolio, representing
1.62%1.6 % of our
grosstotal loan portfolio. Subprime loans are defined
by the FDIC as loans that at the time of loan origination had a FICO credit score of
less than 660.660 or lower. Of the
$107.4$112.5 million in one- to four- family loans originated in
2015,2018, only
$1.0$8.9 million, or
0.09%,7.9 %, were to borrowers with a credit score under 660.
We obtain updated FICO scores on allAdditionally, of
our borrowers periodically and based on the
most recently updated score, $19.4 million, or 4.2% of our gross loan portfolio would be deemed subprime at December 31, 2015. Based on the FICO score as of December 31, 2015, our subprime portfolio included approximately $12.6 million in one- to four-family mortgage loans, $4.0 million in home equity loans, $2.2$7.3 million in manufactured home loans
$319,000originated in
construction2018, $813,000, or 11.1% were to borrowers with a credit score under 660. As of December 31, 2018 and
land2017, the total amount of loans
and $257,000held in
other consumer loans or $19.4 million in the aggregate , representing 4.2% of our loan
portfolio.portfolio to borrowers with a FICO score of 660 or lower were $27.5 million and $29.9 million, respectively. In exchange for the additional lender risk associated with these loans, these borrowers may be required to pay a higher interest rate, and depending on the severity of the credit history, a lower loan-to-value ratio may be required than for a conforming loan borrower. The repayment performance of these loans has been substantially the same as other loans in these portfolios.
In addition to interest earned on loans and loan origination fees, we receive fees for loan commitments, late payments and other miscellaneous services.
We also sell whole
one-to four-familyone-to-four family loans without recourse to Fannie Mae, subject to a provision for repurchase upon breach of representation, warranty or covenant. These loans are fixed-rate mortgages, which primarily are sold to
improvereduce our interest rate
risk.risk and generate noninterest income. These loans are generally sold for cash in amounts equal to the unpaid principal amount of the loans determined using present value yields to the buyer. These sales allow for a servicing fee on loans when the servicing is retained by us. Most one- to four-family loans are sold with servicing retained. At December 31,
2015,2018, we were servicing a
$360.4$352.2 million portfolio of residential mortgage loans for Fannie Mae.
NoWe did not repurchase any loans
werein 2018 and repurchased
from Fannie Maeone loan in
2015 and two loans were repurchased from Fannie Mae2017 totaling
$453,000 in 2014.$135,000.
We earned mortgage servicing income of
$840,000, $509,000$562,000, $566,000 and
$457,000$907,000 for the years ended December 31,
2015, 20142018, 2017 and
2013,2016, respectively. In November 2009, we acquired a $340.1 million loan servicing portfolio from Leader Financial Services. These loans are 100% owned by Fannie Mae and are subserviced under an agreement with a third party loan servicer who performs all servicing including payment processing, reporting and collections.
In October 2015, we acquired a $45.9 million loans servicing portfolio from Seattle Bank. These loans are 100% owned by Fannie Mae and are serviced by us. These mortgage servicing rights are carried at fair value and had a value at December 31, 20152018 of $3.2$3.4 million. See Note 6 in the Notes to the Consolidated Financial Statements.
Statements contained in Item 8 of this report on Form 10-K.
Sales of whole real estate loans can beare beneficial to us since these sales generallymay generate income at the time of sale, produce future servicing income on loans where servicing is retained, provide funds for additional lending, and increase liquidity. We sold $72.6
$50.0 million, $52.7$52.0 million and $108.9$85.1 million of conforming one- to four- family loans TABLE OF CONTENTS
during the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. Gains, losses and transfer fees on sales of one-to four-familyone-to-four family loans and participations are recognized at the time of the sale. Our net gain on sales of residential loans for all of 2015, 2014the years ended December 31, 2018, 2017 and 20132016 was $1.3 million, $624,000$1.1 million and $967,000,$1.4 million, respectively. In addition to loans sold to Fannie Mae on a servicing retained basis, we also sell certainnonconforming residential loans to correspondent banks on a servicing released basis. In 2015,2018 and 2017, we sold $2.9$7.6 million and $4.3 million, respectively, of loans servicing released.
The following table shows our loan origination, sale and repayment activities, including loans held-for-sale, for the periods indicated (in thousands):
| For the year ended December 31, |
| 2015 | 2014 | 2013 |
Originations by type:
| | | | | | | | | |
Fixed-rate:
| | | | | | | | | |
One- to four-family | $ | 107,440 | | $ | 81,130 | | $ | 118,217 | |
Home equity | | 3,170 | | | 2,812 | | | 8,450 | |
Commercial and multifamily | | 29,215 | | | 25,342 | | | 35,468 | |
Construction and land | | 22,665 | | | 48,490 | | | 55,591 | |
Manufactured homes | | 4,594 | | | 2,068 | | | 1,198 | |
Other consumer | | 12,905 | | | 9,652 | | | 3,804 | |
Commercial business | | 3,286 | | | 5,146 | | | 8,530 | |
Total fixed-rate | | 183,275 | | | 174,640 | | | 231,258 | |
Adjustable rate:
| | | | | | | | | |
One- to four-family | | 4,831 | | | 1,199 | | | 552 | |
Home equity | | 1,881 | | | 3,550 | | | 294 | |
Commercial and multifamily | | 35,136 | | | 25,789 | | | 14,524 | |
Construction and land | | 2,609 | | | 8,228 | | | 1,478 | |
Other consumer | | 133 | | | 264 | | | 280 | |
Commercial business | | 3,266 | | | 4,193 | | | 5,226 | |
Total adjustable-rate | | 47,856 | | | 43,223 | | | 22,354 | |
Total loans originated | | 231,131 | | | 217,863 | | | 253,612 | |
Purchases by type:
| | | | | | | | | |
Commercial and multifamily participations | | — | | | — | | | 983 | |
Commercial business participations | | — | | | 166 | | | 4,325 | |
Total loan participations purchased | | — | | | 166 | | | 5,308 | |
Sales, repayments and participations sold:
| | | | | | | | | |
One- to four-family | | 72,622 | | | 52,696 | | | 108,870 | |
Commercial and multifamily | | 6,858 | | | 5,445 | | | 2,676 | |
Total loans sold and loan participations | | 79,480 | | | 58,141 | | | 111,546 | |
Total principal repayments | | 122,351 | | | 119,774 | | | 79,479 | |
Total reductions | | 201,831 | | | 177,915 | | | 191,025 | |
Net increase | $ | 29,300 | | $ | 40,114 | | $ | 62,587 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Originations by type: | | | | | |
| Fixed-rate: | | | | | |
| One-to-four family | $ | 67,823 |
| | $ | 73,560 |
| | $ | 137,760 |
|
| Home equity | 4,459 |
| | 4,538 |
| | 1,733 |
|
| Commercial and multifamily | 94,725 |
| | 34,438 |
| | 20,561 |
|
| Construction and land | 24,303 |
| | 49,771 |
| | 31,610 |
|
| Manufactured homes | 7,313 |
| | 5,106 |
| | 5,006 |
|
| Floating homes | 20,660 |
| | 7,409 |
| | 12,694 |
|
| Other consumer | 3,402 |
| | 2,360 |
| | 630 |
|
| Commercial business | 2,277 |
| | 10,440 |
| | 6,365 |
|
| Total fixed-rate | $ | 224,962 |
| | $ | 187,622 |
| | $ | 216,359 |
|
| Adjustable rate: | | | | | |
| One-to-four family | 44,726 |
| | 36,130 |
| | 4,970 |
|
| Home equity | 9,705 |
| | 5,832 |
| | 2,067 |
|
| Commercial and multifamily | 55,945 |
| | 33,155 |
| | 37,256 |
|
| Construction and land | — |
| | 6,094 |
| | 629 |
|
| Other consumer | 48 |
| | 86 |
| | 81 |
|
| Commercial business | 17,202 |
| | 7,527 |
| | 2,131 |
|
| Total adjustable-rate | $ | 127,626 |
| | $ | 88,824 |
| | $ | 47,134 |
|
| Total loans originated | $ | 352,588 |
| | $ | 276,446 |
| | $ | 263,493 |
|
| Purchases by type: | | | | | |
| Commercial business participations | — |
| | 15,450 |
| | 2,694 |
|
| Total loan participations purchased | $ | — |
| | $ | 15,450 |
| | $ | 2,694 |
|
| Sales, repayments and participations sold: | | | | | |
| One-to-four family | 49,966 |
| | 51,959 |
| | 85,092 |
|
| Commercial and multifamily | — |
| | 3,136 |
| | 3,042 |
|
| Total loans sold and loan participations | 49,966 |
| | 55,095 |
| | 88,134 |
|
| Total principal repayments | 231,627 |
| | 188,121 |
| | 137,400 |
|
| Total reductions | 281,593 |
| | 243,216 |
| | 225,534 |
|
| Net increase | $ | 70,995 |
| | $ | 48,680 |
| | $ | 40,653 |
|
The increase in originations in 20152018 compared to 20142017 was primarily due to a modest decreasethe relatively strong economy in interest rates which spurred the increase in one- to four-family originationour market area and increased sales efforts by our increased emphasis on originating commercialloan officers. Demand for construction loans for new homes and multifamily real estate loans in 2015 compared to 2014. One- to four- family home purchasesapartments continued to be strong as our markets experienced appreciation in residential market prices and a declining supply of homes for sale because of strong demand. Commercial and multifamily, and floating home loan originations more than doubled in 2018 compared to 2017. Manufactured homes and home equity loan originations also increased significantly in 2018 compared to 2017. One-to-four family fixed rate, residential loan originations decreased while one- to four-family adjustable rate, residential loan originations increased significantly compared to prior years, reflecting the rise in residential mortgage rates over the last year. During 2018, the Bank identified continued demand in the marketplace for one- to-four family adjustable rate, residential
mortgages, especially those above the Fannie Mae conforming limits. Commercial business loan originations also increased in 2018 as compared to 2017 as a result of our emphasis on this business segment and the continued demand in our
market area duelocal market. Construction and land loan originations for both fixed rate and adjustable rate loans decreased significantly in 2018 compared to
the economic environment2017 as we shifted our focus to commercial and
the rate of unemploymentmultifamily loans originations in
our markets although it has somewhat been hampered due to the lack of overall supply, especially in the Seattle area. Demand for multi-family and construction loans continued to be strong in our markets due to continued demand for new homes and apartments.2018. TABLE OF CONTENTS
When a borrower fails to make a required payment on a
one-to four-familyone-to-four family loan, we attempt to cure the delinquency by contacting the borrower. In the case of loans secured by a
one-to four-familyone-to-four family property, a late notice typically is sent 15 days after the due
date, anddate. Generally, a pre-foreclosure loss mitigation letter is also mailed to the borrower
is contacted by phone within 30 days after the due date.
Generally, a delinquency letter is also mailed to the borrower. All delinquent accounts are reviewed by a loan officer or branch manager who attempts to cure the delinquency by contacting the
borrower once the loan is 30 days past due.borrower. If the account becomes
60120 days delinquent and an acceptable
repayment planforeclosure alternative has not been agreed upon, we generally refer the account to legal counsel with instructions to prepare a notice of
intent to foreclose.default. The notice of
intent to foreclose allowsdefault begins the
borrower up to 30 days to bring the account current.foreclosure process. If
foreclosed,foreclosure is completed, typically we take title to the property and sell it directly through a real estate broker.
Delinquent consumer loans
as well as delinquent home equity loans and lines of credit, are handled in a similar manner to
one-to four-family loans, except that appropriate action may be taken to collect any loan payment that is delinquent for more than 15 days. Once the loan is 90 days past due, it is classified as nonaccrual. Generally, credits are charged-off at 120 days past due, unless the Loss Mitigation Department provides support for continuing collection efforts.one-to-four family loans. Our procedures for repossession and sale of consumer collateral are subject to various requirements under the applicable consumer protection laws as well as other applicable laws and the determination by us that it would be beneficial from a cost basis.
Delinquent
Once a loan is 90 days past due, it is classified as nonaccrual. Generally, delinquent consumer loans are
initially handled by the loan officer or branch manager in charge of the loan, who is responsible for contacting the borrower. The Loss Mitigation Department also works with the lenders to see that the necessary steps are taken to collect delinquent loans. In addition, management meets with all of the loan officers and reviewscharged-off at 120 days past due,
unless we have a reasonable basis to justify additional collection and
classified loans, as well as other loans that management feels may present possible collection problems, which are reported to the board on a quarterly basis. If an acceptable workout of a delinquent loan cannot be agreed upon, we generally initiate foreclosure or repossession proceedings on any collateral securing the loan.recovery efforts.
Delinquent Loans. The following table sets forth our loan delinquencies by type, by amount and by percentage of type at December 31, 20152018 (dollars in thousands): | Loans Delinquent For: | | | |
| 30-89 Days | 90 Days and Over | 90+ Days and accruing | Total Delinquent Loans |
| Number | Amount | Percent
of Loan
Category | Number | Amount | Percent
of Loan
Category | Number | Amount | Percent
of Loan
Category | Number | Amount | Percent
of Loan
Category |
One- to four- family | 17 | $ | 2,718 | | | 1.93 | % | | 5 | | $ | 881 | | | 0.62 | % | | 1 | | $ | 117 | | | 0.08 | % | | 23 | | $ | 3,716 | | | 2.63 | % |
Home equity | 11 | | 412 | | | 1.30 | | | 2 | | | 296 | | | 0.94 | | | | | | | | | | | | 13 | | | 708 | | | 2.24 | |
Commercial and Multifamily | 1 | | 203 | | | 0.12 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 203 | | | 0.12 | |
Construction and land | 1 | | 65 | | | 0.11 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 65 | | | 0.11 | |
Manufactured homes | 6 | | 130 | | | 0.94 | | | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 130 | | | 0.94 | |
Floating Homes | — | | — | | | 0.00 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 0.00 | |
Other consumer | 10 | | 43 | | | 0.19 | | | — | | | — | | | — | | | — | | | — | | | — | | | 10 | | | 43 | | | 0.19 | |
Commercial Business | 2 | | 162 | | | 0.84 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 162 | | | 0.84 | |
Total | 48 | $ | 3,733 | | | 0.81 | % | | 7 | | $ | 1,177 | | | 0.26 | % | | 1 | | $ | 117 | | | 0.03 | % | | 53 | | $ | 5,027 | | | 1.09 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Delinquent For: | | | | | | |
| | 30-89 Days | | 90 Days and Over | | Total Delinquent Loans |
| | Number | | Amount | | Percent of Loan Category | | Number | | Amount | | Percent of Loan Category | | Number | | Amount | | Percent of Loan Category |
| One- to four- family | 14 |
| | $ | 1,529 |
| | 0.9 | % | | 6 |
| | $ | 514 |
| | 0.3 | % | | 20 |
| | $ | 2,043 |
| | 1.2 | % |
| Home equity | 6 |
| | 447 |
| | 1.6 |
| | 7 |
| | 284 |
| | 1.0 |
| | 13 |
| | 731 |
| | 2.6 |
|
| Commercial and Multifamily | 1 |
| | 139 |
| | 0.1 |
| | 1 |
| | 353 |
| | 0.1 |
| | 2 |
| | 492 |
| | 0.2 |
|
| Construction and land | 3 |
| | 650 |
| | 1.0 |
| | 1 |
| | 50 |
| | 0.1 |
| | 4 |
| | 700 |
| | 1.1 |
|
| Manufactured homes | 8 |
| | 207 |
| | 1.0 |
| | 6 |
| | 199 |
| | 1.0 |
| | 14 |
| | 406 |
| | 2.0 |
|
| Floating homes | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other consumer | 12 |
| | 16 |
| | 0.2 |
| | — |
| | — |
| | — |
| | 12 |
| | 16 |
| | 0.2 |
|
| Commercial Business | 3 |
| | 405 |
| | 1.0 |
| | 3 |
| | 122 |
| | 0.3 |
| | 6 |
| | 527 |
| | 1.4 |
|
| Total | 47 |
| | $ | 3,393 |
| | 0.6 | % | | 24 |
| | $ | 1,522 |
| | 0.2 | % | | 71 |
| | $ | 4,915 |
| | 0.8 | % |
Nonperforming Assets. The table below sets forth the amounts and categories of nonperforming assets in our loan portfolio (in thousands). Loans are placed on nonaccrual status when the collection of principal and/or interest become doubtful or when the loan is more than 90 days past due. OREOOther real estate owned ("OREO") and repossessed assets include assets acquired in settlement of loans.We had one accruing loan 90 days or more delinquent for the 2015 period reported totaling $117,000.
TABLE OF CONTENTS
| December 31, |
| 2015 | 2014 | 2013 | 2012 | 2011 |
Nonperforming loans(1):
| | | | | | | | | | | | | | | |
One- to four- family | $ | 1,640 | | $ | 1,512 | | $ | 772 | | $ | 1,143 | | $ | 4,401 | |
Home equity | | 428 | | | 386 | | | 222 | | | 717 | | | 873 | |
Commercial and multifamily | | — | | | 1,639 | | | 820 | | | 1,347 | | | 1,219 | |
Construction and land | | — | | | 81 | | | — | | | 471 | | | 80 | |
Manufactured homes | | 62 | | | 195 | | | 106 | | | 29 | | | — | |
Floating Homes | | | | | | | | | | | | | | | |
Other consumer | | — | | | 29 | | | 1 | | | 8 | | | 64 | |
Commercial business | | — | | | — | | | — | | | 197 | | | — | |
Total nonperforming loans | $ | 2,130 | | $ | 3,842 | | $ | 1,921 | | | 3,912 | | | 6,637 | |
OREO and repossessed assets:
| | | | | | | | | | | | | | | |
One- to four-family | $ | 159 | | $ | 269 | | $ | 1,086 | | $ | 1,318 | | $ | 478 | |
Commercial and multifamily | | 600 | | | — | | | — | | | 1,073 | | | 2,225 | |
Construction and land | | — | | | — | | | — | | | — | | | — | |
Manufactured homes | | 10 | | | 54 | | | 92 | | | 112 | | | 118 | |
Floating Homes | | | | | | | | | | | | | | | |
Other consumer | | — | | | — | | | — | | | — | | | — | |
Total OREO and repossessed assets | | 769 | | | 323 | | | 1,178 | | | 2,503 | | | 2,821 | |
Total nonperforming assets | $ | 2,899 | | $ | 4,165 | | $ | 3,099 | | $ | 6,415 | | $ | 9,458 | |
Nonperforming assets as a percentage of total assets | | 0.54 | % | | 0.84 | % | | 0.70 | % | | 1.68 | % | | 2.78 | % |
Performing restructured loans:
| | | | | | | | | | | | | | | |
One- to four- family | $ | 2,415 | | $ | 2,619 | | $ | 3,195 | | $ | 3,198 | | $ | 2,508 | |
Home equity | | 232 | | | 679 | | | 704 | | | 356 | | | 812 | |
Commercial and multifamily | | 1,966 | | | 1,317 | | | 761 | | | 776 | | | 785 | |
Construction and land | | 91 | | | 99 | | | 106 | | | 100 | | | — | |
Manufactured homes | | 255 | | | 279 | | | 496 | | | 602 | | | — | |
Other consumer | | — | | | 1 | | | 9 | | | 19 | | | 4 | |
Floating Homes | | | | | | | | | | | | | | | |
Commercial business | | 114 | | | 123 | | | 133 | | | 564 | | | 26 | |
Total performing restructured loans | $ | 5,073 | | $ | 5,117 | | $ | 5,404 | | $ | 5,615 | | $ | 4,135 | |
| |
| (1) | Nonperforming loans include $817,000, $445,000, $683,000, $971,000 $2.3 million, $1.0 million, $828,000 and $2.8$2.3 million in nonperforming troubled debt restructurings as of December 31, 2018, 2017, 2016, 2015 and 2014, 2013, 2012 and 2011, respectively. We had no accruing loan 90 days or more delinquent for the periods reported. |
There were noNonperforming loans, consisting of nonaccrual loans and nonperforming commercial and multifamily estate loans at December 31, 2015 comparedTDRs, increased $384,000 to $1.6$2.7 million at December 31, 2014. Nonperforming one- to four- family loans increased $128,000 to $1.62018 from $2.3 million at December 31, 2015 from $1.5 million at December 31, 2014.2017 due primarily to a $283,000 increase in the one-to-four family loan and $333,000 increase in the commercial and multifamily loan categories, partially offset by a $363,000 decrease in the home equity loan category. Our largest nonperforming loan at December 31, 20152018 was a one-to-four-$167,000 one-to-four family loan totaling $324,000. The balance in nonperformingloan. Nonperforming one- to four- family loans at December 31, 20152018 consisted of 12thirteen loans to different borrowers with an average loan balance of $137,000.
$90,000. There were ten home equity loans, eight manufactured home loans, five commercial business loans, three construction and land loans and two commercial real estate loans classified as nonperforming at December 31, 2018.
For the year ended December 31,
2015,2018, gross interest income that would have been recorded had the nonaccrual loans been current in accordance with their original terms amounted to
$104,000,$172,000, all of which was excluded from interest income for the year ended December 31,
2015.2018. See
“Item 7. Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition at December 31,
20152018 Compared to December 31,
20142017 -- Delinquencies and Nonperforming
Assets”Assets" contained in Item 7 of this report on Form 10-K for more information on troubled assets.
TABLE OF CONTENTS
Troubled Debt Restructured Loans.Loans. Troubled debt restructurings (“TDRs)("TDRs"), which are accounted for under Accounting Codification Standard (“ASC”)ASC 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a lower interest rate, a reduction in principal, or a longer term to maturity. All TDRs are initially classified as impaired regardless of whether the loan was performing at the time it was restructured. Once a troubled debt restructuring 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. At December 31, 2015,2018, we had $5.1$2.0 million of loans that were classified as performing TDRs and still on accrual.accrual, compared to $3.3 million at December 31, 2017. Included in nonperforming loans at December 31, 20152018 and 20142017 were troubled debt restructured loansTDRs of $971,000$817,000 and $2.3 million,$445,000, respectively.
OREO and Repossessed Assets. OREO and repossessed assets include assets acquired in settlement of loans. At December 31, 2015,2018, OREO and repossessed assets totaled $769,000.$575,000. Our largest OREO property as ofat December 31, 2015 was2018, consisted of a commercial real estateformer bank branch property located in Port Angeles, Washington which was acquired in 20142015 as a part of the three branches purchased from another financial institution. ItThe former bank branch property originally was originally classified as a fixed asset and was subsequently reclassified to OREO in 2015.2016. It is currently leased to a local not-for-profit organization at a below market rate.
Other Loans of Concern.Concern. In addition to the nonperforming assets set forth in the table above, as of December 31, 2015,2018, there were 1434 loans totaling $3.3$8.5 million with respect toabout which known information about theof possible credit problems of the borrowers have caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the nonperforming asset categories. The majority of these loans have been considered individually in management’s determination of our allowance for loan losses. Thetwo largest loans of concern at December 31, 2015,2018, were a $1.3$2.4 million loan and $2.1 million loan both secured by one- to four-family residential propertyreal estate located in King County, Washington and a $185,000 loan secured by residential property in Snohomish County, Washington. OtherAdditional other loans of concern included, $271,000$1.6 million in residential first mortgages, $293,000commercial and multifamily real estate loans, $1.6 million in commercial business loans, $571,000 in one-to four-family, $146,000 in home equity loans, $43,000$71,000 in manufactured home loans,homes, and $5,000$52,000 in other consumer loans. Loans of concern had specific loan loss reserves of $144,000 at December 31, 2015.
Classified Assets.Assets. Federal regulations provide for the classification of lower quality loans and other assets (such as OREO and repossessed assets), debt and equity securities considered as “substandard,” “doubtful”"substandard," "doubtful" or “loss.”"loss." An asset is considered “substandard”"substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard”"Substandard" assets include those characterized by the ��distinct possibility”"distinct possibility" that the insured institution will sustain “some loss”"some loss" if the deficiencies are not corrected. Assets classified as “doubtful”"doubtful" have all of the weaknesses in those classified “substandard,”"substandard," with the added characteristic that the weaknesses present make “collection"collection or liquidation in full,”" on the basis of currently existing facts, conditions and values, “highly"highly questionable and improbable.”" Assets classified as “loss”"loss" are those considered “uncollectible”"uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address specific impairments. General allowances represent loss allowances 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 assets. When an insured institution classifies problem assets as a loss, it is required to charge off those assets in the period in which they are deemed uncollectible. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the FDIC and, since our conversion to a Washington chartered commercial bank, the WDFI, which can order the establishment of additional loss allowances. Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated as special mention. At December 31,
2015,2018, special mention assets totaled
$2.9$6.1 million.
We regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of
management’smanagement's review of our assets, at December 31,
2015,2018, we had classified
$3.7$11.7 million of our assets as substandard, of which
$2.5$11.1 million represented a variety of outstanding loans
$449,000and $575,000 represented
non-agency mortgage backed securities, and the
remaining balance
of our OREO and repossessed assets. At that date, we had no assets classified as doubtful or loss. This total amount of classified assets represented
6.9%16.3% of our equity capital and
0.7%1.6% of our assets at December 31,
2015.2018. Classified assets totaled
$6.1$6.8 million, or
12.0%10.4% of our equity capital and
1.2%1.1% of our assets at December 31,
2014.2017.TABLE OF CONTENTS
Allowance for Loan Losses. We maintain an allowance for loan losses to absorb probable loan losses in the loan portfolio. The allowance is based on ongoing, monthly assessments of the estimated probable incurred losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers the types of loans and the amount of loans in the loan portfolio, peer group information, historical loss experience, adverse situations that may affect the borrower’sborrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Large groups of smaller balance homogeneous loans, such as one-to four-family,one-to-four family, small commercial and multifamily real estate, home equity and consumer loans, including floating homes and manufactured homes, are evaluated in the aggregate using historical loss factors and peer group data adjusted for current economic conditions. More complex loans, such as commercial and multifamily real estate
loans and commercial business loans are evaluated individually for impairment, primarily through the evaluation of the
borrower’sborrower's net operating income and available cash flow and their possible impact on collateral values.
At December 31,
2015,2018, our allowance for loan losses was
$4.6$5.8 million, or
1.01%0.93% of our total loan portfolio, compared to
$4.4$5.2 million, or
1.02%0.96% of our total loan portfolio in
2014.2017. Specific valuation reserves totaled
$882,000$736,000 and
$367,000$1.1 million at December 31,
20152018 and
2014,2017, respectively.
Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, properly reflects estimated probable loan losses inherent in our loan portfolio. See Notes 1 and 5
ofin the Notes to Consolidated Financial
Statements.Statements contained in Item 8 of this report on Form 10-K. The following table sets forth an analysis of our allowance for loan losses at the dates indicated (dollars in thousands):
| December 31, |
| 2015 | 2014 | 2013 | 2012 | 2011 |
Balance at beginning of period | $ | 4,387 | | $ | 4,177 | | $ | 4,248 | | $ | 4,455 | | $ | 4,436 | |
Charge-offs:
| | | | | | | | | | | | | | | |
One-to four-family | | 21 | | | 127 | | | 560 | | | 2,740 | | | 834 | |
Home equity | | 35 | | | 295 | | | 593 | | | 1,084 | | | 1,652 | |
Commercial and multifamily | | | | | 47 | | | 194 | | | 503 | | | 1,353 | |
Construction and land | | 40 | | | | | | 7 | | | 222 | | | 159 | |
Manufactured homes | | 37 | | | 197 | | | 143 | | | 152 | | | 239 | |
Floating Homes | | | | | | | | | | | | | | | |
Other consumer | | 77 | | | 77 | | | 41 | | | 286 | | | 255 | |
Commercial business | | | | | — | | | 46 | | | 44 | | | 310 | |
Total charge-offs | | 210 | | | 743 | | | 1,584 | | | 5,031 | | | 4,802 | |
Recoveries:
| | | | | | | | | | | | | | | |
One-to four-family | | | | | 64 | | | — | | | 4 | | | 11 | |
Home equity | | 36 | | | 52 | | | 19 | | | 158 | | | 10 | |
Commercial and multifamily | | | | | 2 | | | 32 | | | 83 | | | 96 | |
Construction and land | | | | | — | | | — | | | — | | | — | |
Manufactured homes | | 8 | | | 14 | | | 3 | | | 11 | | | 8 | |
Floating Homes | | | | | | | | | | | | | | | |
Other consumer | | 15 | | | 21 | | | 31 | | | 33 | | | 53 | |
Commercial business | | | | | — | | | 78 | | | 10 | | | 43 | |
Total recoveries | | 59 | | | 153 | | | 163 | | | 299 | | | 221 | |
Net charge-offs | | 151 | | | 590 | | | 1,421 | | | 4,732 | | | 4,581 | |
Additions charged to operations | | 400 | | | 800 | | | 1,350 | | | 4,525 | | | 4,600 | |
Balance at end of period | $ | 4,636 | | $ | 4,387 | | $ | 4,177 | | $ | 4,248 | | $ | 4,455 | |
Net charge-offs during the period as a percentage of average loans outstanding during the period | | 0.03 | % | | 0.14 | % | | 0.40 | % | | 1.55 | % | | 1.53 | % |
Net charge-offs during the period as a percentage of average nonperforming assets | | 5.26 | % | | 18.65 | % | | 41.16 | % | | 35.15 | % | | 48.04 | % |
Allowance as a percentage of nonperforming loans | | 217.65 | % | | 114.19 | % | | 217.44 | % | | 110.88 | % | | 67.12 | % |
Allowance as a percentage of total loans (end of period) | | 1.01 | % | | 1.02 | % | | 1.07 | % | | 1.30 | % | | 1.47 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Balance at beginning of period | $ | 5,241 |
| | $ | 4,822 |
| | $ | 4,636 |
| | $ | 4,387 |
| | $ | 4,177 |
|
| Charge-offs: | | | | | | | | | |
| One- to four-family | — |
| | — |
| | (72 | ) | | (21 | ) | | (127 | ) |
| Home equity | (7 | ) | | (89 | ) | | (15 | ) | | (35 | ) | | (295 | ) |
| Commercial and multifamily | — |
| | (24 | ) | | (314 | ) | | — |
| | (47 | ) |
| Construction and land | — |
| | — |
| | — |
| | (40 | ) | | — |
|
| Manufactured homes | (12 | ) | | (12 | ) | | — |
| | (37 | ) | | (197 | ) |
| Other consumer | (31 | ) | | (18 | ) | | (42 | ) | | (77 | ) | | (77 | ) |
| Commercial business | — |
| | — |
| | (29 | ) | | — |
| | — |
|
| Total charge-offs | (50 | ) | | (143 | ) | | (472 | ) | | (210 | ) | | (743 | ) |
| Recoveries: | | | | | | | | | |
| One- to four-family | 1 |
| | — |
| | 47 |
| | — |
| | 64 |
|
| Home equity | 44 |
| | 33 |
| | 78 |
| | 36 |
| | 52 |
|
| Commercial and multifamily | — |
| | 1 |
| | — |
| | — |
| | 2 |
|
| Construction and land | — |
| | — |
| | 18 |
| | — |
| | — |
|
| Manufactured homes | — |
| | 8 |
| | 8 |
| | 8 |
| | 14 |
|
| Other consumer | 12 |
| | 20 |
| | 53 |
| | 15 |
| | 21 |
|
| Commercial business | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Total recoveries | 58 |
| | 62 |
| | 204 |
| | 59 |
| | 153 |
|
| Net recoveries (charge-offs) | 8 |
| | (81 | ) | | (268 | ) | | (151 | ) | | (590 | ) |
| Provisions charged to operations | 525 |
| | 500 |
| | 454 |
| | 400 |
| | 800 |
|
| Balance at end of period | $ | 5,774 |
| | $ | 5,241 |
| | $ | 4,822 |
| | $ | 4,636 |
| | $ | 4,387 |
|
| Net recoveries (charge-offs) during the period as a percentage of average loans outstanding during the period | — | % | | (0.02 | )% | | (0.06 | )% | | (0.03 | )% | | (0.14 | )% |
| Net recoveries (charge-offs) during the period as a percentage of average nonperforming assets | 0.30 | % | | (2.12 | )% | | (6.27 | )% | | (5.26 | )% | | (18.65 | )% |
| Allowance as a percentage of nonperforming loans | 216.50 | % | | 229.57 | % | | 143.98 | % | | 217.65 | % | | 114.19 | % |
| Allowance as a percentage of total loans (end of period) | 0.93 | % | | 0.96 | % | | 0.96 | % | | 1.01 | % | | 1.02 | % |
TABLE OF CONTENTS
Economic conditions have improved since the end of the economic recession, however, economic growth has been slow and uneven, presenting an unusually challenging environment for bank and their holding companies, including us. Property values, which began improving in 2013, have generally stabilized, although for some loans they are still lower than when many of the related loans were originated. Recent trends in housing prices and unemployment ratesfavorable in our market areas. Housing prices have experienced continued growth throughout 2018, with historically low inventory levels. Unemployment rates in many of our market areas are generally reflecting continuing improvement.remain low as the job market is competitive. The increasedecrease in our allowance for loan losses as a percentage of nonperforming loans ratio during 20152018 was primarily a result of a decrease in nonperforming loans during the last year.loan growth. The allowance for loan losses as a percentage of nonperforming loans was 217.65%216.50% and 114.19%229.57% as of December 31, 20152018 and 2014,2017, respectively.
The unallocated portion of our allowance for loan losses has increased in 2018 primarily due to an increase in amount of loan losses, loan recoveries and impaired loans relative to prior periods. The
provision for loan losses totaled $525,000 for the year ended December 31, 2018, compared to $500,000 for the year ended December 31, 2017. The increase was primarily as a result of the increase in loans held for portfolio and to a lesser extent the increase in non-performing loans as compared to December 31, 2017.
The distribution of our allowance for losses on loans at the dates indicated is summarized as follows (dollars in thousands):
| December 31, |
| 2015 | 2014 | 2013 | 2012 | 2011 |
| Amount | Percent
of loans
in each
category
to total
loans | Amount | Percent
of loans
in each
category
to total
loans | Amount | Percent
of loans
in each
category
to total
loans | Amount | Percent
of loans
in each
category
to total
loans | Amount | Percent
of loans
in each
category
to total
loans |
Allocated at end of
period to:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
One- to four-family | $ | 1,839 | | | 30.61 | % | $ | 1,442 | | | 30.80 | % | $ | 1,915 | | | 30.02 | % | $ | 1,417 | | | 28.71 | % | $ | 1,117 | | | 31.45 | % |
Home equity | | 607 | | | 6.85 | | | 601 | | | 8.03 | | | 781 | | | 8.96 | | | 997 | | | 10.80 | | | 1,426 | | | 13.20 | |
Commercial and multifamily | | 921 | | | 38.01 | | | 1,244 | | | 39.12 | | | 300 | | | 40.17 | | | 492 | | | 40.79 | | | 969 | | | 35.27 | |
Construction and land | | 382 | | | 12.37 | | | 399 | | | 10.72 | | | 318 | | | 11.30 | | | 217 | | | 7.77 | | | 105 | | | 5.93 | |
Manufactured homes | | 301 | | | 2.99 | | | 193 | | | 2.90 | | | 209 | | | 3.44 | | | 260 | | | 4.96 | | | 290 | | | 6.14 | |
Floating homes | | 149 | | | 3.95 | | | 116 | | | 2.71 | | | 59 | | | 1.42 | | | 56 | | | 1.01 | | | 125 | | | 2.14 | |
Other consumer | | 39 | | | 1.04 | | | 51 | | | 1.20 | | | 50 | | | 1.20 | | | 90 | | | 1.63 | | | 88 | | | 1.49 | |
Commercial business | | 157 | | | 4.18 | | | 108 | | | 4.52 | | | 102 | | | 3.49 | | | 218 | | | 4.33 | | | 254 | | | 4.38 | |
Unallocated | | 241 | | | — | | | 233 | | | — | | | 443 | | | — | | | 501 | | | — | | | 81 | | | — | |
Total | $ | 4,636 | | | 100.00 | % | $ | 4,387 | | | 100.00 | % | $ | 4,177 | | | 100.00 | % | $ | 4,248 | | | 100.00 | % | $ | 4,455 | | | 100.00 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | Amount | | Percent of loans in each category to total loans | | Amount | | Percent of loans in each category to total loans | | Amount | | Percent of loans in each category to total loans | | Amount | | Percent of loans in each category to total loans | | Amount | | Percent of loans in each category to total loans |
| Allocated at end of period to: | | | | | | | | | | | | | | | | | | | |
| One- to four-family | $ | 1,314 |
| | 27.3 | % | | $ | 1,436 |
| | 28.5 | % | | $ | 1,542 |
| | 30.3 | % | | $ | 1,839 |
| | 30.5 | % | | $ | 1,442 |
| | 30.9 | % |
| Home equity | 202 |
| | 4.4 |
| | 293 |
| | 5.2 |
| | 378 |
| | 5.5 |
| | 607 |
| | 6.9 |
| | 601 |
| | 8.0 |
|
| Commercial and multifamily | 1,638 |
| | 40.6 |
| | 1,250 |
| | 38.4 |
| | 1,144 |
| | 36.1 |
| | 921 |
| | 38.0 |
| | 1,244 |
| | 39.1 |
|
| Construction and land | 431 |
| | 10.6 |
| | 378 |
| | 11.2 |
| | 459 |
| | 14.1 |
| | 382 |
| | 12.4 |
| | 399 |
| | 10.7 |
|
| Manufactured homes | 427 |
| | 3.2 |
| | 355 |
| | 3.1 |
| | 168 |
| | 3.1 |
| | 301 |
| | 3.0 |
| | 193 |
| | 2.9 |
|
| Floating homes | 265 |
| | 6.6 |
| | 169 |
| | 5.3 |
| | 132 |
| | 4.8 |
| | 102 |
| | 4.0 |
| | 90 |
| | 2.7 |
|
| Other consumer | 112 |
| | 1.1 |
| | 80 |
| | 0.9 |
| | 112 |
| | 0.8 |
| | 86 |
| | 1.0 |
| | 77 |
| | 1.2 |
|
| Commercial business | 356 |
| | 6.2 |
| | 372 |
| | 7.4 |
| | 175 |
| | 5.3 |
| | 157 |
| | 4.2 |
| | 108 |
| | 4.5 |
|
| Unallocated | 1,029 |
| | — |
| | 908 |
| | — |
| | 712 |
| | — |
| | 241 |
| | — |
| | 233 |
| | — |
|
| Total | $ | 5,774 |
| | 100.0 | % | | $ | 5,241 |
| | 100.0 | % | | $ | 4,822 |
| | 100.0 | % | | $ | 4,636 |
| | 100.0 | % | | $ | 4,387 |
| | 100.0 | % |
State
chartered commercial banks have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, including callable agency securities, certain certificates of deposit of insured
commercial banks and savings
institutions,banks, certain
bankers’bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, state commercial banks may also invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that the institution is otherwise authorized to make directly. See
“-"- How We Are Regulated – Sound Community
Bank”Bank" for a discussion of additional restrictions on our investment activities.
Our Chief Executive Officer and Chief Financial Officer have the responsibility for the management of our investment portfolio, subject to the direction and guidance of the Board of Directors. These officers consider various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.
The general objectives of our investment portfolio
will beare to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low and to maximize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. Our investment quality
will emphasizeemphasizes safer investments with the yield on those investments secondary to not taking unnecessary risk with the available funds. See
“Management’s Discussion"Quantitative and
AnalysisQualitative Disclosures About Market Risk" for additional information about our interest rate risk management contained in Item 7A. of
Financial Condition and Results of Operations – Asset/Liability Management.”this report on Form 10-K.
At December 31,
2015,2018, we owned
$2.2$4.1 million
FHLB stock.of stock issued by the FHLB. As a condition of membership
atin the FHLB, we are required to purchase and hold a certain amount of FHLB stock.
TABLE OF CONTENTS
The following table sets forth the composition of our securities portfolio and other investments at the dates indicated. At December 31, 2015,2018, our securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity capital.
| December 31, |
| 2015 | 2014 | 2013 |
Securities available for sale | Amortized
Cost | Fair
Value | Amortized
Cost | Fair
Value | Amortized
Cost | Fair
Value |
Municipal bonds | $ | 1,912 | | $ | 2,096 | | $ | 1,911 | | $ | 2,083 | | $ | 1,911 | | $ | 1,931 | |
Agency mortgage-backed securities | | 4,088 | | | 4,172 | | | 7,024 | | | 7,096 | | | 11,228 | | | 11,071 | |
Non-agency mortgage-backed securities(1) | | 449 | | | 428 | | | 2,312 | | | 2,345 | | | 2,689 | | | 2,419 | |
Total available for sale securities | | 6,449 | | | 6,696 | | | 11,247 | | | 11,524 | | | 15,828 | | | 15,421 | |
FHLB stock | | 2,212 | | | 2,212 | | | 2,224 | | | 2,224 | | | 2,314 | | | 2,314 | |
Total securities | $ | 8,661 | | $ | 8,908 | | $ | 13,471 | | $ | 13,748 | | $ | 18,142 | | $ | 17,735 | |
See Note 4 in the Notes to Consolidated Financial Statements contained in Item 8 of this report on Form 10-K.
| (1) | Our non-agency mortgage backed securities consist of one security purchased at a discount which had an unrealized loss of $21,000 as of December 31, 2015. This security has performed and paid principal and interest each month as contractually committed. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 |
| Securities available-for-sale | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Municipal bonds | $ | 3,218 |
| | $ | 3,317 |
| | $ | 3,240 |
| | $ | 3,369 |
| | $ | 3,262 |
| | $ | 3,353 |
|
| Agency mortgage-backed securities | 1,594 |
| | 1,640 |
| | 2,030 |
| | 2,066 |
| | 2,858 |
| | 2,904 |
|
| Non-agency mortgage-backed securities | — |
| | — |
| | — |
| | — |
| | 362 |
| | 347 |
|
| Total available for sale securities | 4,812 |
| | 4,957 |
| | 5,270 |
| | 5,435 |
| | 6,482 |
| | 6,604 |
|
| FHLB stock | 4,134 |
| | 4,134 |
| | 3,065 |
| | 3,065 |
| | 2,840 |
| | 2,840 |
|
| Total securities | $ | 8,946 |
| | $ | 9,091 |
| | $ | 8,335 |
| | $ | 8,500 |
| | $ | 9,322 |
| | $ | 9,444 |
|
The composition and maturities of our investment securities portfolio at December 31, 2015, excluding FHLB stock, are as follows: Municipal bonds with an amortized cost of $1.9 million and a fair value of $2.1 million and a final maturity in five to ten years, federal agency mortgage-backed securities with an amortized cost of $4.1 million and a fair value of $4.2 million and a final maturity greater than ten years and one non-agency mortgage-backed security with an amortized cost of $449,000 and a fair value of $428,000 and a final maturity greater than ten years.
We review investment securities on an ongoing basis for the presence of other-than-temporary impairment
(“OTTI”("OTTI") taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected.
Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and the fair value, is recognized as a charge to other comprehensive income. Impairment losses related to all other factors are presented as separate categories within other comprehensive income.
During the year ended December 31,
2015,2018, we
recognized nodid not recognize any non-cash OTTI charges on our investment securities.
One agency security and one non-agency mortgage-backed securityThree municipal bond securities had unrealized losses
butalthough management determined the decline in value was not related to specific credit deterioration. We do not intend to sell
this securitythese securities and it is more likely than not that we will not be required to sell
thisany securities before anticipated recovery of the remaining amortized cost basis. We closely monitor our investment securities for changes in credit risk. The current market environment significantly limits our ability to mitigate our exposure to valuation changes in
this securitythese securities by selling
it.them. If market conditions deteriorate and we determine our holdings of
this securitythese or other investment securities are OTTI, our future earnings,
shareholders’shareholders' equity, regulatory capital and continuing operations could be materially adversely affected.
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General. Our sources of funds are primarily deposits (including deposits from public entities), borrowings, payments of principal and interest on loans and investments and funds provided from operations.
Deposits. We offer a variety of deposit accounts to both consumers and businesses havingwith a wide range of interest rates and terms. Our deposits consist of savings accounts, money market deposit accounts, nowNOW accounts, demand accounts and certificates of deposit. We solicit deposits primarily in our market area; however, at December 31, 2015,2018, approximately 3.8%4.2% of our deposits were from persons outside the State of Washington.As of December 31, 2015,2018, core deposits, which we define as our non-time deposit accounts and time deposit accounts less than $250,000, represented approximately 85.7%90.5% of total deposits, compared to 86.9%90.8% and 87.0%88.0% as of December 31, 20142017 and December 31, 2013,2016, respectively. We primarily rely on competitive pricing policies, marketing and customerclient service to attract and retain these deposits and we expect to continue these practices in the future. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds
and to respond with flexibility to changes in consumer demand. We
have becomeare more susceptible to short-term fluctuations in deposit flows as
customers have becomeclients are more interest rate sensitive. We manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors. Based on our experience, we believe that our deposits are relatively stable sources of funds. Despite this stability, our ability to attract and maintain these deposits and the rates paid on them
has beenis and will continue to be significantly affected by market conditions.
The following table sets forth our deposit flows during the periods indicated (dollars in thousands):
| For the year ended December 31, |
| 2015 | 2014 | 2013 |
Opening balance | $ | 407,809 | | $ | 348,339 | | $ | 312,083 | |
Net deposits | | 29,569 | | | 57,201 | | | 34,160 | |
Interest credited | | 2,646 | | | 2,269 | | | 2,096 | |
Ending balance | $ | 440,024 | | $ | 407,809 | | $ | 348,339 | |
Net increase | $ | 32,215 | | $ | 59,470 | | $ | 36,256 | |
Percent increase | | 7.9 | % | | 17.1 | % | | 11.6 | % |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Opening balance | $ | 514,400 |
| | $ | 467,731 |
| | $ | 440,024 |
|
| Net deposits | 35,362 |
| | 43,648 |
| | 24,999 |
|
| Interest credited | 3,839 |
| | 3,021 |
| | 2,708 |
|
| Ending balance | $ | 553,601 |
| | $ | 514,400 |
| | $ | 467,731 |
|
| Net increase | $ | 39,201 |
| | $ | 46,669 |
| | $ | 27,707 |
|
| Percent increase | 7.6 | % | | 10.0 | % | | 6.3 | % |
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by us at the dates indicated (dollars in thousands):
| December 31, |
| 2015 | 2014 | 2013 |
| Amount | Percent
of total | Amount | Percent
of total | Amount | Percent
of total |
Noninterest-bearing demand | $ | 48,067 | | | 10.92 | % | $ | 41,773 | | | 10.24 | % | $ | 31,877 | | | 9.15 | % |
Interest-bearing demand | | 127,392 | | | 28.95 | | | 103,048 | | | 25.27 | | | 70,639 | | | 20.28 | |
Savings | | 38,833 | | | 8.83 | | | 33,233 | | | 8.15 | | | 26,509 | | | 7.61 | |
Money market | | 54,046 | | | 12.28 | | | 55,236 | | | 13.54 | | | 59,069 | | | 16.96 | |
Escrow | | 2,806 | | | 0.64 | | | 2,580 | | | 0.63 | | | 2,717 | | | 0.78 | |
Total non-maturity deposits | | 271,144 | | | 61.62 | | | 235,870 | | | 57.83 | | | 190,811 | | | 54.78 | |
Certificates of deposit:
| | | | | | | | | | | | | | | | | | |
1.99% or below | | 155,409 | | | 35.32 | | | 156,690 | | | 38.43 | | | 140,139 | | | 40.23 | |
2.00 - 3.99% | | 13,471 | | | 3.06 | | | 15,217 | | | 3.73 | | | 17,300 | | | 4.97 | |
4.00 - 5.99% | | 0 | | | 0.00 | | | 32 | | | 0.01 | | | 89 | | | 0.02 | |
Total certificates of deposit | | 168,880 | | | 38.38 | | | 171,939 | | | 42.17 | | | 157,528 | | | 45.22 | |
Total deposits | $ | 440,024 | | | 100.00 | % | $ | 407,809 | | | 100.00 | % | $ | 348,339 | | | 100.00 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 |
| | Amount | | Percent of total | | Amount | | Percent of total | | Amount | | Percent of total |
| Noninterest-bearing demand | $ | 93,823 |
| | 17.0 | % | | $ | 69,094 |
| | 13.4 | % | | $ | 60,566 |
| | 12.9 | % |
| Interest-bearing demand | 164,919 |
| | 29.8 |
| | 173,413 |
| | 33.7 |
| | 150,327 |
| | 32.1 |
|
| Savings | 54,102 |
| | 9.8 |
| | 49,450 |
| | 9.6 |
| | 44,879 |
| | 9.6 |
|
| Money market | 46,689 |
| | 8.4 |
| | 54,860 |
| | 10.7 |
| | 49,042 |
| | 10.5 |
|
| Escrow | 2,243 |
| | 0.4 |
| | 3,029 |
| | 0.6 |
| | 3,175 |
| | 0.7 |
|
| Total non-maturity deposits | 361,776 |
| | 65.4 |
| | 349,846 |
| | 68.0 |
| | 307,989 |
| | 65.8 |
|
| Certificates of deposit: | |
| | |
| | |
| | |
| | |
| | |
|
| 1.99% or below | 118,478 |
| | 21.4 |
| | 154,102 |
| | 30.0 |
| | 152,294 |
| | 32.6 |
|
| 2.00 - 3.99% | 73,347 |
| | 13.2 |
| | 10,452 |
| | 2.0 |
| | 7,448 |
| | 1.6 |
|
| Total certificates of deposit | 191,825 |
| | 34.6 |
| | 164,554 |
| | 32.0 |
| | 159,742 |
| | 34.2 |
|
| Total deposits | $ | 553,601 |
| | 100.0 | % | | $ | 514,400 |
| | 100.0 | % | | $ | 467,731 |
| | 100.0 | % |
Noninterest-bearing demand accounts increased
during the last three years primarily as a result of a continued marketing emphasis on our rewards checking product as well a competitively priced interest-bearing demand account. This product is priced and marketed similarly35.8% in 2018 compared to
a money market account, however it does not have the monthly withdrawal and outgoing transfer restrictions like savings and money market accounts.2017. The increase
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noninterest-bearing demand accounts was primarily a result of our continued emphasis on attracting relatively low-cost core deposit accounts, in particular from small businesses. The decrease in money market accounts was primarily the result of customers placing these funds in higher yielding interest-bearing demand accounts. In addition, during 2014, we acquired three retail branches on the North Olympic Peninsula with $21.6 million in deposits upon acquisition of which $19.3 million were retained as of December 31, 2014. The increase in certificates during 2014certificate accounts over the past year was primarilyas a result of several targetedour marketing initiatives offering interest rates slightly above market rates.
emphasis on our competitively priced certificates of deposits products.
We are a public funds depository and as of December 31,
2015,2018, we had
$48.6$29.0 million in public
funds.funds compared to $30.0 million in public funds at December 31, 2017. These funds consisted of
$48.1$25.7 million in certificates of deposit,
$141,000$3.2 million in money market accounts and
$343,000$37,000 in checking accounts at December 31,
2015.2018. These accounts must be
100%50% collateralized if the amount on deposit exceeds FDIC insurance of $250,000. We use letters of credit from the FHLB as collateral for these funds.
The following table shows rate and maturity information for our certificates of deposit at December 31,
20152018 (dollars in thousands):
| 0.00-
1.99% | 2.00-
3.99% | Total | Percent of
Total |
Certificate accounts maturing in quarter ending:
| | | | | | | | | | | | |
March 30, 2016 | $ | 29,061 | | $ | 1,848 | | $ | 30,909 | | | 18.30 | % |
June 30, 2016 | | 21,835 | | | 1,523 | | | 23,358 | | | 13.83 | |
September 30, 2016 | | 18,044 | | | 1,344 | | | 19,388 | | | 11.48 | |
December 31, 2016 | | 25,797 | | | 1,328 | | | 27,125 | | | 16.06 | |
March 30, 2017 | | 18,390 | | | 1,652 | | | 20,042 | | | 11.87 | |
June 30, 2017 | | 6,690 | | | 4,184 | | | 10,874 | | | 6.44 | |
September 30, 2017 | | 10,095 | | | 1,524 | | | 11,619 | | | 6.88 | |
December 31, 2017 | | 7,592 | | | — | | | 7,592 | | | 4.50 | |
March 30, 2018 | | 5,135 | | | 68 | | | 5,203 | | | 3.08 | |
June 30, 2018 | | 4,474 | | | — | | | 4,474 | | | 2.65 | |
September 30, 2018 | | 535 | | | — | | | 4,474 | | | 0.32 | |
December 31, 2018 | | 1,475 | | | — | | | 6,286 | | | 0.87 | |
Thereafter | | 6,286 | | | — | | | 6,286 | | | 3.72 | |
Total | $ | 155,409 | | $ | 13,471 | | $ | 168,880 | | | 100.00 | % |
Percent of total | | 92.02 | % | | 7.98 | % | | 100.00 | % | | | |
|
| | | | | | | | | | | | | | |
| | 0.00-1.99% | | 2.00-3.99% | | Total | | Percent of Total |
| Certificate accounts maturing in quarter ending: | |
| | |
| | | | |
| March 30, 2019 | $ | 42,701 |
| | $ | 3,304 |
| | $ | 46,005 |
| | 24.0 | % |
| June 30, 2019 | 26,848 |
| | 3,134 |
| | 29,982 |
| | 15.6 |
|
| September 30, 2019 | 12,899 |
| | 7,730 |
| | 20,629 |
| | 10.8 |
|
| December 31, 2019 | 4,161 |
| | 9,971 |
| | 14,132 |
| | 7.4 |
|
| March 30, 2020 | 4,859 |
| | 4,227 |
| | 9,086 |
| | 4.7 |
|
| June 30, 2020 | 3,278 |
| | 5,636 |
| | 8,914 |
| | 4.6 |
|
| September 30, 2020 | 2,732 |
| | 10,349 |
| | 13,081 |
| | 6.8 |
|
| December 31, 2020 | 1,074 |
| | 20,897 |
| | 21,971 |
| | 11.5 |
|
| March 30, 2021 | 3,407 |
| | 464 |
| | 3,871 |
| | 2.0 |
|
| June 30, 2021 | 3,562 |
| | 394 |
| | 3,956 |
| | 2.1 |
|
| September 30, 2021 | 6,546 |
| | 51 |
| | 6,597 |
| | 3.4 |
|
| December 31, 2021 | 1,655 |
| | 50 |
| | 1,705 |
| | 0.9 |
|
| Thereafter | 4,756 |
| | 7,140 |
| | 11,896 |
| | 6.2 |
|
| Total | $ | 118,478 |
| | $ | 73,347 |
| | $ | 191,825 |
| | 100.0 | % |
| Percent of total | 61.8 | % | | 38.2 | % | | 100.0 | % | | |
|
The following table indicates the amount of our certificates of deposit and other deposits by time remaining until maturity as of December 31,
20152018 (in thousands):
| Maturity | |
| 3 months
or less | Over 3 to
6 months | Over 6 to
12 months | Over 12
months | Total |
Certificates of deposit less than $100,000 | $ | 4,264 | | $ | 9,241 | | $ | 15,176 | | $ | 23,570 | | $ | 52,251 | |
Certificates of deposit of $100,000 or more | | 26,645 | | | 14,117 | | | 31,337 | | | 44,530 | | | 116,629 | |
Total certificates of deposit | $ | 30,909 | | $ | 23,358 | | $ | 46,513 | | $ | 68,100 | | $ | 168,880 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Maturity | | |
| | 3 months or less | | Over 3 to 6 months | | Over 6 to 12 months | | Over 12 months | | Total |
| Certificates of deposit less than $100,000 | $ | 14,790 |
| | $ | 12,044 |
| | $ | 9,884 |
| | $ | 29,237 |
| | $ | 65,955 |
|
| Certificates of deposit of $100,000 or more | 31,215 |
| | 17,938 |
| | 24,877 |
| | 51,840 |
| | 125,870 |
|
| Total certificates of deposit | $ | 46,005 |
| | $ | 29,982 |
| | $ | 34,761 |
| | $ | 81,077 |
| | $ | 191,825 |
|
Borrowings. Although deposits are our primary source of funds, we may utilize borrowings as a cost-effective source of funds when they can be invested at a positive interest rate spread, for additional capacity to fund loan demand, or to meet our asset/liability management goals. Our borrowings currently consist of advances from the FHLB. See Note 10 ofin the Notes to Consolidated Financial Statements.Statements contained in Item 8 of this report on Form 10-K.
We are a member of and obtain advances from the FHLB, which is part of the Federal Home Loan Bank System. The eleven regional Federal Home Loan Banks provide a central credit facility for their member institutions. These advances are provided upon the security of certain of our mortgage loans and mortgage-backed securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features, and all long-term advances are required to provide funds for residential home financing. We have entered into a loan agreement with the FHLB pursuant to
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which Sound Community Bank may borrow up to approximately 35%45% of its total assets, secured by a blanket pledge on a portion of our residential mortgage portfolio including one- to fourone-to-four family firstloans, commercial and second mortgagemultifamily real estate loans and commercial and multifamilyhome equity loans. Based on eligible collateral, the total amount available under this agreement as of December 31, 20152018 was $174.0$321.5 million. At the same date, we had $40.4$84.0 million in FHLB advances outstanding with maturities between zero and three years. We also had outstanding letters of credit from the FHLB with a notional amount of $47.5$14.5 million at December 31, 2015.2018. We plan to rely in part on long-term FHLB advances to fund asset and loan growth. We also use short-term advances to meet short term liquidity needs. We are required to own stock in the FHLB based on the amount of our advances.
From time to time, we also may borrow from the Federal Reserve Bank of San
Francisco’s “discount window”Francisco's "discount window" for overnight liquidity needs, although we have not borrowed from the discount window in recent years.
The following table sets forth the maximum balance and average balance of borrowings for the periods indicated (dollars in thousands):
| For the year ended December 31, |
| 2015 | 2014 | 2013 |
Maximum balance:
| | | | | | | | | |
FHLB advances | $ | 44,988 | | $ | 47,006 | | $ | 63,489 | |
Average balances:
| | | | | | | | | |
FHLB advances | $ | 24,626 | | $ | 26,384 | | $ | 33,697 | |
Weighted average interest rate:
| | | | | | | | | |
FHLB advances | | 0.43 | % | | 0.58 | % | | 0.53 | % |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Maximum balance: | | | | | |
| FHLB advances | $ | 99,500 |
| | $ | 61,500 |
| | $ | 59,846 |
|
| Average balances: | | | | | |
| FHLB advances | $ | 69,900 |
| | $ | 29,791 |
| | $ | 36,609 |
|
| Weighted average interest rate: | | | | | |
| FHLB advances | 2.18 | % | | 1.16 | % | | 0.58 | % |
The following table sets forth certain information about our borrowings at the dates indicated (dollars in thousands):
| December 31, |
| 2015 | 2014 | 2013 |
FHLB advances | $ | 40,435 | | $ | 30,578 | | $ | 43,221 | |
Weighted average interest rate:
| | | | | | | | | |
FHLB advances | | 0.39 | % | | 0.38 | % | | 0.36 | % |
|
| | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 |
| FHLB advances | $ | 84,000 |
| | $ | 59,000 |
| | $ | 54,792 |
|
| Weighted-average interest rate: | |
| | |
| | |
|
| FHLB advances | 2.72 | % | | 1.63 | % | | 0.82 | % |
Subsidiary and Other Activities
Sound Financial Bancorp has one subsidiary, Sound Community Bank.
In 2018, Sound Community Bank formed Sound Community Insurance Agency, Inc. as a wholly owned subsidiary for purposes of selling a full range of insurance products.
We face competition in attracting deposits and originating loans. Competition in originating real estate loans comes primarily from
other commercial
financial institutions,banks, credit unions, life insurance companies,
mortgage brokers and
mortgage brokers. Other savings banks, commercialmore recently financial technology (or "FinTech") companies. Commercial banks, credit unions and finance
companies, including FinTech companies, provide vigorous competition in consumer lending. Commercial business competition is primarily from local commercial banks, but
other savings banks and credit unions also compete for this business. We compete by consistently delivering high-quality, personal service to our
customersclients which results in a high level of
customerclient satisfaction.
Our market area has a high concentration of financial institutions, many of which are branches of large money center and regional banks that have resulted from the consolidation of the banking industry in Washington and other western states. These include such large national lenders as US Bank, JP Morgan Chase, Wells Fargo, Bank of America, Key Bank and others in our market area that have greater resources than we
do and may offer services that we do not provide. Customers who seek “one-stop shopping” may be drawn to institutions that offer services that we do not.do.
We attract our deposits through our branch
office system.offices and web site. Competition for those deposits is principally from savings banks, commercial banks and credit unions, as well as mutual funds,
FinTech companies and other alternative investments. We compete for these deposits by offering superior service,
online and mobile access and a variety of deposit accounts at competitive rates. Based on the most recent data provided by the FDIC, there are approximately
5750 other commercial banks and savings
institutionsbanks operating in the Seattle
MSA.MSA, which includes King, Snohomish and Pierce Counties. Based on the most recent branch deposit data provided by the FDIC, our share of deposits in the Seattle MSA
wasis approximately
0.18%0.2%. The five largest financial institutions
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in that area have 23.25%71.2% of those deposits. In Clallam County there are 11nine other commercial banks and savings institutions.banks. Our share of deposits in Clallam County was the second highest in the county at 14.19%approximately 16.5%, with the five largest institutions in that county having 72.57%76.9% of the deposits. In Jefferson County there are sevensix other commercial banks and savings banks. Our share of deposits in Jefferson County is estimated to be 4.04%approximately 6.8%, withwhile the five largest institutions in that county have 76.17%82.0% of those deposits.
General. On December 28, 2012 Sound Community Bank converted from a federally chartered savings bank tois a Washington state-chartered commercial bank. As a Washington commercial bank,The regulators of Sound Community Bank’s regulatorsBank as a commercial bank are the WDFI and the FDIC, rather than the OCC.FDIC. The Federal Reserve is the primary federal regulator for Sound Financial Bancorp. A brief description of certain laws and regulations that are applicable to Sound Financial Bancorp and Sound Community Bank is set forth below. TheThis description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. Legislation is introduced from time to time in the United States Congress or the Washington State Legislature that may affect the operations of Sound Financial Bancorp and Sound Community Bank. In addition, the regulations governing us may be amended from time to time. Any such legislation or regulatory changes in the future could adversely affect our operations and financial condition. The WDFI and FDIC have extensive enforcement authority over Sound Community Bank. The Federal Reserve has the same type of authority over Sound Financial Bancorp. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease-and-desist orders and removal orders and initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the regulators.
Regulatory Reform. On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).Act. The Dodd-Frank Act imposes newimposed various restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. The following discussion summarizes significant aspects of the Dodd-Frank Act that will affect us. The following aspects of the Dodd-Frank Act, among others, are related to our operations:
The Consumer Financial Protection Bureau (the “CFPB”), an independent consumer compliance regulatory agency, was established within the Federal Reserve, has been established.Reserve. The CFPB is empowered to exercise broad regulatory, supervisory and enforcement authority over financial institutions with total assets over $10 billion with respect to both new and existing consumer financial protection laws. Smaller financial institutions, like Sound Community Bank, are subject to supervision and enforcement by their primary federal banking regulator with respect to federal consumer financial protection laws and regulations. The CFPB also has authority to promulgate new consumer financial protection regulations and amend existing consumer financial protection regulations.
The Federal Deposit Insurance Act was amended to direct federal regulators toReserve must require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.
The prohibition on payment of interest on demand deposits was repealed.
Deposit insurance increased to $250,000.
The deposit insurance assessment base for FDIC insurance is the depository institution’s average consolidated total assets less average tangible equity during the assessment period.
The minimum reserve ratio of the Deposit Insurance Fund ("DIF") increased to 1.35 percent of estimated annual insured deposits or the comparable percentage of the assessment base; however, the FDIC is directed to “offsetoffset the effect”effect of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion. Pursuant to the Dodd-Frank Act, the FDIC issued a rule setting a designated reserve ratio at 2.0% of insured deposits.
Tier 1 capital treatment for “hybrid” capital items like trust preferred securities iswas eliminated subject to various grandfathering and transition rules. The federal banking agencies have promulgated new rules
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on regulatory capital for both depository institutions and their holding companies, to includeincluding leverage capital and risk-based capital measures at least as stringent as those now applicable to Sound Community Bank under the prompt corrective action regulations. See “-Capital Rules”
A separate, non-binding shareholder vote is required regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments.
Securities exchanges are required to prohibit brokers from using their own discretion to vote shares not beneficially owned by them for certain “significant” matters, which include votes on the election of directors, executive compensation matters, and any other matter determined to be significant.
Stock exchanges, not including the OTC Bulletin Board, are prohibited from listing the securities of any issuer that does not have a policy providing for (i) disclosure of its policy on incentive compensation that is based on financial information required to be reported under the securities laws, and (ii) the recovery from current or former executive officers, following an accounting restatement triggered by material noncompliance with securities law reporting requirements, of any incentive compensation paid erroneously during the three-year period preceding the date on which the restatement was required that exceeds the amount that would have been paid on the basis of the restated
financial information.
2018 Regulatory Reform
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for community banks such as Sound Community Bank, and their holding companies.
The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single Community Bank Leverage Ratio of between 8 and 10 percent. Any qualifying depository institution or its holding company that exceeds that ratio will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules.
The Act also expands the category of holding companies that may rely on the Small Bank Holding Company and Savings and Loan Holding Company Policy Statement of the Federal Reserve by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. A major effect of this change is to exclude such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
It is difficult at this time to predict when or how any new standards under the Act will ultimately be applied to us or what specific impact the Act and the yet-to-be-written implementing rules and regulations will have on community banks.
Regulation of Sound Community Bank
General. Sound Community Bank, as a state-chartered commercial bank, is subject to applicable provisions of Washington law and to regulations and examinations of the WDFI. As an insured institution, it also is subject to examination and regulation by the FDIC, which insures the deposits of Sound Community Bank to the maximum permitted by law. During these state or federal regulatory examinations, the examiners may require Sound Community Bank to provide for higher general or specific loan loss reserves, which can impact our capital and earnings. This regulation of Sound Community Bank is intended for the protection of depositors and the Deposit Insurance Fund of the FDIC and not for the purpose of protecting shareholders of Sound Community Bank or Sound Financial Bancorp. Sound Community Bank is required to maintain minimum levels of regulatory capital and is subject to certain limitations on the payment of dividends to Sound Financial Bancorp. See “- Capital Rules” and “-Limitations on Dividends and Other Capital Distributions.”Federal and State Enforcement Authority and Actions. As part of its supervisory authority over Washington-chartered commercial banks, the WDFI may initiate enforcement proceedings to obtain a cease-and-desist order against an institution believed to have engaged in unsafe and unsound practices or to have violated a law, regulation, or other regulatory limit, including a written agreement. The FDIC also has the authority to initiate enforcement actions against insured institutions for similar reasons and may terminate the deposit insurance if it determines that an institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. Both these agencies may utilize less formal supervisory tools to address their concerns about the condition, operations of compliance status of a commercial bank.
Regulation by the Washington Department of Financial InstitutionsWDFI and the FDIC. State law and regulations govern Sound Community Bank’s ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make other loans, to invest in securities, to offer various banking services to its customers,clients, and to establish branch offices. As a state commercial bank, Sound Community Bank must pay semi-annual assessments, examination costs and certain other charges to the WDFI. Washington law generally provides the same powers for Washington commercial banks as federally and other-state chartered savings
institutions and banks with branches in Washington. Washington law allows Washington commercial banks to charge the maximum interest rates on loans and other extensions of credit to Washington residents which are allowable for a national bank in another state if higher than Washington limits. In addition, the WDFI may approve applications by Washington commercial banks to engage in an otherwise unauthorized activity, if it determines that the activity is closely related to banking, and Sound Community Bank is otherwise qualified under the statute.
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Federal law and regulations generally limitslimit the activities, subsidiary investments and activities and equity investments of Sound Community Bank as principal, to those that are permissible for national banks, unless approved by the FDIC. OurFDIC, and govern our relationship with our depositors and borrowers is regulated to a great extent, by federal laws and regulations, especially with respect to disclosure requirements.
The FDIC has adopted regulatory guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and information systems, audit systems, interest rate risk exposure and compensation and other benefits. If the FDIC determines that Sound Community Bank fails to meet any standard
prescribed by these guidelines, it may require Sound Community Bank to submit an acceptable plan to achieve compliance with the standard.
Among these safety and soundness standards are FDIC regulations that require Sound Community Bank to adopt and maintain written policies that establish appropriate limits and standards for real estate loans. These standards, which must be consistent with safe and sound banking practices, establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value ratio limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. Sound Community Bank is obligated to monitor conditions in its real estate markets to ensure that its standards continue to be appropriate for current market conditions. Sound Community Bank’s board of directors is required to review and approve Sound Community Bank’s standards at least annually. The FDIC has published guidelines for compliance with these regulations, including supervisory limitations on loan-to-value ratios for different categories of real estate loans. Under the guidelines, the aggregate level of all loans in excess of the supervisory loan-to-value ratios should not exceed an aggregate limit of 100% of total capital, and within the aggregate limit, the total of all loans for commercial, agricultural, multifamily or other non-one-to-four-familynon-one-to-four family residential properties should not exceed 30% of total capital.
Loans in excess of the supervisory loan-to-value ratio limitations must be identified in Sound Community Bank’s records and reported at least quarterly to Sound Community Bank’s Board of Directors. Sound Community Bank is in compliance with the
recordrecords and reporting requirements. As of December 31,
2015,2018, Sound Community Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were
$7.8$5.8 million.
The FDIC and the WDFI must approve any merger transaction involving Sound Community Bank as the acquirer, including an assumption of deposits from another depository institution. The FDIC generally is authorized to approve interstate merger transactions without regard to whether the transaction is prohibited by the law of any state. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions willare also be subject to the nationwide and statewide insured deposit concentration amounts described below. The Dodd-Frank Act permits de novointerstate branching for banks by establishing de novo branches.banks.
Insurance of Accounts. The Deposit Insurance Fund (“DIF”) of the FDIC insures deposit accounts in Sound Community Bank up to $250,000 per separately insured depositor.deposit ownership right or category.
The FDIC assesses deposit insurance premiums
quarterly on each FDIC-insured institution
quarterly based on annualized rates for one of four risk categories applied to its
deposits, subject to certain adjustments. Each institution with less than $10 billion in assetsdeposit base, which is
assigned to one of four risk categories based on its capital levels, supervisory ratings and other factors. Well capitalized institutions that are financially sound with only a few minor weaknesses are assigned to Risk Category I. Risk Categories II, III and IV present progressively greater risks to the DIF.Under the FDIC’s regulations for deposit insurance assessments, the assessment base for a bank is equal to its totaltheir average consolidated total assets less average tangibleminus its Tier 1 capital. The FDIC assessment rates range from approximately 5 basis points to 35 basis points, subject to applicable adjustments for unsecured debt issued by an institution, brokered deposits and unsecured debt of other FDIC-insured institutions, until such time as the FDIC’s reserve ratio equals 1.15%. When the FDIC’s reserve ratio reaches 1.15% and the reserve ratio for the immediately prior assessment period is less than 2.0%, the applicable assessment rates may range from 3 basis points to 30 basis points (subject to adjustments as described above). When the reserve ratio for the prior assessment period is equal to or greater than 2.0% and less than 2.5%, the assessment rates may range from 2 basis points to 28 basis points and if the reserve ratio for prior assessment period is greater than 2.5%, the assessment rates may range from 1 basis point to 25 basis points (in each case subject to adjustments as described above). No institution may pay a dividend if it is in default on its federal deposit insurance assessment.
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The FDIC calculates assessments for small institutions (those with assets of less than $10 billion) based on an institution’s weighted average CAMELS component ratings and certain financial ratios. Currently, assessment rates range from 3 to 16 basis points for institutions with CAMELS composite ratings of 1 or 2, 6 to 30 basis points for those with CAMELS composite ratings of 3, and 16 to 30 basis points for those with CAMELS composite ratings of 4 or 5, all subject to certain adjustments. Assessment rates are expected to decrease in the future as the reserve ratio increases in specified increments.TABLE OF CONTENTS
As required by the Dodd Frank Act, the FDIC has proposedadopted a rule to offset the effect of the increase in the minimum reserve ratio of the DIF on small institutions by imposing a surcharge on institutions with assets of $10 billion or more commencing on July 1, 2016 and ending when the reserve ratio reaches 1.15% and ending when it1.35%, which, the FDIC announced occurred on September 30, 2018. When the reserve ratio reaches 1.35%. This surcharge period is expected to begin in 2016 and end by December 31, 2018. Smaller1.38%, small institutions will receive credits for the portionportions of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. The creditSubject to certain limitations, the credits will apply to reduce regular assessments by 2.0 basis points for quarters when the reserve ratio is at least 1.40%.
until exhausted.
Transactions with Related Parties. Transactions between Sound Community Bank and its affiliates are required to be on terms as favorable to Sound Community Bank as transactions with non-affiliates, and certain of these transactions, such as loans to an affiliate, are restricted to a percentage of Sound Community Bank’s capital and require eligible collateral in specified amounts. Sound Financial Bancorp is an affiliate of Sound Community Bank.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by Sound Financial Bancorp to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, Sound Community Bank’s authority to extend credit to executive officers, directors and 10% or greater shareholders (“insiders”), as well as entities such persons control, is limited. The laws limit both the individual and aggregate amount of loans that Sound Community Bank may make to insiders based, in part, on Sound Community Bank’s capital level and requires that certain board approval procedures be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated borrowers and must not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved.
Capital Rules.Rules. Effective January 1, 2015 (with some provisions transitioned into full effectiveness over several years), Sound Financial Bancorp and Sound Community Bank areis subject to newthe capital regulations adopted by the Federal Reserve and the FDIC.FDIC pursuant to the Dodd-Frank Act. Under the newthese capital regulations, the minimum capital ratios are: (1) a common equity Tier 1 (“CET1”) capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total capital ratio of 8.0% of risk-weighted assets, and (4) a leverage ratio (the ratio of Tier 1 capital to average total adjusted assets) of 4.0%. CET1 generally consists of common stock, retained earnings, accumulated other comprehensive income (“AOCI”) unless an institution elects to exclude AOCI from regulatory capital, as discussed below, and certain minority interests, all subject to applicable regulatory adjustments and deductions.Tier 1 capital generally includes CET1 and noncumulative perpetual preferred stock, less most intangible assets, subject to certain adjustments. Total capital consists of Tier 1 and Tier 2 Capital. Tier 2 capital, which is limited to 100 percent of Tier 1 capital, includes such items as qualifying general loan loss reserves, cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt and limited life preferred stock; however, the amount of term subordinated debt and intermediate term preferred stock that may be included in Tier 2 capital is limited to 50 percent of Tier 1 capital. Risk-weighted assets are determined under the capital regulations, which assign risk-weights to all assets and to certain off-balance sheet items.The new
These regulations include the phasing-out of certain instruments as qualifying capital. Mortgage servicing and deferred tax assets over designated percentages of CET1 are deducted from capital. In addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available for sale debt and equity securities, unless an institution elects to opt out of such inclusion, if eligible to do so. We have elected to permanently opt-out of the inclusion of AOCI in our capital calculations.
The
new capital regulations include a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% risk weight for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; and a 250% risk weight for mortgage servicing and deferred tax assets that are not deducted from capital.
In addition to the minimum CET1, Tier 1 and total capital ratios, Sound Financial Bancorp and Sound Community Bank must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum
risk-based capital levels in order to avoid limitations on paying
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dividends, engaging in share repurchases, and paying discretionary bonuses. The capital conservation buffer requirement is phasedbegan to phase in beginning on January 1, 2016, when a buffer greater than 0.625% of risk-weighted assets will bewas required, which amount will increaseincreased each year until the buffer requirement iswas fully implemented on January 1, 2019.
Under the FDIC’s prompt corrective action standards, in order to be considered well-capitalized, a bank must have a ratio of CET1 capital to risk-weighted assets of
at least 6.5%, a ratio of Tier 1 capital to risk-weighted assets of
at least 8%, a ratio of total capital to risk-weighted assets of
at least 10%, and a leverage ratio of
at least 5%
., and the bank must not be subject to a regulatory capital requirement imposed on it as an individual bank. In order to be considered adequately capitalized, a bank must have the minimum capital ratios described above. Institutions with lower capital ratios are assigned to lower capital categories. Based on safety and soundness concerns, the FDIC may assign an institution to a lower capital category than would originally apply based on its capital ratios. The FDIC is also authorized to require Sound Community Bank to maintain additional amounts of capital in connection with concentrations of assets, interest rate risk, and certain other items. The FDIC has not imposed such a requirement on Sound Community Bank.
An institution that is not well capitalized is subject to certain restrictions on brokered deposits and interest rates on deposits. An institution that is not at least adequately capitalized is subject to numerous additional restrictions, and a guaranty by its holding company is required. An institution with a ratio of tangible equity to total assets of
20%2.0% or less is subject to appointment of the FDIC as receiver if its capital level does not improve in timely fashion. When the FDIC as receiver liquidates an institution, the claims of depositors and the FDIC as their successor have priority over other unsecured claims against the institution.
The Financial Accounting Standards Board has adopted a new accounting standard for US Generally Accepted Accounting Principles that will be effective for us for our first fiscal year beginning after December 15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets. CECL covers a broader range of assets than the current method of recognizing credit losses and generally results in earlier recognition of credit losses. Upon
adoption of CECL, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the current methodology and the amount required under CECL. For a banking organization, implementation of CECL is generally likely to reduce retained earnings, and to affect other items, in a manner that reduces its regulatory capital.
The federal banking regulators (the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC) have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital.
As of December 31,
2015, Sound Financial Bancorp and2018, Sound Community Bank
are well-capitalizedwas well capitalized under
applicable regulations and met the
capital rules and we anticipate that we will meet thefully phased-in capital conservation buffer requirement.
Volcker Rule Regulations. Regulations. Regulations were adopted by the federal banking agencies to implement the provisions of the Dodd Frank Act commonly referred to as the Volcker Rule. The regulations contain prohibitions and restrictions on the ability of banks and their holding companies and the affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds, and certain other investments, including certain collateralized mortgage obligations, collateralized debt obligations, collateralized loan obligations and others.
Community Reinvestment and Consumer Protection Laws.Laws. In connection with its lending and other activities, Sound Community Bank is subject to a number of federal laws designed to protect customersclients and promote lending to various sectors of the economy and population. These include, among others, the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Community Reinvestment Act (“CRA”). Among other things, these laws:
require lenders to disclose credit terms in meaningful and consistent ways;
prohibit discrimination against an applicant in a credit transaction;
prohibit discrimination in housing-related lending activities;
require certain lenders to collect and report applicant and borrower data regarding home;
home loans;
require lenders to provide borrowers with information regarding the nature and cost of real estate settlements;
prohibit certain lending practices and limit escrow account amounts with respect to real estate loan transactions;
require financial institutions to implement identity theft prevention programs and measures to protect the confidentiality of consumer financial information; and
prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
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The CFPB has authority for amendingto amend existing consumer complianceprotection regulations and implementingimplement new regulations, and is charged with examining the compliance of financial institutions with assets in excess of $10 billion with these consumer protection rules. Sound Community Bank’s compliance with consumer protection rules is examined by the WDFI and the FDIC since it does not meet this $10 billion asset level threshold.
FDIC.
In addition, federal regulations limit the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated parties.
The CRA requires the appropriate federal banking agency to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods. The FDIC examines Sound Community Bank for compliance with its CRA obligations. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance” and the appropriate federal banking agency is to take this rating into account in the evaluation of certain applications of the institution, such as an application relating to a merger or the establishment of a branch. An unsatisfactory rating may be the basis for the denial of such an application. The CRA also requires that all institutions make public disclosures of their CRA ratings. Sound Community Bank received a “satisfactory” rating in its most recent CRA evaluation. Under the law of the state of Washington, Sound Community Bank has a similar obligation to meet the credit needs of the communities it serves, and is subject to examination by the WDFI for this purpose, including assignment of a rating. An unsatisfactory rating may be the basis for denial of certain applications by the WDFI.
Bank Secrecy Act / Anti-Money Laundering Laws. Sound Community Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. These laws and regulations require Sound
Community Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their
customers.clients. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing mergers and acquisitions.
Federal Home Loan Bank System. Sound Community Bank is a member of the Federal Home Loan Bank of Des Moines,FHLB, one of the 11 regional Federal Home Loan Banks in the Federal Home Loan Bank System. The Federal Home Loan Bank System provides a central credit facility for member institutions. As a member of the Federal Home Loan Bank of Des Moines, Sound CommunityFHLB, the Bank is required to hold shares of capital stock in that Federal Home Loan Bank.FHLB. At December 31, 2015, Sound Community2018, the Bank had $2.2$4.1 million in Federal Home Loan BankFHLB stock, which was in compliance with this requirement. Sound Community Bank received $13,000$174,000 in dividends from the Federal Home Loan Bank of Des MoinesFHLB for the year ended December 31, 2015.2018.
The Federal Home Loan Banks have continued to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of
Federal Home Loan Bank dividends paid
by the FHLB and could continue to do so in the future. These contributions could also have an adverse effect on the value of
Federal Home Loan BankFHLB stock in the future. A reduction in value of Sound Community Bank’s
Federal Home Loan BankFHLB stock may result in a corresponding reduction in its capital.
Regulation of Sound Financial Bancorp
General. Sound Financial Bancorp, as the sole shareholder of Sound Community Bank, is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations promulgated thereunder. This regulation and oversight is generally intended to ensure that Sound Financial Bancorp limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of Sound Community Bank.
As a bank holding company, Sound Financial Bancorp is required to file quarterly and annual reports with the Federal Reserve and any additional information required by the Federal Reserve and is subject to regular examinations by the Federal Reserve and to examination by the WDFI.
The Federal Reserve also has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, to issueTABLE OF CONTENTS
cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.
A merger or acquisition of Sound Financial Bancorp, or an acquisition of control of Sound Financial Bancorp, is generally subject to approval by the Federal Reserve and WDFI. In general, control for this purpose means 25% of voting stock, but such approval can be required in other circumstances, including but not limited to an acquisition of as low as 5% of voting stock.
The Dodd-Frank Act requires a bank holding company to serve as a source of financial strength to its subsidiary banks, with the ability to provide financial assistance to a subsidiary bank in financial distress. Regulations to implement this provision are required, but to date, none have been promulgated.
Permissible Activities. Under the Bank Holding Company Act, the Federal Reserve may approve the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities generally include, among others, operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers. The Bank Holding Company Act prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. A bank holding company that meets certain supervisory and financial standards and elects to be designed as a financial holding company may also engage in certain securities, insurance and merchant banking activities and other activities determined to be financial in nature or incidental to financial activities.
The Federal Reserve must approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank, and may approve an acquisition located in a state other than the holding
company’scompany's home state, without regard to whether the transaction is prohibited by the laws of any state, but may not approve the acquisition of a bank that has not been in existence for the minimum time period, not exceeding five years, specified by the law of the host state, or an application where the applicant controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch. Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the federal law.
The Federal Reserve also takes into consideration the CRA performance of a bank when evaluating acquisition proposals involving the bank’s holding company.
Capital Requirements for Sound Financial Bancorp. Effective January 1, 2015, Sound Financial Bancorp isBancorp. As discussed above, pursuant to the Act, effective August 30, 2018, bank holding companies with less than $3.0 billion in consolidated assets are generally no longer subject to the Federal Reserve’s capital rulesregulations, which are essentially the same as the capital regulations applicable to Sound Community Bank described under the caption “Capital Rules” above. If Sound Financial Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at December 31, 2018, the Company would have exceeded all regulatory requirements. The Federal Reserve expects a holding company’scompany's subsidiary banks to be well capitalized under the prompt corrective action regulations. In addition, a bank holding company must serve as a source of financial strength for its depository institution subsidiaries.
Federal Securities Law. The stock of Sound Financial Bancorp is registered with the SEC under the Securities Exchange Act of 1934, as amended. Sound Financial Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Securities Exchange Act of 1934.1934 (the “Exchange Act”).
Sound Financial Bancorp stock held by persons who are affiliates of Sound Financial Bancorp may not be resold without registration unless sold in accordance with certain resale restrictions. For this purpose, affiliates are generally considered to be officers, directors and principal shareholders. If Sound Financial Bancorp meets specified current public information requirements, each affiliate of Sound Financial Bancorp will be able to sell in the public market, without registration, a limited number of shares in any three-month period.
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The SEC has adopted regulations and policies under the Sarbanes-Oxley Act of 2002 that apply to Sound Financial Bancorp as a registered company under the Securities Exchange Act of 1934.Act. The stated goals of these requirements are to increase corporate responsibility, provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The SEC and Sarbanes-Oxley-related regulations and policies include very specific additional disclosure requirements and corporate governance rules.
Limitations on Dividends and Stock Repurchases
Sound Financial Bancorp. Bancorp.Sound FinancialBancorp’s ability to declare and pay dividends is subject to the Federal Reserve’s limits, including the capital conservation buffer requirement, and Maryland law, and may depend on its ability to receive dividends from Sound Community Bank.
A policy of the Federal Reserve limits the payment of a cash dividend by a bank holding company if the holding
company’scompany's net income for the past year is not sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with capital needs, asset quality and overall financial condition. A bank holding company that does not meet any applicable capital standard would not be able to pay any cash dividends under this policy. A bank holding company subject to the Small Bank Holding Company Policy Statement, such as Sound Financial Bancorp, is expected not to pay dividends unless its debt-to-equity ratio is less than 1:1 and it meets certain additional criteria. The Federal Reserve also has indicated that it is inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.
Except for a company that meets the well-capitalized standard for bank holding companies, is well managed, and is not subject to any unresolved supervisory issues, a bank holding company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the
company’scompany's consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation or regulatory order, condition, or written agreement with the Federal Reserve. Regardless of its asset size, a bank holding company is considered well-capitalized if on a consolidated basis it has a total risk-based capital ratio of at least 10.0% and a Tier 1 risk-based capital ratio of 6.0% or more, and is not subject to an agreement, order, or directive to maintain a specific level for any capital measure.
Under Maryland corporate law, Sound Financial Bancorp generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total assets would be less than the sum of its total liabilities.liabilities
.
Sound Community Bank. Bank. The amount of dividends payable by Sound Community Bank to Sound Financial Bancorp depends upon Sound Community Bank’s earnings and capital position, and is limited by federal and state laws, regulations and policies, including the new capital conservation buffer requirement. Sound Community Bank may not declare or pay a cash dividend on its capital stock if the payment would cause its net worth to be reduced below the amount required for its liquidation account.
Dividends on Sound Community Bank’s capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of Sound Community Bank without the approval of the WDFI.
The amount of dividends actually paid during any one period will be strongly affected by Sound Community Bank’s policy of maintaining a strong capital position. Federal law further provides that without prior approval no insured depository institution may pay a cash dividend if it would cause the institution to be less than adequately capitalized as defined in the prompt corrective action regulations. Moreover, the FDIC has the general authority to limit the dividends paid by insured banks if such payments are deemed to constitute an unsafe and unsound practice. In addition, dividends may not be declared or paid if Sound Community Bank is in default in payment of any assessment due the FDIC.
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General. We are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Sound Financial Bancorp or Sound Community Bank. Our federal income tax returns have never been audited by the Internal Revenue Service.
We
On December 22, 2017, the U.S. Government enacted the Tax Cuts and Jobs Act (the “Tax Act”). For businesses, the Tax Act reduced the federal corporate income tax rate from 35 percent to 21 percent. The corporate income tax rate reduction was effective January 1, 2018. The Tax Act required a revaluation of the Company's deferred tax assets and liabilities to account for the future impact of lower corporate tax rates and other provisions of the legislation. As a result of the Company's revaluation, the Company's deferred tax asset was reduced through one time $309,000 increase to the provision for income tax for the year ended December 31, 2017. The Company had no unrecognized tax benefits at December 31,
20152018 and at December 31,
2014.2017.
Method of Accounting. For federal income tax purposes, we currently report our income and expenses on the accrual method of accounting and use a fiscal year ending on December 31 for filing our federal income tax return.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain items of tax preference and adjustment, called alternative minimum taxable income. Net operating losses can offset no more than 90% of alternative minimum taxable income. The alternative minimum tax is payable to the extent that the taxpayer’staxpayer's alternative minimum tax is in excess of the taxpayer’staxpayer's regular tax. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. We have not been subject to the alternative minimum tax in prior years, nor do we have any such amounts available as credits for carryover.
Corporate Dividends-Received Deduction. Sound Financial Bancorp has elected to file a consolidated return with Sound Community Bank. Therefore any dividends Sound Financial Bancorp receives from Sound Community Bank will not be included as income to Sound Financial Bancorp. We are subject to a business and occupation tax imposed under Washington
state law at the rate of 1.5% of gross receipts. Interest received
and servicing income on loans secured by mortgages or deeds of trust on residential properties and certain investment securities are exempt from this tax.
At December 31,
2015,2018, we had a total of
98109 full-time employees and
1310 part-time employees. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.
Executive Officers of Sound Financial Bancorp and Sound Community Bank
Officers are elected annually to serve for a one year term. There are no arrangements or understandings between the officers and any other person pursuant to which he or she was or is to be selected as an officer.
Laura Lee Stewart.Stewart. Ms. Stewart, age 66,69, is currently President and Chief Executive Officer of Sound Community Bank and Sound Financial Bancorp. Prior to joining Sound Community Bank as its President in 1989, when it was a credit union, Ms. Stewart was Senior Vice President/Retail Banking at Great Western Bank. Ms. Stewart was selected as an inaugural member of the FDIC Community Bank Advisory Board and completed her term in 2011. In 2011, Ms. Stewart was appointed to the inaugural Consumer Financial Protection Bureau board and completed her term in 2013. She also served as Chair of the ABAAmerican Bankers Association’s (ABA) Government Relations Council and is the past Chair of the Washington Bankers Association. In 2011 and again in 2015, The American Banker magazine honored her as one of the top 25 Women to Watch in banking.banking in 2011, 2015,
2016, 2017 and 2018. In 2016, Ms. Stewart was recognized as a Women of Influence by the Puget Sound Business Journal. In 2018, she was named Community Banker of the year by American Banker. Ms. Stewart also is
a memberChair of the National Arthritis Foundation’s board of directors as well as serving as the
immediate Past Chair of the board of directors of Woodland Park Zoo.
In October 2017, Ms. Stewart was elected Chair elect of the ABA. Her many years of service in all areas of the financial institution operations and duties as President and Chief Executive Officer of
Sound Financial Bancorp and Sound Community Bank bring a special knowledge of the financial, economic and regulatory challenges we face, and she is well suited to educating the Board on these matters.
Matthew P. Deines. Mr. Deines, age 42, has served as Chief Financial Officer of Sound Community Bank since 2002 and was appointed Executive Vice President in January 2005. Mr. Deines has also served as Chief Financial Officer and Executive Vice President of Sound Financial Bancorp (and its predecessor company) since its incorporation in 2008. Mr. Deines currently is responsible for management of our accounting, financial reporting, operations and information technology functions and is chair of Sound Community Bank’s Asset-Liability Management Committee. Prior to joining Sound Community Bank, Mr. Deines was an Audit Supervisor with
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McGladrey and Pullen, LLP and received his Washington CPA certificate in 2000. Mr. Deines received a Bachelor of Science Degree from Loyola Marymount University. He received a Master of Business Administration Degree from the University of Washington in June 2010.
Elliott Pierce.Pierce. Mr. Pierce, age 59,62, was appointed Senior Vice President and Chief Credit Officer of Sound Community Bank in April 2015 and was appointed Executive Vice President in January 2016. Mr. Pierce is responsible for management of the Bank’sBank's Lending and Credit Administration functions, and is a member of the Bank’sBank's Loan Committee. Prior to joining Sound Community Bank, Mr. Pierce was a Senior Vice President and Credit Administrator with Union Bank N.A. Mr. Pierce received his Bachelor of Arts Degree from the University of Washington and his Master of Business Administration from Seattle Pacific University. Mr. Pierce is also a graduate of the Pacific Coast Banking School.
Christina Gehrke.Gehrke. Ms. Gehrke, age 51,54, was appointed Senior Vice President and Chief Administrative Officer of Sound Community Bank in October 2015.2015 and was appointed Executive Vice President in January 2017. Her responsibilities include, among other things, overseeing project management,internal audit, SOX program, vendor management program, human resources, facilities management and marketingfacilities functions at the Bank. Ms. Gehrke previously served as Chief Accounting and Administrative Officer of the Federal Home Loan Bank of Seattle (the “FHLB”(“FHLB Seattle”) where she was employed for 17 years. Ms. Gehrke’s responsibilities at the FHLB Seattle included overseeing the accurate and timely reporting of SEC periodic reports, the preparation of consolidated financial statements, SEC reporting and analysis, compliance with SOX policies and procedures, data management as well as facilities management.Kelli Nielsen
Heidi Sexton. Ms. Nielsen,Ms. Sexton, age 44,43, is SeniorExecutive Vice President, of Retail Banking. Ms. Nielsen isChief Operating Officer responsible for Business Development.oversight of the Bank’s support functions, including Information Technology, Marketing, Retail Support, Compliance, Enterprise Risk Management, and Project Management. Ms. NielsenSexton started her career in Banking, as a teller while in college. She received a Bachelor's of Arts in Accounting from the University of Wisconsin-Eau Claire. Ms. Sexton joined the Sound Community Bank in August 2012.2007 and previously served as the Vice President of Operations managing deposit, electronic, and lending operations. Prior to joining the Bank, Ms. NielsenSexton was a Director for RSM McGladrey. She currently holds a number of professional certifications including Certified Internal Auditor, Certified Regulatory Compliance Manager and is a graduate of the Washington Bankers Association’s Executive Development Program. Ms. Sexton is also a member of the Consumer Financial Protection Bureau's (CFPB) Community Bank Advisory Counsel and American Bankers Association's (ABA) Compliance Administrative Committee. She serves on the Board of Financial Beginnings, a non-profit that provides youth to adult financial education programs at no cost.
Daphne Kelley. Ms. Kelley, age 47, is currently Executive Vice President, of Relationship StrategiesChief Financial Officer at Opus Bank (formerly Cascade Bank). She joined CascadeSound Financial Bancorp and Sound Community Bank. Prior to joining the Bank in 2002 asJuly 2018, Ms. Kelley was Senior Vice President, Controller of HomeStreet Bank where she was responsible for SEC and Salesregulatory reporting, accounting operations, corporate tax and Service Manager for Retail Banking. Kelli has over 24 yearsSarbanes-Oxley. Additional experience includes the Controller role at the Federal Home Loan Bank of banking experienceSeattle as well as various roles at GE Capital, Toyota and has served 14 years on the WBA (Washington Bankers Association) Education Committee and holds three certificatesErnst & Young. Ms. Kelley received a Bachelor's of Science degree from the Ritz Carlton Leadership Training Center. She is the 2014 - 2016 ChairUniversity of the WBA Retail Leadership CommitteeCalifornia at Berkeley and a 2014 – 2016 Task Force Committee Member at the American Bankers Association StonierMasters of Business Administration from UCLA Anderson School of Banking.Internet Management. She currently holds a Certified Public Accountant license in the State of Washington and the State of California.
We maintain a website, www.soundcb.com. Information pertaining to us, including SEC filings, can be found by clicking the link on our site called “Investor Relations.” This Annual Report on Form 10-K and our other reports, proxy statements and other information filed with the SEC are available on that website within the Investor Relations webpage by clicking the link called “SEC Filings.”website; www.soundcb.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own internet access charges, we make available free of charge through its website the Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the SEC. Information pertaining to us, including SEC filings, can be found by clicking the link on our site called "Investor Relations." For more information regarding access to these filings on our website, please contact our Corporate Secretary, Sound Financial Bancorp, Inc., 2005 5th2400 3rd Avenue, Suite 200,150, Seattle, Washington, 98121 or by calling (206) 448-0884.
Item 1A. Risk Factors
Not required; we are a smaller reporting company.
| |
| Item 1B. | Unresolved Staff Comments |
Not applicable.
FiveSeven of our seventen offices are leased. The operating leases contain renewal options and require us to pay property taxes and operating expenses onfor the properties. Our total rental expense for each of the years ended December 31, 20152018 and 20142017 was $877,000$1.4 million and $873,000,$1.1 million, respectively. The aggregate net book value of our land, buildings, leasehold improvements, furniture and equipment was $5.3$7.0 million at December 31, 2015.2018. See also Note 7 ofin the Notes to Consolidated Financial Statements.Statements contained in Item 8 of this report on Form 10-K. In the opinion of management, the facilities are adequate and suitable for our current needs. We may open additional banking offices to better serve current customersclients and to attract new customersclients in subsequent years.
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The following table sets forth certain information concerning our main office, our branch offices and our loan production office at December 31, 2015:
2018:Location
|
|
| | | | | |
| Location | | Year opened |
| Owned or leased |
| Lease expiration date |
Main office:
| | | |
2005 5th Avenue
Seattle, WA 98121
| 1993
| Leased
| 2017(1)
|
| | | |
Future Main office:
| | | |
Third and Battery
Seattle, WA 98121 | 2017 (est)
| Leased
2017 | | Leased | | 2029 (est)(1) |
| Branch offices: | | | | | | |
| | | |
Branch offices:
| | | |
Cedar Plaza Branch
22807 44th Avenue West
Mountlake Terrace, WA 98043 | 2004
| Leased
2004 | | Leased | | 2025(2) |
TacomaPort Angeles Branch
2941 S. 38th
110 N. Alder Street
Tacoma, Port Angeles, WA 9840998682 | 2009
| Leased
2010 | 2019(5)
| Leased | | 2028 (3) |
Port Ludlow Branch
9500 Oak Bay Road, SteSuite A.
Port Ludlow, WA 98365 | 2014
| Owned
2014 | | Owned | | |
Seattle Branch 2001 5th Avenue Seattle, WA 98121 | | 1993 | | Leased | | 2020 (4) |
Sequim Branch
645 W. Washington Street
Sequim, WA 98382 | 1997
| Owned
1997 | | Owned | | |
Port AngelesTacoma Branch
110 N. Alder
2941 S. 38th Street
Port Angeles, Tacoma, WA 9868298409 | 2010
| Leased
2009 | 2028
| Leased | | 2019 (3) |
University Place Branch 4922 Bridgeport Way West University Place, WA 98467 | | 2017 | | Leased | | 2023 (2) |
| Loan Production Offices: | | | | | | |
Creekside Loan Production Office:
Office 990 E. Washington Street, Suite F Sequim, WA 98382 | | 2017 | | Owned | | |
Madison Park Loan Office
3101 E. Madison Street
Seattle, WA 98112 | 2013
| Leased
2013 | | Leased | | 2019(4) (5) |
| |
| (1) | Lease has one ten-year renewal option or lessee may choose two five-year renewal options. |
| |
| (2) | Lease has one five-year renewal option. |
| |
| (3) | Lease has two five-year renewal options. |
| |
| (4) | Lease contains no renewal option. |
| (2) |
| (5) | Lease provides forhas one five-year renewal.three-year renewal option. As of February 5, 2019, the renewal option was exercised extending the lease to 2022. |
| (3) | Lease provides for two ten-year renewals. |
| (4) | Lease provides for three three-year renewals. |
| (5) | Lease provides for two five-year renewals. |
We maintain depositor and borrower customerclient files on an online basis,in a service bureau environment, utilizing a telecommunications network, portions of which are leased. Management has a disaster recovery plan in place with respect to the data processing system, as well as our operations as a whole.
From time to time we are involved as plaintiff or defendant in various legal actions arising in the normal course of business. We do not anticipate incurring any material legal fees or other material liability as a result of such litigation.
| |
| Item 4. | Mine Safety Disclosures |
Not applicable.
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| |
| Item 5. | Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The common stock of Sound Financial Bancorp which began trading on August 23, 2012, is traded on The NASDAQ Capital Market under the symbol “SFBC.” The table below shows the high and low closing prices and quarterly dividends for our common stock for the periods indicated.
| Stock Price | Dividends
Per Share |
2015 Quarters | High | Low |
First Quarter (ended 3/31/2015) | $ | 19.80 | | $ | 18.00 | | $ | 0.05 | |
Second Quarter (ended 6/30/2015) | $ | 22.40 | | $ | 18.82 | | $ | 0.06 | |
Third Quarter (ended 9/30/2015) | $ | 21.00 | | $ | 18.50 | | $ | 0.06 | |
Fourth Quarter (ended 12/31/2015) | $ | 22.65 | | $ | 20.05 | | $ | 0.06 | |
| Stock Price | Dividends
Per Share |
2014 Quarters | High | Low |
First Quarter (ended 3/31/2014) | $ | 17.58 | | $ | 16.55 | | $ | 0.05 | |
Second Quarter (ended 6/30/2014) | $ | 17.51 | | $ | 16.55 | | $ | 0.05 | |
Third Quarter (ended 9/30/2014) | $ | 18.75 | | $ | 17.09 | | $ | 0.05 | |
Fourth Quarter (ended 12/31/2014) | $ | 18.93 | | $ | 17.48 | | $ | 0.05 | |
At December 31, 2015, there"SFBC." There were 2,469,688 shares outstanding and the closing priceapproximately 250 shareholders of record of our common stock on that date was $22.64. On that date, we had approximately 260 shareholdersas of record.
March 12, 2019
Our cash dividend payout policy is reviewed
continuallyregularly by management and the Board of Directors. Any dividends declared and paid in the future would depend upon a number of factors, including capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. Our future payment of dividends may depend, in part, upon receipt of dividends from Sound Community Bank, which are restricted by federal regulations.
Equity Compensation Plan Information regarding our
The equity compensation plan
is includedinformation presented in
Part III, Item 12 of this Form
10-K.Stock Repurchases
There were no10-K is incorporated herein by reference.
Issuer Purchases of Equity Securities
The Company may repurchase shares of its common stock from time-to-time in open market transactions. The timing, volume and price of purchases are made at our discretion, and are contingent upon our overall financial condition, as well as general market conditions. The Company did not make any stock repurchases byduring the fourth quarter of 2018 and as of December 31, 2018, the Company duringdid not have any authorized stock repurchase programs.
On January 28, 2019, the quarter ended DecemberCompany's Board of Directors authorized a stock repurchase program. Under this repurchase program, the Company may repurchase up to $1,750,000 of the Company’s outstanding shares, in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on January 31, 2015.2019, continuing until the earlier of the completion of the repurchase or the next six (6) months, depending upon market conditions. The Company’s Board of Directors also authorized management to enter into a trading plan with a registered broker-dealer in accordance with Rule 10b5-1 of the Exchange Act, to facilitate repurchases of its common stock pursuant to the above mentioned stock repurchase program.
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| |
| Item 6. | Selected Financial Data |
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain information concerning the
Company’sCompany's consolidated financial position and results of operations at and for the dates indicated and have been derived from the audited consolidated financial statements. The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with Item 7.,
“Management’s"Management's Discussion and Analysis of Financial Condition and Results of
Operations”Operations" and Item 8.,
“Financial"Financial Statements and Supplementary Data.
”" (In thousands)
| At December 31, |
| 2015 | 2014 | 2013 |
Selected Financial Condition Data:
| | | | | | | | | |
Total assets | $ | 540,760 | | $ | 495,187 | | $ | 442,611 | |
Total loans, net | | 454,833 | | | 425,973 | | | 386,749 | |
Loans held-for-sale | | 2,091 | | | 810 | | | 130 | |
Available for sale securities, at fair value | | 6,696 | | | 11,524 | | | 15,421 | |
Bank-owned life insurance, net | | 11,746 | | | 11,408 | | | 11,068 | |
Other real estate owned and repossessed assets, net | | 769 | | | 323 | | | 1,178 | |
Federal Home Loan Bank stock, at cost | | 2,212 | | | 2,224 | | | 2,314 | |
Total deposits | | 440,024 | | | 407,809 | | | 348,339 | |
Borrowings | | 40,435 | | | 30,578 | | | 43,221 | |
Stockholders’ equity | | 54,520 | | | 50,644 | | | 46,504 | |
| For the years ended December 31, |
| 2015 | 2014 | 2013 |
Selected Operations Data:
| | | | | | | | | |
Total interest income | $ | 22,453 | | $ | 21,356 | | $ | 19,626 | |
Total interest expense | | 2,752 | | | 2,423 | | | 2,312 | |
Net interest income | | 19,701 | | | 18,933 | | | 17,314 | |
Provision for loan losses | | 400 | | | 800 | | �� | 1,350 | |
Net interest income after provision for loan losses | | 19,301 | | | 18,133 | | | 15,964 | |
Service charges and fee income | | 2,605 | | | 2,571 | | | 2,270 | |
Gain on sale of loans | | 1,301 | | | 624 | | | 967 | |
Mortgage servicing income | | 840 | | | 509 | | | 457 | |
Loss on Sale of Securities | | (31 | ) | | — | | | (30 | ) |
Fair value adjustment on mortgage servicing rights | | 210 | | | 328 | | | 900 | |
Earnings on cash surrender value of BOLI | | 338 | | | 340 | | | 348 | |
Total noninterest income | | 5,263 | | | 4,372 | | | 4,912 | |
Salaries and benefits | | 9,223 | | | 8,278 | | | 7,206 | |
Operations expense | | 3,995 | | | 4,045 | | | 3,950 | |
Occupancy expense | | 1,493 | | | 1,359 | | | 1,316 | |
Net losses on OREO and repossessed assets | | 311 | | | 208 | | | 1,036 | |
Other noninterest expense | | 2,463 | | | 2,037 | | | 1,613 | |
Total noninterest expense | | 17,485 | | | 15,927 | | | 15,121 | |
Income before provision for income taxes | | 7,079 | | | 6,578 | | | 5,755 | |
Provision for income taxes | | 2,289 | | | 2,338 | | | 1,815 | |
Net income | $ | 4,790 | | $ | 4,240 | | $ | 3,940 | |
|
| | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 |
| Selected Financial Condition Data: | | | | | |
| Total assets | $ | 716,735 |
| | $ | 645,244 |
| | $ | 588,383 |
|
| Total loans held for portfolio, net | 613,769 |
| | 543,354 |
| | 495,179 |
|
| Loans held-for-sale | 1,172 |
| | 1,777 |
| | 871 |
|
| Available for sale securities, at fair value | 4,957 |
| | 5,435 |
| | 6,604 |
|
| Bank-owned life insurance, net | 13,365 |
| | 12,750 |
| | 12,082 |
|
| Other real estate owned and repossessed assets, net | 575 |
| | 610 |
| | 1,172 |
|
| FHLB stock, at cost | 4,134 |
| | 3,065 |
| | 2,840 |
|
| Total deposits | 553,601 |
| | 514,400 |
| | 467,731 |
|
| Borrowings | 84,000 |
| | 59,000 |
| | 54,792 |
|
| Stockholders' equity | $ | 71,627 |
| | $ | 65,160 |
| | $ | 60,275 |
|
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|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Selected Operations Data: | | | | | |
| Total interest income | $ | 32,947 |
| | $ | 27,449 |
| | $ | 25,050 |
|
| Total interest expense | 5,360 |
| | 3,368 |
| | 2,919 |
|
| Net interest income | 27,587 |
| | 24,081 |
| | 22,131 |
|
| Provision for loan losses | 525 |
| | 500 |
| | 454 |
|
| Net interest income after provision for loan losses | 27,062 |
| | 23,581 |
| | 21,677 |
|
| Service charges and fee income | 1,876 |
| | 1,895 |
| | 2,508 |
|
| Net gain on sale of loans | 1,258 |
| | 1,071 |
| | 1,366 |
|
| Mortgage servicing income | 562 |
| | 566 |
| | 907 |
|
| Earnings on cash surrender value of Bank Owned Life Insurance | 320 |
| | 327 |
| | 336 |
|
| Other income | 490 |
| | — |
| | — |
|
| Total noninterest income | 4,506 |
| | 3,859 |
| | 5,117 |
|
| Salaries and benefits | 12,775 |
| | 10,733 |
| | 10,505 |
|
| Operations expense | 5,370 |
| | 4,348 |
| | 4,361 |
|
| Occupancy expense | 2,139 |
| | 1,889 |
| | 1,526 |
|
| Net losses and expenses on OREO and repossessed assets | 86 |
| | 110 |
| | 6 |
|
| Other noninterest expense | 2,453 |
| | 2,167 |
| | 2,323 |
|
| Total noninterest expense | 22,823 |
| | 19,247 |
| | 18,721 |
|
| Income before provision for income taxes | 8,745 |
| | 8,193 |
| | 8,073 |
|
| Provision for income taxes | 1,706 |
| | 3,068 |
| | 2,695 |
|
| Net income | $ | 7,039 |
| | $ | 5,125 |
| | $ | 5,378 |
|
| For the years ended December 31, |
| 2015 | 2014 | 2013 |
Selected Financial Ratios and Other Data:
| | | | | | | | | |
Performance ratios:
| | | | | | | | | |
Return on assets (ratio of net income to average total assets) | | 0.95 | % | | 0.93 | % | | 0.96 | % |
Return on equity (ratio of net income to average equity) | | 8.93 | | | 8.76 | | | 8.68 | |
Dividend payout ratio | | 11.98 | | | 11.89 | | | 9.85 | |
Interest rate spread information:
| | | | | | | | | |
Average during period | | 4.13 | | | 4.45 | | | 4.44 | |
End of period | | 4.17 | | | 4.33 | | | 4.06 | |
Net interest margin(1) | | 4.17 | | | 4.49 | | | 4.55 | |
Noninterest income to total net revenue(2) | | 21.08 | | | 18.76 | | | 22.10 | |
Noninterest expense to average total assets | | 3.47 | | | 3.48 | | | 3.68 | |
Average interest-earning assets to average interest-bearing liabilities | | 106.82 | | | 117.53 | | | 116.97 | |
Efficiency ratio(3) | | 68.71 | | | 66.97 | | | 63.29 | |
Asset quality ratios:
| | | | | | | | | |
Nonperforming assets to total assets at end of period | | 0.54 | | | 0.84 | | | 0.70 | |
Nonperforming loans to total loans | | 0.47 | | | 0.89 | | | 0.49 | |
Allowance for loan losses to nonperforming loans | | 217.65 | | | 114.19 | | | 217.44 | |
Allowance for loan losses to total loans | | 1.01 | | | 1.02 | | | 1.07 | |
Net charge-offs to average loans outstanding | | 0.03 | | | 0.14 | | | 0.40 | |
Capital ratios:
| | | | | | | | | |
Equity to total assets at end of period | | 10.08 | | | 10.24 | | | 10.51 | |
Average equity to average assets | | 10.66 | | | 10.57 | | | 11.04 | |
Other data:
| | | | | | | | | |
Number of full service offices | | 6 | | | 6 | | | 5 | |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Selected Financial Ratios and Other Data: | | | | | |
Performance ratios: | | | | | |
| Return on assets (ratio of net income to average total assets) | 1.03 | % | | 0.87 | % | | 0.97 | % |
| Return on equity (ratio of net income to average equity) | 10.24 |
| | 8.13 |
| | 9.37 |
|
| Dividend payout ratio | 19.42 |
| | 29.37 |
| | 13.84 |
|
| Interest rate spread information: | | | | | |
| Average during period | 4.03 |
| | 4.15 |
| | 4.14 |
|
| End of period | 3.81 |
| | 3.95 |
| | 4.10 |
|
Net interest margin (1) | 4.25 |
| | 4.30 |
| | 4.26 |
|
Noninterest income to total net revenue (2) | 14.04 |
| | 13.81 |
| | 18.78 |
|
| Noninterest expense to average total assets | 3.34 |
| | 3.25 |
| | 3.39 |
|
| Average interest-earning assets to average interest-bearing liabilities | 125.94 |
| | 123.93 |
| | 120.92 |
|
| Efficiency ratio | 71.12 |
| | 68.89 |
| | 68.71 |
|
Asset quality ratios: | | | | | |
| Nonperforming assets to total assets at end of period | 0.45 |
| | 0.45 |
| | 0.77 |
|
| Nonperforming loans to total loans | 0.43 |
| | 0.42 |
| | 0.67 |
|
| Allowance for loan losses to nonperforming loans | 216.50 |
| | 229.57 |
| | 143.98 |
|
| Allowance for loan losses to total loans | 0.93 |
| | 0.96 |
| | 0.96 |
|
| Net charge-offs to average loans outstanding | — |
| | 0.02 |
| | 0.06 |
|
Capital ratios: | | | | | |
| Equity to total assets at end of period | 9.99 |
| | 10.10 |
| | 10.24 |
|
| Average equity to average assets | 10.08 | % | | 10.64 | % | | 10.39 | % |
Other data: | | | | | |
| Number of full service offices | 8 |
| | 7 |
| | 6 |
|
| |
| (1) | Net interest income divided by average interest earning assets. |
| |
| (2) | Noninterest income divided by the sum of noninterest income and net interest income. |
| (3) |
| Item 7. | Noninterest expense, excluding other real estate owned and repossessed property expense, as a percentage of net interest income and total noninterest income, excluding net securities transactions.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto that appear in Item 8 of this Form 10-K. The information contained in this section should be read in conjunction with these Consolidated Financial Statements and footnotes and the business and financial information provided in this Form 10-K.
Our principal business consists of attracting retail
and commercial deposits from the general public and investing those funds, along with borrowed funds, in loans secured by first and second mortgages on one- to
four-familyfour- family residences (including home equity loans and lines of credit), commercial and multifamily
real estate, construction and land, consumer and commercial business
loans. Our commercial business loans include unsecured lines of credit and secured term loans and
constructionlines of credit secured by inventory, equipment and
land loans.accounts receivable. We
also offer a
wide variety of secured and unsecured consumer loan products, including manufactured home loans, floating home loans, automobile loans, boat loans and recreational vehicle loans.
We intend to continue emphasizing our residential mortgage, commercial and multifamily and commercial business lending, while continuing to originate home equity and consumer loans. As part of our business, we focus on residential mortgage loan originations,
mosta portion of which we sell to Fannie
Mae.Mae and the majority of which we retain for our loan portfolio consistent with our asset/liability objectives. We sell
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many loans which conform to the underwriting standards of these loans withFannie Mae (“conforming”) in which we retain the servicing retainedof the loan in order to maintain the direct customer relationship and promoteto generate noninterest income. Residential loans which do not conform to the underwriting standards of Fannie Mae (“non-conforming”), are either held in our emphasis on strong customer service. loan portfolio or sold with servicing released. We originate and retain a significant amount of commercial real estate loans, including those secured by owner-
occupied and nonowner-occupied commercial real estate, multifamily property, mobile home parks and construction and land development loans.
We originated
$112.3$112.5 million,
$82.3$109.7 million and
$118.8$142.7 million of one- to four-family residential mortgage loans during the years ended December 31,
2015, 20142018, 2017 and
2013,2016, respectively. During these same periods, we sold
$72.6$50.0 million,
$52.7$52.0 million and
$108.9$85.1 million, respectively, of one- to four-family residential mortgage loans.
Our operating revenues are derived principally from earnings on interest earning assets, service charges and fees, and gains on the sale of loans. Our primary sources of funds are deposits,
Federal Home Loan Bank (“FHLB”)FHLB advances, and payments received on loans and securities. We offer a variety of deposit accounts that provide a wide range of interest rates and terms,
generally including savings, money
markets,market, NOW,
interest bearing and noninterest bearing demand accounts,
termand certificates
and demand accounts.of deposit.
Our noninterest expenses consist primarily of salaries,
medical benefits, incentive pay, commissions, and employee benefits, expenses for occupancy,
online and mobile services, marketing, professional fees, data processing,
charitable contributions, FDIC deposit insurance premiums and regulatory expenses. Salaries and benefits consist primarily of the salaries
and wages paid to our employees, payroll taxes, directors' fees,
retirement expenses,
for retirement, share-based compensation and other employee benefits. Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease payments, property taxes, depreciation charges, maintenance and the cost of utilities.
Our strategic plan targets consumers, small and medium size businesses, and professionals in our market area for loans and deposits. In pursuit of these goals and
by managing the size of our loan portfolio, we focus on including a significant amount of commercial business and commercial and multifamily
real estate loans in our portfolio. A significant portion of these
commercial and multifamily and business loans have adjustable rates, higher yields or shorter terms and higher credit risk than traditional fixed-rate mortgages. Our commercial loan portfolio (commercial and multifamily
real estate and commercial business loans) increased to
$194.6$291.4 million or
42.2%46.8% of our loan portfolio at December 31,
2015,2018, from
$188.4$252.1 million or
43.6%45.8% of our loan portfolio at December 31,
2014,2017, and
$171.2$207.3 million or
43.7%41.4% of our loan portfolio at December 31,
2013.2016. In addition to higher balances in commercial lending, we also benefit from additional lending opportunities in our
construction and land developmentconsumer loan portfolio. Our
constructionconsumer loan portfolio, which includes manufactured and
land development portfoliofloating homes and other consumer loans, increased to
$57.0$67.6 million or
12.4%10.9% of our loan portfolio at December 31,
2015,2018, from
$46.3$51.1 million or
10.7%9.3% of our loan portfolio at December 31, 2017, and $43.4 million or 8.7% of our loan portfolio as of December 31,
2014 and $44.3 million or 11.3% as of December 31, 2013.2016. Additional commercial and multifamily
real estate and
construction and landconsumer loans have improved our net interest income and helped
further diversify our loan portfolio mix.
Our provision for loan losses expense was
significantly lower$525,000 for the year ended December 31, 2018, compared to $500,000 and $454,000 for the years ended December 31, 2017 and 2016, respectively. The increase in
2015the provision for the year was primarily a result of the growth in loans held-for-portfolio, which increased 12.9% and
2014 than during the three previous years23.9% from December 31, 2017 and
reflects decreased levels of delinquencies, classified loans and net charge-offs.2016, respectively.
Recent Accounting Standards
For a discussion of recent accounting standards, please see Note 2 - Accounting Pronouncements Recently Issued or Adopted in the Notes to Consolidated Financial Statements
contained in Item 8 of this
report on Form 10-K.
Critical Accounting Policies
Certain of our accounting policies are important to an understanding of our financial condition, since they require management to make difficult, complex or subjective judgments, which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, accounting for other-than-temporary impairment of securities, accounting for mortgage servicing rights, accounting for other real estate owned, and accounting for deferred income taxes. For additional information on our accounting policies see
“Note"Note 1 - Organization and Significant Accounting
Principles”Policies" in the Notes to Consolidated Financial Statements
contained in Item 8 of this
report on Form 10-K.
Allowance for Loan Loss. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio as of the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of subjectivity and requires us to make various assumptions and TABLE OF CONTENTS
judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of historical and current loss factors
to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. To strengthen our loan review and classification process, we engage an independent consultant to review our classified loans and a significant sample of recently originated non-classified loans on a regular basis. We also enhanced our credit administration policies and procedures to improve our maintenance of updated financial data on commercial borrowers. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination.
Other-than-temporary impairment of securities. Management reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”("OTTI"), taking into consideration current market conditions; fair value in relationship to cost; extent and nature of the change in fair value; issuer rating changes and trends; whether management intends to sell a security or if it is likely that we will be required to sell the security before recovery of the amortized cost basis of the investment, which may be upon maturity; and other factors. For debt securities, if management intends to sell the security or it is likely that we will be required to sell the security before recovering our cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If management does not intend to sell the security and it is not more likely than not that we will be required to sell the security, but management does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, i.e., the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (loss). Impairment losses related to all other factors are presented as separate components within accumulated other comprehensive income (loss).
Mortgage Servicing Rights. We record mortgage servicing rights on loans sold to Fannie Mae with servicing retained as well as for acquired servicing rights. We stratify our capitalized mortgage servicing rights based on the type, term and interest rates of the underlying loans. Mortgage servicing rights are carried at fair value. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect, the value of our mortgage servicing rights could be negatively impacted. We use a third party to assist us in the preparation of the analysis of the market value each quarter.
Other Real Estate Owned. Other real estate owned (“OREO”("OREO") represents real estate that we have taken control of in partial or full satisfaction of significantly delinquent loans. At the time of foreclosure, OREO is recorded at the fair value less costs to sell, which becomes the property’sproperty's new basis. Any write-downs based on the asset’sasset's fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Subsequent valuation adjustments are recognized within net (loss) gain on OREO. Revenue and expenses from operations and subsequent adjustments to the carrying amount of the property are included in other non-interest expense in the consolidated statements of income. In some instances, TABLE OF CONTENTS
we may make loans to facilitate the sales of OREO. Management reviews all sales for which it is the lending institution for compliance with sales treatment under provisions established by ASC Topic 360, “Accounting"Accounting for Sales of Real Estate”Estate". Any gains related to sales of OREO are deferred until the buyer has a sufficient initial and continuing investment in the property.
Income Taxes. Income taxes are reflected in our financial statements to show the tax effects of the operations and transactions reported in the financial statements and consist of taxes currently payable plus deferred taxes. ASC Topic 740, “Accounting"Accounting for Income Taxes,”" requires the asset and liability approach for financial accounting and reporting for deferred income taxes. Deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of assets and liabilities. They are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled and are determined using the assets and liability method of accounting. The deferred income provision represents the difference between net deferred tax asset/liability at the beginning and end of the reported period. In formulating our deferred tax asset, we are required to estimate our income and taxes in the jurisdiction in which we operate. This process involves estimating our actual current tax exposure for the reported period together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses, for tax and financial reporting purposes. Valuation allowances are established to reduce the net carrying amount of
deferred tax assets if it is determined to be more likely than not all or some portion of the potential deferred tax asset will not be realized.
Business and Operating Strategies and Goals
Our goal is to deliver returns to shareholders by increasing higher-yielding assets (including
consumer, commercial and multifamily
real estate and commercial business loans), increasing
lower costing core deposit balances,
reducingmanaging expenses, managing problem assets and exploring expansion opportunities. We seek to achieve these results by focusing on the following objectives:
Focusing on Asset Quality. We believe that strong asset quality is a key to our long-term financial success. We are focused on monitoring existing performing loans, resolving nonperforming assets and selling foreclosed assets. Nonperforming assets were $3.2 million, or 0.45% of total assets, at December 31, 2018 compared to $2.9 million or 0.45% of total assets, at December 31, 2017. We continue to seek to reduce the level of non-performing assets through collections, modifications and sales of OREO. We also take proactive steps to resolve our non-performing loans, including negotiating payment plans, forbearances, loan modifications and loan extensions on delinquent loans when such actions have been deemed appropriate. Our goal is to maintain or improve upon our level of nonperforming assets by managing credit risk on the current loan portfolio and new originations. We are focused on actively monitoring and managing all segments of our loan portfolio in order to proactively identify and mitigate risk. We continue to devote significant efforts and resources to reduce our problem assets. Nonperforming assets decreased to $2.9 million at December 31, 2014, compared to $4.2 million at December 31, 2014 and decreased from $3.1 million at December 31, 2013.
Improving Earnings by Expanding Product Offerings.We intend to prudently maintain the percentage of our assets consisting of higher-yielding commercial and multifamily real estate and commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations than one-to four-one-to-four family mortgage loans while maintaining our focus on residential lending. With our long experience and expertise in residential lending we believe we can be effective in capturing mortgage banking opportunities. We continue to develop correspondent relationships to sell nonconforming mortgage loans servicing-released. We also intend to selectively add additional products to further diversify revenue sources and to capture more of each customer’sclient's banking relationship by cross sellingoffering loan and deposit products and additional services to our customers.clients. We intend to further build relationships with medium and small businesses through new and improving existing product offerings including merchant services, remote deposit capture, online and mobile cash management, and online tools for wires, ACH and bill payment. With our long experience and expertise in residential lending we believe we can be effective in capturing the opportunities of these market changes in residential lending. We continue to develop correspondent relationships to sell some mortgage loans servicing-released.
Emphasizing lower cost core deposits to manage the funding costs of our loan growth. Our strategic focus is to emphasize total relationship banking with our customersclients to internally fund our loan growth. We are also focused onemphasize reducing wholesale funding sources, including FHLB advances, through the continued growth of core customer deposits. We believe that a continued focus on customerclient relationships will help to increase the level of core deposits and locally-based retail certificates of deposit.deposit from consumers and businesses in our market area. We intend to increase demand deposits by growing retail and business banking relationships. New technology and services are generally reviewed for business development and cost saving opportunities. We continue to experience growth in customerclient use of our online and mobile banking services, which allows customersallow clients to conduct a full range of services on a real-time basis, including balance inquiries, transfers and electronic bill paying while providing our customersclients greater flexibility and convenience in conducting their banking. In addition to our retail branches, we maintain state of the art technology-based products, such as business cash management, business remote deposit products, business and an online personal financial managementconsumer mobile banking applications and consumer remote deposit product.products. Total deposits increased to $440.0 million TABLE OF CONTENTS
at December 31, 2015, from $407.8$553.6 million at December 31, 2014, and $348.32018, from $514.4 million at December 31, 2013.2017, and $467.7 million at December 31, 2016. At December 31, 2015,2018, core deposits, which we define as our non-time deposit accounts and time deposit accounts of less than $250,000, increased $22.7$33.6 million to $377.3$500.9 million, while FHLB advances increased $9.9$25.0 million to $40.4$84.0 million from December 31, 2014.
2017.
Maintaining Our CustomerClient Service Focus. Exceptional service, local involvement (including volunteering and contributing to the communities where we are located)do business) and timely decision-making are integral parts of our business strategy. We emphasize to ourOur employees understand the importance of delivering exemplary customer service and seeking opportunities to build further relationships with our customersclients to enhance our market position and add profitable growth opportunities. The goal is toWe compete with other financial service providers by relying on the strength of our customer service and relationship banking approach. We believe that one of our strengths is that our employees are also significant shareholders through our employee stock ownership (“ESOP”("ESOP") and 401(k) plans. We also offer incentives that are designed to reward employees for achieving high quality client relationship growth.
Expanding our presence within our existing and contiguous market areas and by capturing business opportunities resulting from changes in the competitive environment. We believe that opportunities currently exist within our market area to grow our franchise. We anticipate continued organic growth as the local economy and loan demand strengthens,remains strong, through our marketing efforts and as a result of the opportunities being created as a result of the consolidation of financial institutions that is occurring in our market area. In addition, by delivering high quality, customer-focusedclient-focused products and services, we expect to attract additional borrowers and depositors and thus increase our market share and revenue generation. We opened a loan production office in Seattle in March 2013 and acquired three branches in August 2014. Following completion of the transaction, we closed our Sequim branch location and consolidated it into the acquired Sequim branch location and closed the acquired branch office located in Port Angeles and consolidated those operations into the Bank’s existing Port Angeles branch. We continue to be disciplined
as it pertains to future expansion, acquisitions and de novo branching focusing on the markets in Western Washington, which we know and understand.
Comparison of Financial Condition at December 31, 20152018 and December 31, 20142017
General. Total assets increased by $45.6$71.5 million, or 9.2%11.1%, to $540.8$716.7 million at December 31, 20152018 from $495.2$645.2 million at December 31, 2014.2017. This increase was primarily the result of a $28.9 million, or 6.8%, increase in our net loan portfolio, a $19.0 million, or 64.8%, increase in cash and cash equivalents, an increase in OREO and repossessed assets of $446,000 and a $401,000 increase in other assets partially offset by a $220,000, decrease in premises and equipment.loans held-for-portfolio, which increased $70.9 million or 12.9% compared to one year ago. Asset growth was funded by a $32.2$39.2 million, or 7.9%7.6%, increase in deposits and a $9.9$25.0 million, or 42.4%, increase in FHLB borrowings.
Cash and Securities. We increased our on-balance sheet liquidity in 2015 in order to manage liquidity and interest rate risk. Cash, cash equivalents and our available-for-sale securities increased by $14.1 million,$652,000, or 34.6%1.0%, to $55.0$66.8 million at December 31, 2015.2018. Cash and cash equivalents increased by $19.0$1.1 million, or 63.8%1.9%, to $48.3$61.8 million at December 31, 2015.2018. Available-for-sale securities, which consist primarily of agency mortgage-backed securities, decreased by $4.8 million,$478,000, or 41.9%8.8%, to $6.7$5.0 million at December 31, 20152018 from $11.5$5.4 million at December 31, 20142017, primarily as a result of normal principal pay downs.downs on investments during the year.
At December 31,
2015,2018, our securities portfolio consisted of
12six agency mortgage-backed securities
one non-agency mortgage-backed securities and
fiveeight municipal securities with a fair value of
$6.7$5.0 million. At December 31,
2014,2017, our securities portfolio consisted of
15seven agency mortgage-backed securities
five non-agency mortgage-backed securities and
fiveeight municipal bonds with a fair value of
$11.5$5.4 million.
During the year ended December 31,
2015,2018 we
recognized nodid not recognize any non-cash OTTI charges on our investment securities.
Our one non-agency mortgage-backed securityAt December 31, 2018, three municipal securities had
an unrealized
losslosses but management determined the decline in value was not related to specific credit deterioration. The unrealized
loss waslosses were caused by changes in interest rates and
the widening of market
illiquidity causing a decline in the fair valuespreads subsequent to
the purchase. The contractual termspurchase of
this security does not permit the issuer to settle the security at a price less than par.these securities. We do not intend to sell
this securitythese securities and it is more likely than not that we will not be required to sell
this securitythese securities before anticipated recovery of the remaining amortized cost basis.
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Loans. Our total loanloans held for portfolio, net, excluding loans held-for-sale, increased $29.1$70.4 million, or 6.8%13.0%, to $459.5$613.8 million at December 31, 20152018 from $430.3$543.4 million at December 31, 2014.2017. Loans held-for-sale increaseddecreased to $2.1$1.2 million at December 31, 20152018 from $810,000$1.8 million at December 31, 2014, reflecting primarily the timing of transactions in late 2015, as compared to late 2014.
2017.
The following table reflects the changes in the
typesloan mix, excluding deferred fees, of
loans in our portfolio at the end of
2015,2018, as compared to the end of
20142017 (dollars in thousands):
| December 31, | Amount
Change | Percent
Change |
| 2015 | 2014 |
One-to-four-family | | 141,125 | | $ | 133,031 | | $ | 8,094 | | | 6.08 | % |
Home equity | | 31,573 | | | 34,675 | | | (3,102 | ) | | (8.95 | ) |
Commercial and multifamily | | 175,312 | | | 168,952 | | | 6,360 | | | 3.76 | |
Construction and land | | 57,043 | | | 46,279 | | | 10,764 | | | 23.26 | |
Manufactured homes | | 13,798 | | | 12,539 | | | 1,259 | | | 10.16 | |
Other consumer | | 23,030 | | | 16,875 | | | 6,155 | | | 36.47 | |
Commercial business | | 19,295 | | | 19,525 | | | (230 | ) | | (1.18 | ) |
Total loans | $ | 461,176 | | $ | 431,876 | | $ | 29,300 | | | 6.78 | % |
The most significant change in
|
| | | | | | | | | | | | | | |
| | December 31, | | Amount | | Percent |
| | 2018 | | 2017 | | Change | | Change |
| One-to-four family | $ | 169,830 |
| | $ | 157,417 |
| | $ | 12,413 |
| | 7.9 | % |
| Home equity | 27,655 |
| | 28,379 |
| | (724 | ) | | (2.6 | ) |
| Commercial and multifamily | 252,644 |
| | 211,269 |
| | 41,375 |
| | 19.6 |
|
| Construction and land | 65,259 |
| | 61,482 |
| | 3,777 |
| | 6.1 |
|
| Manufactured homes | 20,145 |
| | 17,111 |
| | 3,034 |
| | 17.7 |
|
| Floating homes | 40,806 |
| | 29,120 |
| | 11,686 |
| | 40.1 |
|
| Other consumer | 6,628 |
| | 4,902 |
| | 1,726 |
| | 35.2 |
|
| Commercial business | 38,804 |
| | 40,829 |
| | (2,025 | ) | | (5.0 | ) |
| Total loans | $ | 621,771 |
|
| $ | 550,509 |
| | $ | 71,262 |
| | 12.9 | % |
All categories of our loan portfolio was anincreased at December 31, 2018, compared to December 31, 2017, except for commercial business and home equity loans. The increase in one- to four- family mortgage loans which was primarily a result of positive economic conditions which contributed to demand for credit. The largest dollar increases in higher yielding jumbo mortgagethe loan portfolio were in the commercial and non-conforming one-multifamily loans which increased $41.4 million, or 19.6%, to four-$252.6 million, one-to-four family mortgageloans which increased $12.4 million, or 7.9%, to $169.8 million, floating homes loans which increased $11.7 million, or 40.1%, to $40.8 million, and construction and land loans which increased $3.8 million, or 6.1%, to $65.3 million. Partially offsetting these increases were decreases in commercial business loans of $2.0 million, or 5.0%, to $38.8 million and home equity loans of $724,000, or 2.6%, to $27.7 million.
The increase in our commercial and multifamily real estate loan portfolio was primarily a result of opportunities in the markets where we do business and an emphasis by our commercial lenders to originate these types of loans. Commercial and multifamily real estate loans increased primarily as a result of continued effortsare generally higher yielding loans and have contributed to expand and diversifydiversifying our lending portfolio. Other consumer loans increased primarily as a result of expansion of our floating home loan portfolio. ManufacturedWe have also experienced appreciation in residential market prices and have a record low inventory of homes for sale due to continued strong demand. Floating and manufactured home loans increased as a result of increased demand for these types of
loans by well-qualified
borrowers.borrowers coupled with less competition for these types of loans. The loan portfolio remains well-diversified with commercial and multifamily real estate loans accounting for
38.0%40.6% of the portfolio, one-to-four family real estate loans
30.6%accounting for 27.3% of the portfolio and home equity, manufactured and
floating homes, and other consumer loans
14.9%accounting for 15.3% of the
portfolio.portfolio at December 31, 2018. Construction and land loans
account for 12.4% of the portfolio and commercial business loans account for the remaining 4.2% of the portfolio. At December 31, 2014, commercial and multifamily real estate loans accounted for
39.1% of the portfolio, , one-to-four family real estate loans accounted for 30.8% of the portfolio and home equity, manufactured and other consumer loans 14.8% of the portfolio, construction and land loans 10.7%10.6% of the portfolio and commercial business loans accounted for the remaining
4.5%6.2% of the
portfolio.Mortgage Servicing Rights.portfolio at December 31, 2018. At December 31, 20152017, commercial and 2014,multifamily real estate loans accounted for 38.4% of the portfolio, one- to-four family real estate loans accounted for 28.5% of the portfolio and home equity, manufactured homes, floating homes, and other consumer loans accounted for 14.5% of the portfolio, construction and land loans accounted for 11.2% of the portfolio and commercial business loans accounted for the remaining 7.4% of the portfolio.
Mortgage Servicing Rights. At December 31, 2018 and 2017 both, we had $3.2$3.4 million in mortgage servicing rights recorded at fair value. We record mortgage servicing rights on loans sold to Fannie Mae with servicing retained and upon acquisition of a servicing portfolio. We stratify our capitalized mortgage servicing rights based onupon the type, term and interest rates of the underlying loans. Mortgage servicing rights are carried at fair value. If the fair value of our mortgage servicing rights fluctuates significantly, our financial results could be materially impacted.
Nonperforming Assets. At December 31, 2015,2018, our nonperforming assets totaled $2.9$3.2 million, or 0.5%0.45% of total assets, compared to $4.2$2.9 million, or 0.84%0.45% of total assets at December 31, 2014.2017.
The table below sets forth the amounts and categories of nonperforming assets in our loan portfolio at the dates indicated (dollars in thousands):
| Nonperforming Assets at December 31, |
| 2015 | 2014 | Amount
Change | Percent
Change |
Nonaccrual loans | $ | 1,042 | | $ | 1,464 | | $ | 64 | | | 4.37 | % |
Accruing loans 90 days or more delinquent | | 117 | | | 114 | | | 3 | | | 2.63 | |
Nonperforming TDRs | | 971 | | | 2,264 | | | (1,779 | ) | | (78.58 | ) |
OREO and repossessed assets | | 769 | | | 323 | | | 446 | | | 138.08 | |
Total | $ | 2,899 | | $ | 4,165 | | $ | (1,266 | ) | | (30.40 | )% |
|
| | | | | | | | | | | | | | |
| | December 31, | | Amount | | Percent |
| | 2018 | | 2017 | | Change | | Change |
| Nonaccrual loans | $ | 2,541 |
| | $ | 2,149 |
| | $ | 392 |
| | 18.2 | % |
| Performing TDRs | 126 |
| | 134 |
| | (8 | ) | | (6.0 | ) |
| OREO and repossessed assets | 575 |
| | 610 |
| | (35 | ) | | (5.7 | ) |
| Total | $ | 3,242 |
|
| $ | 2,893 |
| | $ | 349 |
| | 12.1 | % |
Nonperforming
assets are comprised of nonaccrual loans,
to total loans decreased to $2.1 million, or 0.5%, of total loans at December 31, 2015 from $3.8 million, or 0.9%, at December 31, 2014. Nonperforming one- to four- familynonperforming TDRs, other real estate
owned and other assets. The increase in nonperforming assets was principally due to an increase in nonaccrual loans
increased $128,000 to $1.6 million at December 31, 2015 from $1.5 million at December 31, 2014.TABLE OF CONTENTS
of $392,000, or 18.2% and the reduction in OREO and repossessed assets increased 138.1%of $35,000, or 5.7% as these assets were sold during the year.
At December 31, 2018, eight TDRs totaling $691,000 were on nonaccrual, five were over 90 days past due totaling $387,000, one loan for $167,000 was 60-89 days past due and two loans totaling $137,000 were less than 60 days past due. Once a TDR has performed according to $769,000its modified terms for six months and the collection of principal and interest under the revised terms is deemed probable, we remove the TDR from nonaccrual status. Should a TDR, which was performing subsequently, become more than 30 days past due, we then consider it a nonperforming TDR.
OREO and repossessed assets decreased 5.7% to $575,000 at December 31,
2015, primarily due to the reclassification2018. OREO and repossessed assets at December 31, 2018 consisted solely of
thea former bank branch property located in Port Angeles,
Washington which was acquired in 2015 as a part of three branches purchased from another financial institution. It is currently leased to a not-for-profit organization headquartered in our market area at a below market rate. We sold one residential OREO property
from Bank premises to OREO.during 2018 with a net loss of $74,000. During
2015,2017, we
repossessed three personal residences and five manufactured homes. We sold four personal residences
and seven manufactured homes at an aggregate
net loss of
$201,000. Our largest$94,000 that were being held as OREO. There were no OREO
at December 31, 2015, consisted of a $600,000 former bank branch property, a $124,000 loan secured by a landsales in
Mason County, Washington, and a $35,000 loan secured by a personal residence in Clallam County.2018.
Allowance for Loan Losses. The allowance for loan losses is maintained to cover losses that are probable and can be estimated on the date of evaluation in accordance with generally accepted accounting principles in the United States. It is our best estimate of probable incurred credit losses in our loan portfolio.
The following table reflects the adjustments in our allowance during
20152018 and
20142017 (dollars in thousands):
| Year Ended December 31, |
| 2015 | 2014 |
Balance at beginning of period | $ | 4,387 | | $ | 4,177 | |
Charge-offs | | (210 | ) | | (743 | ) |
Recoveries | | 59 | | | 153 | |
Net charge-offs | | 151 | | | 590 | |
Provisions charged to operations | | 400 | | | 800 | |
Balance at end of period | $ | 4,636 | | $ | 4,387 | |
Ratio of net charge-offs during the period to average loans outstanding during the period | | 0.03 | % | | 0.14 | % |
Allowance as a percentage of nonperforming loans | | 217.65 | % | | 114.19 | % |
Allowance as a percentage of total loans (end of period) | | 1.01 | % | | 1.02 | % |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| Balance at beginning of period | $ | 5,241 |
| | $ | 4,822 |
|
| Charge-offs | (50 | ) | | (143 | ) |
| Recoveries | 58 |
| | 62 |
|
| Net recoveries (charge-offs) | 8 |
| | (81 | ) |
| Provisions charged to operations | 525 |
| | 500 |
|
| Balance at end of period | $ | 5,774 |
| | $ | 5,241 |
|
| Ratio of net charge-offs during the period to average loans outstanding during the period | — | % | | 0.02 | % |
| Allowance as a percentage of nonperforming loans | 216.50 | % | | 229.57 | % |
| Allowance as a percentage of total loans (end of period) | 0.93 | % | | 0.96 | % |
Our allowance for loan losses increased $533,000, or 10.2%, to $5.8 million at December 31, 2018, from $5.2 million at December 31, 2017. The provision for loan losses totaled $525,000 for the year ended December 31, 2018 primarily as a result of the increase in loans held-for-portfolio and to a lesser extent the increase in non-performing loans as compared to December 31, 2017.
Specific loan loss reserves increased $515,000,decreased to $736,000 at December 31, 2018 compared to $1.1 million at December 31, 2017, while general loan loss reserves decreased $266,000increased to $4.0 million at December 31, 2015,2018, compared to $3.2 million at December 31, 2017 and the prior year end. unallocated reserve increased to $1.0 million compared to $908,000 at December 31, 2017.
The
increasedecrease in specific loan loss reserves was primarily due to
improvement in financial performance for certain loans since December 31, 2017. The increase in the general reserve was a
changeresult of the changes in
valuation methods on a commercial real estate loan
from cash flow to collateral value resultingbalances and historical loss rates. The overall increase in
a lower valuation. The decrease in generalthe allowance for loan
loss reserveslosses was
primarily due to
an increase in loans held-for-portfolio to $619.5 million at December 31, 2018 from $548.6 million at December 31, 2017, and to a lesser extent the
improved credit quality of the loan portfolio. Net charge-offsincrease in non-performing loans. Loans individually evaluated for
2015 were $151,000, or 0.03% of average loans,impairment decreased to $5.9 million at December 31, 2018, compared to
$590,000,$10.7 million at December 31, 2017. Net recoveries were $8,000 or
0.14%0.0% of average loans for
2014. The decrease inthe year ended December 31, 2018, compared to net charge-offs
was primarily due toof $81,000 or 0.02% of average loans for the
improved economic conditions in our market area and continued efforts in credit administration and collections. As ofyear ended December 31,
2015,2017. At December 31, 2018, the allowance for loan losses as a percentage of total loans and nonperforming loans was
1.01%0.93% and
217.65%216.50%, respectively, compared to
1.02%0.96% and
114.19%229.57%, respectively, at December 31,
2014.2017.
Deposits. Total deposits increased by $32.2$39.2 million, or 7.9%7.6%, to $444.0$553.6 million at December 31, 20152018 from $407.8$514.4 million at December 31, 2014. Interest-bearing2017. The increase was primarily due to increases in noninterest-bearing demand accounts increased $24.3deposits (including escrow accounts) of $23.9 million, or 23.6%33.2%, to $96.1 million at December 31, 2018 from $72.1 million at December 31, 2017 and noninterest-bearing demandcertificates of deposit accounts which increased $6.3$27.3 million, or 15.1% and savings accounts increased $5.616.6% to $191.8 million or 16.9%.at December 31, 2018 from $164.6 million at December 31, 2017. These increases were partially offset by a $1.2$8.5 million, or 2.2%4.9%, decrease in interest-bearing demand accounts to $164.9 million at December 31, 2018 from $173.4 million at December 31, 2017, and a $8.2 million, or 14.9%, decrease in money market accounts and a $3.1to $46.7 million or 1.8% decrease in certificates. The increase in interest-bearing demand accounts was primarily a result of emphasis on our rewards checking product as well as a competitively priced interest-bearing demand account.at December 31, 2018 from $54.9 million at December 31, 2017. The increase in noninterest-bearing demand accounts was primarily a result of our continued emphasis on attracting relatively low-cost core deposit accounts from small businesses.businesses and consumers. The decrease in certificates was due in part to low rates on these types of deposits. The decrease in money market accounts was primarily the result of customers placing these funds in higher yielding interest-bearing demand accounts. Escrow accounts increased by $226,000, or 8.8%, as a result of higher balancesincrease in our custodial accounts for our loan servicing portfolio. At December 31, 2015, brokeredtotal deposits were $4.6 million compared to $5.0 million at December 31, 2014.2018 compared to December 31, 2017 reflects our continued focus on generating low cost deposits to support our loan growth. There were no brokered deposits outstanding at December 31, 2018 compared to $512,000 at December 31, 2017. TABLE OF CONTENTS
A summary of deposit accounts with the corresponding weighted averageweighted-average cost of fundsat December 31, 2018 and 2017 is presented below (dollars in thousands):
| As of December 31, 2015 | As of December 31, 2014 |
| Amount | Wtd. Avg.
Rate | Amount | Wtd. Avg.
Rate |
Noninterest-bearing demand | $ | 48,067 | | | 0.00 | % | $ | 41,773 | | | 0.00 | % |
Interest-bearing demand | | 127,392 | | | 0.42 | | | 103,048 | | | 0.43 | |
Savings | | 38,833 | | | 0.18 | | | 33,233 | | | 0.16 | |
Money market | | 54,046 | | | 0.16 | | | 55,236 | | | 0.27 | |
Certificates | | 168,880 | | | 1.22 | | | 171,939 | | | 1.03 | |
Escrow | | 2,806 | | | 0.00 | | | 2,580 | | | 0.00 | |
Total | $ | 440,024 | | | 0.63 | % | $ | 407,809 | | | 0.60 | % |
|
| | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Amount | | Wtd. Avg. Rate | | Amount | | Wtd. Avg. Rate |
| Noninterest-bearing demand | $ | 93,823 |
| | — | % | | $ | 69,094 |
| | — | % |
| Interest-bearing demand | 164,919 |
| | 0.47 |
| | 173,413 |
| | 0.43 |
|
| Savings | 54,102 |
| | 0.29 |
| | 49,450 |
| | 0.21 |
|
| Money market | 46,689 |
| | 0.24 |
| | 54,860 |
| | 0.21 |
|
| Certificates | 191,825 |
| | 1.58 |
| | 164,554 |
| | 1.33 |
|
| Escrow | 2,243 |
| | — |
| | 3,029 |
| | — |
|
| Total | $ | 553,601 |
| | 0.71 | % | | $ | 514,400 |
| | 0.61 | % |
Borrowings. FHLB advances increased $9.8$25.0 million, or 32.2%42.4%, to $40.4$84.0 million at December 31, 2015,2018, with a weighted-average cost of 0.39%2.72%, from $30.6$59.0 million at December 31, 2014,2017, with a weighted-average cost of 0.38%1.63%. This increase in borrowings was a result of the growth in our loan portfolio. We rely on FHLB advances to fund interest-earning assets when deposits alone cannot fully fund interest-earning asset growth. This reliance on borrowings, rather than deposits, may increase our overall cost of funds.Stockholders’
Stockholders' Equity. Total stockholders’stockholders' equity increased $3.9$6.5 million, or 7.7%9.9%, to $54.5$71.6 million at December 31, 2015.2018, from $65.2 million December 31, 2017. This increase primarily reflects net income of $4.8$7.0 million, stock-based compensation of $273,000, and ESOP share allocations of $457,000,$421,000, partially offset by $1.3 million in stock repurchases and cash dividends of $574,000.$1.4 million.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis. All average balances are daily average balances.
NonaccruingNonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on
non-accrualnonaccrual (dollars in thousands).
| December 31, |
| 2015 | 2014 | 2013 |
| Average
Outstanding
Balance | Interest
Earned/
Paid | Yield/
Rate
| Average
Outstanding
Balance | Interest
Earned/
Paid | Yield/
Rate | Average
Outstanding
Balance | Interest
Earned/
Paid | Yield/
Rate |
Interest-earning assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans receivable(1) | $ | 437,425 | | $ | 22,233 | | | 5.08 | % | $ | 408,283 | | $ | 21,143 | | | 5.18 | % | $ | 358,029 | | $ | 19,329 | | | 5.40 | % |
Investments and interest bearing accounts | | 34,601 | | | 220 | | | 0.64 | | | 13,792 | | | 213 | | | 1.54 | | | 22,902 | | | 297 | | | 1.30 | |
Total interest-earning assets(1) | | 472,026 | | | 22,453 | | | 4.76 | | | 422,075 | | | 21,356 | | | 5.06 | | | 380,931 | | | 19,626 | | | 5.15 | |
Interest-bearing liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Savings and money market accounts | | 90,639 | | | 150 | | | 0.17 | | | 85,192 | | | 201 | | | 0.24 | | | 99,799 | | | 253 | | | 0.25 | |
Demand and NOW accounts | | 160,583 | | | 478 | | | 0.30 | | | 125,312 | | | 378 | | | 0.30 | | | 44,009 | | | 162 | | | 0.37 | |
Certificate accounts | | 166,030 | | | 2,018 | | | 1.22 | | | 163,527 | | | 1,690 | | | 1.03 | | | 148,154 | | | 1,681 | | | 1.13 | |
Borrowings | | 24,626 | | | 106 | | | 0.43 | | | 26,318 | | | 154 | | | 0.59 | | | 33,697 | | | 216 | | | 0.64 | |
Total interest-bearing liabilities | | 441,878 | | | 2,752 | | | 0.62 | | | 400,349 | | | 2,423 | | | 0.61 | | | 325,659 | | | 2,312 | | | 0.71 | |
Net interest income | | | | $ | 19,701 | | | | | | | | $ | 18,933 | | | | | | | | $ | 17,314 | | | | |
Net interest rate spread | | | | | | | | 4.13 | % | | | | | | | | 4.45 | % | | | | | | | | 4.44 | % |
Net earning assets | $ | 30,148 | | | | | | | | $ | 21,872 | | | | | | | | $ | 55,272 | | | | | | | |
Net interest margin | | | | | | | | 4.17 | % | | | | | | | | 4.49 | % | | | | | | | | 4.55 | % |
Average interest-earning assets to average interest-bearing liabilities | | | | | 106.82 | % | | | | | | | | 105.47 | % | | | | | | | | 116.97 | % | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 |
| | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate | | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate | | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate |
| Interest-earning assets: | | | | | | | | | | | | | | | | | |
Loans (1) | $ | 589,205 |
| | $ | 31,661 |
| | 5.37 | % | | $ | 508,520 |
| | $ | 26,707 |
| | 5.25 | % | | $ | 474,356 |
| | $ | 24,608 |
| | 5.19 | % |
| Investments and interest bearing accounts | 60,628 |
| | 1,286 |
| | 2.12 |
| | 51,747 |
| | 742 |
| | 1.43 |
| | 45,613 |
| | 442 |
| | 0.97 |
|
Total interest-earning assets (1) | 649,833 |
| | 32,947 |
| | 5.07 |
| | 560,267 |
| | 27,449 |
| | 4.90 |
| | 519,969 |
| | 25,050 |
| | 4.82 |
|
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | |
| Savings and money market accounts | 100,639 |
| | 200 |
| | 0.20 |
| | 101,717 |
| | 164 |
| | 0.16 |
| | 92,741 |
| | 147 |
| | 0.16 |
|
| Demand and NOW accounts | 170,518 |
| | 874 |
| | 0.51 |
| | 163,009 |
| | 744 |
| | 0.46 |
| | 135,465 |
| | 529 |
| | 0.39 |
|
| Certificate accounts | 174,922 |
| | 2,765 |
| | 1.58 |
| | 157,575 |
| | 2,113 |
| | 1.34 |
| | 165,210 |
| | 2,032 |
| | 1.23 |
|
| Borrowings | 69,900 |
| | 1,521 |
| | 2.18 |
| | 29,791 |
| | 347 |
| | 1.16 |
| | 36,609 |
| | 211 |
| | 0.58 |
|
| Total interest-bearing liabilities | 515,979 |
| | 5,360 |
| | 1.04 | % | | 452,092 |
| | 3,368 |
| | 0.74 | % | | 430,025 |
| | 2,919 |
| | 0.68 |
|
| Net interest income | |
| | $ | 27,587 |
| | | | |
| | $ | 24,081 |
| | |
| | |
| | $ | 22,131 |
| | |
|
| Net interest rate spread | |
| | |
| | 4.03 | % | | |
| | |
| | 4.15 | % | | |
| | |
| | 4.14 | % |
| Net earning assets | $ | 133,854 |
| | |
| | |
| | $ | 108,175 |
| | |
| | |
| | $ | 89,944 |
| | |
| | |
|
| Net interest margin | |
| | |
| | 4.25 | % | | |
| | |
| | 4.30 | % | | |
| | |
| | 4.26 | % |
| Average interest-earning assets to average interest-bearing liabilities | |
| | 125.94 | % | | |
| | |
| | 123.93 | % | | |
| | |
| | 120.92 | % | | |
|
| |
| (1) | Calculated net of deferred loan fees, loan discounts and loans in process. |
TABLE OF CONTENTS
The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate (dollars in thousands).
| Year ended December 31,
2015 vs. 2014 | Year ended December 31,
2014 vs. 2013 |
| Increase
(decrease) due to | Total
Increase
(decrease) | Increase
(decrease) due to | Total
Increase
(decrease) |
| Volume | Rate | Volume | Rate |
Interest-earning assets:
| | | | | | | | | | | | | | | | | | |
Loans receivable | | 1,509 | | $ | (419 | ) | $ | 1,090 | | $ | 2,713 | | $ | (899 | ) | $ | 1,814 | |
Investments and interest bearing accounts | | 321 | | | (314 | ) | | 7 | | | (118 | ) | | 34 | | | (84 | ) |
Total interest-earning assets | | 1,830 | | | (733 | ) | | 1,097 | | | 2,595 | | | (865 | ) | | 1,730 | |
Interest-bearing liabilities:
| | | | | | | | | | | | | | | | | | |
Savings and Money Market accounts | | 13 | | | (64 | ) | | (51 | ) | | (37 | ) | | (15 | ) | | (52 | ) |
Demand and NOW accounts | | 106 | | | (6 | ) | | 100 | | | 299 | | | (83 | ) | | 216 | |
Certificate accounts | | 26 | | | 302 | | | 328 | | | 174 | | | (165 | ) | | 9 | |
Borrowings | | (10 | ) | | (38 | ) | | (48 | ) | | (47 | ) | | (16 | ) | | (63 | ) |
Total interest-bearing liabilities | $ | 135 | | $ | 194 | | $ | 329 | | $ | 389 | | $ | (279 | ) | $ | 110 | |
Change in net interest income | | | | | | | $ | 768 | | | | | | | | $ | 1,620 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 vs. 2017 | | Year Ended December 31, 2017 vs. 2016 |
| | Increase (Decrease) due to | | Total Increase | | Increase (Decrease) due to | | Total Increase |
| | Volume | | Rate | | Volume | | Rate | |
| Interest-earning assets: | | | | | | | | | | | |
| Loans | $ | 4,336 |
| | $ | 618 |
| | $ | 4,954 |
| | $ | 1,794 |
| | $ | 305 |
| | $ | 2,099 |
|
| Investments and interest bearing accounts | 188 |
| | 356 |
| | 544 |
| | 88 |
| | 212 |
| | 300 |
|
| Total interest-earning assets | 4,524 |
| | 974 |
| | 5,498 |
| | 1,882 |
| | 517 |
| | 2,399 |
|
| Interest-bearing liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
| Savings and Money Market accounts | (2 | ) | | 38 |
| | 36 |
| | 14 |
| | 3 |
| | 17 |
|
| Demand and NOW accounts | 38 |
| | 92 |
| | 130 |
| | 126 |
| | 89 |
| | 215 |
|
| Certificate accounts | 274 |
| | 378 |
| | 652 |
| | (102 | ) | | 183 |
| | 81 |
|
| Borrowings | 873 |
| | 301 |
| | 1,174 |
| | (79 | ) | | 215 |
| | 136 |
|
| Total interest-bearing liabilities | $ | 1,183 |
| | $ | 809 |
| | $ | 1,992 |
| | $ | (41 | ) | | $ | 490 |
| | $ | 449 |
|
| Change in net interest income | |
| | |
| | $ | 3,506 |
| | |
| | |
| | $ | 1,950 |
|
Comparison of Results of Operation for the Years Ended December 31, 20152018 and 20142017
General. Net income increased $550,000$1.9 million to $4.8$7.0 million, or $1.86$2.74 per diluted common share for the year ended December 31, 2015,2018, from $4.2$5.1 million, or $1.63$2.00 per diluted common share for the year ended December 31, 2014.2017. The primary reasons for the improvement were increasesincrease in net income in 2018 compared to last year was due to higher net interest income and noninterest income and a decrease in thelower provision for loan losses,income taxes, which were partially offset by higher noninterest expense. Income for the year ended December 31, 2018 was positively impacted by a $1.2 million decrease in tax expense due to tax rate changes, while the year ended December 31, 2017 was negatively impacted by $309,000 in tax expense related to an adjustment to the Company's deferred tax asset from the tax rate changes.
Interest Income. Interest Total interest income increased by $1.1$5.5 million, or 5.1%20.0%, to $22.5$32.9 million for the year ended December 31, 2015,2018, from $21.4$27.4 million for the year ended December 31, 2014.2017. The increase in interest income for the year primarily reflectedreflects the increase in the average balance of interest-earning assets, in particular our average balance of loans receivable which outpaced the decline in the weighted averageheld for portfolio and, to a lesser extent, a higher weighted-average yield on our interest-earning assets during the year ended December 31, 20152018 as compared to the prior year. Our
weighted averageweighted-average yield on interest-earning assets
was 4.76%increased to 5.07% for the year ended December 31,
2015,2018, compared to
5.06%4.90% for the year ended December 31,
2014.2017. The
weighted averageweighted-average yield on loans
decreased,increased 12 basis points to
5.08%5.37% for the year ended December 31,
20152018 from
5.18%5.25% for the year ended December 31,
2014.2017. The weighted-average yield on investments was 2.12%, compared to 1.43% for the year ended December 31, 2017. The increase in the average loan yield was due to the increase in market interest rates over the past year and the increase in the average balance of the loan portfolio. The average balance of
gross loans
receivableportfolio increased
$29.1$80.7 million, or
7.1%15.9%, for the year ended December 31,
20152018 as compared to the prior year. The
weightedincrease in the average
yield on available for sale securities was 0.64% for the year ended December 31, 2015outstanding balance in our loan portfolio compared to
1.54%prior year was primarily a result of positive economic conditions which contributed to demand for
the year ended December 31, 2014.credit. The average balance of
available for saleavailable-for-sale securities and
interest bearinginterest-bearing accounts increased
$20.8$8.9 million, or
150.9%17.2%, for the year ended December 31,
20142018 as compared to the prior year.
The increase in the average yields for all of our interest-earning assets for the year ended December 31, 2018 as compared to the prior year was due to the increase in market interest rates over the past year.
Interest Expense. Interest expense increased $329,000,$2.0 million, or 13.6%59.1%, to $2.8$5.4 millionfor the year ended December 31, 2018, from $3.4 million for the year ended December 31, 2015,2017. This increase was primarily due to increases in both the average balance of and rates paid on deposits and FHLB advances. Our overall weighted-average cost of interest-bearing liabilities was 1.04% for the year ended December 31, 2018, compared to 0.74% for the year ended December 31, 2017. The rise in the cost of interest-bearing liabilities resulted from $2.4the increase in the targeted federal funds rate over the past year.
Interest paid on deposits increased $818,000, or 27.1%, to $3.8 million for the year ended December 31,
2014. This increase reflects primarily overall higher balances of deposits partially offset by a decrease in the average balance of FHLB advances and a lower weighted average cost of interest-bearing deposits during the year. Our weighted average cost of interest-bearing liabilities was 0.62% for the year ended December 31, 2015, compared to 0.61% for the year ended December 31, 2014. TABLE OF CONTENTS
Interest paid on deposits increased $377,000, or 16.6%, to $2.62018, from $3.0 million for the year ended December 31, 2015, from $2.32017, driven by an increase of $23.8 million, or 5.6% in the average balance of interest-bearing deposits to $446.1 million and a 10 basis points increase in the average rate paid on interest-bearing deposits for the year ended December 31, 2018. The average balance of total deposits increased $43.7 million to $537.2 million for the year ended December 31, 2014. This increase resulted from a $43.22018 as compared to $493.6 million increasefor the same period in the average balances of deposits, which was partially offset by a lower weighted average2017. Our weighted-average cost of deposits was 0.71% during the year ended December 31, 2018 as compared to 0.61% during the prior year. The primary reason for the increase was the additional expense recognized in 2015 compared to 2014, for the amortization of the premium paid for the deposits acquired in the branch transaction in August 2014. We experienced a two basis point increase in the average rate paid oncost of deposits during the year ended December 31, 2015 compared to 2014.
2018 was primarily a result of the increase in market interest rates.
Interest expense on borrowings
decreased $48,000,increased $1.2 million, or
31.2%338.3%, to
$106,000 for the year ended December 31, 2015 from $154,000 for the year ended December 31, 2014. The decrease was a result of a 15 basis point decrease in our cost of borrowings to 0.43% for the year ended December 31, 2015 from 0.58% for the year ended December 31, 2014 and a $1.6 million decrease in the average balance of borrowings outstanding during the year.Net Interest Income. Net interest income increased $768,000, or 4.1%, to $19.7$1.5 million for the year ended December 31, 2015,2018 from $19.0$347,000 for the year ended December 31, 2017. The increase in interest expense on borrowings for the year ended December 31, 2018 was due to an increase in the average balance of borrowings and an increase in short-term interest rates from the rise in the targeted federal funds rate during the year. Average borrowings during the year ended December 31, 2018 were $69.9 million, compared to $29.8 million for the year ended December 31, 2014.2017. The average cost of borrowings for the year ended December 31, 2018 increased to 2.18% compared to 1.16% for the year ended December 31, 2017.
Net Interest Income. Net interest income increased $3.5 million, or 14.6%, to $27.6 million for the year ended December 31, 2018, from $24.1 million for the year ended December 31, 2017. The year over year increase primarily resulted from increased interest income due primarily to both higher average loan balances and lower average balances and cost of borrowings. This washigher yields on our loan portfolio, partially offset by higher average balances of interest-bearing deposits during 2015 as compared to 2014. In addition, our average yield on loans receivable decreased during the year ended December 31, 2015 as compared to the prior year as new loan origination s and re-pricing adjustable rate loans reflect the continued low rate environment.increased interest expense. Our net interest margin was 4.17%4.25% for the year ended December 31, 2015,2018, compared to 4.49%4.30% for the year ended December 31, 2014.2017. The decrease was primarily due to higher funding costs as interest rates paid on interest-bearing liabilities increased more rapidly than yields earned on interest-earning assets.
Provision for Loan Losses. We establish our allowance for loan losses through provisions for loan losses, which are charged to earnings, at a level required to reflect management’smanagement's best estimate of the probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’borrowers' ability to repay, estimated value of any underlying collateral, peer group data, prevailing economic conditions, and currentother qualitative factors. Large groups of smaller balance homogeneous loans, such as one-to four-family, commercial and multifamily real estate, home equity and consumer loans, including floating homes and manufactured homes, are evaluated in the aggregate using historical loss factors adjusted for current economic conditions and other relevant data. Loans, for which management has concerns about the borrowers’borrowers' ability to repay, are evaluated individually, and specific loss allocations are provided for these loans when necessary.A
We recorded a provision
for loan losses of
$400,000 was made during$525,000 for the year ended December 31,
2015,2018, compared to
a provision of $800,000 during$500,000 for the year ended December 31,
2014.2017. The
reduced provision primarily reflects improvements in our credit metrics partially offset by higher average loan balances and changesincrease in the
compositionprovision for the year was primarily a result of
ourthe growth in loans held for portfolio, which increased 12.9% from a year ago. Net loan
portfolio.recoveries were $8,000 for the year ended December 31, 2018, compared to net charge-offs of $81,000 for the year ended December 31, 2017. Nonperforming loans increased $384,000 during the year to $2.7 million at December 31, 2018, compared to a year ago.
For the year ended December 31,
2015,2018, the
annualized percentage of net
recoveries/charge-offs to average loans
decreased 11 basis pointsoutstanding was to
0.03% from 0.14%0.0% compared to 0.02% for the year ended December 31,
2014.2017. Nonperforming loans to total loans
decreasedincreased slightly to
0.47%0.43% at December 31,
20152018 from
0.89%0.42% at December 31,
2014.2017. The allowance for loan losses increased to $5.8 million at December 31, 2018 compared to $5.2 million at December 31, 2017. See
“-"- Comparison of Financial Condition at December 31,
20152018 and December 31,
20142017 – Delinquencies and Nonperforming
Assets”Assets" for more information on nonperforming loans in
2015.2018.While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination. TABLE OF CONTENTS
Noninterest Income. Noninterest income increased $891,000,$647,000, or 20.4%16.8%, to $5.3$4.5 million for the year ended December 31, 2015,2018, as compared to $4.4$3.9 million for the year ended December 31, 20142017 as reflected below (dollars in thousands):
| Year Ended December 31, | Amount
Change | Percent
Change |
| 2015 | 2014 |
Service charges and fee income | $ | 2,605 | | $ | 2,571 | | $ | 34 | | | 1.3 | % |
Earnings on cash surrender value of bank owned life insurance | | 338 | | | 340 | | | (2 | ) | | (0.6 | ) |
Mortgage servicing income | | 840 | | | 509 | | | 331 | | | 65.0 | |
Fair value adjustment on mortgage servicing rights | | 210 | | | 328 | | | (118 | ) | | (36.0 | ) |
Gain (Loss) on Sale of Securities | | (31 | ) | | — | | | (31 | ) | | | |
Net gain on sale of loans | | 1,301 | | | 624 | | | 677 | | | 108.5 | |
Total noninterest income | $ | 5,263 | | $ | 4,372 | | $ | 891 | | | 20.4 | % |
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Amount | | Percent |
| | 2018 | | 2017 | | Change | | Change |
| Service charges and fee income | $ | 1,876 |
| | $ | 1,895 |
| | $ | (19 | ) | | (1.0 | )% |
| Earnings on cash surrender value of bank owned life insurance | 320 |
| | 327 |
| | (7 | ) | | (2.1 | ) |
| Mortgage servicing income | 562 |
| | 566 |
| | (4 | ) | | (0.7 | ) |
| Net gain on sale of loans | 1,258 |
| | 1,071 |
| | 187 |
| | 17.5 |
|
| Other income | 490 |
| | — |
| | 490 |
| | NM |
|
| Total noninterest income | $ | 4,506 |
| | $ | 3,859 |
| | $ | 647 |
| | 16.8 | % |
NM = not meaningful
The increase in
service charges and feenoninterest income
from one year ago was primarily
the result of increased deposit service fees and higher loan fees. Mortgage servicing income increased due to
one-time proceeds of $490,000 from the
gain on sale of Visa B Shares, included in other noninterest income, and a $187,000 increase in
volume of loans being serviced by the Bank. The decrease in the fair value adjustment on mortgage servicing rights was primarily a result of the duration on the underlying loans being projected to shorten due to the increased refinance activity. The increase innet gain on sale of loans,
was primarily reflective of higher volumespartially offset by a decrease in service charges and
average premiums on loans sold.fees income.
Noninterest Expense. Noninterest expense increased $1.6$3.6 million, or 9.8%18.6%, to $17.5 million during 2015 compared to $15.9 million during 2014, as reflected below (dollars in thousands): | Year Ended December 31, | Amount
Change | Percent
Change |
| 2015 | 2014 |
Salaries and benefits | $ | 9,223 | | $ | 8,278 | | $ | 945 | | | 11.4 | % |
Operations | | 3,995 | | | 4,045 | | | (50 | ) | | (1.2 | ) |
Regulatory assessments | | 746 | | | 267 | | | 479 | | | 179.4 | |
Occupancy | | 1,493 | | | 1,359 | | | 134 | | | 9.9 | |
Data processing | | 1,717 | | | 1,770 | | | (53 | ) | | (3.0 | ) |
Losses and expenses on OREO and repossessed assets | | 311 | | | 208 | | | 103 | | | 49.5 | |
Total noninterest expense | $ | 17,485 | | $ | 15,927 | | $ | 1,558 | | | 9.8 | % |
Salaries and benefits expense increased during 2015 primarily due to a net increase of three full time equivalent employees, and an increase in incentive compensation and medical expense. Regulatory assessments increased in part due to the fee structure utilized by the Washington State Department of Financial Institutions, for providing services to the Bank compared to the former regulatory agency that provided those services. Occupancy expenses increased due to the operation of an additional branch for the year compared to only five months in 2014. Losses and expenses on OREO and repossessed assets increased $103,000 due to write-downs on OREO properties.
Income Tax Expense. For the year ended December 31, 2015, we had income tax expense of $2.3 million on our pre-tax income as compared to $2.3$22.8 million for the year ended December 31, 2014.2018, from $19.2 million for the year ended December 31, 2017, as reflected below (dollars in thousands):
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Amount | | Percent |
| | 2018 | | 2017 | | Change | | Change |
| Salaries and benefits | $ | 12,775 |
| | $ | 10,733 |
| | $ | 2,042 |
| | 19.0 | % |
| Operations | 5,370 |
| | 4,348 |
| | 1,022 |
| | 23.5 |
|
| Regulatory assessments | 432 |
| | 431 |
| | 1 |
| | 0.2 |
|
| Occupancy | 2,139 |
| | 1,889 |
| | 250 |
| | 13.2 |
|
| Data processing | 2,021 |
| | 1,736 |
| | 285 |
| | 16.4 |
|
| Losses and expenses on OREO and repossessed assets | 86 |
| | 110 |
| | (24 | ) | | (21.8 | ) |
| Total noninterest expense | $ | 22,823 |
| | $ | 19,247 |
| | $ | 3,576 |
| | 18.6 | % |
The increase in noninterest expense from the year ended December 31, 2017 was primarily due to higher expense for salaries and benefits, operations and occupancy. Salaries and benefits expense increased $2.0 million compared to a year ago, primarily due to higher medical expenses, and an increase in the number of full-time equivalent employees ("FTE's") as a result of the addition of our University Place branch and loan production office in Sequim in 2017, as well as addition of our new Belltown branch in 2018. In addition, the percent of incentive bonuses paid out quarterly increased starting in January 2018, which also contributed to the year-over-year increase. Operations expense increased $1.0 million from a year ago, primarily due to an increase in audit fees, professional fees and loan related expenses. For the year ended December 31, 2018, compared to the prior year, occupancy expense increased $250,000, or 13.2%, due to a one-time adjustment to recognize straight-line rent expense over the life of a lease.
The efficiency ratio, which is noninterest expense as a percentage of net interest income and noninterest income, for the year ended December 31, 2018 was 71.12%, compared to 68.89% for the year ended December 31, 2017. The slight increase in the efficiency ratio compared to the prior year was primarily due to the increase in noninterest expense outpacing the increase in net interest income and noninterest income.
Income Tax Expense . The provision for income taxes decreased $1.4 million, or 44.4% to $1.7 million for the year ended December 31, 2018, compared to $3.1 million for the year ended December 31, 2017. The decrease was primarily a result of the Tax Act, which impacted the Company positively in 2018 by reducing its statutory federal corporate income tax rate from 35% to 21%, and negatively in 2017 by requiring the Company to revalue its net deferred tax assets, resulting in a $309,000 adjustment through income tax expense in 2017. The effective tax rates for the years ended December 31, 20152018 and 20142017 were 32.8%19.5% and 35.5%38.4%, respectively.
Liquidity management is both a daily and longer-term function of management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer term basis, we maintain a strategy of investing in various
lendingloan products and investment securities, including mortgage-backed securities. We use our sources of funds primarily to meet ongoing commitments, pay maturing deposits, fund deposit withdrawals and fund loan commitments.
We maintain cash and investments that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound
operationoperations and meet demands for
customerclient funds (particularly withdrawals of deposits). At December 31,
2015,2018, we had
$55.0$66.8 million in cash and investment securities available for sale and
$2.1$1.2 million in loans held-for-sale. We can also obtain funds from borrowings, primarily FHLB advances. At December 31,
2015,2018, we
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had the ability to borrow an additional $86.1$156.0 million in FHLB advances, subject to certain collateral requirements. We haverequirements and we had access to additional borrowings of $25.9$47.3 million through the Federal Reserve’sReserve's Discount Window, subject to certain collateral requirements, $10.0requirements. In addition, we also had available $21.0 million through a an unsecured lines of credit facilities with The Bankers Bank (TIB), $2.0 million through an unsecured line of creditother financial institutions, with no balance outstanding at Pacific Coast Banker’s Bank and up to $9.0 million through a Fed Funds Sweep and Line Agreement established with Zions Bank.
December 31, 2018 or 2017.
We are required to have adequate cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained.
Liquidity management involves the matching of cash flow requirements of
customers,clients, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and our ability to manage those requirements. We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance we have in short-term investments at any given time will adequately cover any reasonably anticipated, immediate need for funds. Additionally, we maintain relationships with correspondent banks, which could provide funds on short-term notice if needed. Our liquidity, represented by cash and cash-equivalents, is a product of our operating, investing and financing activities.
As disclosed in our Consolidated Statements of Cash Flows in Item 8 of this Annual Report on Form 10-K, cash and cash equivalents increased
$19.0$1.1 million to
$48.3$61.8 million as of December 31,
2015,2018, from
$29.3$60.7 million
as ofat December 31,
2014.2017. Net cash provided by operating activities was
$3.8$10.3 million for the year ended December 31,
2015.2018. Net cash of
$25.6$71.5 million was used in investing activities
duringfor the year ended December 31,
20152018 and consisted principally of loan originations, net of principal
repayments and purchases of premises and equipmentrepayments. There was
$40.9$62.3 million of cash provided by financing activities
duringfor the year ended December 31,
2015 and2018 which primarily consisted of a
$32.2$39.2 million
net increase in deposits and a
$9.9$25.0 million
net increase in
net FHLB advances.
Sound Financial Bancorp is a separate legal entity from Sound Community Bank and must provide for its own liquidity. In addition to its own operating expenses (many of which are paid to Sound Community Bank), Sound Financial Bancorp is responsible for paying any dividends declared to its shareholders, and interest and principal on outstanding debt. Sound Financial
Bancorp’sBancorp's primary source of funds is dividends from Sound Community Bank, which are subject to regulatory limits. At December 31,
2015,2018 Sound Financial Bancorp, on an unconsolidated basis, had
$451,000$18,000 in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.
Our liquidity, represented by cash and cash equivalents and investment securities, is a product of our operating, investing and financing activities. Our primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest
rates, which provide liquidity to meet lending requirements.rates. We also generate cash through borrowings. We utilize FHLB advances to leverage our capital base and provide funds for our lending and investment activities, and to enhance our interest rate risk management.
We use our sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At December 31, 2015,2018, the approved outstanding loan commitments, including unused lines and letters of credit, amounted to $59.1$110.6 million. Certificates of deposit scheduled to mature in one year or less at December 31, 2015,2018, totaled $100.8$110.7 million. It is management’smanagement's policy to manageoffer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with us. See also the Consolidated Statements of Cash Flows, included in Item 8, “financial"Financial Statements and Supplementary Data,”" of this Form 10-K, for further information.
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Off-Balance Sheet Activities
In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage
customers’clients' requests for funding and take the form of loan commitments and lines of credit. For the year ended December 31,
2015,2018, we
engageddid not engage in
noany off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.
A summary of our off-balance sheet loan commitments at December 31,
2015,2018, is as follows (in thousands):
Off-balance sheet loan commitments:
| | | |
Residential mortgage commitments | $ | 6,037 | |
- Undisbursed portion of loans closed | | 32,951 | |
Unused lines of credit | | 19,925 | |
Irrevocable letters of credit | | 185 | |
Total loan commitments | $ | 59,098 | |
|
| | | |
| Off-balance sheet loan commitments: | Amount |
| Residential mortgage commitments | $ | 3,176 |
|
| Unfunded construction commitments | 60,632 |
|
| Unused lines of credit | 45,315 |
|
| Irrevocable letters of credit | 1,460 |
|
| Total loan commitments | $ | 110,583 |
|
Sound Community Bank is subject to minimum capital requirements imposed by regulations of the FDIC. Based on its capital levels at December 31,
2015,2018, Sound Community Bank exceeded these requirements as of that date. Consistent with our goals to operate a sound and profitable organization, our policy is for Sound Community Bank to maintain a
“well-capitalized”"well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at December 31,
2015,2018, Sound Community Bank was considered to be well-capitalized. Management monitors the capital levels to provide for current and future business opportunities and to maintain Sound Community
Bank’s “well-capitalized”Bank's "well-capitalized" status.
See “BusinessFor additional details see Note 15 in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" and "Item 1. "Business - How We Are
Regulated -- Regulated—Regulation of Sound Community
Bank — Bank—Capital
Rules” in Part I, Item 1Rules" of this Form
10-K for revised capital rules that Sound Community Bank became subject to as of January 1, 2015.10-K.
The following table shows the capital ratios of Sound Community Bank at December 31,
20152018 (dollars in thousands):
| Actual | Minimum Capital
Requirements | Minimum Required
to Be Well-Capitalized
Under Prompt
Corrective
Action Provisions |
| Amount | Ratio | Amount | | Ratio | Amount | | Ratio |
Tier 1 Capital to total adjusted assets(1) | $ | 53,041 | | | 10.19 | % | $ | 20,812 | | ≥ | | 4.0 | % | $ | 26,015 | | ≥ | | 5.0 | % |
Common Equity Tier 1 risk-based capital ratio(1) | $ | 53,041 | | | 11.70 | % | $ | 20,401 | | ≥ | | 4.5 | % | $ | 29,467 | | ≥ | | 6.5 | % |
Tier 1 Capital to risk-weighted assets(2) | $ | 53,041 | | | 11.70 | % | $ | 27,201 | | ≥ | | 6.0 | % | $ | 36,268 | | ≥ | | 8.0 | % |
Total Capital to risk-weighted assets(2) | $ | 57,677 | | | 12.74 | % | $ | 36,268 | | ≥ | | 8.0 | % | $ | 45,335 | | ≥ | | 10.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Actual | | Minimum Capital Requirements | | Minimum Required to be Well-Capitalized Under Prompt Corrective Action Provisions |
| | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
Tier 1 Capital to average total adjusted assets (1) | | $ | 69,685 |
| | 9.73 | % | | $ | 28,659 |
| | 4.0 | % | | $ | 35,824 |
| | 5.0 | % |
Common Equity Tier 1 to risk-weighted assets (2) | | 69,685 |
| | 11.76 |
| | 26,665 |
| | 4.5 |
| | 38,516 |
| | 6.5 |
|
Tier 1 Capital to risk-weighted assets (2) | | 69,685 |
| | 11.76 |
| | 35,553 |
| | 6.0 |
| | 47,404 |
| | 8.0 |
|
Total Capital to risk-weighted assets (2) | | $ | 75,874 |
| | 12.80 | % | | $ | 47,404 |
| | 8.0 | % | | $ | 59,255 |
| | 10.0 | % |
| |
| (1) | Based on total adjusted assets of $520,307$716,475 at December 31, 2015.2018. |
| |
| (2) | Based on risk-weighted assets of $453,345$592,551 at December 31, 2015.2018. |
For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action regulations. If Sound Financial Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2018, Sound Financial Bancorp would have exceeded all regulatory capital requirements. The estimated regulatory capital ratios calculated for Sound Financial Bancorp as of December 31, 2018 were 9.85% for Tier 1 Capital to total adjusted assets, 11.92% for both Common Equity Tier 1 risk-based capital, and Tier 1 Capital to risk-based assets and 12.96% for total risk-based capital.
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| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Asset/Liability Management
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market rates change over time. Like other financial institutions, our results of operations are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of efforts to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In doing so, we analyze and manage assets and liabilities based on their interest rates and payment streams, timing of maturities, re-pricing opportunities, and sensitivity to actual or potential changes in market interest rates. We are subject to interest rate risk to the extent that our interest-bearing liabilities, primarily deposits and FHLB advances, re-price more rapidly or at different rates than our interest-earning assets. In order to minimize the potential for adverse effects of material prolonged increases or decreases in interest rates on our results of operations, we have adopted an asset and liability management policy. Our
boardBoard of
directors setsDirectors approves the asset and liability policy, which is implemented by the asset/liability committee.
The purpose of the asset/liability committee is to communicate, coordinate, and control asset/liability management consistent with our business plan and board-approved policies. The committee establishes and monitors the volume and mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals.
The committee generally meets monthly to, among other things, protect capital through earnings stability over the interest rate cycle; maintain our well-capitalized status; and provide a reasonable return on investment. The committee recommends appropriate strategy changes based on this review. The committee is responsible for reviewing and reporting the effects of the policy implementations and strategies to the board of directors at least quarterly. Senior managers oversee the process on a daily basis.
A key element of our asset/liability management plan is to protect net earnings by managing the maturity or re-pricing mismatch between our interest-earning assets and our rate-sensitive liabilities. We seek to reduce exposure to earnings by extending funding maturities through the use of FHLB advances, through the use of adjustable rate loans and through the sale of certain fixed rate loans in the secondary market.
As part of our efforts to monitor and manage interest rate risk, we maintain
our ownan interest rate risk model and utilize software and resources provided by a third party. The model contains several assumptions that are based upon a combination of proprietary and market data that reflect historical results and current market conditions. These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of certain assets under the various interest rate scenarios. The
model’smodel's capital at risk measure, also known as the Economic Value of Equity
“EVE”("EVE"), evaluates the change in the projected EVE over a two-year period given an immediate increase or decrease in interest rates. It considers both the absolute dollar change in EVE and also the percentage change in EVE. Management and the
boardBoard of
directorsDirectors review these measurements on a quarterly basis to determine whether our interest rate exposure is within the limits established by the
boardBoard of
directors.Directors.
Our asset/liability management strategy dictates acceptable limits on the amounts of change in given changes in interest rates. For interest rate increases of 100, 200, 300 and 400 basis points, our policy dictates that our EVE percentage change should not decrease greater than
10%, 20%,
30%, 40%25% and
50%30%, respectively and that our EVE ratio not fall below 9%, 8%, 6% and 5%, respectively. As illustrated in the table below, we were in compliance with this aspect of our asset/liability management policy at December 31,
2015.2018.
The table presented below,
as ofat December 31,
2015 (the latest available information),2018, is an internal analysis of our interest rate risk as measured by changes in EVE for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up 400 basis points and down
100200 basis
points, No rates inpoints. Given that the
model are allowedcurrent targeted Federal Funds Rate is a range of 2.25 to
go below zero as any further decline2.50%, a 300 basis point reduction in rates is
impossible given the Federal Funds Rate of 0.50%.not reported.TABLE OF CONTENTS
As illustrated in the table below (dollars in thousands), our EVE would be negatively impacted by an increase in interest rates of 400 basis points or a decrease in interest rates.rates of 100 and 200 basis points. Our EVE is impacted as a result of deposit accounts re-pricing more rapidly than loans and securities due to the fixed rate nature of a large portion of our loan and security portfolios. As interest rates rise,increase, the market value of our fixed rate assets decline due to both rate increases and slowing prepayments.
December 31, 2015 |
Change in
Interest
Rates in
Basis Points | Economic Value of Equity | EVE
Ratio % |
$ Amount | $ Change | % Change |
+400bp | $ | 54,447 | | $ | (16,057 | ) | | (22.8 | )% | | 11.70 | % |
+300bp | | 58,085 | | | (12,418 | ) | | (17.6 | ) | | 12.17 | |
+200bp | | 61,733 | | | (8,769 | ) | | (12.4 | ) | | 12.62 | |
+100bp | | 66,911 | | | (3,592 | ) | | (5.09 | ) | | 13.30 | |
0bp | | 70,503 | | | — | | | 0.0 | | | 13.62 | |
-100bp | | 67,804 | | | (2,699 | ) | | (3.82 | ) | | 12.76 | |
|
| | | | | | | | | | | | | | |
| December 31, 2018 |
| Change in Interest Rates in Basis Points (bps) | | Economic Value of Equity | | EVE Ratio % |
| $ Amount | | $ Change | | % Change | |
| +400 | | $ | 91,450 |
| | $ | (385 | ) | | (0.42 | )% | | 13.84 | % |
| +300 | | 93,214 |
| | 1,379 |
| | 1.50 |
| | 13.86 |
|
| +200 | | 94,125 |
| | 2,290 |
| | 2.49 |
| | 13.76 |
|
| +100 | | 93,732 |
| | 1,897 |
| | 2.07 |
| | 13.47 |
|
| 0 | | 91,835 |
| | — |
| | — |
| | 12.97 |
|
| -100 | | 88,733 |
| | (3,102 | ) | | (3.38 | ) | | 12.34 |
|
| -200 | | $ | 79,203 |
| | $ | (12,633 | ) | | (13.76 | )% | | 10.84 | % |
In addition to monitoring selected measures of EVE, management also monitors effects on net interest income resulting from increases or decrease in rates. This process is used in conjunction with EVE measures to identify excessive interest rate risk. In managing our assets/liability mix, depending on the relationship between
longlong- and
short termshort-term interest rates, market conditions and consumer preference, we may place somewhat greater emphasis on maximizing
itsour net interest margin than on strictly matching the interest rate sensitivity of
its assets and liabilities. Management also believes that the increased net income which may result from an acceptable mismatch in the actual maturity or re-pricing of its asset and liability portfolios can, during periods of declining or stable interest rates, provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. Management believes that our level of interest rate risk is acceptable under this approach.
In evaluating our exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or re-pricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk.
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| |
| Item 8. | Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
Sound Financial Bancorp, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Sound Financial Bancorp, Inc. and Subsidiary (the Company)“Company”) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended. Theseended, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements arereferred to above present fairly, in all material respects, the responsibilityconsolidated financial position of the Company as of December 31, 2108 and 2017, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management.management is responsible for these consolidatedfinancial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not requiredmisstatement, whether due to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration oferror or fraud, and whether effective internal control over financial reporting as a basis for designing audit procedures that are appropriatewas maintained in the circumstances, but not for the purpose of expressing an opinion on the effectivenessall material respects.
Our audits of the Company’s internal control overconsolidated financial reporting. Accordingly, we express no such opinion. An audit includesstatements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.In our opinion,opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the consolidatedreliability of financial reporting and the preparation of financial statements referredfor external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to above presentthe maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in all material respects, the consolidated financial position of Sound Financial Bancorp, Inc. and Subsidiary as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended, in conformityaccordance with generally accepted accounting principles, generally acceptedand that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the United Statescompany’s assets that could have a material effect on the financial statements.
Because of
America.its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Everett, Washington
53
We have served as the Company’s auditor since 2002.
TABLE OF CONTENTSSOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
| December 31, |
| 2015 | 2014 |
ASSETS
| | | | | | |
Cash and cash equivalents | $ | 48,264 | | $ | 29,289 | |
Available-for-sale securities, at fair value | | 6,696 | | | 11,524 | |
Loans held-for-sale | | 2,091 | | | 810 | |
Loans | | 459,469 | | | 430,360 | |
Allowance for loan losses | | (4,636 | ) | | (4,387 | ) |
Total loans, net | | 454,833 | | | 425,973 | |
Accrued interest receivable | | 1,608 | | | 1,497 | |
Bank-owned life insurance, net | | 11,746 | | | 11,408 | |
Other real estate owned (“OREO”) and repossessed assets, net | | 769 | | | 323 | |
Mortgage servicing rights, at fair value | | 3,249 | | | 3,028 | |
Federal Home Loan Bank (“FHLB”) stock, at cost | | 2,212 | | | 2,224 | |
Premises and equipment, net | | 5,335 | | | 5,555 | |
Other assets | | 3,957 | | | 3,556 | |
Total assets | $ | 540,760 | | $ | 495,187 | |
LIABILITIES
| | | | | | |
Deposits | | | | | | |
Interest-bearing | | 389,151 | | | 363,456 | |
Noninterest-bearing demand | | 50,873 | | | 44,353 | |
Total deposits | | 440,024 | | | 407,809 | |
Borrowings | | 40,435 | | | 30,578 | |
Accrued interest payable | | 72 | | | 76 | |
Other liabilities | | 5,140 | | | 5,606 | |
Advance payments from borrowers for taxes and insurance | | 569 | | | 474 | |
Total liabilities | | 486,240 | | | 444,543 | |
COMMITMENTS AND CONTINGENCIES (NOTE 18)
| | | | | | |
STOCKHOLDERS’ EQUITY
| | | | | | |
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued or outstanding | | — | | | — | |
Common stock, $0.01 par value, 40,000,000 shares authorized, 2,469,206 and 2,515,664 issued and outstanding as of December 31, 2015 and 2014, respectively | | 25 | | | 25 | |
Additional paid-in capital | | 23,002 | | | 23,552 | |
Unearned shares - Employee Stock Ownership Plan (“ESOP”) | | (911 | ) | | (1,140 | ) |
Retained earnings | | 32,240 | | | 28,024 | |
Accumulated other comprehensive income, net of tax | | 164 | | | 183 | |
Total stockholders’ equity | | 54,520 | | | 50,644 | |
Total liabilities and stockholders’ equity | $ | 540,760 | | $ | 495,187 | |
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 61,810 |
| | $ | 60,680 |
|
| Available-for-sale securities, at fair value | 4,957 |
| | 5,435 |
|
| Loans held-for-sale | 1,172 |
| | 1,777 |
|
| Loans held for portfolio | 619,543 |
| | 548,595 |
|
| Allowance for loan losses | (5,774 | ) | | (5,241 | ) |
| Total loans held for portfolio, net | 613,769 |
| | 543,354 |
|
| Accrued interest receivable | 2,287 |
| | 1,977 |
|
| Bank-owned life insurance, net | 13,365 |
| | 12,750 |
|
| Other real estate owned ("OREO") and repossessed assets, net | 575 |
| | 610 |
|
| Mortgage servicing rights, at fair value | 3,414 |
| | 3,426 |
|
| Federal Home Loan Bank ("FHLB") stock, at cost | 4,134 |
| | 3,065 |
|
| Premises and equipment, net | 7,044 |
| | 7,392 |
|
| Other assets | 4,208 |
| | 4,778 |
|
| Total assets | $ | 716,735 |
| | $ | 645,244 |
|
| LIABILITIES | | | |
| Deposits | | | |
| Interest-bearing | $ | 457,535 |
| | $ | 442,277 |
|
| Noninterest-bearing demand | 96,066 |
| | 72,123 |
|
| Total deposits | 553,601 |
| | 514,400 |
|
| Borrowings | 84,000 |
| | 59,000 |
|
| Accrued interest payable | 137 |
| | 77 |
|
| Other liabilities | 6,681 |
| | 5,972 |
|
| Advance payments from borrowers for taxes and insurance | 689 |
| | 635 |
|
| Total liabilities | 645,108 |
| | 580,084 |
|
| COMMITMENTS AND CONTINGENCIES (NOTE 7 and 17) |
|
| |
|
|
| 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, 2,544,059 and 2,511,127 issued and outstanding as of December 31, 2018 and 2017, respectively | 25 |
| | 25 |
|
| Additional paid-in capital | 25,663 |
| | 24,986 |
|
| Unearned shares - Employee Stock Ownership Plan ("ESOP") | (340 | ) | | (453 | ) |
| Retained earnings | 46,165 |
| | 40,493 |
|
| Accumulated other comprehensive income, net of tax | 114 |
| | 109 |
|
| Total stockholders' equity | 71,627 |
| | 65,160 |
|
| Total liabilities and stockholders' equity | $ | 716,735 |
| | $ | 645,244 |
|
See notes to consolidated financial statements
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In thousands, except share and per share amounts)
| Years Ended December 31, |
| 2015 | 2014 |
INTEREST INCOME
| | | | | | |
Loans, including fees | $ | 22,233 | | | 21,143 | |
Interest and dividends on investments, cash and cash equivalents | | 220 | | | 213 | |
Total interest income | | 22,453 | | | 21,356 | |
INTEREST EXPENSE
| | | | | | |
Deposits | | 2,646 | | | 2,269 | |
Borrowings | | 106 | | | 154 | |
Total interest expense | | 2,752 | | | 2,423 | |
Net interest income | | 19,701 | | | 18,933 | |
PROVISION FOR LOAN LOSSES | | 400 | | | 800 | |
Net interest income after provision for loan losses | | 19,301 | | | 18,133 | |
NONINTEREST INCOME
| | | | | | |
Service charges and fee income | | 2,605 | | | 2,571 | |
Earnings on cash surrender value of bank-owned life insurance | | 338 | | | 340 | |
Mortgage servicing income | | 840 | | | 509 | |
Fair value adjustment on mortgage servicing rights | | 210 | | | 328 | |
Loss on sale of securities | | (31 | ) | | — | |
Net gain on sale of loans | | 1,301 | | | 624 | |
Total noninterest income | | 5,263 | | | 4,372 | |
NONINTEREST EXPENSE
| | | | | | |
Salaries and benefits | | 9,223 | | | 8,278 | |
Operations | | 3,995 | | | 4,045 | |
Regulatory assessments | | 746 | | | 267 | |
Occupancy | | 1,493 | | | 1,359 | |
Data processing | | 1,717 | | | 1,770 | |
Net loss and expenses on OREO and repossessed assets | | 311 | | | 208 | |
Total noninterest expense | | 17,485 | | | 15,927 | |
Income before provision for income taxes | | 7,079 | | | 6,578 | |
Provision for income taxes | | 2,289 | | | 2,338 | |
Net income | $ | 4,790 | | $ | 4,240 | |
| | | | | | |
Earnings per common share:
| | | | | | |
Basic | $ | 1.92 | | $ | 1.69 | |
Diluted | $ | 1.86 | | $ | 1.63 | |
Weighted average number of common shares outstanding:
| | | | | | |
Basic | | 2,491,683 | | | 2,513,069 | |
Diluted | | 2,579,575 | | | 2,602,146 | |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| INTEREST INCOME | | | |
| Loans, including fees | $ | 31,661 |
| | $ | 26,707 |
|
| Interest and dividends on investments, cash and cash equivalents | 1,286 |
| | 742 |
|
| Total interest income | 32,947 |
| | 27,449 |
|
| INTEREST EXPENSE | | | |
| Deposits | 3,839 |
| | 3,021 |
|
| Borrowings | 1,521 |
| | 347 |
|
| Total interest expense | 5,360 |
| | 3,368 |
|
| Net interest income | 27,587 |
| | 24,081 |
|
| PROVISION FOR LOAN LOSSES | 525 |
| | 500 |
|
| Net interest income after provision for loan losses | 27,062 |
| | 23,581 |
|
| NONINTEREST INCOME | | | |
| Service charges and fee income | 1,876 |
| | 1,895 |
|
| Earnings on cash surrender value of bank-owned life insurance | 320 |
| | 327 |
|
| Mortgage servicing income | 562 |
| | 566 |
|
| Net gain on sale of loans | 1,258 |
| | 1,071 |
|
| Other income | 490 |
| | — |
|
| Total noninterest income | 4,506 |
| | 3,859 |
|
| NONINTEREST EXPENSE | | | |
| Salaries and benefits | 12,775 |
| | 10,733 |
|
| Operations | 5,370 |
| | 4,348 |
|
| Occupancy | 2,139 |
| | 1,889 |
|
| Data processing | 2,021 |
| | 1,736 |
|
| Regulatory assessments | 432 |
| | 431 |
|
| Net loss and expenses on OREO and repossessed assets | 86 |
| | 110 |
|
| Total noninterest expense | 22,823 |
| | 19,247 |
|
| Income before provision for income taxes | 8,745 |
| | 8,193 |
|
| Provision for income taxes | 1,706 |
| | 3,068 |
|
| Net income | 7,039 |
| | 5,125 |
|
| Earnings per common share: | | | |
| Basic | $ | 2.82 |
| | $ | 2.05 |
|
| Diluted | $ | 2.74 |
| | $ | 2.00 |
|
| Weighted average number of common shares outstanding: | | | |
| Basic | 2,498,161 |
| | 2,504,430 |
|
| Diluted | 2,567,165 |
| | 2,568,082 |
|
See notes to consolidated financial statements
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(In thousands)
| Years Ended December 31, |
| 2015 | 2014 |
Net income | $ | 4,790 | | $ | 4,240 | |
Available for sale securities:
| | | | | | |
Reclassification adjustment loss on sale of securities, net of taxes of $11, and $0, respectively | | 20 | | | — | |
Unrealized (losses) gains arising during the year, net of taxes of $(13) and $233, respectively | | (39 | ) | | 452 | |
Other comprehensive income (loss), net of tax | | (19 | ) | | 452 | |
Comprehensive income | $ | 4,771 | | $ | 4,692 | |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| Net income | $ | 7,039 |
| | $ | 5,125 |
|
| Available for sale securities: | | | |
| Unrealized gains arising during the year | 7 |
| | 43 |
|
| Income tax expense related to unrealized gains/losses | (2 | ) | | (15 | ) |
| Other comprehensive income, net of tax | 5 |
| | 28 |
|
| Comprehensive income | $ | 7,044 |
| | $ | 5,153 |
|
See notes to consolidated financial statements
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’Stockholders' Equity
(In thousands, except
number of shares) | Shares | Common
Stock | Additional
Paid-in
Capital | Unearned
ESOP
Shares | Retained
Earnings | Accumulated
Other
Comprehensive
Income (Loss),
net of tax | Total
Stockholders’
Equity |
Balances at December 31, 2013 | | 2,510,810 | | $ | 25 | | $ | 23,829 | | $ | (1,369 | ) | $ | 24,288 | | $ | (269 | ) | $ | 46,504 | |
Net income | | | | | | | | | | | | | | 4,240 | | | | | | 4,240 | |
Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | 452 | | | 452 | |
Share-based compensation | | | | | | | | 333 | | | | | | | | | | | | 333 | |
Restricted stock awards | | 45,565 | | | | | | | | | | | | | | | | | | — | |
Cash dividends on common stock ($0.20 per share) | | | | | | | | | | | | | | (504 | ) | | | | | (504 | ) |
Common stock repurchased | | (53,340 | ) | | | | | (904 | ) | | | | | | | | | | | (904 | ) |
Stock options exercised | | 21,610 | | | | | | 81 | | | | | | | | | | | | 81 | |
Excess tax benefits of stock compensation | | | | | | | | 39 | | | | | | | | | | | | 39 | |
Restricted shares forfeited | | (8,981 | ) | | | | | | | | | | | | | | | | | — | |
Allocation of ESOP shares | | | | | | | | 174 | | | 229 | | | | | | | | | 403 | |
Balances at December 31, 2014 | | 2,515,664 | | $ | 25 | | $ | 23,552 | | $ | (1,140 | ) | $ | 28,024 | | $ | 183 | | $ | 50,644 | |
| Shares | Common
Stock | Additional
Paid-in
Capital | Unearned
ESOP
Shares | Retained
Earnings | Accumulated
Other
Comprehensive
Income (Loss),
net of tax | Total
Stockholders’
Equity |
Balances at December 31, 2014 | | 2,515,664 | | $ | 25 | | $ | 23,552 | | $ | (1,140 | ) | $ | 28,024 | | $ | 183 | | $ | 50,644 | |
Net income | | | | | | | | | | | | | | 4,790 | | | | | | 4,790 | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | (19 | ) | | (19 | ) |
Share-based compensation | | | | | | | | 418 | | | | | | | | | | | | 418 | |
Restricted stock awards | | 10,208 | | | | | | | | | | | | | | | | | | — | |
Cash dividends on common stock ($0.23 per share) | | | | | | | | | | | | | | (574 | ) | | | | | (574 | ) |
Common stock repurchased | | (63,371 | ) | | | | | (1,261 | ) | | | | | | | | | | | (1,261 | ) |
Restricted shares forfeited | | (482 | ) | | | | | | | | | | | | | | | | | — | |
Stock options exercised | | 7,187 | | | | | | 65 | | | | | | | | | | | | 65 | |
Allocation of ESOP shares | | | | | | | | 228 | | | 229 | | | | | | | | | 457 | |
Balances at December 31, 2015 | | 2,469,206 | | $ | 25 | | $ | 23,002 | | $ | (911 | ) | $ | 32,240 | | $ | 164 | | $ | 54,520 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2016 | 2,498,804 |
| | $ | 25 |
| | $ | 23,979 |
| | $ | (683 | ) | | $ | 36,873 |
| | $ | 81 |
| | $ | 60,275 |
|
| Net income | | | | | | | | | 5,125 |
| | | | 5,125 |
|
| Other comprehensive loss, net of tax | | | | | | | | | | | 28 |
| | 28 |
|
| Share-based compensation | | | | | 523 |
| | | | | | | | 523 |
|
| Restricted stock awards | 576 |
| | | | | | | | | | | | — |
|
| Cash dividends on common stock ($0.60 per share) | | | | | | | | | (1,505 | ) | | | | (1,505 | ) |
| Common stock repurchased | (3,353 | ) | | | | | | | | | | | | — |
|
| Common stock options exercised | 15,100 |
| | | | 43 |
| | | | | | | | 43 |
|
| Allocation of ESOP shares | | | | | 441 |
| | 230 |
| | | | | | 671 |
|
| Balance at December 31, 2017 | 2,511,127 |
| | $ | 25 |
| | $ | 24,986 |
| | $ | (453 | ) | | $ | 40,493 |
| | $ | 109 |
| | $ | 65,160 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2017 | 2,511,127 |
| | $ | 25 |
| | $ | 24,986 |
| | $ | (453 | ) | | $ | 40,493 |
| | $ | 109 |
| | $ | 65,160 |
|
| Net income | | | | | | | | | 7,039 |
| | | | 7,039 |
|
| Other comprehensive income, net of tax | | | | | (22 | ) | | | | | | 5 |
| | (17 | ) |
| Share-based compensation | | | | | 273 |
| | | | | | | | 273 |
|
| Restricted stock awards | 323 |
| | | | | | | | | | | | — |
|
| Cash dividends on common stock ($0.54 per share) | | | | | | | | | (1,367 | ) | | | | (1,367 | ) |
| Common stock repurchased | (16,314 | ) | | | | | | | | | | | | — |
|
| Restricted shares forfeited | (343) | | | | | | | | | | | | — |
|
| Common stock options exercised | 49,266 |
| | | | 118 |
| | | | | | | | 118 |
|
| Allocation of ESOP shares | | | | | 308 |
| | 113 |
| | | | | | 421 |
|
| Balance at December 31, 2018 | 2,544,059 |
| | $ | 25 |
| | $ | 25,663 |
| | $ | (340 | ) | | $ | 46,165 |
| | $ | 114 |
| | $ | 71,627 |
|
See notes to consolidated financial statements
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
| Year Ended December 31, |
| 2015 | 2014 |
CASH FLOWS FROM OPERATING ACTIVITIES:
| | | | | | |
Net income | $ | 4,790 | | $ | 4,240 | |
Adjustments to reconcile net income to net cash from operating activities:
| | | | | | |
Accretion of net premium on investments | | 102 | | | 404 | |
Loss on sale of securities | | 31 | | | — | |
Provision for loan losses | | 400 | | | 800 | |
Depreciation and amortization | | 620 | | | 555 | |
Compensation expense related to stock options and restricted stock | | 418 | | | 333 | |
Fair value adjustment on mortgage servicing rights | | (210 | ) | | (328 | ) |
Additions to mortgage servicing rights | | (679 | ) | | (505 | ) |
Amortization of mortgage servicing rights | | 668 | | | 789 | |
Increase in cash surrender value of bank-owned life insurance | | (338 | ) | | (340 | ) |
Deferred income tax | | (359 | ) | | (137 | ) |
Gain on sale of loans | | (1,301 | ) | | (624 | ) |
Proceeds from sale of loans | | 73,951 | | | 50,406 | |
Originations of loans held-for-sale | | (73,931 | ) | | (50,462 | ) |
Loss on sale of other real estate owned and repossessed assets | | 201 | | | 28 | |
Change in operating assets and liabilities:
| | | | | | |
Accrued interest receivable | | (111 | ) | | (131 | ) |
Other assets | | (31 | ) | | 278 | |
Accrued interest payable | | (4 | ) | | (6 | ) |
Other liabilities | | (466 | ) | | 1,503 | |
Net cash from operating activities | | 3,751 | | | 6,803 | |
CASH FLOWS FROM INVESTING ACTIVITIES:
| | | | | | |
Proceeds from principal payments, maturities and sales of available for sale securities | | 4,665 | | | 4,177 | |
FHLB stock redeemed | | 12 | | | 90 | |
Net increase in loans | | (29,931 | ) | | (40,632 | ) |
Improvements to OREO and other repossessed assets | | — | | | (12 | ) |
Proceeds from sale of OREO and other repossessed assets | | 736 | | | 1,447 | |
Purchases of premises and equipment, net | | (1,112 | ) | | (3,972 | ) |
Net cash used by investing activities | | (25,630 | ) | | (38,902 | ) |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net income | $ | 7,039 |
| | $ | 5,125 |
|
| Adjustments to reconcile net income to net cash from operating activities: | | | |
| Amortization (accretion) of net premiums/discounts on investments | 41 |
| | (2 | ) |
| Provision for loan losses | 525 |
| | 500 |
|
| Depreciation and amortization | 989 |
| | 943 |
|
| Compensation expense related to stock options and restricted stock | 273 |
| | 523 |
|
| Change in fair value of mortgage servicing rights | 513 |
| | 135 |
|
| Increase in cash surrender value of BOLI | (320 | ) | | (327 | ) |
| Net change in advances from borrowers for taxes and insurance | 54 |
| | (3 | ) |
| Deferred income tax | 69 |
| | 106 |
|
| Net gain on sale of loans | (1,258 | ) | | (1,071 | ) |
| Proceeds from sale of loans held-for-sale | 49,341 |
| | 51,959 |
|
| Originations of loans held-for-sale | (47,979 | ) | | (51,794 | ) |
| Net loss on OREO and repossessed assets | 74 |
| | 94 |
|
| Change in operating assets and liabilities: | | | |
| Accrued interest receivable | (310 | ) | | (161 | ) |
| Other assets | 505 |
| | (305 | ) |
| Accrued interest payable | 60 |
| | 4 |
|
| Other liabilities | 709 |
| | 1,098 |
|
| Net cash provided by operating activities | 10,325 |
| | 6,824 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Proceeds from principal payments, maturities and sales of available for sale securities | 416 |
| | 1,214 |
|
| Net increase in loans | (70,995 | ) | | (48,651 | ) |
| Purchase of BOLI | (295 | ) | | (341 | ) |
| Proceeds from sale of OREO and other repossessed assets | 16 |
| | 468 |
|
| Purchases of premises and equipment, net | (641 | ) | | (2,474 | ) |
| Net cash received from branch acquisition | — |
| | 13,671 |
|
| Net cash used in investing activities | (71,499 | ) | | (36,113 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| Net increase in deposits | 39,201 |
| | 32,195 |
|
| Proceeds from borrowings | 262,000 |
| | 229,000 |
|
| Repayment of borrowings | (237,000 | ) | | (224,792 | ) |
| FHLB stock purchased | (1,069 | ) | | (225 | ) |
| ESOP shares released | 421 |
| | 671 |
|
| Proceeds from common stock option exercises | 118 |
| | 43 |
|
| Dividends paid on common stock | (1,367 | ) | | (1,505 | ) |
| Net cash provided by financing activities | 62,304 |
| | 35,387 |
|
| Net increase in cash and cash equivalents | 1,130 |
| | 6,098 |
|
| Cash and cash equivalents, beginning of year | 60,680 |
| | 54,582 |
|
| Cash and cash equivalents, end of year | $ | 61,810 |
| | $ | 60,680 |
|
| | | | |
| SUPPLEMENTAL CASH FLOW INFORMATION | | | |
| Cash paid for income taxes | $ | 2,670 |
| | $ | 2,460 |
|
|
| | | | | | | |
| Interest paid on deposits and borrowings | 5,300 |
| | 3,364 |
|
| Noncash net transfer from loans to OREO and repossessed assets | 55 |
| | — |
|
| Acquired assets | — |
| | 803 |
|
| Assumed liabilities | $ | — |
| | $ | 14,474 |
|
See notes to consolidated financial statements
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
| Year Ended December 31, |
| 2015 | 2014 |
CASH FLOWS FROM FINANCING ACTIVITIES
| | | | | | |
Net increase in deposits | | 32,215 | | | 59,470 | |
Proceeds from borrowings | | 107,000 | | | 174,100 | |
Repayment of borrowings | | (97,143 | ) | | (186,743 | ) |
Net change in advances from borrowers for taxes and insurance | | 95 | | | 112 | |
ESOP shares released | | 457 | | | 403 | |
Excess tax benefits of stock compensation | | — | | | 39 | |
Common stock option redemptions | | 65 | | | 81 | |
Repurchase of common stock | | (1,261 | ) | | (904 | ) |
Dividends paid | | (574 | ) | | (504 | ) |
Net cash from financing activities | | 40,854 | | | 46,054 | |
Net increase in cash and cash equivalents | | 18,975 | | | 13,955 | |
Cash and cash equivalents, beginning of year | | 29,289 | | | 15,334 | |
Cash and cash equivalents, end of year | $ | 48,264 | | $ | 29,289 | |
SUPPLEMENTAL CASH FLOW INFORMATION
| | | | | | |
Cash paid for income taxes | $ | 2,860 | | $ | 1,975 | |
Interest paid on deposits and borrowings | $ | 2,756 | | $ | 2,429 | |
Noncash net transfer from premises and equipment to OREO and repossessed assets | $ | 712 | | | — | |
Noncash net transfer from loans to OREO and repossessed assets | $ | 671 | | $ | 608 | |
The following summarized the non-cash activities related to the acquisition:
| | | | | | |
Fair value of assets acquired | $ | — | | $ | 4,904 | |
Fair value of liabilities assumed | $ | — | | $ | (21,602 | ) |
Net fair value of liabilities | $ | — | | $ | (16,698 | ) |
See notes to consolidated financial statements
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 - Organization and significant accounting policies
Sound Financial Bancorp, a Maryland corporation
(“("Sound Financial
Bancorp”Bancorp" or the
“Company”"Company"), is a bank holding company for its wholly owned subsidiary, Sound Community Bank (the
“Bank”"Bank"). Substantially all of Sound Financial Bancorp's business is conducted through Sound Community Bank, a Washington state-chartered commercial bank. As a Washington commercial bank, the Bank's regulators are the Washington State Department of Financial Institutions
(“WDFI”("WDFI") and the Federal Deposit Insurance Corporation
(“FDIC”("FDIC"). The Board of Governors of the Federal Reserve System
(“("Federal
Reserve”Reserve") is the primary federal regulator for Sound Financial Bancorp.
The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank.
Subsequent events – The Company has evaluated subsequent events for potential recognition and disclosure.
Basis of Presentation and Use of Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the fair value of mortgage servicing rights, valuations of impaired loans and OREO, and the realization of deferred taxes. The accompanying consolidated financial statements include the accounts of Sound Financial Bancorp and its wholly-owned subsidiary Sound Community Bank. All significant intercompany balances and transactions between Sound Financial Bancorp and its subsidiary have been eliminated in consolidation.
Cash and cash equivalents – For purposes of reporting cash flows, cash and cash equivalents include cash on hand and in banks and interest-bearing deposits. All have original maturities of three months or less and may exceed federally insured limits.
Investment securities – Investment securities are classified into one of three categories: (1) held-to-maturity, (2) available-for-sale (AFS)("AFS"), or (3) trading. The Company had no held-to-maturity or trading securities at December 31, 20152018 or 2014.2017. AFS securities consist of debt securities that the Company has the intent and ability to hold for an indefinite period, but not necessarily to maturity. Such securities may be sold to implement the Company’sCompany's asset/liability management strategies and/or in response to changes in interest rates and similar factors. AFS securities are reported at fair value. Dividend and interest income are recognized when earned. Unrealized gains and losses, net of the related deferred tax effect, are reported as a net amount in
accumulated other comprehensive income (loss) on AFS securities in the
Accumulated Other Comprehensive Income (Loss).consolidated balance sheets. Realized gains and losses on AFS securities, determined using the specific identification method, are included in earnings. Amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the interest method over the period to maturity.
The Company reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment
(“OTTI”("OTTI") or permanent impairment, taking into consideration current market conditions, fair value in relation to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether the Company
intendintends to sell a security or if it is likely that the Company will be required to sell the security before recovery of its amortized cost basis of the investment, which may be maturity, and other factors. For debt securities, if the Company intends to sell the security or it is likely that it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI.
The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and the fair value, is recognized as a charge to other comprehensive income
(“OCI”("OCI"). The Company does not intend to sell these securities and it is more likely than not that it will not be required to
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
sell the securities before anticipated recovery of the remaining amortized cost basis. The Company closely monitors its investment securities for changes in credit risk. The
Notes to Consolidated Financial Statements
current market environment significantly limits the
Company’sCompany's ability to mitigate its exposure to valuation changes in these securities by selling them. Accordingly, if market conditions deteriorate further and the Company determines its holdings of these or other investment securities are OTTI, its future earnings,
stockholders’stockholders' equity, regulatory capital and continuing operations could be materially adversely affected.
Loans held-for-sale – To mitigate interest rate sensitivity, from time to time, certain fixed rate mortgage loans are identified as held-for-sale in the secondary market. Accordingly, such loans are classified as held-for-sale in the consolidated balance sheets and are carried at the lower of cost or estimated fair market value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Mortgage loans held-for-sale are generally sold with the mortgage servicing rights retained by the Company. Gains or losses on sales of loans are recognized based on the difference between the selling price and the carrying value of the related loans sold based on the specific identification method.
Loans – The Company grants mortgage, commercial, and consumer loans to clients. A substantial portion of the loan portfolio is represented by loans secured by real estate located throughout the Puget Sound region, especially King, Snohomish and Pierce Counties, and in Clallam Countyand Jefferson Counties of Washington State. The ability of the Company’sCompany's debtors to honor their contracts is dependent upon employment, real estate and general economic conditions in these areas. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal
balancesbalance adjusted for any charge-offs,
the allowance for loan losses, and any deferred fees or costs on origination of loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method over the contractual life of the loan for term loans or the straight-line method for open ended loans.
The accrual of interest is discontinued at the time the loan is
three months90 days past due or if, in
management’smanagement's opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions. Loans are typically charged off no later than 120 days past due, unless secured by collateral. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or
charged offcharged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current, future payments are reasonably assured and payments have been received for twelve consecutive months.
A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) due according to the contractual terms of the original loan agreement. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as a practical expedient, the current fair value of the collateral, reduced by costs to sell, is used. When the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest), impairment is recognized by charging off the impaired portion or creating or adjusting a specific allocation of the allowance for loan losses.
A loan is classified as a troubled debt restructuring
(“TDR”("TDR") when certain concessions have been made to the contractual terms, such as reductions of interest rates or deferrals of interest or principal payments due to the
borrower’sborrower's deteriorated financial condition. All TDRs are reported and accounted for as impaired loans.
Allowance for loan losses - – The allowance for loan losses is a reserve established through a provision for loan losses charged to expense and represents management’smanagement's best estimate of probable losses incurred within the existing loan portfolio as of the balance sheet date. The level of the allowance reflects management’smanagement's view of trends in loan loss activity, current loan portfolio quality and present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific loans; however, the allowance is available for any loan that is charged off. The allowance is increased by provisions charged to earnings and by recoveries of TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
amounts previously charged off, and is reduced by charge-offs on loans (or portions thereof) deemed to be uncollectible. Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely. Full or partial charge-offs on collateral dependent impaired loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.
The allowance for loan losses is maintained at a level sufficient to provide for probable credit losses based upon evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management’smanagement's continuing analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the
Notes to Consolidated Financial Statements
loan portfolio, delinquency levels, actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectability may not be assured. The detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific, general, and unallocated components.
The specific component relates to loans that are classified as doubtful, substandard, or special mention.The Company considers installment loans to be pools of smaller balance, homogenous loans that are collectively evaluated for impairment, unless such loans are subject to a TDR agreement.
For such loans that are also classified as impaired,
ana specific component within the allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. The general component covers
non-classifiednon-impaired loans and is based upon historical loss experience adjusted for qualitative factors.
An unallocated component is maintained to cover uncertainties that could affect
management’smanagement's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
The appropriateness of the allowance for loan losses is estimated based upon those factors and trends identified by management at the time consolidated financial statements are prepared. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for loan losses.
The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement.
The ultimate recovery of all loans is susceptible to future market factors beyond the
Company’sCompany's control. These factors may result in losses or recoveries differing significantly from those provided in the consolidated financial statements. In addition, regulatory agencies, as an integral part of their examination process, periodically review the
Company’sCompany's allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
Transfers of financial assets – Transfers of an entire financial asset, or a participating interest in an entire financial asset, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) a group of financial assets or a participating interest in an entire financial asset has been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Mortgage servicing rights (“MSR”("MSR") – Mortgage servicing rights represent the value associated with servicing residential mortgage loans, when the mortgage loans have been sold into the secondary market and the related servicing has been retained by the Company. The Company may also purchase mortgage servicing rights. The value is determined though a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. The Company measures its mortgage servicing assets at fair value and reports changes in fair value through earnings under the caption mortgage banking revenue in the period in which the change occurs. TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Premises and equipment – Premises, leasehold improvements and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from 1 to 10 years. The cost of leasehold improvements is amortized using the straight-line method over the terms of the related leases. The cost of premises is amortized using the straight-line method over the estimated useful life of the building, up to 39 years. Management reviews premises, leasehold improvements and furniture and equipment for impairment on an annual basis.
Bank-owned life insurance, net — – The carrying amount of bank owned life insurance approximates its fair value, and is estimated using the cash surrender value, net of any surrender charges.
Federal Home Loan Bank stock – The Company is a member of the Federal Home Loan Bank of Des Moines (“FHLB”("FHLB"). FHLB stock represents the Company’sCompany's investment in the FHLB and is carried at par value, which reasonably approximates its
Notes to Consolidated Financial Statements
fair value. As a member of the FHLB, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At December 31,
20152018 and
2014,2017, the
Company’sCompany's minimum required investment in FHLB stock was
$2.2$4.1 million and
$1.3$3.1 million, respectively. Typically the Company may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.
Other real estate owned and repossessed assets – OREO and repossessed assets represent real estate and other assets which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, OREO and repossessed assets are recorded at fair value less estimated costs to sell, which becomes the new basis. Any write-downs based on the asset’sasset's fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the property is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Revenue and expenses from operations and subsequent adjustments to the carrying amount of the property are included in other noninterest expense in the consolidated statements of income. In some instances, the Company may make loans to facilitate the sales of OREO. Management reviews all sales for which it is the lending institution. Any gains related to sales of other real estate owned may be deferred until the buyer has a sufficient investment in the property.
Income Taxes – Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’sCompany's income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized.
Segment reporting – The Company operates in one segment and makes management decisions based on consolidated results. The Company’sCompany's operations are solely in the financial services industry and include providing to its customersclients traditional banking and other financial services.
Off-balance-sheet credit-related financial instruments – In the normal course of operations, the Company engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’customers' requests for funding and take the form of loan commitments, letters of credit and lines of credit. Such financial instruments are recorded when they are funded.
Advertising costs – The Company expenses advertising costs as they are incurred. Advertising costs, including other marketing expenses were $150,000$244,000 and $135,000, respectively,$204,000 for the years ended December 31, 20152018 and 2014.2017, respectively.
Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investments, are reported as a separate component of the equity section of the consolidated balance sheet,sheets, net of tax. Such items, along with net income, are components of comprehensive income. TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Intangible assets – At December 31, 20152018 and 2014,2017, the Company had $485,000$209,000 and $615,000,$362,000, respectively, of identifiable intangible assets included in other assets as a result of the acquisition of deposits from other institutions. This asset isThese assets are amortized using the straight-line method over a period of 9.58-10 years and hashave a remaining weighted average life of 3.25.6 years. Management reviews intangible assets for impairment on an annual basis. No impairment losses have been recognized in the periods presented.
Employee stock ownership plan (ESOP) – The Company sponsors a leveraged ESOP. As shares are committed to be released, compensation expense is recorded equal to the market price of the shares, and the shares become outstanding for purposes of earnings per share calculations. Cash dividends on allocated shares (those credited to ESOP participants’participants' accounts) are recorded as a reduction of stockholders’stockholders' equity and distributed directly to participants’participants' accounts. Cash dividends on unallocated shares (those held by the ESOP not yet credited to participants’participants' accounts) are used to pay administrative expenses and debt service requirements of the ESOP. See Note 13 – Employee Benefits for further information. At December 31, 2015,2018, there were 88,24334,020 unallocated shares in the plan. Shares released on December 31, 20152018 totaled 21,44311,340 and will be credited to plan participants’participants' accounts in 2016.2019.
Notes to Consolidated Financial Statements
Unearned ESOP shares are shown as a reduction of
stockholders’stockholders' equity. When the shares are released, unearned common shares held by the ESOP are reduced by the cost of the ESOP shares released and the differential between the fair value and the cost is charged to additional paid in capital. The loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP reported as a liability on the
Company’s Consolidated StatementsCompany's consolidated statements of
Condition.condition.
Earnings Per Common Share – Earnings per share (“EPS”("EPS") is computed using the two-class method. Basic EPS is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding for the period, excluding any participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends at the same rate as the holders of the Company’sCompany's common stock. Diluted EPS is computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of common shares determined for the basic EPS plus the dilutive effect of common stock equivalents using the treasury stock method based on the average market price for the period. Some stock options are anti-dilutive and therefore are not included in the calculation of diluted EPS.
Fair value – Fair value is the price that would be received when an asset is sold or a liability is transferred in an orderly transaction between market participants at the measurement date. Fair values of the
Company’sCompany's financial instruments are based on the fair value hierarchy which requires an entity to maximize the use of observable inputs, typically market data obtained from third parties, and minimize the use of unobservable inputs, which reflects its estimates for market assumptions, when measuring fair value.
Three levels of valuation inputs are ranked in accordance with the prescribed fair value hierarchy as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Assets or liabilities whose significant value drivers are unobservable. In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value measurements. In certain cases, the inputs used to measure fair value of an asset or liability may fall into different levels of the fair value hierarchy. The level within which the fair value measurement is categorized is based on the lowest level unobservable input that is significant to the fair value measurement in its entirety. Therefore, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.
Share-Based Compensation – The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. These costs are recognized on a straight-line basis over the vesting period during which an employee is required to provide services in exchange TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
for the award, also known as the requisite service period. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted. When determining the estimated fair value of stock options granted, the Company utilizes various assumptions regarding the expected volatility of the stock price, estimated forfeitures using historical data on employee terminations, the risk-free interest rate for periods within the contractual life of the stock option, and the expected dividend yield that the Company expects over the expected life of the options granted. Reductions in compensation expense associated with forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted monthly based on actual forfeiture experience. The Company measures the fair value of the restricted stock using the closing market price of the Company’sCompany's common stock on the date of grant. The Company expenses the grant date fair value of the Company’sCompany's stock options and restricted stock with a corresponding increase in equity.
Reclassifications – Certain amounts reported in prior years’years' consolidated financial statements have been reclassified to conform to the current presentation. The results of the reclassifications are not considered material and have no effect on previously reported net income, earnings per share or stockholders’stockholders' equity.
Note 2 – Accounting Pronouncements Recently Issued or Adopted
In June 2015, FASBAugust 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
Notes to Consolidated Financial Statements
2018-13, "Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU No. 2015-10, Technical Corrections and Improvements. On November 10, 2010 FASB added a standing project that will facilitate2018-13"). This ASU modifies the disclosure requirements on fair value measurements. The following disclosure requirements were removed from FASB Accounting Standards Codification (‘Codification”("ASC") updatesTopic 820 - Fair Value Measurement: (1) the amount of and reasons for technical corrections, clarifications,transfers between Level 1 and improvements. These amendments are referredLevel 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as Technical Correctionsof the reporting date. The ASU adds the following disclosure requirements for Level 3 measurements: (1) changes in unrealized gains and Improvements. Maintenance updates include non-substantive correctionslosses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period; and (2) the range and weighted average of significant unobservable inputs used to the Codification, such as editorial corrections, various link-related changes, and changes to source fragment information. This update contains amendments that will affect a wide variety of Topics in the Codification. The amendmentsdevelop Level 3 fair value measurements. Amendments in this ASU will apply to all reporting entitiesare effective for fiscal years beginning after December 15, 2019, including interim periods within the scopethose fiscal years. Early adoption is permitted for any removed or modified disclosures. The adoption of the affected accounting guidance and generally fall into one of four categories: amendments related to differences between original guidance and the Codification, guidance clarification and reference corrections, simplification, and minor improvements. In summary, the amendments in this ASU represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are2018-13 is not expected to have a significant effect on current accounting practice. Transition guidance varies basedmaterial impact on the amendmentsCompany'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 this ASU. The amendmentslieu of an expected term in the option-pricing model for nonemployee awards. Amendments in this ASU that require transition guidance are effective for fiscal yearsannual periods, and interim reporting periods within those annual periods, beginning after December 15, 2015. Early2018 and early adoption is permitted includingpermitted. The adoption of ASU No. 2018-07 on January 1, 2019 is not expected to have a material impact on the Company's consolidated financial statements.
In March 2018, FASB issued ASU No. 2018-5, Income Taxes (Topic 740). This ASU was issued to provide guidance on the income tax accounting implications of the Tax Cuts and Jobs Act of 2017 ("Tax Act") and allows for entities to report provisional amounts for specific income tax effects of the Tax Act for which the accounting under Topic 740 was not yet complete, but a reasonable estimate could be determined. A measurement period of one-year is allowed to complete the accounting effects under Topic 740 and revise any previous estimates reported. Any provisional amounts or subsequent adjustments included in an interim period. Allentity's financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense in the reporting period the amounts are determined. The Company adopted this ASU with the provisional adjustments as reported in the consolidated financial statements on Form 10-K as of December 31, 2017. For the year ended December 31, 2018, the Company did not incur any adjustments to the provisional recognition.
In February 2018, FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU was issued to allow a reclassification from accumulated other amendments arecomprehensive income to retained earnings from stranded tax effects resulting from the revaluation of the Company's net deferred tax asset ("DTA") to the new corporate tax rate of 21% as a result of the "Tax Act". The ASU is effective upon the issuancefor reporting periods beginning after December 15, 2018 with early adoption permitted. The adoption of this ASU. ASU 2015-10No. 2018-02 did not have a material impact on the Company's consolidated financial statements.
In July 2015,August 2017, the FASB issued ASU No. 2015-14, Revenue from Contracts2017-12, 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 Customers, deferringthose risk management activities and reduce the effective datecomplexity 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 new revenue standard by one year. The standard also allows entities to choose to adopthedging instrument in the standard assame income statement line item in which the earnings effect of the originalhedged item is reported. The amendments in this ASU are effective date.for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted. The FASB decided, basedadoption of ASU No. 2017-12 on its outreachJanuary 1, 2019, is not expected to various stakeholders andhave a material impact on the forthcoming amendments to the new revenue standard, that a deferral is necessary to provide adequate time to effectively implement the new revenue standard.Company's consolidated financial statements.
In August 2015,May 2017, the FASB issued ASU No. 2015-15, Interest—Imputation2017-09, Compensation--Stock Compensation (Topic 718): Scope of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.Modification Accounting. The ASU provides guidance not previously includedwas issued to provide clarity as to when to apply modification accounting when there is a change in ASU 2015-03 regarding debt issuance relatedthe
Notes to line-of-credit arrangements. The amendment allowsConsolidated Financial Statements
terms or conditions of a share-based payment award. According to this ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award is the same after the modification as compared to presentthe original award prior to the modification. The standard was effective for reporting periods beginning after December 15, 2017. The Company has not had any modifications on share-based payment awards and therefore the adoption of ASU No. 2017-09 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 issuance costssecurities 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 asset and subsequently amortize the deferred debt issuance costsadjustment of yield over the termcontractual life of the line-of-credit arrangement, regardless if there are any outstanding borrowingsinstrument. 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 is not expected to have a material impact on the line-of-credit arrangement.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 amendment isCompany does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
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 were effective for fiscal years beginning after December 15, 2015. This2017, including interim periods within those fiscal years. The Company does not currently have items on its cash flow statement that were impacted by adoption of this ASU isand therefore adoption of ASU 2016-15 did not expected to have a material effectimpact on the Company's consolidated financial statements.
In September 2015,June 2016, the FASB issued ASU No. 2015-16, Business Combinations2016-13, Financial Instruments- Credit Losses (Topic 805)326): Measurement of Credit Losses on Financial Instruments. TheThis ASU simplifiesreplaces the accounting for measurement period adjustments.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 an acquirer recognize adjustmentsis measured at amortized cost to provisional amountsbe 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 are identifiedhave taken place during the reporting period. The measurement period inof expected credit losses will be based on historical information, current conditions, and reasonable and supportable forecasts that impact the reporting period whencollectability of the adjustment amounts are determined. The acquirer is required to record inreported amount. Available-for-sale securities will bifurcate the same period's financial statements the effect on earnings from changes in depreciation, amortization, or other income effects resulting from the change to provisional amounts, calculated as if the accounting had been completed at the acquisition date. The acquirer must present separately onfair 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 discloseloss. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the notes,beginning of the amount recorded TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
first reporting period in current-period earnings that would have been recordedwhich the ASU is adopted. The amendments in previous reporting periods if the provisional amount had been recognized at the acquisition date. For public business entities, the amendmentsthis ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. This ASU2019 with early adoption permitted after December 15, 2018. The Company is notevaluating its current expected to have a material effectloss methodology on the Company's consolidated financial statements.
In January 2016,loan and investment portfolios to identify the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognitionnecessary modifications in accordance with this standard and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendment requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This ASU also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendment also requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting fromexpects a change in the instrument specificprocesses and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit risk (also referred to as “own credit”) whenlosses over the organization has elected to measurelife of the liability at fair value in accordance withloan versus 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.current accounting practice that utilizes the incurred loss model. The Company is currentlyin the process of compiling historical data that will be used to calculate expected credit losses on the loan portfolio to ensure that it is fully compliant with the ASU at the adoption date and is evaluating the potential impact adoption of this ASU will have on its consolidated financial statements. While the Company has not quantified the impact of this ASU, onit does expect changing from the Company's consolidated financial statements.
current incurred loss model to an expected loss model
Notes to Consolidated Financial Statements
will result in an earlier recognition of losses. The Company also expects that once adopted the allowance for loan losses will increase, however, until its evaluation is complete the magnitude of the increase will be unknown.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize, on the balance sheet, the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income. For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements. This ASU amended the new leases standard to give entities another option for transition and to provide lessors with a practical expedient. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The practical expedient provides lessors with an option to not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components. The amendments have the same effective date as ASU 2016-02. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in the ASU is permitted.
The Company is currently evaluating the impact of ASU 2016-02. Upon adoption of this guidance on January 1, 2019, we expect the right-of-use assets and lease liabilities recorded will be less than 5% of our total assets. The Company does not expect the new lease standard to have a material impact on its consolidated financial statements.
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments - Overall, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendments in this ASU require an entity to disclose the fair value of financial instruments using the exit price notion. Exit price is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The methods of determining the fair value of assets and liabilities are consistent with our methodologies disclosed in Note 11 - Fair Value Measurements of this Form 10-K, except for the valuation of loans held-for-investment and time deposits which were impacted by the adoption of ASU 2016-01. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. As of December 31, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The amendments in this ASU were effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Refer to Note 11 of this Form 10-K. Prior period information has not been updated to conform with the new guidance. The adoption of ASU 2016-02 is2016-01 did not expected to have a material impact on the Company's consolidated financial statements.
In May 2014, the "FASB" issued "ASU" No. 2014-09, Revenue from Contracts with Customers (Topic 606). In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) which postponed the effective date of 2014-09. Subsequently, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. This amendment clarifies that an entity should determine if 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 core principle of Topic 606 is that an entity must recognize revenue when it has satisfied a performance obligation of transferring promised goods or services to a customer. These standards were effective for interim and annual periods beginning after December 15, 2017. The Company has analyzed its revenue sources of noninterest income to determine when the satisfaction of the performance obligation occurs and the appropriate recognition of revenue. For further information, see Note 19 - Revenue from Contracts with Customers of this Form 10-K. The adoption of these ASUs did not have a material impact on the Company's consolidated financial statements, other than the additional disclosures included in Note 19 of this Form 10-K.
Notes to Consolidated Financial Statements
Federal Reserve Board regulations require that the Company maintain certain minimum reserve balances either as cash on hand or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The reserve balances were
$4.6$13.8 million and
$3.3$12.2 million at December 31,
20152018 and
2014,2017, respectively.
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 4 – Investments
The amortized cost and fair value of AFS securities and the corresponding amounts of gross unrealized gains and losses at December 31,
20152018 and
20142017 were as follows (in thousands):
| Amortized
Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Estimated
Fair Value |
December 31, 2015
| | | | | | | | | | | | |
Municipal bonds | $ | 1,912 | | $ | 184 | | $ | — | | $ | 2,096 | |
Agency mortgage-backed securities | | 4,088 | | | 102 | | | (18 | ) | | 4,172 | |
Non-agency mortgage-backed securities | | 449 | | | — | | | (21 | ) | | 428 | |
Total | $ | 6,449 | | $ | 286 | | $ | (39 | ) | $ | 6,696 | |
| | | | | | | | | | | | |
December 31, 2014
| | | | | | | | | | | | |
Municipal bonds | $ | 1,911 | | $ | 172 | | $ | — | | $ | 2,083 | |
Agency mortgage-backed securities | | 7,024 | | | 110 | | | (38 | ) | | 7,096 | |
Non-agency mortgage-backed securities | | 2,312 | | | 83 | | | (50 | ) | | 2,345 | |
Total | $ | 11,247 | | $ | 365 | | $ | (88 | ) | $ | 11,524 | |
|
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| December 31, 2018 | | | | | | | |
| Municipal bonds | $ | 3,218 |
| | $ | 122 |
| | $ | (23 | ) | | $ | 3,317 |
|
| Agency mortgage-backed securities | 1,594 |
| | 46 |
| | — |
| | 1,640 |
|
| Total | $ | 4,812 |
| | $ | 168 |
| | $ | (23 | ) | | $ | 4,957 |
|
| | | | | | | | |
| December 31, 2017 | | | | | | | |
| Municipal bonds | $ | 3,240 |
| | $ | 155 |
| | $ | (26 | ) | | $ | 3,369 |
|
| Agency mortgage-backed securities | 2,030 |
| | 36 |
| | — |
| | 2,066 |
|
| Total | $ | 5,270 |
| | $ | 191 |
| | $ | (26 | ) | | $ | 5,435 |
|
The amortized cost and fair value of
mortgage-backedAFS securities
at December 31, 2018, by contractual maturity,
at December 31, 2015, are shown below (in thousands). Expected maturities of
mortgage-backedAFS securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| December 31, 2015 |
| Amortized
Cost | Fair
Value |
Due in less than one year | $ | 94 | | $ | 95 | |
Due in one to five years | | 2,605 | | | 2,707 | |
Due after five to ten years | | 1,649 | | | 1,649 | |
Due after ten years | | 2,101 | | | 2,245 | |
Total | $ | 6,449 | | $ | 6,696 | |
|
| | | | | | | | | | |
| | December 31, 2018 |
| | Amortized Cost | | Fair Value | | Weighted-Average Yield |
| Due in one to five years | $ | 1,566 |
| | $ | 1,550 |
| | 1.93 | % |
| Due after five to ten years | 460 |
| | 485 |
| | 4.75 |
|
| Due after ten years | 1,192 |
| | 1,282 |
| | 5.43 |
|
| Mortgage-backed securities | 1,594 |
| | 1,640 |
| | 4.14 |
|
| Total | $ | 4,812 |
| | $ | 4,957 |
| | 3.82 | % |
There were no pledged securities at December 31,
2015.2018 and 2017. There were no sales of AFS securities
forduring the years ended December 31,
2015 or 2014.2018 and 2017.
The following
table summarizes at December 31, 2015 and 2014tables summarize the aggregate fair value and gross unrealized loss by length of time
of those investments
that have been
continuously in
ana continuous unrealized loss position
at December 31, 2018 and 2017 (in thousands):
| December 31, 2015 |
| Less Than 12 Months | 12 Months or Longer | Total |
| Fair
Value | Unrealized
Loss | Fair
Value | Unrealized
Loss | Fair
Value | Unrealized
Loss |
Agency mortgage-backed securities | $ | — | | $ | — | | $ | 1,370 | | $ | (18 | ) | $ | 1,370 | | $ | (18 | ) |
Non-agency mortgage-backed securities | | — | | | — | | | 428 | | | (21 | ) | | 428 | | | (21 | ) |
Total | $ | — | | $ | — | | $ | 1,798 | | $ | (39 | ) | $ | 1,798 | | $ | (39 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Less Than 12 Months | | 12 Months or Longer | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| Municipal bonds | $ | — |
| | $ | — |
| | $ | 1,283 |
| | $ | (23 | ) | | $ | 1,283 |
| | $ | (23 | ) |
| Total | $ | — |
| | $ | — |
| | $ | 1,283 |
| | $ | (23 | ) | | $ | 1,283 |
| | $ | (23 | ) |
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
| December 31, 2014 |
| Less Than 12 Months | 12 Months or Longer | Total |
| Fair
Value | Unrealized
Loss | Fair
Value | Unrealized
Loss | Fair
Value | Unrealized
Loss |
Agency mortgage-backed securities | $ | 627 | | $ | (6 | ) | $ | 2,216 | | $ | (32 | ) | $ | 2,843 | | $ | (38 | ) |
Non-agency mortgage-backed securities | | — | | | — | | | 507 | | | (50 | ) | | 507 | | | (50 | ) |
Total | $ | 627 | | $ | (6 | ) | $ | 2,723 | | $ | (82 | ) | $ | 3,350 | | $ | (88 | ) |
The following table presents at December 31, 2015 and 2014 the cumulative roll forward of
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 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 | $ | — |
| | $ | — |
| | $ | 1,302 |
| | $ | (26 | ) | | $ | 1,302 |
| | $ | (26 | ) |
| Total | $ | — |
| | $ | — |
| | $ | 1,302 |
| | $ | (26 | ) | | $ | 1,302 |
| | $ | (26 | ) |
There were no credit losses recognized in earnings
during the years ended December 31, 2018 and 2017 relating to the
Company’s non-U.S. agency mortgage backed securities (in thousands): | Year Ended December 31, |
| 2015 | 2014 |
Estimated credit losses, beginning balance | $ | 450 | | $ | 450 | |
Additions for credit losses not previously recognized | | — | | | — | |
Reduction for increases in cash flows | | — | | | — | |
Removal of credit losses due to securities sold | | (450 | ) | | — | |
Estimated credit losses, ending balance | $ | — | | $ | 450 | |
At December 31, 2015,2018, the securities portfolio consisted of 12six agency mortgage-backed securities one non-agency mortgage-backed security and fiveeight municipal securities with a fair value of $6.7$5.0 million. At December 31, 2014,2017, the securities portfolio consisted of 15seven agency mortgage-backed securities five non-agency mortgage-backed securities and fiveeight municipal bonds with a fair value of $11.5$5.4 million. At both the December 31, 2015, one of the 12 agency mortgage-backed securities2018 and 2017, there were in an unrealized loss position compared to three of the 15 agency mortgage-backed securities at December 31, 2014. All of the agency mortgage-backedno securities in an unrealized loss position at December 31, 2015for less than 12 months, and December 31, 2014there were issued or guaranteed by U.S. governmental agencies. Thethree municipal securities in an unrealized loss position for more than 12 months. For both the 2018 and 2017 periods, 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. BecauseThe unrealized losses on these investments are not considered other-than-temporary impairment ("OTTI") during the years ended December 31, 2018 and 2017, because the decline in fair value is not attributable to changes in interest rates or widening market spreads and not credit quality and because the Company doeswe do not intend, to sell the securities in this class and it is not likely that itwe 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 OTTI.
As of December 31, 2015 and 2014, one non-agency mortgage-backed security was in an unrealized loss position. The unrealized loss was caused by changes in interest rates and market illiquidity causing a decline in the fair value subsequent to the purchase. The contractual terms of this security do not permit the issuer to settle the security at a price less than par. While management does not intend to sell the 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 indicates that this security possesses quantitative factors that 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, no non-agency mortgage-backed security reflected OTTI during the year ended December 31, 2015.
.
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The composition of the loan portfolio, excluding loans held-for-sale, at December 31,
20152018 and
20142017 is as follows (in thousands):
| At December 31, |
| 2015 | 2014 |
Real estate loans:
| | | | | | |
One- to four-family | $ | 141,125 | | $ | 133,031 | |
Home equity | | 31,573 | | | 34,675 | |
Commercial and multifamily | | 175,312 | | | 168,952 | |
Construction and land | | 57,043 | | | 46,279 | |
Total real estate loans | | 405,053 | | | 382,937 | |
Consumer loans:
| | | | | | |
Manufactured homes | | 13,798 | | | 12,539 | |
Other consumer | | 23,030 | | | 16,875 | |
Total consumer loans | | 36,828 | | | 29,414 | |
Commercial business loans
| | 19,295 | | | 19,525 | |
Total loans | | 461,176 | | | 431,876 | |
Deferred fees | | (1,707 | ) | | (1,516 | ) |
Total loans, gross | | 459,469 | | | 430,360 | |
Allowance for loan losses | | (4,636 | ) | | (4,387 | ) |
Total loans, net | $ | 454,833 | | $ | 425,973 | |
|
| | | | | | | |
| | At December 31, |
| | 2018 | | 2017 |
| Real estate loans: | | | |
| One-to-four family | $ | 169,830 |
| | $ | 157,417 |
|
| Home equity | 27,655 |
| | 28,379 |
|
| Commercial and multifamily | 252,644 |
| | 211,269 |
|
| Construction and land | 65,259 |
| | 61,482 |
|
| Total real estate loans | 515,388 |
| | 458,547 |
|
| Consumer loans: | | | |
| Manufactured homes | 20,145 |
| | 17,111 |
|
| Floating homes | 40,806 |
| | 29,120 |
|
| Other consumer | 6,628 |
| | 4,902 |
|
| Total consumer loans | 67,579 |
| | 51,133 |
|
| Commercial business loans | 38,804 |
| | 40,829 |
|
| Total loans | 621,771 |
| | 550,509 |
|
| Deferred fees | (2,228 | ) | | (1,914 | ) |
| Total loans, gross | 619,543 |
| | 548,595 |
|
| Allowance for loan losses | (5,774 | ) | | (5,241 | ) |
| Total loans, net | $ | 613,769 |
| | $ | 543,354 |
|
The following table presents the balance in the allowance for loan losses and the unpaid principal balance in loans, net of partial charge-offs by portfolio segment and based on impairment method as of December 31,
20152018 (in thousands):
| One-to-
four
family | Home
equity | Commercial
and
multifamily | Construction
and
land | Manufactured
homes | Other
consumer | Commercial
business | Unallocated | Total |
Allowance for loan losses:
|
Individually evaluated for impairment | $ | 647 | | $ | 110 | | $ | 36 | | $ | 18 | | $ | 63 | | $ | — | | $ | 8 | | $ | — | | $ | 882 | |
Collectively evaluated for impairment | | 1,192 | | | 497 | | | 885 | | | 364 | | | 238 | | | 188 | | | 149 | | | 241 | | | 3,754 | |
Ending balance | $ | 1,839 | | $ | 607 | | $ | 921 | | $ | 382 | | $ | 301 | | $ | 188 | | $ | 157 | | $ | 241 | | $ | 4,636 | |
Loans receivable:
|
Individually evaluated for impairment | $ | 5,779 | | $ | 904 | | $ | 1,966 | | $ | 91 | | $ | 361 | | $ | 5 | | $ | 114 | | $ | — | | $ | 9,220 | |
Collectively evaluated for impairment | | 135,346 | | | 30,669 | | | 173,346 | | | 56,952 | | | 13,437 | | | 23,025 | | | 19,181 | | | — | | | 451,956 | |
Ending balance | $ | 141,125 | | $ | 31,573 | | $ | 175,312 | | $ | 57,043 | | $ | 13,798 | | $ | 23,030 | | $ | 19,295 | | $ | — | | $ | 461,176 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Allowance: Individually evaluated for impairment | | Allowance: Collectively evaluated for impairment | | Ending balance | | Loans held for investment: Individually evaluated for impairment | | Loans held for investment: Collectively evaluated for impairment | | Ending balance |
| | | | | | | | | | | | |
| One-to-four family | $ | 228 |
| | $ | 1,086 |
| | $ | 1,314 |
| | $ | 2,760 |
| | $ | 167,070 |
| | $ | 169,830 |
|
| Home equity | 25 |
| | 177 |
| | 202 |
| | 440 |
| | 27,215 |
| | 27,655 |
|
| Commercial and multifamily | — |
| | 1,638 |
| | 1,638 |
| | 702 |
| | 251,942 |
| | 252,644 |
|
| Construction and land | 8 |
| | 423 |
| | 431 |
| | 163 |
| | 65,096 |
| | 65,259 |
|
| Manufactured homes | 299 |
| | 128 |
| | 427 |
| | 424 |
| | 19,721 |
| | 20,145 |
|
| Floating homes | — |
| | 265 |
| | 265 |
| | — |
| | 40,806 |
| | 40,806 |
|
| Other consumer | 64 |
| | 48 |
| | 112 |
| | 157 |
| | 6,471 |
| | 6,628 |
|
| Commercial business | 112 |
| | 244 |
| | 356 |
| | 1,192 |
| | 37,612 |
| | 38,804 |
|
| Unallocated | — |
| | 1,029 |
| | 1,029 |
| | — |
| | — |
| | — |
|
| Total | $ | 736 |
| | $ | 5,038 |
|
| $ | 5,774 |
| | $ | 5,838 |
| | $ | 615,933 |
| | $ | 621,771 |
|
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table presents the balance in the allowance for loan losses and the unpaid principal balance in loans, net of partial charge-offs by portfolio segment and based on impairment method as of December 31,
20142017 (in thousands):
| One-to-
four
family | Home
equity | Commercial
and
multifamily | Construction
and land | Manufactured
homes | Other
consumer | Commercial
business | Unallocated | Total |
Allowance for loan losses:
|
Individually evaluated for impairment | $ | 258 | | $ | 28 | | $ | 8 | | $ | 14 | | $ | 41 | | $ | 18 | | $ | — | | $ | — | | $ | 367 | |
Collectively evaluated for impairment | | 1,184 | | | 573 | | | 1,236 | | | 385 | | | 152 | | | 149 | | | 108 | | | 233 | | | 4,020 | |
Ending balance | $ | 1,442 | | $ | 601 | | $ | 1,244 | | $ | 399 | | $ | 193 | | $ | 167 | | $ | 108 | | $ | 233 | | $ | 4,387 | |
Loans receivable:
|
Individually evaluated for impairment | $ | 4,186 | | $ | 1,247 | | $ | 2,956 | | $ | 180 | | $ | 404 | | $ | 51 | | $ | 124 | | $ | — | | $ | 9,148 | |
Collectively evaluated for impairment | | 128,845 | | | 33,428 | | | 165,996 | | | 46,099 | | | 12,135 | | | 16,824 | | | 19,401 | | | — | | | 422,728 | |
Ending balance | $ | 133,031 | | $ | 34,675 | | $ | 168,952 | | $ | 46,279 | | $ | 12,539 | | $ | 16,875 | | $ | 19,525 | | $ | — | | $ | 431,876 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Allowance: Individually evaluated for impairment | | Allowance: Collectively evaluated for impairment | | Ending balance | | Loans held for investment: Individually evaluated for impairment | | Loans held for investment: Collectively evaluated for impairment | | Ending balance |
| | | | | | | | | | | | |
| One-to-four family | $ | 555 |
| | $ | 881 |
| | $ | 1,436 |
| | $ | 6,256 |
| | $ | 151,161 |
| | $ | 157,417 |
|
| Home equity | 120 |
| | 173 |
| | 293 |
| | 1,028 |
| | 27,351 |
| | 28,379 |
|
| Commercial and multifamily | — |
| | 1,250 |
| | 1,250 |
| | 1,699 |
| | 209,570 |
| | 211,269 |
|
| Construction and land | 13 |
| | 365 |
| | 378 |
| | 141 |
| | 61,341 |
| | 61,482 |
|
| Manufactured homes | 258 |
| | 97 |
| | 355 |
| | 385 |
| | 16,726 |
| | 17,111 |
|
| Floating homes | — |
| | 169 |
| | 169 |
| | — |
| | 29,120 |
| | 29,120 |
|
| Other consumer | 43 |
| | 37 |
| | 80 |
| | 194 |
| | 4,708 |
| | 4,902 |
|
| Commercial business | 135 |
| | 237 |
| | 372 |
| | 1,000 |
| | 39,829 |
| | 40,829 |
|
| Unallocated | — |
| | 908 |
| | 908 |
| | — |
| | — |
| | — |
|
| Total | $ | 1,124 |
| | $ | 4,117 |
| | $ | 5,241 |
| | $ | 10,703 |
| | $ | 539,806 |
| | $ | 550,509 |
|
The following table summarizes the activity in
the allowance for loan losses for the year ended December 31,
20152018 (in thousands):
| Beginning
Allowance | Charge-offs | Recoveries | Provision | Ending
Allowance |
One-to-four family | $ | 1,442 | | $ | (21 | ) | $ | — | | $ | 418 | | $ | 1,839 | |
Home equity | | 601 | | | (35 | ) | | 36 | | | 5 | | | 607 | |
Commercial and multifamily | | 1,244 | | | — | | | — | | | (323 | ) | | 921 | |
Construction and land | | 399 | | | (40 | ) | | — | | | 23 | | | 382 | |
Manufactured homes | | 193 | | | (37 | ) | | 8 | | | 137 | | | 301 | |
Other consumer | | 167 | | | (77 | ) | | 15 | | | 83 | | | 188 | |
Commercial business | | 108 | | | — | | | — | | | 49 | | | 157 | |
Unallocated | | 233 | | | — | | | — | | | 8 | | | 241 | |
| $ | 4,387 | | $ | (210 | ) | $ | 59 | | $ | 400 | | $ | 4,636 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Beginning Allowance | | Charge-offs | | Recoveries | | Provision | | Ending Allowance |
| One-to-four family | $ | 1,436 |
| | $ | — |
| | $ | 1 |
| | $ | (123 | ) | | $ | 1,314 |
|
| Home equity | 293 |
| | (7 | ) | | 44 |
| | (128 | ) | | 202 |
|
| Commercial and multifamily | 1,250 |
| | — |
| | — |
| | 388 |
| | 1,638 |
|
| Construction and land | 378 |
| | — |
| | — |
| | 53 |
| | 431 |
|
| Manufactured homes | 355 |
| | (12 | ) | | — |
| | 84 |
| | 427 |
|
| Floating homes | 169 |
| | — |
| | — |
| | 96 |
| | 265 |
|
| Other consumer | 80 |
| | (31 | ) | | 12 |
| | 51 |
| | 112 |
|
| Commercial business | 372 |
| | — |
| | 1 |
| | (17 | ) | | 356 |
|
| Unallocated | 908 |
| | — |
| | — |
| | 121 |
| | 1,029 |
|
| | $ | 5,241 |
| | $ | (50 | ) | | $ | 58 |
| | $ | 525 |
| | $ | 5,774 |
|
Notes to Consolidated Financial Statements
The following table summarizes the activity in
the allowance for loan losses for the year ended December 31,
20142017 (in thousands):
| Beginning
Allowance | Charge-offs | Recoveries | Provision | Ending
Allowance |
One-to-four family | $ | 1,915 | | $ | (127 | ) | $ | 64 | | $ | (410 | ) | $ | 1,442 | |
Home equity | | 781 | | | (295 | ) | | 52 | | | 63 | | | 601 | |
Commercial and multifamily | | 300 | | | (47 | ) | | 2 | | | 989 | | | 1,244 | |
Construction and land | | 318 | | | — | | | — | | | 81 | | | 399 | |
Manufactured homes | | 209 | | | (197 | ) | | 14 | | | 167 | | | 193 | |
Other consumer | | 109 | | | (77 | ) | | 21 | | | 114 | | | 167 | |
Commercial business | | 102 | | | — | | | — | | | 6 | | | 108 | |
Unallocated | | 443 | | | — | | | — | | | (210 | ) | | 233 | |
| $ | 4,177 | | $ | (743 | ) | $ | 153 | | $ | 800 | | $ | 4,387 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Beginning Allowance | | Charge-offs | | Recoveries | | Provision | | Ending Allowance |
| One-to-four family | $ | 1,542 |
| | $ | — |
| | $ | — |
| | $ | (106 | ) | | $ | 1,436 |
|
| Home equity | 378 |
| | (89 | ) | | 33 |
| | (29 | ) | | 293 |
|
| Commercial and multifamily | 1,144 |
| | (24 | ) | | 1 |
| | 129 |
| | 1,250 |
|
| Construction and land | 459 |
| | — |
| | — |
| | (81 | ) | | 378 |
|
| Manufactured homes | 168 |
| | (12 | ) | | 8 |
| | 191 |
| | 355 |
|
| Floating homes | 132 |
| | — |
| | — |
| | 37 |
| | 169 |
|
| Other consumer | 112 |
| | (18 | ) | | 20 |
| | (34 | ) | | 80 |
|
| Commercial business | 175 |
| | — |
| | — |
| | 197 |
| | 372 |
|
| Unallocated | 712 |
| | — |
| | — |
| | 196 |
| | 908 |
|
| | $ | 4,822 |
| | $ | (143 | ) | | $ | 62 |
| | $ | 500 |
| | $ | 5,241 |
|
Credit Quality Indicators. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful or loss. An assetA loan is considered substandard if TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
it is inadequately protected by the current net worth and pay capacity of the borrower or of any collateral pledged. Substandard assetsloans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. AssetsLoans classified as doubtful have all the weaknesses of currently existing facts, conditions and values. AssetsLoans 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 the Company classifies problem loans as either substandard or doubtful, it may establish a specific allowance in an amount it deems prudent to address the risk specifically (if the loan is impaired) or it 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 assets. When the Company classifies problem loans as a loss, it charges off such
assetsloans in the period in which they are deemed uncollectible.
AssetsLoans that do not currently expose the Company to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are classified as either watch or special mention
assets.loans. The
Company’sCompany's determination as the classification of its
assetsloans and the amount of its valuation allowances is subject to review by the FDIC, 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 December 31,
20152018, by type of loan (in thousands):
| One-to-
four
family | Home
equity | Commercial
and
multifamily | Construction
and land | Manufactured
homes | Other
consumer | Commercial
business | Total |
Grade:
| | | | | | | | | | | | | | | | | | | | | | | | |
Pass | $ | 136,879 | | $ | 30,310 | | $ | 169,072 | | $ | 55,984 | | $ | 13,621 | | $ | 22,967 | | $ | 18,449 | | $ | 447,282 | |
Watch | | 1,015 | | | 609 | | | 4,810 | | | 1,059 | | | 96 | | | 58 | | | 846 | | | 8,493 | |
Special Mention | | 1,409 | | | — | | | 1,430 | | | — | | | 33 | | | — | | | — | | | 2,872 | |
Substandard | | 1,822 | | | 654 | | | — | | | — | | | 48 | | | 5 | | | — | | | 2,529 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 141,125 | | $ | 31,573 | | $ | 175,312 | | $ | 57,043 | | $ | 13,798 | | $ | 23,030 | | $ | 19,295 | | $ | 461,176 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One-to-four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total |
| Grade: | | | | | | | | | | | | | | | | | |
| Pass | $ | 163,655 |
| | $ | 27,150 |
| | $ | 246,907 |
| | $ | 55,916 |
| | $ | 19,860 |
| | $ | 40,806 |
| | $ | 6,576 |
| | $ | 35,876 |
| | $ | 596,746 |
|
| Watch | — |
| | — |
| | 1,139 |
| | 5,968 |
| | — |
| | — |
| | — |
| | 689 |
| | 7,796 |
|
| Special Mention | — |
| | — |
| | 2,497 |
| | 3,252 |
| | — |
| | — |
| | — |
| | 367 |
| | 6,116 |
|
| Substandard | 6,175 |
| | 505 |
| | 2,101 |
| | 123 |
| | 285 |
| | — |
| | 52 |
| | 1,872 |
| | 11,113 |
|
| Doubtful | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 169,830 |
| | $ | 27,655 |
| | $ | 252,644 |
| | $ | 65,259 |
| | $ | 20,145 |
| | $ | 40,806 |
| | $ | 6,628 |
| | $ | 38,804 |
| | $ | 621,771 |
|
Notes to Consolidated Financial Statements
The following table represents the internally assigned grades as of December 31,
20142017, by type of loan (in thousands):
| One-to-
four family | Home
equity | Commercial
and
multifamily | Construction
and land | Manufactured
homes | Other
consumer | Commercial
business | Total |
Grade:
| | | | | | | | | | | | | | | | | | | | | | | | |
Pass | $ | 120,152 | | $ | 30,785 | | $ | 163,573 | | $ | 45,427 | | $ | 11,427 | | $ | 16,587 | | $ | 18,919 | | $ | 406,870 | |
Watch | | 11,793 | | | 3,322 | | | 3,740 | | | 852 | | | 1,038 | | | 240 | | | 606 | | | 21,591 | |
Special Mention | | — | | | — | | | — | | | — | | | 24 | | | — | | | — | | | 24 | |
Substandard | | 1,086 | | | 568 | | | 1,639 | | | — | | | 50 | | | 48 | | | — | | | 3,391 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 133,031 | | $ | 34,675 | | $ | 168,952 | | $ | 46,279 | | $ | 12,539 | | $ | 16,875 | | $ | 19,525 | | $ | 431,876 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One-to-four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total |
| Grade: | | | | | | | | | | | | | | | | | |
| Pass | $ | 153,793 |
| | $ | 27,493 |
| | $ | 199,887 |
| | $ | 61,390 |
| | $ | 16,877 |
| | $ | 29,120 |
| | $ | 4,708 |
| | $ | 39,089 |
| | $ | 532,357 |
|
| Watch | 244 |
| | — |
| | 9,683 |
| | — |
| | — |
| | — |
| | — |
| | 827 |
| | 10,754 |
|
| Special Mention | 137 |
| | — |
| | 357 |
| | — |
| | — |
| | — |
| | — |
| | 784 |
| | 1,278 |
|
| Substandard | 3,243 |
| | 886 |
| | 1,342 |
| | 92 |
| | 234 |
| | — |
| | 194 |
| | 129 |
| | 6,120 |
|
| Doubtful | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 157,417 |
| | $ | 28,379 |
| | $ | 211,269 |
| | $ | 61,482 |
| | $ | 17,111 |
| | $ | 29,120 |
| | $ | 4,902 |
| | $ | 40,829 |
| | $ | 550,509 |
|
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 three monthsninety days past due or if, in management’smanagement's opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions. TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table presents the recorded investment in nonaccrual loans as of December 31,
20152018 and
20142017, by type of loan (in thousands):
| 2015 | 2014 |
One- to four- family | $ | 1,157 | | $ | 1,092 | |
Home equity | | 344 | | | 258 | |
Construction and land | | — | | | 81 | |
Manufactured homes | | 27 | | | 6 | |
Other consumer | | — | | | 27 | |
Total | $ | 1,528 | | $ | 1,464 | |
|
| | | | | | | |
| | 2018 | | 2017 |
| One-to-four family | $ | 1,075 |
| | $ | 791 |
|
| Home equity | 360 |
| | 722 |
|
| Other consumer | — |
| | 8 |
|
| Commercial and multifamily | 534 |
| | 201 |
|
| Construction and land | 123 |
| | 92 |
|
| Manufactured homes | 214 |
| | 206 |
|
| Commercial | 235 |
| | 129 |
|
| Total | $ | 2,541 |
| | $ | 2,149 |
|
The following table represents the aging of the recorded investment in past due loans as of December 31,
20152018, by type of loan (in thousands):
| 30-59 Days
Past Due | 60-89 Days
Past Due | Greater
Than 90
Days Past
Due | Recorded
Investment
> 90 Days
and
Accruing | Total
Past Due | Current | Total
Loans |
One-to-four family | $ | 2,453 | | $ | 265 | | $ | 881 | | $ | 117 | | $ | 3,716 | | $ | 137,409 | | $ | 141,125 | |
Home equity | | 352 | | | 60 | | | 296 | | | — | | | 708 | | | 30,865 | | | 31,573 | |
Commercial and multifamily | | 203 | | | — | | | — | | | — | | | 203 | | | 175,109 | | | 175,312 | |
Construction and land | | 65 | | | — | | | — | | | — | | | 65 | | | 56,978 | | | 57,043 | |
Manufactured homes | | 103 | | | 27 | | | — | | | — | | | 130 | | | 13,668 | | | 13,798 | |
Other consumer | | 17 | | | 26 | | | — | | | — | | | 43 | | | 22,987 | | | 23,030 | |
Commercial business | | 154 | | | 8 | | | — | | | — | | | 162 | | | 19,133 | | | 19,295 | |
Total | $ | 3,347 | | $ | 386 | | $ | 1,177 | | $ | 117 | | $ | 5,027 | | $ | 456,149 | | $ | 461,176 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater than 90 Days Past Due | | Recorded Investment > 90 Days and Accruing | | Total Past Due | | Current | | Total Loans |
| One-to-four family | $ | 1,362 |
| | $ | 167 |
| | $ | 514 |
| | $ | — |
| | $ | 2,043 |
| | $ | 167,787 |
| | $ | 169,830 |
|
| Home equity | 298 |
| | 149 |
| | 284 |
| | — |
| | 731 |
| | 26,924 |
| | 27,655 |
|
| Commercial and multifamily | 139 |
| | — |
| | 353 |
| | — |
| | 492 |
| | 252,152 |
| | 252,644 |
|
| Construction and land | 650 |
| | — |
| | 50 |
| | — |
| | 700 |
| | 64,559 |
| | 65,259 |
|
| Manufactured homes | 78 |
| | 129 |
| | 199 |
| | — |
| | 406 |
| | 19,739 |
| | 20,145 |
|
| Floating homes | — |
| | — |
| | — |
| | — |
| | — |
| | 40,806 |
| | 40,806 |
|
| Other consumer | 11 |
| | 5 |
| | — |
| | — |
| | 16 |
| | 6,612 |
| | 6,628 |
|
| Commercial business | 228 |
| | 177 |
| | 122 |
| | — |
| | 527 |
| | 38,277 |
| | 38,804 |
|
| Total | $ | 2,766 |
| | $ | 627 |
| | $ | 1,522 |
| | $ | — |
| | $ | 4,915 |
| | $ | 616,856 |
| | $ | 621,771 |
|
Notes to Consolidated Financial Statements
The following table represents the aging of the recorded investment in past due loans as of December 31,
20142017, by type of loan (in thousands):
| 30-59 Days
Past Due | 60-89 Days
Past Due | Greater
Than 90
Days Past
Due | Recorded
Investment
> 90 Days
and
Accruing | Total
Past Due | Current | Total
Loans |
One-to-four family | $ | 1,300 | | $ | 167 | | $ | 720 | | $ | — | | $ | 2,187 | | $ | 130,844 | | $ | 133,031 | |
Home equity | | 585 | | | 109 | | | 203 | | | — | | | 897 | | | 33,778 | | | 34,675 | |
Commercial and multifamily | | — | | | — | | | — | | | — | | | — | | | 168,952 | | | 168,952 | |
Construction and land | | — | | | — | | | 81 | | | — | | | 81 | | | 46,198 | | | 46,279 | |
Manufactured homes | | 197 | | | 42 | | | 27 | | | 114 | | | 380 | | | 12,159 | | | 12,539 | |
Other consumer | | 23 | | | 7 | | | — | | | — | | | 30 | | | 16,845 | | | 16,875 | |
Commercial business | | 430 | | | — | | | — | | | — | | | 430 | | | 19,095 | | | 19,525 | |
Total | $ | 2,535 | | $ | 325 | | $ | 1,031 | | $ | 114 | | $ | 4,005 | | $ | 427,871 | | $ | 431,876 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater Than 90 Days Past Due | | Recorded Investment > 90 Days and Accruing | | Total Past Due | | Current | | Total Loans |
| One-to-four family | $ | 2,092 |
| | $ | 1,819 |
| | $ | 727 |
| | $ | — |
| | $ | 4,638 |
| | $ | 152,779 |
| | $ | 157,417 |
|
| Home equity | 521 |
| | 5 |
| | 633 |
| | — |
| | 1,159 |
| | 27,220 |
| | 28,379 |
|
| Commercial and multifamily | 313 |
| | — |
| | — |
| | — |
| | 313 |
| | 210,956 |
| | 211,269 |
|
| Construction and land | 51 |
| | — |
| | 92 |
| | — |
| | 143 |
| | 61,339 |
| | 61,482 |
|
| Manufactured homes | 185 |
| | 50 |
| | 197 |
| | — |
| | 432 |
| | 16,679 |
| | 17,111 |
|
| Floating homes | — |
| | — |
| | — |
| | — |
| | — |
| | 29,120 |
| | 29,120 |
|
| Other consumer | 15 |
| | — |
| | — |
| | — |
| | 15 |
| | 4,887 |
| | 4,902 |
|
| Commercial business | 400 |
| | — |
| | — |
| | — |
| | 400 |
| | 40,429 |
| | 40,829 |
|
| Total | $ | 3,577 |
| | $ | 1,874 |
| | $ | 1,649 |
| | $ | — |
| | $ | 7,100 |
| | $ | 543,409 |
| | $ | 550,509 |
|
Nonperforming Loans.Loans are considered nonperforming when they are placed on nonaccrual and/or when they are considered to be nonperforming TDRs and/or when they are 90 days or greater past due and still accruing interest.due. Nonperforming TDRs include TDRs that do not have sufficient payment history (typically greater than six6 months) to be considered performing or TDRs that have become 31 or more days past due. TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table represents the credit risk profile based on payment activity as of December 31, 20152018, by type of loan (in thousands):
| One- to
four-
family | Home
equity | Commercial
and
multifamily | Construction
and land | Manufactured
homes | Other
consumer | Commercial
business | Total |
Performing | $ | 139,484 | | $ | 31,146 | | $ | 175,312 | | $ | 57,043 | | $ | 13,736 | | $ | 23,030 | | $ | 19,295 | | $ | 454,137 | |
Nonperforming | | 1,640 | | | 428 | | | — | | | | | | 62 | | | — | | | — | | | 2,130 | |
Total | $ | 141,125 | | $ | 31,573 | | $ | 175,312 | | $ | 57,043 | | $ | 13,798 | | $ | 23,030 | | $ | 19,295 | | $ | 461,176 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One-to-four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total |
| Performing | $ | 168,710 |
| | $ | 27,296 |
| | $ | 252,110 |
| | $ | 65,136 |
| | $ | 19,931 |
| | $ | 40,806 |
| | $ | 6,628 |
| | $ | 38,487 |
| | $ | 619,104 |
|
| Nonperforming | 1,120 |
| | 359 |
| | 534 |
| | 123 |
| | 214 |
| | — |
| | — |
| | 317 |
| | 2,667 |
|
| Total | $ | 169,830 |
| | $ | 27,655 |
| | $ | 252,644 |
| | $ | 65,259 |
| | $ | 20,145 |
| | $ | 40,806 |
| | $ | 6,628 |
| | $ | 38,804 |
| | $ | 621,771 |
|
The following table represents the credit risk profile based on payment activity as of December 31,
20142017, by type of loan (in thousands):
| One- to
four-
family | Home
equity | Commercial
and
multifamily | Construction
and land | Manufactured
homes | Other
consumer | Commercial
business | Total |
Performing | $ | 131,519 | | $ | 34,289 | | $ | 167,313 | | $ | 46,198 | | $ | 12,344 | | $ | 16,846 | | $ | 19,525 | | $ | 428,034 | |
Nonperforming | | 1,512 | | | 386 | | | 1,639 | | | 81 | | | 195 | | | 29 | | | — | | | 3,842 | |
Total | $ | 133,031 | | $ | 34,675 | | $ | 168,952 | | $ | 46,279 | | $ | 12,539 | | $ | 16,875 | | $ | 19,525 | | $ | 431,876 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One-to-four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total |
| Performing | $ | 156,580 |
| | $ | 27,657 |
| | $ | 211,068 |
| | $ | 61,390 |
| | $ | 16,905 |
| | $ | 29,120 |
| | $ | 4,894 |
| | $ | 40,612 |
| | $ | 548,226 |
|
| Nonperforming | 837 |
| | 722 |
| | 201 |
| | 92 |
| | 206 |
| | — |
| | 8 |
| | 217 |
| | 2,283 |
|
| Total | $ | 157,417 |
| | $ | 28,379 |
| | $ | 211,269 |
| | $ | 61,482 |
| | $ | 17,111 |
| | $ | 29,120 |
| | $ | 4,902 |
| | $ | 40,829 |
| | $ | 550,509 |
|
Impaired Loans. A loan is considered impaired when the Company has determined that it 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, the Company takes 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 loans and the borrowers, including payment history and amounts 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
Notes to Consolidated Financial Statements
impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses.
The following table presents
Impaired loans
individually evaluated for impairment as ofat December 31,
20152018 and 2017, by type of loan
were as follows (in thousands):
| Recorded
Investment | Unpaid
Principal
Balance | Related
Allowance | Average
Recorded
Investment | Interest
Income
Recognized |
With no related allowance recorded:
| | | | | | | | | | | | | | | |
One- to four- family | $ | 499 | | $ | 615 | | $ | — | | $ | 1,390 | | $ | 23 | |
Home equity | | 162 | | | 162 | | | — | | | 341 | | | 7 | |
Commercial and multifamily | | 1,430 | | | 1,430 | | | — | | | 1,051 | | | 80 | |
Construction and land | | — | | | — | | | — | | | 40 | | | — | |
Manufactured homes | | — | | | — | | | — | | | 52 | | | — | |
Other consumer | | — | | | — | | | — | | | 28 | | | — | |
Commercial business | | — | | | — | | | — | | | 61 | | | — | |
Total | | 2,091 | | | 2,207 | | | — | | | 2,963 | | | 110 | |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | | | Recorded Investment | | |
| | Unpaid Principal Balance | | Without Allowance | | With Allowance | | Total Recorded Investment | | Related Allowance |
| One-to-four family | $ | 2,894 |
| | $ | 1,085 |
| | $ | 1,675 |
| | $ | 2,760 |
| | $ | 228 |
|
| Home equity | 520 |
| | 359 |
| | 81 |
| | 440 |
| | 25 |
|
| Commercial and multifamily | 702 |
| | 702 |
| | — |
| | 702 |
| | — |
|
| Construction and land | 163 |
| | 123 |
| | 40 |
| | 163 |
| | 8 |
|
| Manufactured homes | 430 |
| | — |
| | 424 |
| | 424 |
| | 299 |
|
| Other consumer | 156 |
| | — |
| | 157 |
| | 157 |
| | 64 |
|
| Commercial business | 1,192 |
| | 659 |
| | 533 |
| | 1,192 |
| | 112 |
|
| Total | $ | 6,057 |
| | $ | 2,928 |
| | $ | 2,910 |
| | $ | 5,838 |
| | $ | 736 |
|
TABLE OF CONTENTS
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | | | Recorded Investment | | |
| | Unpaid Principal Balance | | Without Allowance | | With Allowance | | Total Recorded Investment | | Related Allowance |
| One-to-four family | $ | 6,562 |
| | $ | 3,197 |
| | $ | 3,059 |
| | $ | 6,256 |
| | $ | 555 |
|
| Home equity | 1,149 |
| | 677 |
| | 351 |
| | 1,028 |
| | 120 |
|
| Commercial and multifamily | 1,722 |
| | 1,699 |
| | — |
| | 1,699 |
| | — |
|
| Construction and land | 141 |
| | 100 |
| | 41 |
| | 141 |
| | 13 |
|
| Manufactured homes | 409 |
| | 23 |
| | 362 |
| | 385 |
| | 258 |
|
| Other consumer | 194 |
| | 125 |
| | 69 |
| | 194 |
| | 43 |
|
| Commercial business | 1,017 |
| | 784 |
| | 216 |
| | 1,000 |
| | 135 |
|
| Total | $ | 11,194 |
| | $ | 6,605 |
| | $ | 4,098 |
| | $ | 10,703 |
| | $ | 1,124 |
|
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Income on impaired loans for the year ended December 31, 2018 and 2017, by type of loan were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 | | Year Ended December 31, 2017 |
| | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| One-to-four family | $ | 4,704 |
| | $ | 214 |
| | $ | 5,514 |
| | $ | 320 |
|
| Home equity | 740 |
| | 29 |
| | 931 |
| | 38 |
|
| Commercial and multifamily | 2,564 |
| | 140 |
| | 1,643 |
| | 96 |
|
| Construction and land | 726 |
| | 95 |
| | 112 |
| | 4 |
|
| Manufactured homes | 414 |
| | 35 |
| | 349 |
| | 29 |
|
| Other consumer | 169 |
| | 9 |
| | 129 |
| | 10 |
|
| Commercial business | 1,854 |
| | 140 |
| | 809 |
| | 62 |
|
| Total | $ | 11,171 |
| | $ | 662 |
| | $ | 9,487 |
| | $ | 559 |
|
Notes to Consolidated Financial Statements
| Recorded
Investment | Unpaid
Principal
Balance | Related
Allowance | Average
Recorded
Investment | Interest
Income
Recognized |
With an allowance recorded:
| | | | | | | | | | | | | | | |
One- to four- family | | 5,280 | | | 5,396 | | | 647 | | | 3,686 | | | 246 | |
Home equity | | 742 | | | 832 | | | 110 | | | 748 | | | 30 | |
Commercial and multifamily | | 536 | | | 536 | | | 36 | | | 1,357 | | | 10 | |
Construction and land | | 91 | | | 91 | | | 18 | | | 106 | | | 5 | |
Manufactured homes | | 361 | | | 366 | | | 63 | | | 332 | | | 29 | |
Other consumer | | 5 | | | 5 | | | — | | | 11 | | | 1 | |
Commercial business | | 114 | | | 114 | | | 8 | | | 68 | | | 6 | |
Total | | 7,129 | | | 7,340 | | | 882 | | | 6,308 | | | 327 | |
Totals:
| | | | | | | | | | | | | | | |
One- to four- family | | 5,779 | | | 6,011 | | | 647 | | | 5,076 | | | 269 | |
Home equity | | 904 | | | 994 | | | 110 | | | 1,089 | | | 37 | |
Commercial and multifamily | | 1,966 | | | 1,966 | | | 36 | | | 2,408 | | | 90 | |
Construction and land | | 91 | | | 91 | | | 18 | | | 146 | | | 5 | |
Manufactured homes | | 361 | | | 366 | | | 63 | | | 384 | | | 29 | |
Other consumer | | 5 | | | 5 | | | — | | | 39 | | | 1 | |
Commercial business | | 114 | | | 114 | | | 8 | | | 129 | | | 6 | |
Total | $ | 9,220 | | $ | 9,547 | | $ | 882 | | $ | 9,271 | | $ | 437 | |
The following table presents loans individually evaluated for impairment as of December 31, 2014 by type of loan (in thousands):
| Recorded
Investment | Unpaid
Principal
Balance | Related
Allowance | Average
Recorded
Investment | Interest
Income
Recognized |
With no related allowance recorded:
| | | | | | | | | | | | | | | |
One- to four- family | $ | 2,096 | | $ | 2,340 | | $ | — | | $ | 1,314 | | $ | 83 | |
Home equity | | 494 | | | 555 | | | — | | | 370 | | | 17 | |
Commercial and multifamily | | 1,492 | | | 1,542 | | | — | | | 1,743 | | | 74 | |
Construction and land | | 100 | | | 100 | | | — | | | 61 | | | 1 | |
Manufactured homes | | 87 | | | 94 | | | — | | | 93 | | | 7 | |
Other consumer | | 21 | | | 21 | | | — | | | 19 | | | 3 | |
Commercial business | | 124 | | | 124 | | | — | | | 230 | | | 6 | |
Total | | 4,414 | | | 4,776 | | | — | | | 3,830 | | | 191 | |
With an allowance recorded:
| | | | | | | | | | | | | | | |
One- to four- family | | 2,090 | | | 2,090 | | | 258 | | | 3,082 | | | 93 | |
Home equity | | 753 | | | 847 | | | 28 | | | 1,053 | | | 30 | |
Commercial and multifamily | | 1,464 | | | 1,464 | | | 8 | | | 1,592 | | | 72 | |
Construction and land | | 80 | | | 80 | | | 14 | | | 134 | | | 4 | |
Manufactured homes | | 317 | | | 317 | | | 41 | | | 433 | | | 24 | |
Other consumer | | 30 | | | 30 | | | 18 | | | 23 | | | 2 | |
Commercial business | | — | | | — | | | — | | | 83 | | | — | |
Total | | 4,734 | | | 4,828 | | | 367 | | | 6,400 | | | 225 | |
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
| Recorded
Investment | Unpaid
Principal
Balance | Related
Allowance | Average
Recorded
Investment | Interest
Income
Recognized |
Totals:
| | | | | | | | | | | | | | | |
One- to four- family | | 4,186 | | | 4,430 | | | 258 | | | 4,396 | | | 176 | |
Home equity | | 1,247 | | | 1,402 | | | 28 | | | 1,423 | | | 47 | |
Commercial and multifamily | | 2,956 | | | 3,006 | | | 8 | | | 3,335 | | | 146 | |
Construction and land | | 180 | | | 180 | | | 14 | | | 195 | | | 5 | |
Manufactured homes | | 404 | | | 411 | | | 41 | | | 526 | | | 31 | |
Other consumer | | 51 | | | 51 | | | 18 | | | 42 | | | 5 | |
Commercial business | | 124 | | | 124 | | | — | | | 313 | | | 6 | |
Total | $ | 9,148 | | $ | 9,604 | | $ | 367 | | $ | 10,230 | | $ | 416 | |
Forgone interest on nonaccrual loans was $104,000$172,000 and $78,000 at$33,000 for the year ended December 31, 20152018 and 2014,2017, respectively. There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual, TDR or impaired at December 31, 20152018 and 2014.
2017.
Troubled debt restructurings. Loans classified as TDRs totaled $6.0$2.8 million and $7.7$3.7 million at December 31, 20152018 and 2014, respectively.2017, respectively, and are included in impaired loans. A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession of some kind. The Company has granted, in its TDRs, a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:
Rate Modification: A modification in which the interest rate is changed.
Term Modification: A modification in which the maturity date, timing of payments or frequency of payments is changed.
Payment Modification:Modifications: A modification in which the dollar amount of the payment is changed. Interest only modifications in which a loan inis 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.The following table presents new TDRs by type of modification
There were six loans totaling $695,000, that
occurredwere modified as a TDR during the year ended December 31,
2015 (dollars in thousands): | Twelve months ended December 31, 2015 |
| Number of
Contracts | Rate
Modifications | Term
Modifications | Payment
Modifications | Combination
Modifications | Total
Modifications |
Commercial and multifamily | | 1 | | $ | — | | $ | — | | $ | — | | $ | 368 | | $ | 368 | |
Total | | 1 | | $ | — | | $ | — | | $ | — | | $ | 368 | | $ | 368 | |
2018. The following table presents new TDRs by type of modification that occurredTDR loans were paid off during the year ended December 31, 2014 (dollars2018: two one-to-four family residential loans totaling $1.4 million and two home equity loans totaling $95,000. In addition to the aforementioned payoffs, there was a charge-off of one manufactured home TDR loan totaling $11,000 during the year ended December 31, 2018.
There was one post-modification change of $11,000 charge-offs in
thousands): | Twelve months ended December 31, 2014 |
| Number of
Contracts | Rate
Modifications | Term
Modifications | Payment
Modifications | Combination
Modifications | Total
Modifications |
One- to four- family | | 2 | | $ | — | | $ | — | | $ | — | | $ | 407 | | $ | 407 | |
Home equity | | 2 | | | — | | | — | | | — | | | 74 | | | 74 | |
Commercial and multifamily | | 1 | | | — | | | — | | | — | | | 1,464 | | | 1,464 | |
Total | | 5 | | $ | — | | $ | — | | $ | — | | $ | 1,945 | | $ | 1,945 | |
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
manufactured home loans, that was recorded as a result of the TDRs for the year ended December 31, 2018. There were no post-modification changes for the unpaid principal balance in loans, net of partial charge-offs, that were recorded as a result of the TDRs for the yearsyear ended December 31, 2015 and 2014.
The following table represents loans modified as2017. There were three TDRs totaling $362,000 for which there was a payment default within the first 12 months of modification during the year ended December 31, 2018. There were no TDRs for which there was a payment default within the first 12 months of modification during the twelve monthsyear ended December 31, 2015 and 2014 (in thousands):
| 2015 | 2014 |
One- to four- family | $ | — | | $ | 174 | |
Home equity | | — | | | — | |
Total | $ | — | | $ | 174 | |
For the preceding table, a loan was considered in default when a payment was 31 days past due. None of the defaults reached 90 days past due at December 31, 2015 or 2014.
At December 31, 2015, six TDRs for $533,000 were on nonaccrual and none were 60-89 days past due. At December 31, 2014, one TDR for $55,000 was on nonaccrual but current on payments and two TDRs totaling $276,000 were 60-89 days past due.
The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in TDRs. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses.
In the ordinary course of business, the Company makes loans to its directors and officers. Certain loans to directors, officers, and employees are offered at discounted rates as compared to other customersclients as permitted by federal regulations. Employees, officers, and directors are eligible for mortgage loans with an adjustable rate that resets annually to 1% over the rolling cost of funds. Employees and officers are eligible for consumer loans that are 1% below the market loan rate at the time of origination. Director and officer loans are summarized as follows (in thousands):
| December 31, |
| 2015 | 2014 |
Balance, beginning of period | $ | 4,675 | | $ | 5,214 | |
Advances | | 69 | | | 49 | |
New / (retired) loans, net | | 174 | | | (381 | ) |
Repayments | | (826 | ) | | (207 | ) |
Balance, end of period | $ | 4,093 | | $ | 4,675 | |
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Balance, beginning of period | $ | 4,012 |
| | $ | 3,180 |
|
| Advances | 291 |
| | 248 |
|
New / (reclassified) loans, net (1) | (526 | ) | | 1,387 |
|
| Repayments | (407 | ) | | (803 | ) |
| Balance, end of period | $ | 3,370 |
| | $ | 4,012 |
|
(1) Reclassified loans relate to changes in related parties during the year.
At December 31, 20152018 and 2014, respectively,2017, loans totaling $7.8$5.8 million and $15.5$8.1 million, representrespectively, represented real estate secured loans that had current loan-to-value ratios above supervisory guidelines.
Note 6 – Mortgage Servicing Rights
The unpaid principal balances of loans serviced for Federal National Mortgage Association (FNMA)("Fannie Mae") at December 31, 20152018 and 2014,2017, totaled approximately $360.4$352.2 million and $357.8$361.1 million, respectively, and are not included in the Company’sCompany's consolidated financial statements. The CompanyWe also servicesservice loans for other financial institutions.institutions for which a servicing fee is received. The unpaid principal balances of loans serviced for other financial institutions at December 31, 20152018 and 2014,2017, totaled approximately $9.4$2.2 million and $14.2
Notes to Consolidated Financial Statements
$19.9 million, respectively, and
wasare not included in the
Company’sCompany's financial statements.
In addition to the foregoing, there were $24.3 million and $31.5 million of loans from Fannie Mae and other financial institutions not included in the Company's financial statements at December 31, 2018 and 2017, respectively, for which we outsource the servicing and pay a fee to third party. TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
A summary of the change in the balance of mortgage servicing assets at December 31, 20152018 and 20142017 is as follows (in thousands):
| Year Ended December 31, |
| 2015 | 2014 |
Beginning balance, at fair value | $ | 3,028 | | $ | 2,984 | |
Servicing rights that result from transfers of financial assets | | 679 | | | 505 | |
Changes in fair value:
| | | | | | |
Due to changes in model inputs or assumptions(1) | | 210 | | | 328 | |
Other(2) | | (668 | ) | | (789 | ) |
Ending balance, at fair value | $ | 3,249 | | $ | 3,028 | |
| (1) | Represents changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates. |
|
| | | | | | | |
| | At December 31, |
| | 2018 | | 2017 |
| Beginning balance, at fair value | $ | 3,426 |
| | $ | 3,561 |
|
| Servicing rights that result from transfers and sale of financial assets | 482 |
| | 277 |
|
| Changes in fair value: | | | |
Due to changes in model inputs or assumptions(1) | (494 | ) | | (412 | ) |
| Ending balance, at fair value | $ | 3,414 |
| | $ | 3,426 |
|
| (2) | Represents changes due to collection or realization of expected cash flows over time. |
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
The key economic assumptions used in determining the fair value of mortgage servicing rights wereat the dates indicated are as follows: | At December 31, |
| 2015 | 2014 |
Prepayment speed (PSA) | | 178 | % | | 216 | % |
Weighted-average life (years) | | 6.7 | | | 5.9 | |
Yield to maturity discount rate | | 10.0 | % | | 10.0 | % |
|
| | | | | |
| | At December 31, |
| | 2018 | | 2017 |
| Prepayment speed (Public Securities Association "PSA" model) | 123 | % | | 160 | % |
| Weighted-average life | 7.7 years |
| | 6.9 years |
|
| Yield to maturity discount rate | 12.5 | % | | 13.0 | % |
The amountamounts of contractually specified servicing, late and ancillary fees earned and recorded, net of fair value market adjustments to the mortgage servicing rights, are included in mortgage servicing income on the Consolidated Statements of Income was $840,000which were $562,000 and $509,000,$566,000, for the years ended December 31, 20152018 and 2014,2017, respectively.
Note 7 – Premises and Equipment
Premises and equipment at December 31,
20152018 and
20142017 are summarized as follows (in thousands):
| At December 31, |
| 2015 | 2014 |
Land | $ | 653 | | $ | 653 | |
Buildings and improvements | | 4,739 | | | 5,390 | |
Furniture and equipment | | 2,752 | | | 1,702 | |
Less: Accumulated depreciation and amortization | | (2,809 | ) | | (2,190 | ) |
Premises and equipment, net | $ | 5,335 | | $ | 5,555 | |
|
| | | | | | | |
| | At December 31, |
| | 2018 | | 2017 |
| Land | $ | 920 |
| | $ | 920 |
|
| Buildings and improvements | 6,393 |
| | 6,302 |
|
| Furniture and equipment | 5,203 |
| | 4,715 |
|
| Less: Accumulated depreciation and amortization | (5,472 | ) | | (4,545 | ) |
| Premises and equipment, net | $ | 7,044 |
| | $ | 7,392 |
|
Depreciation and amortization expense was
$620,000$989,000 and
$555,000,$943,000, for the years ended December 31,
20152018 and
2014,2017, respectively.
The Company leases office space in several buildings. Generally, operating leases contain renewal options and provisions requiring the Company to pay property taxes and operating expenses over base period amounts. All rental payments are dependent only upon the lapse of time.
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Minimum rental payments under non-cancelable operating leases with initial or remaining terms of one year or more are as follows (in thousands):
Year ending
December 31, | Amount |
2016 | $ | 1,101 | |
2017 | | 1,270 | |
2018 | | 933 | |
2019 | | 903 | |
2020 | | 858 | |
Thereafter | | 6,981 | |
| $ | 12,046 | |
|
| | | |
| Year Ended December 31, | Amount |
| 2019 | $ | 1,085 |
|
| 2020 | 1,043 |
|
| 2021 | 986 |
|
| 2022 | 960 |
|
| 2023 | 931 |
|
| Thereafter | 4,820 |
|
| | $ | 9,825 |
|
The total rental expense for the years ended December 31, 20152018 and 20142017 for all facilities leased under operating leases was approximately $877,000$1.4 million and $873,000,$1.1 million, respectively.
Note 8 – Other Real Estate Owned and Repossessed Assets
The following table presents activity related to OREO and other repossessed assets for the periods shown (in thousands):
| Year ended December 31, |
| 2015 | 2014 |
Beginning balance | $ | 323 | | $ | 1,178 | |
Additions to OREO and repossessed assets | | 1,383 | | | 608 | |
Capitalized improvements | | — | | | 12 | |
Pay downs/Sales | | (736 | ) | | (1,447 | ) |
Write-downs/Losses | | (201 | ) | | (28 | ) |
| $ | 769 | | $ | 323 | |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| Beginning balance | $ | 610 |
| | $ | 1,172 |
|
| Additions to OREO and repossessed assets | 55 |
| | — |
|
| Sales | (16 | ) | | (468 | ) |
| Write-downs/Losses | (74 | ) | | (94 | ) |
| | $ | 575 |
| | $ | 610 |
|
A summary of deposit accounts with the corresponding weighted average cost of funds at December 31,
20152018 and
20142017, are presented below (dollars in thousands):
| As of December 31, 2015 | As of December 31, 2014 |
| Deposit
Balance | Wtd Avg
Rate | Deposit
Balance | Wtd Avg
Rate |
Noninterest-bearing demand | $ | 48,067 | | | 0.00 | % | $ | 41,773 | | | 0.00 | % |
Interest-bearing demand | | 127,392 | | | 0.42 | | | 103,048 | | | 0.43 | |
Savings | | 38,833 | | | 0.18 | | | 33,233 | | | 0.16 | |
Money market | | 54,046 | | | 0.16 | | | 55,236 | | | 0.27 | |
Certificates | | 168,880 | | | 1.22 | | | 171,939 | | | 1.03 | |
Escrow(1) | | 2,806 | | | 0.00 | | | 2,580 | | | 0.00 | |
Total | $ | 440,024 | | | 0.63 | % | $ | 407,809 | | | 0.60 | % |
|
| | | | | | | | | | | | | |
| | As of December 31, 2018 | | As of December 31, 2017 |
| | Deposit Balance | | Wtd. Avg Rate | | Deposit Balance | | Wtd. Avg Rate |
| Noninterest-bearing demand | $ | 93,823 |
| | — | % | | $ | 69,094 |
| | — | % |
| Interest-bearing demand | 164,919 |
| | 0.47 |
| | 173,413 |
| | 0.43 |
|
| Savings | 54,102 |
| | 0.29 |
| | 49,450 |
| | 0.21 |
|
| Money market | 46,689 |
| | 0.24 |
| | 54,860 |
| | 0.21 |
|
| Certificates | 191,825 |
| | 1.58 |
| | 164,554 |
| | 1.33 |
|
Escrow (1) | 2,243 |
| | — |
| | 3,029 |
| | — |
|
| Total | $ | 553,601 |
| | 0.71 | % | | $ | 514,400 |
| | 0.61 | % |
| |
| (1) | Escrow balances shown in noninterest-bearing deposits on the consolidated balance sheetssheets. |
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Scheduled maturities of time deposits at December 31,
20152018, are as follows (in thousands):
Year Ending
December 31, | Amount |
2016 | $ | 100,780 | |
2017 | | 50,127 | |
2018 | | 11,687 | |
2019 | | 2,236 | |
Thereafter | | 4,050 | |
| $ | 168,880 | |
|
| | | |
| Year Ending December 31, | Amount |
| 2019 | $ | 110,749 |
|
| 2020 | 53,052 |
|
| 2021 | 16,129 |
|
| 2022 | 8,509 |
|
| Thereafter | 3,386 |
|
| | $ | 191,825 |
|
Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of five years or less.
The aggregate amount of time deposits in denominations of
more than $250,000
or more at December 31,
20152018 and
20142017, was approximately
$63.3$52.7 million and
$54.5$47.1 million, respectively. Deposits in excess of $250,000 are not federally insured. There were
$4.7 million and $5.0 million ofno brokered deposits
outstanding at December 31,
2015 and 2014, respectively.2018 compared to $512,000 at December 31, 2017.
Deposits from related parties held by the Company were
$3.0$2.8 million and
$2.2$1.7 million at December 31,
20152018 and
2014,2017, respectively.
The Company utilizes a loan agreement with the
FHLB of Des Moines.FHLB. The terms of the agreement call for a blanket pledge of a portion of the
Company’sCompany's mortgage
and commercial and multifamily portfolio based on the outstanding balance. At December 31,
20152018 and
2014,2017, the amount available to borrow under this credit facility was
$174.0$321.5 million and
$133.3$217.6 million, respectively. At December 31,
2015,2018, the credit facility was collateralized as follows: one- to four- family mortgage loans with
a market valuean advance equivalent of
$101.0$128.4 million, commercial and multifamily mortgage loans with
a market valuean advance equivalent of
$130.6$119.8 million and home equity loans with
a market valuean advance equivalent of
$8.0$6.3 million. At December 31, 2017, the credit facility was collateralized as follows: one- to four- family mortgage loans with an advance equivalent of $111.5 million, commercial and multifamily mortgage loans with an advance equivalent of $103.0 million and home equity loans with an advance equivalent of $15.2 million. The Company had outstanding borrowings under this arrangement of
$40.4$84.0 million and
$30.6$59.0 million at December 31,
20152018 and
2014,2017, respectively.
The weighted-average interest rate of our borrowings was 2.72% at December 31, 2018 and was 1.63% at December 31, 2017. Additionally, the Company had outstanding letters of credit from the FHLB
of Des Moines with a notional amount of
$47.5$14.5 million
and 42.5 millionboth at December 31,
20152018 and
December 31, 2014,2017, respectively, to secure public deposits. The
net remaining amount available
to borrow as of December 31,
20152018 and
December 31, 2014,2017, was
$86.1$156.0 million and
$60.3$144.1 million, respectively.
Contractual Overnight federal funds with contractual principal repayments at the balance sheet date noted below of outstanding borrowings$59.0 million, with a weighted-average interest rate of 2.63% and a Repo with contractual principal repayments of $8.8 million, with a weighted-average interest rate of 2.85% at December 31, 20152018, are as follows (dollarsdue within one year. Fixed rate advances of $8.8 million, with a weighted-average interest rate of 2.96% are due within a year and $7.5 million, with a weighted-average interest rate of 3.05%, are due in thousands):
Year Ending
December 31, | Amount |
2016 | $ | 40,143 | |
2017 | | 292 | |
Total | $ | 40,435 | |
The maximum amount outstanding from the FHLB under term advances at month endmonth-end during 20152018 was $45.0$99.5 million and during 20142017 was $47.0$61.5 million. The average balance outstanding was $69.9 million during 2015 was $24.62018 and $29.8 million and during 2014 was $26.4 million.2017. The weighted averageweighted-average interest rate on the borrowings was 0.43%2.18% in 20152018 and 0.58%1.16% in 2014.
2017.
As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in the FHLB of Des Moines stock based on specific percentages of its outstanding FHLB advances. At December 31, 2018 and 2017, the Company had an investment of $4.1 million and $3.1 million, respectively, in FHLB of Des Moines stock.
The Company participates in the Federal Reserve Bank
(“FRB”("FRB") Borrower-in-Custody program, which gives the Company access to the discount window. The terms of the program call for a pledge of specific assets. The Company
pledges commercial and consumer loans as collateral for this line of credit. The Company had unused borrowing capacity of
$25.9$47.3 million and
$21.8$51.2 million and no outstanding borrowings under this program at December 31,
20152018 and
2014,2017, respectively.
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company has access to an unsecured
Fed Funds line of credit from the Pacific Coast
Banker’sBanker's Bank. The line has a
two-yearone-year term maturing on June 30,
20162019 and is renewable
biannually.annually. As of December 31,
2015,2018, the amount available under this line of credit was $2.0 million. There was no balance on this line of credit as of December 31,
20152018 and
2014,2017, respectively.
The Company has access to a Fed Funds line of credit from Zions Bank under a Fed Funds Sweep and Line
Agreement established September 26, 2014.Agreement. The agreement allows access to a Fed Funds Line of up to $9.0 million and requires the Company to maintain cash balances with Zions Bank of $250,000. The agreement
has no maturity date.may be terminated by either party. There was no balance on this line of credit as of December 31,
20152018 and
2014,2017, respectively.
The Company has access to an unsecured Fed Funds line of credit from The Independent Bank (TIB). As of December 31, 2015,2018, the amount available under this line of credit was $10.0 million. The agreement may be terminated by either party. There was no balance on this line of credit as of December 31, 2015.2018 and 2017, respectively.
Note 11 – Fair Value Measurements
On January 1, 2018, the Company adopted ASU 2016-01, which requires us to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
The Company determines the fair values of its financial instruments based on the requirements established in ASC 820, Fair Value Measurements, which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 defines fair values for financial instruments as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. The Company’s fair values for financial instruments at December 31, 2018 were determined based on these requirements.
The following methods and assumptions were used to estimate the fair value of other financial instruments:
Cash and cash equivalents - The estimated fair value is equal to the carrying amount.
Available-for-Sale Securities - Available-for-sale securities are recorded at fair value based on quoted market prices, if available. If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 2 securities include those traded on an active exchange, as well as U.S. government securities.
Loans Held-for-Sale - Residential mortgage loans held-for-sale are recorded at the lower of cost or fair value. The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from government sponsored enterprises. At December 31, 2018 and 2017, loans held-for-sale were carried at cost, as no impairment was required.
Loans Held for Portfolio - The estimated fair value of loans consists of a credit adjustment to reflect the estimated adjustment to the carrying value of the loans due to credit-related factors and a yield adjustment, to reflect the estimated adjustment to the carrying value of the loans due to a differential in yield between the portfolio loan yields and estimated current market rate yields on loans with similar characteristics.
Mortgage Servicing Rights -The fair value of mortgage servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs.
FHLB stock - The estimated fair value is equal to the par value of the stock.
Non-maturity deposits - The estimated fair value is equal to the carrying amount.
Time deposits - The estimated fair value of time deposits is based on the difference between interest costs paid on the Company's time deposits and current market rates for time deposits with comparable characteristics.
Borrowings - The fair value of borrowings are estimated using the Company’s current incremental borrowing rates for similar
Notes to Consolidated Financial Statements
types of borrowing arrangements.
A description of the valuation methodologies used for impaired loans and OREO is as follows:
Impaired Loans - The fair value of collateral dependent loans is based on the current appraised value of the collateral less estimated costs to sell, or internally developed models utilizing a calculation of expected discounted cash flows which contain management’s assumptions.
OREOand Repossessed Assets - The fair value of OREO and repossessed assets is based on the current appraised value of the collateral less estimated costs to sell.
Off-balance sheet financial instruments - The fair value for the Company's off-balance sheet loan commitments are estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the Company's clients. The estimated fair value of these commitments is not significant.
The following tables
presentspresent information about the level in the fair value hierarchy for the
Company’sCompany's financial instruments as of December 31,
20152018 and
20142017 (in thousands):
| December 31, 2015 | Fair Value Measurements Using: |
| Carrying
Value | Estimated
Fair Value | Level 1 | Level 2 | Level 3 |
FINANCIAL ASSETS:
| | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 48,264 | | $ | 48,264 | | $ | 48,264 | | $ | — | | $ | — | |
Available for sale securities | | 6,696 | | | 6,696 | | | — | | | 6,268 | | | 428 | |
Loans held-for-sale | | 2,091 | | | 2,091 | | | — | | | 2,091 | | | — | |
Loans, net | | 454,833 | | | 454,854 | | | — | | | — | | | 454,854 | |
Accrued interest receivable | | 1,608 | | | 1,608 | | | 1,608 | | | — | | | — | |
Mortgage servicing rights | | 3,249 | | | 3,249 | | | — | | | — | | | 3,249 | |
FHLB Stock | | 2,212 | | | 2,212 | | | — | | | — | | | 2,212 | |
FINANCIAL LIABILITIES:
| | | | | | | | | | | | | | | |
Non-maturity deposits | | 271,639 | | | 271,639 | | | — | | | 271,639 | | | — | |
Time deposits | | 168,881 | | | 168,091 | | | — | | | 168,091 | | | — | |
Borrowings | | 40,435 | | | 40,421 | | | — | | | 40,421 | | | — | |
Accrued interest payable | | 72 | | | 72 | | | — | | | 72 | | | — | |
| December 31, 2014 | Fair Value Measurements Using: |
| Carrying
Value | Estimated
Fair Value | Level 1 | Level 2 | Level 3 |
FINANCIAL ASSETS:
| | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 29,289 | | $ | 29,289 | | $ | 29,289 | | $ | — | | $ | — | |
Available for sale securities | | 11,524 | | | 11,524 | | | — | | | 9,179 | | | 2,345 | |
Loans held-for-sale | | 810 | | | 828 | | | — | | | 828 | | | — | |
Loans, net | | 425,973 | | | 423,714 | | | — | | | — | | | 423,714 | |
Accrued interest receivable | | 1,497 | | | 1,497 | | | 1,497 | | | — | | | — | |
Mortgage servicing rights | | 3,028 | | | 3,028 | | | — | | | — | | | 3,028 | |
FHLB Stock | | 2,224 | | | 2,224 | | | — | | | — | | | 2,224 | |
FINANCIAL LIABILITIES:
| | | | | | | | | | | | | | | |
Non-maturity deposits | | 235,870 | | | 235,870 | | | — | | | 235,870 | | | — | |
Time deposits | | 171,939 | | | 172,334 | | | — | | | 172,334 | | | — | |
Borrowings | | 30,578 | | | 30,534 | | | — | | | 30,534 | | | — | |
Accrued interest payable | | 76 | | | 76 | | | — | | | 76 | | | — | |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | Fair Value Measurements Using: |
| | Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
| FINANCIAL ASSETS: | | | | | | | | | |
| Cash and cash equivalents | $ | 61,810 |
| | $ | 61,810 |
| | $ | 61,810 |
| | $ | — |
| | $ | — |
|
| Available for sale securities | 4,957 |
| | 4,957 |
| | — |
| | 4,957 |
| | — |
|
| Loans held-for-sale | 1,172 |
| | 1,172 |
| | — |
| | 1,172 |
| | — |
|
Loans held for portfolio, net (1) | 613,769 |
| | 613,371 |
| | — |
| | — |
| | 613,371 |
|
| Mortgage servicing rights | 3,414 |
| | 3,414 |
| | — |
| | — |
| | 3,414 |
|
| FHLB Stock | 4,134 |
| | 4,134 |
| | — |
| | 4,134 |
| | — |
|
| FINANCIAL LIABILITIES: | | | | | | | | | |
| Non-maturity deposits | 361,776 |
| | 361,776 |
| | — |
| | 361,776 |
| | — |
|
Time deposits(1) | 191,825 |
| | 191,679 |
| | — |
| | 191,679 |
| | — |
|
| Borrowings | 84,000 |
| | 84,000 |
| | — |
| | 84,000 |
| | — |
|
TABLE OF CONTENTS
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | Fair Value Measurements Using: |
| | Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
| FINANCIAL ASSETS: | | | | | | | | | |
| Cash and cash equivalents | $ | 60,680 |
| | $ | 60,680 |
| | $ | 60,680 |
| | $ | — |
| | $ | — |
|
| Available for sale securities | 5,435 |
| | 5,435 |
| | — |
| | 5,435 |
| | — |
|
| Loans held-for-sale | 1,777 |
| | 1,777 |
| | — |
| | 1,777 |
| | — |
|
Loans held for portfolio, net (1) | 543,354 |
| | 543,400 |
| | — |
| | — |
| | 543,400 |
|
| Mortgage servicing rights | 3,426 |
| | 3,426 |
| | — |
| | — |
| | 3,426 |
|
| FHLB Stock | 3,065 |
| | 3,065 |
| | — |
| | 3,065 |
| | — |
|
| FINANCIAL LIABILITIES: | | | | | | | | | |
| Non-maturity deposits | 349,846 |
| | 349,846 |
| | — |
| | 349,846 |
| | — |
|
Time deposits(1) | 164,554 |
| | 163,485 |
| | — |
| | 163,485 |
| | — |
|
| Borrowings | 59,000 |
| | 59,000 |
| | — |
| | 59,000 |
| | — |
|
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
(1) The estimated fair values of loans held for portfolio, net and time deposits for December 31, 2018 reflect exit price assumptions. The December 31, 2017 fair value estimates are not based on exit price assumptions.
Notes to Consolidated Financial Statements
The following tables present the balance of assets measured at fair value on a recurring basis as of December 31,
20152018 and
20142017 (in thousands):
| Fair Value at December 31, 2015 |
Description | Total | Level 1 | Level 2 | Level 3 |
Municipal bonds | $ | 2,096 | | $ | — | | $ | 2,096 | | $ | — | |
Agency mortgage-backed securities | | 4,172 | | | — | | | 4,172 | | | — | |
Non-agency mortgage-backed securities | | 428 | | | — | | | — | | | 428 | |
Mortgage servicing rights | | 3,249 | | | — | | | — | | | 3,249 | |
| Fair Value at December 31, 2014 |
Description | Total | Level 1 | Level 2 | Level 3 |
Municipal bonds | $ | 2,083 | | $ | — | | $ | 2,083 | | $ | — | |
Agency mortgage-backed securities | | 7,096 | | | — | | | 7,096 | | | — | |
Non-agency mortgage-backed securities | | 2,345 | | | — | | | — | | | 2,345 | |
Mortgage servicing rights | | 3,028 | | | — | | | — | | | 3,028 | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value at December 31, 2018 |
| Description | | Total | | Level 1 | | Level 2 | | Level 3 |
| Municipal bonds | | $ | 3,317 |
| | $ | — |
| | $ | 3,317 |
| | $ | — |
|
| Agency mortgage-backed securities | | 1,640 |
| | — |
| | 1,640 |
| | — |
|
| Mortgage servicing rights | | 3,414 |
| | — |
| | — |
| | 3,414 |
|
|
| | | | | | | | | | | | | | | | |
| | | Fair Value at December 31, 2017 |
| Description | | Total | | Level 1 | | Level 2 | | Level 3 |
| Municipal bonds | | $ | 3,369 |
| | $ | — |
| | $ | 3,369 |
| | $ | — |
|
| Agency mortgage-backed securities | | 2,066 |
| | — |
| | 2,066 |
| | — |
|
| Mortgage servicing rights | | 3,426 |
| | — |
| | — |
| | 3,426 |
|
For the
yearyears ended December 31,
20152018 and 2017, there were no transfers between Level 1 and Level 2
noror between Level 2 and Level 3.
The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’sCompany's assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at December 31, 2015:2018:
|
| | | | | | |
Financial Instrument | | Valuation
Technique |
| Unobservable Input(s) | | Range
(Weighted Average) |
Mortgage Servicing Rights | | Discounted cash flow | | Prepayment speed
| 105-369% (178%
| 80-515% (123%) |
| | | | Discount rate | 8%-12% (10%)
|
Non-agency
mortgage-backed
securities
| Discounted cash flow
| Discount rate
| 7%-9% (8%13%-14% (12.5%)
|
The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’sCompany's assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at December 31, 2014:
2017: |
| | | | | | |
Financial Instrument | | Valuation
Technique |
| Unobservable Input(s) | | Range
(Weighted Average) |
Mortgage Servicing Rights | | Discounted cash flow | | Prepayment speed
| 95-462% (216%
| 103-412% (160%) |
| | | | Discount rate | 8-12% (10%)
|
Non-agency
mortgage-backed
securities
| Discounted cash flow
| Discount rate
| 7%-9% (8%13%-15% (12.5%)
|
Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustment (and decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). An increase in the weighted average life assumptions will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted average life will result in an increase of the constant prepayment rate.
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
There were no assets or liabilities (excluding mortgage servicing rights) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the year ended December 31, 2018. The following table provides a reconciliation of assets and liabilities (excluding mortgage servicing rights) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the
yearsyear ended December 31,
2015 and 20142017 (in thousands):
| Year Ended December 31, |
| 2015 | 2014 |
Beginning balance, at fair value | $ | 2,345 | | $ | 2,419 | |
OTTI impairment losses | | — | | | — | |
Sales and principal payments | | (2,375 | ) | | (374 | ) |
Change in unrealized loss | | 30 | | | 300 | |
Ending balance, at fair value | $ | 428 | | $ | 2,345 | |
|
| | | | |
| | | |
| | | 2017 |
| Beginning balance, at fair value | | $ | 347 |
|
| OTTI impairment losses | | — |
|
| Sales, redemptions and principal payments | | (347 | ) |
| Change in unrealized loss | | — |
|
| Ending balance, at fair value | | $ | — |
|
Mortgage servicing rights are measured at fair value using significant unobservable input (Level 3) on a recurring basis and a reconciliation of this asset can be found in Note
76 – Mortgage Servicing Rights.
The following table presents the balance of assets measured at fair value on a nonrecurring basis and the total losses resulting from these fair value adjustments (in thousands):
| Fair Value at December 31, 2015 |
Description | Total | Level 1 | Level 2 | Level 3 |
OREO and repossessed assets | $ | 769 | | $ | — | | $ | — | | $ | 769 | |
Impaired loans | | 9,220 | | | — | | | — | | | 9,220 | |
| Fair Value at December 31, 2014 |
Description | Total | Level 1 | Level 2 | Level 3 |
OREO and repossessed assets | $ | 323 | | $ | — | | $ | — | | $ | 323 | |
Impaired loans | | 9,148 | | | — | | | — | | | 9,148 | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value at December 31, 2018 |
| Description | | Total | | Level 1 | | Level 2 | | Level 3 |
| OREO and repossessed assets | | $ | 575 |
| | $ | — |
| | $ | — |
| | $ | 575 |
|
| Impaired loans | | 5,838 |
| | — |
| | — |
| | 5,838 |
|
|
| | | | | | | | | | | | | | | | |
| | | Fair Value at December 31, 2017 |
| Description | | Total | | Level 1 | | Level 2 | | Level 3 |
| OREO and repossessed assets | | $ | 610 |
| | $ | — |
| | $ | — |
| | $ | 610 |
|
| Impaired loans | | 10,703 |
| | — |
| | — |
| | 10,703 |
|
There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31,
20152018 or December 31,
2014.2017.
The following table provides a description of the valuation technique, observable input, and qualitative information about the unobservable inputs for the Company’sCompany's assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at December 31, 2015:2018:
|
| | | | | | |
Financial
Instrument | | Valuation
Technique(s) |
| Unobservable Input(s) | | Range
(Weighted Average) |
OREO | | Market approach | | Adjusted for difference
between comparable sales | 0-57% (7%
| 0-0% (0%) |
Impaired loans | | Market approach | | Adjusted for difference
between comparable sales | | 0-100% (7%(13%) |
Notes to Consolidated Financial Statements
The following table provides a description of the valuation technique, observable input, and qualitative information about the unobservable inputs for the Company’sCompany's assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at December 31, 2014:2017:
|
| | | | | | |
Financial
Instrument | | Valuation
Technique(s) |
| Unobservable Input(s) | | Range
(Weighted Average) |
OREO | | Market approach | | Adjusted for difference
between comparable sales | 0-44% (12%
| 0-0% (0%) |
Impaired loans | | Market approach | | Adjusted for difference
between comparable sales | | 0-100% (7%(8%) |
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
A description of the valuation methodologies used for impaired loans and OREO is as follows:
Impaired Loans – The fair value of collateral dependent loans is based on the current appraised value of the collateral or internally developed models utilizing a calculation of expected discounted cash flows which contain management’s assumptions.
OREO and Repossessed Assets – The fair value of OREO and repossessed assets is based on the current appraised value of the collateral or internally developed models utilizing a calculation of expected discounted cash flows which contain management’s assumptions.
The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and cash equivalents, accrued interest receivable and payable – The estimated fair value is equal to the carrying amount.
AFS Securities – AFS securities are recorded at fair value based on quoted market prices, if available. If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 2 securities include those traded on an active exchange, as well as U.S. government and its agencies securities. Level 3 securities include private label mortgage-backed securities.
Loans Held-for-Sale – Residential mortgage loans held-for-sale are recorded at the lower of cost or fair value. The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from government sponsored enterprises. At December 31, 2015 and 2014, loans held-for-sale were carried at cost as no impairment was required.
Loans – The estimated fair value for all fixed rate loans is determined by discounting the estimated cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and maturities. The estimated fair value for variable rate loans is the carrying amount. The fair value for all loans also takes into account projected loan losses as a part of the estimate.
Mortgage Servicing Rights – The fair value of mortgage servicing rights is determined though a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs.
FHLB stock – The estimated fair value is equal to the par value of the stock, which approximates fair value.
Bank-owned Life Insurance – The estimated fair value is equal to the cash surrender value of policies, net of surrender charges.
Deposits – The estimated fair value of deposit accounts (savings, demand deposit, and money market accounts) is the carrying amount. The fair values of fixed-maturity time certificates of deposit are estimated by discounting the estimated cash flows using the current rate at which similar certificates would be issued.
Borrowings – The fair value of borrowings are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Off-balance-sheet financial instruments – The fair value for the Company’s off-balance-sheet loan commitments are estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the Company’s customers. The estimated fair value of these commitments is not significant.
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, which may be favorable or unfavorable to it. Management attempts to match maturities of assets and liabilities to the extent necessary or possible to minimize interest rate risk. However, borrowers with fixed-rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by establishing early
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
withdrawal penalties for certificates of deposit, creating interest rate floors for certain variable rate loans, adjusting terms of new loans and deposits, by borrowing at fixed rates for fixed terms and investing in securities with terms that mitigate the Company’s overall interest rate risk.
Note 12 – Earnings Per Share
Basic earnings per common share is computed by dividing net income
(which has been adjusted for distributed and undistributed earnings to participating securities) by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. Unvested share-based awards
that containcontaining non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and
shall beare included in the computation of earnings per share pursuant to the two-class method, described in
ASC 260-10-45-60B.the Accounting Standard Codification for Earnings Per Share. Diluted earnings per common share
reflectsreflect the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the
Company’sCompany's stock for the period.
Therefore, under the two-class method, the difference in EPS is not significant for these participating securities.
Earnings per share are summarized
for the periods presented in the following table
(all figures in(in thousands, except
earnings per
share)share data):
| Years Ended December 31, |
| 2015 | 2014 |
Net income | $ | 4,790 | | $ | 4,240 | |
Weighted average number of shares outstanding, basic | | 2,492 | | | 2,513 | |
Effect of potentially dilutive common shares(1) | | 88 | | | 89 | |
Weighted average number of shares outstanding, diluted | | 2,579 | | | 2,602 | |
Earnings per share, basic | $ | 1.92 | | $ | 1.69 | |
Earnings per share, diluted | $ | 1.86 | | $ | 1.63 | |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| Net income | $ | 7,039 |
| | $ | 5,125 |
|
| Weighted average number of shares outstanding, basic | 2,498 |
| | 2,504 |
|
| Effect of potentially dilutive common shares | 69 |
| | 64 |
|
| Weighted average number of shares outstanding, diluted | 2,567 |
| | 2,568 |
|
| Earnings per share, basic | $ | 2.82 |
| | $ | 2.05 |
|
| Earnings per share, diluted | $ | 2.74 |
| | $ | 2.00 |
|
| (1) | Represents the effect of the assumed exercise of warrants, assumed exercise of stock options, vesting of non-participating restricted shares, and vesting of restricted stock units, based on the treasury stock method. |
There were no anti-dilutive securities at December 31, 20152018 or 2014.
2017.Note 13 – Employee Benefits
The Company has a 401(k)
pensionretirement plan that allows employees to defer a portion of their salary into the 401(k) plan. The Company matches a portion of
employees’employees' salary deferrals.
Pension401(k) costs are accrued and funded on a current basis. The Company contributed
$135,000$172,000 and
$112,000$132,000 to the plan for the years ended December 31,
20152018 and
2014,2017, respectively.
The Company also offersBank maintains a deferred compensation account for the benefit of Ms. Stewart, which account was established in 1994 in connection with an incentive plan for designated senior managers, which providesis no longer active. Ms. Stewart was fully vested in her benefits payable at age 65. Under certain circumstances, benefits are payable to designated beneficiaries. Contributionsunder this plan as of January 2005. Pursuant to the plan are discretionary, and monies set aside to fundterms of the plan, are currentlypayments in an amount equal to the fair market value of the assets in the deferred compensation account shall be made to Ms. Stewart (or to her designated beneficiary in the event of her death) in 120 equal monthly installments commencing on the last day of the month following the month in which her employment with the Bank is terminated. In the event of the death of Ms. Stewart and her designated beneficiary prior to the account being fully paid, the remaining value of the account shall be paid in a lump sum to the beneficiary’s estate. The assets in the deferred compensation account consist of cash which is held in a certificate of deposit accounts at the CompanyBank and earns interest at market rates. At
Notes to Consolidated Financial Statements
December 31, 2018, the amounts held in the certificates of deposit at the Bank were $104,000, compared to $103,000 at December 31, 20152017.
The Bank maintains a nonqualified deferred compensation plan (the “NQDC Plan”), which was effective on January 1, 2017. The purpose of the NQDC Plan is to provide a select group of management or highly-compensated employees of the Bank with an opportunity to defer the receipt of up to eighty percent (80%) of their annual base salary, bonus, performance-based compensation and
2014 approximated $102,000any commission income and
$101,000, respectively. Theto assist the Company
made noin attracting, retaining and motivating employees of high caliber and experience. In addition to elective deferrals, the Bank may make discretionary and other contributions to
be credited to the
planaccount of any or all participants, subject to the vesting requirements set forth in the NQDC Plan. Discretionary contributions by the Bank become 100% vested upon the completion of three years of service from a participant’s effective date of participation in the NQDC Plan (with accelerated vesting upon death, disability or a change in control), while other Bank contributions (including matching contributions) vest at the rate of 20% per year, beginning with the participant’s two-year anniversary of his or her date of hire. The board of directors of the Bank agreed that in the event Ms. Stewart has a separation from service prior to January 1, 2020, the date she becomes vested in her discretionary contributions, then the Bank shall amend the NQDC Plan to provide for
immediate vesting as of the date of the separation from service. During both the years ended December 31,
20152018, and
2014.2017, the Bank made discretionary contributions to the 2017 NQDC Plan in the amount of $75,000.
Each participant’s deferred compensation account is credited with an investment return determined as if the account was invested in one or more investment funds. Each participant elects the investment funds in which his or her account shall be deemed to be invested. Distributions of vested account balances are made upon death, disability, separation from service, or a specified in-service date unforeseeable emergency. Distributions shall be made in a single cash payment or, at the election of the participant, in annual installments for a period of up to ten (10) years in the case of a separation from service and in annual installments for a period of up to five (5) years in the case of an in-service distribution.
The obligations of the Bank under the NQDC Plan are general unsecured obligations of the Bank to pay deferred compensation in the future to eligible participants in accordance with the terms of the NQDC Plan from the general assets of the Bank, although the Bank may establish a trust to hold amounts which the Bank may use to satisfy NQDC Plan distributions from time to time. Distributions from the NQDC Plan are governed by the Internal Revenue Code and the NQDC Plan. The Company may, at any time, in its sole discretion, terminate the NQDC Plan or amend or modify the NQDC Plan, in whole or in part, except that no such termination, amendment or modification shall have any retroactive effect to reduce any amounts deemed to be accrued and vested prior to such amendment.
Supplemental Executive Retirement Plans.
The Company maintains two supplemental executive retirement plans for the benefit of Ms. Stewart, which are intended to be unfunded, non-contributory defined benefit plans maintained primarily to provide her with supplemental retirement income. The first supplemental executive retirement plan
(“("SERP
1”1") was effective as
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
of August 2007. The second supplemental executive retirement plan (“("SERP 2”2") was effective as of December 30, 2011, at which time the benefits under SERP 1 were frozen. At that time, the Company also entered into a Confidentiality, Non-Competition, and Non-Solicitation Agreement with Ms. Stewart, which is discussed below.
Under the terms of SERP 1, as amended, Ms. Stewart is entitled to receive $53,320 per year for life commencing on the first day of the month following her separation from service (as defined in SERP 1) for any reason from Sound Community Bank.
No payments will be made under SERP 1 in the event of Ms.
Stewart’sStewart's death and any payments that have commenced will cease upon death. In the event Ms. Stewart is involuntarily terminated in connection with a change in control (as defined in SERP 1), she will be entitled to receive the annual benefit described in the first sentence of this paragraph commencing upon such termination (subject to any applicable cutback for payments after a change in control as required by Section 280G of the Internal Revenue Code).
Under the terms of SERP 2, as amended, upon Ms. Stewart’sStewart's termination of employment with Sound Community Bank for any reason other than death, she will be entitled to receive additional retirement benefits of $78,030$96,390 per year for life commencing on the first day of the month following the later of age 70 or her separation from service (as defined in SERP 2) from Sound Community Bank. In the event of Ms. Stewart’sStewart's death, her beneficiary will be entitled to a single lump sum payment within 90 days thereafter in an amount equal to the account value as of the death benefit valuation date, or approximately $978,000$1.2 million at December 31, 2015.2018. If a change in control occurs (as defined in SERP 2), Ms. Stewart will receive her full retirement benefit
Notes to Consolidated Financial Statements
under SERP 2 commencing upon the first day of the month following her separation from service from Sound Community Bank.
Confidentiality, Non-Competition, and Non-Solicitation Agreement.
Effective December 30, 2011, Sound Community
On January 25, 2019, the Bank entered into aan Amended and Restated Confidentiality, Non-competition, and Non-solicitation Agreement (the “Non-compete“Amended Non-compete Agreement”) with Ms. Stewart. TheThis Amended Non-compete Agreement commences uponamends and restates the Confidentiality, Non-Competition, and Non-Solicitation Agreement between the Bank and Ms. Stewart's terminationStewart as originally adopted effective December 30, 2011, as amended and restated on November 23, 2015.
The Amended Non-Compete Agreement provides that the term of
employment with usthe non-compete and
expires upon the earliernon-solicitation periods applicable to Ms. Stewart is a fixed period of
(a) 36 months from the date of Ms. Stewart’s separation from service
(as defined inwith the
Non-compete Agreement”) or (b)Company and the
date she begins receiving retirement benefits underBank (the “Restricted Period”). Under the
SERP 2, which time frame is referred to asterms of the
“Restricted Period.” In consideration of Ms. Stewart’s non-competition and non-solicitation obligations under theAmended Non-compete Agreement,
upon Ms. Stewart's termination of employment by the Bank for cause or voluntarily by Ms. Stewart (other than for good reason), Ms. Stewart will be entitled to receive a bi-monthly payment, in an amount equal to
$3,541.67,Three Thousand Five Hundred Forty-Two Dollars ($3,542), which amount shall be paid in equal bi-monthly payments during the Restricted Period beginning on the fifth day of the month following her separation from service with
Sound Community Bank, except if herthe Bank. Upon Ms. Stewart’s termination of employment
occurswith the Bank for
goodany reason
(as definedother than set forth in the
Non-compete Agreement). In the event Ms. Stewart employment terminates for good reason,preceding sentence, she will be entitled to receive an amount equal to
150 percent150% of her then-base salary plus the average of her past three years short term bonus pay, or approximately
$649,000$804,000 at December 31,
2015,2018, payable in 12 monthly installments beginning on the first day of the month following her termination. If Ms. Stewart
breaches any of the covenants contained in the Amended Non-compete Agreement, her right to any of the payments specified above after the date of the breach shall be forever forfeited. Notwithstanding the foregoing, under her Amended Non-compete Agreement, if Ms. Stewart’s employment with the Bank is involuntarily terminated or she terminates her employment with
usthe Bank for good reason
at any time within 24 months following a change in control,
(as defined in the Non-compete Agreement), Ms. Stewart will be entitled to receive
an amount equal to 150% of her then-base salary plus the
amount described in the preceding sentence, butaverage of her past three years short term bonus, payable in a lump sum.
Ms. Stewart's benefits under the Non-compete Agreement are forfeited if she breaches the terms of the agreement. No payments will be made under the agreement if Ms. Stewart’s employment ceases on account of her disability or death (and payments that have commenced will cease upon death), or if she is otherwise ineligible to work in the financial product or services industry.
Stock Options and Restricted Stock
The Company currently has two existing
shareholder approved Equity Incentive Plans,
athe 2008 Equity
InventiveIncentive Plan
(the”(the"2008
Plan”Plan") and
athe Amended and Restated 2013 Equity Incentive Plan (the
“2013 Plan”"2013 Plan")
, and together with the 2008 Plan, (the “Plans”), both of which were approved by shareholders.. The Plans permit the grant of restricted stock, restricted stock units, stock options, and stock appreciation rights.
UnderThe 2008 Plan expired in November 2018 and no further awards may be made under the 2008 Plan; provided, however, all awards outstanding under the 2008 Plan
126,287remain outstanding in accordance with their terms. Under the 2013 Plan, 181,750 shares of common stock were approved for awards for stock options and stock appreciation rights and
50,514116,700 shares of common stock were approved for awards for restricted stock and restricted stock units.
Under the 2013 Plan, 141,750 shares of common stock were approved for awards for stock options and stock appreciation rights and 56,700 shares of common stock were approved for awards for restricted stock and restricted stock units.TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
As of December 31, 2015,2018, on an adjusted basis, awards for stock options totaling 226,885261,876 shares and awards for restricted stock totaling 96,090107,193 shares of Company common stock have been granted, net of any forfeitures, to participants in the Plan. During the years ended December 31, 20152018 and 2014,2017, share-based compensation expense totaled $418,000$273,000 and $333,000,$523,000, respectively.
Notes to Consolidated Financial Statements
Stock Option Awards
All of the
The stock option awards granted
to date under the
Plans to date provide for the recipient’s award to2008 Plan vest in 20 percent annual increments commencing one year from the grant
date.date in accordance with the requirements of the 2008 Plan. The stock option awards granted to date under the 2013 Plan vest in equal annual installments of either two or four years. All of the options granted are exercisable for a period of 10 years from the date of grant, subject to vesting.
2015 grants vested 33.33% immediately with two-year vesting. The following is a summary of the
Company’sCompany's stock option plan
awardsaward activity during the period ended December 31,
2015: | Shares | Weighted-
Average
Exercise Price | Weighted-
Average
Remaining
Contractual
Term
In Years | Aggregate
Intrinsic
Value |
Outstanding at the beginning of the year | | 152,018 | | $ | 13.30 | | | 7.21 | | $ | 858,902 | |
Granted | | 40,782 | | | 18.36 | | | | | | | |
Exercised | | (7,187 | ) | | 9.13 | | | | | | | |
Forfeited | | (1,205 | ) | | 16.80 | | | | | | | |
Expired | | — | | | — | | | | | | | |
Outstanding at December 31, 2015 | | 184,407 | | $ | 14.56 | | | 6.97 | | $ | 1,490,009 | |
Exercisable | | 83,375 | | $ | 12.20 | | | 5.51 | | $ | 870,435 | |
Expected to vest, assuming a 0% forfeiture rate over the vesting term | | 184,407 | | $ | 14.56 | | | 6.97 | | $ | 1,490,009 | |
|
| | | | | | | | | | | | |
| | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term In Years | | Aggregate Intrinsic Value |
| Outstanding at the beginning of the year | 186,363 |
| | $ | 18.04 |
| | 6.26 | | $ | 2,977,279 |
|
| Granted | 3,400 |
| | 36.00 |
| | | | |
| Exercised | (49,266 | ) | | 14.92 |
| | | | |
| Forfeited | (7,321 | ) | | 17.99 |
| | | | |
| Expired | — |
| | — |
| | | | |
| Outstanding at December 31, 2018 | 133,176 |
| | 19.66 |
| | 5.89 | | 1,716,306 |
|
| Exercisable | 101,788 |
| | 18.56 |
| | 5.60 | | 1,423,658 |
|
| Expected to vest, assuming a 0% forfeiture rate over the vesting term | 31,388 |
| | $ | 23.23 |
| | 6.83 | | $ | 292,648 |
|
As of December 31,
2015,2018, there was
$579,000$56,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of
1.450.87 years.
The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. The fair value of options granted in
20152018 was determined using the following weighted-average assumptions as of the grant date.
Annual dividend yield
| 1.20%
|
Expected volatility
| 24.80%
|
Risk-free interest rate
| 1.35%
|
Expected term
| 5.0 Years
|
Weighted-average grant date fair value per option granted
| $3.83
|
|
| | | | | | | |
| | 2018 | | 2017 |
| Annual dividend yield | 1.72 | % | | 1.28 | % |
| Expected volatility | 21.75 | % | | 22.99 | % |
| Risk-free interest rate | 2.95 | % | | 2.20 | % |
| Expected term | 6.50 years | | 6.50 years |
| Weighted-average grant date fair value per option granted | $ | 7.63 |
| | $ | 6.62 |
|
The fair value of the restricted stock awards is equal to the fair value of the
Company’sCompany's stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based.
TheOutstanding restricted stock awards
granted under the 2008 Plan to date provide for vesting in 20 percent annual increments commencing one year from the grant date. The restricted stock awards granted under the 2013 Plan to date vested 33.33%vest over periods of
a recipient’s award immediately with the full compensation expense associated with those shares recognized in the first quarter of 2015. The balance of an individual’s award under the 2013 Plan vests in two equal annual installments commencing one year from the grant date with the remaining compensation expense recognized over the two year vesting period of the remaining awards.one-to-two years.TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following is a summary of the
Company’sCompany's non-vested restricted stock awards for the year ended December 31,
2015:Non-vested Shares | Shares | Weighted-
Average Grant-
Date Fair Value
Per Share | Aggregate
Intrinsic Value
Per Share |
Non-vested at January 1, 2015 | | 33,243 | | $ | 15.60 | | | | |
Granted | | 10,208 | | | 18.36 | | | | |
Vested | | (11,416 | ) | | 16.03 | | | | |
Forfeited | | (482 | ) | | 16.80 | | | | |
Expired | | — | | | | | | | |
Non-vested at December 31, 2015 | | 31,533 | | $ | 16.32 | | $ | 6.32 | |
Expected to vest assuming a 0% forfeiture rate over the vesting term | | 31,533 | | $ | 16.32 | | $ | 6.32 | |
|
| | | | | | | | | | | |
| Non-vested Shares | | Shares | | Weighted-Average Grant-Date Fair Value Per Share | | Aggregate Intrinsic Value Per Share |
| Non-vested at January 1, 2018 | | 11,785 |
| | $ | 19.05 |
| | |
| Granted | | 323 |
| | 35.27 |
| | |
| Vested | | (10,907 | ) | | 18.93 |
| | |
| Forfeited | | (343 | ) | | 18.36 |
| | |
| Expired | | — |
| | — |
| | |
| Non-vested at December 31, 2018 | | 858 |
| | 26.96 |
| | $ | 32.55 |
|
| Expected to vest assuming a 0% forfeiture rate over the vesting term | | 858 |
| | $ | 26.96 |
| | $ | 32.55 |
|
As of December 31,
2015,2018, there was
$505,000$15,000 of unrecognized compensation cost related to non-vested restricted stock granted under the Plan. The cost is expected to be recognized over the weighted-average vesting period of
1.482.29 years. The total fair value of shares vested for the years ended December 31,
20152018 and
20142017 was
$211,000$206,470 and
$227,000,$263,000, respectively.
Employee Stock Ownership Plan
In January 2008, the ESOP borrowed $1.2 million from the Company to purchase common stock of the Company. In August 2012, in conjunction with the
Company’sCompany's conversion to a full stock company from the mutual holding company structure, the ESOP borrowed an additional $1.1 million from the Company to purchase common stock of the Company.
Both loans areThe first loan for $1.2 million was paid off in 2017. The remaining loan for $1.1 million is being repaid principally by the Bank through contributions to the ESOP over a period of
ten10 years. The interest rate on the
loansloan is fixed at
4.0% and 2.25%, per
annum, respectively.annum. As of December 31,
2015,2018, the remaining
balancesbalance of the ESOP
loans were $270,000 and $701,000, respectively.loan was $362,000.
Neither the loan
balancesbalance nor the related interest expense
areis reflected on the
condensed consolidated financial statements.
At December 31,
2015,2018, the ESOP was committed to release
21,44311,340 shares of the
Company’sCompany's common stock to participants and held
88,24334,020 unallocated shares remaining to be released in future years. The
funds to purchase shares in the ESOP come from contributions the Bank makes twice a year to the Plan. For the year ended December 31, 2018, the ESOP trustee purchased 9,858 shares of the Company's common stock for inclusion in the Plan. The fair value of the
193,670171,254 restricted shares held by the ESOP trust was
$4.4$5.6 million at December 31,
2015.2018. ESOP compensation expense included in salaries and benefits was
$448,000$652,000 and
$388,000$640,000 for the years ended December 31,
20152018 and
2014,2017, respectively.
Note 14 –
Acquisition of Columbia State Bank BranchesOn August 25, 2014, the Bank completed its acquisition of three branches of Columbia State Bank (“Columbia”), located at 602 E. Front St., Port Angeles, WA 98362, 645 W. Washington St., Sequim, WA 98382, and 9500 Oak Bay Rd., Port Ludlow, WA 98365. These branch acquisitions were completed under a Purchase and Assumption Agreement between the Company and Columbia. In this transaction, the Company purchased loans, certain personal property and records at the former Columbia branches and the buildings and real estate at each location. These assets were acquired in exchange for the Bank's assumption of the deposits at the three branches, as well as the payment of a deposit premium of 2.35%.
Following completion of the transaction, the Bank closed its Sequim branch location and consolidated it into the acquired Columbia Sequim branch location and closed the acquired Columbia branch office located in Port Angeles and consolidated those operations into the Bank’s existing Port Angeles branch.
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The assets acquired and liabilities assumed were recorded at fair value. Goodwill of approximately $7,000 resulted from the acquisition and is included in other assets in the consolidated balance sheet. The amount of goodwill is equal to the amount by which the fair value of liabilities assumed exceeded the fair value of assets purchased.
There was no change to the provision for loan losses as a result of the branch acquisitions. Non-interest income included additional estimated income related to service charges on deposit accounts. Non-interest expense included additional estimated costs related to compensation, operations, occupancy and data processing.
The revenue and earnings since the acquisition date (August 25, 2014) included in the consolidated financial statements as of and for the period ended December 31, 2015, are not considered significant.
Note 15 – Income Taxes
The provision for income taxes at December 31,
20152018 and
20142017 was as follows (in thousands):
| At December 31, |
| 2015 | 2014 |
Current | $ | 2,648 | | $ | 2,475 | |
Deferred | | (359 | ) | | (137 | ) |
Total tax expense | $ | 2,289 | | $ | 2,338 | |
|
| | | | | | | |
| | At December 31, |
| | 2018 | | 2017 |
| Current | $ | 1,637 |
| | $ | 2,962 |
|
| Deferred | 69 |
| | (203 | ) |
| Rate change | — |
| | 309 |
|
| Total tax expense | $ | 1,706 |
| | $ | 3,068 |
|
On December 22, 2017, the U.S. Government enacted the Tax Act. For businesses, the Tax Act reduces the corporate federal income tax rate from a maximum of 35% to a flat 21% rate. The corporate income tax rate reduction was effective January 1, 2018. The Tax Act required a revaluation of the Company's deferred tax assets and liabilities to account for the future impact of
Notes to Consolidated Financial Statements
lower corporate tax rates and other provisions of the legislation. As a result of the Company's revaluation, the Company's deferred tax asset was reduced through an increase to the provision for income tax in 2017.
A reconciliation of the provision for income taxes for the years ended December 31,
20152018 and
20142017, with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes, is as follows (dollars in thousands):
| Years Ended December 31, |
| 2015 | 2014 |
Provision at statutory rate | $ | 2,407 | | $ | 2,237 | |
Tax-exempt income | | (63 | ) | | (154 | ) |
Other | | (55 | ) | | 183 | |
| | 2,289 | | | 2,338 | |
Federal Tax Rate | | 34.0 | % | | 34.0 | % |
Tax exempt rate | | (0.9 | ) | | (2.3 | ) |
Other | | (0.8 | ) | | 3.8 | |
Effective tax rate | | 32.3 | % | | 35.5 | % |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| Provision at statutory rate | $ | 1,836 |
| | $ | 2,786 |
|
| Tax-exempt income | (79 | ) | | (79 | ) |
| Rate change | — |
| | 309 |
|
| Other | (51 | ) | | 52 |
|
| | $ | 1,706 |
| | $ | 3,068 |
|
| Federal Tax Rate | 21.0 | % | | 35.0 | % |
| Tax exempt rate | (0.9 | ) | | (1.0 | ) |
| Rate change | — |
| | 3.8 |
|
| Other | (0.6 | ) | | 0.6 |
|
| Effective tax rate | 19.5 | % | | 38.4 | % |
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SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following table reflects the temporary differences that gave rise to the components of the Company’sCompany's deferred tax assets at December 31, 20152018 and 20142017 (in thousands):
| At December 31, |
| 2015 | 2014 |
Deferred tax assets
| | | | | | |
Deferred compensation and supplemental retirement | $ | 437 | | $ | 397 | |
Other, net | | 164 | | | 166 | |
Nonaccrual interest | | — | | | 8 | |
Equity based compensation | | 90 | | | 57 | |
Allowance for loan losses | | 641 | | | 385 | |
Total deferred tax assets | | 1,332 | | | 1,013 | |
Deferred tax liabilities
| | | | | | |
Prepaid expenses | | (79 | ) | | (66 | ) |
FHLB stock dividends | | (142 | ) | | (142 | ) |
Unrealized gain on securities | | (84 | ) | | (94 | ) |
Depreciation | | (112 | ) | | (83 | ) |
Intangible assets | | (3 | ) | | (2 | ) |
Mortgage servicing rights | | (55 | ) | | — | |
Deferred loan costs | | (322 | ) | | (460 | ) |
Total deferred tax liabilities | | (797 | ) | | (847 | ) |
Net deferred tax asset | $ | 535 | | $ | 166 | |
|
| | | | | | | |
| | At December 31, |
| | 2018 | | 2017 |
| Deferred tax assets | | | |
| Deferred compensation and supplemental retirement | $ | 411 |
| | $ | 342 |
|
| Other, net | 89 |
| | 66 |
|
| Equity based compensation | 35 |
| | 84 |
|
| Intangible assets | 66 |
| | 53 |
|
| Allowance for loan losses | 1,212 |
| | 844 |
|
| Total deferred tax assets | 1,813 |
| | 1,389 |
|
| Deferred tax liabilities | | | |
| Prepaid expenses | (59 | ) | | (62 | ) |
| FHLB stock dividends | (87 | ) | | (87 | ) |
| Unrealized gain on securities | (30 | ) | | (35 | ) |
| Depreciation | (312 | ) | | (258 | ) |
| Mortgage servicing rights | (161 | ) | | (67 | ) |
| Deferred loan costs | (728 | ) | | (380 | ) |
| Total deferred tax liabilities | (1,377 | ) | | (889 | ) |
| Net deferred tax asset | $ | 436 |
| | $ | 500 |
|
As of December 31,
20152018 and
2014,2017, the Company had no unrecognized tax benefits. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in
“Provision"Provision for income
taxes”taxes" in the Consolidated Statements of Income. During the years ended December 31,
20152018 and
2014,2017, the Company recognized no interest and penalties.
The Company or its subsidiary files an income tax return in the U.S. federal jurisdiction, and various states.jurisdiction. With few exceptions, the Company is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before 2011.2015.
Notes to Consolidated Financial Statements
Note
1615 – Minimum Regulatory Capital Requirements
The Company is a bank holding company under the supervision of the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve Board, except that, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act, effective August 30, 2018, a bank holding company with consolidated assets of less than $3 billion is generally not subject to the Federal Reserve’s capital regulations, which parallel the FDIC’s capital regulations. If the Company were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at December 31, 2018, and 2017, the Company would have exceeded all regulatory requirements. The Bank is a state-chartered, federally insured institution and thereby is subject to minimumthe capital requirements imposed by regulations of the FDIC. Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank became subject to new minimum capital adequacy adoptedestablished by the FDIC, which creates a new required ratio for common equity Tier 1 (“CET1”) capital, increases the leverage and Tier 1 capital ratios, changes the risk-weightings of certain assets for purposes of the risk-based capital ratios, creates an additional capital conservation buffer over the required capital ratios and changes what qualifies as capital for purposes of meeting these various capital requirements.FDIC. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company'sCompany’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital regulations that involve quantitative measures of their assets, liabilities, and certain off-balance- sheet items as calculated under regulatory accounting practices.
The Bank iscapital amounts and classifications are also requiredsubject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain
additional levelsminimum amounts and ratios (set forth in the following table) of
CET1 over the minimum risk-based capital levels before it may pay dividends, repurchase shares or pay discretionary bonuses.The new minimum requirements are a ratio of CET1 to total risk-weighted assets (“CET1 risk-based ratio”) of 4.5%, aand Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0%,to risk-weighted assets (as defined in the regulations) and a leverage ratio of 4.0%.
In addition to the capital requirements, there are a number of changes in what constitutes regulatory capital, subject to a certain transition periods. These changes include the phasing-out of certain instruments as qualifying capital. The Bank does not have any of these instruments. Mortgage servicing and deferred tax assets over designated percentages of CET1 are be deducted from capital, subject to a transition period ending December 31, 2017. CET1 consists of Tier 1 capital less allto average assets.
As of December 31, 2018, according to the most recent notification from the FDIC, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category.
The Bank's actual capital components thatamounts (in thousands) and ratios as of December 31, 2018 and 2017 are not considered common equity. In addition, Tier 1 capital includes accumulated other comprehensive income, which includes all unrealized gainspresented in the following table:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Actual | | Minimum Capital Requirements | | Minimum Required to be Well-Capitalized Under Prompt Corrective Action Provisions |
| | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| As of December 31, 2018 | | | | | | | | | | | | |
Tier 1 Capital to total adjusted assets (1) | | $ | 69,685 |
| | 9.73 | % | | $ | 28,659 |
| | 4.0 | % | | $ | 35,824 |
| | 5.0 | % |
Common Equity Tier 1 risk-based capital ratio (2) | | 69,685 |
| | 11.76 |
| | 26,665 |
| | 4.5 |
| | 38,516 |
| | 6.5 |
|
Tier 1 Capital to risk-weighted assets (2) | | 69,685 |
| | 11.76 |
| | 35,553 |
| | 6.0 |
| | 47,404 |
| | 8.0 |
|
Total Capital to risk-weighted assets (2) | | $ | 75,874 |
| | 12.80 | % | | $ | 47,404 |
| | 8.0 | % | | $ | 59,255 |
| | 10.0 | % |
| | | | | | | | | | | | | |
| As of December 31, 2017 | | | | | | | | | | | | |
Tier 1 Capital to total adjusted assets (3) | | $ | 62,432 |
| | 10.10 | % | | $ | 24,721 |
| | 4.0 | % | | $ | 30,902 |
| | 5.0 | % |
Common Equity Tier 1 risk-based capital ratio (4) | | 62,432 |
| | 12.03 |
| | 23,354 |
| | 4.5 |
| | 33,733 |
| | 6.5 |
|
Tier 1 Capital to risk-weighted assets (4) | | 62,432 |
| | 12.03 |
| | 31,138 |
| | 6.0 |
| | 41,518 |
| | 8.0 |
|
Total Capital to risk-weighted assets (4) | | $ | 67,868 |
| | 13.08 | % | | $ | 41,518 |
| | 8.0 | % | | $ | 51,897 |
| | 10.0 | % |
| |
| (1) | Based on total adjusted assets of $716,475 at December 31, 2018. |
| |
| (2) | Based on risk-weighted assets of $592,551 at December 31, 2018. |
| |
| (3) | Based on total adjusted assets of $618,035 at December 31, 2017. |
| |
| (4) | Based on risk-weighted assets of $518,970 at December 31, 2017. |
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
and losses on available for sale debt and equity securities, subject to a transition period end December 31, 2017. Because of the Bank’s asset size, it is not are considered an “advanced approaches banking organization” and has elected to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in our capital calculations.
The new requirements also include changes in the risk-weighting of assets to better reflect credit risk and other risk exposure. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%); and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.
In addition to the minimum
CET1,common equity Tier 1
and total capital
ratios,ratio (“CET1”), the Bank
will be required tomust maintain a capital conservation buffer consisting of additional CET1 capital
equal to 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This
new capital conservation buffer requirement
is to bewas phased in beginning in January 2016 at
an amount more than 0.625% of risk-weighted assets and
increasingincreased each year
untilto an amount more than 2.5% of risk-weighted assets when fully implemented
inon January
2019.Under the new standards, in order to be considered well-capitalized, the Bank must have to have a CET1 risk-based ratio of 6.5% (new), a Tier 1, risk-based ratio of 8% (increased from 6%), a total risk-based capital ratio of 10% (unchanged) and a leverage ratio of 5% (unchanged).
Based on its capital levels at2019. At December 31, 2015,2018, the Bank exceeded these requirements as of that date. Consistent with the Company’s goals to operate a soundconservation buffer requirement was 1.875% and profitable organization, its policy is for the Bank to maintain a “well-capitalized” status under the regulatory capital categories of the FDIC. Based on capital levels at December 31, 2015, the Bank was considered to be well-capitalized under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's “well-capitalized” status.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations) and Tier 1 capital to average assets (as defined in the regulations)actual conservation buffer was 4.80% .
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank’s actual capital amounts (in thousands) and ratios as of December 31, 2015 and 2014 are presented in the following table:
| Actual | Minimum Capital
Requirements | Minimum Required
to Be Well-Capitalized
Under Prompt
Corrective
Action Provisions |
| Amount | Ratio | Amount | | Ratio | Amount | | Ratio |
As of December 31, 2015
| | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital to total adjusted assets(1) | $ | 53,041 | | | 10.19 | % | $ | 20,812 | | | ≥ | | | 4.0 | % | $ | 26,015 | | | ≥ | | | 5.0 | % |
Common Equity Tier 1 risk-based capital ratio(1) | $ | 53,041 | | | 11.70 | % | $ | 20,401 | | | ≥ | | | 4.5 | % | $ | 29,467 | | | ≥ | | | 6.5 | % |
Tier 1 Capital to risk-weighted assets(2) | $ | 53,041 | | | 11.70 | % | $ | 27,201 | | | ≥ | | | 6.0 | % | $ | 36,268 | | | ≥ | | | 8.0 | % |
Total Capital to risk-weighted assets(2) | $ | 57,677 | | | 12.74 | % | $ | 36,268 | | | ≥ | | | 8.0 | % | $ | 45,335 | | | ≥ | | | 10.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2014
| | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital to total adjusted assets(3) | $ | 48,343 | | | 10.19 | % | $ | 18,973 | | | ≥ | | | 4.0 | % | $ | 23,716 | | | ≥ | | | 5.0 | % |
Tier 1 Capital to risk-weighted assets(4) | $ | 48,343 | | | 12.44 | % | $ | 15,540 | | | ≥ | | | 4.0 | % | $ | 23,310 | | | ≥ | | | 6.0 | % |
Total Capital to risk-weighted assets(4) | $ | 52,730 | | | 13.57 | % | $ | 31,080 | | | ≥ | | | 8.0 | % | $ | 38,850 | | | ≥ | | | 10.0 | % |
| (1) | Based on total adjusted assets of $520,307 at December 31, 2015. |
| (2) | Based on risk-weighted assets of $453,345 at December 31, 2015. |
| (3) | Based on total adjusted assets of $474,313 at December 31, 2014. |
| (4) | Based on risk-weighted assets of $388,498 at December 31, 2014. |
For a bank holding company with less than $1.0$3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary banks to be well capitalized under the prompt corrective action regulations.capitalized. If Sound Financial Bancorp was subject to regulatory guidelines for bank holding companies with $1.0$3.0 billion or more in assets, at December 31, 20152018 Sound Financial Bancorp would have exceeded all regulatory capital requirements. The estimated regulatory capital ratios calculated for Sound Financial Bancorp as of December 31, 20152018 were 10.38%9.85% for Tier 1 leverage-based capital, 11.91%11.92% for both Common Equity Tier 1 risk-based capital, Tier 1 Capital to risk-based assets and 12.93%12.96% for total risk-based capital.
Note
1716 – Concentrations of Credit Risk
Most of the Company’sCompany's business activity is with customersclients located in the state of Washington. A substantial portion of the loan portfolio is represented by real estate loans throughout western Washington. The ability of the Company’sCompany's debtors to honor their contracts is dependent upon the real estate and general economic conditions in the area. Loans to one borrower are generally limited by federal banking regulations to 15% of the Company’sCompany's unimpaired capital and surplus.
Note
1817 – Commitments and Contingencies
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its
customers.clients. These financial instruments generally represent a commitment to extend credit in the form of loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The
Company’sCompany's exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Commitments to extend credit are agreements to lend to a customerclient as long as there is no violation of any condition established by the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’sclient's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’smanagement's credit evaluation of the customer.
client.
Financial instruments whose contract amount represents credit risk were as follow (in thousands):
| At December 31, |
| 2015 | 2014 |
Commitments to make loans | $ | 6,037 | | $ | 5,615 | |
Undisbursed portion of loans closed | | 32,951 | | | 37,337 | |
Unused lines of credit | | 19,925 | | | 30,615 | |
Irrevocable letters of credit | | 185 | | | 65 | |
Total loan commitments | $ | 59,098 | | $ | 73,632 | |
|
| | | | | | | |
| | At December 31, |
| | 2018 | | 2017 |
| Commitments to make loans | $ | 3,176 |
| | $ | 1,689 |
|
| Unfunded construction commitments | 60,632 |
| | 39,400 |
|
| Unused lines of credit | 45,315 |
| | 32,440 |
|
| Irrevocable letters of credit | 1,460 |
| | 1,400 |
|
| Total loan commitments | $ | 110,583 |
| | $ | 74,929 |
|
At December 31,
2015,2018, fixed rate loan commitments totaled
$6.0$4.1 million and had a
weighted averageweighted-average interest rate of
4.0%4.93%. At December 31,
2014,2017, fixed rate loan commitments totaled
$5.6$3.4 million and had a
weighted averageweighted-average interest rate of
3.8%4.29%.
Notes to Consolidated Financial Statements
Commitments for credit may expire without being drawn upon. Therefore, the total commitment amount does not necessarily represent future cash requirements of the Company. These commitments are not reflected in the financial statements.
At December 31,
2015,2018 and 2017 both, the Company had letters of credit issued by the FHLB
of Des Moines with a notional amount of
$47.5$14.5 million in order to secure Washington State Public Funds.
In the ordinary course of business, the Company sells loans without recourse that may have to be subsequently repurchased due to defects that occurred during the origination of the loan. The defects are categorized as documentation errors, underwriting errors, early payment defaults, and fraud. When a loan sold to an investor without recourse fails to perform, the investor will typically review the loan file to determine whether defects in the origination process occurred. If a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no defects, the Company has no commitment to repurchase the loan. As of December 31,
20152018 and
2014,2017, the maximum amount of these guarantees totaled
$360.4$376.5 million and
$357.8$392.6 million, respectively. These amounts represent the unpaid principal balances of the
Company’sCompany's loans serviced for
others’others' portfolios. There were no loans repurchased during the year ended December 31,
2015. There were three loans totaling $453,0002018 and one loan with the amount of $135,000 repurchased
from Fannie Mae during the year during the year ended December 31,
2014.2017.
The Company pays certain medical, dental, prescription, and vision claims for its employees, on a self-insured basis. The Company has purchased stop-loss insurance to cover claims that exceed stated limits and has recorded estimated reserves for the ultimate costs for both reported claims and claims incurred but not reported, which
arewere not considered significant at December 31,
2015 and 2014.2017. At December 31, 2018, the Company recorded $239,000 in stop loss medical insurance claim which is included in other assets on the consolidated statements of financial condition.
At various times, the Company may be the defendant in various legal proceedings arising in connection with its business. It is the opinion of management that the financial position and the results of operations of the Company will not be materially adversely affected by the outcome of these legal proceedings and that adequate provision has been made in the accompanying consolidated financial statements.
TABLE OF CONTENTS
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note
1918 – Parent Company Financial Information
The Balance Sheets, Statements of Income, and Statements of Cash Flows for Sound Financial Bancorp (Parent Only) are presented below (dollars in thousands):
Balance sheets
| December 31, |
| 2015 | 2014 |
Assets
| | | | | | |
Cash and cash equivalents | $ | 451 | | $ | 413 | |
Investment in Sound Community Bank | | 53,483 | | | 49,443 | |
Other assets | | 586 | | | 788 | |
Total assets | $ | 54,520 | | $ | 50,644 | |
Liabilities and Stockholders’ Equity
| | | | | | |
Other liabilities | | — | | | — | |
Total liabilities | | — | | | — | |
Stockholders’ equity | | 54,520 | | | 50,644 | |
Total liabilities and stockholders’ equity | $ | 54,520 | | $ | 50,644 | |
Statements of Income
| Year Ended December 31, |
| 2015 | 2014 |
Interest income | $ | — | | $ | — | |
Dividend from subsidiary | | 1,200 | | | — | |
Other expenses | | (244 | ) | | (169 | ) |
Loss before income tax benefit and equity in undistributed net income of subsidiary | | 956 | | | (169 | ) |
Income tax benefit | | 83 | | | 46 | |
Equity in undistributed earnings of subsidiary | | 3,751 | | | 4,363 | |
Net income | $ | 4,790 | | $ | 4,240 | |
Statements of Cash Flows | Year Ended December 31, |
| 2014 | 2014 |
Cash flows from operating activities:
| | | | | | |
Net income | $ | 4,790 | | $ | 4,240 | |
Adjustments to reconcile net income to net cash provided by operating activities Other, net | | 312 | | | (81 | ) |
Change in undistributed equity of subsidiary | | (3,751 | ) | | (4,363 | ) |
Net cash used by operating activities | | 1,351 | | | (204 | ) |
Cash flows from investing activities:
| | | | | | |
Net change in ESOP loan receivable | | 457 | | | 403 | |
Net cash provided by investing activities | | 457 | | | 403 | |
Cash flows from financing activities:
| | | | | | |
Dividends paid | | (574 | ) | | (504 | ) |
excess tax benefit of stock compensation | | — | | | 39 | |
Common stock exercised | | 65 | | | 81 | |
Common stock repurchased | | (1,261 | ) | | (904 | ) |
Net cash used by financing activities | | (1,770 | ) | | (1,288 | ) |
Net increase (decrease) in cash | | 38 | | | (1,089 | ) |
Cash and cash equivalents at beginning of year | | 413 | | | 1,502 | |
Cash and cash equivalents at end of year | $ | 451 | | $ | 413 | |
|
| | | | | | | | |
| Balance sheets | | December 31, |
| | | 2018 | | 2017 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 18 |
| | $ | 882 |
|
| Investment in Sound Community Bank | | 70,785 |
| | 63,535 |
|
| Other assets | | 824 |
| | 743 |
|
| Total assets | | $ | 71,627 |
| | $ | 65,160 |
|
| Liabilities and Stockholders' Equity | | | | |
| Other liabilities | | $ | — |
| | $ | — |
|
| Total liabilities | | — |
| | — |
|
| Stockholders' equity | | 71,627 |
| | 65,160 |
|
| Total liabilities and stockholders' equity | | $ | 71,627 |
| | $ | 65,160 |
|
93
Notes to Consolidated Financial Statements
|
| | | | | | | | |
| Statements of Income | | Year Ended December 31, |
| | | 2018 | | 2017 |
| Other expenses | | $ | (310 | ) | | $ | (243 | ) |
| Income before income tax benefit and equity in undistributed net | | | | |
| Income of subsidiary | | (310 | ) | | (243 | ) |
| Income tax benefit | | 65 |
| | 83 |
|
| Equity in undistributed earnings of subsidiary | | 7,284 |
| | 5,285 |
|
| Net income | | $ | 7,039 |
| | $ | 5,125 |
|
|
| | | | | | | | |
| Statements of Cash Flows | | Year Ended December 31, |
| | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | |
| Net income | | $ | 7,039 |
| | $ | 5,125 |
|
| Adjustments to reconcile net income to net cash provided by operating activities | | | | |
| Other, net | | (65 | ) | | (83 | ) |
| Change in undistributed equity of subsidiary | | (7,284 | ) | | (5,285 | ) |
| Net cash used in operating activities | | (310 | ) | | (243 | ) |
| Cash flows from investing activities: | | | | |
| ESOP shares released | | — |
| | 671 |
|
| Net cash provided by investing activities | | — |
| | 671 |
|
| Cash flows from financing activities: | | | | |
| Dividends paid | | (1,367 | ) | | (1,505 | ) |
| Dividends received from subsidiary | | 711 |
| | — |
|
| Stock options exercised | | 102 |
| | 43 |
|
| Net cash used in financing activities | | (554 | ) | | (1,462 | ) |
| Net decrease in cash | | (864 | ) | | (1,034 | ) |
| Cash and cash equivalents at beginning of year | | 882 |
| | 1,916 |
|
| Cash and cash equivalents at end of year | | $ | 18 |
| | $ | 882 |
|
TABLE OF CONTENTSPART III
Notes to Consolidated Financial Statements
Note 19 – Revenue from Contracts with Customers
All of the Company's revenue from contracts with customers in the scope of ASC 606 - Revenue from Contracts with Customers ("ASC 606") is recognized in Noninterest Income with the exception of the net loss on OREO and repossessed assets, which is included in Noninterest Expense. The following table presents the Company's sources of Noninterest Income for the year ended December 31, 2018 and 2017 (in thousands). Items outside of the scope of ASC 606 are noted as such.
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 |
| Noninterest income: | | | | |
| Service charges and fee income | | | | |
| Account maintenance fees | | $ | 192 |
| | $ | 178 |
|
| Transaction-based and overdraft service charges | | 481 |
| | 417 |
|
| Debit/ATM interchange fees | | 927 |
| | 912 |
|
| Credit card interchange fees | | 40 |
| | 32 |
|
| Loan fees (a) | | 188 |
| | 296 |
|
| Other fees (a) | | 48 |
| | 60 |
|
| Total service charges and fee income | | 1,876 |
|
| 1,895 |
|
| Earnings on cash surrender value of bank-owned life insurance (a) | | 320 |
| | 327 |
|
| Mortgage servicing income (a) | | 562 |
| | 566 |
|
| Net gain on sale of loans (a) | | 1,258 |
| | 1,071 |
|
| Other income (a) | | 490 |
| | — |
|
| Total noninterest income | | $ | 4,506 |
|
| $ | 3,859 |
|
(a) Not within scope of ASC 606
Account maintenance fees and transaction-based and overdraft service charges
The Company earns fees from its customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and fees are recognized on a monthly basis as the service period is completed. Transaction-based fees and overdraft service fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds, overdraft, and wire services. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.
Debit/ATM and credit card interchange income
Debit/ATM interchange income represent fees earned when a debit card issued by the Bank is used for a transaction. The Bank earns interchange fees from debit cardholder transactions through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' account. Certain expenses directly associated with the debit card are recorded on a net basis with the interchange income.
The Company utilizes a third party agency relationship to brand credit cards with fees for originating new accounts paid by the issuing bank. Credit card interchange income represents fees earned when a credit card is issued by the third party agent. Similar to debit card interchange fees, the Bank earns an interchange fee for each transaction made with Sound Community Bank's branded credit cards. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' credit card. Certain expenses and rebates directly related to the credit card interchange contract are recorded net of the interchange income.
Net loss on OREO and repossessed assets
We record a gain or loss from the sale of other real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed of trust. When the Bank finances the sale of other real estate owned to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether
Notes to Consolidated Financial Statements
collectability of the transaction price is probable. Once these criteria are met, the other real estate owned asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, we adjust the transaction price and related gain or loss on sale if a significant financing component is present. The Company had a loss on the sale of OREO of $74,000 and $94,000 for the years ended December 31, 2018 and 2017, respectively, included in Noninterest Expense.
Note 20 – Subsequent Events
On January 28, 2019, the Company declared a quarterly cash dividend of 0.14 per common share, payable on February 22, 2019 to shareholders of record at the close of business February 8, 2019.
On January 28, 2019, the Company announced that its Board of Directors authorized a stock repurchase program. Under
this repurchase program, the Company may repurchase up to $1,750,000 of the Company’s outstanding shares, in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on January 31, 2019,
continuing until the earlier of the completion of the repurchase or the next six (6) months, depending upon market conditions.
The Company’s Board of Directors also authorized management to enter into a trading plan with registered broker-dealer in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to facilitate repurchases of its common stock pursuant to the above mentioned stock repurchase program.
| |
| Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
None.
| |
| Item 9A. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”"Exchange Act")) as of December 31,
2015,2018, was carried out under the supervision and with the participation of the our Chief Executive Officer, Chief Financial Officer and several other members of our senior management team within the 90-day period preceding the filing of this annual report. Our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31,
2015,2018, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management (including our Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the
SEC’sSEC's rules and forms.
We intend to continually review and evaluate the design and effectiveness of the
Company’sCompany's disclosure controls and procedures and to improve the
Company’sCompany's controls and procedures over time and to correct any deficiencies that we may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the
Company’sCompany's business. While we believe the present design of the disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.
The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
(b) Internal Control Over Financial Reporting
MANAGEMENT’S
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Sound Financial Bancorp is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The
Company’sCompany's internal control over financial reporting is a process designed to provide reasonable assurance to the
Company’sCompany's management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s There are inherent limitations in the effectiveness of any system of internal control over financial reporting, includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of overriding controls. Accordingly, even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projectionsProjections of any evaluation of effectiveness to future periods are subject to the riskrisks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Our management
Management assessed the effectiveness of the
Company’sCompany's internal control over financial reporting as of December 31,
2015.2018. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on
ourthis assessment, we concluded that, as of December 31,
2015,2018, the
Company’sCompany's internal control over financial reporting was effective based on those criteria.
Moss Adams, LLP, the Company’s independent registered public accounting firm that audited our consolidated financial statements at and, for, the year ended December 31, 2018, included in this annual report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. The attestation report is included above in Item 8.
(c) Changes in Internal Controls over Financial Reporting
As required by Rule 13a-15(d), our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2015,2018, that have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
| |
| Item 9B. | Other Information |
None.
None.
PART III
| |
| Item 10. | Directors, Executive Officers and Corporate Governance |
Directors
Directors
Information concerning the
Company’sCompany's directors is incorporated herein by reference from the
Company’sCompany's definitive proxy statement for its Annual Meeting of Shareholders to be held in May
2016,2019, a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
Information concerning the executive officers of the Company and the Bank is contained under the heading
“Executive Officers”"Executive Officers" under Part I, Item 1 of this Form 10-K and is incorporated herein by reference.
Section 16(a) Beneficial Ownership and Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than 10% of Sound Financial
Bancorp’sBancorp's common stock to report to the SEC their initial ownership of Sound Financial
Bancorp’sBancorp's common stock and any subsequent changes in that ownership. Specific due dates for these reports have been established by the SEC, and Sound Financial Bancorp is required to disclose in its proxy statement any late filings or failures to file. To our knowledge, based solely on a review of the copies of reports furnished to us and written representations relative to the filing of certain forms, all Section 16(a) filing requirements applicable to our executive officers, directors and greater than 10% beneficial owners were met for transactions in our common stock during
2015.2018.
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, and person performing similar functions, and to all of our other employees and our directors. You may obtain a copy of the code of ethics free of charge by writing to the Corporate Secretary of Sound Financial Bancorp, 2005 5th2400 3rd Avenue, Suite 200,150, Seattle, Washington, 98121 or by calling (206) 448-0884. In addition, the code of ethics is available on our website at www.soundcb.com under “Investor"Investor Relations – Governance.”"
Nominating Procedures. There have been no material changes to the procedures by which shareholders may recommend nominees to our Board of Directors since last disclosed to shareholders. TABLE OF CONTENTS
Audit Committee and Audit Committee Financial Expert.Sound Financial Bancorp has an Audit Committee that is appointed by the Board of Directors to provide assistance to the Board in fulfilling its oversight responsibility relating to the integrity of our consolidated financial statements and the financial reporting processes, the systems of internal accounting and financial controls, compliance with legal and regulatory requirements, the annual independent audit of our consolidated financial statements, the independent auditors’auditors' qualifications and independence, the performance of our internal audit function and independent auditors and any other areas of potential financial risk to Sound Financial Bancorp specified by its Board of Directors. The Audit Committee also is responsible for the appointment, retention and oversight of our independent auditors,
including pre-approval of all audit and non-audit services to be performed by the independent auditors. During 2015,2018, the Audit Committee was comprised of Directors Jones (chair), Carney, Cook, Riojas and Haddad, each of whom is “independent”"independent" as that term is defined for audit committee members in the Nasdaq Rules. The Board of Directors has determined that Director Jones is an “audit"audit committee financial expert”expert" as defined in Item 407(e) of Regulation S-K of the Securities and Exchange Commission and that all of the Audit Committee members meet the financial literacy requirements under the NasdaqNASDAQ listing standards. Additional information concerning the Audit Committee is incorporated herein by reference from the Company’sCompany's definitive proxy statement for its Annual Meeting of Shareholders to be held in May 20162019 (except for information contained under the heading “Report"Report of the Audit Committee”Committee"), a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
| |
| Item 11. | Executive Compensation |
Information concerning executive compensation is incorporated herein by reference from the Company’sCompany's definitive proxy statement for its Annual Meeting of Shareholders to be held in May 20162019 (except for information contained under the heading “Report"Report of the Audit Committee”Committee"), a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the Company’sCompany's definitive proxy statement for its Annual Meeting of Shareholders to be held in May 2016,2019, a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of Sound Financial Bancorp, Inc.
Equity Compensation Plan Information. The following table sets forth information as of December 31, 2015 2018with respect to the Company’s equity compensation plans, underall of which shares of common stock were issued.Plan Category | Number of
securities
to be issued
upon exercise of
outstanding options,
warrants and rights | Weighted average
exercise price of
outstanding options,
warrants and rights | Number of securities
remaining available
for future issuance
under equity
compensation plan |
Equity Incentive Plan approved
by security holders | | 184,407 | | $ | 14.56 | | | 52,276 | (1) |
| | | | | | | | | |
Equity Incentive Plan not
approved by security holders | | — | | | — | | | — | |
| (1) | Consists of stock options and stock appreciation rights covering up to 41,152 shares of common stock and restricted stock and restricted stock units covering up to 11,124 shares of common stock. |
|
| | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plan |
| Equity Incentive Plan approved by security holders | | 101,788 |
| | $ | 18.56 |
| | (1 | ) |
| Equity Incentive Plan not approved by security holders | | — |
| | — |
| | — |
|
| Total | | 101,788 |
| | $ | 18.56 |
| | — |
|
(1) Total number of shares available for issuance for stock awards, other than awards of stock options and stock appreciation rights.
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Information concerning certain relationships and related transactions, our independent directors and our audit and nominating committee charters is incorporated herein by reference from the Company’sCompany's definitive proxy
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statement for its Annual Meeting of Shareholders to be held in May 2016,2019, a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
| |
| Item 14. | Principal Accounting Fees and Services |
Information concerning principal accountant fees and services is incorporated herein by reference from the Company’sCompany's definitive proxy statement for its Annual Meeting of Shareholders to be held in May 20162019 (except for information contained under the heading “Report"Report of the Audit Committee”Committee") a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
PART IV
| |
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) List of Financial Statements
The following are contained in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 20152018 and 2014
2017
Consolidated Statements of Income for the Years Ended December 31, 20152018 and 2014
2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 20152018 and 2014
2017
Consolidated Statements of Stockholders’Stockholders' Equity for the Years Ended December 31, 20152018 and 2014
2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 20152018 and 2014
2017
Notes to Consolidated Financial Statements
(a)(2) List of Financial Statement Schedules:
All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable.
(a)(3) List of Exhibits:
See Exhibit Index following signature page.
(b)
Exhibits - See Exhibit Index following signature page.Exhibits:
EXHIBIT INDEX
|
| | |
| Exhibits: | | |
| | Articles of Incorporation of Sound Financial Bancorp, Inc. (incorporated herein by reference to the Registration Statement on Form S-1 filed with the SEC on March 27, 2012 (File No. 333-180385)) |
| | Bylaws of Sound Financial Bancorp, Inc . (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on February 3, 2015 (File No. 001-35633)) |
| | Form of Common Stock Certificate of Sound Financial Bancorp, Inc . (incorporated herein by reference to the Registration Statement on Form S-1 filed with the SEC on March 27, 2012 (File No. 333-180385)) |
| | Form of Amended and Restated Employment Agreement dated August 30, 2016, among Sound Financial Bancorp, Inc., Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on September 1, 2016 (File No. 001-35633)) |
| | Amended and Restated Supplemental Executive Retirement Agreement by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on November 27, 2015 (File No. 001-35633)) |
| | Amended and Restated Long Term Compensation Agreement by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on November 27, 2015 (File No. 001-35633)) |
| | Amended and Restated Confidentiality, Non-Competition and Non-Solicitation Agreement by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on November 27, 2015 (File No. 001-35633)) |
| | 2008 Equity Incentive Plan (incorporated herein by reference to the Annual Report on Form 10-K filed with the SEC on March 30, 2009 (File No. 000-52889)) |
| 10.6 | | |
| | Summary of Annual Bonus Plan (incorporated herein by reference to the Registration Statement on Form SB-2 filed with the SEC on September 20, 2007 (File No. 333-146196)) |
| | 2013 Equity Inventive Plan (included as Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,2013 and incorporated herein by reference (File No. 001-35633)) |
|
| | |
| | Form of Incentive Stock Option Agreement, Non-Qualified Stock Option Agreement and Restricted Stock Agreement under the 2013 Equity Incentive Plan (included as Exhibit 10.14 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference (File No. 001-35633)) |
| | Amended and Restated Change of Control Agreement dated June 21, 2016, by and among Sound Financial Bancorp, Inc., Sound Community Bank and Matthew P. Deines (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on June 24, 2016 (File No. 001-35633)) |
| | Change of Control Agreement dated June 21, 2016, by and among Sound Financial Bancorp, Inc., Sound Community Bank and Elliott Pierce (included as Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 and incorporated herein by reference (File No. 001-35633)) |
| | Adoption Agreement for the Sound Community Bank Nonqualified Deferred Compensation Plan (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on March 24, 2017 (File No. 001-35633)) |
| | The Sound Community Bank Nonqualified Deferred Compensation Plan (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on March 24, 2017 (File No. 001-35633)) |
| | Change of Control Agreement dated June 22, 2016, by and among Sound Financial Bancorp, Inc., Sound Community Bank and Christina Gehrke (included as Exhibit 10.14 to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 and incorporated herein by reference (File No. 001-35633)) |
| | Separation Agreement and Release of All Claims entered into between Mathew P. Deines and Sound Community Bank)(incorporated herein by reference to the Current Report on Form 8-K/A filed with the SEC on April 12, 2018 (File No. 001-35633)) |
| | Change of Control Agreement dated October 25, 2018, by and among Sound Financial Bancorp, Inc., Sound Community Bank and Daphne Kelley (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on October 26, 2018 (File No. (001-35633)) |
| | Change of Control Agreement dated October 25, 2018, by and among Sound Financial Bancorp, Inc., Sound Community Bank and Heidi Sexton (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on October 26, 2018 (File No. (001-35633)) |
| | Credit Union of the Pacific Incentive Compensation Achievement Plan, dated January 1, 1994 |
| | Amended and Restated Employment Agreement dated January 25, 2019, by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on January 30, 2019 (File No. 001-35633)) |
| | Amended and Restated Confidentiality, Non-Competition, and Non-Solicitation Agreement dated January 25, 2019, by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on January 30, 2019 (File No. 001-35633)) |
| | Statement re computation of per share earnings (See Note 12 of the Notes to Consolidated Financial Statements contained in Item 8, Part II of this Annual Report on Form 10-K.) |
| | Subsidiaries of Registrant (incorporated herein by reference to the Registration Statement on Form SB-2 filed with the SEC on September 20, 2007 (File No. 333-146196)) |
| | Consent of Moss Adams LLP |
| | Power of Attorney (set forth on signature page) |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
| | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
| 101 | | Interactive Data File |
(c) Financial Statements Schedules -None 97
Item 16. Form 10-K Summary - None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| Sound Financial Bancorp, Inc. |
| | |
Date: March 30, 2016 14, 2019 | By: | /s/ Laura Lee Stewart |
| | Laura Lee Stewart, President and Chief Executive Officer |
| | (Duly Authorized Representative) |
We, the undersigned officers and directors of Sound Financial Bancorp, Inc., hereby severally and individually constitute and appoint Laura Lee Stewart and
Matthew P. Deines,Daphne D. Kelley, and each of them, the true and lawful attorneys and agents of each of us to execute in the name, place and stead of each of us (individually and in any capacity stated below) any and all amendments to this Annual Report on Form 10-K and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the others and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys and agents or each of them to any and all such amendments and instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| | |
| /s/ Laura Lee Stewart | | /s/ Tyler K. Myers |
Laura Lee Stewart, President and Director | | Tyler K. Myers, Chairman of the Board |
(Principal Executive Officer) | | Date: March 30, 201614, 2019 |
Date: March 30, 2016 14, 2019 | | |
| | |
/s/ David S. Haddad, Jr. | | /s/ Robert F. Carney |
David S. Haddad, Jr., Director | | Robert F. Carney, Director |
Date: March 30, 2016 14, 2019 | | Date: March 30, 201614, 2019 |
| | |
/s/ Debra Jones | | /s/ Rogelio Riojas |
Debra Jones, Director | | Rogelio Riojas, Director |
Date: March 30, 2016 14, 2019 | | Date: March 30, 201614, 2019 |
| | |
/s/ James E. Sweeney | | /s/ Kathleen B. Cook |
James E. Sweeney, Director | | Kathleen B. Cook, Director |
Date: March 30, 2016 14, 2019 | | Date: March 30, 201614, 2019 |
| | |
/s/ Matthew P. Deines Daphne D. Kelley | | |
Matthew P. Deines,Daphne D. Kelley, Executive Vice President
| |
and Chief Financial Officer | | |
(Principal Financial and Accounting Officer) | | |
Date: March 30, 2016 14, 2019 | | |
TABLE OF CONTENTS
EXHIBIT INDEX
Exhibits:
| |
2.0
| Plan of Conversion and Reorganization (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on January 30, 2012 (File No. 000-52889))
|
3.1
| Articles of Incorporation of Sound Financial Bancorp, Inc. (incorporated herein by reference to the Registration Statement on Form S-1 filed with the SEC on March 27, 2012 (File No. 333-180385))
|
3.2
| Bylaws of Sound Financial Bancorp, Inc. (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on February 3, 2015 (File No. 001-35633))
|
4.0
| Form of Common Stock Certificate of Sound Financial Bancorp, Inc. (incorporated herein by reference to the Registration Statement on Form S-1 filed with the SEC on March 27, 2012 (File No. 333-180385))
|
10.1
| Employment Agreement by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Registration Statement on Form SB-2 filed with the SEC on September 20, 2007 (File No. 333-146196))
|
10.2
| Amended and Restated Supplemental Executive Retirement Agreement by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on November 27, 2015 (File No. 001-35633))
|
10.3
| Amended and Restated Long Term Compensation Agreement by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on November 27, 2015 (File No. 001-35633))
|
10.4
| Amended and Restated Confidentiality, Non-Competition and Non-Solicitation Agreement by and between Sound Community Bank and Laura Lee Stewart (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on November 27, 2015 (File No. 001-35633))
|
10.5
| 2008 Equity Incentive Plan (incorporated herein by reference to the Annual Report on Form 10-K filed with the SEC on March 30, 2009 (File No. 000-52889))
|
10.6
| Forms of Incentive Stock Option Agreement, Non-Qualified Stock Option Agreement and Restricted Stock Agreements under the 2008 Equity Incentive Plan (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on January 29, 2009 (File No. 000-52889))
|
10.7
| Summary of Annual Bonus Plan (incorporated herein by reference to the Registration Statement on Form SB-2 filed with the SEC on September 20, 2007 (File No. 333-146196))
|
10.8
| 2013 Equity Inventive Plan (included as Exhibit 10.13 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30,2013 and incorporated herein by reference (File No. 001-35633))
|
10.9
| Form of Incentive Stock Option Agreement, Non-Qualified Stock Option Agreement and Restricted Stock Agreement under the 2013 Equity Incentive Plan (included as Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference (File No. 001-35633))
|
10.10
| Change of Control Agreement dated October 30, 2013, by and among Sound Financial Bancorp, Inc., Sound Community Bank and Matthew P. Deines (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on November 1, 2013 (File No. 001-35633))
|
11
| Statement re computation of per share earnings (See Note 13 of the Notes to Consolidated Financial Statements contained in Item 8, Part II of this Annual Report on Form 10-K.)
|
21
| Subsidiaries of Registrant (incorporated herein by reference to the Registration Statement on Form SB-2 filed with the SEC on September 20, 2007 (File No. 333-146196))
|
23
| Consent of Moss Adams LLP
|
24
| Power of Attorney (set forth on signature page)
|
31.1
| Rule 13(a)-14(a) Certification (Chief Executive Officer)
|
31.2
| Rule 13(a)-14(a) Certification (Chief Financial Officer)
|
32
| Section 1350 Certification
|