UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021March 31, 2022
OR
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☐ | 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
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Sound Financial Bancorp, Inc. |
(Exact Name of Registrant as Specified in its Charter) |
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Maryland | | 45-5188530 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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2400 3rd Avenue, Suite 150, Seattle, Washington | | 98121 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (206) 448-0884
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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Common Stock, $0.01 par value | SFBC | The NASDAQ Stock Market LLC |
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☐ |
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Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
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| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
As of November 3, 2021,May 6, 2022, there were 2,617,4252,616,431 shares of the registrant’s common stock outstanding.
SOUND FINANCIAL BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION | |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share amounts)
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | ASSETS | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 206,702 | | | $ | 193,828 | | Cash and cash equivalents | $ | 197,091 | | | $ | 183,590 | |
Available-for-sale securities, at fair value | Available-for-sale securities, at fair value | 7,060 | | | 10,218 | | Available-for-sale securities, at fair value | 10,223 | | | 8,419 | |
Held-to-maturity securities, at amortized cost | | Held-to-maturity securities, at amortized cost | 2,223 | | | — | |
Loans held-for-sale | Loans held-for-sale | 3,884 | | | 11,604 | | Loans held-for-sale | 1,297 | | | 3,094 | |
Loans held-for-portfolio | Loans held-for-portfolio | 667,551 | | | 613,363 | | Loans held-for-portfolio | 709,485 | | | 686,398 | |
Allowance for loan losses | Allowance for loan losses | (6,327) | | | (6,000) | | Allowance for loan losses | (6,407) | | | (6,306) | |
Total loans held-for-portfolio, net | Total loans held-for-portfolio, net | 661,224 | | | 607,363 | | Total loans held-for-portfolio, net | 703,078 | | | 680,092 | |
Accrued interest receivable | Accrued interest receivable | 2,231 | | | 2,254 | | Accrued interest receivable | 2,117 | | | 2,217 | |
Bank-owned life insurance (“BOLI”), net | Bank-owned life insurance (“BOLI”), net | 20,926 | | | 14,588 | | Bank-owned life insurance (“BOLI”), net | 21,116 | | | 21,095 | |
Other real estate owned (“OREO”) and repossessed assets, net | Other real estate owned (“OREO”) and repossessed assets, net | 659 | | | 594 | | Other real estate owned (“OREO”) and repossessed assets, net | 659 | | | 659 | |
Mortgage servicing rights, at fair value | Mortgage servicing rights, at fair value | 4,211 | | | 3,780 | | Mortgage servicing rights, at fair value | 4,668 | | | 4,273 | |
Federal Home Loan Bank (“FHLB”) stock, at cost | Federal Home Loan Bank (“FHLB”) stock, at cost | 1,052 | | | 877 | | Federal Home Loan Bank (“FHLB”) stock, at cost | 1,117 | | | 1,046 | |
Premises and equipment, net | Premises and equipment, net | 5,941 | | | 6,270 | | Premises and equipment, net | 5,730 | | | 5,819 | |
Right of use assets | Right of use assets | 6,033 | | | 6,722 | | Right of use assets | 5,777 | | | 5,811 | |
Other assets | Other assets | 8,188 | | | 3,304 | | Other assets | 3,758 | | | 3,576 | |
Total assets | Total assets | $ | 928,111 | | | $ | 861,402 | | Total assets | $ | 958,854 | | | $ | 919,691 | |
LIABILITIES | LIABILITIES | | | | LIABILITIES | | | |
Deposits | Deposits | | Deposits | |
Interest-bearing | Interest-bearing | $ | 612,805 | | | $ | 615,491 | | Interest-bearing | $ | 627,323 | | | $ | 607,854 | |
Noninterest-bearing demand | Noninterest-bearing demand | 194,848 | | | 132,490 | | Noninterest-bearing demand | 208,768 | | | 190,466 | |
Total deposits | Total deposits | 807,653 | | | 747,981 | | Total deposits | 836,091 | | | 798,320 | |
| Accrued interest payable | Accrued interest payable | 48 | | | 369 | | Accrued interest payable | 38 | | | 200 | |
Lease liabilities | Lease liabilities | 6,462 | | | 7,134 | | Lease liabilities | 6,211 | | | 6,242 | |
Other liabilities | Other liabilities | 8,711 | | | 7,674 | | Other liabilities | 9,169 | | | 8,571 | |
Advance payments from borrowers for taxes and insurance | Advance payments from borrowers for taxes and insurance | 1,708 | | | 1,168 | | Advance payments from borrowers for taxes and insurance | 1,851 | | | 1,366 | |
Subordinated notes, net | Subordinated notes, net | 11,623 | | | 11,592 | | Subordinated notes, net | 11,644 | | | 11,634 | |
Total liabilities | Total liabilities | 836,205 | | | 775,918 | | Total liabilities | 865,004 | | | 826,333 | |
COMMITMENTS AND CONTINGENCIES (NOTE 7) | COMMITMENTS AND CONTINGENCIES (NOTE 7) | — | | | — | | COMMITMENTS AND CONTINGENCIES (NOTE 7) | — | | | — | |
STOCKHOLDERS’ EQUITY | STOCKHOLDERS’ EQUITY | | STOCKHOLDERS’ EQUITY | |
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued or outstanding | Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued or outstanding | — | | | — | | 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, 2,617,425 and 2,592,587 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 26 | | | 25 | | |
Common stock, $0.01 par value, 40,000,000 shares authorized, 2,621,531 and 2,613,768 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | | Common stock, $0.01 par value, 40,000,000 shares authorized, 2,621,531 and 2,613,768 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | 26 | | | 26 | |
Additional paid-in capital | Additional paid-in capital | 27,835 | | | 27,106 | | Additional paid-in capital | 28,154 | | | 27,956 | |
Unearned shares - Employee Stock Ownership Plan (“ESOP”) | (28) | | | (113) | | |
| Retained earnings | Retained earnings | 63,905 | | | 58,226 | | Retained earnings | 66,139 | | | 65,237 | |
Accumulated other comprehensive income, net of tax | Accumulated other comprehensive income, net of tax | 168 | | | 240 | | Accumulated other comprehensive income, net of tax | (469) | | | 139 | |
Total stockholders’ equity | Total stockholders’ equity | 91,906 | | | 85,484 | | Total stockholders’ equity | 93,850 | | | 93,358 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 928,111 | | | $ | 861,402 | | Total liabilities and stockholders’ equity | $ | 958,854 | | | $ | 919,691 | |
See notes to condensed consolidated financial statements
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except share and per share amounts)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
2021 | | 2020 | | 2021 | | 2020 | 2022 | | 2021 | |
INTEREST INCOME | INTEREST INCOME | | | | | | | | INTEREST INCOME | | | | |
Loans, including fees | Loans, including fees | $ | 8,967 | | | $ | 8,422 | | | $ | 25,152 | | | $ | 25,463 | | Loans, including fees | $ | 8,075 | | | $ | 7,886 | | |
Interest and dividends on investments, cash and cash equivalents | Interest and dividends on investments, cash and cash equivalents | 135 | | | 86 | | | 365 | | | 400 | | Interest and dividends on investments, cash and cash equivalents | 138 | | | 113 | | |
Total interest income | Total interest income | 9,102 | | | 8,508 | | | 25,517 | | | 25,863 | | Total interest income | 8,213 | | | 7,999 | | |
INTEREST EXPENSE | INTEREST EXPENSE | | | | | | | | INTEREST EXPENSE | | | | |
Deposits | Deposits | 617 | | | 1,738 | | | 2,807 | | | 5,346 | | Deposits | 427 | | | 1,295 | | |
Borrowings | — | | | 87 | | | — | | | 209 | | |
| Subordinated notes | Subordinated notes | 168 | | | 23 | | | 504 | | | 23 | | Subordinated notes | 168 | | | 168 | | |
Total interest expense | Total interest expense | 785 | | | 1,848 | | | 3,311 | | | 5,578 | | Total interest expense | 595 | | | 1,463 | | |
Net interest income | Net interest income | 8,317 | | | 6,660 | | | 22,206 | | | 20,285 | | Net interest income | 7,618 | | | 6,536 | | |
PROVISION FOR LOAN LOSSES | PROVISION FOR LOAN LOSSES | 175 | | | 275 | | | 425 | | | 925 | | PROVISION FOR LOAN LOSSES | 125 | | | — | | |
Net interest income after provision for loan losses | Net interest income after provision for loan losses | 8,142 | | | 6,385 | | | 21,781 | | | 19,360 | | Net interest income after provision for loan losses | 7,493 | | | 6,536 | | |
NONINTEREST INCOME | NONINTEREST INCOME | | NONINTEREST INCOME | | |
Service charges and fee income | Service charges and fee income | 556 | | | 510 | | | 1,615 | | | 1,433 | | Service charges and fee income | 549 | | | 532 | | |
Earnings on cash surrender value of bank-owned life insurance | Earnings on cash surrender value of bank-owned life insurance | 104 | | | 102 | | | 281 | | | 207 | | Earnings on cash surrender value of bank-owned life insurance | 21 | | | 82 | | |
Mortgage servicing income | Mortgage servicing income | 328 | | | 260 | | | 961 | | | 739 | | Mortgage servicing income | 320 | | | 312 | | |
Fair value adjustment on mortgage servicing rights | Fair value adjustment on mortgage servicing rights | (125) | | | (623) | | | (694) | | | (1,423) | | Fair value adjustment on mortgage servicing rights | 268 | | | (275) | | |
Net gain on sale of loans | Net gain on sale of loans | 568 | | | 1,819 | | | 3,683 | | | 3,399 | | Net gain on sale of loans | 365 | | | 2,053 | | |
| Total noninterest income | Total noninterest income | 1,431 | | | 2,068 | | | 5,846 | | | 4,355 | | Total noninterest income | 1,523 | | | 2,704 | | |
NONINTEREST EXPENSE | NONINTEREST EXPENSE | | | | | | | | NONINTEREST EXPENSE | | | | |
Salaries and benefits | Salaries and benefits | 3,512 | | | 2,880 | | | 10,470 | | | 8,933 | | Salaries and benefits | 4,167 | | | 3,644 | | |
Operations | Operations | 1,466 | | | 1,390 | | | 4,033 | | | 4,109 | | Operations | 1,314 | | | 1,206 | | |
Regulatory assessments | Regulatory assessments | 91 | | | 111 | | | 283 | | | 480 | | Regulatory assessments | 101 | | | 101 | | |
Occupancy | Occupancy | 441 | | | 442 | | | 1,298 | | | 1,437 | | Occupancy | 432 | | | 448 | | |
Data processing | Data processing | 808 | | | 707 | | | 2,400 | | | 1,923 | | Data processing | 821 | | | 779 | | |
Net gain on OREO and repossessed assets | Net gain on OREO and repossessed assets | — | | | — | | | (16) | | | — | | Net gain on OREO and repossessed assets | — | | | (16) | | |
Total noninterest expense | Total noninterest expense | 6,318 | | | 5,530 | | | 18,468 | | | 16,882 | | Total noninterest expense | 6,835 | | | 6,162 | | |
Income before provision for income taxes | Income before provision for income taxes | 3,255 | | | 2,923 | | | 9,159 | | | 6,833 | | Income before provision for income taxes | 2,181 | | | 3,078 | | |
Provision for income taxes | Provision for income taxes | 663 | | | 588 | | | 1,865 | | | 1,390 | | Provision for income taxes | 458 | | | 627 | | |
Net income | Net income | $ | 2,592 | | | $ | 2,335 | | | $ | 7,294 | | | $ | 5,443 | | Net income | $ | 1,723 | | | $ | 2,451 | | |
| Earnings per common share: | Earnings per common share: | | Earnings per common share: | | |
Basic | Basic | $ | 1.00 | | | $ | 0.90 | | | $ | 2.81 | | | $ | 2.11 | | Basic | $ | 0.66 | | | $ | 0.95 | | |
Diluted | Diluted | $ | 0.98 | | | $ | 0.90 | | | $ | 2.76 | | | $ | 2.09 | | Diluted | $ | 0.65 | | | $ | 0.93 | | |
Weighted-average number of common shares outstanding: | Weighted-average number of common shares outstanding: | | Weighted-average number of common shares outstanding: | | |
Basic | Basic | 2,586,966 | | | 2,563,018 | | | 2,581,517 | | | 2,558,475 | | Basic | 2,602,168 | | | 2,571,726 | | |
Diluted | Diluted | 2,633,459 | | | 2,589,241 | | | 2,624,632 | | | 2,588,101 | | Diluted | 2,640,359 | | | 2,610,986 | | |
See notes to condensed consolidated financial statements
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(In thousands)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | |
Net income | Net income | $ | 2,592 | | | $ | 2,335 | | | $ | 7,294 | | | $ | 5,443 | | | Net income | $ | 1,723 | | | $ | 2,451 | | |
Available for sale securities: | Available for sale securities: | | | Available for sale securities: | | |
Unrealized (losses) gains arising during the period | (34) | | | (4) | | | (91) | | | 106 | | | |
Income tax benefit (expense) related to unrealized gains/losses | 7 | | | 1 | | | 19 | | | (22) | | | |
Other comprehensive (loss) income, net of tax | (27) | | | (3) | | | (72) | | | 84 | | | |
Unrealized losses arising during the period | | Unrealized losses arising during the period | (770) | | | (59) | | |
Income tax benefit related to unrealized losses | | Income tax benefit related to unrealized losses | 162 | | | 12 | | |
Other comprehensive loss, net of tax | | Other comprehensive loss, net of tax | (608) | | | (47) | | |
Comprehensive income | Comprehensive income | $ | 2,565 | | | $ | 2,332 | | | $ | 7,222 | | | $ | 5,527 | | | Comprehensive income | $ | 1,115 | | | $ | 2,404 | | |
See notes to condensed consolidated financial statements
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders’ Equity
For the Three and Nine Months Ended September 30,March 31, 2022 and 2021 and 2020 (unaudited)
(In thousands, except share and per share amounts)
| | | Shares | | Common Stock | | Additional Paid -in Capital | | Unearned ESOP Shares | | Retained Earnings | | Accumulated Other Comprehensive Income, net of tax | | Total Stockholders’ Equity | | Shares | | Common Stock | | Additional Paid -in Capital | | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss), net of tax | | Total Stockholders’ Equity |
Balance, at June 30, 2021 | 2,614,329 | | | $ | 26 | | | $ | 27,613 | | | $ | (57) | | | $ | 61,758 | | | $ | 195 | | | $ | 89,535 | | |
Net income | — | | | — | | | — | | | — | | | 2,592 | | | — | | | 2,592 | | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (27) | | | (27) | | |
Share-based compensation | — | | | — | | | 65 | | | — | | | — | | | — | | | 65 | | |
| Cash dividends paid on common stock ($0.17 per share) | — | | | — | | | — | | | — | | | (445) | | | — | | | (445) | | |
Common stock surrendered | (100) | | | — | | | — | | | — | | | — | | | — | | | — | | |
Restricted shares forfeited | (420) | | | — | | | — | | | — | | | — | | | — | | | — | | |
Common stock options exercised | 3,616 | | | — | | | 59 | | | — | | | — | | | — | | | 59 | | |
Allocation of ESOP shares | — | | | — | | | 98 | | | 29 | | | — | | | — | | | 127 | | |
Balance, at September 30, 2021 | 2,617,425 | | | $ | 26 | | | $ | 27,835 | | | $ | (28) | | | $ | 63,905 | | | $ | 168 | | | $ | 91,906 | | |
| Balance, at December 31, 2020 | 2,592,587 | | | $ | 25 | | | $ | 27,106 | | | $ | (113) | | | $ | 58,226 | | | $ | 240 | | | $ | 85,484 | | |
| Balance, at December 31, 2021 | | Balance, at December 31, 2021 | 2,613,768 | | | $ | 26 | | | $ | 27,956 | | | | $ | 65,237 | | | $ | 139 | | | $ | 93,358 | |
Net income | Net income | — | | | — | | | — | | | — | | | 7,294 | | | — | | | 7,294 | | Net income | — | | | — | | | — | | | | 1,723 | | | — | | | 1,723 | |
Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (72) | | | (72) | | Other comprehensive loss, net of tax | — | | | — | | | — | | | | — | | | (608) | | | (608) | |
Share-based compensation | Share-based compensation | — | | | — | | | 295 | | | — | | | — | | | — | | | 295 | | Share-based compensation | — | | | — | | | 203 | | | | — | | | — | | | 203 | |
Restricted stock awards issued | Restricted stock awards issued | 10,168 | | | — | | | — | | | — | | | — | | | — | | | Restricted stock awards issued | 9,700 | | | — | | | — | | | | — | | | — | | | — | |
Cash dividends paid on common stock ($0.61 per share) | — | | | — | | | — | | | — | | | (1,594) | | | — | | | (1,594) | | |
Cash dividends paid on common stock ($0.27 per share) | | Cash dividends paid on common stock ($0.27 per share) | — | | | — | | | — | | | | (709) | | | — | | | (709) | |
Common stock repurchased | Common stock repurchased | — | | | — | | | (9) | | | — | | | (21) | | | — | | | (30) | | Common stock repurchased | (4,008) | | | — | | | (48) | | | | (112) | | | — | | | (160) | |
Common stock surrendered | Common stock surrendered | (4,091) | | | — | | | — | | | — | | | — | | | — | | Common stock surrendered | (100) | | | — | | | — | | | | — | | | — | | | — | |
Restricted shares forfeited | Restricted shares forfeited | (1,890) | | | — | | | — | | | — | | | — | | | — | | | — | | Restricted shares forfeited | (250) | | | — | | | — | | | | — | | | — | | | — | |
Common stock options exercised | Common stock options exercised | 20,651 | | | 1 | | | 181 | | | — | | | — | | | — | | | 182 | | Common stock options exercised | 2,421 | | | — | | | 43 | | | | — | | | — | | | 43 | |
Allocation of ESOP shares | — | | | — | | | 262 | | | 85 | | | — | | | — | | | 347 | | |
Balance, at September 30, 2021 | 2,617,425 | | | $ | 26 | | | $ | 27,835 | | | $ | (28) | | | $ | 63,905 | | | $ | 168 | | | $ | 91,906 | | |
| Balance, at March 31, 2022 | | Balance, at March 31, 2022 | 2,621,531 | | | $ | 26 | | | $ | 28,154 | | | | $ | 66,139 | | | $ | (469) | | | $ | 93,850 | |
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
(In thousands, except share and per share amounts)
| | | Shares | | Common Stock | | Additional Paid -in Capital | | Unearned ESOP Shares | | Retained Earnings | | Accumulated Other Comprehensive Income, net of tax | | Total Stockholders’ Equity | | Shares | | Common Stock | | Additional Paid -in Capital | | Unearned ESOP Shares | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss), net of tax | | Total Stockholders’ Equity |
Balance, at June 30, 2020 | 2,593,152 | | | $ | 25 | | | $ | 26,894 | | | $ | (170) | | | $ | 53,224 | | | $ | 262 | | | $ | 80,235 | | |
| Balance, at December 31, 2020 | | Balance, at December 31, 2020 | 2,592,587 | | | $ | 25 | | | $ | 27,106 | | | $ | (113) | | | $ | 58,226 | | | $ | 240 | | | $ | 85,484 | |
Net income | Net income | — | | | — | | | — | | | — | | | 2,335 | | | — | | | 2,335 | | Net income | — | | | — | | | — | | | — | | | 2,451 | | | — | | | 2,451 | |
Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | | Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (47) | | | (47) | |
Share-based compensation | Share-based compensation | — | | | — | | | 52 | | | — | | | — | | | — | | | 52 | | Share-based compensation | — | | | — | | | 166 | | | — | | | — | | | — | | | 166 | |
Common stock surrendered | Common stock surrendered | (2,842) | | | — | | | — | | | — | | | — | | | — | | | — | | Common stock surrendered | (3,029) | | | — | | | — | | | — | | | — | | | — | | | — | |
Cash dividends paid on common stock ($0.15 per share) | — | | | — | | | — | | | — | | | (389) | | | — | | | (389) | | |
| Common stock options exercised | 4,979 | | | — | | | 23 | | | — | | | — | | | — | | | 23 | | |
Allocation of ESOP shares | — | | | — | | | 49 | | | 28 | | | — | | | — | | | 77 | | |
Balance, at September 30, 2020 | 2,595,289 | | | $ | 25 | | | $ | 27,018 | | | $ | (142) | | | $ | 55,170 | | | $ | 259 | | | $ | 82,330 | | |
| Balance, at December 31, 2019 | 2,567,389 | | | $ | 25 | | | $ | 26,343 | | | $ | (227) | | | $ | 51,410 | | | $ | 175 | | | $ | 77,726 | | |
Net income | — | | | — | | | — | | | — | | | 5,443 | | | — | | | 5,443 | | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | 84 | | | 84 | | |
Share-based compensation | — | | | — | | | 283 | | | — | | | — | | | — | | | 283 | | |
Common stock surrendered | (3,423) | | | — | | | — | | | — | | | — | | | — | | | — | | |
Cash dividends paid on common stock ($0.65 per share) | — | | | — | | | — | | | — | | | (1,683) | | | — | | | (1,683) | | |
Cash dividends paid on common stock ($0.27 per share) | | Cash dividends paid on common stock ($0.27 per share) | — | | | — | | | — | | | — | | | (702) | | | — | | | (702) | |
Restricted stock forfeited | Restricted stock forfeited | (1,690) | | | — | | | — | | | — | | | — | | | — | | | — | | Restricted stock forfeited | (1,470) | | | — | | | — | | | — | | | — | | | — | | | — | |
Restricted stock awards issued | Restricted stock awards issued | 13,600 | | | — | | | — | | | — | | | — | | | — | | | — | | Restricted stock awards issued | 10,168 | | | — | | | — | | | — | | | — | | | — | | | — | |
Common stock options exercised | Common stock options exercised | 19,413 | | | — | | | 239 | | | — | | | — | | | — | | | 239 | | Common stock options exercised | 11,550 | | | 1 | | | 103 | | | — | | | — | | | — | | | 104 | |
Allocation of ESOP shares | Allocation of ESOP shares | — | | | — | | | 153 | | | 85 | | | — | | | — | | | 238 | | Allocation of ESOP shares | — | | | — | | | 72 | | | 28 | | | — | | | — | | | 100 | |
Balance, at September 30, 2020 | 2,595,289 | | | $ | 25 | | | $ | 27,018 | | | $ | (142) | | | $ | 55,170 | | | $ | 259 | | | $ | 82,330 | | |
Balance, at March 31, 2021 | | Balance, at March 31, 2021 | 2,609,806 | | | $ | 26 | | | $ | 27,447 | | | $ | (85) | | | $ | 59,975 | | | $ | 193 | | | $ | 87,556 | |
See notes to condensed consolidated financial statements
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
| | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | Net income | $ | 7,294 | | | $ | 5,443 | | Net income | $ | 1,723 | | | $ | 2,451 | |
Adjustments to reconcile net income to net cash from operating activities: | Adjustments to reconcile net income to net cash from operating activities: | | Adjustments to reconcile net income to net cash from operating activities: | |
Amortization of net discounts on investments | Amortization of net discounts on investments | 108 | | | 104 | | Amortization of net discounts on investments | 24 | | | 56 | |
Provision for loan losses | Provision for loan losses | 425 | | | 925 | | Provision for loan losses | 125 | | | — | |
Depreciation and amortization | Depreciation and amortization | 502 | | | 696 | | Depreciation and amortization | 173 | | | 176 | |
Compensation expense related to stock options and restricted stock | Compensation expense related to stock options and restricted stock | 295 | | | 283 | | Compensation expense related to stock options and restricted stock | 203 | | | 166 | |
Fair value adjustment on mortgage servicing rights | Fair value adjustment on mortgage servicing rights | 694 | | | 1,423 | | Fair value adjustment on mortgage servicing rights | (268) | | | 275 | |
Right of use assets amortization | Right of use assets amortization | 689 | | | 696 | | Right of use assets amortization | 34 | | | 247 | |
Change in lease liabilities | Change in lease liabilities | (672) | | | (662) | | Change in lease liabilities | (31) | | | (240) | |
Increase in cash surrender value of BOLI | Increase in cash surrender value of BOLI | (281) | | | (207) | | Increase in cash surrender value of BOLI | (21) | | | (74) | |
Net change in advances from borrowers for taxes and insurance | Net change in advances from borrowers for taxes and insurance | 540 | | | 373 | | Net change in advances from borrowers for taxes and insurance | 485 | | | 578 | |
| Net gain on sale of loans | Net gain on sale of loans | (3,683) | | | (3,399) | | Net gain on sale of loans | (365) | | | (2,053) | |
Proceeds from sale of loans held-for-sale | Proceeds from sale of loans held-for-sale | 130,890 | | | 179,244 | | Proceeds from sale of loans held-for-sale | 12,424 | | | 69,741 | |
Originations of loans held-for-sale | Originations of loans held-for-sale | (120,612) | | | (193,892) | | Originations of loans held-for-sale | (12,118) | | | (67,401) | |
Net gain on OREO and repossessed assets | Net gain on OREO and repossessed assets | (16) | | | — | | Net gain on OREO and repossessed assets | — | | | (16) | |
Change in operating assets and liabilities: | Change in operating assets and liabilities: | | Change in operating assets and liabilities: | |
Accrued interest receivable | Accrued interest receivable | 23 | | | (330) | | Accrued interest receivable | 100 | | | 94 | |
Other assets | Other assets | (4,865) | | | 314 | | Other assets | (20) | | | (337) | |
Accrued interest payable | Accrued interest payable | (321) | | | (13) | | Accrued interest payable | (162) | | | (236) | |
Other liabilities | Other liabilities | 1,037 | | | (585) | | Other liabilities | 598 | | | 4,353 | |
Net cash provided by (used in) operating activities | 12,047 | | | (9,587) | | |
Net cash provided by operating activities | | Net cash provided by operating activities | 2,904 | | | 7,780 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchase of available-for-sale securities | Purchase of available-for-sale securities | — | | | (7,177) | | Purchase of available-for-sale securities | (2,803) | | | — | |
Proceeds from principal payments, maturities and sales of available-for-sale securities | Proceeds from principal payments, maturities and sales of available-for-sale securities | 2,990 | | | 3,190 | | Proceeds from principal payments, maturities and sales of available-for-sale securities | 215 | | | 1,047 | |
Purchase of held-to-maturity securities | | Purchase of held-to-maturity securities | (2,226) | | | — | |
Proceeds from principal payments of held-to-maturity securities | | Proceeds from principal payments of held-to-maturity securities | 3 | | | — | |
Net increase in loans | Net increase in loans | (54,370) | | | (68,622) | | Net increase in loans | (21,382) | | | (1,079) | |
Purchase of BOLI | Purchase of BOLI | (6,057) | | | (14) | | Purchase of BOLI | — | | | (28) | |
Purchases of premises and equipment, net | Purchases of premises and equipment, net | (173) | | | (396) | | Purchases of premises and equipment, net | (84) | | | (29) | |
Proceeds from sale of OREO and other repossessed assets | Proceeds from sale of OREO and other repossessed assets | 35 | | | — | | Proceeds from sale of OREO and other repossessed assets | — | | | 35 | |
Net cash used in investing activities | Net cash used in investing activities | (57,575) | | | (73,019) | | Net cash used in investing activities | (26,277) | | | (54) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Net increase in deposits | Net increase in deposits | 59,672 | | | 132,132 | | Net increase in deposits | 37,771 | | | 68,712 | |
Proceeds from borrowings | — | | | 87,991 | | |
Repayment of borrowings | — | | | (87,991) | | |
Proceeds from subordinated debt, net | — | | | 11,676 | | |
| FHLB stock purchased | FHLB stock purchased | (175) | | | (4) | | FHLB stock purchased | (71) | | | (175) | |
Common stock repurchases | Common stock repurchases | (30) | | | — | | Common stock repurchases | (160) | | | — | |
Allocation of ESOP shares | Allocation of ESOP shares | 347 | | | 238 | | Allocation of ESOP shares | — | | | 100 | |
Dividends paid on common stock | Dividends paid on common stock | (1,594) | | | (1,683) | | Dividends paid on common stock | (709) | | | (702) | |
Proceeds from common stock option exercises | Proceeds from common stock option exercises | 182 | | | 239 | | Proceeds from common stock option exercises | 43 | | | 104 | |
Net cash provided by financing activities | Net cash provided by financing activities | 58,402 | | | 142,598 | | Net cash provided by financing activities | 36,874 | | | 68,039 | |
Net change in cash and cash equivalents | Net change in cash and cash equivalents | 12,874 | | | 59,992 | | Net change in cash and cash equivalents | 13,501 | | | 75,765 | |
Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | 193,828 | | | 55,770 | | Cash and cash equivalents, beginning of period | 183,590 | | | 193,828 | |
Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | $ | 206,702 | | | $ | 115,762 | | Cash and cash equivalents, end of period | $ | 197,091 | | | $ | 269,593 | |
SUPPLEMENTAL CASH FLOW INFORMATION: | SUPPLEMENTAL CASH FLOW INFORMATION: | | | | SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
Cash paid for income taxes | Cash paid for income taxes | $ | 2,290 | | | $ | 1,270 | | Cash paid for income taxes | $ | — | | | $ | — | |
Interest paid on deposits and borrowings | Interest paid on deposits and borrowings | 3,632 | | | 5,591 | | Interest paid on deposits and borrowings | 757 | | | 1,699 | |
Loans transferred from loans held-for-portfolio to OREO and repossessed assets | 84 | | | — | | |
| |
See notes to condensed consolidated financial statements
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1 – Basis of Presentation
The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial Bancorp, Inc., and its wholly owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc. References in this document to Sound Financial Bancorp refer to Sound Financial Bancorp, Inc. and references to the “Bank” refer to Sound Community Bank. References to “we,” “us,” and “our” or the “Company” refers to Sound Financial Bancorp and its wholly-owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc., unless the context otherwise requires.
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, as filed with the SEC on March 30, 15, 2022 (“2021 (“2020 Form 10-K”). The results for the interim periods are not necessarily indicative of results for a full year or any other future period.
Certain amounts in the prior period’s consolidated financial statements have been reclassified to conform to the current presentation. These classifications do not have an impact on previously reported consolidated net income, stockholders’ equity or earnings per share.
Note 2 – Accounting Pronouncements Recently Issued or Adopted
The Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), signed into law onOn March 27, 2020, provides relief from certain accounting and financial reporting requirements under U.S. GAAP. Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for troubled debt restructurings (“TDRs”) under Accounting Standards Codification ("ASC") 310-40 for loan modifications related to the novel coronavirus disease 2019 ("COVID-19") pandemic. In addition, on April 7, 2020, a group of banking agencies issued an interagency statement (“Interagency Statement”) for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs. The Interagency Statement was originally issued on March 22, 2020, but the banking agencies revised it to address the relationship between their TDR accounting and disclosure guidance and the TDR guidance in Section 4013 of the CARES Act. Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. The Interagency Statement indicates that a lender can conclude that a borrower is not experiencing financial difficulty if either (1) short-term (e.g., six months) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or (2) the modification or deferral program is mandated by the federal government or a state government. Accordingly, any loan modification made in response to the COVID-19 pandemic that meets either of these practical expedients would not be considered a TDR. The Company adopted this guidance effective March 27, 2020. On December 27, 2020, the Consolidated Appropriations Act 2021 (“CAA 2021”) was signed into law. Among other purposes, CAA 2021 provides coronavirus emergency response and relief, including extending relief offered under the CARES Act related to restructured loans as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.
In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-08, “Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”). ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. ASU 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements.
On March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform" ("Topic 848"). This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update apply to contract modifications that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) Modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) Modifications of contracts within the scope of Topics 840, Leases, and 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (for example, the incremental borrowing rate) or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted for as separate contracts; and 3) Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives. In January 2021, ASU 2021-01 updated amendments in the new ASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification. The amendments in this ASU have differing effective dates, beginning with interim period including and subsequent to March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by removing the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items, removing the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and removing the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Disclosure requirements removed from FASB Subtopic 715-20 include the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer, related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, and, for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs and benefit obligation for postretirement health care benefits. Disclosure requirements added to FASB Subtopic 715-20 include the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This ASU is effective for fiscal years ending after December 15, 2020. The adoption of ASU No. 2018-14 did not have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.and subsequent amendments to the initial guidance in November 2018, ASU No. 2018-19, April 2019, ASU 2019-04, May 2019, ASU 2019-05, November 2019, ASU 2019-11, February 2020, ASU 2020-02, and March 2020, ASU 2020-03, all of which clarifies codification and corrects unintended application of the guidance. This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The
income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted. The new guidance may result in an increase in the allowance for loan losses; however, the Company is still in the process of determining the magnitude of the change and its impact on the Company's consolidated financial statements. The FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), delaying implementation of ASU No. 2016-13 for SEC smaller reporting company filers until fiscal years beginning after December 15, 2022. The Bank meets the requirements of a smaller reporting company and will delay implementation of ASU No. 2016-13.
In March 2022, the FASB issued ASU 2022-02,
10Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases. This ASU will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, upon the Company’s adoption of the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology.
Note 3 – Investments
The Company classifies its debt investment securities in two categories: held-to-maturity (“HTM”) or available-for-sale (“AFS”). Unrealized holding gains or losses, net of the related tax effect, on AFS securities are excluded from income and are reported as a separate component of shareholders’ equity as accumulated other comprehensive income net of applicable taxes until realized. Recognized gains and losses from the sale of AFS securities are determined on a specific-identification basis. These securities are adjusted for the amortization or accretion of premiums or discounts. Securities classified as HTM are those that the Company has the positive intent and ability to hold until maturity. These securities are carried at amortized cost, adjusted for the amortization or accretion of premiums or discounts.The Company does not own any debt securities classified as trading or equity securities.
The amortized cost and fair value of our available-for-sale (“AFS”)AFS securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands):
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
September 30, 2021 | | | | | | | | |
March 31, 2022 | | March 31, 2022 | | | | | | | |
| Municipal bonds | Municipal bonds | $ | 4,216 | | | $ | 160 | | | $ | (6) | | | $ | 4,370 | | Municipal bonds | $ | 6,724 | | | $ | 74 | | | $ | (520) | | | $ | 6,278 | |
Agency mortgage-backed securities | Agency mortgage-backed securities | 2,631 | | | 70 | | | (11) | | | 2,690 | | Agency mortgage-backed securities | 4,093 | | | 14 | | | (162) | | | 3,945 | |
| Total | Total | $ | 6,847 | | | $ | 230 | | | $ | (17) | | | $ | 7,060 | | Total | $ | 10,817 | | | $ | 88 | | | $ | (682) | | | $ | 10,223 | |
| December 31, 2020 | | |
December 31, 2021 | | December 31, 2021 | |
| Municipal bonds | Municipal bonds | $ | 5,209 | | | $ | 204 | | | $ | — | | | $ | 5,413 | | Municipal bonds | $ | 5,931 | | | $ | 148 | | | $ | (13) | | | $ | 6,066 | |
Agency mortgage-backed securities | Agency mortgage-backed securities | 4,706 | | | 105 | | | (6) | | | 4,805 | | Agency mortgage-backed securities | 2,312 | | | 53 | | | (12) | | | 2,353 | |
| Total | Total | $ | 9,915 | | | $ | 309 | | | $ | (6) | | | $ | 10,218 | | Total | $ | 8,243 | | | $ | 201 | | | $ | (25) | | | $ | 8,419 | |
The amortized cost and fair value of our HTM securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
March 31, 2022 | | | | | | | |
| | | | | | | |
Municipal bonds | $ | 705 | | | $ | — | | | $ | (87) | | | $ | 618 | |
Agency mortgage-backed securities | 1,518 | | | — | | | (80) | | | 1,438 | |
| | | | | | | |
Total | $ | 2,223 | | | $ | — | | | $ | (167) | | | $ | 2,056 | |
| | | | | | | |
December 31, 2021 | | | | | | | |
| | | | | | | |
Municipal bonds | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Agency mortgage-backed securities | — | | | — | | | — | | | — | |
| | | | | | | |
Total | $ | — | | | $ | — | | | $ | — | | | $ | — | |
The amortized cost and fair value of AFS and HTM securities at September 30, 2021,March 31, 2022, by contractual maturity, are shown below (in thousands). Expected maturities of AFS securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately. | | | | | | | | | | | | | March 31, 2022 |
| | September 30, 2021 | | Available-for-sale | | Held-to-maturity |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due within one year | Due within one year | $ | 226 | | | $ | 226 | | Due within one year | $ | 260 | | | $ | 262 | | | $ | — | | | $ | — | |
Due after one year through five years | Due after one year through five years | 260 | | | 268 | | Due after one year through five years | 151 | | | 155 | | | — | | | — | |
Due after five years through ten years | Due after five years through ten years | 457 | | | 492 | | Due after five years through ten years | 1,226 | | | 1,279 | | | — | | | — | |
Due after ten years | Due after ten years | 3,273 | | | 3,384 | | Due after ten years | 5,087 | | | 4,582 | | | 705 | | | 618 | |
Agency mortgage-backed securities | Agency mortgage-backed securities | 2,631 | | | 2,690 | | Agency mortgage-backed securities | 4,093 | | | 3,945 | | | 1,518 | | | 1,438 | |
Total | Total | $ | 6,847 | | | $ | 7,060 | | Total | $ | 10,817 | | | $ | 10,223 | | | $ | 2,223 | | | $ | 2,056 | |
There were no pledged securities at September 30, 2021March 31, 2022 or December 31, 2020.2021.
There were no sales of AFS securities during the three and nine months ended September 30, 2021March 31, 2022 or 2020.
2021. There were no sales of HTM securities during the three months ended March 31, 2022.The following table summarizes the aggregate fair value and gross unrealized loss by length of time of those investments that have been in a continuous unrealized loss position at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| Less Than 12 Months | | 12 Months or Longer | | Total |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
Available-for-sale securities | | | | | | | | | | | |
| | | | | | | | | | | |
Municipal bonds | $ | 3,488 | | | $ | (520) | | | $ | — | | | $ | — | | | $ | 3,488 | | | $ | (520) | |
Agency mortgage-backed securities | 2,792 | | | (117) | | | 355 | | | (45) | | | 3,147 | | | (162) | |
| | | | | | | | | | | |
Total available-for-sale securities | $ | 6,280 | | | $ | (637) | | | $ | 355 | | | $ | (45) | | | $ | 6,635 | | | $ | (682) | |
Held-to-maturity securities | | | | | | | | | | | |
| | | | | | | | | | | |
Municipal bonds | $ | 618 | | | $ | (87) | | | $ | — | | | $ | — | | | $ | 618 | | | $ | (87) | |
Agency mortgage-backed securities | 1,438 | | | (80) | | | — | | | — | | | 1,438 | | | (80) | |
| | | | | | | | | | | |
Total held-to-maturity securities | $ | 2,056 | | | $ | (167) | | | $ | — | | | $ | — | | | $ | 2,056 | | | $ | (167) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| Less Than 12 Months | | 12 Months or Longer | | Total |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| | | | | | | | | | | |
Municipal bonds | $ | 660 | | | $ | (6) | | | $ | — | | | $ | — | | | $ | 660 | | | $ | (6) | |
Agency mortgage-backed securities | 434 | | | (11) | | | — | | | — | | | 434 | | | (11) | |
| | | | | | | | | | | |
Total | $ | 1,094 | | | $ | (17) | | | $ | — | | | $ | — | | | $ | 1,094 | | | $ | (17) | |
| | | December 31, 2020 | | December 31, 2021 |
| | Less Than 12 Months | | 12 Months or Longer | | Total | | Less Than 12 Months | | 12 Months or Longer | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| Municipal bonds | | Municipal bonds | $ | 1,632 | | | $ | (13) | | | $ | — | | | $ | — | | | $ | 1,632 | | | $ | (13) | |
Agency mortgage-backed securities | Agency mortgage-backed securities | $ | 1,618 | | | $ | (6) | | | $ | — | | | $ | — | | | $ | 1,618 | | | $ | (6) | | Agency mortgage-backed securities | $ | — | | | $ | — | | | $ | 402 | | | $ | (12) | | | $ | 402 | | | $ | (12) | |
| Total | Total | $ | 1,618 | | | $ | (6) | | | $ | — | | | $ | — | | | $ | 1,618 | | | $ | (6) | | Total | $ | 1,632 | | | $ | (13) | | | $ | 402 | | | $ | (12) | | | $ | 2,034 | | | $ | (25) | |
There were no credit losses recognized in earnings related to other than temporary impairments during the three and nine months ended September 30, 2021March 31, 2022 or 2020.2021.
At September 30, 2021,March 31, 2022, the total securities portfolio consisted of 1112 agency mortgage-backed securities and 912 municipal bonds with a total portfolio fair value of $7.1$12.3 million. At December 31, 2020,2021, the securities portfolio consisted of 1610 agency mortgage-backed securities and 10 municipal bonds with a fair value of $10.2$8.4 million. At September 30, 2021,March 31, 2022, there were 313 securities in an unrealized loss position for less than 12 months, and there were no securities1 security in an unrealized loss position for more than 12 months. Of the 13 securities in an unrealized loss position for less than 12 months, 2 securities were classified as HTM. At December 31, 2020,2021, there were 32 securities in an unrealized loss position for less than 12 months, and there were no securities1 security in an unrealized loss position for more than 12 months. The unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not related to the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. The unrealized losses on these investments are not considered other-than-temporary impairment ("OTTI") as of September 30, 2021,March 31, 2022, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis. Deterioration in market and economic conditions related to the COVID-19 pandemic may, however, have an adverse impact on credit quality in the future and result in OTTI charges.
Note 4 – Loans
The composition of the loans-held-for portfolio at the dates indicated, excluding loans held-for-sale, was as follows (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Real estate loans: | Real estate loans: | | | | Real estate loans: | | | |
One-to-four family | One-to-four family | $ | 194,346 | | | $ | 130,657 | | One-to-four family | $ | 221,832 | | | $ | 207,660 | |
Home equity | Home equity | 14,012 | | | 16,265 | | Home equity | 13,798 | | | 13,250 | |
Commercial and multifamily | Commercial and multifamily | 246,794 | | | 265,774 | | Commercial and multifamily | 279,892 | | | 278,175 | |
Construction and land | Construction and land | 81,576 | | | 62,752 | | Construction and land | 70,402 | | | 63,105 | |
Total real estate loans | Total real estate loans | 536,728 | | | 475,448 | | Total real estate loans | 585,924 | | | 562,190 | |
Consumer loans: | Consumer loans: | | | | Consumer loans: | | | |
Manufactured homes | Manufactured homes | 21,459 | | | 20,941 | | Manufactured homes | 22,179 | | | 21,636 | |
Floating homes | Floating homes | 58,358 | | | 39,868 | | Floating homes | 59,784 | | | 59,268 | |
Other consumer | Other consumer | 15,732 | | | 15,024 | | Other consumer | 18,370 | | | 16,748 | |
Total consumer loans | Total consumer loans | 95,549 | | | 75,833 | | Total consumer loans | 100,333 | | | 97,652 | |
Commercial business loans | Commercial business loans | 36,620 | | | 64,217 | | Commercial business loans | 24,452 | | | 28,026 | |
Total loans held-for-portfolio | Total loans held-for-portfolio | 668,897 | | | 615,498 | | Total loans held-for-portfolio | 710,709 | | | 687,868 | |
Premiums for purchased loans(1) | | Premiums for purchased loans(1) | 788 | | | 897 | |
Deferred fees, net | Deferred fees, net | (1,346) | | | (2,135) | | Deferred fees, net | (2,012) | | | (2,367) | |
Total loans held-for-portfolio, gross | Total loans held-for-portfolio, gross | 667,551 | | | 613,363 | | Total loans held-for-portfolio, gross | 709,485 | | | 686,398 | |
Allowance for loan losses | Allowance for loan losses | (6,327) | | | (6,000) | | Allowance for loan losses | (6,407) | | | (6,306) | |
Total loans held-for-portfolio, net | Total loans held-for-portfolio, net | $ | 661,224 | | | $ | 607,363 | | Total loans held-for-portfolio, net | $ | 703,078 | | | $ | 680,092 | |
(1)Includes premiums resulting from purchased loans of $548 thousand related to one-to-four family loans, $65 thousand related to commercial and multifamily loans, and $175 thousand related to commercial business loans as of March 31, 2022. Includes premiums resulting from purchased loans of $556 thousand related to one-to-four family loans, $181 thousand related to commercial and multifamily loans, and $160 thousand related to commercial business loans as of December 31, 2021.
The Company was automatically authorized to participate in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), as a qualified lender since the inception of the program. As of September 30, 2021,March 31, 2022, the Bank had funded PPP loans totaling $119.2 million, $11.8$2.1 million of which remained outstanding and are included in commercial business loans above. PPP loans are 100% guaranteed by the SBA.
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of the dates indicated (in thousands):
| | | September 30, 2021 | | March 31, 2022 |
| | Allowance: Individually evaluated for impairment | | Allowance: Collectively evaluated for impairment | | Allowance: Ending balance | | Loans held for investment: Individually evaluated for impairment | | Loans held for investment: Collectively evaluated for impairment | | Loans held for investment: Ending balance | | Allowance: Individually evaluated for impairment | | Allowance: Collectively evaluated for impairment | | Allowance: Ending balance | | Loans held for investment: Individually evaluated for impairment | | Loans held for investment: Collectively evaluated for impairment | | Loans held for investment: Ending balance |
One-to-four family | One-to-four family | $ | 137 | | | $ | 1,183 | | | $ | 1,320 | | | $ | 3,791 | | | $ | 190,555 | | | $ | 194,346 | | One-to-four family | $ | 109 | | | $ | 1,365 | | | $ | 1,474 | | | $ | 3,458 | | | $ | 218,374 | | | $ | 221,832 | |
Home equity | Home equity | 7 | | | 87 | | | 94 | | | 226 | | | 13,786 | | | 14,012 | | Home equity | 6 | | | 90 | | | 96 | | | 228 | | | 13,570 | | | 13,798 | |
Commercial and multifamily | Commercial and multifamily | — | | | 1,857 | | | 1,857 | | | — | | | 246,794 | | | 246,794 | | Commercial and multifamily | — | | | 2,227 | | | 2,227 | | | 2,336 | | | 277,556 | | | 279,892 | |
Construction and land | Construction and land | 5 | | | 771 | | | 776 | | | 255 | | | 81,321 | | | 81,576 | | Construction and land | 4 | | | 694 | | | 698 | | | 66 | | | 70,336 | | | 70,402 | |
Manufactured homes | Manufactured homes | 105 | | | 198 | | | 303 | | | 201 | | | 21,258 | | | 21,459 | | Manufactured homes | 116 | | | 332 | | | 448 | | | 214 | | | 21,965 | | | 22,179 | |
Floating homes | Floating homes | — | | | 383 | | | 383 | | | 504 | | | 57,854 | | | 58,358 | | Floating homes | — | | | 376 | | | 376 | | | — | | | 59,784 | | | 59,784 | |
Other consumer | Other consumer | 27 | | | 179 | | | 206 | | | 108 | | | 15,624 | | | 15,732 | | Other consumer | 26 | | | 307 | | | 333 | | | 348 | | | 18,022 | | | 18,370 | |
Commercial business | Commercial business | — | | | 426 | | | 426 | | | 182 | | | 36,438 | | | 36,620 | | Commercial business | — | | | 238 | | | 238 | | | 170 | | | 24,282 | | | 24,452 | |
Unallocated | Unallocated | — | | | 962 | | | 962 | | | — | | | — | | | — | | Unallocated | — | | | 517 | | | 517 | | | — | | | — | | | — | |
Total | Total | $ | 281 | | | $ | 6,046 | | | $ | 6,327 | | | $ | 5,267 | | | $ | 663,630 | | | $ | 668,897 | | Total | $ | 261 | | | $ | 6,146 | | | $ | 6,407 | | | $ | 6,820 | | | $ | 703,889 | | | $ | 710,709 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Allowance: Individually evaluated for impairment | | Allowance: Collectively evaluated for impairment | | Allowance: Ending balance | | Loans held for investment: Individually evaluated for impairment | | Loans held for investment: Collectively evaluated for impairment | | Loans held for investment: Ending balance |
One-to-four family | $ | 112 | | | $ | 1,290 | | | $ | 1,402 | | | $ | 4,066 | | | $ | 203,594 | | | $ | 207,660 | |
Home equity | 7 | | | 86 | | | 93 | | | 215 | | | 13,035 | | | 13,250 | |
Commercial and multifamily | — | | | 2,340 | | | 2,340 | | | 2,380 | | | 275,795 | | | 278,175 | |
Construction and land | 4 | | | 646 | | | 650 | | | 68 | | | 63,037 | | | 63,105 | |
Manufactured homes | 144 | | | 331 | | | 475 | | | 221 | | | 21,415 | | | 21,636 | |
Floating homes | — | | | 372 | | | 372 | | | 493 | | | 58,775 | | | 59,268 | |
Other consumer | 26 | | | 284 | | | 310 | | | 106 | | | 16,642 | | | 16,748 | |
Commercial business | — | | | 269 | | | 269 | | | 176 | | | 27,850 | | | 28,026 | |
Unallocated | — | | | 395 | | | 395 | | | — | | | — | | | — | |
Total | $ | 293 | | | $ | 6,013 | | | $ | 6,306 | | | $ | 7,725 | | | $ | 680,143 | | | $ | 687,868 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Allowance: Individually evaluated for impairment | | Allowance: Collectively evaluated for impairment | | Allowance: Ending balance | | Loans held for investment: Individually evaluated for impairment | | Loans held for investment: Collectively evaluated for impairment | | Loans held for investment: Ending balance |
One-to-four family | $ | 165 | | | $ | 898 | | | $ | 1,063 | | | $ | 3,705 | | | $ | 126,952 | | | $ | 130,657 | |
Home equity | 14 | | | 133 | | | 147 | | | 293 | | | 15,972 | | | 16,265 | |
Commercial and multifamily | — | | | 2,370 | | | 2,370 | | | 353 | | | 265,421 | | | 265,774 | |
Construction and land | 6 | | | 572 | | | 578 | | | 77 | | | 62,675 | | | 62,752 | |
Manufactured homes | 163 | | | 366 | | | 529 | | | 265 | | | 20,676 | | | 20,941 | |
Floating homes | — | | | 328 | | | 328 | | | 518 | | | 39,350 | | | 39,868 | |
Other consumer | 30 | | | 258 | | | 288 | | | 114 | | | 14,910 | | | 15,024 | |
Commercial business | — | | | 291 | | | 291 | | | 615 | | | 63,602 | | | 64,217 | |
Unallocated | — | | | 406 | | | 406 | | | — | | | — | | | — | |
Total | $ | 378 | | | $ | 5,622 | | | $ | 6,000 | | | $ | 5,940 | | | $ | 609,558 | | | $ | 615,498 | |
The following tables summarize the activity in the allowance for loan losses for the periods indicated (in thousands): | | | Three Months Ended September 30, 2021 | | Three Months Ended March 31, 2022 |
| | Beginning Allowance | | Charge-offs | | Recoveries | | Provision (Recapture) | | Ending Allowance | | Beginning Allowance | | Charge-offs | | Recoveries | | Provision (Recapture) | | Ending Allowance |
One-to-four family | One-to-four family | $ | 1,292 | | | $ | — | | | $ | — | | | $ | 28 | | | $ | 1,320 | | One-to-four family | $ | 1,402 | | | $ | — | | | $ | — | | | $ | 72 | | | $ | 1,474 | |
Home equity | Home equity | 111 | | | — | | | 2 | | | (19) | | | 94 | | Home equity | 93 | | | — | | | 2 | | | 1 | | | 96 | |
Commercial and multifamily | Commercial and multifamily | 1,987 | | | — | | | — | | | (130) | | | 1,857 | | Commercial and multifamily | 2,340 | | | — | | | — | | | (113) | | | 2,227 | |
Construction and land | Construction and land | 700 | | | — | | | — | | | 76 | | | 776 | | Construction and land | 650 | | | — | | | — | | | 48 | | | 698 | |
Manufactured homes | Manufactured homes | 367 | | | — | | | 1 | | | (65) | | | 303 | | Manufactured homes | 475 | | | — | | | — | | | (27) | | | 448 | |
Floating homes | Floating homes | 318 | | | — | | | — | | | 65 | | | 383 | | Floating homes | 372 | | | — | | | — | | | 4 | | | 376 | |
Other consumer | Other consumer | 201 | | | (8) | | | — | | | 13 | | | 206 | | Other consumer | 310 | | | (26) | | | 5 | | | 44 | | | 333 | |
Commercial business | Commercial business | 693 | | | — | | | — | | | (267) | | | 426 | | Commercial business | 269 | | | (6) | | | 1 | | | (26) | | | 238 | |
Unallocated | Unallocated | 488 | | | — | | | — | | | 474 | | | 962 | | Unallocated | 395 | | | — | | | — | | | 122 | | | 517 | |
Total | Total | $ | 6,157 | | | $ | (8) | | | $ | 3 | | | $ | 175 | | | $ | 6,327 | | Total | $ | 6,306 | | | $ | (32) | | | $ | 8 | | | $ | 125 | | | $ | 6,407 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Beginning Allowance | | Charge-offs | | Recoveries | | Provision (Recapture) | | Ending Allowance |
One-to-four family | $ | 1,063 | | | $ | (76) | | | $ | — | | | $ | 333 | | | $ | 1,320 | |
Home equity | 147 | | | (8) | | | 4 | | | (49) | | | 94 | |
Commercial and multifamily | 2,370 | | | — | | | — | | | (513) | | | 1,857 | |
Construction and land | 578 | | | — | | | — | | | 198 | | | 776 | |
Manufactured homes | 529 | | | (2) | | | 3 | | | (227) | | | 303 | |
Floating homes | 328 | | | — | | | — | | | 55 | | | 383 | |
Other consumer | 288 | | | (27) | | | 6 | | | (61) | | | 206 | |
Commercial business | 291 | | | — | | | 2 | | | 133 | | | 426 | |
Unallocated | 406 | | | — | | | — | | | 556 | | | 962 | |
Total | $ | 6,000 | | | $ | (113) | | | $ | 15 | | | $ | 425 | | | $ | 6,327 | |
14 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Beginning Allowance | | Charge-offs | | Recoveries | | (Recapture) Provision | | Ending Allowance |
One-to-four family | $ | 1,063 | | | $ | (62) | | | $ | — | | | $ | (21) | | | $ | 980 | |
Home equity | 147 | | | — | | | — | | | (36) | | | 111 | |
Commercial and multifamily | 2,370 | | | — | | | — | | | (261) | | | 2,109 | |
Construction and land | 578 | | | — | | | — | | | 17 | | | 595 | |
Manufactured homes | 529 | | | — | | | 1 | | | (159) | | | 371 | |
Floating homes | 328 | | | — | | | — | | | (37) | | | 291 | |
Other consumer | 288 | | | (9) | | | 3 | | | (95) | | | 187 | |
Commercial business | 291 | | | — | | | 2 | | | 427 | | | 720 | |
Unallocated | 406 | | | — | | | — | | | 165 | | | 571 | |
Total | $ | 6,000 | | | $ | (71) | | 0 | $ | 6 | | | $ | — | | | $ | 5,935 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Beginning Allowance | | Charge-offs | | Recoveries | | (Recapture) Provision | | Ending Allowance |
One-to-four family | $ | 1,149 | | | $ | (20) | | | $ | 4 | | | $ | 37 | | | $ | 1,170 | |
Home equity | 154 | | | (2) | | | 7 | | | (17) | | | 142 | |
Commercial and multifamily | 1,991 | | | — | | | — | | | 16 | | | 2,007 | |
Construction and land | 623 | | | — | | | — | | | (43) | | | 580 | |
Manufactured homes | 362 | | | — | | | 1 | | | (33) | | | 330 | |
Floating homes | 324 | | | — | | | — | | | (31) | | | 293 | |
Other consumer | 127 | | | (4) | | | 2 | | | (10) | | | 115 | |
Commercial business | 501 | | | (306) | | | — | | | 68 | | | 263 | |
Unallocated | 800 | | | — | | | — | | | 288 | | | 1,088 | |
Total | $ | 6,031 | | | $ | (332) | | 0 | $ | 14 | | | $ | 275 | | | $ | 5,988 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Beginning Allowance | | Charge-offs | | Recoveries | | (Recapture) Provision | | Ending Allowance |
One-to-four family | $ | 1,120 | | | $ | (20) | | | $ | 12 | | | $ | 58 | | | $ | 1,170 | |
Home equity | 178 | | | (2) | | | 46 | | | (80) | | | 142 | |
Commercial and multifamily | 1,696 | | | — | | | — | | | 311 | | | 2,007 | |
Construction and land | 492 | | | — | | | — | | | 88 | | | 580 | |
Manufactured homes | 480 | | | — | | | 1 | | | (151) | | | 330 | |
Floating homes | 283 | | | — | | | — | | | 10 | | | 293 | |
Other consumer | 112 | | | (20) | | | 13 | | | 10 | | | 115 | |
Commercial business | 331 | | | (607) | | | — | | | 539 | | | 263 | |
Unallocated | 948 | | | — | | | — | | | 140 | | | 1,088 | |
Total | $ | 5,640 | | | $ | (649) | | | $ | 72 | | | $ | 925 | | | $ | 5,988 | |
Credit Quality Indicators. 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" or "loss." An asset is considered "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" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without 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 Federal Deposit Insurance Corporation (“FDIC”), the Bank's federal regulator, and, since our conversion to a Washington-chartered commercial bank, the Washington Department of Financial Institutions, the Bank's state banking regulator, 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.
The following tables present the internally assigned grades as of the dates indicated, by type of loan (in thousands):
| | | September 30, 2021 | | March 31, 2022 |
| | One-to- four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total | | One-to- four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total |
Grade: | Grade: | | | | | | | | | | | | | | | | | | Grade: | | | | | | | | | | | | | | | | | |
Pass | Pass | $ | 190,857 | | | $ | 13,654 | | | $ | 200,617 | | | $ | 67,021 | | | $ | 21,025 | | | $ | 57,250 | | | $ | 15,711 | | | $ | 30,242 | | | $ | 596,377 | | Pass | $ | 218,585 | | | $ | 13,459 | | | $ | 245,940 | | | $ | 64,581 | | | $ | 21,672 | | | $ | 59,183 | | | $ | 18,108 | | | $ | 20,817 | | | $ | 662,345 | |
Watch | Watch | 299 | | | 23 | | | 29,061 | | | 11,962 | | | 243 | | | 604 | | | — | | | 4,059 | | | 46,251 | | Watch | 353 | | | 22 | | | 22,713 | | | 4,184 | | | 316 | | | — | | | — | | | 3,464 | | | 31,052 | |
Special Mention | Special Mention | — | | | — | | | 9,958 | | | 837 | | | — | | | — | | | — | | | 1,746 | | | 12,541 | | Special Mention | — | | | — | | | 4,129 | | | 830 | | | — | | | 601 | | | — | | | — | | | 5,560 | |
Substandard | Substandard | 3,190 | | | 335 | | | 7,158 | | | 1,756 | | | 191 | | | 504 | | | 21 | | | 573 | | | 13,728 | | Substandard | 2,894 | | | 317 | | | 7,110 | | | 807 | | | 191 | | | — | | | 262 | | | 171 | | | 11,752 | |
| Total | Total | $ | 194,346 | | | $ | 14,012 | | | $ | 246,794 | | | $ | 81,576 | | | $ | 21,459 | | | $ | 58,358 | | | $ | 15,732 | | | $ | 36,620 | | | $ | 668,897 | | Total | $ | 221,832 | | | $ | 13,798 | | | $ | 279,892 | | | $ | 70,402 | | | $ | 22,179 | | | $ | 59,784 | | | $ | 18,370 | | | $ | 24,452 | | | $ | 710,709 | |
| | | December 31, 2020 | | December 31, 2021 |
| | One-to- four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total | | One-to- four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total |
Grade: | Grade: | | | | | | | | | | | | | | | | | | Grade: | | | | | | | | | | | | | | | | | |
Pass | Pass | $ | 113,185 | | | $ | 15,556 | | | $ | 228,652 | | | $ | 44,360 | | | $ | 19,606 | | | $ | 38,746 | | | $ | 15,000 | | | $ | 56,743 | | | $ | 531,848 | | Pass | $ | 203,883 | | | $ | 12,904 | | | $ | 233,300 | | | $ | 56,310 | | | $ | 21,137 | | | $ | 58,171 | | | $ | 16,728 | | | $ | 23,713 | | | $ | 626,146 | |
Watch | Watch | 15,142 | | | 245 | | | 22,945 | | | 13,808 | | | 1,115 | | | 604 | | | — | | | 5,202 | | | 59,061 | | Watch | 363 | | | 23 | | | 32,770 | | | 4,347 | | | 305 | | | — | | | — | | | 3,561 | | | 41,369 | |
Special Mention | Special Mention | — | | | — | | | 10,813 | | | 3,939 | | | — | | | — | | | — | | | 310 | | | 15,062 | | Special Mention | — | | | — | | | 4,553 | | | 830 | | | — | | | 604 | | | — | | | 211 | | | 6,198 | |
Substandard | Substandard | 2,330 | | | 464 | | | 3,364 | | | 645 | | | 220 | | | 518 | | | 24 | | | 1,962 | | | 9,527 | | Substandard | 3,414 | | | 323 | | | 7,552 | | | 1,618 | | | 194 | | | 493 | | | 20 | | | 541 | | | 14,155 | |
| Total | Total | $ | 130,657 | | | $ | 16,265 | | | $ | 265,774 | | | $ | 62,752 | | | $ | 20,941 | | | $ | 39,868 | | | $ | 15,024 | | | $ | 64,217 | | | $ | 615,498 | | Total | $ | 207,660 | | | $ | 13,250 | | | $ | 278,175 | | | $ | 63,105 | | | $ | 21,636 | | | $ | 59,268 | | | $ | 16,748 | | | $ | 28,026 | | | $ | 687,868 | |
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 placed on nonaccrual once the loan is 90 days past due or sooner if,
in management’s opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions.
The following table presents the recorded investment in nonaccrual loans as of the dates indicated, by type of loan (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
One-to-four family | One-to-four family | $ | 1,915 | | | $ | 1,668 | | One-to-four family | $ | 1,676 | | | $ | 2,207 | |
Home equity | Home equity | 150 | | | 156 | | Home equity | 155 | | | 140 | |
Commercial and multifamily | Commercial and multifamily | — | | | 353 | | Commercial and multifamily | 2,336 | | | 2,380 | |
Construction and land | Construction and land | 220 | | | 40 | | Construction and land | 31 | | | 33 | |
Manufactured homes | Manufactured homes | 98 | | | 149 | | Manufactured homes | 135 | | | 122 | |
Floating homes | Floating homes | 504 | | | 518 | | Floating homes | — | | | 493 | |
| Other consumer | | Other consumer | 244 | | | — | |
Commercial business | Commercial business | 182 | | | — | | Commercial business | 170 | | | 176 | |
Total | Total | $ | 3,069 | | | $ | 2,884 | | Total | $ | 4,747 | | | $ | 5,552 | |
The following tables present the aging of the recorded investment in past due loans as of the dates indicated, by type of loan (in thousands):
| | | September 30, 2021 | | March 31, 2022 |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days and Greater Past Due | | > 90 Days and Accruing | | Total Past Due | | Current | | Total Loans | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days and Greater Past Due | | > 90 Days and Accruing | | Total Past Due | | Current | | Total Loans |
One-to-four family | One-to-four family | $ | — | | | $ | 604 | | | $ | 1,571 | | | $ | — | | | $ | 2,175 | | | $ | 192,171 | | | $ | 194,346 | | One-to-four family | $ | 74 | | | $ | — | | | $ | 1,535 | | | $ | — | | | $ | 1,609 | | | $ | 220,223 | | | $ | 221,832 | |
Home equity | Home equity | 16 | | | — | | | 134 | | | — | | | 150 | | | 13,862 | | | 14,012 | | Home equity | — | | | — | | | 136 | | | — | | | 136 | | | 13,662 | | | 13,798 | |
Commercial and multifamily | Commercial and multifamily | 2,429 | | | — | | | — | | | — | | | 2,429 | | | 244,365 | | | 246,794 | | Commercial and multifamily | — | | | — | | | — | | | — | | | — | | | 279,892 | | | 279,892 | |
Construction and land | Construction and land | — | | | — | | | — | | | — | | | — | | | 81,576 | | | 81,576 | | Construction and land | 84 | | | — | | | — | | | — | | | 84 | | | 70,318 | | | 70,402 | |
Manufactured homes | Manufactured homes | 33 | | | 79 | | | 97 | | | — | | | 210 | | | 21,249 | | | 21,459 | | Manufactured homes | 75 | | | — | | | 73 | | | — | | | 148 | | | 22,031 | | | 22,179 | |
Floating homes | Floating homes | — | | | — | | | 247 | | | — | | | 247 | | | 58,111 | | | 58,358 | | Floating homes | — | | | — | | | — | | | — | | | — | | | 59,784 | | | 59,784 | |
Other consumer | Other consumer | 20 | | | 2 | | | — | | | — | | | 22 | | | 15,710 | | | 15,732 | | Other consumer | 249 | | | 12 | | | — | | | — | | | 261 | | | 18,109 | | | 18,370 | |
Commercial business | Commercial business | — | | | — | | | 182 | | | — | | | 182 | | | 36,438 | | | 36,620 | | Commercial business | — | | | — | | | 170 | | | — | | | 170 | | | 24,282 | | | 24,452 | |
Total | Total | $ | 2,498 | | | $ | 685 | | | $ | 2,231 | | | $ | — | | | $ | 5,413 | | | $ | 663,484 | | | $ | 668,897 | | Total | $ | 482 | | | $ | 12 | | | $ | 1,914 | | | $ | — | | | $ | 2,408 | | | $ | 708,301 | | | $ | 710,709 | |
| | | December 31, 2020 | | December 31, 2021 |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days and Greater Past Due | | > 90 Days and Accruing | | Total Past Due | | Current | | Total Loans | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days and Greater Past Due | | > 90 Days and Accruing | | Total Past Due | | Current | | Total Loans |
One-to-four family | One-to-four family | $ | 498 | | | $ | 362 | | | $ | 1,407 | | | $ | — | | | $ | 2,267 | | | $ | 128,390 | | | $ | 130,657 | | One-to-four family | $ | 1,805 | | | $ | 58 | | | $ | 87 | | | $ | — | | | $ | 1,950 | | | $ | 205,710 | | | $ | 207,660 | |
Home equity | Home equity | 102 | | | — | | | 112 | | | — | | | 214 | | | 16,051 | | | 16,265 | | Home equity | — | | | — | | | 140 | | | — | | | 140 | | | 13,110 | | | 13,250 | |
Commercial and multifamily | Commercial and multifamily | — | | | — | | | 353 | | | — | | | 353 | | | 265,421 | | | 265,774 | | Commercial and multifamily | — | | | — | | | — | | | — | | | — | | | 278,175 | | | 278,175 | |
Construction and land | Construction and land | 690 | | | — | | | 40 | | | — | | | 730 | | | 62,022 | | | 62,752 | | Construction and land | 837 | | | — | | | — | | | — | | | 837 | | | 62,268 | | | 63,105 | |
Manufactured homes | Manufactured homes | 159 | | | 74 | | | 149 | | | — | | | 382 | | | 20,559 | | | 20,941 | | Manufactured homes | 123 | | | — | | | 59 | | | — | | | 182 | | | 21,454 | | | 21,636 | |
Floating homes | Floating homes | — | | | 269 | | | 249 | | | — | | | 518 | | | 39,350 | | | 39,868 | | Floating homes | — | | | — | | | 244 | | | — | | | 244 | | | 59,024 | | | 59,268 | |
Other consumer | Other consumer | 15 | | | 1 | | | — | | | — | | | 16 | | | 15,008 | | | 15,024 | | Other consumer | 2 | | | 76 | | | — | | | — | | | 78 | | | 16,670 | | | 16,748 | |
Commercial business | Commercial business | 583 | | | — | | | — | | | — | | | 583 | | | 63,634 | | | 64,217 | | Commercial business | 6 | | | — | | | 176 | | | — | | | 182 | | | 27,844 | | | 28,026 | |
Total | Total | $ | 2,047 | | | $ | 706 | | | $ | 2,310 | | | $ | — | | | $ | 5,063 | | | $ | 610,435 | | | $ | 615,498 | | Total | $ | 2,773 | | | $ | 134 | | | $ | 706 | | | $ | — | | | $ | 3,613 | | | $ | 684,255 | | | $ | 687,868 | |
Nonperforming Loans. Loans are considered nonperforming when they are placed on nonaccrual.
The following tables present the credit risk profile of our loan portfolio based on payment activity as of the dates indicated, by type of loan (in thousands):
| | | September 30, 2021 | | March 31, 2022 |
| | One-to-four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total | | One-to-four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total |
Performing | Performing | | $ | 192,431 | | | $ | 13,862 | | | $ | 246,794 | | | $ | 81,356 | | | $ | 21,361 | | | $ | 57,854 | | | $ | 15,732 | | | $ | 36,438 | | | $ | 665,828 | | Performing | | $ | 220,156 | | | $ | 13,643 | | | $ | 277,556 | | | $ | 70,371 | | | $ | 22,044 | | | $ | 59,784 | | | $ | 18,126 | | | $ | 24,282 | | | $ | 705,962 | |
Nonperforming | Nonperforming | | 1,915 | | | 150 | | | — | | | 220 | | | 98 | | | 504 | | | — | | | 182 | | | 3,069 | | Nonperforming | | 1,676 | | | 155 | | | 2,336 | | | 31 | | | 135 | | | — | | | 244 | | | 170 | | | 4,747 | |
Total | Total | | $ | 194,346 | | | $ | 14,012 | | | $ | 246,794 | | | $ | 81,576 | | | $ | 21,459 | | | $ | 58,358 | | | $ | 15,732 | | | $ | 36,620 | | | $ | 668,897 | | Total | | $ | 221,832 | | | $ | 13,798 | | | $ | 279,892 | | | $ | 70,402 | | | $ | 22,179 | | | $ | 59,784 | | | $ | 18,370 | | | $ | 24,452 | | | $ | 710,709 | |
| | | December 31, 2020 | | December 31, 2021 |
| | One-to-four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total | | One-to-four family | | Home equity | | Commercial and multifamily | | Construction and land | | Manufactured homes | | Floating homes | | Other consumer | | Commercial business | | Total |
Performing | Performing | | $ | 128,989 | | | $ | 16,109 | | | $ | 265,421 | | | $ | 62,712 | | | $ | 20,792 | | | $ | 39,350 | | | $ | 15,024 | | | $ | 64,217 | | | $ | 612,614 | | Performing | | $ | 205,453 | | | $ | 13,110 | | | $ | 275,795 | | | $ | 63,072 | | | $ | 21,514 | | | $ | 58,775 | | | $ | 16,748 | | | $ | 27,850 | | | $ | 682,316 | |
Nonperforming | Nonperforming | | 1,668 | | | 156 | | | 353 | | | 40 | | | 149 | | | 518 | | | — | | | — | | | 2,884 | | Nonperforming | | 2,207 | | | 140 | | | 2,380 | | | 33 | | | 122 | | | 493 | | | — | | | 176 | | | 5,552 | |
Total | Total | | $ | 130,657 | | | $ | 16,265 | | | $ | 265,774 | | | $ | 62,752 | | | $ | 20,941 | | | $ | 39,868 | | | $ | 15,024 | | | $ | 64,217 | | | $ | 615,498 | | Total | | $ | 207,660 | | | $ | 13,250 | | | $ | 278,175 | | | $ | 63,105 | | | $ | 21,636 | | | $ | 59,268 | | | $ | 16,748 | | | $ | 28,026 | | | $ | 687,868 | |
Impaired Loans. A loan is considered impaired when we determine that we may be unable to collect payments of principal or interest when due under the terms of the loan. In the process of identifying loans as impaired, we take into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered on a case by case basis, after taking into consideration the totality of circumstances surrounding the loan and the borrower, including payment history. Impairment is measured on a loan by loan basis for all loans in the portfolio. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses.
Impaired loans at the dates indicated, by type of loan were as follows (in thousands): | | | September 30, 2021 | | March 31, 2022 |
| | | | Recorded Investment | | | | | | Recorded Investment | | |
| | Unpaid Principal Balance | | Without Allowance | | With Allowance | | Total Recorded Investment | | Related Allowance | | Unpaid Principal Balance | | Without Allowance | | With Allowance | | Total Recorded Investment | | Related Allowance |
One-to-four family | One-to-four family | $ | 3,901 | | | $ | 2,749 | | | $ | 1,042 | | | $ | 3,791 | | | $ | 137 | | One-to-four family | $ | 3,566 | | | $ | 2,510 | | | $ | 948 | | | $ | 3,458 | | | $ | 109 | |
Home equity | Home equity | 226 | | | 150 | | | 76 | | | 226 | | | 7 | | Home equity | 228 | | | 155 | | | 73 | | | 228 | | | 6 | |
Commercial and multifamily | Commercial and multifamily | — | | | — | | | — | | | — | | | — | | Commercial and multifamily | 2,336 | | | 2,336 | | | — | | | 2,336 | | | — | |
Construction and land | Construction and land | 256 | | | 220 | | | 35 | | | 255 | | | 5 | | Construction and land | 66 | | | 31 | | | 35 | | | 66 | | | 4 | |
Manufactured homes | Manufactured homes | 201 | | | 45 | | | 156 | | | 201 | | | 105 | | Manufactured homes | 214 | | | 68 | | | 146 | | | 214 | | | 116 | |
Floating homes | Floating homes | 504 | | | 504 | | | — | | | 504 | | | — | | Floating homes | — | | | — | | | — | | | — | | | — | |
Other consumer | Other consumer | 108 | | | — | | | 108 | | | 108 | | | 27 | | Other consumer | 348 | | | 244 | | | 104 | | | 348 | | | 26 | |
Commercial business | Commercial business | 182 | | | 182 | | | — | | | 182 | | | — | | Commercial business | 170 | | | 170 | | | — | | | 170 | | | — | |
Total | Total | $ | 5,378 | | | $ | 3,850 | | | $ | 1,417 | | | $ | 5,267 | | | $ | 281 | | Total | $ | 6,928 | | | $ | 5,514 | | | $ | 1,306 | | | $ | 6,820 | | | $ | 261 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| | | Recorded Investment | | |
| Unpaid Principal Balance | | Without Allowance | | With Allowance | | Total Recorded Investment | | Related Allowance |
One-to-four family | $ | 3,791 | | | $ | 2,392 | | | $ | 1,313 | | | $ | 3,705 | | | $ | 165 | |
Home equity | 293 | | | 156 | | | 137 | | | 293 | | | 14 | |
Commercial and multifamily | 353 | | | 353 | | | — | | | 353 | | | — | |
Construction and land | 77 | | | 40 | | | 37 | | | 77 | | | 6 | |
Manufactured homes | 268 | | | 47 | | | 218 | | | 265 | | | 163 | |
Floating homes | 518 | | | 518 | | | — | | | 518 | | | — | |
Other consumer | 114 | | | — | | | 114 | | | 114 | | | 30 | |
Commercial business | 615 | | | 615 | | | — | | | 615 | | | — | |
Total | $ | 6,029 | | | $ | 4,121 | | | $ | 1,819 | | | $ | 5,940 | | | $ | 378 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | | Recorded Investment | | |
| Unpaid Principal Balance | | Without Allowance | | With Allowance | | Total Recorded Investment | | Related Allowance |
One-to-four family | $ | 4,177 | | | $ | 3,109 | | | $ | 957 | | | $ | 4,066 | | | $ | 112 | |
Home equity | 215 | | | 140 | | | 75 | | | 215 | | | 7 | |
Commercial and multifamily | 2,380 | | | 2,380 | | | — | | | 2,380 | | | — | |
Construction and land | 68 | | | 33 | | | 35 | | | 68 | | | 4 | |
Manufactured homes | 221 | | | 44 | | | 177 | | | 221 | | | 144 | |
Floating homes | 493 | | | 493 | | | — | | | 493 | | | — | |
Other consumer | 106 | | | — | | | 106 | | | 106 | | | 26 | |
Commercial business | 176 | | | 176 | | | — | | | 176 | | | — | |
Total | $ | 7,836 | | | $ | 6,375 | | | $ | 1,350 | | | $ | 7,725 | | | $ | 293 | |
The following table presents the average recorded investment and interest income recognized on impaired loans for the periods indicated, by loan types (in thousands):
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
One-to-four family | One-to-four family | $ | 3,069 | | | $ | 60 | | | $ | 6,027 | | | $ | 69 | | One-to-four family | $ | 3,762 | | | $ | 25 | | | $ | 3,575 | | | $ | 29 | |
Home equity | Home equity | 321 | | | 3 | | | 336 | | | 3 | | Home equity | 221 | | | 4 | | | 290 | | | 5 | |
Commercial and multifamily | Commercial and multifamily | — | | | — | | | 465 | | | 16 | | Commercial and multifamily | 2,358 | | | 29 | | | 353 | | | — | |
Construction and land | Construction and land | 166 | | | 11 | | | 315 | | | 20 | | Construction and land | 67 | | | 1 | | | 76 | | | — | |
Manufactured homes | Manufactured homes | 225 | | | 3 | | | 349 | | | 5 | | Manufactured homes | 218 | | | 4 | | | 262 | | | 5 | |
Floating homes | Floating homes | 507 | | | 5 | | | 405 | | | 15 | | Floating homes | 247 | | | — | | | 516 | | | 3 | |
Other consumer | Other consumer | 109 | | | 1 | | | 127 | | | — | | Other consumer | 227 | | | 4 | | | 114 | | | 1 | |
Commercial business | Commercial business | 93 | | | 1 | | | 1,076 | | | 12 | | Commercial business | 173 | | | 1 | | | 614 | | | 5 | |
Total | Total | $ | 4,490 | | | $ | 84 | | | $ | 9,100 | | | $ | 140 | | Total | $ | 7,273 | | | $ | 68 | | | $ | 5,800 | | | $ | 48 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2021 | | 2020 | | |
| Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | | | |
One-to-four family | $ | 3,322 | | | $ | 118 | | | $ | 6,650 | | | $ | 208 | | | | | |
Home equity | 305 | | | 11 | | | 341 | | | 12 | | | | | |
Commercial and multifamily | 176 | | | — | | | 409 | | | 26 | | | | | |
Construction and land | 121 | | | 12 | | | 579 | | | 21 | | | | | |
Manufactured homes | 244 | | | 12 | | | 391 | | | 19 | | | | | |
Floating homes | 511 | | | 12 | | | 406 | | | 23 | | | | | |
Other consumer | 111 | | | 4 | | | 134 | | | 4 | | | | | |
Commercial business | 353 | | | 1 | | | 1,174 | | | 12 | | | | | |
Total | $ | 5,143 | | | $ | 170 | | | $ | 10,084 | | | $ | 325 | | | | | |
Forgone interest on nonaccrual loans was $89$64 thousand and $62$40 thousand for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively, and $138 thousand and $126 thousand for the nine months ended September 30, 2021 and 2020, respectively. There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual or impaired at September 30, 2021March 31, 2022 and December 31, 2020.2021.
Troubled debt restructurings. TDRs are loans accounted for under ASC 310-40, 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. Once a TDR has performed according to its modified terms for six months and the collection of principal and interest under the revised terms is deemed probable, we remove the TDR from nonperforming status. Loans classified as TDRs totaled $2.3 million and $2.6 million and $3.2 million at September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively, and are included in impaired loans. The Company has granted, in its TDRs, a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:
Rate Modification: A modification in which the interest rate is changed.
Term Modification: A modification in which the maturity date, timing of payments or frequency of payments is changed.
Payment Modification: A modification in which the dollar amount of the payment is changed. Interest only modifications in which a loan is converted to interest only payments for a period of time are included in this category.
Combination Modification: Any other type of modification, including the use of multiple categories above.
There were no loans modified as a TDR during the three and nine months ended September 30,March 31, 2022 and March 31, 2021. There were 2no TDRs totaling $484 thousand that were paid off during the nine months ended September 30, 2021.
There was 1 loan totaling $146 thousand modified as a TDR during the three months ended September 30, 2020March 31, 2022 and 4 loans totaling $795 thousand modified as TDRs during the nine months ended September 30, 2020. There were 2 TDR loan totaling $2.9 million that were paid off during the nine months ended September 30, 2020.March 31, 2021.
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 three and nine months ended September 30, 2021March 31, 2022 and 2020.March 31, 2021. There were no loans modified as a TDR for which there was a payment default within the first 12 months of modification during the three and nine months ended September 30,March 31, 2022 and March 31, 2021. There was 1 loan totaling $161 thousand modified as a TDR for which there was a payment default within the first 12 months of modification during the nine months ended September 30, 2020.
The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified into TDRs.
In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act, and the Interagency Statement provides that a short-term modification made to a loan in response to COVID-19 which meets certain criteria does not need to be placed on nonaccrual status or accounted for as a TDR pursuant to applicable accounting and regulatory guidance until the earlier of 60 days after the national emergency termination date or January 1, 2022. The majority of these borrowers had resumed making payments as of September 30, 2021, and as of that date, there were 6 residential loans totaling $933 thousand on deferral status under COVID-19 loan modification forbearance agreements. We continue to monitor these loans through our normal credit risk processes and any request for continuation of relief beyond the initial modification is reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.
As of September 30, 2021,March 31, 2022, there was 1 one-to-four family loans totaling $39 thousand that was in process of foreclosure.
Note 5 – Fair Value Measurements
The Company determines the fair values of its financial instruments based on the requirements established in ASC 820, Fair Value Measurements (“ASC 820”), 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 September 30, 2021March 31, 2022 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 SecuritiesAvailable-for-sale securities – Available-for-saleAFS 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.
Held-to-maturity securities – HTM securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. The fair value is 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-Saleheld-for-sale - One-to-four family mortgage loans held-for-sale are recorded at the lower of cost or fair value. The fair value of fixed-rate one-to-four family loans is based on whole loan forward prices obtained from government sponsored enterprises. At September 30, 2021March 31, 2022 and December 31, 2020,2021, loans held-for-sale were carried at cost, as no impairment was required.
Loans Held-for-Portfolioheld-for-portfolio - The estimated fair value of loans-held-for portfolio 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. The estimated fair values of loans held for portfolio reflect exit price assumptions. The liquidity premium/discounts are part of the valuation for exit pricing.
Mortgage Servicing Rightsservicing 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 types of borrowing arrangements.
Subordinated Debtnotes - The fair value of subordinated debtnotes is estimated using discounted cash flows based on current lending rates for similar long-term debt instruments with similar terms and remaining time to maturity.
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.
OREO and Repossessed Assetsrepossessed 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 is 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.
In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the lowest level of inputs that is significant to the measurement is used to determine the hierarchy for the entire asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process. There were no transfers between levels during the three and nine months ended September 30, 2021March 31, 2022 and 2020.2021.
The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether or not recognized or recorded at fair value as of the dates indicated (in thousands):
| | | September 30, 2021 | | Fair Value Measurements Using: | | March 31, 2022 | | Fair Value Measurements Using: |
| | Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
FINANCIAL ASSETS: | FINANCIAL ASSETS: | | | | | | | | | | FINANCIAL ASSETS: | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 206,702 | | | $ | 206,702 | | | $ | 206,702 | | | $ | — | | | $ | — | | Cash and cash equivalents | $ | 197,091 | | | $ | 197,091 | | | $ | 197,091 | | | $ | — | | | $ | — | |
Available-for-sale securities | Available-for-sale securities | 7,060 | | | 7,060 | | | — | | | 7,060 | | | — | | Available-for-sale securities | 10,223 | | | 10,223 | | | — | | | 10,223 | | | — | |
Held-to-maturity securities | | Held-to-maturity securities | 2,223 | | | 2,056 | | | — | | | 2,056 | | | — | |
Loans held-for-sale | Loans held-for-sale | 3,884 | | | 3,884 | | | — | | | 3,884 | | | — | | Loans held-for-sale | 1,297 | | | 1,297 | | | — | | | 1,297 | | | — | |
Loans held-for-portfolio, net | Loans held-for-portfolio, net | 661,224 | | | 658,604 | | | — | | | — | | | 658,604 | | Loans held-for-portfolio, net | 703,078 | | | 688,447 | | | — | | | — | | | 688,447 | |
Mortgage servicing rights | Mortgage servicing rights | 4,211 | | | 4,211 | | | — | | | — | | | 4,211 | | Mortgage servicing rights | 4,668 | | | 4,668 | | | — | | | — | | | 4,668 | |
FHLB stock | FHLB stock | 1,052 | | | 1,052 | | | — | | | 1,052 | | | — | | FHLB stock | 1,117 | | | 1,117 | | | — | | | 1,117 | | | — | |
FINANCIAL LIABILITIES: | FINANCIAL LIABILITIES: | | FINANCIAL LIABILITIES: | |
Non-maturity deposits | Non-maturity deposits | 688,212 | | | 688,212 | | | — | | | 688,212 | | | — | | Non-maturity deposits | 737,598 | | | 737,598 | | | — | | | 737,598 | | | — | |
Time deposits | Time deposits | 119,441 | | | 120,798 | | | — | | | 120,798 | | | — | | Time deposits | 98,493 | | | 99,415 | | | — | | | 99,415 | | | — | |
| Subordinated notes | Subordinated notes | 11,623 | | | 11,623 | | | — | | | 11,623 | | | — | | Subordinated notes | 11,644 | | | 11,644 | | | — | | | 11,644 | | | — | |
| | | December 31, 2020 | | Fair Value Measurements Using: | | December 31, 2021 | | Fair Value Measurements Using: |
| | Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 | | Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
FINANCIAL ASSETS: | FINANCIAL ASSETS: | | | | | | | | | | FINANCIAL ASSETS: | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 193,828 | | | $ | 193,828 | | | $ | 193,828 | | | $ | — | | | $ | — | | Cash and cash equivalents | $ | 183,590 | | | $ | 183,590 | | | $ | 183,590 | | | $ | — | | | $ | — | |
Available-for-sale securities | Available-for-sale securities | 10,218 | | | 10,218 | | | — | | | 10,218 | | | — | | Available-for-sale securities | 8,419 | | | 8,419 | | | — | | | 8,419 | | | — | |
| Loans held-for-sale | Loans held-for-sale | 11,604 | | | 11,604 | | | — | | | 11,604 | | | — | | Loans held-for-sale | 3,094 | | | 3,094 | | | — | | | 3,094 | | | — | |
Loans held-for-portfolio, net | Loans held-for-portfolio, net | 607,363 | | | 608,575 | | | — | | | — | | | 608,575 | | Loans held-for-portfolio, net | 680,092 | | | 675,154 | | | — | | | — | | | 675,154 | |
Mortgage servicing rights | Mortgage servicing rights | 3,780 | | | 3,780 | | | — | | | — | | | 3,780 | | Mortgage servicing rights | 4,273 | | | 4,273 | | | — | | | — | | | 4,273 | |
FHLB stock | FHLB stock | 877 | | | 877 | | | — | | | 877 | | | — | | FHLB stock | 1,046 | | | 1,046 | | | — | | | 1,046 | | | — | |
FINANCIAL LIABILITIES: | FINANCIAL LIABILITIES: | | FINANCIAL LIABILITIES: | |
Non-maturity deposits | Non-maturity deposits | 512,508 | | | 512,508 | | | — | | | 512,508 | | | — | | Non-maturity deposits | 692,598 | | | 692,598 | | | — | | | 692,598 | | | — | |
Time deposits | Time deposits | 235,473 | | | 238,629 | | | — | | | 238,629 | | | — | | Time deposits | 105,722 | | | 106,834 | | | — | | | 106,834 | | | — | |
| Subordinated notes | Subordinated notes | 11,592 | | | 11,592 | | | — | | | 11,592 | | | — | | Subordinated notes | 11,634 | | | 11,634 | | | — | | | 11,634 | | | — | |
The following tables present the balance of assets measured at fair value on a recurring basis as of the dates indicated (in thousands):
| | | Fair Value at September 30, 2021 | | Fair Value at March 31, 2022 |
Description | Description | Total | | Level 1 | | Level 2 | | Level 3 | Description | Total | | Level 1 | | Level 2 | | Level 3 |
Municipal bonds | Municipal bonds | 4,370 | | | — | | | 4,370 | | | — | | Municipal bonds | $ | 6,278 | | | $ | — | | | $ | 6,278 | | | $ | — | |
Agency mortgage-backed securities | Agency mortgage-backed securities | 2,690 | | | — | | | 2,690 | | | — | | Agency mortgage-backed securities | 3,945 | | | — | | | 3,945 | | | — | |
| Mortgage servicing rights | Mortgage servicing rights | 4,211 | | | — | | | — | | | 4,211 | | Mortgage servicing rights | 4,668 | | | — | | | — | | | 4,668 | |
| | | Fair Value at December 31, 2020 | | Fair Value at December 31, 2021 |
Description | Description | Total | | Level 1 | | Level 2 | | Level 3 | Description | Total | | Level 1 | | Level 2 | | Level 3 |
Municipal bonds | Municipal bonds | $ | 5,413 | | | $ | — | | | $ | 5,413 | | | $ | — | | Municipal bonds | $ | 6,066 | | | $ | — | | | $ | 6,066 | | | $ | — | |
Agency mortgage-backed securities | Agency mortgage-backed securities | 4,805 | | | — | | | 4,805 | | | — | | Agency mortgage-backed securities | 2,353 | | | — | | | 2,353 | | | — | |
| Mortgage servicing rights | Mortgage servicing rights | 3,780 | | | — | | | — | | | 3,780 | | Mortgage servicing rights | 4,273 | | | — | | | — | | | 4,273 | |
The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2021March 31, 2022 |
Financial Instrument | | | Valuation Technique | | | Unobservable Input(s) | | Range (Weighted-Average) |
Mortgage Servicing Rights | | | Discounted cash flow | | | Prepayment speed assumption | | | 214%-503% (217%154%-440% (164%) |
| | | | | | Discount rate | | | 10.5%-14.5% (12.5%) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 20202021 |
Financial Instrument | | | Valuation Technique | | | Unobservable Input(s) | | Range (Weighted-Average) |
Mortgage Servicing Rights | | | Discounted cash flow | | | Prepayment speed assumption | | | 178%-276% (247%204%-344% (205%) |
| | | | | | Discount rate | | | 10%-12% (10%10.5%-14.5% (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.
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 three and nine months ended September 30, 2021March 31, 2022 and 2020.2021.
Mortgage servicing rights are measured at fair value using a significant unobservable input (Level 3) on a recurring basis - additional information is included in “Note 6—Mortgage Servicing Rights.”
The following tables present the balance of assets measured at fair value on a nonrecurring basis at the dates indicated (in thousands): | | | Fair Value at September 30, 2021 | | Fair Value at March 31, 2022 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
OREO and repossessed assets | OREO and repossessed assets | $ | 659 | | | $ | — | | | $ | — | | | $ | 659 | | OREO and repossessed assets | $ | 659 | | | $ | — | | | $ | — | | | $ | 659 | |
Impaired loans | Impaired loans | 5,267 | | | — | | | — | | | 5,267 | | Impaired loans | 6,820 | | | — | | | — | | | 6,820 | |
| | | Fair Value at December 31, 2020 | | Fair Value at December 31, 2021 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
OREO and repossessed assets | OREO and repossessed assets | $ | 594 | | | $ | — | | | $ | — | | | $ | 594 | | OREO and repossessed assets | $ | 659 | | | $ | — | | | $ | — | | | $ | 659 | |
Impaired loans | Impaired loans | 5,940 | | | — | | | — | | | 5,940 | | Impaired loans | 7,725 | | | — | | | — | | | 7,725 | |
There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at September 30, 2021March 31, 2022 and December 31, 2020.2021.
The following tables provide a description of the valuation technique, observable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated: | | | | | | | | | | | | | | | | | | | | |
September 30, 2021March 31, 2022 |
Financial Instrument | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average) |
OREO | | Third Party Appraisals | | No discounts | | N/A |
Impaired loans(1) | | Discounted Cash Flow | | Discount Rate | | 0-10% (5%(4%) |
Impaired loans(2) | | Third Party Appraisals | | No discounts | | N/A |
(1) Represents troubled debt restructuringsTDRs included within impaired loans.
(2) Excludes troubled debt restructurings.TDRs.
| | | | | | | | | | | | | | | | | | | | |
December 31, 20202021 |
Financial Instrument | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average) |
OREO | | Third Party Appraisals | | No discounts | | N/A |
Impaired loans(1) | | Discounted Cash Flow | | Discount Rate | | 0-10% (6%(4%) |
Impaired loans(2) | | Third Party Appraisals | | No discounts | | N/A |
(1) Represents troubled debt restructuringsTDRs included within impaired loans.
(2) Excludes troubled debt restructurings.TDRs.
Note 6 – Mortgage Servicing Rights
The Company’s mortgage servicing rights portfolio totaled $514.0$502.5 million at September 30, 2021March 31, 2022 compared to $488.7$508.1 million at December 31, 2020.2021. Of this total balance, the unpaid principal balance of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at September 30, 2021March 31, 2022 and December 31, 20202021 were $507.8$499.4 million and $481.6$504.1 million, respectively. The unpaid principal balance of loans serviced for other financial institutions at September 30, 2021March 31, 2022 and December 31, 2020,2021, totaled $6.2$3.1 million and $7.1$4.0 million, respectively. Loans serviced for others are not included in the Company’s financial statements as they are not assets of the Company.
A summary of the change in the balance of mortgage servicing assets during the periods indicated were as follows (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | |
Beginning balance, at fair value | Beginning balance, at fair value | $ | 4,151 | | | $ | 3,113 | | | $ | 3,780 | | | $ | 3,239 | | | Beginning balance, at fair value | $ | 4,273 | | | $ | 3,780 | | |
Servicing rights that result from transfers and sale of financial assets | Servicing rights that result from transfers and sale of financial assets | 185 | | | 849 | | | 1,125 | | | 1,523 | | | Servicing rights that result from transfers and sale of financial assets | 127 | | | 604 | | |
Changes in fair value: | Changes in fair value: | | | Changes in fair value: | | |
Due to changes in model inputs or assumptions and other(1) | Due to changes in model inputs or assumptions and other(1) | (125) | | | (623) | | | (694) | | | (1,423) | | | Due to changes in model inputs or assumptions and other(1) | 268 | | | (275) | | |
| Ending balance, at fair value | Ending balance, at fair value | $ | 4,211 | | | $ | 3,339 | | | $ | 4,211 | | | $ | 3,339 | | | Ending balance, at fair value | $ | 4,668 | | | $ | 4,109 | | |
(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 at the dates indicated are as follows: | | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Prepayment speed (Public Securities Association “PSA” model) | Prepayment speed (Public Securities Association “PSA” model) | 217 | % | | 247 | % | Prepayment speed (Public Securities Association “PSA” model) | 164 | % | | 205 | % |
Weighted-average life | Weighted-average life | 5.6 years | | 5.2 years | Weighted-average life | 6.7 years | | 5.8 years |
Discount rate | Discount rate | 12.5 | % | | 10.0 | % | Discount rate | 12.5 | % | | 12.5 | % |
The amount of contractually specified servicing, late and ancillary fees earned on the mortgage servicing rights are included in
mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $328 thousand and $961$320 thousand for the three and nine months ended September 30, 2021, respectively,March 31, 2022 and $260 thousand and $739$312 thousand for the three and nine months ended September 30, 2020, respectively.March 31, 2021.
Note 7 – Commitments and Contingencies
In the normal course of operations, the Company engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage clients’ requests for funding and take the form of loan commitments and lines of credit.
Note 8 – Borrowings, FHLB Stock and Subordinated Notes
The Company has a loan agreement with the FHLB of Des Moines. The terms of the agreement call for a blanket pledge of a portion of the Company’s mortgage and commercial and multifamily loan portfolio based on the outstanding balance. At September 30, 2021March 31, 2022 and December 31, 2020,2021, the amount available to borrow under this credit facility was $397.9$413.9 million and $390.5$417.7 million, respectively, subject to eligible pledged collateral. At September 30,March 31, 2022, the credit facility was collateralized as follows: one-to-four family mortgage loans with an advance equivalent of $57.3 million, commercial and multifamily mortgage loans with an advance equivalent of $51.0 million and home equity loans with an advance equivalent of $467 thousand. At December 31, 2021, the credit facility was collateralized as follows: one-to-four family mortgage loans with an advance equivalent of $77.2$59.7 million, commercial and multifamily mortgage loans with an advance equivalent of $61.4$52.9 million and home equity loans with an advance equivalent of $569$482 thousand. At December 31, 2020, the credit facility was collateralized as follows: one-to-four family mortgage loans with an advance equivalent of $103.6 million, commercial and multifamily mortgage loans with an advance equivalent of $128.9 million and home equity loans with an advance equivalent of $2.8 million. The Company had no outstanding borrowings under this arrangement at both September 30, 2021March 31, 2022 and December 31, 2020. The weighted-average interest rate of the Company’s borrowings under this agreement at December 31, 2020 was 3.10%.2021.
Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $17.6$13.0 million and $21.6$11.5 million at September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively, to secure public deposits. The remaining amount available to borrow as of September 30, 2021March 31, 2022 and December 31, 2020,2021, was $121.6$95.8 million and $213.7$101.5 million, respectively.
As a member of the FHLB, the Company is required to maintain a minimum level of investment in FHLB of Des Moines stock based on specific percentages of its outstanding FHLB advances. At September 30, 2021March 31, 2022 and December 31, 2020,2021, the Company had an investment of $1.1 million and $877 thousand,$1.0 million, respectively in FHLB of Des Moines stock.
The Company has access to an unsecured Fed Funds line of credit from Pacific Coast Banker’s Bank.Bank (“PCBB”). The line has a one year term maturing on June 30, 2022 and is renewable annually. As of September 30, 2021,March 31, 2022, the amount available under this line of credit was $20.0 million. There was no balance on this line of credit as of September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively.
In September 2020, the Company issued $12.0 million of fixed to floating rate subordinated notes that mature in 2030. The subordinated notes have an initial fixed interest rate of 5.25% to, but excluding, October 1, 2025, payable semi-annually in arrears. From, and including, October 1, 2025, the interest rate on the subordinated notes will reset quarterly to a floating rate per annum equal to a benchmark rate, which is expected to be the then-current three-month term Secured Overnight Financing Rate, or SOFR, plus 513 basis points, payable quarterly in arrears. The subordinated notes mature on May 15, 2030. Prior to October 1, 2025, the Company may redeem these notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes and are redeemable by the Company in whole or in part beginning with the interest payment date of October 1, 2025. As of both September 30, 2021March 31, 2022 and December 31, 2020,2021, the balance of the subordinated notes was $11.6 million.
Note 9 – Earnings Per Common Share
Basic earnings per common share is computed by dividing net income available to common shareholders 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 containing non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share. Diluted earnings per common share reflect the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company's stock for the period.
The following table summarizes the calculation of earnings per share for the periods indicated (in thousands, except per share data):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | |
Net income | Net income | $ | 2,592 | | | $ | 2,319 | | | $ | 7,294 | | | $ | 5,407 | | | Net income | $ | 1,723 | | | $ | 2,451 | | |
Weighted-average number of shares outstanding, basic | Weighted-average number of shares outstanding, basic | 2,587 | | | 2,563 | | | 2,582 | | | 2,558 | | | Weighted-average number of shares outstanding, basic | 2,602 | | | 2,572 | | |
Effect of potentially dilutive common shares | Effect of potentially dilutive common shares | 46 | | | 26 | | | 43 | | | 30 | | | Effect of potentially dilutive common shares | 38 | | | 39 | | |
Weighted-average number of shares outstanding, diluted | Weighted-average number of shares outstanding, diluted | 2,633 | | | 2,589 | | | 2,625 | | | 2,588 | | | Weighted-average number of shares outstanding, diluted | 2,640 | | | 2,611 | | |
Earnings per share, basic(1)(2) | Earnings per share, basic(1)(2) | $ | 1.00 | | | $ | 0.90 | | | $ | 2.81 | | | $ | 2.11 | | | Earnings per share, basic(1)(2) | $ | 0.66 | | | $ | 0.95 | | |
Earnings per share, diluted(1)(2) | Earnings per share, diluted(1)(2) | $ | 0.98 | | | $ | 0.90 | | | $ | 2.76 | | | $ | 2.09 | | | Earnings per share, diluted(1)(2) | $ | 0.65 | | | $ | 0.93 | | |
(1)The basic and diluted earnings per share amounts for the three and nine months ended September 30,March 31, 2022 and 2021 include the impact of income allocated to participating securities of $17$12 thousand and $50$12 thousand, respectively.
(2)The difference between the basic and diluted earnings per share amounts for the three and nine months ended September 30,March 31, 2022 and 2021 and 2020 under the Treasury Stock Method and the Two-Class Method, as prescribed in FASB ASC 260-10, Earnings Per Share, is immaterial.
There were no2,656 anti-dilutive securities at September 30, 2021March 31, 2022 and 19,2812,793 anti-dilutive securities at September 30, 2020.March 31, 2021.
Note 10 – Stock-based Compensation
Stock Options and Restricted Stock
The Company currently has 1 active shareholder approved stock-based compensation plan, the Amended and Restated 2013 Equity Incentive Plan (the "2013 Plan"). The 2013 Plan permits the grant of restricted stock, restricted stock units, stock options, and stock appreciation rights. The equity incentive plan approved by stockholders in 2008 (the"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 remain 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 116,700 shares of common stock were approved for awards for restricted stock and restricted stock units.
As of September 30, 2021,March 31, 2022, on an adjusted basis, awards for stock options totaling 271,874284,202 shares and awards for restricted stock totaling 142,201151,651 shares of Company common stock have been granted, net of any forfeitures, to participants in the 2013 Plan
and the 2008 Plan. Share-based compensation expense was $65$203 thousand and $295$166 thousand for the three and nine months ended months ended September 30,March 31, 2022 and March 31, 2021, respectively, and was $52 thousand and $283 thousand for the three and nine months ended September 30, 2020, respectively.
Stock Option Awards
All stock option awards granted under the 2008 Plan vest in 20% annual increments commencing one year from the grant date in accordance with the requirements of the 2008 Plan. The stock option awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary date of each grant date in equal annual installments over periods of one-to-four years subject to the continued service of the participant with the Company. All of the options granted under the 2008 Plan and the 2013 Plan are exercisable for a period of 10 years from the date of grant, subject to vesting.
The following is a summary of the Company’s stock option award activity during the three months ended September 30, 2021March 31, 2022 (dollars in thousands, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted- Average Exercise Price | | Weighted-Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value |
Outstanding at July 1, 2021 | 95,202 | | | $ | 24.35 | | | 5.21 | | $ | 1,818 | |
Granted | — | | | — | | | | | |
Exercised | (3,616) | | | 17.55 | | | | | |
Forfeited | (250) | | | 33.58 | | | | | |
Expired | — | | | — | | | | | |
Outstanding at September 30, 2021 | 91,336 | | | 24.59 | | | 5.02 | | 1,858 | |
Exercisable | 72,843 | | | 22.28 | | | 4.12 | | 1,650 | |
Expected to vest, assuming a 0% forfeiture rate over the vesting term | 91,336 | | | $ | 24.59 | | | 5.02 | | $ | 1,858 | |
The following is a summary of the Company’s stock option award activity during the nine months ended September 30, 2021 (dollars in thousands, except per share amounts): | | | Shares | | Weighted- Average Exercise Price | | Weighted-Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value | | Shares | | Weighted- Average Exercise Price | | Weighted-Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value |
Outstanding at January 1, 2021 | 100,977 | | | $ | 22.00 | | | 4.71 | | $ | 1,045 | | |
Outstanding at January 1, 2022 | | Outstanding at January 1, 2022 | 91,316 | | | $ | 24.59 | | | 4.77 | | $ | 1,773 | |
Granted | Granted | 12,250 | | | 32.46 | | | Granted | 12,800 | | | 42.85 | | |
Exercised | Exercised | (20,651) | | | 15.99 | | | Exercised | (2,421) | | | 19.49 | | |
Forfeited | Forfeited | (1,170) | | | 34.93 | | | Forfeited | (452) | | | 32.53 | | |
Expired | (70) | | | 34.29 | | | |
Outstanding at September 30, 2021 | 91,336 | | | 24.59 | | | 5.02 | | 1,858 | | |
| Outstanding at March 31, 2022 | | Outstanding at March 31, 2022 | 101,243 | | | 26.98 | | | 5.21 | | 1,186 | |
Exercisable | Exercisable | 72,843 | | | 22.28 | | | 4.12 | | 1,650 | | Exercisable | 79,331 | | | 23.97 | | | 4.18 | | 1,134 | |
Expected to vest, assuming a 0% forfeiture rate over the vesting term | Expected to vest, assuming a 0% forfeiture rate over the vesting term | 91,336 | | | $ | 24.59 | | | 5.02 | | $ | 1,858 | | Expected to vest, assuming a 0% forfeiture rate over the vesting term | 101,243 | | | $ | 26.98 | | | 5.21 | | $ | 1,186 | |
As of September 30, 2021,March 31, 2022, there was $91$164 thousand of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.63.0 years.
The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. The fair value of options granted for the ninethree months ended September 30,March 31, 2022 and 2021 and 2020 were determined using the following weighted-average assumptions as of the grant date. | | | | Nine Months Ended September 30, | | | Three Months Ended March 31, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
Annual dividend yield | Annual dividend yield | | 1.60 | % | | 1.60 | % | Annual dividend yield | | 1.59 | % | | 1.60 | % |
Expected volatility | Expected volatility | | 21.67 | % | | 21.67 | % | Expected volatility | | 26.48 | % | | 21.67 | % |
Risk-free interest rate | Risk-free interest rate | | 0.60 | % | | 1.38 | % | Risk-free interest rate | | 1.64 | % | | 0.60 | % |
Expected term | Expected term | | 6.50 years | | 6.50 years | Expected term | | 6.00 years | | 6.50 years |
Weighted-average grant date fair value per option granted | Weighted-average grant date fair value per option granted | | $ | 5.64 | | | $ | 7.14 | | Weighted-average grant date fair value per option granted | | $ | 9.95 | | | $ | 5.64 | |
There were no12,800 and 12,248 options granted during the three months ended September 30,March 31, 2022 and 2021, or 2020.respectively.
Restricted Stock Awards
The fair value of the restricted stock awards is equal to the fair value of the Company's stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. The restricted stock awards granted under the 2008 Plan vest in 20% annual increments commencing one year from the grant date. The restricted stock awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary date of each of the grant date in equal annual installments over periods of one-to-four years subject to the continued service of the participant with the Company.
The following is a summary of the Company’s non-vested restricted stock award activity during the three months ended September 30, 2021:March 31, 2022: | | | | | | | | | | | | | | | | | |
| Shares | | Weighted-Average Grant-Date Fair Value Per Share | | Aggregate Intrinsic Value Per Share |
Non-Vested at July 1, 2021 | 18,050 | | | $ | 34.01 | | | |
Granted | — | | | — | | | |
Vested | — | | | — | | | |
Forfeited | (420) | | | 33.45 | | | |
Non-Vested at September 30, 2021 | 17,630 | | -0.0094814404432133 | $ | 34.02 | | | $ | 44.94 | |
Expected to vest assuming a 0% forfeiture rate over the vesting term | 17,630 | | | $ | 34.02 | | | $ | 44.94 | |
The following is a summary of the Company’s non-vested restricted stock award activity during the nine months ended September 30, 2021: | | | Shares | | Weighted-Average Grant-Date Fair Value Per Share | | Aggregate Intrinsic Value Per Share | | Shares | | Weighted-Average Grant-Date Fair Value Per Share | | Aggregate Intrinsic Value Per Share |
Non-Vested at January 1, 2021 | 17,114 | | | $ | 35.03 | | | | |
Non-Vested at January 1, 2022 | | Non-Vested at January 1, 2022 | 17,586 | | | $ | 34.02 | | | |
Granted | Granted | 10,168 | | | 32.46 | | | Granted | 9,700 | | | 42.85 | | |
Vested | Vested | (7,762) | | | 33.99 | | | Vested | (8,432) | | | 36.34 | | |
Forfeited | Forfeited | (1,890) | | | 34.93 | | | Forfeited | (250) | | | 32.63 | | |
Non-Vested at September 30, 2021 | 17,630 | | | $ | 34.02 | | | $ | 44.94 | | |
Non-Vested at March 31, 2022 | | Non-Vested at March 31, 2022 | 18,604 | | | $ | 37.59 | | | $ | 38.10 | |
Expected to vest assuming a 0% forfeiture rate over the vesting term | Expected to vest assuming a 0% forfeiture rate over the vesting term | 17,630 | | | $ | 34.02 | | | $ | 44.94 | | Expected to vest assuming a 0% forfeiture rate over the vesting term | 18,604 | | | $ | 37.59 | | | $ | 38.10 | |
As of September 30, 2021,March 31, 2022, there was $455$647 thousand of unrecognized compensation cost related to non-vested restricted stock granted under the Plans. The cost is expected to be recognized over the weighted-average vesting period of 2.52.8 years. The total fair value of shares vested for the ninethree months ended September 30,March 31, 2022 and 2021 and 2020 was $264$306 thousand and $236$264 thousand, respectively.
Employee Stock Ownership Plan
In January 2008, the ESOP borrowed $1.2 million from the Company to purchase common stock of the Company which was paid in full in 2017. In August 2012, in conjunction with the Company’s conversion to a full stock company from the mutual holding company structure, the ESOP borrowed an additional $1.1 million from the Company to purchase common stock of the Company. The loan iswas being repaid principally by the Bank through contributions to the ESOP over a period of ten years. The interest rate on the loan iswas fixed at 2.25% per annum. As of September 30, 2021, the remaining balance ofMarch 31, 2022, the ESOP loan was $126 thousand.repaid in full.
Neither the loan balance nor the related interest expense iswas reflected on the condensed consolidated financial statements.
At September 30, 2021, the ESOP held and is committed to release 11,340 shares of the Company’s common stock to participants during 2021. The fair value of the 147,766144,740 shares held by the ESOP trust was $6.8$5.5 million at September 30, 2021.March 31, 2022. ESOP compensation expense included in salaries and benefits was $180$205 thousand and $530$170 thousand for the three and nine months ended September 30,March 31, 2022 and March 31, 2021, respectively, and $126 thousand and $474 thousand for the three and nine months ended September 30, 2020, respectively.
Note 11 – Leases
We have operating leases for branch locations, a loan production office, our corporate office and in the past, for certain equipment. The lease term for our leases begins on the date we become legally obligated for the rent payments or we take possession of the building, whichever is earlier. Generally, our real estate leases have initial terms of three to ten years and
typically include 1 renewal option. Our leases have remaining lease terms of less than one year to eightseven years. The operating leases generally contain renewal options and require us to pay property taxes and operating expenses for the properties.
The following table presents the lease right-of-use assets and lease liabilities recorded on the condensed consolidated balance sheet at the dates indicated (in thousands): | | | | September 30, 2021 | | December 31, 2020 | | | March 31, 2022 | | December 31, 2021 |
Operating lease right-of-use assets | Operating lease right-of-use assets | | $ | 6,033 | | | $ | 6,722 | | Operating lease right-of-use assets | | $ | 5,777 | | | $ | 5,811 | |
Operating lease liabilities | Operating lease liabilities | | $ | 6,462 | | | $ | 7,134 | | Operating lease liabilities | | $ | 6,211 | | | $ | 6,242 | |
The following table presents the components of lease expense for the periods indicated (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | |
Operating lease expense | Operating lease expense | | | | | | | | | Operating lease expense | | | | | |
Office leases | Office leases | | $ | 272 | | | $ | 268 | | | $ | 817 | | | $ | 882 | | Office leases | | $ | 283 | | | $ | 273 | | |
Equipment leases | | — | | | 5 | | | — | | | 15 | | |
| Sublease income | Sublease income | | (3) | | | (3) | | | (9) | | | (9) | | Sublease income | | (3) | | | (3) | | |
Net lease expense | Net lease expense | | $ | 269 | | | $ | 270 | | | $ | 808 | | | $ | 888 | | Net lease expense | | $ | 280 | | | $ | 270 | | |
The following table presents the maturity of lease liabilities at the date indicated:indicated (in thousands): | | | September 30, 2021 | | March 31, 2022 |
Remainder of 2021 | | $ | 263 | | |
2022 | | 1,016 | | |
Remainder of 2022 | | Remainder of 2022 | | $ | 807 | |
2023 | 2023 | | 989 | | 2023 | | 1,054 | |
2024 | 2024 | | 968 | | 2024 | | 1,035 | |
2025 | 2025 | | 885 | | 2025 | | 896 | |
2026 | | 2026 | | 862 | |
Thereafter | Thereafter | | 3,012 | | Thereafter | | 2,149 | |
Total lease payments | Total lease payments | | 7,133 | | Total lease payments | | 6,803 | |
Less: Present value discount | Less: Present value discount | | 671 | | Less: Present value discount | | 592 | |
Present value of lease liabilities | Present value of lease liabilities | | $ | 6,462 | | Present value of lease liabilities | | $ | 6,211 | |
Lease term and discount rate by lease type consist of the following at the dates indicated:
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Weighted-average remaining lease term: | Weighted-average remaining lease term: | | | | | Weighted-average remaining lease term: | | | | |
Office leases | Office leases | | 7.24 years | | 7.89 years | Office leases | | 6.7 years | | 7.0 years |
Equipment leases | | 0.00 years | | 1.42 years | |
| Weighted-average discount rate (annualized): | Weighted-average discount rate (annualized): | | Weighted-average discount rate (annualized): | |
Office leases | Office leases | | 2.66 | % | | 2.66 | % | Office leases | | 2.64 | % | | 2.67 | % |
Equipment leases | | — | % | | 1.62 | % | |
|
Supplemental cash flow information related to leases was as follows for the periods indicated (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | |
Cash paid for amounts included in the measurement of lease liabilities for operating leases: | Cash paid for amounts included in the measurement of lease liabilities for operating leases: | | | | | | | | | Cash paid for amounts included in the measurement of lease liabilities for operating leases: | | | | | |
Operating cash flows | Operating cash flows | | Operating cash flows | | |
Office leases | Office leases | | $ | 263 | | | $ | 257 | | | $ | 779 | | | $ | 839 | | Office leases | | $ | 265 | | | $ | 258 | | |
Equipment leases | | $ | — | | | $ | 5 | | | $ | — | | | $ | 15 | | |
|
Note 12 – Subsequent Events
On OctoberApril 26, 2021,2022, the Board of Directors of the Company declared a quarterly cash dividend of $0.17 per common share, payable on NovemberMay 24, 20212022 to stockholders of record at the close of business on NovemberMay 10, 2021.2022.
On OctoberApril 26, 2021,2022, the Company’s Board of Directors adopted a newauthorized an extension of the previously announced stock repurchase program. Under this new repurchase program authorizing the Company mayto repurchase up to $2.0 million of its outstanding shares of common stock during the period ending October 29, 2022. Repurchases may be made by the Company from time to time in the open market, in an amount up to $2.0 million, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on October 29, 2021, continuing until the earlieror pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the completion of the repurchase or the next six months, depending upon market conditions.Securities and Exchange Commission.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Form 10-Q 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” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “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:
•potential adverse impacts to economic conditions in the effectCompany’s local market areas, other markets where the Company has lending relationships, or other aspects of the novel coronavirus disease 2019 (“COVID-19”) pandemic, including on our credit quality andCompany’s business operations, as well as its impact on general economic andor financial market conditions and other uncertaintiesmarkets, generally, resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;any governmental or societal responses thereto;
•changes in consumer spending, borrowing and savings habits;
•changes in economic conditions, either nationally or in our market area;
•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;
•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;
•fluctuations in the demand for loans, the number of unsold homes, land and other properties;
•fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area;
•our ability to access cost-effective funding;
•the potentialfuture of the London Interbank Offered Rate (“LIBOR”), and the transition away from LIBOR toward new interest rateinterest-rate benchmarks;
•our ability to control operating costs and expenses;
•secondary market conditions for loans and our ability to sell loans in the secondary market;
•fluctuations in interest rates;
•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's regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;
•inability of key third-party providers to perform their obligations to us;
•our ability to attract and retain deposits;
•competitive pressures among financial services companies;
•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;
•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;
•our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors who perform several of our critical processing functions;
•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, including as a result of the Coronavirus Aid, Relief, and Economic Securities Act of 2020 ("CARES Act") and the Consolidated Appropriations Act, 2021 ("CAA 2021");Board;
•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, including as a result of COVID-19, and the availability of resources to address such changes;
•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;
•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 possibility of other-than-temporary impairments of securities held in our securities portfolio;
•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including the CARES Act, CAA 2021 and recent COVID 19 vaccination and stimulus efforts,services; and
•the other risks described from time to time in our filings with the U.S. Securities and Exchange Commission (the "SEC"), including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 20202021 (“20202021 Form 10-K”).
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.
General
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’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 Department of Financial Institutions and the Federal Deposit Insurance Corporation (the “FDIC”). The Federal Reserve is the primary federal regulator for Sound Financial Bancorp. We also sell insurance products and services for clients through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank.
Sound Community Bank’s deposits are insured up to applicable limits by the FDIC. At September 30, 2021,March 31, 2022, Sound Financial Bancorp, on a consolidated basis, had assets of $928.1$958.9 million, net loans held-for-portfolio of $661.2$703.1 million, deposits of $807.7$836.1 million and stockholders’ equity of $91.9$93.9 million. The shares of Sound Financial Bancorp are traded on NASDAQ Capital Market under the symbol “SFBC.” Our executive offices are located at 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121.
Our principal business consists of attracting retail and commercial deposits from the general public and investing those funds in loans secured by first and second mortgages on one-to-four 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 home loans, automobile loans, boat loans and recreational vehicle loans. As part of our business, we focus on residential mortgage loan originations, a significant portion of which we sell to Fannie Mae and other correspondents 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”) in which we retain the servicing of the loan in order to maintain the direct customer relationship and to generate noninterest income. Residential loans which do not conform to the underwriting standards of Fannie Mae (“non-conforming”), are held in our loan portfolio. 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.
Critical Accounting Policies
Certain of our accounting policies 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. Our methodologies for analyzing the allowance for loan losses, other-than-temporary impairment, mortgage servicing rights, other real estate owned and deferred tax asset accounts are described in our 20202021 Form 10-K.
COVID-19 Response
Paycheck Protection Program ("PPP") Participation. The CARES Act was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”)Impact to temporarily guarantee loans under a loan program called the Paycheck Protection Program, or PPP. As a qualified SBA lender, the Company was automatically authorized
The Company is actively monitoring and responding to originate PPP loans upon commencementthe effects of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan termrapidly-changing COVID 19 pandemic. The Company maintains its commitment to maturity;supporting its community and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA. The first round of the program expired on August 8, 2020, and a second round reopened the program beginning January 1, 2021 through May 31, 2021.
As of September 30, 2021, we had received SBA forgiveness for 899 PPP loans totaling $74.7 million out of the $76.4 million in PPP loans fundedcustomers during the first PPP. During the nine months ended September 30, 2021, we began acceptingCOVID-19 pandemic and processing loan applications under the second PPP enacted in December 2020. As of September 30, 2021, we had funded 599 PPP loans totaling $42.8 million and had received SBA forgiveness for 550 PPP loans totaling $32.7 million under the second PPP. We had 66 PPP loans outstanding totaling $11.8 million as of September 30, 2021.
The following table summarizes our PPP participation as of September 30, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Funded | | At September 30, 2021 |
| Total | | Number of Loans | | Average Loan Amount | | Outstanding | | Number of Loans |
First PPP | $ | 76,384 | | | 916 | | | $ | 83,389 | | | $ | 1,674 | | | 17 | |
Second PPP | 42,787 | | | 599 | | | 71,431 | | | 10,115 | | | 49 | |
Total PPP loans | $ | 119,171 | | | 1,515 | | | $ | 78,661 | | | $ | 11,789 | | | 66 | |
During the three and nine months ended September 30, 2021, we recorded in interest income SBA processing fees of $1.0 million and $2.5 million, respectively, and $473 thousand and $521 thousand for the three and nine months ended September 30, 2020. In addition, interest income earned on PPP loans totaled $46 thousand and $323 thousand for the three and nine months ended September 30, 2021 and $49 thousand and $318 thousand for the three and nine months ended September 30, 2020.
Loan Modifications. We are continuing to provide payment relief for both consumer and business clients, most of which relief involves interest only or payment deferrals that range from 90 to 180 days. Deferred loans are re-evaluated at the end of the deferral period and will either return to the original loan terms or be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. All of these loan modifications have been made in response to the COVID-19 pandemic.
The following table summarizes our loans under payment relief related to COVID-19 as of September 30, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Second Request | | Third Request | | Fourth Request | | Total |
| # of Loans | | Amount | | # of Loans | | Amount | | # of Loans | | Amount | | # of Loans | | Amount |
Residential loans (1) | 1 | | $ | 67 | | | 2 | | $ | 189 | | | 3 | | $ | 677 | | | 6 | | $ | 933 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(1)Entered into a forbearance agreement with a weighted-average loan-to-value of 75%, 37% and 72% for loans under their second, third or fourth request, respectively. The weighted-average loan-to-values are based on appraisals obtained at the time of loan origination and the current loan amount.
Of the six total loans presented above, five of these loans, or $777 thousand of the $933 thousand, are not classified as troubled debt restructurings (“TDRs”) pursuant to applicable accounting and regulatory guidance until the earlier of 60 days after the national emergency termination date or January 1, 2022. We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.
Support for Clients, Employees and Community during Pandemic. We remainremains focused on keeping ourits employees safe and the Bank running effectively to serve its clients.customers. As of March 31, 2022, all banking branches are open with normal hours and substantially all employees have returned to their routine working environments. The Bank is managingwill continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios followingand follow governmental restrictions and considering public health authority guidelines, and encouraging remote work and supporting employees with paid time off. As of September 30, 2021, all of our branch lobbies were open. The Company is aware of the surge in COVID-19 infections arising out of the so-called Delta variant and is prepared to restore other protocols, as may prove to be necessary.
We continue to work closely with our borrowers to evaluate pandemic related challenges. We also continue to support our not-for-profit organizations with volunteering, donations and support of both virtual and live fund raising activities.guideline.
Comparison of Financial Condition at September 30, 2021March 31, 2022 and December 31, 20202021
General. Total assets increased $66.7$39.2 million, or 7.7%4.3%, to $928.1$958.9 million at September 30, 2021March 31, 2022 from $861.4$919.7 million at December 31, 2020.2021. The increase was primarily a result of higher balancesincreases in loans held-for-portfolio and cash and cash equivalents, partially offset by a decrease ininvestment securities, and loans held-for-sale.held-for-portfolio.
Cash and Securities. Cash and cash equivalents increased $12.9$13.5 million, or 6.6%7.4%, to $206.7$197.1 million at September 30, 2021March 31, 2022 from $193.8$183.6 million at December 31, 20202021 primarily due to significant deposit growthincreases in noninterest-bearing and interest-bearing deposits, partially related to temporary increases in lawyer trust accounts. These increases were partially offset by the redeployment of excess liquidity into higher earning loans and investments. Investment securities increased $4.0 million, or 47.8%, to $12.4 million at March 31, 2022, compared to $8.4 million at December 31, 2021. Held-to-maturity securities totaled $2.2 million at March 31, 2022, compared to none at December 31, 2021, due to new PPP relationshipsthe purchase of $2.2 million in municipal bonds and growth of existing client balances.agency mortgage-backed securities. Available-for-sale securities which consisttotaled $10.2 million at March 31, 2022, compared to $8.4 million at December 31, 2021, and $9.1 million at March 31, 2021. The increase in available-for-sale securities was primarily due the purchase of $2.8 million in municipal bonds and agency mortgage-backed securities, decreased $3.2 million, or 30.9%, to $7.1 million at September 30, 2021 from $10.2 million at December 31, 2020 as a result of normal pay downs in investment securities during the nine months ended September 30, 2021partially offset by regularly scheduled payments and the call of a municipal bond for $950 thousand during the second quarter of 2021.maturities.
Loans. Loans held-for-portfolio, net, increased $53.9$23.0 million, or 8.9%3.4%, to $661.2$703.1 million at September 30, 2021March 31, 2022 from $607.4$680.1 million at December 31, 2020,2021, driven by a $63.7 million, or 48.7%, increase in one-to-four family loans, an $18.8 million increase in constructionincreases across all loan classes, excluding commercial business loans. The increases primarily resulted from focused marketing campaigns, increased utilization of digital marketing tools and land loans and an $18.5 million increase in loans for floating homesthe addition of experienced lending staff during 2021,2021. These increases were partially offset by a $27.6 millionthe decrease in commercial business loans resulting from the forgiveness by the SBA of $75.9 million of PPP loans, and a $19.0 million decrease in commercial and multifamily loans during the period.SBA.
The following table reflects the changes in the loan mix of our loan portfolio at September 30, 2021,March 31, 2022, as compared to December 31, 20202021 (dollars in thousands):
| | | September 30, 2021 | | December 31, 2020 | | Amount Change | | Percent Change | | March 31, 2022 | | December 31, 2021 | | Amount Change | | Percent Change |
One-to-four family | One-to-four family | $ | 194,346 | | | $ | 130,657 | | | $ | 63,689 | | | 48.7 | % | One-to-four family | $ | 221,832 | | | $ | 207,660 | | | $ | 14,172 | | | 6.8 | % |
Home equity | Home equity | 14,012 | | | 16,265 | | | (2,253) | | | (13.9) | | Home equity | 13,798 | | | 13,250 | | | 548 | | | 4.1 | |
Commercial and multifamily | Commercial and multifamily | 246,794 | | | 265,774 | | | (18,980) | | | (7.1) | | Commercial and multifamily | 279,892 | | | 278,175 | | | 1,717 | | | 0.6 | |
Construction and land | Construction and land | 81,576 | | | 62,752 | | | 18,824 | | | 30.0 | | Construction and land | 70,402 | | | 63,105 | | | 7,297 | | | 11.6 | |
Manufactured homes | Manufactured homes | 21,459 | | | 20,941 | | | 518 | | | 2.5 | | Manufactured homes | 22,179 | | | 21,636 | | | 543 | | | 2.5 | |
Floating homes | Floating homes | 58,358 | | | 39,868 | | | 18,490 | | | 46.4 | | Floating homes | 59,784 | | | 59,268 | | | 516 | | | 0.9 | |
Other consumer | Other consumer | 15,732 | | | 15,024 | | | 708 | | | 4.7 | | Other consumer | 18,370 | | | 16,748 | | | 1,622 | | | 9.7 | |
Commercial business | Commercial business | 36,620 | | | 64,217 | | | (27,597) | | | (43.0) | | Commercial business | 24,452 | | | 28,026 | | | (3,574) | | | (12.8) | |
Premiums for purchased loans | | Premiums for purchased loans | 788 | | | 897 | | | (109) | | | (12.1) | |
Deferred loan fees | Deferred loan fees | (1,346) | | | (2,135) | | | 789 | | | (37.0) | | Deferred loan fees | (2,012) | | | (2,367) | | | 355 | | | (15.0) | |
Total loans held-for-portfolio, gross | Total loans held-for-portfolio, gross | 667,551 | | | 613,363 | | | 54,188 | | | 8.8 | | Total loans held-for-portfolio, gross | 709,485 | | | 686,398 | | | 23,087 | | | 3.4 | |
Allowance for loan losses | Allowance for loan losses | (6,327) | | | (6,000) | | | (327) | | | 5.5 | | Allowance for loan losses | (6,407) | | | (6,306) | | | (101) | | | 1.6 | |
Total loans held-for-portfolio, net | Total loans held-for-portfolio, net | $ | 661,224 | | | $ | 607,363 | | | $ | 53,861 | | | 8.9 | % | Total loans held-for-portfolio, net | $ | 703,078 | | | $ | 680,092 | | | $ | 22,986 | | | 3.4 | % |
The increase in one-to-four family loans was driven primarily by the purchaseorigination of $24.1$13.0 million in conforming and non-conforming jumbo loans during the secondfirst quarter of 20212022 and the origination of $48.6$8.5 million of conforming and non-conforming jumboconventional loans in our portfolio. The increase in construction and land loans during the period was primarily due to new originations and disbursement of advances on previously originated loans and the increase in other consumer loans on floating homes was primarily a result of larger loan sizes, seasonal activity and a small competitive market for these types of loans. The decrease in commercial and multifamily loans was primarily due to increased payoff activity.sizes. The decrease in our commercial business loan portfolio was primarily due to SBA loan forgiveness, partially offset by our origination of 599 PPP loans totaling $42.8 million during the nine months ended September 30, 2021.forgiveness. At September 30, 2021,March 31, 2022, our loan portfolio, net of deferred loan fees, remained well-diversified. Commercial and multifamily real estate loans accounted for 36.9%39.4% of total loans, one-to-four family loans, including home equity loans accounted for 31.2%33.1% of total
loans, commercial business loans accounted for 5.6%3.4% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for 14.3%14.2% of total loans at
September 30, 2021. March 31, 2022. Construction and land loans accounted for 12.2%9.9% of total loans at September 30,March 31, 2022.
Loans held-for-sale totaled $1.3 million at March 31, 2022, compared to $3.1 million at December 31, 2021.
The decrease was primarily due to a decline in mortgage originations reflecting reduced refinance activity.
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 credit losses inherent in our loan portfolio.
The following table reflects the adjustments in our allowance during the periods indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Balance at beginning of period | $ | 6,157 | | | $ | 6,031 | | | $ | 6,000 | | | $ | 5,640 | |
Charge-offs | (8) | | | (332) | | | (113) | | | (649) | |
Recoveries | 3 | | | 14 | | | 15 | | | 72 | |
Net charge-offs | (5) | | | (318) | | | (98) | | | (577) | |
Provision for loan losses during the period | 175 | | | 275 | | | 425 | | | 925 | |
Balance at end of period | $ | 6,327 | | | $ | 5,988 | | | $ | 6,327 | | | $ | 5,988 | |
| | | | | | | |
Ratio of net charge-offs during the period to average loans outstanding during the period | — | % | | (0.18) | % | | (0.02) | % | | (0.12) | % |
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Allowance as a percentage of nonperforming loans (end of period) | 206.16 | % | | 208.04 | % |
Allowance as a percentage of total loans (end of period) | 0.95 | % | | 0.98 | % |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Balance at beginning of period | $ | 6,306 | | | $ | 6,000 | | | | | |
Charge-offs | (32) | | | (71) | | | | | |
Recoveries | 8 | | | 6 | | | | | |
Net charge-offs | (24) | | | (65) | | | | | |
Provision for loan losses during the period | 125 | | | — | | | | | |
Balance at end of period | $ | 6,407 | | | $ | 5,935 | | | | | |
| | | | | | | |
| | | | | | | |
Our allowance for loan losses increased $327$101 thousand, or 5.5%1.6%, to $6.3$6.4 million at September 30, 2021,March 31, 2022, from $6.0$6.3 million at December 31, 2020.2021.
Specific loan loss reserves decreased to $281$261 thousand at September 30, 2021,March 31, 2022, compared to $378$293 thousand at December 31, 2020,2021, while general loan loss reserves decreased to $5.1remained mostly flat at $5.6 million at September 30, 2021, compared to $5.2 million atboth March 31, 2022 and December 31, 20202021 and the unallocated reserve increased to $962$517 thousand at September 30, 2021,March 31, 2022, compared to $406$395 thousand at December 31, 2020.2021. The increase in the unallocated reserve was primarily a result of the increase in the loan portfolio at September 30, 2021, partially offset by a positive adjustment in the qualitative factors applied to real estate related loans as a result of the improvement in economic conditions related to the strong housing market.March 31, 2022. The $11.8$2.1 million balance of PPP loans was omitted from the calculation for the allowance for loan losses at September 30, 2021,March 31, 2022, as these loans are 100% guaranteed by the SBA and management expects that the majority of the remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reduce the Bank’s loan balance for the amount forgiven. Net charge-offs for the three and nine months ended September 30, 2021March 31, 2022 totaled $5$24 thousand and $98 thousand, respectively, compared to net charge-offs of $318 thousand and $577$65 thousand for the three and nine months ended September 30, 2020, respectively.March 31, 2021. At September 30, 2021,March 31, 2022, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.95%0.90% and 206.16%134.97%, respectively, compared to 0.98%0.92% and 208.04%113.58%, respectively, at December 31, 2020.2021. See “Comparison of Results of Operations for the Three and Nine Months Ended September 30,March 31, 2022 and 2021 and 2020 — Provision for Loan Losses.”
The following tables show certain credit ratios at and for the periods indicated and each component of the ratio's calculations.
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Allowance for loan losses as a percentage of total loans outstanding at period end | 0.90 | % | | 0.92 | % |
Allowance for loan losses | 6,407 | | | 6,306 | |
Total loans outstanding | 710,709 | | | 687,868 | |
| | | |
Non-accrual loans as a percentage of total loans outstanding at period end | 0.67 | % | | 0.81 | % |
Total nonaccrual loans | 4,747 | | | 5,552 | |
Total loans outstanding | 710,709 | | | 687,868 | |
| | | |
Allowance for loan losses as a percentage of non-accrual loans at period end | 134.96 | % | | 113.58 | % |
Allowance for loan losses | 6,407 | | | 6,306 | |
Total nonaccrual loans | 4,747 | | | 5,552 | |
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2022 | | 2021 | | |
| | | | | ($ in thousands) |
Net charge-offs during period to average loans outstanding: | | | | | | | | | |
One-to-four family: | | | | | — | % | | 0.19 | % | | |
Net charge-offs | | | | | — | | | 62 | | | |
Average loans outstanding | | | | | 211,315 | | | 130,521 | | | |
| | | | | | | | | |
Home equity: | | | | | (0.05) | % | | — | % | | |
Net (recoveries) | | | | | (2) | | | — | | | |
Average loans outstanding | | | | | 13,449 | | | 14,532 | | | |
| | | | | | | | | |
Commercial and multifamily real estate: | | | | | — | % | | — | % | | |
Net charge-offs | | | | | — | | | — | | | |
Average loans outstanding | | | | | 279,237 | | | 256,478 | | | |
| | | | | | | | | |
Construction and land: | | | | | — | % | | — | % | | |
Net charge-offs | | | | | — | | | — | | | |
Average loans outstanding | | | | | 65,314 | | | 63,906 | | | |
| | | | | | | | | |
Manufactured homes: | | | | | — | % | | (0.02) | % | | |
Net (recoveries) | | | | | — | | | (1) | | | |
Average loans outstanding | | | | | 21,896 | | | 20,692 | | | |
| | | | | | | | | |
Floating homes: | | | | | — | % | | — | % | | |
Net charge-offs | | | | | — | | | — | | | |
Average loans outstanding | | | | | 59,797 | | | 39,692 | | | |
| | | | | | | | | |
Other consumer: | | | | | 0.49 | % | | 0.16 | % | | |
Net charge-offs | | | | | 21 | | | 6 | | | |
Average loans outstanding | | | | | 16,892 | | | 14,804 | | | |
| | | | | | | | | |
Commercial business: | | | | | 0.09 | % | | (0.01) | % | | |
Net charge-offs/(recoveries) | | | | | 5 | | | (2) | | | |
Average loans outstanding | | | | | 25,657 | | | 75,108 | | | |
| | | | | | | | | |
Total loans: | | | | | 0.01 | % | | 0.04 | % | | |
Net charge-offs | | | | | 24 | | | 65 | | | |
Average loans outstanding | | | | | 693,556 | | | 615,735 | | | |
Mortgage Servicing Rights. The fair value of mortgage servicing rights was $4.2$4.7 million at September 30, 2021,March 31, 2022, an increase of $431$395 thousand, or 11.4%9.2%, from $3.8$4.3 million at December 31, 2020.2021. We record mortgage servicing rights on loans sold with servicing retained and upon acquisition of a servicing portfolio. 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 September 30, 2021,March 31, 2022, nonperforming assets totaled $3.7$5.4 million, or 0.40%0.56% of total assets, compared to $3.5$6.2 million, or 0.40%0.68% of total assets at December 31, 2020.2021.
The table below sets forth the amounts and categories of nonperforming assets at the dates indicated (dollars in thousands):
| | | Nonperforming Assets | | Nonperforming Assets |
| | September 30, 2021 | | December 31, 2020 | | Amount Change | | Percent Change | | March 31, 2022 | | December 31, 2021 | | Amount Change | | Percent Change |
Nonaccrual loans | Nonaccrual loans | $ | 2,658 | | | $ | 2,710 | | | $ | (52) | | | (1.9) | % | Nonaccrual loans | $ | 4,474 | | | $ | 5,130 | | | $ | (656) | | | (12.8) | % |
Nonperforming TDRs | Nonperforming TDRs | 411 | | | 174 | | | 237 | | | 135.9 | | Nonperforming TDRs | 273 | | | 422 | | | (149) | | | (35.3) | |
Total nonperforming loans | Total nonperforming loans | 3,069 | | | 2,884 | | | 185 | | | 6.4 | | Total nonperforming loans | 4,747 | | | 5,552 | | | (805) | | | (14.5) | |
OREO and repossessed assets | OREO and repossessed assets | 659 | | | 594 | | | 65 | | | 10.9 | | OREO and repossessed assets | 659 | | | 659 | | | — | | | — | |
Total nonperforming assets | Total nonperforming assets | $ | 3,728 | | | $ | 3,478 | | | $ | 250 | | | 7.2 | % | Total nonperforming assets | $ | 5,406 | | | $ | 6,211 | | | $ | (805) | | | (13.0) | % |
Nonperforming loans increased $185decreased $805 thousand, or 6.4%14.5%, to $3.1$4.7 million at September 30, 2021March 31, 2022 from $2.9$5.6 million at December 31, 2020.2021. The decrease in nonperforming assets primarily was due to decreases in one-to-four family loans and floating homes. The percentage of nonperforming loans to total loans was 0.46%0.67% at September 30, 2021,March 31, 2022, compared to 0.47%0.81% of total loans at December 31, 2020.2021.
Deposits.Deposits and Borrowings. Total deposits increased $59.7$37.8 million, or 8.0%4.7%, to $807.7$836.1 million at September 30, 2021March 31, 2022 from $748.0$798.3 million at December 31, 2020.2021. The increase was due primarily to stimulus funds deposited, developing furthera result of deposit growth from specialty business relationships with PPP borrowers who were not previously clients, as well as reduced withdrawals reflecting changesand temporary increases in customer spending habits due to the COVID-19 pandemic.lawyer trust accounts, partially offset by a managed run-off of higher costing maturing certificates of deposits. We continue our efforts to grow noninterest-bearing deposits, which increased $62.4$18.3 million, or 47.1%9.6%, to $194.8$208.8 million at September 30, 2021,March 31, 2022, compared to $132.5$190.5 million at December 31, 2020.2021. Noninterest-bearing deposits represented 24.1%25.0% of total deposits at September 30, 2021,March 31, 2022, compared to 17.7%23.9% at December 31, 2020.2021.
A summary of deposit accounts with the corresponding weighted-average cost of funds at the dates indicated is presented below (dollars in thousands):
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| | Amount | | Wtd. Avg. Rate | | Amount | | Wtd. Avg. Rate | | Amount | | Wtd. Avg. Rate | | Amount | | Wtd. Avg. Rate |
Noninterest-bearing demand | Noninterest-bearing demand | $ | 190,284 | | | — | % | | $ | 129,299 | | | — | % | Noninterest-bearing demand | $ | 203,819 | | | — | % | | $ | 187,684 | | | — | % |
Interest-bearing demand | Interest-bearing demand | 311,303 | | | 0.21 | | | 230,492 | | | 0.44 | | Interest-bearing demand | 333,449 | | | 0.14 | | | 307,061 | | | 0.19 | |
Savings | Savings | 99,747 | | | 0.09 | | | 83,778 | | | 0.27 | | Savings | 106,217 | | | 0.05 | | | 103,401 | | | 0.08 | |
Money market | Money market | 82,314 | | | 0.22 | | | 65,748 | | | 0.39 | | Money market | 89,164 | | | 0.17 | | | 91,670 | | | 0.21 | |
Time deposits | Time deposits | 119,441 | | | 1.67 | | | 235,473 | | | 2.40 | | Time deposits | 98,493 | | | 1.13 | | | 105,722 | | | 1.57 | |
Escrow (1) | Escrow (1) | 4,564 | | | — | | | 3,191 | | | — | | Escrow (1) | 4,949 | | | — | | | 2,782 | | | — | |
Total deposits | Total deposits | $ | 807,653 | | | 0.47 | % | | $ | 747,981 | | | 1.06 | % | Total deposits | $ | 836,091 | | | 0.21 | % | | $ | 798,320 | | | 0.41 | % |
(1) Escrow balances shown in noninterest-bearing deposits on the consolidated balance sheets.
Scheduled maturities of time deposits at September 30, 2021,March 31, 2022, are as follows (in thousands):
| Year Ending December 31, | Year Ending December 31, | | Amount | Year Ending December 31, | | Amount |
2021 | | $ | 21,405 | | |
2022 | 2022 | | 49,085 | | 2022 | | $ | 43,253 | |
2023 | 2023 | | 38,421 | | 2023 | | 42,326 | |
2024 | 2024 | | 3,940 | | 2024 | | 5,685 | |
2025 | 2025 | | 4,800 | | 2025 | | 4,695 | |
2026 | | 2026 | | 2,229 | |
Thereafter | Thereafter | | 1,790 | | Thereafter | | 305 | |
| | | $ | 119,441 | | | | $ | 98,493 | |
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 at September 30, 2021March 31, 2022 and December 31, 2020,2021, totaled $25.5$18.7 million and $79.9$19.1 million, respectively. DepositsDeposit amounts in excess of $250,000 are not federally insured.
There were no outstanding FHLB advances at March 31, 2022 and December 31, 2021. Subordinated notes, net totaled $11.6 million at March 31, 2022 and December 31, 2021.
Stockholders’ Equity. Total stockholders’ equity increased $6.4 million,$492 thousand, or 7.5%0.5%, to $91.9$93.9 million at September 30, 2021,March 31, 2022, from $85.5$93.4 million at December 31, 2020.2021. This increase primarily reflects $7.3$1.7 million in net income for the ninethree months ended September 30, 2021,March 31, 2022, partially offset by the payment of cash dividends of $1.6 million$709 thousand in dividends to common stockholders during the ninethree months ended September 30, 2021.March 31, 2022 and an unrealized loss, net of tax, of $608 thousand on our available-for-sale securities as a result of declining market values.
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. Nonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual (dollars in thousands). | | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate Annualized | | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate Annualized | | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate Annualized | | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate Annualized |
Interest-earning assets: | Interest-earning assets: | | | | | | | | | | | | Interest-earning assets: | | | | | | | | | | | |
Loans receivable | Loans receivable | $ | 652,251 | | | $ | 8,967 | | | 5.45 | % | | $ | 693,524 | | | $ | 8,422 | | | 4.83 | % | Loans receivable | $ | 694,920 | | | $ | 8,075 | | | 4.71 | % | | $ | 628,397 | | | $ | 7,886 | | | 5.09 | % |
Investments, cash and cash equivalents | Investments, cash and cash equivalents | 229,802 | | | 135 | | | 0.23 | | | 117,660 | | | 86 | | | 0.29 | | Investments, cash and cash equivalents | 189,618 | | | 138 | | | 0.30 | | | 228,752 | | | 113 | | | 0.20 | |
Total interest-earning assets (1) | Total interest-earning assets (1) | 882,053 | | | 9,102 | | | 4.09 | | | 811,184 | | | 8,508 | | | 4.17 | | Total interest-earning assets (1) | 884,538 | | | 8,213 | | | 3.77 | | | 857,149 | | | 7,999 | | | 3.78 | |
Interest-bearing liabilities: | Interest-bearing liabilities: | | | | | | | | | Interest-bearing liabilities: | | | | | | | | |
Savings and money market accounts | Savings and money market accounts | 179,164 | | | 42 | | | 0.09 | | | 132,271 | | | 85 | | | 0.26 | | Savings and money market accounts | 196,128 | | | 30 | | | 0.06 | | | 155,854 | | | 64 | | | 0.17 | |
Demand and NOW accounts | Demand and NOW accounts | 311,273 | | | 141 | | | 0.18 | | | 199,021 | | | 242 | | | 0.48 | | Demand and NOW accounts | 315,181 | | | 122 | | | 0.16 | | | 248,887 | | | 185 | | | 0.30 | |
Certificate accounts | Certificate accounts | 135,757 | | | 434 | | | 1.27 | | | 239,296 | | | 1,411 | | | 2.35 | | Certificate accounts | 102,315 | | | 275 | | | 1.09 | | | 214,517 | | | 1,046 | | | 1.98 | |
Subordinated notes | Subordinated notes | 11,616 | | | 168 | | | 5.74 | | | 1,692 | | | 23 | | | 5.41 | | Subordinated notes | 11,637 | | | 168 | | | 5.85 | | | 11,596 | | | 168 | | | 5.88 | |
Borrowings | 2 | | | — | | | — | | | 40,527 | | | 87 | | | 0.85 | | |
| Total interest-bearing liabilities | Total interest-bearing liabilities | 637,812 | | | 785 | | | 0.49 | % | | 612,807 | | | 1,848 | | | 1.20 | % | Total interest-bearing liabilities | 625,261 | | | 595 | | | 0.39 | % | | 630,854 | | | 1,463 | | | 0.94 | % |
Net interest income | Net interest income | | | $ | 8,317 | | | | | $ | 6,660 | | | Net interest income | | | $ | 7,618 | | | | | $ | 6,536 | | |
Net interest rate spread | Net interest rate spread | | | | 3.61 | % | | | | 2.97 | % | Net interest rate spread | | | | 3.38 | % | | | | 2.84 | % |
Net earning assets | Net earning assets | $ | 244,241 | | | | | $ | 198,377 | | | | Net earning assets | $ | 259,277 | | | | | $ | 226,295 | | | |
Net interest margin | Net interest margin | | | 3.74 | % | | | | 3.27 | % | Net interest margin | | | 3.49 | % | | | | 3.09 | % |
Average interest-earning assets to average interest-bearing liabilities | Average interest-earning assets to average interest-bearing liabilities | | 138.29 | % | | | | 132.37 | % | | | Average interest-earning assets to average interest-bearing liabilities | | 141.47 | % | | | | 135.87 | % | | |
Total deposits | Total deposits | 808,697 | | | 617 | | | 0.30 | % | | 715,231 | | | 1,738 | | | 0.97 | % | Total deposits | 808,180 | | | 427 | | | 0.21 | % | | 780,375 | | | 1,295 | | | 0.67 | % |
Total funding(2) | Total funding(2) | 820,315 | | | 785 | | | 0.38 | % | | 757,450 | | | 1,848 | | | 0.97 | % | Total funding(2) | 819,817 | | | 595 | | | 0.29 | % | | 791,971 | | | 1,463 | | | 0.75 | % |
(1) Calculated net of deferred loan fees, loan discounts and loans in process.
(2) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
| Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate Annualized | | Average Outstanding Balance | | Interest Earned/ Paid | | Yield/ Rate Annualized |
Interest-earning assets: | | | | | | | | | | | |
Loans receivable | $ | 636,352 | | | $ | 25,152 | | | 5.28 | % | | $ | 666,090 | | | $ | 25,463 | | | 5.09 | % |
Investments, cash and cash equivalents | 236,495 | | | 365 | | | 0.21 | | | 82,799 | | | 400 | | | 0.64 | |
Total interest-earning assets (1) | 872,847 | | | 25,517 | | | 3.91 | % | | 748,889 | | | 25,863 | | | 4.60 | |
Interest-bearing liabilities: | | | | | | | | | | | |
Savings and money market accounts | 167,253 | | | 144 | | | 0.12 | | | 122,545 | | | 252 | | | 0.27 | |
Demand and NOW accounts | 281,933 | | | 485 | | | 0.23 | | | 178,712 | | | 688 | | | 0.51 | |
Certificate accounts | 174,712 | | | 2,178 | | | 1.67 | | | 244,480 | | | 4,406 | | | 2.40 | |
Subordinated notes | 11,606 | | | 504 | | | 5.81 | | | 568 | | | 23 | | | 5.39 | |
Borrowings | 1 | | | — | | | — | | | 20,244 | | | 209 | | | 1.38 | |
Total interest-bearing liabilities | 635,505 | | | 3,311 | | | 0.70 | % | | 566,549 | | | 5,578 | | | 1.31 | % |
Net interest income | | | $ | 22,206 | | | | | | | $ | 20,285 | | | |
Net interest rate spread | | | | | 3.21 | % | | | | | | 3.29 | % |
Net earning assets | $ | 237,342 | | | | | | | $ | 182,340 | | | | | |
Net interest margin | | | | | 3.40 | % | | | | | | 3.61 | % |
Average interest-earning assets to average interest-bearing liabilities | | | 137.35 | % | | | | | | 132.18 | % | | |
Total deposits | 798,384 | | | 2,807 | | | 0.47 | % | | 673,042 | | | 5,346 | | | 1.06 | % |
Total funding(2) | 809,991 | | | 3,311 | | | 0.55 | % | | 693,854 | | | 5,578 | | | 1.07 | % |
(1)Calculated net of deferred loan fees, loan discounts and loans in process.
(2)Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding.Rate/Volume Analysis
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 changes related to outstanding balances and changes due to 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).
| | | Three Months Ended September 30, 2021 vs. 2020 | | Nine Months Ended September 30, 2021 vs. 2020 | | Three Months Ended March 31, 2022 vs. 2021 | |
| | Increase (Decrease) due to | | Total Increase (Decrease) | | Increase (Decrease) due to | | Total Increase (Decrease) | | Increase (Decrease) due to | | Total Increase (Decrease) | |
| | Volume | | Rate | | Volume | | Rate | | | Volume | | Rate | | |
Interest-earning assets: | Interest-earning assets: | | | | | | | | | | | | Interest-earning assets: | | | | | | |
Loans receivable | Loans receivable | $ | (567) | | | $ | 1,112 | | | $ | 545 | | | $ | (1,175) | | | $ | 864 | | | $ | (311) | | Loans receivable | $ | 773 | | | $ | (584) | | | $ | 189 | | |
Investments, cash and cash equivalents | Investments, cash and cash equivalents | 66 | | | (17) | | | 49 | | | 237 | | | (272) | | | (35) | | Investments, cash and cash equivalents | (28) | | | 53 | | | 25 | | |
Total interest-earning assets | Total interest-earning assets | (501) | | | 1,095 | | | 594 | | | (938) | | | 592 | | | (346) | | Total interest-earning assets | 745 | | | (531) | | | 214 | | |
Interest-bearing liabilities: | Interest-bearing liabilities: | | | | | | | | | | | | Interest-bearing liabilities: | | | | | | |
Savings and Money Market accounts | Savings and Money Market accounts | 11 | | | (54) | | | (43) | | | 38 | | | (146) | | | (108) | | Savings and Money Market accounts | 6 | | | (40) | | | (34) | | |
Demand and NOW accounts | Demand and NOW accounts | 51 | | | (152) | | | (101) | | | 178 | | | (381) | | | (203) | | Demand and NOW accounts | 26 | | | (89) | | | (63) | | |
Certificate accounts | Certificate accounts | (331) | | | (646) | | | (977) | | | (870) | | | (1,358) | | | (2,228) | | Certificate accounts | (302) | | | (469) | | | (771) | | |
Subordinated notes | Subordinated notes | 144 | | | 1 | | | 145 | | | 479 | | | 2 | | | 481 | | Subordinated notes | 1 | | | (1) | | | — | | |
Borrowings | — | | | (87) | | | (87) | | | — | | | (209) | | | (209) | | |
| Total interest-bearing liabilities | Total interest-bearing liabilities | $ | (125) | | | $ | (938) | | | $ | (1,063) | | | $ | (175) | | | $ | (2,092) | | | $ | (2,267) | | Total interest-bearing liabilities | $ | (269) | | | $ | (599) | | | $ | (868) | | |
Change in net interest income | Change in net interest income | | | | | $ | 1,657 | | | | | | | $ | 1,921 | | Change in net interest income | | | | | $ | 1,082 | | |
Comparison of Results of Operation for the Three and Nine Months Ended September 30,March 31, 2022 and 2021 and 2020
General.
Q3Q1 2022 vs Q1 2021 vs Q3 2020. Net income increased $257decreased $728 thousand, or 11.0%29.7%, to $2.6$1.7 million, or $0.98$0.65 per diluted common share, for the three months ended September 30, 2021,March 31, 2022, compared to $2.3$2.5 million, or $0.90$0.93 per diluted common share, for the three months ended September 30, 2020.March 31, 2021. The increasedecrease in net income was primarily the result of higherlower interest income earned on loans, coupled with lower noninterest income and higher noninterest expense, partially offset by lower interest expense paid on deposits and a lower provision for loan losses, partially offset by a decrease in noninterest income, higher interest expense paid on subordinated notes, and an increase in noninterest expense.
YTD 2021 vs. YTD 2020. Net income increased $1.9 million, or 34.0%, to $7.3 million, or $2.76 per diluted common share, for the nine months ended September 30, 2021, compared to $5.4 million, or $2.09 per diluted common share, for the nine months ended September 30, 2020. The increase was primarily a result of a $2.3 million decrease in interest expense, an increase in noninterest income of $1.5 million and a $500 thousand decrease in the provision for loan losses for the nine months ended September 30, 2021, partially offset by a $1.6 million increase in noninterest expense.deposits.
Interest Income
Q3Q1 2022 vs Q1 2021 vs Q3 2020. Interest income increased $594$214 thousand, or 7.0%2.7%, to $9.1$8.2 million for the three months ended September 30, 2021,March 31, 2022, from $8.5$8.0 million for the three months ended September 30, 2020,March 31, 2021, primarily due to higher average loan balances, partially offset by a 6238 basis point increasedecline in the average loan yield, partially offset by lower average loan balances.yield. Interest income on loans increased $545$189 thousand, or 6.5%2.4%, to $9.0$8.1 million for the three months ended September 30, 2021,March 31, 2022, compared to $8.4$7.9 million for the three months ended September 30, 2020.March 31, 2021. The average balance of total loans was $652.3$694.9 million for the three months ended September 30, 2021,March 31, 2022, compared to $693.5$628.4 million for the three months ended September 30, 2020March 31, 2021 resulting primarily from the declineincreased balances in commercial and multifamily loans andall loan categories, except for commercial business loans which declined as a result of the SBA’s repayment of PPP loans. The average yield on total loans was 5.45%4.71% for three months ended September 30, 2021,March 31, 2022, compared to 4.83%5.09% for the three months ended September 30, 2020.March 31, 2021. The average yield on total loans increaseddecreased primarily due to the decrease in the recognition of net deferred fees due to loan repayments from SBA’sSBA loan forgiveness of PPP loans during the period partially offset by adjustable rateand lower rates on new originations. Interest income included $84 thousand in fees earned related to PPP loans resetting downward.in the three months ended March 31, 2022, compared to $768 thousand in the same period a year ago. For the three months ended September 30, 2021,March 31, 2022, the average balance of PPP loans was $19.0$3.1 million and the average yield on PPP loans was 22.37%11.05%, including the recognition of the net deferred fees, with a positive impact on loan yield of 51three basis points. For the three months ended September 30, 2020,March 31, 2021, the average balance of PPP loans was $74.3$53.9 million and the average yield on PPP loans was 2.80%5.78%, including the recognition of deferred fees, with a negativepositive impact on loan yield of 24six basis points. Interest income included $1.1 million in fees earned related to PPP loans in the three months ended September 30, 2021, compared to $522 thousand in the same period a year ago. At September 30, 2021,March 31, 2022, PPP deferred loan origination fees of $300$60 thousand remain to be accreted into interest income during the remaining life of the loans. The impact of PPP loans on loan yields will change during any period based on the volume of
prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the two- or five-year maturity of the loans.
Interest income on the investment portfolio and cash and cash equivalents increased $49$25 thousand, or 57.0%22.1%, to $135$138 thousand for the three months ended September 30, 2021,March 31, 2022, compared to $86$113 thousand for the three months ended September 30, 2020.March 31, 2021. The increase in the interest income on investment securities and cash and cash equivalents was due to significantly higher average balances,yields, partially offset by lower average yields.balances. The average balance on investments and cash and cash equivalents was $229.8$189.6 million for the three months ended September 30, 2021,March 31, 2022, compared to $117.7$228.8 million for the three months ended September 30, 2020.March 31, 2021. The substantial increase was due to higher average cash balances primarily due to the increase in deposit balances related to new and existing clients increasing their deposit balances. This excess liquidity negatively impacted the average yield on investments and cash and cash equivalents, which decreased to 0.23% for the three months ended September 30, 2021, compared to 0.29% for the three months ended September 30, 2020.
YTD 2021 vs. YTD 2020. Interest income decreased $346 thousand, or 1.3%, to $25.5 million for the nine months ended September 30, 2021, from $25.9 million for the nine months ended September 30, 2020. The decrease was primarily due to a 69 basis point decline in average yield on interest-earning assets. Interest income on loans decreased $311 thousand, or 1.2%, to $25.2 million for the nine months ended September 30, 2021, compared to $25.5 million for the nine months ended September 30, 2020, driven by lower average total loans resulting primarily from the decline in commercial and multifamily loans and commercial business loans, partially offset a 19 basis points increase in the average yield on loans. The average balance of total loans was $636.4 million for the nine months ended September 30, 2021, compared to $666.1 million for the nine months ended September 30, 2020. The average yield on total loans was 5.28% for the nine months ended September 30, 2021, compared to 5.09% for the nine months ended September 30, 2020. For the nine months ended September 30, 2021, the average balance of PPP loans was $44.2 million and the average yield on PPP loans was 8.55%, including the recognition of the net deferred fees, with a positive impact on average loan yield of 24 basis points. For the nine months ended September 30, 2020, the average balance of PPP loans was $42.4 million and the average yield on PPP loans was 2.64%, including the recognition of deferred fees, with a negative impact on average loan yield of 17 basis points. Interest income included $2.8 million in fees earned related to PPP loans in the nine months ended September 30, 2021, compared to $840 thousand in the same period a year ago.
Interest income on the investment portfolio and cash and cash equivalents decreased $35 thousand, or 8.8%, to $365 thousand for the nine months ended September 30, 2021, compared to $400 thousand for the nine months ended September 30, 2020. The decrease in the interest income on investment securities and cash and cash equivalents was due to lower average yields, partially offset bycash balances as we redeployed funds into higher average balances.interest-earning assets. The average yield on investments and cash and cash equivalents was 0.21%increased to 0.30% for the ninethree months ended September 30, 2021,March 31, 2022, compared
to 0.64%0.20% for the ninethree months ended September 30, 2020, primarily due toMarch 31, 2021, as a result of the substantialrising interest rate environment and the increase in cash and cash equivalents earning a nominal yield.
the average balance of our investment securities portfolio.
Interest Expense
Q3Q1 2022 vs Q1 2021 vs Q3 2020. Interest expense decreased $1.1 million,$868 thousand, or 57.5%59.3%, to $785$595 thousand for the three months ended September 30, 2021,March 31, 2022, from $1.8$1.5 million for the three months ended September 30, 2020, primarily as a result of declining deposit costs, a higher percentage of noninterest bearing deposits to total deposits and repayment of FHLB advances, partially offset by the interest expense on subordinated notes issued in the third quarter of 2020.
March 31, 2021. Interest expense on deposits decreased $1.1 million,$868 thousand, or 64.5%67.0%, to $617$427 thousand for the three months ended September 30, 2021,March 31, 2022, compared to $1.7$1.3 million for the same period a year ago. The decrease was primarily the result of a 46 basis point decline in the average cost of deposits reflecting reduced rates paid on all deposits and a $103.5$112.2 million, or 43.3%52.3%, decline in the average balance of higher costcertificate accounts, partially offset by a $106.6 million, or 26.3%, increase in the average balance of interest-bearing deposits other than certificate accounts. In addition, total deposit costs were favorably impacted by a $37.9$33.4 million increase in the average balance of noninterest bearing deposits to $182.5$194.6 million for the three months ended September 30, 2021,March 31, 2022, compared to $144.6$161.1 million for the same period last year. The increase in the average balance of noninterest bearing deposits contributed to the 46 basis point decrease in the average cost of total deposits decreased 67 basis points to 0.30%0.21% for the quarter ended September 30, 2021,March 31, 2022, from 0.97%0.67% for the quarter ended September 30, 2020.
Interest expense on borrowings and subordinated notes increased $58 thousand, or 52.7%, to $168 thousand for the three months ended September 30, 2021, comprised solely of interest expense on our subordinated notes, compared to $110 thousand for the three months ended September 30, 2020, comprised primarily of interest expense on our FHLB advances. Average borrowings and subordinated notes decreased $30.6 million, to $11.6 million at September 30, 2021, consisting solely of subordinated notes, from $42.2 million at September 30, 2020, which consisted primarily of FHLB advances. The average cost of subordinated notes was 5.74% for the three months ended September 30, 2021, and the average cost of the subordinated notes and FHLB advances was 1.04% for the three months ended September 30, 2020.
YTD 2021 vs. YTD 2020. Interest expense decreased $2.3 million, or 40.6%, to $3.3 million for the nine months ended September 30, 2021, from $5.6 million for the nine months ended September 30, 2020, primarily as a result of declining deposit costs and a higher percentage of noninterest bearing deposits to total deposits.
Interest expense on deposits decreased $2.5 million, or 47.5%, to $2.8 million for the nine months ended September 30, 2021, compared to $5.3 million for the same period a year ago. The decrease was primarily the result of a decline in the average cost of deposits reflecting reduced market rates paid on deposits. The average cost of total deposits decreased 59 basis points to 0.47% for the nine months ended September 30, 2021, from 1.06% for the nine months ended September 30, 2020.
Interest expense on borrowings and subordinated notes increased $272 thousand, or 117.2%, to $504 thousand for the nine months ended September 30, 2021, comprised solely of interest expense on our subordinated notes, compared to $232 thousand for the nine months ended September 30, 2020, which was related primarily to FHLB advances. Average borrowings and subordinated notes decreased $9.2 million, to $11.6 million at September 30, 2021, consisting solely of subordinated notes, from $20.8 million at September 30, 2020, which consisted primarily of FHLB advances. The average cost of the subordinated notes and FHLB advances was 5.81% for the nine months ended September 30, 2021, compared to 1.48% for the nine months ended September 30, 2020.
Net Interest Income.
Q3Q1 2022 vs Q1 2021 vs Q3 2020. Net interest income increased $1.7$1.1 million, or 24.9%16.6%, to $8.3$7.6 million for the three months ended September 30, 2021,March 31, 2022, from $6.7$6.5 million for the three months ended September 30, 2020.March 31, 2021. Our net interest margin was 3.74%3.49% and 3.27%3.09% for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively. The increase in net interest income primarily resulted from the decline in the average rate paid on deposits and, to a lesser extent, higher interest income. The increase in net interest margin was primarily due to the decline in rates paid on interest-bearing liabilities following decreases inas a result of the short-term market rates inmanaged runoff of higher costing deposits. During the secondfirst quarter of 2020 exceeding the decline in yields earned on interest-earning assets. During the third quarter of 2021,2022, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of 41three basis points, compared to a negativepositive impact of five18 basis points from our origination of low yielding PPP loans during the quarter ended September 30, 2020.
YTD 2021 vs. YTD 2020. Net interest income increased $1.9 million, or 9.5%, to $22.2 million for the nine months ended September 30, 2021, from $20.3 million for the nine months ended September 30, 2020. Our net interest margin was 3.40% and 3.61% for the nine months ended September 30, 2021, respectively. The increase in net interest income primarily resulted from the decline in the average rate paid on deposits, partially offset by a decline in the average loan balance. The decrease in net interest margin was primarily due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities as changes in the average rate paid on interest-bearing deposits tend to lag changes in market interest rate. During the nine months ended September 30, 2021, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of 27 basis points, compared to a negative impact of six basis points from our origination of low yielding PPP loans during the same period in 2020.March 31, 2021.
Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, based on our review of the level of the allowance for loan losses required to reflect management’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’ ability to repay, estimated value of any underlying collateral, peer group data, prevailing economic conditions, and current factors. Large groups of smaller balance homogeneous loans, such as one- to four- family, small commercial and multifamily, home equity and consumer loans, 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’ ability to repay, are evaluated individually and specific loss allocations are provided for these loans when necessary.
A provision for loan losses of $175 thousand and $425$125 thousand was recorded for the three and nine months ended September 30, 2021,March 31, 2022, as compared to $275 thousand and $925 thousandno provision for loan losses for the three and nine months ended September 30, 2020, respectively.March 31, 2021. The decreaseincrease in the provision for loan losses resulted primarily from the increase in our loan portfolio, partially offset by a shift in the current quarter and nine-month period comparedloan portfolio composition to the comparable periods in 2020 was primarily due toloan types requiring a decrease in the average balance of loans held-for-portfolio between the periods, a positive adjustment to the qualitative factors applied to real estate related loans as a result of improvement in economic conditions related to the strong housing market, and to a lesser extent a $247 thousand decrease in non-performing loans from September 30, 2020.lower general loan allowance. Our allowance for loan losses as of September 30, 2021,March 31, 2022, not only reflects probable and inherent credit losses based upon the economic conditions that existed as of September 30, 2021,March 31, 2022, but also reflects the inherent uncertainty related to the economic improvements in our marketsenvironment as initial COVID-19 restrictions implemented in the second quartera result of last year have
been lifted.local, national and global events. Net charge-offs for the three and nine months ended September 30, 2021March 31, 2022 totaled $5$24 thousand, and $98 thousand, respectively, compared to net charge-offs of $318 thousand and $577$65 thousand for the three and nine months ended September 30, 2020, respectively.March 31, 2021.
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. Recently, we have seen most of our market areas reporting a fairly significant increase in COVID transmissions, which we understand from our public health authorities is largely attributed to lagging vaccination rates and an increase in cases related to the Delta variant. To date, we are not seeing renewed business activity restrictions in our primary markets. To the extent business activity restrictions are renewed, due to COVID-19 or otherwise, this will likely affect our business operations which may, in turn, result in a material increase our provision for loan and lease losses which would adversely affect the Company’s 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.
Noninterest Income. Noninterest income decreased $637 thousand,$1.2 million, or 30.8%43.7%, to $1.4$1.5 million for the three months ended September 30, 2021,March 31, 2022, as compared to $2.1$2.7 million for the three months ended September 30, 2020,March 31, 2021, as reflected below (dollars in thousands):
| | | Three Months Ended September 30, | | Amount Change | | Percent Change | | Three Months Ended March 31, | | Amount Change | | Percent Change |
| | 2021 | | 2020 | | | 2021 | | 2020 | |
Service charges and fee income | Service charges and fee income | $ | 556 | | | $ | 510 | | | $ | 46 | | | 9.0 | % | Service charges and fee income | $ | 549 | | | $ | 532 | | | $ | 17 | | | 3.2 | % |
Earnings on cash surrender value of BOLI | Earnings on cash surrender value of BOLI | 104 | | | 102 | | | 2 | | | 2.0 | | Earnings on cash surrender value of BOLI | 21 | | | 82 | | | (61) | | | (74.4) | |
Mortgage servicing income | Mortgage servicing income | 328 | | | 260 | | | 68 | | | 26.2 | | Mortgage servicing income | 320 | | | 312 | | | 8 | | | 2.6 | |
Fair value adjustment on mortgage servicing rights | Fair value adjustment on mortgage servicing rights | (125) | | | (623) | | | 498 | | | (79.9) | | Fair value adjustment on mortgage servicing rights | 268 | | | (275) | | | 543 | | | (197.5) | |
Net gain on sale of loans | Net gain on sale of loans | 568 | | | 1,819 | | | (1,251) | | | (68.8) | Net gain on sale of loans | 365 | | | 2,053 | | | (1,688) | | | (82.2) |
Total noninterest income | Total noninterest income | $ | 1,431 | | | $ | 2,068 | | | $ | (637) | | | (30.8) | % | Total noninterest income | $ | 1,523 | | | $ | 2,704 | | | $ | (1,181) | | | (43.7) | % |
The decrease in noninterest income during the three months ended September 30, 2021March 31, 2022 compared to the same period in 20202021 was primarily due to thea $1.7 million decrease in our net gain on sale of loans due to a decline in both the amount of loans originated for sale and gross margins for loans sold, partially offset by a $498$543 thousand improvement in the fair value adjustment on mortgage servicing rights and increases in both our mortgage servicing income of $68 thousand and service charges and fee income of $46 thousand. As a result of refinance activity slowing over the past six months, our residential loans originated for sale decreased.rights. Loans sold during the quarter ended September 30, 2021,March 31, 2022, totaled $20.3$12.2 million, compared to $89.5$68.1 million during the quarter ended September 30, 2020.March 31, 2021. The improvement in the fair value adjustment on mortgage servicing rights resulted from loan prepayment speeds slowing during the quarter as mortgage interest rates moved slightly higher. The increase in the service charges and fee income primarily resulted from an increase in the number of checking accounts and an increase in debit card interchange fees.
Noninterest income increased $1.5 million, or 34.2%, to $5.8 million for the nine months ended September 30, 2021, as compared to $4.4 million for the nine months ended September 30, 2020, as reflected below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Amount Change | | Percent Change |
| 2021 | | 2020 | | |
Service charges and fee income | $ | 1,615 | | | $ | 1,433 | | | $ | 182 | | | 12.7 | % |
Earnings on cash surrender value of BOLI | 281 | | | 207 | | | 74 | | | 35.7 | |
Mortgage servicing income | 961 | | | 739 | | | 222 | | | 30.0 | |
Fair value adjustment on mortgage servicing rights | (694) | | | (1,423) | | | 729 | | | (51.2) | |
Net gain on sale of loans | 3,683 | | | 3,399 | | | 284 | | | 8.4 |
Total noninterest income | $ | 5,846 | | | $ | 4,355 | | | $ | 1,491 | | | 34.2 | % |
The increase in noninterest income during the nine months ended September 30, 2021, compared to the same period in 2020 was primarily due to improvement in the fair value adjustment on mortgage servicing rights, and increases in both gain on sale of loans and in mortgage servicing income. Net gain on sale of loans increased due to higher margins on our sales offsetting the
decrease in sales volume. Loans sold during the nine months ended September 30, 2021, totaled $128.3 million, compared to $176.0 million during the nine months ended September 30, 2020. Mortgage servicing income was higher as a result of our mortgage servicing portfolio increasing to $514.0 million at September 30, 2021 compared to $444.3 million at September 30, 2020.
Noninterest Expense. Noninterest expense increased $788$673 thousand, or 14.2%10.9%, to $6.3$6.8 million during the three months ended September 30, 2021,March 31, 2022, compared to $5.5$6.2 million during the three months ended September 30, 2020,March 31, 2021, as reflected below (dollars in thousands):
| | | Three Months Ended September 30, | | Amount Change | | Percent Change | | Three Months Ended March 31, | | Amount Change | | Percent Change |
| | 2021 | | 2020 | | | 2022 | | 2021 | |
Salaries and benefits | Salaries and benefits | $ | 3,512 | | | $ | 2,880 | | | $ | 632 | | | 21.9 | % | Salaries and benefits | $ | 4,167 | | | $ | 3,644 | | | $ | 523 | | | 14.4 | % |
Operations | Operations | 1,466 | | | 1,390 | | | 76 | | | 5.5 | | Operations | 1,314 | | | 1,206 | | | 108 | | | 9.0 | |
Regulatory assessments | Regulatory assessments | 91 | | | 111 | | | (20) | | | (18.0) | | Regulatory assessments | 101 | | | 101 | | | — | | | — | |
Occupancy | Occupancy | 441 | | | 442 | | | (1) | | | (0.2) | | Occupancy | 432 | | | 448 | | | (16) | | | (3.6) | |
Data processing | Data processing | 808 | | | 707 | | | 101 | | | 14.3 | | Data processing | 821 | | | 779 | | | 42 | | | 5.4 | |
| Net gain on OREO and repossessed assets | | Net gain on OREO and repossessed assets | — | | | (16) | | | 16 | | | (100.0) |
Total noninterest expense | Total noninterest expense | $ | 6,318 | | | $ | 5,530 | | | $ | 788 | | | 14.2 | % | Total noninterest expense | $ | 6,835 | | | $ | 6,162 | | | $ | 673 | | | 10.9 | % |
The increase in noninterest expense during the three months ended September 30, 2021March 31, 2022 compared to the same period in 20202021 was primarily due to an increase in salaries and benefits of $632$523 thousand primarily due toas a result of higher wages and incentive compensation, higher medical expenses and lower deferred compensation, partially offset by a decrease in commission expense related to a decline in mortgage activity in thirdfirst quarter of 20212022 as compared to the same period in 2020. Data processing2021. Operations expense also increased $101$108 thousand due to technology investments.
Noninterest expense increased $1.6 million, or 9.4%, to $18.5 million during the nine months ended September 30, 2021, compared to $16.9 million during the nine months ended September 30, 2020, as reflected below (dollarsincreases in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Amount Change | | Percent Change |
| 2021 | | 2020 | | |
Salaries and benefits | $ | 10,470 | | | $ | 8,933 | | | $ | 1,537 | | | 17.2 | % |
Operations | 4,033 | | | 4,109 | | | (76) | | | (1.8) | |
Regulatory assessments | 283 | | | 480 | | | (197) | | | (41.0) | |
Occupancy | 1,298 | | | 1,437 | | | (139) | | | (9.7) | |
Data processing | 2,400 | | | 1,923 | | | 477 | | | 24.8 | |
Net gain on OREO and repossessed assets | (16) | | | — | | | (16) | | | (100.0) |
Total noninterest expense | $ | 18,468 | | | $ | 16,882 | | | $ | 1,586 | | | 9.4 | % |
The increase in noninterest expense during the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to increases of $1.5 million in salaries and benefits and $477 thousand in data processing expense, partially offset by a $76 thousand decrease in operations expense, a $197 thousand decrease in regulatory assessments and a $139 thousand decrease in occupancy expense. Salaries and benefits increased primarily due to discretionary bonuses paid for added efforts associated with the Company's COVID-19 response, higher wages, lower deferred compensation and higher medicalvarious accounts including marketing expenses, during 2021 as compared to 2020. Data processing expense increased due to technology investments and variable costs associated with increased loan originations. Operations expense decreased primarily due to lower loanoffice related expenses, and office operations, and regulatory assessments decreased as the nine months ended September 30, 2020 included regulatory examination costs. Occupancy expense decreased due to the closure of one branch location in June 2020.professional fees.
The efficiency ratio for the quarter ended September 30, 2021March 31, 2022 was 64.81%74.77%, compared to 63.36%66.69% for the quarter ended September 30, 2020, and was 65.83% for the nine months ended September 30, 2021, compared to 68.51% for the nine months ended September 30, 2020.March 31, 2021. The weakening in the efficiency ratio for the current quarter compared to the same period in the prior year is primarily due to higher noninterest expense partially offset by slightly higherand lower revenues. The improvement in the efficiency ratio
Income Tax Expense. Income tax expense declined to $458 thousand from $627 thousand for the ninethree months ended September 30,March 31, 2022 and March 31, 2021, wasrespectively, primarily due to higher revenues, partially offset by higher noninterest expense.
lower pre-tax income. The effective tax rate for both the three months ended March 31, 2022 and 2021 was 21.0% and 20.4%.
Income Tax Expense. We incurred income tax expense of $663 thousand and $1.9 million for the three and nine months ended September 30, 2021, respectively, as compared $588 thousand and $1.4 million for the same periods in 2020. The effective tax rates for the three and nine months ended September 30, 2021 were 20.37% and 20.36%, respectively. The effective tax rates for the three and nine months ended September 30, 2020 were 20.12% and 20.34%, respectively.
LiquidityCapital and Capital ResourcesLiquidity
The Management Discussion and Analysis in Item 7 of the Company’s 20202021 Form 10-K contains an overview of Sound Financial Bancorp’s and the Bank’s liquidity management, sources of liquidity and cash flows. This discussion updates that disclosure for the ninethree months ended September 30,March 31, 2022.
Capital. Shareholders’ equity totaled $93.9 million at March 31, 2022 and $93.4 million at December 31, 2021. In addition to net income of $1.7 million, other sources of capital during the three months ended March 31, 2022 included $43 thousand in proceeds from stock option exercises and $203 thousand related to stock-based compensation. Uses of capital during the three months ended March 31, 2022 included $709 thousand of dividends paid on common stock, other comprehensive loss, net of tax, of $608 thousand and $160 thousand of stock repurchases.
We paid regular quarterly dividends of $0.17 per common share and a special dividend of $0.10 per common share during the three months ended March 31, 2022 and 2021, which equates to a dividend payout ratio of 41.15% in 2022 and 28.64% in 2021. The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Assuming continued payment of the regular quarterly cash dividend during the remainder of 2022 at this rate of $0.17 per share, our average total dividend paid each quarter would be approximately $445 thousand based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards).
The Bank’s primarydividends, if any, we may pay may be limited as more fully discussed under “Business—How We Are Regulated—Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the Company’s 2021 Form 10-K.
Stock Repurchase Plans. From time to time, our board of directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. The Company’s current stock repurchase program authorizes the Company to repurchase, during the period ending October 29, 2022, up to $2.0 million of the Company’s outstanding shares in the open market, based on prevailing market prices, or in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. 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. As of May 6, 2022, approximately $1.5 million of our common stock remains available for repurchase under this program. See “Unregistered Sales of Equity Securities and Use of Proceeds” contained in Item 2, Part II of this Form 10-Q for additional information relating to stock repurchases.
Liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of fundsfunds. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are deposits, principal and interest payments on loans and borrowings. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank’s primary investing activity is loan originations. The Bank maintains liquidity levels it believes to be adequate to fund loan commitments, investment opportunities, deposit withdrawalsour operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial commitments. At September 30, 2021,assets and financial liabilities on our balance sheet. Our liquidity position is enhanced by our ability to raise additional funds as needed in the Bankwholesale markets.
Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities, sales of fixed rate residential mortgage loans in the secondary market and federal funds sold. Liability liquidity generally is provided by access to funding sources which include core deposits and advances from the FHLB and other borrowing relationships with third party financial institutions.
Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.
As of March 31, 2022, we had $213.8$207.3 million in cash and available-for-sale investment securities available-for-sale and $3.9$1.3 million in loans held-for-sale generally available for its cash needs. Also, at September 30, 2021, the Bankheld-for-sale. At March 31, 2022, we had the ability to borrow an additional $121.6$95.8 million in FHLB advances based on existing collateral pledged, and could access $22.6to additional borrowings of $20.5 million through the Federal Reserve’s Discount Window. At September 30, 2021,Reserve's discount window, in each case subject to certain collateral requirements. We had no outstanding advances or borrowings with the FHLB or Federal Reserve at March 31, 2022. In addition, we also had available a total of $20.0 million inof credit facilities with other financial institutions,PCBB, with no balance outstanding. outstanding at March 31, 2022. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible. As of March 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us. For additional details, see “Note 8—Borrowings, FHLB Stock and Subordinated Notes” in the Notes to Consolidated Financial Statements contained in "Item 1. Financial Statements and Supplementary Data" of this Form 10-Q.
In the ordinary course of business, we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such payments as of March 31, 2022. These include payments related to (i) long-term borrowings (Note 8—Borrowings, FHLB Stock and Subordinated Notes) and (ii) operating leases (Note 11—Leases). Refer to the Financial Condition discussion within this Item 2 for the expected timing of such payments as of March 31, 2022 related to time deposits with stated maturity dates and the discussion below for commitments to extend credit and standby letters of credit.
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 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'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.
Commitments to extend credit are agreements to lend to a client 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. These commitments are not reflected in the consolidated financial statements. The Company evaluates each client'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's credit evaluation of the client.
Financial instruments whose contract amount represents credit risk were as follow (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Residential mortgage commitments | $ | 10,248 | | | $ | 6,663 | |
Unfunded construction commitments | 90,619 | | | 89,797 | |
Unused lines of credit | 37,655 | | | 35,036 | |
Irrevocable letters of credit | 151 | | | 151 | |
Total loan commitments | $ | 138,673 | | | $ | 131,647 | |
Sound Financial Bancorp is a separate legal entity from Sound Community Bank uses theseand 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 for any stock repurchases, dividends declared to its stockholders, interest and principal on outstanding debt, and other general corporate expenses.
Sound Financial Bancorp is a holding company and does not conduct operations; its sources of funds primarilyliquidity are generally dividends up-streamed from Sound Community Bank, interest on investment securities, if any, and borrowings from outside sources. Banking regulations may limit the dividends that may be paid to meet ongoing commitments, pay maturing depositsus by Sound Community Bank. See, “Business — How We Are Regulated — Limitations on Dividends and fund withdrawals and loan commitments.Stock Repurchases” contained in Item 1, Part I of the Company’s 2021 Form 10-K. At September 30, 2021, outstanding loan commitments totaled $84.5 million, including unused lines and letters of credit of $34.5 million and undisbursed construction and land loans of $43.1 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2021, totaled $57.8 million.
Cash and cash equivalents increased $12.9 million to $206.7 million as of September 30, 2021, from $193.8 million as of DecemberMarch 31, 2020. Net cash provided by operating activities was $12.0 million for the nine months ended September 30, 2021. Net cash used in investing activities totaled $57.6 million during the nine months ended September 30, 2021 and consisted primarily of increases in loans and the purchase of BOLI, partially offset by principal payments on and maturities of investment securities. The $58.4 million of net cash provided by financing activities during the nine months ended September 30, 2021 primarily was the result of a $59.7 million net increase in deposits, partially offset by the payment of $1.6 million of dividends on our common stock.
At September 30, 2021, the Company,2022 Sound Financial Bancorp, on an unconsolidated basis, had $4.6$3.1 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs. The Company’s principal source
See also the "Consolidated Statements of liquidity is dividendsCash Flows" included in “Item 1. Financial Statements and ESOP loan repayments from the Bank. The long-term abilitySupplementary Data” of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. As long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a Community Bank Leverage Ratio ("CBLR") greater than the required percentage), as discussed below, and operates in a safe and sound manner, it is management's belief that its banking regulators will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.Form 10-Q, for further information.
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’ requests for funding and take the form of loan commitments and lines of credit.
A summary of our off-balance sheet loan commitments at September 30, 2021, is as follows (in thousands):
| | | | | |
| September 30, 2021 |
Commitments to make loans | $ | 6,774 | |
Unfunded construction commitments | 43,081 | |
Unused lines of credit | 34,467 | |
Irrevocable letters of credit | 150 | |
Total loan commitments | $ | 84,472 | |
Regulatory Capital
Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action (“PCA”). Qualifying institutions that elect to use the Community Bank Leverage Ratio, or CBLR, framework, such as the Bank and the Company, that maintain the required minimum leverage ratio will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies’ PCA framework. As of September 30, 2021,March 31, 2022, the Bank and Company’s CBLR was 10.56%10.96% and 9.80%10.05%, respectively, which exceeded the minimum requirements. See "Part I, Item 1. Business – Regulation of Sound Community Bank – Capital Rules " in the Company's 20202021 Form 10-K for additional information related to regulatory capital.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company provided information about market risk in Item 7A of its 20202021 Form 10-K. There have been no material changes in our market risk since our 20202021 Form 10-K.
Item 4. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures.
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a -15(e) under the Securities Exchange Act of 1934 (the “Act”), as of September 30, 2021,March 31, 2022, was carried out under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, and several other members of the Company’s senior management. The Company’s principal executive officer and principal financial officer concluded that, as of September 30, 2021,March 31, 2022, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Company’s principal executive officer and principal financial officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
We intend to continually review and evaluate the design and effectiveness of the Company’s disclosure controls and procedures and to improve the Company’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’s business. While we believe the present design of the disclosure controls and procedures is effective to achieve this goal, future events affecting our 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 errors or mistakes. 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 is also 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 and 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)Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the three months ended September 30, 2021,March 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
In the normal course of business, the Company occasionally becomes involved in various legal proceedings. In the opinion of management, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.
Item 1A Risk Factors
There have been no material changes in the Risk Factors previously disclosed in Item 1A of our 20202021 Form 10-K.
Item 2 Unregistered Sales of Equity Securities and use of Proceeds
(a) Not applicable.
(b)Not applicable.
(c)On April 28, 2021, 26, 2022, the Company announced that itsCompany’s Board of Directors authorized aapproved an extension of its previously announced stock repurchase program. program, which was set to expire on April 29, 2022, until October 29, 2022.Under this repurchase program the Company couldis authorized to repurchase up to $2.0 million of its outstanding shares of common stock during the period ending October 29, 2022, from time to time in the open market, in an amount up to $2.0 million, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on April 29, 2021, and expiring on October 28, 2021. The Company purchased $30 thousand of its shares under this program. On October 26, 2021, the Company’s Board of Directors adopted a new stock repurchase program. Under this new repurchase program, the Company may repurchase its outstanding shares in the open market in an amount upor pursuant to $2.0 million, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on October 29, 2021, continuing until the earlier of the completion of the repurchase or the next six months, depending upon market conditions. The Company’s Board of Directors also authorized management to enter into aany trading plan with a registered broker-dealerthat may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange ActCommission. The timing, volume and price of 1934,purchases are made at our discretion, and are contingent upon our overall financial condition, as amended, to facilitate repurchases of its common stock pursuant to the above-mentioned stock repurchase program.well as general market conditions.
The following table sets forth information with respect to our repurchases of our outstanding common shares during the three months ended September 30, 2021:March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximated Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (2) |
July 1, 2021 - July 31, 2021 | — | | $ | — | | | — | | $ | 1,970,289 | |
August 1, 2021 - August 31, 2021 | 100 | | $ | 45.25 | | | — | | 1,970,289 | |
September 1, 2021 - September 30, 2021 | — | | $ | — | | | — | | 1,970,289 | |
Total | 100 | | $ | 45.25 | | | — | | $ | 1,970,289 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximated Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs |
January 1, 2022 - January 31, 2022 | 578 | | $ | 43.46 | | | 578 | | $ | 1,852,183 | |
February 1, 2022 - February 28, 2022 | 579 | | $ | 41.01 | | | 579 | | 1,828,440 | |
March 1, 2022 - March 31, 2022 | 2,851 | | $ | 39.00 | | | 2,851 | | 1,717,261 | |
Total | 4,008 | | $ | 39.93 | | | 4,008 | | $ | 1,717,261 | |
________________________
(1) Includes the surrender of shares of Company common stock that the participants already own as payment of the exercise price for stock options. Shares surrendered by participants in the equity incentive plans are repurchased pursuant to the terms of the plan and applicable award agreement and not pursuant to publicly announced share repurchase programs.
(2) 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.
Item 3 Defaults Upon Senior Securities
Nothing to report.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Nothing to report.
Item 6. Exhibits
| | | | | |
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)) |
| Amended and Restated Bylaws of Sound Financial Bancorp, Inc. (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on October 26, 2021 (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)) |
| Description of capital stock (incorporated herein by reference to the Annual Report on Form 10-K for the year ended December 31, 2019 (File No. 001-35633)) |
| Forms of 5.25% Fixed-to-Floating Rate Subordinated Note due October 1, 2030 (included as Exhibit A to the Subordinate Note Purchase Agreement included in Exhibit 10.16) (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on September 21, 2020 (File No. 001-35633)). |
| 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 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 December 16, 2019 (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 31, 2009 (File No. 000-52889)) |
10.610.6+ | |
| Summary of Annual Bonus Plan (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on February 3, 2020 (File No. 000-35633)) |
| 2013 Equity Incentive Plan (included as Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q/A 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/A for the quarter ended September 30, 2013 and incorporated herein by reference (File No. 001-35633)) |
| Form of Adoption Agreement for the Sound Community Bank Nonqualified Deferred Compensation Plan (incorporated herein by reference to the Annual Report on Form 10-K filed with the SEC on March 30, 2021 (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 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 (incorporated herein by reference to the Annual Report on Form 10-K filed with the SEC on March 14, 2019 (File No. (001-35633)) |
| Form of Subordinated Note Purchase Agreement, dated September 18, 2020, by and among Sound Financial Bancorp, Inc. and the Purchasers (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on September 21, 2020 (File No. 001-35633)). |
| Change in Control Agreement dated August 25, 2021 by and among Sound Financial Bancorp, Inc., Sound Community Bank and Wes Ochs (incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on August 31, 2021 (File No. 001-35633)). |
| Rule 13(a)-14(a) Certification (Chief Executive Officer) |
| Rule 13(a)-14(a) Certification (Chief Financial Officer) |
| Section 1350 Certification |
101 | The following financial statements from the Sound Financial Bancorp, Inc. Quarterly Report on Form 10-Q for the three months ended September 30, 2021,March 31, 2022, formatted in Extensive Business Reporting Language (XBRL): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of income, (iii) condensed consolidated statements of comprehensive income, (iv) condensed consolidated statements of equity (v) condensed consolidated statements of cash flows and (vi) the notes to condensed consolidated financial statements |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
+ Indicates management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements 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: November 8, 2021May 10, 2022 | By: | /s/ Laura Lee Stewart |
| | Laura Lee Stewart |
| | President/Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| By: | /s/ Wes Ochs |
| | Wes Ochs |
| | Executive Vice President/Chief Strategy Officer and Chief Financial Officer |
| | (Principal Financial Officer) |