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EX-32 - EXHIBIT 32 - Sound Financial Bancorp, Inc.ex32.htm
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EX-31.1 - EXHIBIT 31.1 - Sound Financial Bancorp, Inc.ex31_1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to

COMMISSION FILE NUMBER 001-35633

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

Maryland
 
45-5188530
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
2400 3rd Avenue, Suite 150, Seattle, Washington
 
98121
(Address of principal executive offices)
 
(Zip Code)

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

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

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

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

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

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

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

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

As of August 10, 2017, there were 2,510,045 shares of the registrant’s common stock outstanding.
 


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

 
Page Number
PART I    FINANCIAL INFORMATION
 
   
Item 1.      Financial Statements
 
   
3
   
4
   
5
   
6
   
7
   
8
   
25
   
33
   
33
   
PART II
OTHER INFORMATION
 
     
Item 1.
34
     
Item 1A
34
     
Item 2.
34
     
Item 3.
34
     
Item 4.
35
     
Item 5.
34
     
Item 6.
34
     
36
   
EXHIBITS
38
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share amounts)
 
   
June 30,
2017
   
December 31,
2016
 
ASSETS
           
Cash and cash equivalents
 
$
59,956
   
$
54,582
 
Available-for-sale securities, at fair value
   
6,200
     
6,604
 
Loans held for sale
   
720
     
871
 
Loans
   
493,896
     
500,001
 
Allowance for loan losses
   
(4,835
)
   
(4,822
)
Total loans, net
   
489,061
     
495,179
 
Accrued interest receivable
   
1,677
     
1,816
 
Bank-owned life insurance (“BOLI”), net
   
12,429
     
12,082
 
Other real estate owned (“OREO”) and repossessed assets, net
   
952
     
1,172
 
Mortgage servicing rights, at fair value
   
3,450
     
3,561
 
Federal Home Loan Bank (“FHLB”) stock, at cost
   
1,705
     
2,840
 
Premises and equipment, net
   
7,467
     
5,549
 
Other assets
   
4,634
     
4,127
 
Total assets
 
$
588,251
   
$
588,383
 
LIABILITIES
               
Deposits
               
Interest-bearing
 
$
418,724
   
$
403,990
 
Noninterest-bearing demand
   
75,020
     
63,741
 
Total deposits
   
493,744
     
467,731
 
Borrowings
   
25,000
     
54,792
 
Accrued interest payable
   
78
     
73
 
Other liabilities
   
6,011
     
4,874
 
Advance payments from borrowers for taxes and insurance
   
548
     
638
 
Total liabilities
   
525,381
     
528,108
 
COMMITMENTS AND CONTINGENCIES (NOTE 7)
               
STOCKHOLDERS' EQUITY
               
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued or outstanding
   
-
     
-
 
Common stock, $0.01 par value, 40,000,000 shares authorized, 2,501,515 and 2,498,804 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
   
25
     
25
 
Additional paid-in capital
   
24,300
     
23,979
 
Unearned shares - Employee Stock Ownership Plan (“ESOP”)
   
(683
)
   
(683
)
Retained earnings
   
39,089
     
36,873
 
Accumulated other comprehensive income, net of tax
   
139
     
81
 
Total stockholders’ equity
   
62,870
     
60,275
 
Total liabilities and stockholders’ equity
 
$
588,251
   
$
588,383
 

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
June 30,
   
Six Months Ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
INTEREST INCOME
                       
Loans, including fees
 
$
6,358
   
$
6,051
   
$
12,798
   
$
12,003
 
Interest and dividends on investments, cash and cash equivalents
   
159
     
92
     
310
     
181
 
Total interest income
   
6,517
     
6,143
     
13,108
     
12,184
 
INTEREST EXPENSE
                               
Deposits
   
688
     
654
     
1,391
     
1,342
 
Borrowings
   
75
     
55
     
166
     
84
 
Total interest expense
   
763
     
709
     
1,557
     
1,426
 
Net interest income
   
5,754
     
5,434
     
11,551
     
10,758
 
PROVISION FOR LOAN LOSSES
   
-
     
100
     
-
     
250
 
Net interest income after provision for loan losses
   
5,754
     
5,334
     
11,551
     
10,508
 
NONINTEREST INCOME
                               
Service charges and fee income
   
492
     
652
     
1,003
     
1,245
 
Earnings on cash surrender value of bank-owned life insurance
   
82
     
85
     
163
     
168
 
Mortgage servicing income
   
148
     
132
     
381
     
223
 
Net gain on sale of loans
   
261
     
341
     
433
     
551
 
Total noninterest income
   
983
     
1,210
     
1,980
     
2,187
 
NONINTEREST EXPENSE
                               
Salaries and benefits
   
2,662
     
2,618
     
5,353
     
5,181
 
Operations
   
1,029
     
1,084
     
2,050
     
2,056
 
Regulatory assessments
   
136
     
125
     
260
     
280
 
Occupancy
   
522
     
380
     
895
     
765
 
Data processing
   
438
     
444
     
845
     
830
 
Net loss on OREO and repossessed assets
   
11
     
6
     
14
     
6
 
Total noninterest expense
   
4,798
     
4,657
     
9,417
     
9,118
 
Income before provision for income taxes
   
1,939
     
1,887
     
4,114
     
3,577
 
Provision for income taxes
   
636
     
633
     
1,397
     
1,217
 
Net income
 
$
1,303
   
$
1,254
   
$
2,717
   
$
2,360
 
                                 
Earnings per common share:
                               
Basic
 
$
0.52
   
$
0.51
   
$
1.09
   
$
0.95
 
Diluted
 
$
0.50
   
$
0.49
   
$
1.04
   
$
0.92
 
Weighted-average number of common shares outstanding:
                               
Basic
   
2,500,752
     
2,481,093
     
2,500,131
     
2,479,422
 
Diluted
   
2,596,791
     
2,558,028
     
2,600,564
     
2,552,005
 

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
June 30,
   
Six Months Ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
Net income
 
$
1,303
   
$
1,254
   
$
2,717
   
$
2,360
 
Available for sale securities:
                               
Unrealized gains arising during the period, net of tax provision of $12, $27, $30 and $30, respectively
   
24
     
52
     
58
     
58
 
Other comprehensive income, net of tax
   
24
     
52
     
58
     
58
 
Comprehensive income
 
$
1,327
   
$
1,306
   
$
2,775
   
$
2,418
 

See notes to condensed consolidated financial statements
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders’ Equity
For the Six Months Ended June 30, 2017 and 2016 (unaudited)
(In thousands, except share and per share amounts)

   
Shares
   
Common
Stock
   
Additional Paid
-in Capital
   
Unearned
ESOP Shares
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income, net of
tax
   
Total
Stockholders’
Equity
 
Balances at December 31, 2015
   
2,469,206
   
$
25
   
$
23,002
   
$
(911
)
 
$
32,240
   
$
164
   
$
54,520
 
Net income
                                   
2,360
             
2,360
 
Other comprehensive income, net of tax
                                           
58
     
58
 
Share-based compensation
                   
228
                             
228
 
Cash dividends paid on common stock ($0.15 per share)
                                   
(372
)
           
(372
)
Restricted stock awards issued
   
11,606
                                             
-
 
Restricted stock forfeited and retired
   
(1,059
)
                                           
-
 
Exercise of options
   
1,077
             
17
                             
17
 
Balances at June 30, 2016
   
2,480,830
   
$
25
   
$
23,247
   
$
(911
)
 
$
34,228
   
$
222
   
$
56,811
 

   
Shares
   
Common
Stock
   
Additional Paid-
in Capital
   
Unearned
ESOP Shares
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income, net of
tax
   
Total
Stockholders’
Equity
 
Balances at December 31, 2016
   
2,498,804
   
$
25
   
$
23,979
   
$
(683
)
 
$
36,873
   
$
81
   
$
60,275
 
Net income
                                   
2,717
             
2,717
 
Other comprehensive income, net of tax
                                           
58
     
58
 
Share-based compensation
                   
288
                             
288
 
Cash dividends paid on common stock ($0.20 per share)
                                   
(501
)
           
(501
)
Restricted stock awards issued
   
576
                                             
-
 
Exercise of options
   
2,135
             
33
                             
33
 
Balances at June 30, 2017
   
2,501,515
   
$
25
   
$
24,300
   
$
(683
)
 
$
39,089
   
$
139
   
$
62,870
 

See notes to condensed consolidated financial statements
 
 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 
   
Six Months Ended June 30,
 
   
2017
   
2016
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
2,717
   
$
2,360
 
Adjustments to reconcile net income to net cash from operating activities:
               
Accretion of net discounts on investments
   
27
     
17
 
Dividends paid on FHLB stock
   
-
     
32
 
Provision for loan losses
   
-
     
250
 
Depreciation and amortization
   
455
     
394
 
Compensation expense related to stock options and restricted stock
   
288
     
228
 
Net change in mortgage servicing rights
   
111
     
223
 
Increase in cash surrender value of BOLI
   
(163
)
   
(168
)
Net gain on sale of loans
   
(433
)
   
(551
)
Proceeds from sale of loans
   
22,008
     
36,080
 
Originations of loans held-for-sale
   
(21,424
)
   
(34,125
)
Net (gain)/loss on sale and write-downs of OREO and repossessed assets
   
(3
)
   
8
 
Change in operating assets and liabilities:
               
Accrued interest receivable
   
139
     
16
 
Other assets
   
(535
)
   
(282
)
Accrued interest payable
   
5
     
18
 
Other liabilities
   
1,137
     
(267
)
Net cash provided by operating activities
   
4,329
     
4,233
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from principal payments, maturities and sales of available-for-sale securities
   
463
     
737
 
Purchases of available-for-sale securities
   
-
     
(1,363
)
FHLB stock redeemed
   
1,135
     
107
 
Net decrease/(increase) in loans
   
6,118
     
(5,378
)
Purchase of BOLI
   
(184
)
   
-
 
Proceeds from sale of OREO and other repossessed assets
   
223
     
132
 
Purchases of premises and equipment, net
   
(2,373
)
   
(147
)
Net cash received from branch acquisition
   
13,671
     
-
 
Net cash provided/(used) by investing activities
   
19,053
     
(5,912
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase in deposits
   
12,342
     
3,843
 
Proceeds from borrowings
   
70,500
     
56,500
 
Repayment of borrowings
   
(100,292
)
   
(61,322
)
Dividends paid on common stock
   
(501
)
   
(372
)
Net change in advances from borrowers for taxes and insurance
   
(90
)
   
(64
)
Proceeds from stock option exercises
   
33
     
17
 
Net cash used by financing activities
   
(18,008
)
   
(1,398
)
Net change in cash and cash equivalents
   
5,374
     
(3,077
)
Cash and cash equivalents, beginning of period
   
54,582
     
48,264
 
Cash and cash equivalents, end of period
 
$
59,956
   
$
45,187
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for income taxes
 
$
1,310
   
$
1,000
 
Interest paid on deposits and borrowings
   
1,552
     
1,408
 
Noncash net transfer from loans to OREO and repossessed assets
   
-
     
712
 
Assets acquired in acquisition of branch
   
14,474
     
-
 

See notes to condensed consolidated financial statements
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
 
Note 1 – Basis of Presentation

The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial Bancorp, Inc., and its wholly owned subsidiary, Sound Community Bank.  References in this document to Sound Financial Bancorp refer to Sound Financial Bancorp, Inc. and references to the “Bank” refer to Sound Community Bank. References to “we,” “us,” and “our” or the “Company” refers to Sound Financial Bancorp and its wholly-owned subsidiary, Sound Community Bank, unless the context otherwise requires.

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”).  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.  Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.  These unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 27, 2017 (“2016 Form 10-K”).  The results for the interim periods are not necessarily indicative of results for a full year.  For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2016, included in the 2016 Form 10-K.  Certain amounts in the prior quarters’ consolidated financial statements have been reclassified to conform to the current presentation.  These classifications do not have an impact on previously reported consolidated net income, retained earnings, stockholders’ equity or earnings per share.

Note 2 – Accounting Pronouncements Recently Issued or Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which creates Topic 606 and supersedes Topic 605, Revenue Recognition. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which postponed the effective date of 2014-09. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net, which amended the principal versus agent implementation guidance set for in ASU 2014-09. Among other things, ASU 2016-08 clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The ASU amends certain aspects of the guidance set forth in the FASB's new revenue standard related to identifying performance obligations and licensing implementation. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new ASU requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.  In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in certain narrow areas and adds some practical expedients, but does not change the core revenue recognition principle in Topic 606. This ASU is effective for interim and annual periods beginning after December 15, 2017; early adoption is not permitted. For financial reporting purposes, the ASU allows for either full retrospective adoption, meaning this ASU is applied to all of the periods presented, or modified retrospective adoption, meaning the ASU is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the ASU recognized at the date of initial application. As a financial institution, the Company's largest component of revenue, interest income, is excluded from the scope of this ASU. Accordingly, the adoption of ASU No. 2014-09 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, the ASU requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This ASU also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The ASU also requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for certain provisions. The Company is currently evaluating the impact of this ASU on the Company's consolidated financial statements.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize, on the balance sheet, the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income. For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in the
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
 
ASU is permitted. Although an estimate of the impact of the new leasing standard has not yet been determined, once adopted, we expect to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, however, based on current leases the adoption is not expected to have a material impact on the Company’s consolidated financial statements.
 
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The measurement of expected credit losses will be based on historical information, current conditions, and reasonable and supportable forecasts that impact the collectability of the reported amount. Available-for-sale securities will bifurcate the fair value mark and establish an allowance for credit losses through the income statement for the credit portion of that mark. The interest portion will continue to be recognized through accumulated other comprehensive income or loss. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 with early adoption permitted after December 15, 2018. The Company has begun the process to implement this new standard by working with a vendor that specializes in this area.  While the Company has not quantified the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses. The Company also expects that once adopted the allowance for loan losses will increase, however, until its evaluation is complete the magnitude of the increase will be unknown.

In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  This ASU addresses the appropriate classification of eight specific cash flow issues on the cash flow statement. Debt prepayment costs should be classified as an outflow for financing activities. Settlement of zero-coupon debt instruments divides the interest portion as an outflow for operating activities and the principal portion as an outflow for financing activities. Contingent consideration payments made after a business combination should be classified as outflows for financing and operating activities. Proceeds from the settlement of bank-owned life insurance policies should be classified as inflows from investing activities. Other specific areas are identified in the ASU as to the appropriate classification of the cash inflows or outflows.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted and must be applied using a retrospective transition method to each period presented. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20). ASU 2017-08 is intended to amend the amortization period for certain purchased callable debt securities held at a premium. Under ASU 2017-08, the FASB is shortening the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company is reviewing its securities portfolio to assess the impact the adoption of this ASU will have on the Company’s consolidated financial statements but does not expect this ASU to have a material impact.

In May 2017, the FASB issued ASU No. 2017-09, Compensation--Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to this ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award is the same after the modification as compared to the original award prior to the modification. The standard is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of ASU No. 2017-09 is not expected to have a material impact on the Company’s consolidated financial statements.
 
Note 3 – Investments

The amortized cost and fair value of our available-for-sale (“AFS”) securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands):

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
June 30, 2017
                       
Municipal bonds
 
$
3,251
   
$
184
   
$
(7
)
 
$
3,428
 
Agency mortgage-backed securities
   
2,404
     
51
     
(1
)
   
2,454
 
Non-agency mortgage-backed securities
   
335
     
-
     
(17
)
   
318
 
Total
 
$
5,990
   
$
235
   
$
(25
)
 
$
6,200
 
                                 
December 31, 2016
                               
Municipal bonds
 
$
3,262
   
$
127
   
$
(36
)
 
$
3,353
 
Agency mortgage-backed securities
   
2,858
     
49
     
(3
)
   
2,904
 
Non-agency mortgage-backed securities
   
362
     
-
     
(15
)
   
347
 
Total
 
$
6,482
   
$
176
   
$
(54
)
 
$
6,604
 
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
 
The amortized cost and fair value of AFS securities at June 30, 2017, by contractual maturity, are shown below (in thousands).  Expected maturities of AFS securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately.
 
   
June 30, 2017
 
   
Amortized
Cost
   
Fair
Value
 
Due after one year through five years
 
$
1,338
   
$
1,331
 
Due after five years through ten years
   
414
     
445
 
Due after ten years
   
1,499
     
1,652
 
                 
Mortgage-backed securities
   
2,739
     
2,772
 
Total
 
$
5,990
   
$
6,200
 

There were no pledged securities at June 30, 2017 and December 31, 2016.

There were no sales of AFS securities during the three or six months ended June 30, 2017 and 2016.

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

   
June 30, 2017
 
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Municipal bonds
 
$
1,331
   
$
(7
)
 
$
-
   
$
-
   
$
1,331
   
$
(7
)
Agency mortgage-backed securities
   
953
     
(1
)
   
-
     
-
     
953
     
(1
)
Non-agency mortgage-backed securities
   
-
     
-
     
318
     
(17
)
   
318
     
(17
)
Total
 
$
2,284
   
$
(8
)
 
$
318
   
$
(17
)
 
$
2,602
   
$
(25
)


   
December 31, 2016
 
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
Municipal bonds
 
$
1,313
   
$
(36
)
 
$
-
   
$
-
   
$
1,313
   
$
(36
)
Agency mortgage-backed securities
   
-
     
-
     
1,125
     
(3
)
   
1,125
     
(3
)
Non-agency mortgage-backed securities
   
-
     
-
     
347
     
(15
)
   
347
     
(15
)
Total
 
$
1,313
   
$
(36
)
 
$
1,472
   
$
(18
)
 
$
2,785
   
$
(54
)

There were no credit losses recognized in earnings during the three and six months ended June 30, 2017 or 2016 relating to the Company’s non-agency mortgage-backed securities.

At June 30, 2017, one agency mortgage-backed security and three municipal securities were in an unrealized loss position for less than 12 months.  At December 31, 2016, three municipal securities were in an unrealized loss position for less than 12 months and one agency security was in a loss position for over 12 months.  All of the agency mortgage-backed securities in an unrealized loss position at June 30, 2017 and December 31, 2016 were issued or guaranteed by U.S. governmental agencies.  The unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not related to the underlying credit of the issuers or the underlying collateral.  It is expected that these securities will not be settled at a price less than the amortized cost of each investment.  Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because we do not intend to sell the securities in this class and it is not likely that we will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered an other-than-temporary impairment (“OTTI”) during the three and six months ended June 30, 2017 or the year ended December 31, 2016.
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
 
As of June 30, 2017 and December 31, 2016, one non-agency mortgage-backed security was in an unrealized loss position for over 12 months.  The unrealized loss was caused by changes in interest rates causing a decline in the fair value subsequent to the purchase.  The contractual terms of this investment do not permit the issuer to settle the security at a price less than par.  Management does not intend to sell this non-agency mortgage-backed security and it is unlikely that the Company will be required to sell this security before recovery of its amortized cost basis.  Management’s impairment evaluation indicated that this security possesses qualitative and quantitative factors that do not suggest an OTTI.  These factors include, but are not limited to:  the length of time and extent of the fair value declines, ratings agency down grades, the potential for an increased level of actual defaults, and the extension in duration of the securities.  Based upon the results of the evaluation of the quantitative and qualitative factors, the non-agency mortgage-backed security does not reflect OTTI during the three and six months ended June 30, 2017 or the year ended December 31, 2016.
 
Note 4 – Loans

The composition of the loan portfolio at the dates indicated, excluding loans held-for-sale, was as follows (in thousands):
 
   
June 30,
2017
   
December 31,
2016
 
Real estate loans:
           
One- to four- family
 
$
147,848
   
$
152,386
 
Home equity
   
27,996
     
27,771
 
Commercial and multifamily
   
195,486
     
181,004
 
Construction and land
   
52,775
     
70,915
 
Total real estate loans
 
$
424,105
   
$
432,076
 
Consumer loans:
               
Manufactured homes
   
16,300
     
15,494
 
Floating homes
   
25,225
     
23,996
 
Other consumer
   
4,639
     
3,932
 
Total consumer loans
   
46,164
     
43,422
 
Commercial business loans
   
25,314
     
26,331
 
Total loans
   
495,583
     
501,829
 
Deferred fees
   
(1,687
)
   
(1,828
)
Total loans, gross
   
493,896
     
500,001
 
Allowance for loan losses
   
(4,835
)
   
(4,822
)
Total loans, net
 
$
489,061
   
$
495,179
 
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2017 (in thousands):

   
One- to
four-
family
   
Home
equity
   
Commercial
and
 multifamily
   
Construction
and land
   
Manufactured
homes
   
 
Floating
homes
   
Other
consumer
   
Commercial
business
   
Unallocated
   
Total
 
Allowance for loan losses:
                                                           
Individually evaluated for impairment
 
$
481
   
$
256
   
$
-
   
$
35
   
$
72
   
$
-
   
$
59
   
$
216
   
$
-
   
$
1,119
 
Collectively evaluated for impairment
   
821
     
175
     
1,153
     
317
     
106
     
146
     
39
     
148
     
811
     
3,716
 
Ending balance
 
$
1,302
   
$
431
   
$
1,153
   
$
352
   
$
178
   
$
146
   
$
98
   
$
364
   
$
811
   
$
4,835
 
Loans receivable:
                                                                               
Individually evaluated for impairment
 
$
6,452
   
$
983
   
$
1,735
   
$
128
   
$
298
   
$
-
   
$
59
   
$
335
   
$
-
   
$
9,990
 
Collectively evaluated for impairment
   
141,396
     
27,013
     
193,751
     
52,647
     
16,002
     
25,225
     
4,580
     
24,979
     
-
     
485,593
 
Ending balance
 
$
147,848
   
$
27,996
   
$
195,486
   
$
52,775
   
$
16,300
   
$
25,225
   
$
4,639
   
$
25,314
   
$
-
   
$
495,583
 


The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2016 (in thousands):

   
One- to
four-
family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
Floating
homes
   
Other
consumer
   
Commercial
business
   
Unallocated
   
Total
 
Allowance for  loan losses:
                                                           
Individually evaluated for impairment
 
$
536
   
$
121
   
$
24
   
$
35
   
$
59
   
$
-
   
$
65
   
$
23
   
$
-
   
$
863
 
Collectively evaluated for impairment
   
1,006
     
257
     
1,120
     
424
     
109
     
132
     
47
     
152
     
712
     
3,959
 
Ending balance
 
$
1,542
   
$
378
   
$
1,144
   
$
459
   
$
168
   
$
132
   
$
112
   
$
175
   
$
712
   
$
4,822
 
Loans  receivable:
                                                                               
Individually evaluated for impairment
 
$
4,749
   
$
832
   
$
1,582
   
$
83
   
$
312
   
$
-
   
$
62
   
$
616
   
$
-
   
$
8,236
 
Collectively evaluated for impairment
   
147,637
     
26,939
     
179,422
     
70,832
     
15,182
     
23,996
     
3,870
     
25,715
     
-
     
493,593
 
Ending balance
 
$
152,386
   
$
27,771
   
$
181,004
   
$
70,915
   
$
15,494
   
$
23,996
   
$
3,932
   
$
26,331
   
$
-
   
$
501,829
 
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
 
The following table summarizes the activity in the allowance for loan losses for the three months ended June 30, 2017 (in thousands):

   
Beginning
Allowance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending
Allowance
 
One- to four- family
 
$
1,535
   
$
-
   
$
-
   
$
(233
)
 
$
1,302
 
Home equity
   
248
     
-
     
2
     
181
     
431
 
Commercial and multifamily
   
1,113
     
-
     
-
     
40
     
1,153
 
Construction and land
   
413
     
-
     
-
     
(61
)
   
352
 
Manufactured homes
   
148
     
(6
)
   
1
     
35
     
178
 
Floating homes
   
137
     
-
     
2
     
7
     
146
 
Other consumer
   
98
     
(2
)
   
-
     
2
     
98
 
Commercial business
   
154
     
-
     
-
     
210
     
364
 
Unallocated
   
992
     
-
     
-
     
(181
)
   
811
 
Total
 
$
4,838
   
$
(8
)
 
$
5
   
$
-
   
$
4,835
 
 
The following table summarizes the activity in the allowance for loan losses for the six months ended June 30, 2017 (in thousands):

   
Beginning
Allowance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending
Allowance
 
One- to four- family
 
$
1,542
   
$
-
   
$
-
   
$
(240
)
 
$
1,302
 
Home equity
   
378
     
-
     
28
     
25
     
431
 
Commercial and multifamily
   
1,144
     
(24
)
   
1
     
32
     
1,153
 
Construction and land
   
459
     
-
     
-
     
(107
)
   
352
 
Manufactured homes
   
168
     
(5
)
   
3
     
12
     
178
 
Floating homes
   
132
     
-
     
-
     
14
     
146
 
Other consumer
   
112
     
(7
)
   
17
     
(24
)
   
98
 
Commercial business
   
175
     
-
     
-
     
189
     
364
 
Unallocated
   
712
     
-
     
-
     
99
     
811
 
Total
 
$
4,822
   
$
(36
)
 
$
49
   
$
-
   
$
4,835
 
 
The following table summarizes the activity in the allowance for loan losses for the three months ended June 30, 2016 (in thousands):

   
Beginning
Allowance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending
Allowance
 
One- to four- family
 
$
1,733
   
$
(7
)
 
$
-
   
$
(13
)
 
$
1,713
 
Home equity
   
597
     
-
     
63
     
(159
)
   
501
 
Commercial and multifamily
   
1,267
     
-
     
-
     
110
     
1,377
 
Construction and land
   
463
     
-
     
-
     
(75
)
   
388
 
Manufactured homes
   
202
     
-
     
3
     
(16
)
   
189
 
Floating homes
   
132
     
-
     
-
     
-
     
132
 
Other consumer
   
101
     
(3
)
   
2
     
(11
)
   
89
 
Commercial business
   
164
     
(29
)
   
-
     
36
     
171
 
Unallocated
   
50
     
-
     
-
     
228
     
278
 
Total
 
$
4,709
   
$
(39
)
 
$
68
   
$
100
   
$
4,838
 
 
The following table summarizes the activity in the allowance for loan losses for the six months ended June 30, 2016 (in thousands):

   
Beginning
Allowance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending
Allowance
 
One- to four- family
 
$
1,839
   
$
(72
)
 
$
-
   
$
(54
)
 
$
1,713
 
Home equity
   
607
     
-
     
65
     
(171
)
   
501
 
Commercial and multifamily
   
921
     
-
     
-
     
456
     
1,377
 
Construction and land
   
382
     
-
     
-
     
6
     
388
 
Manufactured homes
   
301
     
-
     
5
     
(117
)
   
189
 
Floating homes
   
111
     
-
     
-
     
21
     
132
 
Other consumer
   
77
     
(21
)
   
4
     
29
     
89
 
Commercial business
   
157
     
(29
)
   
-
     
43
     
171
 
Unallocated
   
241
     
-
     
-
     
37
     
278
 
Total
 
$
4,636
   
$
(122
)
 
$
74
   
$
250
   
$
4,838
 
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
 
Credit Quality Indicators.  Federal regulations provide for the classification of lower quality loans as substandard, doubtful or loss.  An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged.  Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as doubtful have all the weaknesses of currently existing facts, conditions and values.  Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without establishment of a specific loss reserve is not warranted.
 
When we classify problem loans as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address the risk specifically (if the loan is impaired) or we may allow the loss to be addressed in the general allowance (if the loan is not impaired).  General allowances represent loss reserves which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem loans.  When the Company classifies problem loans as a loss, we charge-off such assets in the period in which they are deemed uncollectible.  Assets that do not currently expose us to sufficient risk to warrant classification as substandard, doubtful or loss, but possess identified weaknesses, are classified as either watch or special mention assets.  Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Federal Deposit Insurance Corporation (“FDIC”), the Bank’s federal regulator, and the Washington Department of Financial Institutions (“WDFI”), the Bank’s state banking regulator, which can order the establishment of additional loss allowances.  Pass rated loans are loans that are not otherwise classified or criticized.
 
The following table represents the internally assigned grades as of June 30, 2017 by type of loan (in thousands):

   
One- to
four- family
   
Home
equity
   
Commercial
and multifamily
   
Construction
and land
   
Manufactured
homes
   
Floating
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Grade:
                                                     
Pass
 
$
142,686
   
$
26,794
   
$
184,343
   
$
49,705
   
$
16,122
   
$
25,225
   
$
4,535
   
$
24,730
   
$
474,140
 
Watch
   
544
     
362
     
9,408
     
3,021
     
52
     
-
     
45
     
339
     
13,771
 
Special Mention
   
138
     
-
     
362
     
-
     
23
     
-
     
-
     
106
     
629
 
Substandard
   
4,480
     
840
     
1,373
     
49
     
103
     
-
     
59
     
139
     
7,043
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
147,848
   
$
27,996
   
$
195,486
   
$
52,775
   
$
16,300
   
$
25,225
   
$
4,639
   
$
25,314
   
$
495,583
 
 
The following table represents the internally assigned grades as of December 31, 2016 by type of loan (in thousands):

   
One- to
four- family
   
Home
equity
   
Commercial
and multifamily
   
Construction
and land
   
Manufactured
homes
   
Floating
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Grade:
                                                     
Pass
 
$
148,617
   
$
26,547
   
$
171,678
   
$
67,539
   
$
15,288
   
$
23,996
   
$
3,821
   
$
25,625
   
$
483,111
 
Watch
   
998
     
536
     
8,105
     
3,376
     
78
     
-
     
49
     
326
     
13,468
 
Special Mention
   
139
     
-
     
-
     
-
     
30
     
-
     
-
     
-
     
169
 
Substandard
   
2,632
     
688
     
1,221
     
-
     
98
     
-
     
62
     
380
     
5,081
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
152,386
   
$
27,771
   
$
181,004
   
$
70,915
   
$
15,494
   
$
23,996
   
$
3,932
   
$
26,331
   
$
501,829
 
 
Nonaccrual and Past Due Loans.  Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  Loans are automatically placed on nonaccrual once the loan is 90 days past due or sooner if, in management’s opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory authorities.

The following table presents the recorded investment in nonaccrual loans as of June 30, 2017 and December 31, 2016, by type of loan (in thousands):
 
   
June 30,
2017
   
December 31,
2016
 
One- to four- family
 
$
720
   
$
2,169
 
Home equity
   
674
     
536
 
Commercial and multifamily
   
211
     
218
 
Manufactured homes
   
75
     
72
 
Commercial business
   
139
     
149
 
Total
 
$
1,819
   
$
3,144
 
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
 
The following table represents the aging of the recorded investment in past due loans as of June 30, 2017 by type of loan (in thousands):

   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
90 Days
and Greater
Past Due
   
90 Days and
Greater Past
Due and Still
Accruing
   
Total Past
Due
   
Current
   
Total Loans
 
One- to four- family
 
$
-
   
$
2,197
   
$
540
   
$
-
   
$
2,737
   
$
145,111
   
$
147,848
 
Home equity
   
152
     
118
     
637
     
-
     
907
     
27,089
     
27,996
 
Commercial and multifamily
   
-
     
-
     
-
     
-
     
-
     
195,486
     
195,486
 
Construction and land
   
-
     
-
     
49
     
-
     
49
     
52,726
     
52,775
 
Manufactured homes
   
41
     
63
     
80
     
-
     
184
     
16,116
     
16,300
 
Floating homes
   
-
     
-
     
-
     
-
     
-
     
25,225
     
25,225
 
Other consumer
   
1
     
1
     
-
     
-
     
2
     
4,637
     
4,639
 
Commercial business
   
4
     
-
     
-
     
-
     
4
     
25,310
     
25,314
 
Total
 
$
198
   
$
2,379
   
$
1,306
   
$
-
   
$
3,883
   
$
491,700
   
$
495,583
 

The following table represents the aging of the recorded investment in past due loans as of December 31, 2016 by type of loan (in thousands):

   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
90 Days
and Greater
Past Due
   
90 Days and
Greater Past
Due and Still
Accruing
   
Total Past
Due
   
Current
   
Total Loans
 
One- to four- family
 
$
2,476
   
$
161
   
$
1,787
   
$
-
   
$
4,424
   
$
147,962
   
$
152,386
 
Home equity
   
460
     
-
     
494
     
-
     
954
     
26,817
     
27,771
 
Commercial and multifamily
   
-
     
-
     
-
     
-
     
-
     
181,004
     
181,004
 
Construction and land
   
440
     
-
     
-
     
-
     
440
     
70,475
     
70,915
 
Manufactured homes
   
321
     
28
     
62
     
-
     
411
     
15,083
     
15,494
 
Floating homes
   
-
     
-
     
-
     
-
     
-
     
23,996
     
23,996
 
Other consumer
   
26
     
1
     
-
     
-
     
27
     
3,905
     
3,932
 
Commercial business
   
149
     
-
     
-
     
-
     
149
     
26,182
     
26,331
 
Total
 
$
3,872
   
$
190
   
$
2,343
   
$
-
   
$
6,405
   
$
495,424
   
$
501,829
 

Nonperforming Loans.  Loans are considered nonperforming when they are placed on nonaccrual and/or when they are considered to be nonperforming troubled debt restructurings (“TDRs”) and/or when they are 90 days or greater past due and still accruing interest.  A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company has granted the borrower a concession of some kind.  Nonperforming TDRs include TDRs that do not have sufficient payment history (typically greater than six months) to be considered performing or TDRs that have become 30 or more days past due.

The following table represents the credit risk profile of our loan portfolio based on payment activity as of June 30, 2017 by type of loan (in thousands):

   
One- to
four-
family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
 
Floating
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Performing
 
$
145,809
   
$
27,305
   
$
195,275
   
$
52,775
   
$
16,202
   
$
25,225
   
$
4,639
   
$
25,085
   
$
492,315
 
Nonperforming
   
2,039
     
691
     
211
     
-
     
98
     
-
     
-
     
229
     
3,268
 
Total
 
$
147,848
   
$
27,996
   
$
195,486
   
$
52,775
   
$
16,300
   
$
25,225
   
$
4,639
   
$
25,314
   
$
495,583
 
 
The following table represents the credit risk profile of our loan portfolio based on payment activity as of December 31, 2016 by type of loan (in thousands):

   
One- to
four-
family
   
Home
equity
   
Commercial
and
multifamily
   
Construction
and land
   
Manufactured
homes
   
 
Floating
homes
   
Other
consumer
   
Commercial
business
   
Total
 
Performing
 
$
150,170
   
$
27,218
   
$
180,786
   
$
70,915
   
$
15,374
   
$
23,996
   
$
3,932
   
$
26,089
   
$
498,480
 
Nonperforming
   
2,216
     
553
     
218
     
-
     
120
     
-
     
-
     
242
     
3,349
 
Total
 
$
152,386
   
$
27,771
   
$
181,004
   
$
70,915
   
$
15,494
   
$
23,996
   
$
3,932
   
$
26,331
   
$
501,829
 
 
SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
 
Impaired Loans.  A loan is considered impaired when we have determined that we may be unable to collect payments of principal or interest when due under the terms of the loan.  In the process of identifying loans as impaired, we take into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future.  Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired.  The significance of payment delays and shortfalls is considered on a case by case basis, after taking into consideration the totality of circumstances surrounding the loan and the borrower, 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 June 30, 2017 and December 31, 2016 by type of loan were as follows (in thousands):

   
June 30, 2017
 
         
Recorded Investment
       
   
Unpaid Principal
Balance
   
Without
Allowance
   
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
 
                               
One- to four- family
 
$
6,739
   
$
3,284
   
$
3,168
   
$
6,452
   
$
481
 
Home equity
   
1,096
     
515
     
468
     
983
     
256
 
Commercial and multifamily
   
1,746
     
1,735
     
-
     
1,735
     
-
 
Construction and land
   
127
     
59
     
69
     
128
     
35
 
Manufactured homes
   
313
     
116
     
182
     
298
     
72
 
Other consumer
   
58
     
-
     
59
     
59
     
59
 
Commercial business
   
286
     
-
     
335
     
335
     
216
 
Total
 
$
10,365
   
$
5,709
   
$
4,281
   
$
9,990
   
$
1,119
 

   
December 31, 2016
 
         
Recorded Investment
       
   
Unpaid Principal
Balance
   
Without
Allowance