Sound Financial Bancorp, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Sound Financial Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Sound Financial Bancorp, Inc. and Subsidiary (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Loan Losses As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for loan losses balance was $6.0 million at December 31, 2020. The allowance for loan losses is maintained to provide for probable inherent losses in the loan portfolio based on evaluating risks in the loan portfolio. The level of the allowance reflects the Company’s view of trends in loan loss activity, current loan portfolio quality and present economic, political and regulatory conditions. The allowance is provided based upon management's continuing analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include, but are not limited to, changes in the size and composition of the loan portfolio, delinquency levels, 66 Table of Conten t s actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectability may not be assured. We identified management’s internally assigned grades of loans and the estimation of qualitative factors, both of which are used in the allowance for loan losses calculation, as critical audit matters. The Company uses internally assigned loan grades to stratify loans into pools and to estimate inherent loss rates for each of the loan pools, which are used in the calculation of the allowance for loan losses. Determination of the assigned loan grades involves significant management judgment. The qualitative factors are used to estimate losses related to factors that are not captured in the historical loss rates and are based on management’s evaluation of available internal and external data and involves significant management judgment. Auditing management’s judgments relating to the determination of internally assigned grades and qualitative factors involved a high degree of subjective auditor judgment. The primary procedures we performed to address this critical audit matter included: • Obtain an understanding of the design and implementation of controls relating to management’s calculation of the allowance for loan losses, including controls over the accuracy of assigned loan grades and the determination of the qualitative factors used. • Testing a risk-based, targeted selection of loans to gain substantive evidence that the Company is appropriately grading these loans in accordance with its policies, and that the assigned loan grades are reasonable. • Obtaining management’s analysis and supporting documentation related to the qualitative factors and testing whether the qualitative factors used in the calculation of the allowance for loan losses are supported by the analysis provided by management. • Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for loan losses, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, application of the assigned loan grades determined by management and used in the calculation, application of the qualitative factors determined by management and used in the calculation, and recalculation of the allowance for loan losses balance. /s/ Moss Adams LLP Everett, Washington March 29, 2021 We have served as the Company’s auditor since 2002. 67 Table of Conten t s SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Consolidated Balance Sheets (In thousands, except share and per share amounts) December 31, 2020 2019 ASSETS Cash and cash equivalents $ 193,828 $ 55,770 Available-for-sale securities, at fair value 10,218 9,306 Loans held-for-sale 11,604 1,063 Loans held for portfolio 613,363 619,887 Allowance for loan losses ( 6,000 ) ( 5,640 ) Total loans held for portfolio, net 607,363 614,247 Accrued interest receivable 2,254 2,206 Bank-owned life insurance ("BOLI"), net 14,588 14,183 Other real estate owned ("OREO") and repossessed assets, net 594 575 Mortgage servicing rights ("MSR"), at fair value 3,780 3,239 Federal Home Loan Bank ("FHLB") stock, at cost 877 1,160 Premises and equipment, net 6,270 6,767 Lease right of use assets, net 6,722 7,641 Other assets 3,304 3,696 Total assets $ 861,402 $ 719,853 LIABILITIES Deposits Interest-bearing $ 615,491 $ 519,434 Noninterest-bearing demand 132,490 97,284 Total deposits 747,981 616,718 Borrowings — 7,500 Accrued interest payable 369 226 Lease liabilities 7,134 8,010 Other liabilities 7,674 8,368 Advance payments from borrowers for taxes and insurance 1,168 1,305 Subordinated notes, net 11,592 — Total liabilities 775,918 642,127 COMMITMENTS AND CONTINGENCIES (Notes 12 and 18) 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, 2,592,587 and 2,567,389 issued and outstanding at December 31, 2020 and 2019, respectively 25 25 Additional paid-in capital 27,106 26,343 Unearned shares - Employee Stock Ownership Plan ("ESOP") ( 113 ) ( 227 ) Retained earnings 58,226 51,410 Accumulated other comprehensive income, net of tax 240 175 Total stockholders' equity 85,484 77,726 Total liabilities and stockholders' equity $ 861,402 $ 719,853 See notes to consolidated financial statements 68 Table of Conten t s SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income (In thousands, except share and per share amounts) Year Ended December 31, 2020 2019 INTEREST INCOME Loans, including fees $ 34,439 $ 33,090 Interest and dividends on investments, cash and cash equivalents 497 1,491 Total interest income 34,936 34,581 INTEREST EXPENSE Deposits 7,004 6,865 Borrowings 446 752 Total interest expense 7,450 7,617 Net interest income 27,486 26,964 PROVISION (RECAPTURE) FOR LOAN LOSSES 925 ( 125 ) Net interest income after provision (recapture) for loan losses 26,561 27,089 NONINTEREST INCOME Service charges and fee income 1,905 1,954 Earnings on cash surrender value of BOLI 348 381 Mortgage servicing income 1,027 1,002 Fair value adjustment on MSRs ( 1,857 ) ( 760 ) Net gain on sale of loans 6,022 1,449 Total noninterest income 7,445 4,026 NONINTEREST EXPENSE Salaries and benefits 12,083 12,402 Operations 5,461 5,905 Regulatory assessments 590 279 Occupancy 1,881 2,060 Data processing 2,658 2,104 Net loss and expenses on OREO and repossessed assets 5 35 Total noninterest expense 22,678 22,785 Income before provision for income taxes 11,328 8,330 Provision for income taxes 2,391 1,651 Net income $ 8,937 $ 6,679 Earnings per common share: Basic $ 3.46 $ 2.63 Diluted $ 3.42 $ 2.57 Weighted average number of common shares outstanding: Basic 2,562,650 2,527,329 Diluted 2,592,532 2,583,312 See notes to consolidated financial statements 69 Table of Conten t s SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income (In thousands) Year Ended December 31, 2020 2019 Net income $ 8,937 $ 6,679 Available for sale securities: Unrealized gains arising during the year 82 78 Income tax expense related to unrealized gains ( 17 ) ( 17 ) Other comprehensive income, net of tax 65 61 Comprehensive income $ 9,002 $ 6,740 See notes to consolidated financial statements 70 Table of Conten t s SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity (In thousands, except share and per share amounts) Shares Common Stock Additional Paid-in Capital Unearned ESOP Shares Retained Earnings Accumulated Other Comprehensive Income, net of tax Total Stockholders' Equity Balance at December 31, 2019 2,567,389 $ 25 $ 26,343 $ ( 227 ) $ 51,410 $ 175 $ 77,726 Net income 8,937 8,937 Other comprehensive income, net of tax 65 65 Share-based compensation 338 338 Restricted stock awards issued 13,600 — Cash dividends on common stock ($ 0.80 per share) ( 2,072 ) ( 2,072 ) Common stock surrendered ( 3,423 ) — Common stock repurchased ( 2,477 ) ( 24 ) ( 49 ) ( 73 ) Restricted shares forfeited ( 1,915 ) — Common stock options exercised 19,413 239 239 Allocation of ESOP shares 210 114 324 Balance at December 31, 2020 2,592,587 $ 25 $ 27,106 $ ( 113 ) $ 58,226 $ 240 $ 85,484 Shares Common Stock Additional Paid-in Capital Unearned ESOP Shares Retained Earnings Accumulated Other Comprehensive Income, net of tax Total Stockholders' Equity Balance at December 31, 2018 2,544,059 $ 25 $ 25,663 $ ( 340 ) $ 46,165 $ 114 $ 71,627 Net income 6,679 6,679 Other comprehensive income, net of tax 61 61 Share-based compensation 267 267 Restricted stock awards issued 15,925 — Cash dividends on common stock ($ 0.56 per share) ( 1,434 ) ( 1,434 ) Common stock surrendered ( 3,487 ) — Restricted shares forfeited ( 880 ) — Common stock options exercised 11,772 131 131 Allocation of ESOP shares 282 113 395 Balance at December 31, 2019 2,567,389 $ 25 $ 26,343 $ ( 227 ) $ 51,410 $ 175 $ 77,726 See notes to consolidated financial statements 71 Table of Conten t s SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,937 $ 6,679 Adjustments to reconcile net income to net cash from operating activities: Amortization of net premiums/discounts on investments 160 50 Provision (recapture) for loan losses 925 ( 125 ) Depreciation and amortization 905 931 Compensation expense related to stock options and restricted stock 338 267 Fair value adjustment on MSRs 1,857 760 Right of use assets amortization 919 592 Change in lease liabilities ( 876 ) ( 480 ) Earnings on cash surrender value of BOLI ( 348 ) ( 381 ) Net change in advances from borrowers for taxes and insurance ( 137 ) 616 Deferred income tax 355 ( 267 ) Net gain on sale of loans ( 6,022 ) ( 1,449 ) Proceeds from sale of loans held-for-sale 258,531 78,214 Originations of loans held-for-sale ( 265,448 ) ( 77,241 ) Net loss on sale of OREO and repossessed assets — 21 Change in operating assets and liabilities: Accrued interest receivable ( 48 ) 81 Other assets 19 762 Accrued interest payable 143 89 Other liabilities ( 694 ) 1,944 Net cash (used in) provided by operating activities ( 484 ) 11,063 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from principal payments, maturities and sales of available for sale securities 7,909 845 Purchases of available for sale securities ( 8,889 ) ( 5,166 ) Net decrease (increase) in loans held-for-portfolio 5,940 ( 847 ) Purchase of BOLI/Company-owned life insurance ( 57 ) ( 437 ) Proceeds from sale of OREO and other repossessed assets — 473 Purchases of premises and equipment, net ( 407 ) ( 654 ) Net cash provided by (used in) investing activities 4,496 ( 5,786 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 131,263 63,117 Proceeds from borrowings 174,291 166,800 Repayment of borrowings ( 181,791 ) ( 243,300 ) FHLB stock redeemed 283 2,974 Net proceeds from issuance of subordinated notes 11,582 — ESOP shares released 324 395 Repurchases of common stock ( 73 ) — Proceeds from common stock option exercises 239 131 Dividends paid on common stock ( 2,072 ) ( 1,434 ) Net cash provided by (used in) financing activities 134,046 ( 11,317 ) Net increase (decrease) in cash and cash equivalents 138,058 ( 6,040 ) 72 Table of Conten t s Cash and cash equivalents, beginning of year 55,770 61,810 Cash and cash equivalents, end of year $ 193,828 $ 55,770 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for income taxes $ 1,960 $ 915 Interest paid on deposits and borrowings 7,307 7,528 Noncash net transfer from loans to OREO and repossessed assets 19 494 Noncash transfer from assets in process to premises and equipment 692 — Leases right of use assets obtained in exchange for operating lease liabilities: Right of use assets — 8,490 Lease liabilities $ — $ 8,233 See notes to consolidated financial statements 73 Table of Conten t s SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Note 1— Organization and Significant Accounting Policies Sound Financial Bancorp, a Maryland corporation ("Sound Financial Bancorp" or the "Company"), is the parent holding company for its wholly owned subsidiary, Sound Community Bank (the "Bank") and the Bank's wholly-owned subsidiary, Sound Community Insurance Agency, Inc. Substantially all of Sound Financial Bancorp's business is conducted through Sound Community Bank, a Washington state-chartered commercial bank. As a Washington commercial bank, the Bank's regulators are the Washington State Department of Financial Institutions ("WDFI") and the Federal Deposit Insurance Corporation ("FDIC"). The Board of Governors of the Federal Reserve System ("Federal Reserve") is the primary federal regulator for Sound Financial Bancorp. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank. Subsequent events – The Company has evaluated subsequent events for potential recognition and disclosure. See "Note 21—Subsequent Events" for further information. Basis of Presentation and Use of Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the fair value of MSRs, valuations of impaired loans and OREO, and the realization of deferred taxes. The accompanying consolidated financial statements include the accounts of Sound Financial Bancorp and its wholly-owned subsidiaries Sound Community Bank and Sound Community Insurance Agency, Inc. All significant intercompany balances and transactions between Sound Financial Bancorp and its subsidiaries have been eliminated in consolidation. Cash and cash equivalents – For purposes of reporting cash flows, cash and cash equivalents include cash on hand and in banks and interest-bearing deposits. All have original maturities of three months or less and may exceed federally insured limits. Investment securities – Investment securities are classified into one of three categories: (1) held-to-maturity, (2) available-for-sale or (3) trading. The Company had no held-to-maturity or trading securities at December 31, 2020 or 2019. Available-for-sale securities consist of debt securities that the Company has the intent and ability to hold for an indefinite period, but not necessarily to maturity. Such securities may be sold to implement the Company's asset/liability management strategies and/or in response to changes in interest rates and similar factors. Available-for-sale securities are reported at fair value. Dividend and interest income are recognized when earned. Unrealized gains and losses, net of the related deferred tax effect, are reported as a net amount in accumulated other comprehensive income (loss) on available-for-sale securities in the consolidated balance sheets. Realized gains and losses on available-for-sale securities, determined using the specific identification method, are included in earnings. Amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the interest method over the period to the earlier of call date or maturity. The Company reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment ("OTTI") or permanent impairment, taking into consideration current market conditions, fair value in relation to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether the Company intends to sell a security or if it is likely that the Company will be required to sell the security before recovery of its amortized cost basis of the investment, which may be maturity, and other factors. For debt securities, if the Company intends to sell the security or it is likely that it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and the fair value, is recognized as a charge to other comprehensive income. The Company does not intend to sell 74 Table of Conten t s these securities and it is more likely than not that it will not be required to sell the securities before anticipated recovery of the remaining amortized cost basis. The Company closely monitors its investment securities for changes in credit risk. Loans held-for-sale – To mitigate interest-rate sensitivity, from time to time, certain fixed-rate mortgage loans are identified as held-for-sale in the secondary market. Accordingly, such loans are classified as held-for-sale in the consolidated balance sheets and are carried at the lower of cost or estimated fair market value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Mortgage loans held-for-sale are generally sold with the mortgage servicing rights retained by the Company. Gains or losses on sales of loans are recognized based on the difference between the selling price and the carrying value of the related loans sold based on the specific identification method. Loans – The Company grants mortgage, commercial, and consumer loans to clients. A substantial portion of the loan portfolio is represented by loans secured by real estate located throughout the Puget Sound region, especially King, Snohomish and Pierce Counties, and in Clallam and Jefferson Counties of Washington State. The ability of the Company's debtors to honor their contracts is dependent upon employment, real estate and general economic conditions in these areas. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balance adjusted for any charge-offs, allowance for loan losses, and any deferred fees or costs on origination of loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method over the contractual life of the loan for term loans or the straight-line method for open-ended loans. The accrual of interest is discontinued at the time the loan is 90 days past due or 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. Loans are typically charged off no later than 120 days past due, unless secured by collateral. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current, future payments are reasonably assured and payments have been received for six consecutive months. A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) due according to the contractual terms of the original loan agreement. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as a practical expedient, the current fair value of the collateral, reduced by costs to sell, is used. When the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest), impairment is recognized by charging off the impaired portion or creating or adjusting a specific allocation of the allowance for loan losses. A loan is classified as a troubled debt restructuring ("TDR") when certain concessions have been made to the contractual terms, such as reductions of interest rates or deferrals of interest or principal payments due to the borrower's deteriorated financial condition. All TDRs are reported and accounted for as impaired loans. In March 2020, the Company began offering short-term loan modifications to assist borrowers during the novel coronavirus disease 2019 ("COVID-19") pandemic. The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") and related bank regulatory guidance provides that a short-term modification made in response to COVID-19 and 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. At December 31, 2020, we have provided payment relief related to COVID-19 on 49 commercial loans totaling $ 37.2 million and 84 residential loans totaling $ 19.0 million, of which 40 commercial loans totaling $ 29.1 million and 55 residential loans totaling $ 14.6 million have resumed their normal loan payments, matured, or have paid-off. We continue to monitor these loans through our normal credit risk processes. Allowance for loan losses – The allowance for loan losses is a reserve established through a provision for loan losses charged to expense and represents management's best estimate of probable losses incurred within the existing loan portfolio as of the balance sheet date. The level of the allowance reflects management's view of trends in loan loss activity, current loan portfolio quality and present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific loans; however, the allowance is available for any loan that is charged off. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans (or portions thereof) deemed to be uncollectible. Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely. Full or partial charge-offs on collateral dependent impaired loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. 75 Table of Conten t s The allowance for loan losses is maintained at a level sufficient to provide for probable credit losses based upon evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management's continuing analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectability may not be assured. The detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific, general and unallocated components. The general component of the allowance for loan losses covers non-impaired loans and is determined using a formula-based approach. The formula first incorporates either the historical loss rates of the Company or the historical loss rates of their peer group if minimal loss history exists. This historical loss rate factor is then adjusted for qualitative factors. Qualitative factors are used to estimate losses related to factors that are not captured in the historical loss rates and are based on management’s evaluation of available internal and external data and involve significant management judgement. Qualitative factors include changes in lending standards, changes in economic conditions, changes in the nature and volume of loans, changes in lending management, changes in delinquencies, changes in the loan review system, changes in the value of collateral, the existence of concentrations, and the impact of other external factors. Finally, the general component of the allowance for loan losses is adjusted for changes in the assigned grades of loans, which include the following: pass, watch, special mention, substandard, doubtful, and loss. As loans are downgraded from watch to the lower categories, they are assigned an additional factor to account for the increased credit risk. Loan grades involve significant management judgment. For such loans that are also classified as impaired, a specific component within the allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The Company considers installment loans to be pools of smaller balance, homogenous loans that are collectively evaluated for impairment, unless such loans are subject to a TDR agreement. The appropriateness of the allowance for loan losses is estimated based upon those factors and trends identified by management at the time consolidated financial statements are prepared. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for loan losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement. The ultimate recovery of all loans is susceptible to future market factors beyond the Company's control. These factors may result in losses or recoveries differing significantly from those provided in the consolidated financial statements. Transfers of financial assets – Transfers of an entire financial asset, or a participating interest in an entire financial asset, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) a group of financial assets or a participating interest in an entire financial asset has been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Mortgage servicing rights – MSRs represent the value associated with servicing residential mortgage loans, when the mortgage loans have been sold into the secondary market and the related servicing has been retained by the Company. The Company may also purchase MSRs. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. The Company measures its mortgage servicing assets at fair value and reports changes in fair value through earnings under the caption fair value adjustment on MSRs in other income in the period in which the change occurs. Premises and equipment – Premises, leasehold improvements and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from 1 to 10 years. The cost of leasehold improvements is amortized using the straight-line method over the terms of the related leases. The cost of premises is amortized using the straight-line method over 76 Table of Conten t s the estimated useful life of the building, up to 39 years. Management reviews premises, leasehold improvements and furniture and equipment for impairment on an annual basis. Bank-owned life insurance, net – The carrying amount of BOLI approximates its fair value, and is estimated using the cash surrender value, net of any surrender charges. Federal Home Loan Bank stock – The Company is a member of the FHLB of Des Moines. FHLB stock represents the Company's investment in the FHLB and is carried at par value, which reasonably approximates its fair value. As a member of the FHLB, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At December 31, 2020 and 2019, the Company's minimum required investment in FHLB stock was $ 877,000 and $ 1.2 million, respectively. Typically, the Company may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB. Other real estate owned and repossessed assets – OREO and repossessed assets represent real estate and other assets which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, OREO and repossessed assets are recorded at fair value less estimated costs to sell, which becomes the new basis. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the property is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Revenue and expenses from operations and subsequent adjustments to the carrying amount of the property are included in other noninterest expense in the consolidated statements of income. In some instances, the Company may make loans to facilitate the sales of OREO. Management reviews all sales for which it is the lending institution. Any gains related to sales of other real estate owned may be deferred until the buyer has a sufficient investment in the property. Leases – We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets and operating lease liabilities in our consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease right-of-use asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Additionally, for equipment leases, we apply a portfolio approach to effectively account for the operating lease right-of-use assets and liabilities. The Company has not entered into leases that meet the definition of a financing lease. Income Taxes – Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company's income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized. Segment reporting – The Company operates in one segment and makes management decisions based on consolidated results. The Company's operations are solely in the financial services industry and include providing to its clients traditional banking and other financial services. Off-balance-sheet credit-related financial instruments – In the normal course of operations, the Company engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, letters of credit and lines of credit. Such financial instruments are recorded when they are funded. Advertising costs – The Company expenses advertising costs as they are incurred. Advertising costs, including other marketing expenses were $ 249,000 and $ 376,000 for the years ended December 31, 2020 and 2019, respectively. Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investments, are reported as a separate component of the equity section of the consolidated balance sheets, net of tax. Such items, along with net income, are components of comprehensive income. 77 Table of Conten t s Intangible assets – At December 31, 2020 and 2019, the Company had $ 128,000 and $ 158,000 , respectively, of identifiable intangible assets included in other assets as a result of the acquisition of deposits from other institutions. These assets are amortized using the straight-line method over a period of eight to ten years and have a remaining weighted average life of 4.2 years. Management reviews intangible assets for impairment on an annual basis. No impairment losses have been recognized in the periods presented. Employee stock ownership plan – The Company sponsors a leveraged ESOP. As shares are committed to be released, compensation expense is recorded equal to the market price of the shares, and the shares become outstanding for purposes of earnings per share calculations. Cash dividends on allocated shares (those credited to ESOP participants' accounts) are recorded as a reduction of stockholders' equity and distributed directly to participants' accounts. Cash dividends on unallocated shares (those held by the ESOP not yet credited to participants' accounts) are used to pay administrative expenses and debt service requirements of the ESOP. See "Note 14—Employee Benefits" for further information. For the calendar year 2020, the ESOP was committed to release 11,340 shares of the Company's common stock to participants and held 11,340 unallocated shares remaining to be released in 2021. Shares released on December 31, 2020 totaled 11,340 and will be credited to plan participants' accounts in 2021. Unearned ESOP shares are shown as a reduction of stockholders' equity. When the shares are released, unearned common shares held by the ESOP are reduced by the cost of the ESOP shares released and the differential between the fair value and the cost is charged to additional paid in capital. The loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP reported as a liability on the Company's consolidated statements of condition. Earnings Per Common Share – Earnings per share is computed using the two-class method. Basic earnings per share is computed by dividing net income available to common shares by the weighted average number of common shares outstanding during the period, excluding any participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends at the same rate as the holders of the Company's common stock. Diluted earnings per share is computed by dividing net income available to common stockholders adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of common shares determined for the basic earnings per share plus the dilutive effect of common stock equivalents using the treasury stock method based on the average market price for the period. Some stock options are anti-dilutive and therefore are not included in the calculation of diluted earnings per share. Fair value – Fair value is the price that would be received when an asset is sold or a liability is transferred in an orderly transaction between market participants at the measurement date. Fair values of the Company's financial instruments are based on the fair value hierarchy which requires an entity to maximize the use of observable inputs, typically market data obtained from third parties, and minimize the use of unobservable inputs, which reflects its estimates for market assumptions, when measuring fair value. Three levels of valuation inputs are ranked in accordance with the prescribed fair value hierarchy as follows: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3: Assets or liabilities whose significant value drivers are unobservable. In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value measurements. In certain cases, the inputs used to measure fair value of an asset or liability may fall into different levels of the fair value hierarchy. The level within which the fair value measurement is categorized is based on the lowest level unobservable input that is significant to the fair value measurement in its entirety. Therefore, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable. Share-Based Compensation – The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. These costs are recognized on a straight-line basis over the vesting period during which an employee is required to provide services in exchange for the award, also known as the requisite service period. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted. When determining the estimated fair value of stock options granted, the Company utilizes various assumptions regarding the expected volatility of the stock price, estimated forfeitures using historical data on employee terminations, the risk-free interest rate for periods within the contractual life of the stock option, and the expected dividend yield that the Company expects over the expected life of the options granted. Reductions in compensation expense associated with forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted monthly based on actual forfeiture experience. The Company measures the fair value of the restricted stock using the closing market price of the Company's common stock on the date of 78 Table of Conten t s grant. The Company expenses the grant date fair value of the Company's stock options and restricted stock with a corresponding increase in equity. Reclassifications – Certain amounts reported in prior years' consolidated financial statements have been reclassified to conform to the current presentation. The results of the reclassifications are not considered material and have no effect on previously reported net income, earnings per share or stockholders' equity. Note 2— Accounting Pronouncements Recently Issued or Adopted On March 27, 2020, President Trump signed into law the CARES Act, which provides relief from certain accounting and financial reporting requirements under U.S. GAAP. Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for TDRs under Accounting Standards Codification ("ASC") 310-40 for loan modifications related to the 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. 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 Company does not expect the adoption of ASU 2020-08 to have a material impact on its 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. The amendments in this update 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 ("ASU 2019-12"). This ASU simplifies the accounting for income taxes by removing the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items, removing the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and removing the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This ASU is effective for fiscal years, and interim periods 79 Table of Conten t s within those fiscal years, beginning after December 15, 2020. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Disclosure requirements removed from FASB Subtopic 715-20 include the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer, related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, and, for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs and benefit obligation for postretirement health care benefits. Disclosure requirements added to FASB Subtopic 715-20 include the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This ASU is effective for fiscal years ending after December 15, 2020. The adoption of ASU No. 2018-14 did not have a material impact on the Company's consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements by removing the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds disclosure requirements for Level 3 measurements, including changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements. In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU amends the accounting for share-based payments awards to nonemployees to align with the accounting for employee awards. Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. Amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU No. 2018-07 on January 1, 2019 did not have a material impact on the Company's consolidated financial statements. In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities by better aligning the entity's financial reporting for hedging relationships with those risk management activities and reduce the complexity of and simplify the application of hedge accounting by preparers. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU No. 2017-12 on January 1, 2019, did not have a material impact on the Company's consolidated financial statements. In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) . ASU No. 2017-08 is intended to amend the amortization period for certain purchased callable debt securities held at a premium. Under ASU No. 2017-08, the FASB is shortening the amortization period for the premium to the earliest call date. ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of ASU No. 2017-08 on January 1, 2019 did not have a material impact on the Company's consolidated financial statements. 80 Table of Conten t s In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (" ASU 2017-04"), which eliminates Step 2 from the goodwill impairment test. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Adoption of ASU 2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 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 . This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted. The FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326) , delaying implementation of ASU No. 2016-13 for SEC smaller reporting company filers until fiscal year beginning after December 15, 2022. The Bank meets the requirements of a smaller reporting company and will delay implementation of ASUNo. 2016-13. In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) . ASU No. 2016-02 requires lessees to recognize, on the balance sheet, the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income. For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements . This ASU amended the new leases standard to give entities another option for transition and to provide lessors with a practical expedient. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The practical expedient provides lessors with an option to not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components. The Company adopted these ASUs on January 1, 2019. In March 2019, FASB issued ASU No. 2019-01, Leases (Topic 842), Codification Improvements . The amendments in this ASU include guidance on determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, requiring cash received from lessors from sales-type and direct financing leases to be presented in the cash flow statement within investing activities, and clarifying interim disclosure requirements. The adoption of ASU No. 2019-01 did not have a material impact on the Company's consolidated financial statements and have provided the required annual disclosures in this report. Refer to "Note 12—Leases" for further information. Note 3— Restricted Cash Federal Reserve System ("Federal Reserve") regulations require that the Company maintain certain minimum reserve balances either as cash on hand or on deposit with the Federal Reserve Bank, based on a percentage of deposits. In March 2020, the Federal Reserve announced that it would be reducing the reserve requirement for all depository institutions to zero percent effective March 26, 2020. The Company' reserve balances were zero and $ 12.4 million at December 31, 2020 and 2019, respectively. 81 Table of Conten t s Note 4— Investments The amortized cost and fair value of available-for-sale securities and the corresponding amounts of gross unrealized gains and losses at December 31, 2020 and 2019 were as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2020 Municipal bonds $ 5,209 $ 204 $ — $ 5,413 Agency mortgage-backed securities 4,706 105 ( 6 ) 4,805 Total available-for-sale securities $ 9,915 $ 309 $ ( 6 ) $ 10,218 December 31, 2019 Municipal bonds $ 3,197 $ 173 $ — $ 3,370 Agency mortgage-backed securities 5,888 56 ( 8 ) 5,936 Total available-for-sale securities $ 9,085 $ 229 $ ( 8 ) $ 9,306 The following table details the amortized cost and fair value of available-for-sale securities at December 31, 2020, by contractual maturity (in thousands). Expected maturities of available-for-sale 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 securities, are shown separately. December 31, 2020 Amortized Cost Fair Value Weighted-Average Yield Due within one year $ 228 $ 231 1.46 % Due in one to five years 260 273 3.80 Due after five to ten years 1,419 1,467 3.34 Due after ten years 3,302 3,442 3.40 Mortgage-backed securities 4,706 4,805 2.31 Total $ 9,915 $ 10,218 2.84 % There were no pledged securities at December 31, 2020 and 2019. There were no sales of available-for-sale securities during the years ended December 31, 2020 and 2019. The following tables summarize the aggregate fair value and gross unrealized loss by length of time of those investments that have been in a continuous unrealized loss position at December 31, 2020 and 2019 (in thousands): December 31, 2020 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Agency mortgage-backed securities $ 1,618 $ ( 6 ) $ — $ — $ 1,618 $ ( 6 ) Total $ 1,618 $ ( 6 ) $ — $ — $ 1,618 $ ( 6 ) December 31, 2019 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Agency mortgage-backed securities $ 3,387 $ ( 8 ) $ — $ — $ 3,387 $ ( 8 ) Total $ 3,387 $ ( 8 ) $ — $ — $ 3,387 $ ( 8 ) 82 Table of Conten t s There were no credit losses recognized in earnings during the years ended December 31, 2020 and 2019 relating to the Company's securities. At December 31, 2020, the securities portfolio consisted of 16 agency mortgage-backed securities and 10 municipal securities with a fair value of $ 10.2 million. At December 31, 2019, the securities portfolio consisted of 13 agency mortgage-backed securities and eight municipal bonds with a fair value of $ 9.3 million. At December 31, 2020, there were six agency securities in an unrealized loss position for less than 12 months, and there were no securities in an unrealized loss position for more than 12 months. At December 31, 2019, there were five securities in an unrealized loss position for less than 12 months, and there were no municipal securities in an unrealized loss position for more than 12 months. For both the 2020 and 2019 periods, the unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not related to the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. The unrealized losses on these investments are not considered OTTI losses during the years ended December 31, 2020 and 2019, 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 . 83 Table of Conten t s Note 5— Loans The composition of the loan portfolio, excluding loans held-for-sale, at December 31, 2020 and 2019 is as follows (in thousands): December 31, 2020 2019 Real estate loans: One-to-four family $ 130,657 $ 149,393 Home equity 16,265 23,845 Commercial and multifamily 265,774 261,268 Construction and land 62,752 75,756 Total real estate loans 475,448 510,262 Consumer loans: Manufactured homes 20,941 20,613 Floating homes 39,868 43,799 Other consumer 15,024 8,302 Total consumer loans 75,833 72,714 Commercial business loans 64,217 38,931 Total loans 615,498 621,907 Deferred fees ( 2,135 ) ( 2,020 ) Total loans, gross 613,363 619,887 Allowance for loan losses ( 6,000 ) ( 5,640 ) Total loans, net $ 607,363 $ 614,247 The Company was automatically authorized to participate in the Small Business Administration'ss Paycheck Protection Program ("PPP") as a qualified U.S. SBA lender. At December 31, 2020, the Bank had funded PPP loans totaling $ 74.8 million, $ 43.3 million of which remained outstanding and are included in commercial business loans above. The following table presents the balance in the allowance for loan losses and the unpaid principal balance in loans, net of partial charge-offs by portfolio segment and based on impairment method at December 31, 2020 (in thousands): Allowance: Individually Evaluated for Impairment Allowance: Collectively Evaluated for Impairment Ending Balance Loans Held for Investment: Individually Evaluated for Impairment Loans Held for Investment: Collectively Evaluated for Impairment Ending Balance One-to-four family $ 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 84 Table of Conten t s The following table presents the balance in the allowance for loan losses and the unpaid principal balance in loans, net of partial charge-offs by portfolio segment and based on impairment method at December 31, 2019 (in thousands): Allowance: Individually Evaluated for Impairment Allowance: Collectively Evaluated for Impairment Ending Balance Loans Held for Investment: Individually Evaluated for Impairment Loans Held for Investment: Collectively Evaluated for Impairment Ending Balance One-to-four family $ 205 $ 915 $ 1,120 $ 8,620 $ 140,773 $ 149,393 Home equity 25 153 178 335 23,510 23,845 Commercial and multifamily — 1,696 1,696 353 260,915 261,268 Construction and land 7 485 492 1,215 74,541 75,756 Manufactured homes 349 131 480 440 20,173 20,613 Floating homes — 283 283 290 43,509 43,799 Other consumer 54 58 112 143 8,159 8,302 Commercial business 84 247 331 997 37,934 38,931 Unallocated — 948 948 — — — Total $ 724 $ 4,916 $ 5,640 $ 12,393 $ 609,514 $ 621,907 The following table summarizes the activity in the allowance for loan losses for the year ended December 31, 2020 (in thousands): Beginning Allowance Charge-offs Recoveries (Recapture)/ Provision Ending Allowance One-to-four family $ 1,120 $ ( 20 ) $ 63 $ ( 100 ) $ 1,063 Home equity 178 ( 2 ) 46 ( 75 ) 147 Commercial and multifamily 1,696 — — 674 2,370 Construction and land 492 — — 86 578 Manufactured homes 480 — 2 47 529 Floating homes 283 — — 45 328 Other consumer 112 ( 48 ) 14 210 288 Commercial business 331 ( 620 ) — 580 291 Unallocated 948 — — ( 542 ) 406 $ 5,640 $ ( 690 ) $ 125 $ 925 $ 6,000 The following table summarizes the activity in the allowance for loan losses for the year ended December 31, 2019 (in thousands): Beginning Allowance Charge-offs Recoveries (Recapture)/ Provision Ending Allowance One-to-four family $ 1,314 $ — $ 6 $ ( 200 ) $ 1,120 Home equity 202 — 10 ( 34 ) 178 Commercial and multifamily 1,638 — — 58 1,696 Construction and land 431 — — 61 492 Manufactured homes 427 — — 53 480 Floating homes 265 — — 18 283 Other consumer 112 ( 52 ) 24 28 112 Commercial business 356 — 3 ( 28 ) 331 Unallocated 1,029 — — ( 81 ) 948 $ 5,774 $ ( 52 ) $ 43 $ ( 125 ) $ 5,640 85 Table of Conten t s Credit Quality Indicators. Federal regulations provide for the classification of lower quality assets 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 the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in assets classified substandard with the added characteristic that the weaknesses make collection or liquidation of the assets in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without establishment of a specific loss reserve is not warranted. When the Company classifies problem loans as either substandard or doubtful, it may establish a specific allowance in an amount we deem prudent to address the risk specifically (if the loan is impaired) or it may allow the loss to be addressed in the general allowance (if the loan is not impaired). General allowances represent loss reserves which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When the Company classifies problem loans as a loss, it charges-off such loans in the period in which they are deemed uncollectible. Assets that do not currently expose the Company to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are classified as either watch or special mention loans. Determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the FDIC, the Bank's federal regulator, and the WDFI, the Bank's state banking regulator, both of whom can order the establishment of additional loss allowances. Pass rated loans are loans that are not otherwise classified or criticized. The following table represents the internally assigned grades at December 31, 2020, by type of loan (in thousands): One-to-four Family Home Equity Commercial and Multifamily Construction and Land Manufactured Homes Floating Homes Other Consumer Commercial Business Total Grade: Pass $ 113,185 $ 15,556 $ 228,652 $ 44,360 $ 19,606 $ 38,746 $ 15,000 $ 56,743 $ 531,848 Watch 15,142 245 22,945 13,808 1,115 604 — 5,202 59,061 Special Mention — — 10,813 3,939 — — — 310 15,062 Substandard 2,330 464 3,364 645 220 518 24 1,962 9,527 Doubtful — — — — — — — — — Loss — — — — — — — — — Total $ 130,657 $ 16,265 $ 265,774 $ 62,752 $ 20,941 $ 39,868 $ 15,024 $ 64,217 $ 615,498 The following table represents the internally assigned grades at December 31, 2019, by type of loan (in thousands): One-to-four Family Home Equity Commercial and Multifamily Construction and Land Manufactured Homes Floating Homes Other Consumer Commercial Business Total Grade: Pass $ 138,900 $ 23,206 $ 256,139 $ 68,268 $ 20,204 $ 43,509 $ 8,250 $ 35,347 $ 593,823 Watch — — 217 2,634 124 — — 378 3,353 Special Mention 2,484 — 2,178 3,677 — — — 1,649 9,988 Substandard 8,009 639 2,734 1,177 285 290 52 1,557 14,743 Doubtful — — — — — — — — — Loss — — — — — — — — — Total $ 149,393 $ 23,845 $ 261,268 $ 75,756 $ 20,613 $ 43,799 $ 8,302 $ 38,931 $ 621,907 Nonaccrual and Past Due Loans . Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are 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. 86 Table of Conten t s The following table presents the recorded investment in nonaccrual loans at December 31, 2020 and 2019, by type of loan (in thousands): December 31, 2020 2019 One-to-four family $ 1,668 $ 2,090 Home equity 156 261 Commercial and multifamily 353 353 Construction and land 40 1,177 Manufactured homes 149 226 Floating homes 518 290 Commercial business — 260 Total $ 2,884 $ 4,657 The following table represents the aging of the recorded investment in past due loans (excluding COVID-19 modified loans) at December 31, 2020, by type of loan (in thousands): 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Past Due Recorded Investment > 90 Days and Accruing Total Past Due Current Total Loans One-to-four family $ 498 $ 362 $ 1,407 $ — $ 2,267 $ 128,390 $ 130,657 Home equity 102 — 112 — 214 16,051 16,265 Commercial and multifamily — — 353 — 353 265,421 265,774 Construction and land 690 — 40 — 730 62,022 62,752 Manufactured homes 159 74 149 — 382 20,559 20,941 Floating homes — 269 249 — 518 39,350 39,868 Other consumer 15 1 — — 16 15,008 15,024 Commercial business 583 — — — 583 63,634 64,217 Total $ 2,047 $ 706 $ 2,310 $ — $ 5,063 $ 610,435 $ 615,498 The following table represents the aging of the recorded investment in past due loans at December 31, 2019, by type of loan (in thousands): 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Recorded Investment > 90 Days and Accruing Total Past Due Current Total Loans One-to-four family $ 789 $ 105 $ 1,810 $ — $ 2,704 $ 146,689 $ 149,393 Home equity 81 161 197 — 439 23,406 23,845 Commercial and multifamily 1,742 — 353 — 2,095 259,173 261,268 Construction and land 3,340 1,100 50 — 4,490 71,266 75,756 Manufactured homes 324 43 125 — 492 20,121 20,613 Floating homes 297 250 290 — 837 42,962 43,799 Other consumer 19 2 — — 21 8,281 8,302 Commercial business 226 — 162 — 388 38,543 38,931 Total $ 6,818 $ 1,661 $ 2,987 $ — $ 11,466 $ 610,441 $ 621,907 87 Table of Conten t s Nonperforming Loans. Loans are considered nonperforming when they are placed on nonaccrual. The following table represents the credit risk profile based on payment activity at December 31, 2020, by type of loan (in thousands): One-to-four Family Home Equity Commercial and Multifamily Construction and Land Manufactured Homes Floating Homes Other Consumer Commercial Business Total Performing $ 128,989 $ 16,109 $ 265,421 $ 62,712 $ 20,792 $ 39,350 $ 15,024 $ 64,217 $ 612,614 Nonperforming 1,668 156 353 40 149 518 — — 2,884 Total $ 130,657 $ 16,265 $ 265,774 $ 62,752 $ 20,941 $ 39,868 $ 15,024 $ 64,217 $ 615,498 The following table represents the credit risk profile based on payment activity at December 31, 2019, by type of loan (in thousands): One-to-four Family Home Equity Commercial and Multifamily Construction and Land Manufactured Homes Floating Homes Other Consumer Commercial Business Total Performing $ 147,303 $ 23,584 $ 260,915 $ 74,579 $ 20,387 $ 43,509 $ 8,302 $ 38,671 $ 617,250 Nonperforming 2,090 261 353 1,177 226 290 — 260 4,657 Total $ 149,393 $ 23,845 $ 261,268 $ 75,756 $ 20,613 $ 43,799 $ 8,302 $ 38,931 $ 621,907 Impaired Loans . A loan is considered impaired when it is determined that the Company may not be able to collect payments of principal or interest when due under the terms of the loan. In the process of identifying loans as impaired, the Company takes into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered on a case-by-case basis, after taking into consideration the totality of circumstances surrounding the 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 December 31, 2020 and 2019, by type of loan were as follows (in thousands): 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 88 Table of Conten t s December 31, 2019 Recorded Investment Unpaid Principal Balance Without Allowance With Allowance Total Recorded Investment Related Allowance One-to-four family $ 8,748 $ 7,236 $ 1,384 $ 8,620 $ 205 Home equity 335 256 79 335 25 Commercial and multifamily 353 353 — 353 — Construction and land 1,215 1,177 38 1,215 7 Manufactured homes 445 46 394 440 349 Other consumer 143 — 143 143 54 Commercial business 997 714 283 997 84 Total $ 12,526 $ 10,072 $ 2,321 $ 12,393 $ 724 The following table provides the average recorded investment and interest income on impaired loans for the year ended December 31, 2020 and 2019, by type of loan (in thousands): Year Ended December 31, 2020 Year Ended December 31, 2019 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized One-to-four family $ 6,067 $ 175 $ 4,788 $ 280 Home equity 332 17 1,109 19 Commercial and multifamily 398 19 888 19 Construction and land 479 4 462 156 Manufactured homes 366 24 456 39 Floating homes 429 30 58 16 Other consumer 130 5 155 8 Commercial business 1,062 19 1,082 56 Total $ 9,263 $ 293 $ 8,998 $ 593 Forgone interest on nonaccrual loans was $ 168,000 and $ 370,000 for the year ended December 31, 2020 and 2019, respectively. Troubled debt restructurings. TDRs, accounted for under ASC 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a lower interest rate, a reduction in principal, or a longer term to maturity. 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 $ 3.2 million and $ 7.9 million at December 31, 2020 and 2019, 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 Modifications: 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 four loans totaling $ 795,000 , that were modified as a TDR during the year ended December 31, 2020. The following TDR loans were paid off during the year ended December 31, 2020: five one-to-four family residential loans totaling $ 5,236,000 and one manufactured home loan totaling $ 40,000 . 89 Table of Conten t s There was one TDR totaling $ 161,000 for which there was a payment default within the first 12 months of modification during the year ended December 31, 2020. There was one TDR totaling $ 49,000 for which there was a payment default within the first 12 months of modification during the year ended December 31, 2019. There was one commercial business TDR loan totaling $ 97,000 that was charged off during the year ended December 31, 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 related bank regulatory guidance provides that a short-term modification made in response to COVID-19 and 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. At December 31, 2020, we have provided payment relief related to COVID-19 on 49 commercial loans totaling $ 37.2 million and 84 residential loans totaling $ 19.0 million, of which 40 commercial loans totaling $ 29.1 million and 55 residential loans totaling $ 14.6 million have resumed their normal loan payments, matured, or have paid-off. We continue to monitor these loans through our normal credit risk processes. See “Note 2—Accounting Pronouncements Recently Issued or Adopted.” In the ordinary course of business, the Company makes loans to its employees, officers and directors. Certain loans to employees, officers and directors are offered at discounted rates as compared to other clients as permitted by federal regulations. Employees, officers, and directors are eligible for mortgage loans with an adjustable rate that resets annually to 1.0 % - 1.5 % over the Bank's rolling cost of funds. Employees, officers and directors are also eligible for consumer loans that are 1.00 % below the market loan rate at the time of origination. Director and officer loans are summarized as follows (in thousands): December 31, 2020 2019 Balance, beginning of period $ 3,225 $ 3,370 Advances 196 88 New / (reclassified) loans, net 1,233 515 Repayments ( 659 ) ( 748 ) Balance, end of period $ 3,995 $ 3,225 At December 31, 2020 and 2019, loans totaling $ 11.8 million and $ 19.9 million, respectively, represented real estate secured loans that had current loan-to-value ratios above supervisory guidelines. Note 6— Mortgage Servicing Rights The Company’s MSR portfolio totaled $ 488.7 million at December 31, 2020, compared to $ 377.3 million at December 31, 2019. Of this total balance, the unpaid principal balance of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at December 31, 2020 and 2019 was $ 481.6 million and $ 363.3 million, respectively. The unpaid principal balances of loans serviced for other financial institutions at December 31, 2020 and 2019, totaled $ 7.1 million and $ 14.0 million, respectively. Loans serviced for Fannie Mae and others are not included in the Company’s financial statements as they are not assets of the Company. 90 Table of Conten t s A summary of the change in the balance of mortgage servicing assets at December 31, 2020 and 2019 were as follows (in thousands): December 31, 2020 2019 Beginning balance, at fair value $ 3,239 $ 3,414 Servicing rights that result from transfers and sale of financial assets 2,398 585 Changes in fair value: Due to changes in model inputs or assumptions (1) ( 1,857 ) ( 760 ) Ending balance, at fair value $ 3,780 $ 3,239 (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: December 31, 2020 2019 Prepayment speed (Public Securities Association "PSA" model) 247 % 187 % Weighted-average life 5.2 years 6.2 years Yield to maturity discount rate 10.0 % 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 Consolidated Statements of Income and totaled $ 1.0 million for each of the years ended December 31, 2020 and 2019. See "Note 1—Organization and Significant Accounting Policies" and "Note 11— Fair Measurements" for additional information on MSRs. Note 7— Premises and Equipment Premises and equipment at December 31, 2020 and 2019 are summarized as follows (in thousands): December 31, 2020 2019 Land $ 920 $ 920 Buildings and improvements 6,944 7,067 Furniture and equipment 5,694 5,163 13,558 13,150 Less: Accumulated depreciation and amortization ( 7,288 ) ( 6,383 ) Premises and equipment, net $ 6,270 $ 6,767 Depreciation and amortization expense was $ 905,000 and $ 931,000 for the years ended December 31, 2020 and 2019, respectively. The Company leases office space in several buildings as well as certain equipment. See "Note 12—Leases" for additional information on our leased facilities and equipment. 91 Table of Conten t s Note 8— Other Real Estate Owned and Repossessed Assets The following table presents activity related to OREO and other repossessed assets for the periods shown (in thousands): Year Ended December 31, 2020 2019 Beginning balance, January 1 $ 575 $ 575 Additions to OREO and repossessed assets 19 494 Sales — ( 473 ) Write-downs/Losses — ( 21 ) Ending balance, December 31 $ 594 $ 575 Note 9— Deposits A summary of deposit accounts with the corresponding weighted-average cost of funds at December 31, 2020 and 2019, are presented below (dollars in thousands): December 31, 2020 December 31, 2019 Deposit Balance Wtd. Avg Rate Deposit Balance Wtd. Avg Rate Noninterest-bearing demand $ 129,299 — % $ 94,973 — % Interest-bearing demand 230,492 0.44 159,774 0.54 Savings 83,778 0.27 57,936 0.33 Money market 65,748 0.39 50,337 0.49 Certificates 235,473 2.43 251,387 2.23 Escrow (1) 3,191 — 2,311 — Total $ 747,981 1.01 % $ 616,718 1.16 % (1) Escrow balances shown in noninterest-bearing deposits on the Consolidated Balance Sheets. Scheduled maturities of time deposits at December 31, 2020, are as follows (in thousands): Year Ending December 31, Amount 2021 $ 180,352 2022 28,137 2023 20,485 2024 2,024 Thereafter 4,475 $ 235,473 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 December 31, 2020 and 2019, totaled $ 79.9 million and $ 78.3 million, respectively. Deposits in excess of $250,000 are not federally insured. There were zero and $ 8.0 million of brokered deposits outstanding at December 31, 2020 and 2019, respectively. Deposits from related parties held by the Company were $ 6.4 million and $ 2.9 million at December 31, 2020 and 2019, respectively. 92 Table of Conten t s Note 10— Borrowings, FHLB Stock and Subordinated Notes The Company utilizes a loan agreement with the FHLB of Des Moines, the terms of which call for a blanket pledge of a portion of the Company's mortgage and commercial and multifamily portfolios based on the outstanding balance. At December 31, 2020 and 2019, the maximum amount available to borrow under this credit facility was $ 390.5 million and $ 321.9 million, respectively, subject to eligible pledged collateral. 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. At December 31, 2019, the credit facility was collateralized as follows: one-to-four family mortgage loans with an advance equivalent of $ 111.4 million, commercial and multifamily mortgage loans with an advance equivalent of $ 126.1 million and home equity loans with an advance equivalent of $ 6.9 million. The Company had no outstanding borrowings under this arrangement at December 31, 2020 and outstanding borrowings of $ 7.5 million at December 31, 2019. The weighted-average interest rate of the Company's borrowings under this agreement was 3.10 % and 3.05 % for the years ended December 31, 2020 and 2019, respectively. The maximum amount outstanding from FHLB advances during 2020 was $ 10.1 million and during 2019 was $ 72.8 million. The average balance outstanding was $ 7.1 million during 2020 and $ 24.4 million during 2019. Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $ 21.6 million and $ 19.1 million at December 31, 2020 and 2019, respectively, to secure public deposits. At December 31, 2020 and 2019, the remaining amount available to borrow from the FHLB of Des Moines was $ 213.7 million and $ 217.8 million, respectively. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in the FHLB of Des Moines stock based on specific percentages of its outstanding FHLB advances. At December 31, 2020 and 2019, the Company had an investment of $ 877,000 and $ 1.2 million, respectively, in FHLB of Des Moines stock. The Company participates in the Federal Reserve Bank Borrower-in-Custody program, which gives the Company access to the discount window and, beginning in 2020, the Paycheck Protection Program Liquidity Facility ("PPPLF"). The terms of both programs call for a pledge of specific assets. The Company pledges commercial and consumer loans as collateral for this borrower-in-custody line of credit and PPP loans for the PPPLF. The Company had unused borrowing capacity of $ 23.6 million and $ 41.7 million under the borrower-in-custody program at December 31, 2020 and 2019 and $ 43.3 million under the PPPLF at December 31, 2020. The Company had no outstanding borrowings under either program at December 31, 2020 and 2019. The Company has access to an unsecured Fed Funds line of credit from the Pacific Coast Banker's Bank. The line has a one-year term maturing on June 30, 2021 and is renewable annually. At December 31, 2020, the amount available under this line of credit was $ 10.0 million. There was no balance on this line of credit at December 31, 2020 and 2019, respectively. The Company has access to an unsecured Fed Funds line of credit from The Independent Bank. At December 31, 2020, the amount available under this line of credit was $ 10.0 million. The agreement may be terminated by either party. There was no balance on this line of credit at December 31, 2020 and 2019, respectively. The Company completed a private placement of $ 12.0 million in aggregate principal of 5.25 % Fixed-to-Floating Rate Subordinated Notes (the "subordinated notes") due 2030 resulting in net proceeds, after placement fees and offering expenses, of approximately $ 11.6 million during the quarter ended September 30, 2020. The subordinated notes have a stated maturity of October 1, 2030 and bear interest at a fixed rate of 5.25 % per year until October 1, 2025. From October 1, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term secured overnight financing rate (“SOFR”), plus 513 basis points. As provided in the subordinated notes, the interest rate on the subordinated notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR. Prior to October 1, 2025, the Company may redeem the subordinated notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes. On or after October 1, 2025, the Company may redeem the subordinated notes, in whole or in part, at its option, on any interest payment date. Any redemption by the Company would be at a redemption price equal to 100 % of the principal amount of the subordinated notes being redeemed, together with any accrued and unpaid interest on the subordinated notes being redeemed to but excluding the date of redemption. 93 Table of Conten t s Note 11— Fair Value Measurements The Company determines the fair values of its financial instruments based on the requirements established in ASC 820, Fair Value Measurements , which provides a framework for measuring fair value in accordance with U.S. GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 defines fair values for financial instruments as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. The Company’s fair values for financial instruments at December 31, 2020 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. Treasury Bills - The estimated fair value is equal to the carrying amount. Available-for-Sale Securities - Available-for-sale securities are recorded at fair value based on quoted market prices, if available. If quoted market prices are not available, management utilizes third-party pricing services or broker quotations from dealers in the specific instruments. Level 2 securities include those traded on an active exchange, as well as U.S. government securities. Loans Held-for-Sale - Residential mortgage loans held-for-sale are recorded at the lower of cost or fair value. The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from government-sponsored enterprises. At December 31, 2020 and 2019, loans held-for-sale were carried at cost, as no impairment was required. Loans Held 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 estimate fair value of loans-held-for-portfolio reflect exit price assumptions. The liquidity premiums/discounts are part of the valuation for exit pricing. Mortgage Servicing Rights -The fair value of mortgage servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs. FHLB stock - The estimated fair value is equal to the par value of the stock. Non-maturity Deposits - The estimated fair value is equal to the carrying amount. Time Deposits - The estimated fair value of time deposits is based on the difference between interest costs paid on the Company’s time deposits and current market rates for time deposits with comparable characteristics. Borrowings - The fair value of borrowings are estimated using the Company’s current incremental borrowing rates for similar types of borrowing arrangements. Subordinated Notes- The fair value of subordinated notes t 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 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. 94 Table of Conten t s 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 December 31, 2020 and 2019 (in thousands): December 31, 2020 Fair Value Measurements Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 FINANCIAL ASSETS: Cash and cash equivalents $ 193,828 $ 193,828 $ 193,828 $ — $ — Available for sale securities 10,218 10,218 — 10,218 — Loans held-for-sale 11,604 11,604 — 11,604 — Loans held for portfolio, net 607,363 608,575 — — 608,575 Mortgage servicing rights 3,780 3,780 — — 3,780 FHLB Stock 877 877 — 877 — FINANCIAL LIABILITIES: Non-maturity deposits 512,507 512,507 — 512,507 — Time deposits 235,474 238,629 — 238,629 — Subordinated notes 11,592 11,592 — 11,592 — December 31, 2019 Fair Value Measurements Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 FINANCIAL ASSETS: Cash and cash equivalents $ 55,770 $ 55,770 $ 55,770 $ — $ — Available for sale securities 9,306 9,306 — 9,306 — Loans held-for-sale 1,063 1,063 — 1,063 — Loans held for portfolio, net 614,247 622,147 — — 622,147 Mortgage servicing rights 3,239 3,239 — — 3,239 FHLB Stock 1,160 1,160 — 1,160 — FINANCIAL LIABILITIES: Non-maturity deposits 365,331 365,331 — 365,331 — Time deposits 251,387 255,261 — 255,261 — Borrowings 7,500 7,500 — 7,500 — The following tables present the balance of assets measured at fair value on a recurring basis at December 31, 2020 and 2019 (in thousands): Fair Value at December 31, 2020 Description Total Level 1 Level 2 Level 3 Municipal bonds $ 5,413 $ — $ 5,413 $ — Agency mortgage-backed securities 4,805 — 4,805 — Mortgage servicing rights 3,780 — — 3,780 Fair Value at December 31, 2019 Description Total Level 1 Level 2 Level 3 Municipal bonds $ 3,370 $ — $ 3,370 $ — Agency mortgage-backed securities 5,936 — 5,936 — Mortgage servicing rights 3,239 — — 3,239 95 Table of Conten t s For the years ended December 31, 2020 and 2019, there were no transfers between Level 1 and Level 2 or between Level 2 and Level 3. The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at December 31, 2020: Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted Average) Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 178 %- 276 % ( 247 %) Discount rate 10 %- 12 % ( 10 %) The following table provides 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 at December 31, 2019: Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted Average) Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 132 %- 485 % ( 187 %) Discount rate 12.5 %- 13.5 % ( 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 years ended December 31, 2020 and 2019. Mortgage servicing rights are measured at fair value using significant unobservable input (Level 3) on a recurring basis and a reconciliation of this asset can be found in "Note 6—Mortgage Servicing Rights." The following table presents the balance of assets measured at fair value on a nonrecurring basis and the total losses resulting from these fair value adjustments (in thousands): Fair Value at December 31, 2020 Description Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 594 $ — $ — $ 594 Impaired loans 5,940 — — 5,940 Fair Value at December 31, 2019 Description Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 575 $ — $ — $ 575 Impaired loans 12,393 — — 12,393 There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2020 or December 31, 2019. 96 Table of Conten t s The following table provides 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 December 31, 2020: Financial Instrument Valuation Technique(s) Unobservable Input(s) Range (Weighted Average) OREO Market approach Adjusted for difference between comparable sales 0 - 0 % ( 0 %) Impaired loans Market approach Adjusted for difference between comparable sales 0 - 100 % ( 6 %) The following table provides 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 December 31, 2019: Financial Instrument Valuation Technique(s) Unobservable Input(s) Range (Weighted Average) OREO Market approach Adjusted for difference between comparable sales 0 - 0 % ( 0 %) Impaired loans Market approach Adjusted for difference between comparable sales 0 - 100 % ( 6 %) Note 12— Leases We have operating leases for branch locations, loan production offices, our corporate office and 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 10 years and typically include one renewal option. Our leases have remaining lease terms of one to nine years . The operating leases require us to pay property taxes and operating expenses for the properties. The following table represents the Consolidated Balance Sheet classification of the Company’s right of use assets and lease liabilities (in thousands): December 31, 2020 2019 Operating lease right-of-use assets $ 6,722 $ 7,641 Operating lease liabilities 7,134 8,010 The following table represents the components of lease expense (in thousands): Year Ended December 31, 2020 2019 Operating lease expense: Office leases $ 1,160 $ 1,223 Equipment leases 10 20 Sublease income ( 12 ) ( 12 ) Net lease expense $ 1,158 $ 1,231 97 Table of Conten t s The following table represents the maturity of lease liabilities: December 31, 2020 December 31, 2019 Office Leases Equipment Leases Office Leases Equipment Leases Operating Lease Commitments 2020 $ — $ — $ 1,097 $ 8 2021 1,042 20 1,042 — 2022 1,016 9 1,016 — 2023 989 — 989 — 2024 968 — 968 — Thereafter 3,897 — 3,897 — Total lease payments 7,912 29 9,009 8 Less: Present value discount 807 — 1,007 — Present value of lease liabilities $ 7,105 $ 29 $ 8,002 $ 8 Lease term and discount rate by lease type consist of the following: December 31, 2020 December 31, 2019 Weighted-average remaining lease term: Office leases 7.9 years 8.7 years Equipment leases 1.4 years 0.4 years Weighted-average discount rate (annualized): Office leases 2.66 % 2.64 % Equipment leases 1.62 % 1.62 % Supplemental cash flow information related to leases was as follows (in thousands): Year Ended December 31, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities for operating leases: Operating cash flows Office leases $ 1,097 $ 1,099 Equipment leases 20 20 Note 13— Earnings Per Share Basic earnings per common share is computed by dividing net income 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 pursuant to the two-class method. 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. 98 Table of Conten t s Earnings per share are summarized for the periods presented in the following table (in thousands, except per share data): Year Ended December 31, 2020 2019 Net income $ 8,937 $ 6,679 Weighted average number of shares outstanding, basic 2,563 2,527 Effect of potentially dilutive common shares 30 56 Weighted average number of shares outstanding, diluted 2,593 2,583 Earnings per share, basic $ 3.46 $ 2.63 Earnings per share, diluted $ 3.42 $ 2.57 There were no anti-dilutive securities at December 31, 2020 or 2019. Note 14— Employee Benefits The Company has a 401(k) retirement plan that allows employees to defer a portion of their salary into the 401(k) plan. The Company matches a portion of employees' salary deferrals. 401(k) costs are accrued and funded on a current basis. The Company contributed $ 217,000 and $ 180,000 to the plan for the years ended December 31, 2020 and 2019, respectively. The Bank maintains a deferred compensation account for the benefit of Ms. Stewart, established in 1994 in connection with an incentive plan which is no longer active. Ms. Stewart was fully vested in her benefits under this plan as of January 2005. Pursuant to the terms of the plan, payments in an amount equal to the fair market value of the assets in the deferred compensation account shall be made to Ms. Stewart (or to her designated beneficiary in the event of her death) in 120 equal monthly installments commencing on the last day of the month following the month in which her employment with the Bank is terminated. In the event of the death of Ms. Stewart and her designated beneficiary prior to the account being fully paid, the remaining value of the account shall be paid in a lump sum to the beneficiary’s estate. The assets in the deferred compensation account consist of cash which is held in a certificate of deposit at the Bank and earns interest at market rates. At December 31, 2020, the amounts held in the certificates of deposit at the Bank were $ 109,000 , compared to $ 106,000 at December 31, 2019. The Bank maintains a nonqualified deferred compensation plan (the “NQDC Plan”), which was effective on January 1, 2017. The purpose of the NQDC Plan is to provide a select group of management or highly-compensated employees of the Bank with an opportunity to defer the receipt of up to eighty percent ( 80 %) of their annual base salary, bonus, performance-based compensation and any commission income and to assist the Company in attracting, retaining and motivating employees of high caliber and experience. In addition to elective deferrals, the Bank may make discretionary and other contributions to be credited to the account of any or all participants, subject to the vesting requirements set forth in the NQDC Plan. Discretionary contributions by the Bank become 100% vested upon the completion of three years of service from a participant’s effective date of participation in the NQDC Plan (with accelerated vesting upon death, disability or a change in control), while other Bank contributions (including matching contributions) vest at the rate of 20 % per year, beginning with the participant’s two-year anniversary of his or her date of hire. During the years ended December 31, 2020, and 2019, the Bank made discretionary contributions to the NQDC Plan in the amount of $ 90,000 and $ 90,000 , respectively. Each participant’s deferred compensation account is credited with an investment return determined as if the account was invested in one or more investment funds. Each participant elects the investment funds in which his or her account shall be deemed to be invested. Distributions of vested account balances are made upon death, disability, separation from service, or a specified in-service date unforeseeable emergency. Distributions shall be made in a single cash payment or, at the election of the participant, in annual installments for a period of up to ten ( 10 ) years in the case of a separation from service and in annual installments for a period of up to five ( 5 ) years in the case of an in-service distribution. The obligations of the Bank under the NQDC Plan are general unsecured obligations of the Bank to pay deferred compensation in the future to eligible participants in accordance with the terms of the NQDC Plan from the general assets of the Bank, although the Bank may establish a trust to hold amounts which the Bank may use to satisfy NQDC Plan distributions from time to time. Distributions from the NQDC Plan are governed by the Internal Revenue Code and the NQDC Plan. The Company may, at any time, in its sole discretion, terminate the NQDC Plan or amend or modify the NQDC Plan, in whole or in part, except that no such termination, amendment or modification shall have any retroactive effect to reduce any amounts deemed to be accrued and vested prior to such amendment. 99 Table of Conten t s Supplemental Executive Retirement Plans. The Company maintains two supplemental executive retirement plans for the benefit of Ms. Stewart, which are intended to be unfunded, non-contributory defined benefit plans maintained primarily to provide her with supplemental retirement income. The first supplemental executive retirement plan ("SERP 1") was effective as of August 2007. The second supplemental executive retirement plan ("SERP 2") was effective as of December 30, 2011, at which time the benefits under SERP 1 were frozen. Under the terms of SERP 1, as amended, Ms. Stewart is entitled to receive $ 53,320 per year for life commencing on the first day of the month following her separation from service (as defined in SERP 1) for any reason from Sound Community Bank. No payments will be made under SERP 1 in the event of Ms. Stewart's death and any payments that have commenced will cease upon death. In the event Ms. Stewart is involuntarily terminated in connection with a change in control (as defined in SERP 1), she will be entitled to receive the annual benefit described in the first sentence of this paragraph commencing upon such termination (subject to any applicable cutback for payments after a change in control as required by Section 280G of the Internal Revenue Code). Under the terms of SERP 2, as amended, upon Ms. Stewart's termination of employment with Sound Community Bank for any reason other than death, she will be entitled to receive additional retirement benefits of $ 96,390 per year for life commencing on the first day of the month following the later of age 70 or her separation from service (as defined in SERP 2) from Sound Community Bank. In the event of Ms. Stewart's death, her beneficiary will be entitled to a single lump sum payment within 90 days thereafter in an amount equal to the account value as of the death benefit valuation date, or approximately $ 1.1 million at December 31, 2020. If a change in control occurs (as defined in SERP 2), Ms. Stewart will receive her full retirement benefit under SERP 2 commencing upon the first day of the month following her separation from service from Sound Community Bank. Confidentiality, Non-Competition, and Non-Solicitation Agreement. On December 13, 2019, the Bank entered into an Amended and Restated Confidentiality, Non-competition, and Non-solicitation Agreement (the “Amended Non-Compete Agreement”) with Ms. Stewart. The Amended Non-Compete Agreement provides that the term of the non-compete and non-solicitation periods applicable to Ms. Stewart is a fixed period of 18 months following the date of Ms. Stewart’s separation from service with the Company and the Bank (the “Restricted Period”). Under the terms of the Amended Non-compete Agreement, upon Ms. Stewart's termination of employment by the Bank for cause or voluntarily by Ms. Stewart (other than for good reason), Ms. Stewart will be entitled to receive a bi-monthly payment, in an amount equal to $ 3,542 , which amount shall be paid in equal bi-monthly payments during the Restricted Period beginning on the fifth day of the month following her separation from service with the Bank. Upon Ms. Stewart’s termination of employment with the Bank for any reason other than set forth in the preceding sentence, she will be entitled to receive an amount equal to 150 % of her then-base salary plus the average of her past three years short term bonus pay, or approximately $ 804,000 at December 31, 2020, payable in 12 monthly installments beginning on the first day of the month following her termination. If Ms. Stewart breaches any of the covenants contained in the Amended Non-compete Agreement, her right to any of the payments specified above after the date of the breach shall be forever forfeited. Notwithstanding the foregoing, under her Amended Non-compete Agreement, if Ms. Stewart’s employment with the Bank is involuntarily terminated or she terminates her employment with the Bank for good reason at any time within 24 months following a change in control, Ms. Stewart will be entitled to receive an amount equal to 150 % of her then-base salary plus the average of her past three years short term bonus, payable in a lump sum. Stock Options and Restricted Stock The Company currently has one active stockholder approved equity incentive 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. At December 31, 2020, on an adjusted basis, awards for stock options totaling 260,864 shares and awards for restricted stock totaling 133,923 shares of Company common stock have been granted in the aggregate, net of any forfeitures, under the 2008 Plan and 2013 Plan to participants. During the years ended December 31, 2020 and 2019, share-based compensation expense totaled $ 338,000 and $ 267,000 , respectively. 100 Table of Conten t s Stock Option Awards All stock option awards granted under the 2008 Plan vest in 20 percent 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 plan award activity during the period ended December 31, 2020: Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term In Years Aggregate Intrinsic Value Outstanding at January 1, 2020 121,260 $ 20.80 5.33 $ 1,842,687 Granted 8,225 36.26 Exercised ( 19,413 ) 17.22 Forfeited ( 2,360 ) 29.62 Expired ( 6,733 ) 28.96 Outstanding at December 31, 2020 100,979 22.00 4.71 1,045,041 Exercisable 87,513 20.01 4.12 1,045,041 Expected to vest, assuming a 0 % forfeiture rate over the vesting term 13,466 $ 34.95 8.52 $ — At December 31, 2020, there was $ 73,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 2.6 years. The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. The fair value of options granted in 2020 and 2019 were determined using the following weighted-average assumptions as of the grant date. 2020 2019 Annual dividend yield 1.60 % 1.72 % Expected volatility 21.67 % 21.68 % Risk-free interest rate 1.38 % 2.64 % Expected term 6.50 years 6.50 years Weighted-average grant date fair value per option granted $ 7.14 $ 7.24 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. 101 Table of Conten t s The following is a summary of the Company's non-vested restricted stock awards for the year ended December 31, 2020: Non-vested Shares Shares Weighted-Average Grant-Date Fair Value Per Share Aggregate Intrinsic Value Per Share Non-vested at January 1, 2020 12,290 $ 33.32 Granted 13,600 36.26 Vested ( 6,861 ) 34.61 Forfeited ( 1,915 ) 34.25 Expired — — Non-vested at December 31, 2020 17,114 35.03 $ 31.75 Expected to vest assuming a 0 % forfeiture rate over the vesting term 17,114 $ 35.03 $ 31.75 At December 31, 2020, there was $ 440,000 of unrecognized compensation cost related to non-vested restricted stock granted under the Plan. The cost is expected to be recognized over the weighted-average vesting period of 2.6 years. The total fair value of shares vested for the years ended December 31, 2020 and 2019 was $ 237,000 and $ 118,000 , respectively. Employee Stock Ownership Plan In January 2008, the ESOP borrowed $ 1.2 million from the Company to purchase common stock of the Company, 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 for $ 1.1 million is being repaid principally by the Bank through contributions to the ESOP over a period of 10 years. The interest rate on the loan is fixed at 2.25 %, per annum. At December 31, 2020, the remaining balance of the ESOP loan was $ 126,000 . Neither the loan balance nor the related interest expense is reflected on the consolidated financial statements. For the each of calendar years 2020 and 2019, the ESOP was committed to release 11,340 shares of the Company's common stock to participants. The ESOP held 11,340 unallocated shares remaining to be released in 2021. The funds to purchase shares in the ESOP come from contributions the Bank makes twice a year to the Plan. For the year ended December 31, 2020, the ESOP trustee purchased 10,483 shares of the Company's common stock for inclusion in the Plan. The number of allocated shares was 139,678 and 143,331 at December 31, 2020 and 2019, respectively. The fair value of the 145,554 restricted shares held by the ESOP trust was $ 4.6 million at December 31, 2020. ESOP compensation expense included in salaries and benefits was $ 606,000 and $ 627,000 for the years ended December 31, 2020 and 2019, respectively. Note 15— Income Taxes The provision for income taxes at December 31, 2020 and 2019 was as follows (in thousands): December 31, 2020 2019 Current $ 2,036 $ 1,918 Deferred 355 ( 267 ) Total tax expense $ 2,391 $ 1,651 102 Table of Conten t s A reconciliation of the provision for income taxes for the years ended December 31, 2020 and 2019, with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes, is as follows (dollars in thousands): Year Ended December 31, 2020 2019 Provision at statutory rate $ 2,380 $ 1,749 Tax-exempt income ( 186 ) ( 174 ) Other 197 76 $ 2,391 $ 1,651 Federal Tax Rate 21.0 % 21.0 % Tax exempt rate ( 1.6 ) ( 2.1 ) Other 1.7 0.9 Effective tax rate 21.1 % 19.8 % The following table reflects the temporary differences that gave rise to the components of the Company's deferred tax assets at December 31, 2020 and 2019 (in thousands): December 31, 2020 2019 Deferred tax assets Deferred compensation and supplemental retirement $ 340 $ 508 Equity based compensation 68 110 Intangible assets 55 58 Lease liabilities 1,498 1,682 Other, net 29 107 Allowance for loan losses 1,260 1,184 Total deferred tax assets 3,250 3,649 Deferred tax liabilities Prepaid expenses ( 85 ) ( 59 ) FHLB stock dividends ( 39 ) ( 52 ) Unrealized gain on securities ( 64 ) ( 47 ) Depreciation ( 251 ) ( 198 ) Mortgage servicing rights ( 387 ) ( 263 ) Deferred loan costs ( 698 ) ( 739 ) Right of use assets ( 1,412 ) ( 1,605 ) Total deferred tax liabilities ( 2,936 ) ( 2,963 ) Net deferred tax asset $ 314 $ 686 At December 31, 2020 and 2019, the Company had no unrecognized tax benefits. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in "Provision for income taxes" in the Consolidated Statements of Income. During the years ended December 31, 2020 and 2019, the Company recognized no interest and penalties related to income taxes. The Company or its subsidiary files an income tax return in the U.S. federal jurisdiction. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2017. Note 16— Capital The Company is a bank holding company under the supervision of the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve, except that, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act, effective August 30, 2018, a bank holding company with consolidated assets of less than $3.0 billion is generally not 103 Table of Conten t s subject to the Federal Reserve’s capital regulations, which parallel the FDIC’s capital regulations.The Bank is a state-chartered, federally insured institution and thereby is subject to the capital requirements established by the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital regulations that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. At December 31, 2020, according to the most recent notification from the FDIC, the Bank was categorized as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category. Prior to January 1, 2020, Sound Community Bank followed the FDIC’s prompt corrective actions standards. In order to be considered well-capitalized under the prompt corrective action standards, a bank must have a ratio of Common Equity Tier 1 ("CET1") capital to risk-weighted assets of at least 6.5%, a ratio of Tier 1 capital to risk-weighted assets of at least 8%, a ratio of total capital to risk-weighted assets of at least 10%, and a leverage ratio of at least 5%, and the bank must not be subject to a regulatory capital requirement imposed on it as an individual bank. In order to be considered adequately capitalized, a bank must have the minimum capital ratios described above. Institutions with lower capital ratios are assigned to lower capital categories. Based on safety and soundness concerns, the FDIC may assign an institution to a lower capital category than would originally apply based on its capital ratios. The FDIC is also authorized to require Sound Community Bank to maintain additional amounts of capital in connection with concentrations of assets, interest rate risk, and certain other items. The FDIC has not imposed such a requirement on Sound Community Bank. Effective January 1, 2020, a bank that elects to use the Community Bank Leverage Ratio (“CBLR”) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act will generally be considered well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%. As required by the CARES Act, the FDIC has temporarily lowered the CBLR to 8% beginning in the second quarter of 2020 through the end of the year. Beginning in 2021, the CBLR will increase to 8.5% for that calendar year. The CBLR will return to 9% on January 1, 2022. To be eligible to utilize the CBLR, the Bank also must have total consolidated assets of less than $10 billion, off-balance sheet exposures of 25% or less of its total consolidated assets, and trading assets and trading liabilities of 5.0% or less of its total consolidated assets, all as of the end of the most recent quarter. Beginning January 2020, the Bank elected to use the CBLR framework. At December 31, 2020, the Bank’s CBLR was 10.40 %. The following table shows the capital ratios of Sound Community Bank at December 31, 2019 (dollars in thousands): Actual Minimum Capital Requirements Minimum Required to be Well-Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Tier 1 Capital to average total adjusted assets (1) $ 74,031 10.22 % $ 28,981 4.00 % $ 36,226 5.00 % Common Equity Tier 1 to risk-weighted assets (2) 74,031 12.07 % 27,601 4.50 % 39,868 6.50 % Tier 1 Capital to risk-weighted assets (2) 74,031 12.07 % 36,801 6.00 % 49,068 8.00 % Total Capital to risk-weighted assets (2) $ 79,974 13.04 % $ 49,067 8.00 % $ 61,335 10.00 % (1) Based on total adjusted assets of $ 724,527 at December 31, 2019. (2) Based on risk-weighted assets of $ 613,354 at December 31, 2019. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank-only basis and the Federal Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action regulations. If Sound Financial Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2020, Sound Financial Bancorp would have exceeded all regulatory capital requirements. The estimated CBLR calculated for Sound Financial Bancorp at December 31, 2020 was 10.40 % 104 Table of Conten t s During the quarter ended December 31, 2020, the Company repurchased a total of 2,477 shares of Company common stock at an average price of $ 29.42 per share pursuant to the Company’s stock repurchase program, leaving $ 1.9 million available for future repurchase under the existing program. Note 17— Concentrations of Credit Risk Most of the Company's business activity is with clients located in the state of Washington. A substantial portion of the loan portfolio is represented by real estate loans throughout western Washington. The ability of the Company's debtors to honor their contracts is dependent upon the real estate and general economic conditions in the area. Loans to one borrower are generally limited by federal banking regulations to 15 % of the Company's unimpaired capital and surplus. Note 18— Commitments and Contingencies The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its 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): At December 31, 2020 2019 Residential mortgage commitments $ 3,312 $ 4,384 Unfunded construction commitments 18,981 40,181 Unused lines of credit 34,075 39,605 Irrevocable letters of credit 151 1,240 Total loan commitments $ 56,519 $ 85,410 At December 31, 2020, fixed-rate loan commitments totaled $ 3.3 million and had a weighted-average interest rate of 6.08 %. At December 31, 2019, fixed-rate loan commitments totaled $ 4.4 million and had a weighted-average interest rate of 6.79 %. At December 31, 2020 and 2019, the Company had letters of credit issued by the FHLB with a notional amount of $ 21.6 million and $ 19.1 million, respectively, in order to secure Washington State Public Funds. In the ordinary course of business, the Company sells loans without recourse that may have to be subsequently repurchased due to defects that occurred during the origination of the loan. The defects are categorized as documentation errors, underwriting errors, early payment defaults, and fraud. When a loan sold to an investor without recourse fails to perform, the investor will typically review the loan file to determine whether defects in the origination process occurred. If a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no defects, the Company has no commitment to repurchase the loan. At December 31, 2020 and 2019, the maximum amount of these guarantees totaled $ 488.7 million and $ 377.3 million, respectively. These amounts represent the unpaid principal balances of the Company's loans serviced for others' portfolios. There were no loans repurchased during the years ended December 31, 2020 and 2019. The Company pays certain medical, dental, prescription, and vision claims for its employees, on a self-insured basis. The Company has purchased stop-loss insurance to cover claims that exceed stated limits and has recorded estimated reserves for the ultimate costs for both reported claims and claims incurred but not reported, which were not considered significant at 105 Table of Conten t s December 31, 2020. At December 31, 2020, the Company recorded no stop loss medical insurance claims exceeding stated coverage limits. At various times, the Company may be the defendant in various legal proceedings arising in connection with its business. It is the opinion of management that the financial position and the results of operations of the Company will not be materially adversely affected by the outcome of these legal proceedings and that adequate provision has been made in the accompanying consolidated balance sheets. Note 19— Parent Company Financial Information The Balance Sheets, Statements of Income, and Statements of Cash Flows for Sound Financial Bancorp (Parent Only) are presented below (dollars in thousands): Balance sheets December 31, 2020 2019 Assets Cash and cash equivalents $ 6,837 $ 2,740 Investment in Sound Community Bank 90,568 75,141 Other assets 65 41 Total assets $ 97,470 $ 77,922 Liabilities and Stockholders' Equity Subordinated notes, net $ 11,592 $ — Other liabilities 394 196 Total liabilities 11,986 196 Stockholders' equity 85,484 77,726 Total liabilities and stockholders' equity $ 97,470 $ 77,922 Statements of Income Year Ended December 31, 2020 2019 Interest expense on subordinated notes $ ( 190 ) $ — Other expenses ( 572 ) ( 792 ) Income before income tax benefit and equity in undistributed net income of subsidiary ( 762 ) ( 792 ) Income tax benefit 160 166 Equity in undistributed earnings of subsidiary 9,539 7,305 Net income $ 8,937 $ 6,679 106 Table of Conten t s Statements of Cash Flows Year Ended December 31, 2020 2019 Cash flows from operating activities: Net income $ 8,937 $ 6,679 Adjustments to reconcile net income to net cash provided by operating activities Other, net 70 ( 166 ) Expense allocation to holding company 129 196 Change in undistributed equity of subsidiary ( 9,539 ) ( 7,305 ) Net cash used in operating activities ( 403 ) ( 596 ) Cash flows from investing activities: ESOP shares released 324 716 Net cash provided by investing activities 324 716 Cash flows from financing activities: Proceeds from issuance of subordinated notes, net 11,582 — Transfer of proceeds from issuance of debt to subsidiary ( 5,500 ) — Dividends paid ( 2,072 ) ( 1,434 ) Dividends received from subsidiary — 2,155 Stock repurchase funding from subsidiary — 1,750 Repurchase of stock ( 73 ) — Stock options exercised 239 131 Net cash provided by (used in) financing activities 4,176 2,602 Net increase (decrease) in cash 4,097 2,722 Cash and cash equivalents at beginning of year 2,740 18 Cash and cash equivalents at end of year $ 6,837 $ 2,740 Note 20— Revenue from Contracts with Customers All of the Company's revenue from contracts with customers in the scope of ASC 606— Revenue from Contracts with Customers ("ASC 606") is recognized in Noninterest Income with the exception of the net loss on OREO and repossessed assets, which is included in Noninterest Expense. The following table presents the Company's sources of Noninterest Income for the year ended December 31, 2020 and 2019 (in thousands). Items outside of the scope of ASC 606 are noted as such. Year Ended December 31, 2020 2019 Noninterest income: Service charges and fee income Account maintenance fees $ 274 $ 199 Transaction-based and overdraft service charges 327 447 Debit/ATM interchange fees 1,016 982 Credit card interchange fees 23 27 Loan fees (a) 205 239 Other fees (a) 60 60 Total service charges and fee income 1,905 1,954 Earnings on cash surrender value of bank-owned life insurance (a) 348 381 Mortgage servicing income (a) 1,027 1,002 Fair value adjustment on MSRs (a) ( 1,857 ) ( 760 ) Net gain on sale of loans (a) 6,022 1,449 Total noninterest income $ 7,445 $ 4,026 107 Table of Conten t s (a) Not within scope of ASC 606 Account maintenance fees and transaction-based and overdraft service charges The Company earns fees from its customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis.The performance obligation is satisfied and fees are recognized on a monthly basis as the service period is completed. Transaction-based fees and overdraft service fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds, overdraft, and wire services. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer. Debit/ATM and credit card interchange income Debit/ATM interchange income represent fees earned when a debit card issued by the Bank is used for a transaction. The Bank earns interchange fees from debit cardholder transactions through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' account. Certain expenses directly associated with the debit card are recorded on a net basis with the interchange income. The Company utilizes a third-party agency relationship to brand credit cards with fees for originating new accounts paid by the issuing bank. Credit card interchange income represents fees earned when a credit card is issued by the third-party agent. Similar to debit card interchange fees, the Bank earns an interchange fee for each transaction made with Sound Community Bank's branded credit cards. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' credit card. Certain expenses and rebates directly related to the credit card interchange contract are recorded net of the interchange income. Net loss on OREO and repossessed assets We record a gain or loss from the sale of other real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed of trust. When the Bank finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, we adjust the transaction price and related gain or loss on sale if a significant financing component is present. The Company incurred expenses on our OREO properties of $ 5,000 and $ 35,000 for the years ended December 31, 2020 and 2019, respectively, included in noninterest expense on the Consolidated Statements of Income. Note 21— Subsequent Events On January 28, 2021, the Company declared on Company common stock a quarterly cash dividend of $ 0.17 per common share and a special cash dividend of $ 0.10 per share, payable on February 24, 2021 to stockholders of record at the close of business February 10, 2021. 108 Table of Conten t s Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.