What changed in this filing

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Item 1. Financial Statements

2021-05-13 compared with 2020-11-09 · 205 added, 385 removed, 667 unchanged (47% of the section changed)

4 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

2021 December 31,

17 unchanged sentences

Total deposits 816,693 747,981

Borrowings 7,500 7,500

Accrued interest payable 133 369

7 unchanged sentences

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, 2,595,289 and 2,567,389 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

Common stock, $ 0.01 par value, 40,000,000 shares authorized, 2,609,806 and 2,592,587 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively

Additional paid-in capital 27,447 27,106

9 unchanged sentences

(In thousands, except share and per share amounts)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

INTEREST INCOME

1 unchanged sentence

Interest and dividends on investments, cash and cash equivalents

86 381 400 1,219

Total interest income 7,999 8,646

2 unchanged sentences

Borrowings — 59

Subordinated notes 168 —

Total interest expense 1,463 1,918

Net interest income 6,536 6,728

PROVISION (RECAPTURE) FOR LOAN LOSSES 275 250 925 ( 150 )

Net interest income after provision (recapture) for loan losses 6,385 6,396 19,360 20,292

PROVISION FOR LOAN LOSSES — 250

Net interest income after provision for loan losses 6,536 6,478

NONINTEREST INCOME

11 unchanged sentences

Data processing 779 570

Net loss on OREO and repossessed assets — 1 — 11

Net gain on OREO and repossessed assets ( 16 ) —

Total noninterest expense 6,162 5,946

13 unchanged sentences

(In thousands)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Net income $ 2,451 $ 981

Available for sale securities:

Unrealized holding (losses) gains arising during the period ( 4 ) ( 3 ) 106 90

Income tax expense (benefit) related to unrealized gains/losses 1 1 ( 22 ) ( 19 )

Other comprehensive (loss) income, net of tax ( 3 ) ( 2 ) 84 71

Unrealized holding losses arising during the period ( 59 ) ( 23 )

Income tax expense related to unrealized gains/losses 12 4

Other comprehensive loss, net of tax ( 47 ) ( 19 )

Comprehensive income $ 2,404 $ 962

3 unchanged sentences

Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)

For the Three Months Ended March 31, 2021 and 2020 (unaudited)

(In thousands, except share and per share amounts)

7 unchanged sentences

Stockholders’

Balance, at June 30, 2020 2,593,152 $ 25 $ 26,894 $ ( 170 ) $ 53,224 $ 262 $ 80,235

Net income 2,335 2,335

Other comprehensive loss, net of tax ( 3 ) ( 3 )

Share-based compensation 52 52

Cash dividends paid on common stock ($ 0.15 per share)

( 389 ) ( 389 )

Common stock surrendered ( 2,842 ) —

Common stock options exercised 4,979 23 23

Allocation of ESOP shares 49 28 — 77

Balance, at September 30, 2020 2,595,289 $ 25 $ 27,018 $ ( 142 ) $ 55,170 $ 259 $ 82,330

Balance, at December 31, 2020 2,592,587 $ 25 $ 27,106 $ ( 113 ) $ 58,226 $ 240 $ 85,484

Net income 2,451 2,451

Other comprehensive income, net of tax 84 84

Other comprehensive loss, net of tax ( 47 ) ( 47 )

Share-based compensation 166 166

6 unchanged sentences

Allocation of ESOP shares 72 28 — 100

Balance, at September 30, 2020 2,595,289 $ 25 $ 27,018 $ ( 142 ) $ 55,170 $ 259 $ 82,330

Shares Common

Stock Additional Paid

-in Capital Unearned

ESOP Shares Retained

Earnings Accumulated

Comprehensive

Income, net of tax Total

Stockholders’

Balance, at June 30, 2019 2,563,488 $ 25 $ 25,926 $ ( 283 ) $ 48,710 $ 187 $ 74,565

Net income 1,548 1,548

Other comprehensive loss, net of tax ( 2 ) ( 2 )

Share-based compensation 72 72

Cash dividends paid on common stock ($ 0.14 per share)

( 359 ) ( 359 )

Common stock surrendered ( 1,032 ) —

Common stock options exercised 5,490 93 93

Allocation of ESOP shares 71 28 99

Balance, at September 30, 2019 2,567,946 $ 25 $ 26,162 $ ( 255 ) $ 49,899 $ 185 $ 76,016

Balance, at March 31, 2021 2,609,806 $ 26 $ 27,447 $ ( 85 ) $ 59,975 $ 193 $ 87,556

Balance, at December 31, 2019 2,567,389 $ 25 $ 26,343 $ ( 227 ) $ 51,410 $ 175 $ 77,726

Net income 981 981

Other comprehensive income, net of tax 71 71

Other comprehensive loss, net of tax ( 19 ) ( 19 )

Share-based compensation 185 185

Restricted stock awards issued 13,600 —

Cash dividends paid on common stock ($ 0.35 per share)

1 unchanged sentence

Common stock surrendered —

Restricted stock awards issued 15,925 —

Restricted shares forfeited ( 180 ) —

Common stock options exercised 10,685 182 182

Allocation of ESOP shares 66 29 — 95

Balance, at September 30, 2019 2,567,946 $ 25 $ 26,162 $ ( 255 ) $ 49,899 $ 185 $ 76,016

Balance, at March 31, 2020 2,591,494 $ 25 $ 26,776 $ ( 198 ) $ 51,488 $ 156 $ 78,247

See notes to condensed consolidated financial statements

3 unchanged sentences

(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

2 unchanged sentences

Amortization of net discounts on investments 56 22

Provision (recapture) for loan losses 925 ( 150 )

Provision for loan losses — 250

Depreciation and amortization 176 245

2 unchanged sentences

Right of use assets amortization 247 257

Change in lease liabilities ( 240 ) ( 244 )

Increase in cash surrender value of BOLI ( 74 ) ( 15 )

3 unchanged sentences

Originations of loans held-for-sale ( 67,401 ) ( 23,721 )

Net loss on OREO and repossessed assets — 11

Net gain on OREO and repossessed assets ( 16 ) —

Change in operating assets and liabilities:

2 unchanged sentences

Accrued interest payable ( 236 ) ( 2 )

Change in lease liabilities ( 662 ) ( 656 )

Other liabilities 4,353 ( 878 )

Net cash (used in) provided by operating activities ( 9,587 ) 7,223

Net cash provided by (used in) operating activities 7,780 ( 3,281 )

CASH FLOWS FROM INVESTING ACTIVITIES:

4 unchanged sentences

Purchases of premises and equipment, net ( 29 ) ( 355 )

Net cash (used in) provided by investing activities ( 73,019 ) 3,244

Proceeds from sale of OREO and other repossessed assets 35 —

Net cash used in investing activities ( 54 ) ( 7,702 )

CASH FLOWS FROM FINANCING ACTIVITIES:

2 unchanged sentences

Repayment of borrowings — ( 15,650 )

Proceeds from subordinated debt, net 11,676 —

FHLB stock (purchased) redeemed ( 4 ) 2,776

FHLB stock purchased ( 175 ) ( 5 )

Allocation of ESOP shares 100 95

1 unchanged sentence

Proceeds from common stock option exercises 104 182

Net cash provided by (used in) financing activities 142,598 ( 13,404 )

Net cash provided by financing activities 68,039 17,209

Net change in cash and cash equivalents 75,765 6,226

4 unchanged sentences

Interest paid on deposits and borrowings 1,699 1,920

Loans transferred from loans held-for-portfolio to OREO and repossessed assets — 494

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

Right of use assets — 8,136

Lease Liabilities — 8,408

See notes to condensed consolidated financial statements

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References to “we,” “us,” and “our” or the “Company” refers to Sound Financial Bancorp and its wholly-owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc., unless the context otherwise requires.

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”).

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.

GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”).

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.

Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.

Certain information and disclosures normally included in financial statements prepared in accordance with U.S.

GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.

These unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 30, 2021 (“2020 Form 10-K”).

1 unchanged sentence

Certain amounts in the prior period’s consolidated financial statements have been reclassified to conform to the current presentation.

These classifications do not have an impact on previously reported consolidated net income, retained earnings, stockholders’ equity or earnings per share.

These classifications do not have an impact on previously reported consolidated net income, stockholders’ equity or earnings per share.

Note 2 – Accounting Pronouncements Recently Issued or Adopted

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which provides relief from certain accounting and financial reporting requirements under U.S.

Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for troubled debt restructurings (TDRs) under ASC 310-40 for loan modifications related to the novel coronavirus disease of 2019 (“COVID-19”) pandemic.

The Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), signed into law on March 27, 2020, provides relief from certain accounting and financial reporting requirements under U.S.

Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for troubled debt restructurings (“TDRs”) under Accounting Standards Codification ("ASC") 310-40 for loan modifications related to the novel coronavirus disease 2019 ("COVID-19") pandemic.

In addition, on April 7, 2020, a group of banking agencies issued an interagency statement (“Interagency Statement”) for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs.

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The Company adopted this guidance effective March 27, 2020.

On December 27, 2020, the Consolidated Appropriations Act 2021 (“CAA 2021”) was signed into law.

Among other purposes, CAA 2021 provides coronavirus emergency response and relief, including extending relief offered under the CARES Act related to restructured loans as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.

In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-08, “ Receivables – Nonrefundable Fees and Other Costs ” (“ASU 2020-08”).

1 unchanged sentence

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.

In March 2020, the FASB issued ASU No.

The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements.

On March 2020, the FASB issued ASU No.

2020-04, " Reference Rate Reform" ("Topic 848").

5 unchanged sentences

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 are effective for all entities as of March 12, 2020 through December 31, 2022.

In January 2021, ASU 2021-01 updated amendments in the new ASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification.

The amendments in this ASU have differing effective dates, beginning with interim period including and subsequent to March 12, 2020 through December 31, 2022.

The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

1 unchanged sentence

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (ASU 2019-12).

Simplifying the Accounting for Income Taxes.

This ASU simplifies the accounting for income taxes by removing the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items, removing the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and removing the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements.

The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU No.

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This ASU is effective for fiscal years ending after December 15, 2020.

The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement:

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.

This ASU modifies the disclosure requirements on fair value measurements by removing the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements.

This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

The ASU adds disclosure requirements for Level 3 measurements, including changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

Amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The adoption of ASU 2018-13 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 2017-08 is intended to amend the amortization period for certain purchased callable debt securities held at a premium.

Under ASU 2017-08, the FASB is shortening the amortization period for the premium to the earliest call date.

Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument.

ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

The adoption of ASU No.

2017-08 on January 1, 2019 did not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU No.

2017-04, Intangibles - Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment , or ASU 2017-04, which eliminates Step 2 from the goodwill impairment test.

ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.

An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

Adoption of ASU 2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017.

The Company’s adoption of ASU 2017-04 did not have a material impact on its consolidated financial statements.

2018-14 did not have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU No.

5 unchanged sentences

The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted.

The FASB issued ASU 2019-10, Financial Instruments- Credit Losses (Topic 326) , delaying implementation of ASU 2016-13 for SEC smaller reporting company filers until fiscal year beginning after 2022.

The Bank meets the requirements of a smaller reporting company and delayed implementation of ASU 2016-13.

In February 2016, FASB issued ASU No.

2016-02, Leases (Topic 842) .

2016-02 requires lessees to recognize, on the balance sheet, the assets and liabilities arising from operating leases.

A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term.

A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease.

For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income.

For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis.

In July 2018, the FASB issued ASU No.

2018-11, Leases (Topic 842), Targeted Improvements .

This ASU amended the new leases standard to give entities another option for transition and to provide lessors with a practical expedient.

The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption.

The practical expedient provides lessors with an option to not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components.

The Company adopted these ASUs on January 1, 2019.

In March 2019, FASB issued ASU 2019-01, Leases (Topic 842), Codification Improvements .

The amendments in this ASU include determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, requiring cash received from lessors from sales-type and direct financing leases to be presented in the cash flow statement within investing activities, and clarifying interim disclosure requirements.

The effective date and transition requirements for the first and second items of this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 and early

adoption is permitted.

We have adopted the third item of this ASU and provided the required interim disclosures in this report.

See Note 12- Leases for further information.

The new guidance may result in an increase in the allowance for loan losses;

however, the Company is still in the process of determining the magnitude of the change and its impact on the Company's consolidated financial statements.

The FASB issued ASU No.

2019-10, Financial Instruments - Credit Losses (Topic 326) , delaying implementation of ASU No.

2016-13 for SEC smaller reporting company filers until fiscal year beginning after December 15, 2022.

The Bank meets the requirements of a smaller reporting company and will delay implementation of ASU No.

Note 3 – Investments

1 unchanged sentence

Losses Estimated

September 30, 2020

Treasury bills $ 1,976 $ — $ — $ 1,976

March 31, 2021

Municipal bonds $ 5,192 $ 187 $ ( 20 ) $ 5,359

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Total $ 9,915 $ 309 $ ( 6 ) $ 10,218

The amortized cost and fair value of AFS securities at September 30, 2020, by contractual maturity, are shown below (in thousands).

The amortized cost and fair value of AFS securities at March 31, 2021, by contractual maturity, are shown below (in thousands).

Expected maturities of AFS securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately.

September 30, 2020

March 31, 2021

Due within one year $ 1,182 $ 1,188

4 unchanged sentences

Total $ 8,834 $ 9,078

There were no pledged securities at September 30, 2020 or December 31, 2019.

There were no sales of AFS securities during the three and nine months ended September 30, 2020 or 2019.

There were no pledged securities at March 31, 2021 or December 31, 2020.

There were no sales of AFS securities during the three months ended March 31, 2021 or 2020.

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

September 30, 2020

March 31, 2021

Less Than 12 Months 12 Months or Longer Total

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Value Unrealized

Treasury bills $ 1,033 $ — $ — $ — $ 1,033 $ —

Municipal bonds $ 2,076 $ ( 20 ) $ — $ — $ 2,076 $ ( 20 )

Agency mortgage-backed securities 552 ( 13 ) — — 552 ( 13 )

$ 2,152 $ ( 3 ) $ — $ — $ 2,152 $ ( 3 )

Total $ 2,628 $ ( 33 ) $ — $ — $ 2,628 $ ( 33 )

December 31, 2020

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Value Unrealized

Municipal bonds $ 3,387 $ ( 8 ) $ — $ — $ 3,387 $ ( 8 )

Agency mortgage-backed securities $ 1,618 $ ( 6 ) $ — $ — $ 1,618 $ ( 6 )

Total $ 1,618 $ ( 6 ) $ — $ — $ 1,618 $ ( 6 )

There were no credit losses recognized in earnings during the three and nine months ended September 30, 2020 or 2019 relating to the Company’s securities.

At September 30, 2020, the securities portfolio consisted of 16 agency mortgage-backed securities, ten municipal bonds and three short-term treasury bills with a total portfolio fair value of $ 13.3 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 September 30, 2020, there were four 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 securities in an unrealized loss position for more than 12 months.

There were no credit losses recognized in earnings related to other than temporary impairments during the three months ended March 31, 2021 or 2020.

At March 31, 2021, the securities portfolio consisted of 12 agency mortgage-backed securities and ten municipal bonds with a total portfolio fair value of $ 9.1 million.

At December 31, 2020, the securities portfolio consisted of 16 agency mortgage-backed securities and ten municipal bonds with a fair value of $ 10.2 million.

At March 31, 2021, there were five securities in an unrealized loss position for less than 12 months, and there were no securities in an unrealized loss position for more than 12 months.

At December 31, 2020, there were six securities in an unrealized loss position for less than 12 months, and there were no securities in an unrealized loss position for more than 12 months.

The unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not related to the underlying credit of the issuers or the underlying collateral.

It is expected that these securities will not be settled at a price less than the amortized cost of each investment.

The unrealized losses on these investments are not considered other-than-temporary impairment ("OTTI") as of September 30, 2020, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis .

Additional deterioration in market and economic conditions related to the COVID-19 pandemic may, however, have an adverse impact on credit quality in the future and result in OTTI charges.

The unrealized losses on these investments are not considered other-than-temporary impairment ("OTTI") as of March 31, 2021, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis .

Deterioration in market and economic conditions related to the COVID-19 pandemic may, however, have an adverse impact on credit quality in the future and result in OTTI charges.

Note 4 – Loans

The composition of the loans-held-for portfolio at the dates indicated, excluding loans held-for-sale, was as follows (in thousands):

September 30,

2021 December 31,

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Total loans held-for-portfolio, net $ 608,442 $ 607,363

The Company was automatically authorized to participate in the SBA Paycheck Protection Program (“PPP”), as a qualified U.S.

Small Business Administration’s (“SBA”) lender.

As of September 30, 2020, the Bank had funded PPP loans totaling $ 74.8 million, which are included in commercial business loans above.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2020 (in thousands):

The Company was automatically authorized to participate in the U.S.

Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), as a qualified lender since the inception of the program.

As of March 31, 2021, the Bank had funded PPP loans totaling $ 113.9 million, $ 61.2 million of which remained outstanding and are included in commercial business loans above.

PPP loans are 100% guaranteed by the SBA

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of the dates indicated (in thousands):

March 31, 2021

Individually evaluated for impairment Allowance:

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Total $ 334 $ 5,601 $ 5,935 $ 5,630 $ 611,959 $ 617,589

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2019 (in thousands):

December 31, 2020

Individually evaluated for impairment Allowance:

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Total $ 378 $ 5,622 $ 6,000 $ 5,940 $ 609,558 $ 615,498

The following tables summarize the activity in the allowance for loan losses for the three and nine months ended September 30, 2020 (in thousands):

Three Months Ended September 30, 2020

Allowance Charge-offs Recoveries Provision (Recapture) Ending

One-to-four family $ 1,149 $ ( 20 ) $ 4 $ 37 $ 1,170

Home equity 154 ( 2 ) 7 ( 17 ) 142

Commercial and multifamily 1,991 — — 16 2,007

Construction and land 623 — — ( 43 ) 580

Manufactured homes 362 — 1 ( 33 ) 330

Floating homes 324 — — ( 31 ) 293

Other consumer 127 ( 4 ) 2 ( 10 ) 115

Commercial business 501 ( 306 ) — 68 263

Unallocated 800 — — 288 1,088

Total $ 6,031 $ ( 332 ) $ 14 $ 275 $ 5,988

Nine Months Ended September 30, 2020

The following tables summarize the activity in the allowance for loan losses for the periods indicated (in thousands):

Three Months Ended March 31, 2021

Allowance Charge-offs Recoveries Provision (Recapture) Ending

9 unchanged sentences

Total $ 6,000 $ ( 71 ) $ 6 $ — $ 5,935

The following tables summarize the activity in the allowance for loan losses for the three and nine months ended September 30, 2019 (in thousands):

Three Months Ended September 30, 2019

Three Months Ended March 31, 2020

Allowance Charge-offs Recoveries (Recapture) Provision Ending

9 unchanged sentences

Total $ 5,640 $ ( 6 ) $ 9 $ 250 $ 5,893

Nine Months Ended September 30, 2019

Allowance Charge-offs Recoveries Provision (Recapture) Ending

One-to-four family $ 1,314 $ — $ 3 $ ( 152 ) $ 1,165

Home equity 202 — 8 ( 33 ) 177

Commercial and multifamily 1,638 — — 15 1,653

Construction and land 431 — — 68 499

Manufactured homes 427 — — 68 495

Floating homes 265 — — ( 2 ) 263

Other consumer 112 ( 41 ) 23 16 110

Commercial business 356 — 1 ( 38 ) 319

Unallocated 1,029 — — ( 92 ) 937

Total $ 5,774 $ ( 41 ) $ 35 $ ( 150 ) $ 5,618

Credit Quality Indicators.

Federal regulations provide for the classification of lower quality loans as substandard, doubtful or loss.

An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged.

Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.

Assets classified as doubtful have all the weaknesses inherent in assets classified substandard with the added characteristic that the weaknesses make collection or liquidation of the assets in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without establishment of a specific loss reserve is not warranted.

When we classify problem loans as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address the risk specifically (if the loan is impaired) or we may allow the loss to be addressed in the general allowance (if the loan is not impaired).

General allowances represent loss reserves which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem loans.

When the Company classifies problem loans as a loss, we charge-off such assets in the period in which they are deemed uncollectible.

Assets that do not currently expose us to sufficient risk to warrant classification as substandard, doubtful or loss, but possess identified weaknesses, are classified as either watch or special mention assets.

Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Federal Deposit Insurance Corporation, the Bank’s federal regulator, and the Washington Department of Financial Institutions, the Bank’s state banking regulator, both of whom can order the establishment of additional loss allowances.

Pass rated loans are loans that are not otherwise classified or criticized.

The following table presents the internally assigned grades as of September 30, 2020, by type of loan (in thousands):

Federal regulations provide for the classification of lower quality loans and other assets (such as OREO and repossessed assets), debt and equity securities considered as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

"Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected.

Assets classified as "doubtful" have all of the weaknesses in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address specific impairments.

General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets.

When an insured institution classifies problem assets as a loss, it is required to charge off those assets in the period in which they are deemed uncollectible.

Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Federal Deposit Insurance Corporation (“FDIC”), the Bank's federal regulator, and, since our conversion to a Washington-chartered commercial bank, the Washington Department of Financial Institutions, the Bank's state banking regulator, which can order the establishment of additional loss allowances.

Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated as special mention.

The following tables present the internally assigned grades as of the dates indicated, by type of loan (in thousands):

March 31, 2021

four family Home

12 unchanged sentences

Total $ 129,995 $ 13,763 $ 251,459 $ 63,112 $ 20,781 $ 39,868 $ 14,942 $ 83,669 $ 617,589

The following table presents the internally assigned grades as of December 31, 2019, by type of loan (in thousands):

December 31, 2020

four family Home

14 unchanged sentences

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.

Loans are not placed on nonaccrual for short-term loan modifications made in response to the COVID-19 pandemic.

The following table presents the recorded investment in nonaccrual loans as of September 30, 2020, and December 31, 2019, by type of loan (in thousands):

September 30, 2020 December 31, 2019

Loans are placed on nonaccrual once the loan is 90 days past due or sooner if,

in management’s opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions.

The following table presents the recorded investment in nonaccrual loans as of the dates indicated, by type of loan (in thousands):

March 31, 2021 December 31, 2020

One-to-four family $ 1,507 $ 1,668

4 unchanged sentences

Floating homes 514 518

Other consumer — —

Commercial business — 260

Total $ 2,711 $ 2,884

The following table presents the aging of the recorded investment in past due loans as of September 30, 2020, by type of loan (in thousands):

The following tables present the aging of the recorded investment in past due loans as of the dates indicated, by type of loan (in thousands):

March 31, 2021

Past Due 60-89 Days

10 unchanged sentences

Total $ 5,102 $ 353 $ 2,243 $ — $ 7,698 $ 609,891 $ 617,589

The following table presents the aging of the recorded investment in past due loans as of December 31, 2019, by type of loan (in thousands):

December 31, 2020

Past Due 60-89 Days

12 unchanged sentences

Loans are considered nonperforming when they are placed on nonaccrual.

The following table presents the credit risk profile of our loan portfolio based on payment activity as of September 30, 2020, by type of loan (in thousands):

The following tables present the credit risk profile of our loan portfolio based on payment activity as of the dates indicated, by type of loan (in thousands):

March 31, 2021

equity Commercial

7 unchanged sentences

Total $ 129,995 $ 13,763 $ 251,459 $ 63,112 $ 20,781 $ 39,868 $ 14,942 $ 83,669 $ 617,589

The following table presents the credit risk profile of our loan portfolio based on payment activity as of December 31, 2019, by type of loan (in thousands):

December 31, 2020

equity Commercial

14 unchanged sentences

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 September 30, 2020 and December 31, 2019, by type of loan were as follows (in thousands):

September 30, 2020

Impaired loans at the dates indicated, by type of loan were as follows (in thousands):

March 31, 2021

Recorded Investment

29 unchanged sentences

Total $ 6,029 $ 4,121 $ 1,819 $ 5,940 $ 378

The following tables present the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2020 and 2019, respectively, by loan types (in thousands):

Three Months Ended September 30, 2020 Three Months Ended September 30, 2019

Investment Interest Income

Recognized Average

Investment Interest Income

One-to-four family $ 6,027 $ 69 $ 4,011 $ 65

Home equity 336 3 1,998 14

Commercial and multifamily 465 16 501 —

Construction and land 315 20 121 1

Manufactured homes 349 5 462 14

Floating homes 405 15 — —

Other consumer 127 — 150 2

Commercial business 1,076 12 694 —

Total $ 9,100 $ 140 $ 7,937 $ 96

Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019

The following table presents the average recorded investment and interest income recognized on impaired loans for the periods indicated, by loan types (in thousands):

Three Months Ended March 31,

Investment Interest Income

10 unchanged sentences

Total $ 5,800 $ 48 $ 11,073 $ 138

Forgone interest on nonaccrual loans was $ 62,000 and $ 126,000 for the three and nine months ended September 30, 2020, respectively, compared to $ 74,000 and $ 165,000 for the three and nine months ended September 30, 2019, respectively.

There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual or impaired at September 30, 2020 and December 31, 2019.

Forgone interest on nonaccrual loans was $ 40,000 and $ 62,000 for the three months ended March 31, 2021 and 2020, respectively.

There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual or impaired at March 31, 2021 and December 31, 2020.

Troubled debt restructurings.

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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 $ 5.6 million and $ 7.9 million at September 30, 2020 and December 31, 2019, respectively, and are included in impaired loans.

Loans classified as TDRs totaled $ 3.2 million at both March 31, 2021 and December 31, 2020, 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.

9 unchanged sentences

Any other type of modification, including the use of multiple categories above.

There was one loan totaling $ 146,000 modified as a TDR during the three months ended September 30, 2020 and four loans totaling $ 795,000 modified as TDRs during the nine months ended September 30, 2020.

One TDR loan totaling $ 161,000 was paid-off during the three months ended September 30, 2020 and two TDR loan totaling $ 2.9 million were paid-off during the nine months ended September 30, 2020.

There were four loans totaling $ 5.1 million modified as TDRs during the three and nine months ended September 30, 2019.

There were no TDR loans paid off during the three months ended September 30, 2019, and three TDR loans totaling $ 145,000 were paid-off during the nine months ended September 30, 2019.

There were no post-modification changes for the unpaid principal balance in loans, net of partial charge-offs, that were recorded as a result of the TDRs for the three and nine months ended September 30, 2020 and 2019.

There was one loan totaling $ 161,000 modified as a TDR for which there was a payment default within the first 12 months of modification during the nine months ended September 30, 2020.

During the nine months ended September 30, 2019, there was one loan totaling $ 97,000 modified as TDRs for which there was a payment default within the first 12 months of modification.

There were no loans modified as a TDR during the three months ended March 31, 2021 and two loans totaling $ 218,000 modified as TDRs during the three months ended March 31, 2020.

No TDR loans totaling were paid off during the three months ended March 31, 2021 and one TDR loan totaling $ 2.8 million was paid off during the three months ended March 31, 2020.

There were no post-modification changes for the unpaid principal balance in loans, net of partial charge-offs, that were recorded as a result of the TDRs for the three months ended March 31, 2021 and 2020.

There were no loans modified as a TDR for which there was a payment default within the first 12 months of modification and no charge-offs relating to TDRs during the three months ended March 31, 2021 and 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 accounted for as a TDR.

As of September 30, 2020, we have provided payment relief related to COVID-19 on 49 commercial loans totaling $ 37.4 million and 72 residential loans totaling $ 16.3 million, of which 12 commercial loans totaling $ 14.7 million and 25 residential loans totaling $ 4.7 million have resumed their normal loan payments or matured.

There were $ 34.3 million of loans still under payment relief at September 30, 2020.

Accordingly, the Company does not account for such loan modifications as TDRs.

Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.

See “Note 2 – Accounting Pronouncements Recently Issued or Adopted”.

The CARES Act, and the Interagency Statement provides that a short-term modification made to a loan in response to COVID-19 which meets certain criteria does not need to be placed on nonaccrual status or accounted for as a TDR pursuant to applicable accounting and regulatory guidance until the earlier of 60 days after the national emergency termination date or January 1, 2022.

The majority of these borrowers had resumed making payments as of March 31, 2021, and as of that date, only seven commercial loans totaling $ 9.1 million and 21 residential loans totaling $ 3.6 million, remained on deferral status under COVID-19 loan modification forbearance agreements.

We continue to monitor these loans through our normal credit risk

processes and any request for continuation of relief beyond the initial modification is reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

Note 5 – Fair Value Measurements

The Company determines the fair values of its financial instruments based on the requirements established in Accounting Standards Codification (“ASC”) 820, Fair Value Measurements , which provides a framework for measuring fair value in accordance with U.S.

The Company determines the fair values of its financial instruments based on the requirements established in ASC 820 , Fair Value Measurements (“ASC 820”), which provides a framework for measuring fair value in accordance with U.S.

GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

ASC 820 defines fair values for financial instruments as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.

The Company’s fair values for financial instruments at September 30, 2020 were determined based on these requirements.

The Company’s fair values for financial instruments at March 31, 2021 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.

4 unchanged sentences

The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from government sponsored enterprises.

At September 30, 2020 and December 31, 2019, loans held-for-sale were carried at cost, as no impairment was required.

At March 31, 2021 and December 31, 2020, 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.

12 unchanged sentences

The estimated fair value of these commitments is not significant.

The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether or not recognized or recorded at fair value as of September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020 Fair Value Measurements Using:

In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy.

In such cases, the lowest level of inputs that is significant to the measurement is used to determine the hierarchy for the entire asset or liability.

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the

transfer, which generally coincides with the Company’s quarterly valuation process.

There were no transfers between levels during the three months ended March 31, 2021 and 2020.

March 31, 2021 Fair Value Measurements Using:

Value Estimated

10 unchanged sentences

Time deposits 191,752 194,056 — 194,056 —

241,038 245,062 — 245,062 —

Borrowings 7,500 7,500 — 7,500 —

Subordinated debt 11,676 11,676 — 11,676 —

Subordinated notes $ 11,602 $ 11,602 $ — $ 11,602 $ —

December 31, 2020 Fair Value Measurements Using:

6 unchanged sentences

Loans held-for-portfolio, net 607,363 608,575 — — 608,575

614,247 622,147 — — 622,147

Mortgage servicing rights 3,780 3,780 — — 3,780

3 unchanged sentences

Time deposits 235,474 238,629 — 238,629 —

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 as of September 30, 2020 and December 31, 2019 (in thousands):

Fair Value at September 30, 2020

Subordinated notes 11,592 11,592 — 11,592 —

The following tables present the balance of assets measured at fair value on a recurring basis as of the dates indicated (in thousands):

Fair Value at March 31, 2021

Description Total Level 1 Level 2 Level 3

Treasury bills $ 1,976 $ 1,976 $ — $ —

Municipal bonds 5,359 — 5,359 —

6 unchanged sentences

Mortgage servicing rights 3,780 — — 3,780

The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019:

September 30, 2020

March 31, 2021

Financial Instrument Valuation Technique Unobservable Input(s) Range

10 unchanged sentences

An increase in the weighted-average life assumptions will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted-average life will result in an increase of the constant prepayment rate.

There were no assets or liabilities (excluding mortgage servicing rights) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine months ended September 30, 2020 and September 30, 2019.

Mortgage servicing rights are measured at fair value using a significant unobservable input (Level 3) on a recurring basis - additional information is included in “Note 6—Mortgage Servicing Rights.”

The following tables present the balance of assets measured at fair value on a nonrecurring basis at the dates indicated (in thousands):

Fair Value at September 30, 2020

Fair Value at March 31, 2021

Total Level 1 Level 2 Level 3

5 unchanged sentences

Impaired loans 5,940 — — 5,940

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at September 30, 2020 and December 31, 2019.

The following tables provide a description of the valuation technique, observable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at September 30, 2020 and December 31, 2019:

September 30, 2020

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at March 31, 2021 and December 31, 2020.

March 31, 2021

Instrument Valuation Technique(s) Unobservable Input(s) Range (Weighted Average)

11 unchanged sentences

Note 6 – Mortgage Servicing Rights

The Company’s mortgage servicing rights portfolio totaled $ 444.3 million at September 30, 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 September 30, 2020 and December 31, 2019 were $ 433.2 million and $ 363.3 million, respectively.

The unpaid principal balance of loans serviced for other financial institutions at September 30, 2020 and December 31, 2019, totaled $ 11.1 million and $ 14.0 million, respectively.

The Company’s mortgage servicing rights portfolio totaled $ 509.8 million at March 31, 2021 compared to $ 488.7 million at December 31, 2020.

Of this total balance, the unpaid principal balance of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at March 31, 2021 and December 31, 2020 were $ 502.8 million and $ 481.6 million, respectively.

The unpaid principal balance of loans serviced for other financial institutions at March 31, 2021 and December 31, 2020, totaled $ 7.0 million and $ 7.1 million, respectively.

Loans serviced for others are not included in the Company’s financial statements as they are not assets of the Company.

A summary of the change in the balance of mortgage servicing assets during the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

A summary of the change in the balance of mortgage servicing assets during the periods indicated were as follows (in thousands):

Three Months Ended March 31,

Beginning balance, at fair value $ 3,780 $ 3,239

6 unchanged sentences

The key economic assumptions used in determining the fair value of mortgage servicing rights at the dates indicated are as follows:

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Prepayment speed (Public Securities Association “PSA” model) 224 % 247 %

2 unchanged sentences

The amount of contractually specified servicing, late and ancillary fees earned on the mortgage servicing rights are included in

mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $ 260,000 and $ 739,000 for the three and nine months ended September 30, 2020, respectively, and $ 259,000 and $ 756,000 for the three and nine months ended September 30, 2019, respectively.

mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $ 312,000 and $ 244,000 for the three months ended March 31, 2021 and 2020 respectively.

Note 7 – Commitments and Contingencies

5 unchanged sentences

The terms of the agreement call for a blanket pledge of a portion of the Company’s mortgage and commercial and multifamily loan portfolio based on the outstanding balance.

At September 30, 2020 and December 31, 2019, the amount available to borrow under this credit facility was $ 392.3 million and $ 321.9 million, respectively, subject to eligible pledged collateral.

At September 30, 2020, the credit facility was collateralized as follows:

At March 31, 2021 and December 31, 2020, the amount available to borrow under this credit facility was $ 387.7 million and $ 390.5 million, respectively, subject to eligible pledged collateral.

At March 31, 2021, the credit facility was collateralized as follows:

one-to-four family mortgage loans with an advance equivalent of $ 97.9 million, commercial and multifamily mortgage loans with an advance equivalent of $ 126.2 million and home equity loans with an advance equivalent of $ 2.4 million.

1 unchanged sentence

one-to-four family mortgage loans with an advance equivalent of $ 103.6 million, commercial and multifamily mortgage loans with an advance equivalent of $ 128.9 million and home equity loans with an advance equivalent of $ 2.8 million.

The Company had outstanding borrowings under this arrangement of $ 7.5 million at both September 30, 2020 and December 31, 2019.

The weighted-average interest rate of our borrowings was 3.05 % at both September 30, 2020 and December 31, 2019.

Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $ 20.6 million and $ 19.1 million at September 30, 2020 and December 31, 2019, respectively, to secure public deposits.

The remaining amount available to borrow as of September 30, 2020 and December 31, 2019, was $ 198.6 million and $ 217.8 million, respectively.

The Company had no outstanding borrowings under this arrangement at both March 31, 2021 and December 31, 2020.

The weighted-average interest rate of the Company’s borrowings under this agreement was zero at March 31, 2021 and 3.10 % at December 31, 2020.

Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $ 21.6 million at both March 31, 2021 and December 31, 2020, to secure public deposits.

The remaining amount available to borrow as of March 31, 2021 and December 31, 2020, was $ 204.8 million and $ 213.7 million, respectively.

As a member of the FHLB, the Company is required to maintain a minimum level of investment in FHLB of Des Moines stock based on specific percentages of its outstanding FHLB advances.

At September 30, 2020 and December 31, 2019, the Company had an investment of $ 1.2 million in FHLB of Des Moines stock.

At March 31, 2021 and December 31, 2020, the Company had an investment of $ 1.1 million and $ 877,000 , 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 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 $ 29.4 million and $ 41.7 million and no outstanding borrowings under these programs at September 30, 2020 and December 31, 2019, respectively.

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 $ 23.7 million and $ 23.6 million and no outstanding borrowings under these programs at both March 31, 2021 and December 31, 2020.

The Company has access to an unsecured Fed Funds line of credit from Pacific Coast Banker’s Bank.

The line has a 1 year term maturing on June 30, 2021 and is renewable annually.

As of September 30, 2020, the amount available under this line of credit was $ 10.0 million.

There was no balance on this line of credit as of September 30, 2020 and December 31, 2019, respectively.

The line has a one year term maturing on June 30, 2021 and is renewable annually.

As of March 31, 2021, the amount available under this line of credit was $ 10.0 million.

There was no balance on this line of credit as of March 31, 2021 and December 31, 2020, respectively.

The Company has access to an unsecured Fed Funds line of credit from The Independent Bank.

As of September 30, 2020, the amount available under this line of credit was $ 10.0 million.

As of March 31, 2021, the amount available under this line of credit was $ 10.0 million.

The agreement may be terminated by either party.

There was no balance on this line of credit as of September 30, 2020 and December 31, 2019, respectively.

The Company completed a private placement of $ 12.0 million in aggregate principal amount of 5.25 % Fixed-to-Floating Rate Subordinated Notes due 2030 resulting in net proceeds, after placement fees and offering expenses, of approximately $ 11.7 million during the quarter ended September 30, 2020.

The Company contributed $ 5.5 million of the net proceeds from the sale of the Notes to the Bank and intends to use the remaining net proceeds from the sale of the notes for general corporate purposes, including stock repurchases and to pay dividends on Company common stock.

There was no balance on this line of credit as of both March 31, 2021 and December 31, 2020.

In September 2020, the Company issued $ 12.0 million of fixed to floating rate subordinated notes that mature in 2030.

The subordinated notes have an initial fixed interest rate of 5.25 % to, but excluding, October 1, 2025, payable semi-annually in arrears.

From, and including, October 1, 2025, the interest rate on the subordinated notes will reset quarterly to a floating rate per annum equal to a benchmark rate, which is expected to be the then-current three-month term Secured Overnight Financing Rate, or SOFR, plus 513 basis points, payable quarterly in arrears.

The subordinated notes mature on May 15, Prior to October 1, 2025, the Company may redeem these notes, in whole but not in part, only under certain limited circumstances set forth in the notes and are redeemable by the Company in whole or in part beginning with the interest payment date of October 1, 2025.

As of March 31, 2021, the balance of the subordinated notes was $ 11.6 million.

Note 9 – Earnings Per Common Share

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards.

Unvested share-based awards containing non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share 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.

Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards.

The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company's stock for the period.

The following table summarizes the calculation of earnings per share for the periods indicated (in thousands, except per share data):

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Net income available to common shareholders $ 2,451 $ 981

4 unchanged sentences

Earnings per share, diluted $ 0.93 $ 0.38

There were 19,281 anti-dilutive securities at September 30, 2020 and no anti-dilutive securities at September 30, 2019.

There were 2,793 anti-dilutive securities at March 31, 2021 and 6,809 anti-dilutive securities at March 31, 2020.

Note 10 – Stock-based Compensation

3 unchanged sentences

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.

provided, however, all awards outstanding under the 2008 Plan

remain outstanding in accordance with their terms.

Under the 2013 Plan, 181,750 shares of common stock were approved for awards for stock options and stock appreciation rights and 116,700 shares of common stock were approved for awards for restricted stock and restricted stock units.

As of September 30, 2020, on an adjusted basis, awards for stock options totaling 261,019 shares and awards for restricted stock totaling 134,148 shares of Company common stock have been granted, net of any forfeitures, to participants in the 2013 Plan and the 2008 Plan.

Share-based compensation expense was $ 52,000 and $ 283,000 for the three and nine months ended September 30, 2020, respectively, and was $ 72,000 and $ 159,000 or the three and nine months ended September 30, 2019, respectively.

As of March 31, 2021, on an adjusted basis, awards for stock options totaling 272,124 shares and awards for restricted stock totaling 142,621 shares of Company common stock have been granted, net of any forfeitures, to participants in the 2013 Plan and the 2008 Plan.

Share-based compensation expense was $ 166,000 and $ 185,000 for the three months ended March 31, 2021 and March 31, 2020, respectively.

Stock Option Awards

4 unchanged sentences

All of the options granted under the 2008 Plan and the 2013 Plan are exercisable for a period of 10 years from the date of grant, subject to vesting.

The following is a summary of the Company’s stock option award activity during the nine months ended September 30, 2020:

The following is a summary of the Company’s stock option award activity during the three months ended March 31, 2021:

Shares Weighted-

7 unchanged sentences

Expired ( 70 ) 34.29

Outstanding at September 30, 2020 101,134 22.02 4.97 873,423

Outstanding at March 31, 2021 100,687 23.57 5.21 1,818,387

Exercisable 81,944 21.26 4.33 1,669,256

1 unchanged sentence

18,743 $ 33.67 9.07 $ 149,131

As of September 30, 2020, there was $ 82,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans.

As of March 31, 2021, there was $ 113,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans.

The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 3.03 years.

The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model.

The fair value of options granted for the nine months ended September 30, 2020 and 2019 were determined using the following weighted-average assumptions as of the grant date.

September 30, 2020 September 30, 2019

The fair value of options granted for the three months ended March 31, 2021 were determined using the following weighted-average assumptions as of the grant date.

March 31, 2021

Annual dividend yield 1.60 %

1 unchanged sentence

Risk-free interest rate 0.60 %

Expected term 6.50 years 6.50 years

Expected term 6.50 years

Weighted-average grant date fair value per option granted $ 5.64

1 unchanged sentence

The fair value of the restricted stock awards is equal to the fair value of the Company's stock at the date of grant.

expense is recognized over the vesting period that the awards are based.

The restricted stock awards granted under the 2008

Plan vest in 20 % annual increments commencing one year from the grant date.

The restricted stock awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary date of each of the grant date in equal annual installments over periods of one -to- four years subject to the continued service of the participant with the Company.

The following is a summary of the Company’s non-vested restricted stock award activity during the nine months ended September 30, 2020:

Compensation expense is recognized over the vesting period that the awards are based.

The restricted stock awards granted under the 2008 Plan vest in 20 % annual increments commencing one year from the grant date.

The restricted stock awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the

anniversary date of each of the grant date in equal annual installments over periods of one -to- four years subject to the continued service of the participant with the Company.

The following is a summary of the Company’s non-vested restricted stock award activity during the period indicated:

Shares Weighted-Average

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Forfeited ( 1,470 ) 35.36

Non-Vested at September 30, 2020 17,384 $ 35.03 $ 29.63

Non-Vested at March 31, 2021 18,050 $ 34.00 $ 41.63

Expected to vest assuming a 0 % forfeiture rate over the vesting term

18,050 $ 34.00 $ 41.63

As of September 30, 2020, there was $ 490,000 of unrecognized compensation cost related to non-vested restricted stock granted under the Plans.

As of March 31, 2021, there was $ 576,000 of unrecognized compensation cost related to non-vested restricted stock granted under the Plans.

The cost is expected to be recognized over the weighted-average vesting period of 2.90 years.

The total fair value of shares vested for the nine months ended September 30, 2020 and 2019 was $ 236,000 and $ 365,000 , respectively.

The total fair value of shares vested for the three months ended March 31, 2021 and 2020 was $ 264,000 and $ 236,000 , respectively.

Employee Stock Ownership Plan

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The interest rate on the loan is fixed at 2.25 % per annum.

As of September 30, 2020, the remaining balance of the ESOP loan was $ 126,000 .

As of March 31, 2021, the remaining balance of the ESOP loan was $ 123,000 .

Neither the loan balance nor the related interest expense is reflected on the condensed consolidated financial statements.

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.

The fair value of the 140,679 shares held by the ESOP trust was $ 4.2 million at September 30, 2020.

ESOP compensation expense included in salaries and benefits was $ 126,000 and $ 474,000 for the three and nine months ended September 30, 2020, respectively, and was $ 168,000 and $ 504,000 for the three and nine months ended September 30, 2019, respectively.

Note 11 – 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 three and nine months ended September 30, 2020 and 2019 (in thousands).

Items outside of the scope of ASC 606 are noted as such.

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Noninterest income:

Service charges and fee income

Account maintenance fees $ 74 $ 48 $ 209 $ 143

Transaction-based and overdraft service charges 74 118 235 338

Debit/ATM interchange fees 270 264 742 728

Credit card interchange fees 5 7 18 21

Loan fees (a) 72 59 183 163

Other fees (a) 15 16 46 44

Total service charges and fee income 510 512 1,433 1,437

Earnings on cash surrender value of bank-owned life insurance (a) 102 81 207 267

Mortgage servicing income (a) 260 259 739 756

Fair value adjustment on mortgage servicing rights (a) ( 623 ) ( 90 ) ( 1,423 ) ( 576 )

Net gain on sale of loans (a) 1,819 305 3,399 1,000

Total noninterest income $ 2,068 $ 1,067 $ 4,355 $ 2,884

(a) Not within scope of Topic 606

Account maintenance fees and transaction-based and overdraft service charges

The Company earns fees from its customers for account maintenance, transaction-based and overdraft services.

Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis.

The performance obligation is satisfied and fees are recognized on a monthly basis as the service period is completed.

Transaction-based fees and overdraft service fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds, overdraft, and wire services.

The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

Debit/ATM and credit card interchange income

Debit/ATM interchange income represent fees earned when a debit card issued by the Bank is used for a transaction.

The Bank earns interchange fees from debit cardholder transactions through the MasterCard payment network.

Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' account.

Certain expenses directly associated with the debit card are recorded on a net basis with the interchange income.

The Company utilizes a third-party agency relationship to brand credit cards with fees for originating new accounts paid by the issuing bank.

Credit card interchange income represents fees earned when a credit card is issued by the third-party agent.

Similar to debit card interchange fees, the Bank earns an interchange fee for each transaction made with Sound Community Bank's branded credit cards.

The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' credit card.

Certain expenses and rebates directly related to the credit card interchange contract are recorded net of the interchange income.

Net loss on OREO and repossessed assets

We record a gain or loss from the sale of other real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed of trust.

When the Bank finances the sale of other real estate owned to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable.

Once these criteria are met, the other real estate owned asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

In determining the gain or loss on sale, we adjust the transaction price and related gain or loss on sale if a significant financing component is present.

Company incurred no expenses on OREO properties for the three and nine months ended September 30, 2020, compared to $ 1,000 and $ 11,000 for the three and nine months ended 2019, respectively, which are included in Noninterest Expense on the Company’s Condensed Consolidated Statements of Income.

At March 31, 2021, the ESOP held and is committed to release 11,340 shares of the Company’s common stock to participants during 2021.

The fair value of the 149,182 shares held by the ESOP trust was $ 6.2 million at March 31, 2021.

ESOP compensation expense included in salaries and benefits was $ 170,000 and $ 174,000 for the three months ended March 31, 2021 and March 31, 2020, respectively.

Note 11 – Leases

We have operating leases for branch locations, a loan production office, our corporate office and certain equipment.

We have operating leases for branch locations, a loan production office, our corporate office and in the past, for certain equipment.

The lease term for our leases begins on the date we become legally obligated for the rent payments or we take possession of the building, whichever is earlier.

Generally, our real estate leases have initial terms of three to 10 years and typically include one renewal option.

Our leases have remaining lease terms of 1 year to 10 years.

Generally, our real estate leases have initial terms of three to ten years and typically include one renewal option.

Our leases have remaining lease terms of one year to eight years .

The operating leases generally contain renewal options and require us to pay property taxes and operating expenses for the properties.

The following table represents the lease right-of-use assets and lease liabilities recorded on the condensed consolidated balance sheet at September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020 December 31, 2019

The following table presents the lease right-of-use assets and lease liabilities recorded on the condensed consolidated balance sheet at the dates indicated (in thousands):

March 31, 2021 December 31, 2020

Operating lease right-of-use assets $ 6,475 $ 6,722

Operating lease liabilities $ 6,894 $ 7,134

The following table represents the components of lease expense (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

The following table presents the components of lease expense for the periods indicated (in thousands):

Three Months Ended March 31,

Operating lease expense

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Net lease expense $ 270 $ 309

The following table represents the maturity of lease liabilities:

September 30, 2020

Office leases Equipment leases

The following table presents the maturity of lease liabilities at the date indicated:

March 31, 2021

Office Leases

Operating Lease Commitments

Remainder of 2021 $ 784

2021 1,042 20

Thereafter 3,012

2 unchanged sentences

Present value of lease liabilities $ 6,894

Lease term and discount rate by lease type consist of the following:

September 30, 2020

Weighted-average remaining lease term (in years):

Office leases 8.11

Equipment leases 1.67

Lease term and discount rate by lease type consist of the following at the dates indicated:

March 31, 2021 March 31, 2020

Weighted-average remaining lease term:

Office leases 7.67 years 8.53 years

Equipment leases — 0.17 years

Weighted-average discount rate (annualized):

1 unchanged sentence

Equipment leases — % 1.62 %

Supplemental cash flow information related to leases was as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Supplemental cash flow information related to leases was as follows for the periods indicated (in thousands):

Three Months Ended March 31,

Cash paid for amounts included in the measurement of lease liabilities for operating leases:

2 unchanged sentences

Equipment leases $ — $ 5

Note 13 – Subsequent Event

On October 27, 2020, the Board of Directors of the Company declared a quarterly cash dividend of $ 0.15 per common share, payable on November 24, 2020 to stockholders of record at the close of business on November 10, 2020.

On October 27, 2020, the Company announced that its Board of Directors authorized a stock repurchase program.

Under this repurchase program, the Company may repurchase its outstanding shares in the open market in an amount up to $ 2.0 million, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on October 28, 2020, continuing until the earlier of the completion of the repurchase or the next six months , depending upon market conditions.

The Company’s Board of Directors also authorized management to enter into a trading plan with a registered broker-dealer in

accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to facilitate repurchases of its common

stock pursuant to the above mentioned stock repurchase program.

Note 12 – Subsequent Events

On April 27, 2021, the Board of Directors of the Company declared a quarterly cash dividend of $ 0.17 per common share, payable on May 24, 2021 to stockholders of record at the close of business on May 10, 2021.

On April 28, 2021, the Board of Directors adopted a new stock repurchase program to be effective on April 29, 2021, immediately following the expiration of the Company’s current stock repurchase program.

Under this new repurchase program, the Company may repurchase its outstanding shares in the open market in an amount up to $ 2.0 million, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on April 29, 2021, continuing until the earlier of the completion of the repurchase or the next six months, depending upon market conditions.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements