Sound Financial Bancorp, Inc. 10-Q

Item 1. Financial Statements SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Balance Sheets (unaudited) (In thousands, except share and per share amounts) March 31, 2021 December 31, 2020 ASSETS Cash and cash equivalents $ 269,593 $ 193,828 Available-for-sale securities, at fair value 9,078 10,218 Loans held-for-sale 10,713 11,604 Loans held-for-portfolio 614,377 613,363 Allowance for loan losses ( 5,935 ) ( 6,000 ) Total loans held-for-portfolio, net 608,442 607,363 Accrued interest receivable 2,160 2,254 Bank-owned life insurance (“BOLI”), net 14,690 14,588 Other real estate owned (“OREO”) and repossessed assets, net 575 594 Mortgage servicing rights, at fair value 4,109 3,780 Federal Home Loan Bank (“FHLB”) stock, at cost 1,052 877 Premises and equipment, net 6,123 6,270 Right of use assets 6,475 6,722 Other assets 3,641 3,304 Total assets $ 936,651 $ 861,402 LIABILITIES Deposits Interest-bearing $ 628,009 $ 615,491 Noninterest-bearing demand 188,684 132,490 Total deposits 816,693 747,981 Accrued interest payable 133 369 Lease liabilities 6,894 7,134 Other liabilities 12,027 7,674 Advance payments from borrowers for taxes and insurance 1,746 1,168 Subordinated debt, net 11,602 11,592 Total liabilities 849,095 775,918 COMMITMENTS AND CONTINGENCIES (NOTE 7) STOCKHOLDERS’ EQUITY Preferred stock, $ 0.01 par value, 10,000,000 shares authorized, none issued or outstanding — — Common stock, $ 0.01 par value, 40,000,000 shares authorized, 2,609,806 and 2,592,587 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively 26 25 Additional paid-in capital 27,447 27,106 Unearned shares - Employee Stock Ownership Plan (“ESOP”) ( 85 ) ( 113 ) Retained earnings 59,975 58,226 Accumulated other comprehensive income, net of tax 193 240 Total stockholders’ equity 87,556 85,484 Total liabilities and stockholders’ equity $ 936,651 $ 861,402 See notes to condensed consolidated financial statements 3 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Income (unaudited) (In thousands, except share and per share amounts) Three Months Ended March 31, 2021 2020 INTEREST INCOME Loans, including fees $ 7,886 $ 8,408 Interest and dividends on investments, cash and cash equivalents 113 238 Total interest income 7,999 8,646 INTEREST EXPENSE Deposits 1,295 1,859 Borrowings — 59 Subordinated notes 168 — Total interest expense 1,463 1,918 Net interest income 6,536 6,728 PROVISION FOR LOAN LOSSES — 250 Net interest income after provision for loan losses 6,536 6,478 NONINTEREST INCOME Service charges and fee income 532 494 Earnings on cash surrender value of bank-owned life insurance 82 15 Mortgage servicing income 312 244 Fair value adjustment on mortgage servicing rights ( 275 ) ( 362 ) Net gain on sale of loans 2,053 318 Total noninterest income 2,704 709 NONINTEREST EXPENSE Salaries and benefits 3,644 3,235 Operations 1,206 1,394 Regulatory assessments 101 250 Occupancy 448 497 Data processing 779 570 Net gain on OREO and repossessed assets ( 16 ) — Total noninterest expense 6,162 5,946 Income before provision for income taxes 3,078 1,241 Provision for income taxes 627 260 Net income $ 2,451 $ 981 Earnings per common share: Basic $ 0.95 $ 0.38 Diluted $ 0.93 $ 0.38 Weighted-average number of common shares outstanding: Basic 2,571,726 2,542,514 Diluted 2,610,986 2,587,716 See notes to condensed consolidated financial statements 4 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Comprehensive Income (unaudited) (In thousands) Three Months Ended March 31, 2021 2020 Net income $ 2,451 $ 981 Available for sale securities: 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 See notes to condensed consolidated financial statements 5 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Stockholders’ Equity For the Three Months Ended March 31, 2021 and 2020 (unaudited) (In thousands, except share and per share amounts) Shares Common Stock Additional Paid -in Capital Unearned ESOP Shares Retained Earnings Accumulated Other Comprehensive Income, net of tax Total Stockholders’ Equity 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 loss, net of tax ( 47 ) ( 47 ) Share-based compensation 166 166 Restricted stock awards issued 10,168 — Cash dividends paid on common stock ($ 0.27 per share) ( 702 ) ( 702 ) Common stock surrendered ( 3,029 ) — Restricted shares forfeited ( 1,470 ) — Common stock options exercised 11,550 1 103 104 Allocation of ESOP shares 72 28 — 100 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 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) ( 903 ) ( 903 ) Common stock surrendered — Restricted shares forfeited ( 180 ) — Common stock options exercised 10,685 182 182 Allocation of ESOP shares 66 29 — 95 Balance, at March 31, 2020 2,591,494 $ 25 $ 26,776 $ ( 198 ) $ 51,488 $ 156 $ 78,247 See notes to condensed consolidated financial statements 6 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (unaudited) (In thousands) Three Months Ended March 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,451 $ 981 Adjustments to reconcile net income to net cash from operating activities: Amortization of net discounts on investments 56 22 Provision for loan losses — 250 Depreciation and amortization 176 245 Compensation expense related to stock options and restricted stock 166 185 Fair value adjustment on mortgage servicing rights 275 362 Right of use assets amortization 247 257 Change in lease liabilities ( 240 ) ( 244 ) Increase in cash surrender value of BOLI ( 74 ) ( 15 ) Net change in advances from borrowers for taxes and insurance 578 546 Net gain on sale of loans ( 2,053 ) ( 318 ) Proceeds from sale of loans held-for-sale 69,741 19,003 Originations of loans held-for-sale ( 67,401 ) ( 23,721 ) Net gain on OREO and repossessed assets ( 16 ) — Change in operating assets and liabilities: Accrued interest receivable 94 1 Other assets ( 337 ) 45 Accrued interest payable ( 236 ) ( 2 ) Other liabilities 4,353 ( 878 ) Net cash provided by (used in) operating activities 7,780 ( 3,281 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities — ( 2,489 ) Proceeds from principal payments, maturities and sales of available-for-sale securities 1,047 514 Net (increase) decrease in loans ( 1,079 ) ( 5,485 ) Reduction in (purchase of) BOLI ( 28 ) 113 Purchases of premises and equipment, net ( 29 ) ( 355 ) Proceeds from sale of OREO and other repossessed assets 35 — Net cash used in investing activities ( 54 ) ( 7,702 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 68,712 17,840 Proceeds from borrowings — 15,650 Repayment of borrowings — ( 15,650 ) FHLB stock purchased ( 175 ) ( 5 ) Allocation of ESOP shares 100 95 Dividends paid on common stock ( 702 ) ( 903 ) Proceeds from common stock option exercises 104 182 Net cash provided by financing activities 68,039 17,209 Net change in cash and cash equivalents 75,765 6,226 Cash and cash equivalents, beginning of period 193,828 55,770 Cash and cash equivalents, end of period $ 269,593 $ 61,996 7 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for income taxes $ — $ — Interest paid on deposits and borrowings 1,699 1,920 See notes to condensed consolidated financial statements 8 SOUND FINANCIAL BANCORP, INC. AND SUBSIDIARY Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Basis of Presentation The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Sound Financial Bancorp, Inc., and its wholly owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc. References in this document to Sound Financial Bancorp refer to Sound Financial Bancorp, Inc. and references to the “Bank” refer to Sound Community Bank. References to “we,” “us,” and “our” or the “Company” refers to Sound Financial Bancorp and its wholly-owned subsidiaries, Sound Community Bank and Sound Community Insurance Agency, Inc., unless the context otherwise requires. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 30, 2021 (“2020 Form 10-K”). The results for the interim periods are not necessarily indicative of results for a full year. Certain amounts in the prior period’s consolidated financial statements have been reclassified to conform to the current presentation. These classifications do not have an impact on previously reported consolidated net income, stockholders’ equity or earnings per share. Note 2 – Accounting Pronouncements Recently Issued or Adopted The Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), signed into law on March 27, 2020, provides relief from certain accounting and financial reporting requirements under U.S. GAAP. Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for troubled debt restructurings (“TDRs”) under Accounting Standards Codification ("ASC") 310-40 for loan modifications related to the novel coronavirus disease 2019 ("COVID-19") pandemic. In addition, on April 7, 2020, a group of banking agencies issued an interagency statement (“Interagency Statement”) for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs. The Interagency Statement was originally issued on March 22, 2020, but the banking agencies revised it to address the relationship between their TDR accounting and disclosure guidance and the TDR guidance in Section 4013 of the CARES Act. Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. The Interagency Statement indicates that a lender can conclude that a borrower is not experiencing financial difficulty if either (1) short-term (e.g., six months) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or (2) the modification or deferral program is mandated by the federal government or a state government. Accordingly, any loan modification made in response to the COVID-19 pandemic that meets either of these practical expedients would not be considered a TDR. The Company adopted this guidance effective March 27, 2020. On December 27, 2020, the Consolidated Appropriations Act 2021 (“CAA 2021”) was signed into law. Among other purposes, CAA 2021 provides coronavirus emergency response and relief, including extending relief offered under the CARES Act related to restructured loans as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier. In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-08, “ Receivables – Nonrefundable Fees and Other Costs ” (“ASU 2020-08”). ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. ASU 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements. 9 On March 2020, the FASB issued ASU No. 2020-04, " Reference Rate Reform" ("Topic 848"). This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update apply to contract modifications that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) Modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) Modifications of contracts within the scope of Topics 840, Leases, and 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (for example, the incremental borrowing rate) or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted for as separate contracts; and 3) Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives. In January 2021, ASU 2021-01 updated amendments in the new ASU to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification. The amendments in this ASU have differing effective dates, beginning with interim period including and subsequent to March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by removing the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items, removing the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and removing the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Disclosure requirements removed from FASB Subtopic 715-20 include the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer, related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, and, for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs and benefit obligation for postretirement health care benefits. Disclosure requirements added to FASB Subtopic 715-20 include the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This ASU is effective for fiscal years ending after December 15, 2020. The adoption of ASU No. 2018-14 did not have a material impact on the Company's consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted. The new guidance may result in an increase in the allowance for loan losses; however, the Company is still in the process of determining the magnitude of the change and its impact on the Company's consolidated financial statements. The FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326) , delaying implementation of ASU No. 2016-13 for SEC smaller reporting company filers until fiscal year beginning after December 15, 2022. The Bank meets the requirements of a smaller reporting company and will delay implementation of ASU No. 2016-13 . 10 Note 3 – Investments The amortized cost and fair value of our available-for-sale (“AFS”) securities and the corresponding amounts of gross unrealized gains and losses at the dates indicated were as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value March 31, 2021 Municipal bonds $ 5,192 $ 187 $ ( 20 ) $ 5,359 Agency mortgage-backed securities 3,642 90 ( 13 ) 3,719 Total $ 8,834 $ 277 $ ( 33 ) $ 9,078 December 31, 2020 Municipal bonds $ 5,209 $ 204 $ — $ 5,413 Agency mortgage-backed securities 4,706 105 ( 6 ) 4,805 Total $ 9,915 $ 309 $ ( 6 ) $ 10,218 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. March 31, 2021 Amortized Cost Fair Value Due within one year $ 1,182 $ 1,188 Due after one year through five years 260 271 Due after five years through ten years 458 499 Due after ten years 3,292 3,401 Mortgage-backed securities 3,642 3,719 Total $ 8,834 $ 9,078 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. 11 The following table summarizes the aggregate fair value and gross unrealized loss by length of time of those investments that have been in a continuous unrealized loss position at the dates indicated (in thousands): March 31, 2021 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Municipal bonds $ 2,076 $ ( 20 ) $ — $ — $ 2,076 $ ( 20 ) Agency mortgage-backed securities 552 ( 13 ) — — 552 ( 13 ) Total $ 2,628 $ ( 33 ) $ — $ — $ 2,628 $ ( 33 ) 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 ) 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 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. 12 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): March 31, 2021 December 31, 2020 Real estate loans: One-to-four family $ 129,995 $ 130,657 Home equity 13,763 16,265 Commercial and multifamily 251,459 265,774 Construction and land 63,112 62,752 Total real estate loans 458,329 475,448 Consumer loans: Manufactured homes 20,781 20,941 Floating homes 39,868 39,868 Other consumer 14,942 15,024 Total consumer loans 75,591 75,833 Commercial business loans 83,669 64,217 Total loans held-for-portfolio 617,589 615,498 Deferred fees, net ( 3,212 ) ( 2,135 ) Total loans held-for-portfolio, gross 614,377 613,363 Allowance for loan losses ( 5,935 ) ( 6,000 ) Total loans held-for-portfolio, net $ 608,442 $ 607,363 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 Allowance: Individually evaluated for impairment Allowance: Collectively evaluated for impairment Allowance: Ending balance Loans held for investment: Individually evaluated for impairment Loans held for investment: Collectively evaluated for impairment Loans held for investment: Ending balance One-to-four family $ 126 $ 854 $ 980 $ 3,418 $ 126,577 $ 129,995 Home equity 14 97 111 286 13,477 13,763 Commercial and multifamily — 2,109 2,109 353 251,106 251,459 Construction and land 5 590 595 76 63,036 63,112 Manufactured homes 160 211 371 257 20,524 20,781 Floating homes — 291 291 514 39,354 39,868 Other consumer 29 158 187 113 14,829 14,942 Commercial business — 720 720 613 83,056 83,669 Unallocated — 571 571 — — — Total $ 334 $ 5,601 $ 5,935 $ 5,630 $ 611,959 $ 617,589 13 December 31, 2020 Allowance: Individually evaluated for impairment Allowance: Collectively evaluated for impairment Allowance: Ending balance Loans held for investment: Individually evaluated for impairment Loans held for investment: Collectively evaluated for impairment Loans held for investment: Ending balance One-to-four family $ 165 $ 898 $ 1,063 $ 3,705 $ 126,952 $ 130,657 Home equity 14 133 147 293 15,972 16,265 Commercial and multifamily — 2,370 2,370 353 265,421 265,774 Construction and land 6 572 578 77 62,675 62,752 Manufactured homes 163 366 529 265 20,676 20,941 Floating homes — 328 328 518 39,350 39,868 Other consumer 30 258 288 114 14,910 15,024 Commercial business — 291 291 615 63,602 64,217 Unallocated — 406 406 — — — Total $ 378 $ 5,622 $ 6,000 $ 5,940 $ 609,558 $ 615,498 The following tables summarize the activity in the allowance for loan losses for the periods indicated (in thousands): Three Months Ended March 31, 2021 Beginning Allowance Charge-offs Recoveries Provision (Recapture) Ending Allowance One-to-four family $ 1,063 $ ( 62 ) $ — $ ( 21 ) $ 980 Home equity 147 — — ( 36 ) 111 Commercial and multifamily 2,370 — — ( 261 ) 2,109 Construction and land 578 — — 17 595 Manufactured homes 529 — 1 ( 159 ) 371 Floating homes 328 — — ( 37 ) 291 Other consumer 288 ( 9 ) 3 ( 95 ) 187 Commercial business 291 — 2 427 720 Unallocated 406 — — 165 571 Total $ 6,000 $ ( 71 ) $ 6 $ — $ 5,935 Three Months Ended March 31, 2020 Beginning Allowance Charge-offs Recoveries (Recapture) Provision Ending Allowance One-to-four family $ 1,120 $ — $ 4 $ 5 $ 1,129 Home equity 178 — 2 ( 14 ) 166 Commercial and multifamily 1,696 — — 222 1,918 Construction and land 492 — — 7 499 Manufactured homes 480 — — 2 482 Floating homes 283 — — 35 318 Other consumer 112 ( 6 ) 3 12 121 Commercial business 331 — — 64 395 Unallocated 948 — — ( 83 ) 865 Total $ 5,640 $ ( 6 ) $ 9 $ 250 $ 5,893 14 Credit Quality Indicators. Federal regulations provide for the classification of lower quality loans and other assets (such as OREO and repossessed assets), debt and equity securities considered as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address specific impairments. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off those assets in the period in which they are deemed uncollectible. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Federal Deposit Insurance Corporation (“FDIC”), the Bank's federal regulator, and, since our conversion to a Washington-chartered commercial bank, the Washington Department of Financial Institutions, the Bank's state banking regulator, which can order the establishment of additional loss allowances. Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated as special mention. The following tables present the internally assigned grades as of the dates indicated, by type of loan (in thousands): March 31, 2021 One-to- four family Home equity Commercial and multifamily Construction and land Manufactured homes Floating homes Other consumer Commercial business Total Grade: Pass $ 123,661 $ 13,152 $ 208,405 $ 45,293 $ 20,063 $ 38,750 $ 14,917 $ 77,199 $ 541,440 Watch 4,221 178 30,369 13,511 518 604 2 4,392 53,795 Special Mention — — 10,062 3,543 — — — 465 14,070 Substandard 2,113 433 2,623 765 200 514 23 1,613 8,284 Doubtful — — — — — — — — — Loss — — — — — — — — — Total $ 129,995 $ 13,763 $ 251,459 $ 63,112 $ 20,781 $ 39,868 $ 14,942 $ 83,669 $ 617,589 December 31, 2020 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 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, 15 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 Home equity 151 156 Commercial and multifamily 353 353 Construction and land 40 40 Manufactured homes 146 149 Floating homes 514 518 Total $ 2,711 $ 2,884 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 30-59 Days Past Due 60-89 Days Past Due 90 Days and Greater Past Due > 90 Days and Accruing Total Past Due Current Total Loans One-to-four family $ 2,120 $ 160 $ 1,353 $ — $ 3,633 $ 126,362 $ 129,995 Home equity 169 191 102 — 462 13,301 13,763 Commercial and multifamily 1,467 — 353 — 1,820 249,639 251,459 Construction and land 1,166 — 40 — 1,206 61,906 63,112 Manufactured homes 133 — 146 — 279 20,502 20,781 Floating homes 46 — 249 — 295 39,573 39,868 Other consumer 1 2 — — 3 14,939 14,942 Commercial business — — — — — 83,669 83,669 Total $ 5,102 $ 353 $ 2,243 $ — $ 7,698 $ 609,891 $ 617,589 December 31, 2020 30-59 Days Past Due 60-89 Days Past Due 90 Days and Greater Past Due > 90 Days and Accruing Total Past Due Current Total Loans One-to-four family $ 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 16 Nonperforming Loans. Loans are considered nonperforming when they are placed on nonaccrual. The following tables present the credit risk profile of our loan portfolio based on payment activity as of the dates indicated, by type of loan (in thousands): March 31, 2021 One-to-four family Home equity Commercial and multifamily Construction and land Manufactured homes Floating homes Other consumer Commercial business Total Performing $ 128,488 $ 13,612 $ 251,106 $ 63,072 $ 20,635 $ 39,354 $ 14,942 $ 83,669 $ 614,878 Nonperforming 1,507 151 353 40 146 514 — — 2,711 Total $ 129,995 $ 13,763 $ 251,459 $ 63,112 $ 20,781 $ 39,868 $ 14,942 $ 83,669 $ 617,589 December 31, 2020 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 Impaired Loans. A loan is considered impaired when we determine that we may be unable to collect payments of principal or interest when due under the terms of the loan. In the process of identifying loans as impaired, we take into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered on a case by case basis, after taking into consideration the totality of circumstances surrounding the loan and the borrower, including payment history. Impairment is measured on a loan by loan basis for all loans in the portfolio. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses. 17 Impaired loans at the dates indicated, by type of loan were as follows (in thousands): March 31, 2021 Recorded Investment Unpaid Principal Balance Without Allowance With Allowance Total Recorded Investment Related Allowance One-to-four family $ 3,565 $ 2,516 $ 902 $ 3,418 $ 126 Home equity 375 151 135 286 14 Commercial and multifamily 353 353 — 353 — Construction and land 76 40 36 76 5 Manufactured homes 260 46 211 257 160 Floating homes 514 514 — 514 — Other consumer 112 — 113 113 29 Commercial business 613 613 — 613 — Total $ 5,868 $ 4,233 $ 1,397 $ 5,630 $ 334 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 18 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, 2021 2020 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized One-to-four family $ 3,575 $ 29 $ 7,274 $ 72 Home equity 290 5 347 5 Commercial and multifamily 353 — 353 5 Construction and land 76 — 844 14 Manufactured homes 262 5 434 9 Floating homes 516 3 407 8 Other consumer 114 1 141 2 Commercial business 614 5 1,273 23 Total $ 5,800 $ 48 $ 11,073 $ 138 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. TDRs are 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 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. The modifications granted can generally be described in the following categories: Rate Modification : A modification in which the interest rate is changed. Term Modification : A modification in which the maturity date, timing of payments or frequency of payments is changed. Payment Modification : A modification in which the dollar amount of the payment is changed. Interest only modifications in which a loan is converted to interest only payments for a period of time are included in this category. Combination Modification : Any other type of modification, including the use of multiple categories above. There were no loans modified as a TDR during the three 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 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 19 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 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 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. 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 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. The estimated fair values of loans held for portfolio reflect exit price assumptions. The liquidity premium/discounts are part of the valuation for exit pricing. Mortgage Servicing 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 Debt - The fair value of subordinated debt 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 are estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the Company’s clients. The estimated fair value of these commitments is not significant. 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 20 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. The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether or not recognized or recorded at fair value as of the dates indicated (in thousands): March 31, 2021 Fair Value Measurements Using: Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 FINANCIAL ASSETS: Cash and cash equivalents $ 269,593 $ 269,593 $ 269,593 $ — $ — Available-for-sale securities 9,078 9,078 — 9,078 — Loans held-for-sale 10,713 10,713 — 10,713 — Loans held-for-portfolio, net 608,442 609,134 — — 609,134 Mortgage servicing rights 4,109 4,109 — — 4,109 FHLB stock 1,052 1,052 — 1,052 — FINANCIAL LIABILITIES: Non-maturity deposits 624,941 624,941 — 624,941 — Time deposits 191,752 194,056 — 194,056 — Subordinated notes $ 11,602 $ 11,602 $ — $ 11,602 $ — 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 — 21 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 Municipal bonds 5,359 — 5,359 — Agency mortgage-backed securities 3,719 — 3,719 — Mortgage servicing rights 4,109 — — 4,109 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 The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis as of the dates indicated: March 31, 2021 Financial Instrument Valuation Technique Unobservable Input(s) Range (Weighted-Average) Mortgage Servicing Rights Discounted cash flow Prepayment speed assumption 202 %- 392 % ( 224 %) Discount rate 12.5 %- 13.5 % ( 12.5 %) 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 10.0 %- 12.0 % ( 10.0 %) Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the mortgage servicing rights will result in a negative fair value adjustment (and decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement). An increase in the weighted-average life assumptions will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted-average life will result in an increase of the constant prepayment rate. There were no assets or liabilities (excluding mortgage servicing rights) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three months ended March 31, 2021 and 2020. 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.” 22 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 March 31, 2021 Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 575 $ — $ — $ 575 Impaired loans 5,630 — — 5,630 Fair Value at December 31, 2020 Total Level 1 Level 2 Level 3 OREO and repossessed assets $ 594 $ — $ — $ 594 Impaired loans 5,940 — — 5,940 There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at March 31, 2021 and December 31, 2020. The following tables provide a description of the valuation technique, observable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated: March 31, 2021 Financial Instrument Valuation Technique(s) Unobservable Input(s) Range (Weighted Average) OREO Market approach Adjustment for differences between comparable sales 0 - 0 % ( 0 %) Impaired loans Market approach Adjustment for differences between comparable sales 0 - 100 % ( 6 %) 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 %) Note 6 – Mortgage Servicing Rights 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. 23 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, 2021 2020 Beginning balance, at fair value $ 3,780 $ 3,239 Servicing rights that result from transfers and sale of financial assets 603 119 Changes in fair value: Due to changes in model inputs or assumptions and other (1) ( 274 ) ( 362 ) Ending balance, at fair value $ 4,109 $ 2,996 (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: March 31, 2021 December 31, 2020 Prepayment speed (Public Securities Association “PSA” model) 224 % 247 % Weighted-average life 5.5 years 5.2 years Discount rate 12.5 % 10.0 % 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 $ 312,000 and $ 244,000 for the three months ended March 31, 2021 and 2020 respectively. Note 7 – Commitments and Contingencies In the normal course of operations, the Company engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage clients’ requests for funding and take the form of loan commitments and lines of credit. Note 8 – Borrowings, FHLB Stock and Subordinated Debt The Company utilizes a loan agreement with the FHLB of Des Moines. The terms of the agreement call for a blanket pledge of a portion of the Company’s mortgage and commercial and multifamily loan portfolio based on the outstanding balance. At 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. At December 31, 2020, the credit facility was collateralized as follows: one-to-four family mortgage loans with an advance equivalent of $ 103.6 million, commercial and multifamily mortgage loans with an advance equivalent of $ 128.9 million and home equity loans with an advance equivalent of $ 2.8 million. The Company had no outstanding borrowings under this arrangement at both 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 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 24 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 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 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 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. Diluted earnings per common share reflect the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company's stock for the period. The following table summarizes the calculation of earnings per share for the periods indicated (in thousands, except per share data): Three Months Ended March 31, 2021 2020 Net income available to common shareholders $ 2,451 $ 981 Weighted-average number of shares outstanding, basic 2,572 2,543 Effect of potentially dilutive common shares 39 45 Weighted-average number of shares outstanding, diluted 2,611 2,588 Earnings per share, basic $ 0.95 $ 0.38 Earnings per share, diluted $ 0.93 $ 0.38 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 Stock Options and Restricted Stock The Company currently has one active shareholder 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 25 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 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 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 award activity during the three months ended March 31, 2021: Shares Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value Outstanding at January 1, 2021 100,979 $ 22.00 4.71 $ 1,045,041 Granted 12,248 32.46 Exercised ( 11,550 ) 18.28 Forfeited ( 920 ) 35.30 Expired ( 70 ) 34.29 Outstanding at March 31, 2021 100,687 23.57 5.21 1,818,387 Exercisable 81,944 21.26 4.33 1,669,256 Expected to vest, assuming a 0 % forfeiture rate over the vesting term 18,743 $ 33.67 9.07 $ 149,131 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 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 % Expected volatility 21.67 % Risk-free interest rate 0.60 % Expected term 6.50 years Weighted-average grant date fair value per option granted $ 5.64 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 26 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 Grant-Date Fair Value Per Share Aggregate Intrinsic Value Per Share Non-Vested at January 1, 2021 17,114 $ 35.03 Granted 10,168 32.46 Vested ( 7,762 ) 33.99 Forfeited ( 1,470 ) 35.36 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 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 three months ended March 31, 2021 and 2020 was $ 264,000 and $ 236,000 , 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 is being repaid principally by the Bank through contributions to the ESOP over a period of ten years . The interest rate on the loan is fixed at 2.25 % per annum. 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. 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 in the past, for certain equipment. The lease term for our leases begins on the date we become legally obligated for the rent payments or we take possession of the building, whichever is earlier. Generally, our real estate leases have initial terms of three to ten years and typically include 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. 27 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 presents the components of lease expense for the periods indicated (in thousands): Three Months Ended March 31, 2021 2020 Operating lease expense Office leases $ 273 $ 307 Equipment leases — 5 Sublease income ( 3 ) ( 3 ) Net lease expense $ 270 $ 309 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 2022 1,016 2023 989 2024 968 2025 885 Thereafter 3,012 Total lease payments 7,654 Less: Present value discount 760 Present value of lease liabilities $ 6,894 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): Office leases 2.66 % 2.65 % Equipment leases — % 1.62 % 28 Supplemental cash flow information related to leases was as follows for the periods indicated (in thousands): Three Months Ended March 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities for operating leases: Operating cash flows Office leases $ 258 $ 291 Equipment leases $ — $ 5 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. 29 Table of Contents