What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-08-13 compared with 2021-05-13 · 238 added, 137 removed, 735 unchanged (34% of the section changed)

27 unchanged sentences

Advance payments from borrowers for taxes and insurance 938 1,168

Subordinated debt, net 11,602 11,592

Subordinated notes, net 11,613 11,592

Total liabilities 833,643 775,918

2 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, 2,609,806 and 2,592,587 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively

Common stock, $ 0.01 par value, 40,000,000 shares authorized, 2,614,329 and 2,592,587 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

Additional paid-in capital 27,613 27,106

9 unchanged sentences

(In thousands, except share and per share amounts)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

INTEREST INCOME

39 unchanged sentences

(In thousands)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Net income $ 2,251 $ 2,128 $ 4,702 $ 3,108

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 )

Unrealized gains (losses) arising during the period 3 134 ( 57 ) 110

Income tax (expense) benefit related to unrealized gains/losses ( 1 ) ( 28 ) 12 ( 23 )

Other comprehensive income (loss), net of tax 2 106 ( 45 ) 87

Comprehensive income $ 2,253 $ 2,234 $ 4,657 $ 3,195

3 unchanged sentences

Condensed Consolidated Statements of Stockholders’ Equity

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

For the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)

(In thousands, except share and per share amounts)

7 unchanged sentences

Stockholders’

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

Net income — — — — 2,251 — 2,251

Other comprehensive income, net of tax — — — — — 2 2

Share-based compensation — — 65 — — — 65

Cash dividends paid on common stock ($ 0.17 per share)

— — — — ( 447 ) — ( 447 )

Common stock surrendered ( 962 ) — ( 9 ) — ( 21 ) — ( 30 )

Common stock options exercised 5,485 — 18 — — — 18

Allocation of ESOP shares — — 92 28 — — 120

Balance, at June 30, 2021

2,614,329 $ 26 $ 27,613 $ ( 57 ) $ 61,758 $ 195 $ 89,535

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

9 unchanged sentences

Allocation of ESOP shares — — 164 56 — — 220

Balance, at June 30, 2021

2,614,329 $ 26 $ 27,613 $ ( 57 ) $ 61,758 $ 195 $ 89,535

SOUND FINANCIAL BANCORP, INC.

AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share and per share amounts)

Shares Common

Stock Additional Paid

-in Capital Unearned

ESOP Shares Retained

Earnings Accumulated

Comprehensive

Income, net of tax Total

Stockholders’

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

Net income — — — — 2,128 — 2,128

Other comprehensive loss, net of tax — — — — — 106 106

Share-based compensation — — 46 — — — 46

Restricted stock awards issued — — — — ( 389 ) — ( 389 )

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

( 581 ) — — — — — —

Common stock surrendered ( 1,510 ) — — — — — —

Common stock options exercised 3,749 — 34 — — — 34

Allocation of ESOP shares — — 38 28 ( 3 ) — 63

Balance, at June 30, 2020

2,593,152 $ 25 $ 26,894 $ ( 170 ) $ 53,224 $ 262 $ 80,235

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

9 unchanged sentences

Allocation of ESOP shares — — 104 57 — — 161

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

Balance, at June 30, 2020

2,593,152 $ 25 $ 26,894 $ ( 170 ) $ 53,224 $ 262 $ 80,235

See notes to condensed consolidated financial statements

3 unchanged sentences

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

23 unchanged sentences

Proceeds from principal payments, maturities and sales of available-for-sale securities 2,576 1,649

Net (increase) decrease in loans ( 1,079 ) ( 5,485 )

Reduction in (purchase of) BOLI ( 28 ) 113

Net increase in loans ( 26,447 ) ( 70,557 )

(Purchase of) reduction in BOLI ( 3,057 ) 55

Purchases of premises and equipment, net ( 110 ) ( 395 )

6 unchanged sentences

FHLB stock purchased ( 175 ) ( 4 )

Common stock repurchases ( 30 ) —

Allocation of ESOP shares 220 161

8 unchanged sentences

Interest paid on deposits and borrowings 2,657 3,730

Loans transferred from loans held-for-portfolio to OREO and repossessed assets 84 —

See notes to condensed consolidated financial statements

13 unchanged sentences

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.

The results for the interim periods are not necessarily indicative of results for a full year or any other future period.

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

53 unchanged sentences

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.

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

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

2 unchanged sentences

Losses Estimated

March 31, 2021

June 30, 2021

Municipal bonds $ 4,226 $ 180 $ ( 2 ) $ 4,404

5 unchanged sentences

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).

The amortized cost and fair value of AFS securities at June 30, 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

June 30, 2021

Due within one year $ 227 $ 228

2 unchanged sentences

Due after ten years 3,282 3,412

Mortgage-backed securities 3,642 3,719

Agency mortgage-backed securities 3,053 3,120

Total $ 7,279 $ 7,524

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.

There were no pledged securities at June 30, 2021 or December 31, 2020.

There were no sales of AFS securities during the three and six months ended June 30, 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):

March 31, 2021

June 30, 2021

Less Than 12 Months 12 Months or Longer Total

12 unchanged sentences

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.

There were no credit losses recognized in earnings related to other than temporary impairments during the three and six months ended June 30, 2021 or 2020.

At June 30, 2021, the securities portfolio consisted of 11 agency mortgage-backed securities and nine municipal bonds with a total portfolio fair value of $ 7.5 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.

At June 30, 2021, there were three 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 three 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 .

The unrealized losses on these investments are not considered other-than-temporary impairment ("OTTI") as of June 30, 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.

21 unchanged sentences

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.

As of June 30, 2021, the Bank had funded PPP loans totaling $ 119.2 million, $ 36.0 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

June 30, 2021

Individually evaluated for impairment Allowance:

32 unchanged sentences

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

Three Months Ended March 31, 2021

Three Months Ended June 30, 2021

Allowance Charge-offs Recoveries Provision (Recapture) Ending

9 unchanged sentences

Total $ 5,935 $ ( 33 ) $ 5 $ 250 $ 6,157

Three Months Ended March 31, 2020

Six Months Ended June 30, 2021

Allowance Charge-offs Recoveries Provision (Recapture) Ending

One-to-four family $ 1,063 ( 76 ) — 305 $ 1,292

Home equity 147 ( 8 ) 2 ( 30 ) 111

Commercial and multifamily 2,370 — — ( 383 ) 1,987

Construction and land 578 — — 122 700

Manufactured homes 529 ( 2 ) 2 ( 162 ) 367

Floating homes 328 — — ( 10 ) 318

Other consumer 288 ( 19 ) 6 ( 74 ) 201

Commercial business 291 — 2 400 693

Unallocated 406 — — 82 488

Total $ 6,000 $ ( 105 ) $ 12 $ 250 $ 6,157

Three Months Ended June 30, 2020

Allowance Charge-offs Recoveries (Recapture) Provision Ending

9 unchanged sentences

Total $ 5,893 $ ( 311 ) 0 $ 49 $ 400 $ 6,031

Six Months Ended June 30, 2020

Allowance Charge-offs Recoveries (Recapture) Provision Ending

One-to-four family $ 1,120 $ — $ 8 $ 21 $ 1,149

Home equity 178 — 39 ( 63 ) 154

Commercial and multifamily 1,696 — — 295 1,991

Construction and land 492 — — 131 623

Manufactured homes 480 — — ( 118 ) 362

Floating homes 283 — — 41 324

Other consumer 112 ( 17 ) 11 21 127

Commercial business 331 ( 300 ) — 470 501

Unallocated 948 — — ( 148 ) 800

Total $ 5,640 $ ( 317 ) $ 58 $ 650 $ 6,031

Credit Quality Indicators.

8 unchanged sentences

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

March 31, 2021

June 30, 2021

four family Home

29 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 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

June 30, 2021 December 31, 2020

One-to-four family $ 457 $ 1,668

4 unchanged sentences

Floating homes 510 518

Commercial business 186 —

Total $ 1,492 $ 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

June 30, 2021

Past Due 60-89 Days

26 unchanged sentences

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

June 30, 2021

equity Commercial

25 unchanged sentences

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

March 31, 2021

June 30, 2021

Recorded Investment

30 unchanged sentences

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,

Three Months Ended June 30,

2021 Three Months Ended 2020

Investment Interest Income

10 unchanged sentences

Total $ 4,671 $ 37 $ 9,416 $ 96

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.

Six Months Ended June 30,

2021 Three Months Ended 2020

Investment Interest Income

Recognized Average

Investment Interest Income

One-to-four family $ 3,166 $ 58 $ 6,847 $ 147

Home equity 271 8 357 9

Commercial and multifamily 235 — 353 10

Construction and land 76 1 575 1

Manufactured homes 258 8 411 15

Floating homes 514 7 366 8

Other consumer 112 2 139 4

Commercial business 471 — 1,360 41

Total $ 5,103 $ 84 $ 10,408 $ 235

Forgone interest on nonaccrual loans was $ 49 thousand and $ 109 thousand for the six months ended June 30, 2021 and 2020, respectively.

There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual or impaired at June 30, 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.

TDRs are loans accounted for under ASC 310-40, which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans.

Such modifications to loan terms may include a lower interest rate, a reduction in principal, or a longer term to maturity.

Once a TDR has performed according to its modified terms for six months and the collection of principal and interest under the revised terms is deemed probable, we remove the TDR from nonperforming status.

Loans classified as TDRs totaled $ 3.2 million at both March 31, 2021 and December 31, 2020, and are included in impaired loans.

Loans classified as TDRs totaled $ 2.6 million and $ 3.2 million at June 30, 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 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.

There were no loans modified as a TDR during the three and six months ended June 30, 2021.

There were two TDR loans totaling $ 484 thousand that were paid off during the three and six months ended June 30, 2021.

There was one loan totaling $ 431 thousand modified as a TDR during the three months ended June 30, 2020 and three loans totaling $ 649 thousand were modified as TDRs during the six months ended June 30, 2020.

There was one TDR loan totaling $ 2.8 million paid off during the six months ended June 30, 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 and six months ended June 30, 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 and six months ended June 30, 2021.

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

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified into TDRs.

1 unchanged sentence

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.

The majority of these borrowers had resumed making payments as of June 30, 2021, and as of that date, only three commercial loans totaling $ 1.7 million and nine residential loans totaling $ 1.3 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.

As of June 30, 2021, there were two one-to-four family loans totaling $ 120 thousand that were in process of foreclosure.

Note 5 – Fair Value Measurements

2 unchanged sentences

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 Company’s fair values for financial instruments at June 30, 2021 were determined based on these requirements.

The following methods and assumptions were used to estimate the fair value of other financial instruments:

4 unchanged sentences

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-Sale - One-to-four family mortgage loans held-for-sale are recorded at the lower of cost or fair value.

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

At June 30, 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.

10 unchanged sentences

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.

Off-balance sheet financial instruments - The fair value for the Company’s off-balance sheet loan commitments is estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the Company’s clients.

The estimated fair value of these commitments is not significant.

1 unchanged sentence

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.

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process.

There were no transfers between levels during the three and six months ended June 30, 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:

June 30, 2021 Fair Value Measurements Using:

Value Estimated

26 unchanged sentences

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

Fair Value at June 30, 2021

Description Total Level 1 Level 2 Level 3

8 unchanged sentences

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

June 30, 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 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.”

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

Fair Value at June 30, 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 March 31, 2021 and December 31, 2020.

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at June 30, 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

June 30, 2021

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 %)

OREO Third Party Appraisals No discounts N/A

Impaired loans (1)

Discounted Cash Flow Discount Rate 0 - 10 % ( 9 %)

Impaired loans (2)

Third Party Appraisals No discounts N/A

(1) Represents troubled debt restructurings included within impaired loans.

(2) Excludes troubled debt restructurings.

December 31, 2020

1 unchanged sentence

(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 %)

OREO Third Party Appraisals No discounts N/A

Impaired loans (1)

Discounted Cash Flow Discount Rate 0 - 10 % ( 6 %)

Impaired loans (2)

Third Party Appraisals No discounts N/A

(1) Represents troubled debt restructurings included within impaired loans.

(2) Excludes troubled debt restructurings.

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.

The Company’s mortgage servicing rights portfolio totaled $ 518.7 million at June 30, 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 June 30, 2021 and December 31, 2020 were $ 512.1 million and $ 481.6 million, respectively.

The unpaid principal balance of loans serviced for other financial institutions at June 30, 2021 and December 31, 2020, totaled $ 6.6 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 periods indicated were as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Beginning balance, at fair value $ 4,109 $ 2,996 $ 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:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Prepayment speed (Public Securities Association “PSA” model) 228 % 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 $ 312,000 and $ 244,000 for the three months ended March 31, 2021 and 2020 respectively.

mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $ 321 thousand and $ 633 thousand for the three and six months ended June 30, 2021, respectively, and $ 235 thousand and $ 479 thousand for the three and six months ended June 30, 2020, respectively.

Note 7 – Commitments and Contingencies

2 unchanged sentences

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.

Note 8 – Borrowings, FHLB Stock and Subordinated Notes

The Company has a loan agreement with the FHLB of Des Moines.

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

At 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 June 30, 2021 and December 31, 2020, the amount available to borrow under this credit facility was $ 402.0 million and $ 390.5 million, respectively, subject to eligible pledged collateral.

At June 30, 2021, the credit facility was collateralized as follows:

one-to-four family mortgage loans with an advance equivalent of $ 71.3 million, commercial and multifamily mortgage loans with an advance equivalent of $ 79.6 million and home equity loans with an advance equivalent of $ 582 thousand.

At December 31, 2020, the credit facility was collateralized as follows:

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

The Company had no outstanding borrowings under this arrangement at both 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.

The Company had no outstanding borrowings under this arrangement at both June 30, 2021 and December 31, 2020.

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

Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $ 19.6 million and $ 21.6 million at June 30, 2021 and December 31, 2020, respectively, to secure public deposits.

The remaining amount available to borrow as of June 30, 2021 and December 31, 2020, was $ 131.9 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

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.

At June 30, 2021 and December 31, 2020, the Company had an investment of $ 1.1 million and $ 877 thousand, respectively in FHLB of Des Moines stock.

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

The line has a one year term maturing on June 30, 2022 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.

As of June 30, 2021, the amount available under this line of credit was $ 20.0 million.

There was no balance on this line of credit as of June 30, 2021 and December 31, 2020, respectively.

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

1 unchanged sentence

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.

The subordinated notes mature on May 15, 2030.

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

As of both June 30, 2021 and December 31, 2020, the balance of the subordinated notes was $ 11.6 million.

Note 9 – Earnings Per Common Share

5 unchanged sentences

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,

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

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Net income $ 2,251 $ 2,113 $ 4,702 $ 3,094

Weighted-average number of shares outstanding, basic 2,583 2,560 2,579 2,553

3 unchanged sentences

Earnings per share, diluted $ 0.85 $ 0.82 $ 1.78 $ 1.20

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

(1) The basic and diluted earnings per share amounts for the three and six months ended June 30, 2021 and 2020 are the same under both the Treasury Stock Method and the Two-Class Method as prescribed in FASB ASC 260-10, Earnings Per Share.

There were no anti-dilutive securities at June 30, 2021 and 6,809 anti-dilutive securities at June 30, 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 Company currently has one active shareholder approved stock-based compensation plan, the Amended and Restated 2013 Equity Incentive Plan (the "2013 Plan").

The 2013 Plan permits the grant of restricted stock, restricted stock units, stock options, and stock appreciation rights.

The equity incentive plan approved by stockholders in 2008 (the"2008 Plan") expired in November 2018 and no further awards may be made under the 2008 Plan;

provided, however, all awards outstanding under the 2008 Plan

remain outstanding in accordance with their terms.

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 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.

As of June 30, 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 $ 65 thousand and $ 231 thousand for the three and six months ended months ended June 30, 2021, respectively, and was $ 46 thousand and $ 231 thousand for the three and six months ended June 30, 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.

All stock option awards granted under the 2008 Plan vest in 20 % annual increments commencing one year from the grant date in accordance with the requirements of the 2008 Plan.

The stock option awards granted to date under the 2013 Plan provide

2 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 three months ended March 31, 2021:

The following is a summary of the Company’s stock option award activity during the three months ended June 30, 2021 (dollars in thousands, except per share amounts):

Shares Weighted-

2 unchanged sentences

Term in Years Aggregate

Outstanding at April 1, 2021 100,687 $ 23.57 5.21 $ 1,818

Exercised ( 5,485 ) 10.11

Forfeited — —

Outstanding at June 30, 2021 95,202 24.35 5.19 2,061

Exercisable 76,459 22.06 4.30 1,830

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

95,202 $ 24.35 5.19 $ 2,061

The following is a summary of the Company’s stock option award activity during the six months ended June 30, 2021 (dollars in thousands, except per share amounts):

Shares Weighted-

Exercise Price Weighted-Average

Remaining Contractual

Term in Years Aggregate

Outstanding at January 1, 2021 100,977 $ 22.00 4.71 $ 1,045

3 unchanged sentences

Expired ( 70 ) 34.29

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

Outstanding at June 30, 2021 95,202 24.35 5.19 2,061

Exercisable 76,459 22.06 4.30 1,830

1 unchanged sentence

95,202 $ 24.35 5.19 $ 2,061

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

As of June 30, 2021, there was $ 102 thousand of total unrecognized compensation cost related to non-vested stock options granted under the Plans.

The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.8 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

The fair value of options granted for the six months ended June 30, 2021 and 2020 were determined using the following weighted-average assumptions as of the grant date.

Six Months Ended June 30,

Annual dividend yield 1.60 % 1.60 %

1 unchanged sentence

Risk-free interest rate 0.60 % 1.38 %

Expected term 6.50 years

Expected term 6.50 years 6.50 years

Weighted-average grant date fair value per option granted $ 5.64 $ 7.14

There were no options granted during the three months ended June 30, 2021 or 2020.

Restricted Stock Awards

2 unchanged sentences

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:

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

The following is a summary of the Company’s non-vested restricted stock award activity during the three months ended June 30, 2021:

Shares Weighted-Average

1 unchanged sentence

Value Per Share Aggregate Intrinsic Value Per Share

Non-Vested at April 1, 2021 18,050 $ 34.01

Forfeited — —

Non-Vested at June 30, 2021 18,050 -0.0094814404432133 $ 34.01 $ 45.99

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

18,050 $ 34.01 $ 45.99

The following is a summary of the Company’s non-vested restricted stock award activity during the six months ended June 30, 2021:

Shares Weighted-Average

Grant-Date Fair

Value Per Share Aggregate Intrinsic Value Per Share

Non-Vested at January 1, 2021 17,114 $ 35.03

2 unchanged sentences

Forfeited ( 1,470 ) 35.36

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

Non-Vested at June 30, 2021 18,050 $ 34.01 $ 45.99

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

18,050 $ 34.01 $ 45.99

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

As of June 30, 2021, there was $ 521 thousand of unrecognized compensation cost related to non-vested restricted stock granted under the Plans.

The cost is expected to be recognized over the weighted-average vesting period of 2.7 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.

The total fair value of shares vested for the six months ended June 30, 2021 and 2020 was $ 264 thousand and $ 236 thousand, respectively.

Employee Stock Ownership Plan

3 unchanged sentences

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 .

As of June 30, 2021, the remaining balance of the ESOP loan was $ 126 thousand.

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.

At June 30, 2021, the ESOP held and is committed to release 11,340 shares of the Company’s common stock to participants during 2021.

The fair value of the 148,266 shares held by the ESOP trust was $ 7.0 million at June 30, 2021.

ESOP compensation expense included in salaries and benefits was $ 180 thousand and $ 350 thousand for the three and six months ended June 30, 2021, respectively, and $ 174 thousand and $ 348 thousand for the three and six months ended June 30, 2020, respectively.

Note 11 – Leases

5 unchanged sentences

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

June 30, 2021 December 31,

Operating lease right-of-use assets $ 6,255 $ 6,722

1 unchanged sentence

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Operating lease expense

4 unchanged sentences

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

March 31, 2021

Office Leases

Operating Lease Commitments

June 30, 2021

Remainder of 2021

4 unchanged sentences

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

March 31, 2021 March 31, 2020

2021 December 31,

Weighted-average remaining lease term:

Office leases 7.45 years 7.89 years

Equipment leases — 0.17 years

Equipment leases 0.00 years 1.42 years

Weighted-average discount rate (annualized):

2 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

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

3 unchanged sentences

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.

On July 28, 2021, the Board of Directors of the Company declared a quarterly cash dividend of $ 0.17 per common share, payable on August 24, 2021 to stockholders of record at the close of business on August 10, 2021.

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