What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-11 · 237 added, 165 removed, 198 unchanged (67% of the section changed)

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Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to:

the effect of the novel Coronavirus Disease 2019 (“COVID-19”) , including on our credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S.

• the effect of the novel c oronavirus disease 2019 (“COVID-19”) pandemic , including on our credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S.

and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;

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• results of examinations of Sound Financial Bancorp and Sound Community Bank by their regulators, including the possibility that the regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets, change Sound Community Bank's regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

our ability to attract and retain deposits;

• the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of our allowance for loan losses;

• inability of key third-party providers to perform their obligations to us;

• our ability to attract and retain deposits;

• competitive pressures among financial services companies;

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• the other risks described from time to time in our filings with the U.S.

Securities and Exchange Commission (the "SEC"), including this Form 10-Q and our 2019 Form 10-K.

Securities and Exchange Commission (the "SEC"), including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”).

We wish to advise readers not to place undue reliance on any forward-looking statements and that the factors listed above could materially affect our financial performance and could cause our actual results for future periods to differ materially from any such forward-looking statements expressed with respect to future periods and could negatively affect our stock price performance.

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Sound Financial Bancorp, a Maryland corporation, is a bank holding company for its wholly owned subsidiary, Sound Community Bank.

Substantially all of Sound Financial Bancorp’s business is conducted through Sound Community Bank, a

Washington state-chartered commercial bank.

As a Washington commercial bank, the Bank’s regulators are the WDFI and the FDIC.

Substantially all of Sound Financial Bancorp’s business is conducted through Sound Community Bank, a Washington state-chartered commercial bank.

As a Washington commercial bank, the Bank’s regulators are the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation (the “FDIC”).

The Federal Reserve is the primary federal regulator for Sound Financial Bancorp.

We also sell insurance products and services for consumer clients through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank.

We also sell insurance products and services for clients through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank.

Sound Community Bank’s deposits are insured up to applicable limits by the FDIC.

At March 31, 2020 , Sound Financial Bancorp, on a consolidated basis, had assets of $737.6 million , net loans held-for-portfolio of $619.5 million , deposits of $634.6 million and stockholders’ equity of $78.2 million .

At June 30, 2020, Sound Financial Bancorp, on a consolidated basis, had assets of $871.7 million, net loans held-for-portfolio of $684.7 million, deposits of $694.3 million and stockholders’ equity of $80.2 million.

The shares of Sound Financial Bancorp are traded on NASDAQ Capital Market under the symbol “SFBC.” Our executive offices are located at 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121.

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We also offer a variety of secured and unsecured consumer loan products, including manufactured home loans, floating home loans, automobile loans, boat loans and recreational vehicle loans.

As part of our business, we focus on residential mortgage loan originations, a portion of which we sell to Fannie Mae and other correspondents and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives.

As part of our business, we focus on residential mortgage loan originations, a significant portion of which we sell to Fannie Mae and other correspondents and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives.

We sell loans which conform to the underwriting standards of Fannie Mae (“conforming”) in which we retain the servicing of the loan in order to maintain the direct customer relationship and to generate noninterest income.

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We originate and retain a significant amount of commercial real estate loans, including those secured by owner-occupied and nonowner-occupied commercial real estate, multifamily property, mobile home parks and construction and land development loans.

At the end of May 2020, the branch located on 5 th and Virginia in Seattle was closed.

This closure was planned as the last step of the original move of the administrative offices in 2017, to 2400 3 rd Avenue in Seattle which is located about 5 blocks to the North of the closed branch.

All client relationships, loans and deposits were successfully transferred to the Belltown Branch at 2400 3 rd Avenue which is adjacent to the administrative offices.

The closure will result in reduced occupancy expense and a small reduction in full time equivalent employees.

However no layoffs occurred as turnover and reduced branch hours due to the Covid 19 pandemic allowed us to avoid terminations.

No significant client relationships were lost as a result of the branch closure.

Critical Accounting Policies

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COVID 19 Response

In response to the current global situation surrounding the COVID-19 pandemic, the Company is offering a variety of relief options designed to support our clients and communities, including participating in the U.S.

In response to the COVID-19 pandemic, the Company is offering a variety of relief options designed to support our clients and communities, including participating in the U.S.

Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”).

Paycheck Protection Program ("PPP") Participation.

The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program called the Paycheck Protection Program.

The goal of the PPP is to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls.

The CARES Act was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program called the Paycheck Protection Program.

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020.

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The SBA guarantees 100% of the PPP loans made to eligible borrowers.

The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.

As of April 30, 2020, we have funded over $48.5 million in PPP loans, with an average loan amount of $164,000.

Another $19.4 million in PPP loans are approved and awaiting funding and 201 applications totaling $6.4 million have been submitted but not yet approved as of April 30, 2020.

The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA.

The deadline for PPP loan applications to the SBA has been extended to August 8, 2020.

The Bank is continuing to accept new PPP applications based on this extended deadline and is assisting small businesses with other borrowing options as they become available, including SBA and other government sponsored lending programs, as appropriate.

As of June 30, 2020, we have funded $73.1 million in PPP loans, with an average loan amount of $93,000.

There were $670,000 PPP loans approved awaiting funding as of June 30, 2020, and 37 applications totaling $587,000 were in process.

Many of the PPP applications have been from our existing clients but we are also serving those in our communities who have not had a banking relationship with us in the past.

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We may not collect any fees from the loan applicants.

The following table summarizes our PPP participation as of April 30, 2020 (dollars in thousands):

Approved awaiting funding

Total Outstanding

Number of Loans

Average Loan Amount

Total Request

Number of Loans

Average Loan Amount

The following table summarizes our PPP participation as of June 30, 2020 (dollars in thousands):

Funded Approved awaiting funding

Total Outstanding Number of Loans Average Loan Amount Total Request Number of Loans Average Loan Amount

Existing clients $ 30,801 337 $ 95 $ 20 3 $ 7

New clients 42,348 445 91 650 31 21

Total PPP loans $ 73,149 782 $ 93 $ 670 34 $ 14

PPP loans to our existing clients are in addition to $21.8 million in loans these borrowers had outstanding with the Company at March 31, 2020.

The SBA processing fees for the approved loans total $1.6 million.

We intend to utilize the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company will pledge its PPP loans as collateral at face value to obtain non-recourse loans.

The SBA processing fees for the approved loans totaled $2.7 million at June 30, 2020.

We have been utilizing the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) to retain the capital neutral treatment of PPP loans.

Under the PPPLF, the Bank pledged PPP loans at face value as collateral to obtain Federal Reserve Bank non-recourse loans.

PPPLF loans are risk-weighted at zero percent and have no impact on our leverage ratio and the Bank also receives a borrowing rate of 35 basis points.

Loan Modifications.

We received and continue to receive numerous inquiries and requests from borrowers for some form of payment relief.

We received and continue to receive numerous inquiries and requests from borrowers for some form of payment relief due to the COVID-19 pandemic.

We are providing payment relief for both consumer and business clients.

As of April 30, 2020, we received requests to modify 99 loans aggregating $48.0 million, or 7.7% of total loans.

As of that date, we had modified loans, predominantly payment deferrals for 90-180 days, aggregating $42.8 million, or 6.8% of total loans, as more fully described in the table below.

All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be 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, 2020, we have modified loans, predominantly payment deferrals of interest and/or principal for 90-180 days, aggregating $51.3 million, or 7.4% of total loans, as more fully described in the table below.

In some cases, borrowers who were granted 90-day payment deferrals for residential or consumer loans have requested payment deferral extensions.

Borrowers granted payment deferrals for commercial loans have not requested extensions at this time.

All loans modified due to the COVID-19 pandemic will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.

The following is a summary of the type and amount of loan modifications made by the Company as of April 30, 2020 (dollars in thousands):

The following is a summary of the type and amount of loan modifications made by the Company as of June 30, 2020 (dollars in thousands):

Payment Relief

Interest only

Principal & Interest

% of Total Loans

Interest only Principal & Interest Forbearance

90 days 180 days 365 days 90 days 180 days Total % of Total Loans

Real estate loans:

One-to-four family $ 6,834 $ 333 $ — $ 5,524 $ 2,724 $ 15,415 2.2 %

Home equity — — — 98 — 98 0.01

Construction and land 153 — — 382 — 535 0.07

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Commercial business loans — — — — — — —

The modifications discussed above were not classified as TDRs in accordance with the guidance of the CARES Act.

Total $ 18,335 $ 21,688 $ 1,365 $ 6,255 $ 3,694 $ 51,337 7.4 %

The modifications discussed above were not classified as TDRs in accordance with the guidance of the CARES Act and related regulatory banking guidance.

The CARES Act provided that the short-term modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs.

This includes short-term (e.g.

six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are

insignificant.

Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.

six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

Borrowers are considered current under the CARES Act and related regulatory banking guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.

Support for Clients, Employees and Community during Pandemic.

In order to provide essential services and support our communities while safely conducting business during our state’s Stay Home, Stay Safe order we took a variety of steps.

The vast majority of back office personnel were deployed to work from home with only a skeleton staff in the administrative offices which ensures social distancing.

The administrative building was closed to the general public.

Branch lobby hours were reduced in all markets along with additions of signage and directional markings to ensure clients made every effort to maintain distance and limit contact.

We also strictly manage occupancy in branch lobbies requiring any overflow to remain outside.

At the same time drive-up hours and services were expanded in select markets and Interactive Teller Machine (ITM) hours were extended so clients could achieve contactless transactions.

Our website is regularly updated with best practices and tips for clients to use electronic banking.

The Company leave policies were amended to allow employees that needed time for quarantine to be paid and we implemented the Family First Response Act provisions, further enhancing leave flexibility.

We created a unique email and telephone hotline for loan assistance, and we continued to make new loans in all product lines.

Front line employees received a bonus payment for maintaining our lobby operations.

Certain fees are being waived for clients and no early withdrawal penalty is assessed on certificate withdrawals of up to $25,000 if needed for living or other expenses as a result of the COVID-19 pandemic.

Our employees continued to volunteer in their communities by sewing cloth masks and fundraising for foodbanks, which fundraising was matched by the Company.

Comparison of Financial Condition at March 31, 2020 and December 31, 2019

Total assets increased $17.8 million , or 2.5% , to $737.6 million at March 31, 2020 from $719.9 million at December 31, 2019 .

The increase was primarily due to a higher balances of loans held-for-portfolio and held-for-sale, cash and cash equivalents, and available-for-sale securities.

As various counties where we do business began to reopen, we returned four branches on the Olympic Peninsula to pre-pandemic lobby hours with the exception of Saturdays.

Because of the increased use of electronic services we were able to eliminate Saturday lobby hours.

By the beginning of July we expanded lobby hours in the remaining branches.

We again eliminated lobby hours on Saturday and all branches lobby hours were shortened.

The adoption of electronic /self-serve alternatives reduces need for lobby access.

We believe these shorter hours will be permanent and tailored to individual branches based on location and demographics.

We continuously monitor and conform our practices based on updates from the Center for Disease Control, World Health Organization, Financial Regulatory Agencies, and local and state health departments.

All retail clients and retail employees wear masks.

Lobby traffic continues to be managed to provide for social distancing in the lobbies.

The vast majority of back office workers continue to work remotely.

We stay in constant contact with borrowers who have requested modifications and are also working with those borrowers who were granted 90 days deferrals which are now expiring.

In addition, certain fees may be waived for clients and no early withdrawal penalty is assessed on certificate withdrawals of up to $25,000 if needed for living or other expenses as a result of the COVID-19 pandemic.

Comparison of Financial Condition at June 30, 2020 and December 31, 2019

Total assets increased $151.8 million, or 21.1%, to $871.7 million at June 30, 2020 from $719.9 million at December 31, 2019.

The increase was primarily a result of a higher balances in loans held-for-portfolio and loans held-for-sale, cash and cash equivalents and available-for-sale securities.

Cash and Securities .

Cash and cash equivalents increased $6.2 million , or 11.2% , to $62.0 million at March 31, 2020 from $55.8 million at December 31, 2019 .

Available-for-sale securities, which consist of municipal bonds and agency mortgage-backed securities increased $1.9 million , or 20.7% , to $11.2 million at March 31, 2020 from $9.3 million at December 31, 2019 as a result of investment securities purchased during the current quarter.

Our loans held-for-portfolio, net, increased $5.2 million , or 0.9% , to $619.5 million at March 31, 2020 from $614.2 million at December 31, 2019 .

The following table reflects the changes in the loan mix of our loan portfolio at March 31, 2020 , as compared to December 31, 2019 (dollars in thousands):

March 31, 2020

December 31, 2019

Cash and cash equivalents increased $74.8 million, or 134.1%, to $130.5 million at June 30, 2020 from $55.8 million at December 31, 2019 primarily due to an increase in cash from borrowing through the PPPLF.

Available-for-sale

securities, which consist of municipal bonds and agency mortgage-backed securities increased $892,000, or 9.6%, to $10.2 million at June 30, 2020 from $9.3 million at December 31, 2019 as a result of investment securities purchased during the year.

Our loans held-for-portfolio, net, increased $70.4 million, or 11.5%, to $684.7 million at June 30, 2020 from $614.2 million at December 31, 2019, primarily driven by our origination of PPP loans.

The following table reflects the changes in the loan mix of our loan portfolio at June 30, 2020, as compared to December 31, 2019 (dollars in thousands):

June 30, 2020 December 31, 2019 Amount

Change Percent

One-to-four family $ 137,988 $ 149,393 $ (11,405) (7.6) %

Home equity 19,286 23,845 (4,559) (19.1)

Commercial and multifamily 273,084 261,268 11,816 4.5

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Total loans held-for-portfolio, net $ 684,672 $ 614,247 $ 70,425 11.5 %

As illustrated in the table above, the increase in our loan portfolio at March 31, 2020 , compared to December 31, 2019 , was primarily a result of the $18.8 million , or 7.2% increase in commercial and multifamily real estate loans and $3.0 million , or 6.9% ,

increase in floating homes loans, partially offset by decreases in one-to-four family loans of $8.9 million , or 5.9% , home equity loans of $2.9 million , or 12.0% , construction and land loans of $3.7 million , or 4.9% , and commercial business loans of $2.4 million , or 6.1% .

At March 31, 2020 , our loan portfolio, net of deferred loan fees, remained well-diversified.

Commercial and multifamily real estate loans accounted for approximately 44.6% of total loans and one-to-four family loans, including home equity loans accounted for approximately 25.7% of total loans and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for approximately 12.3% of total loans at March 31, 2020 .

Construction and land loans accounted for approximately 11.5% of total loans and commercial business loans accounted for approximately 5.8% of total loans at March 31, 2020 .

All categories of our loan portfolio increased at June 30, 2020, compared to December 31, 2019, except for one-to-four family and home equity loans.

The largest increase in the loan portfolio was in commercial business loans which increased $70.8 million, or 181.8%, to $109.7 million, at June 30, 2020, compared to $38.9 million at December 31, 2019, driven by our origination of 782 PPP loans totaling $73.1 million at June 30, 2020.

PPP loans are 100% guaranteed by the SBA.

At June 30, 2020, our loan portfolio, net of deferred loan fees, remained well-diversified.

Commercial and multifamily real estate loans accounted for approximately 39.3% of total loans, one-to-four family loans, including home equity loans accounted for approximately 22.7% of total loans, commercial business loans accounted for 15.8% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for approximately 11.2% of total loans at June 30, 2020.

Construction and land loans accounted for approximately 11.0% of total loans at June 30, 2020.

Allowance for Loan Losses.

The allowance for loan losses is maintained to cover losses that are probable and can be estimated on the date of evaluation in accordance with generally accepted accounting principles in the United States.

It is our best estimate of probable credit losses inherent in our loan portfolio.

The allowance for loan losses is maintained to cover losses that are probable and can be estimated

on the date of evaluation in accordance with generally accepted accounting principles in the United States.

It is our best estimate

of probable credit losses inherent in our loan portfolio.

The following table reflects the adjustments in our allowance during the periods indicated (dollars in thousands):

Three Months Ended March 31,

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

2020 2019 2020 2019

Balance at beginning of period $ 5,893 $ 5,577 $ 5,640 $ 5,774

Charge-offs (311) (12) (317) (32)

Recoveries 49 5 58 28

Net recoveries/(charge-offs) (262) (7) (259) (4)

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Ratio of net recoveries/(charge-offs) during the period to average loans outstanding during the period — % — % — % — %

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Allowance as a percentage of nonperforming loans (end of period) 173.30 % 121.11 %

Allowance as a percentage of total loans (end of period) 0.87 % 0.91 %

Our allowance for loan losses increased $253,000 , or 4.5% , to $5.9 million at March 31, 2020 , from $5.6 million at December 31, 2019 .

The overall increase in the allowance for loan losses is related to uncertainty as a result of the COVID-19 pandemic and increases in the loan portfolio.

The entire economy has been adversely affected by the COVID-19 pandemic, with the hospitality industry being extremely hard hit.

Our direct exposure to the hospitality industry, which includes food and beverage, lodging and recreation, was comprised of 16 loans to unrelated borrowers totaling $7.6 million and indirect exposure was $12.0 million at March 31, 2020.

Most loans are secured by underlying collateral and were originated with loan-to-values ratios of 78% or less, except for one unsecured loan totaling $10,000.

Seven of these borrowers with loans totaling $4.8 million received PPP loans from the Bank totaling $793,000, which are 100% federally guaranteed.

Added pressures on asset quality in future quarters may require additional increases to the allowance for loan losses.

The amount of allowance for loan losses will depend on a number of factors, including but not limited to the extent and duration of the impact of the COVID-19 pandemic on public health and the economy.

Specific loan loss reserves increased to $786,000 at March 31, 2020 , compared to $724,000 at December 31, 2019 , while general loan loss reserves increased to $4.2 million at March 31, 2020 , compared to $4.0 million at December 31, 2019 and the unallocated reserve decreased to $865,000 at March 31, 2020 , compared to $948,000 at December 31, 2019 .

Our allowance for loan losses increased $391,000, or 6.9%, to $6.0 million at June 30, 2020, from $5.6 million at December 31, 2019.

The increase in provision for loan losses not only reflects probable credit losses based upon the conditions that existed as of June 30, 2020, but also considers the potential effects from future impacts of the COVID-19 pandemic.

Specific loan loss reserves increased to $729,000 at June 30, 2020, compared to $724,000 at December 31, 2019, while general loan loss reserves increased to $4.5 million at June 30, 2020, compared to $4.0 million at December 31, 2019 and the unallocated reserve decreased to $800,000 at June 30, 2020, compared to $948,000 at December 31, 2019.

The increase in the general reserve was a result of the higher balance on loans held-for-portfolio.

Net charge-offs for both the three months ended March 31, 2020 and 2019 were $3,000, respectively.

At March 31, 2020 , the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.93% and 138.53% , respectively, compared to 0.91% and 121.11%, respectively, at December 31, 2019 .

Net charge-offs for the three and six months ended June 30, 2020 were $262,000 and $259,000 respectively, compared to net charge-offs of $7,000 and $4,000 for the three and six months ended June 30, 2019, respectively.

At June 30, 2020, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.87% and 173.30%, respectively, compared to 0.91% and 121.11%, respectively, at December 31, 2019.

Excluding the $73.1 million of PPP loans from the $690.7 million of total loans at June 30, 2020, the allowance for loan losses to total loans was 0.97% (1) at June 30, 2020.

PPP loans are fully guaranteed by the SBA and management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven.

Mortgage Servicing Rights .

The fair value of mortgage servicing rights was $3.0 million at March 31, 2020 , a decrease of $243,000 or 7.5% from $3.2 million at December 31, 2019 .

The fair value of mortgage servicing rights was $3.1 million at June 30, 2020, a decrease of $126,000 or 3.9% from $3.2 million at December 31, 2019.

We record mortgage servicing rights on loans sold with servicing retained and upon acquisition of a servicing portfolio.

We stratify our capitalized mortgage servicing rights based upon the type, term and interest rates of the underlying loans.

Mortgage servicing rights are carried at fair value.

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Nonperforming Assets.

At March 31, 2020 , our nonperforming assets totaled $4.8 million , or 0.65% of total assets, compared to $5.2 million , or 0.73% of total assets at December 31, 2019 .

At June 30, 2020, nonperforming assets totaled $4.1 million, or 0.47% of total assets, compared to $5.2 million, or 0.73% of total assets at December 31, 2019.

The table below sets forth the amounts and categories of nonperforming assets at the dates indicated (dollars in thousands):

Nonperforming Assets

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019 Amount

Change Percent

Nonaccrual loans $ 3,480 $ 4,657 $ (1,177) (25.3) %

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Total nonperforming assets $ 4,055 $ 5,232 $ (1,177) (22.5) %

Nonaccrual loans decreased $403,000, or 8.7%, to $4.2 million at March 31, 2020 from $4.7 million at December 31, 2019 .

Nonaccrual loans were 0.67% of total loans at March 31, 2020 , compared to 0.75% of total loans at December 31, 2019 .

OREO and repossessed assets were $575,000 at both March 31, 2020 and December 31, 2019 .

At March 31, 2020 , OREO and repossessed assets consisted solely of a former bank branch property located in Port Angeles, Washington which was acquired in 2015 as a part of three branches purchased from another financial institution.

Nonaccrual loans decreased $1.2 million, or 25.3%, to $3.5 million at June 30, 2020 from $4.7 million at December 31, 2019.

The percentage of nonaccrual loans to total loans was 0.50% at June 30, 2020, compared to 0.75% of total loans at December 31, 2019.

OREO and repossessed assets were $575,000 at both June 30, 2020 and December 31, 2019.

At June 30, 2020, OREO and repossessed assets consisted solely of a former bank branch property located in Port Angeles, Washington which was acquired in 2015 as a part of three branches purchased from another financial institution.

It is currently leased to a not-for-profit organization headquartered in our market area at a below market rate.

Total deposits increased $17.8 million , or 2.9% , to $634.6 million at March 31, 2020 from $616.7 million at December 31, 2019 .

The increase was due primarily to increases in all deposit products other than certificates of deposit, as a result of our effort to grow retail non-maturity deposits (i.e, non-certificates of deposit).

The certificates of deposit decreased $7.2 million , or 2.9% , to $244.2 million at March 31, 2020 from $251.4 million at December 31, 2019 .

We continue our efforts to increase noninterest-bearing deposits, which increased $12.8 million, or 13.2%, to $110.1 million at March 31, 2020, compared to $97.3 million at December 31, 2019.

Total deposits increased $77.6 million, or 12.6%, to $694.3 million at June 30, 2020 from $616.7 million at December 31, 2019.

The increase was due primarily to disbursements of PPP loan funds into borrowers’ deposit accounts as well as reduced withdrawals reflecting changes in customer spending habits due to the COVID-19 pandemic.

We continue our efforts to grow noninterest-bearing deposits, which increased $45.2 million, or 46.5%, to $142.5 million at June 30, 2020, compared to $97.3 million at December 31, 2019.

(1) We have presented a non-GAAP financial measure in addition to results presented in accordance with GAAP for the allowance for loan losses to total loans excluding PPP loans.

The Bank has presented this non-GAAP financial measure because it believes that it provides useful information to assess the Bank’s allowance for loan losses.

The non-GAAP financial measure has inherent limitations and is not required to be uniformly applied.

Further, this non-GAAP financial measure should not be considered in isolation or as a substitute for the allowance for loan losses to total loans determined in accordance with GAAP and may not be comparable to similarly titled measures reported by other financial institutions.

Reconciliation of the GAAP and non-GAAP financial measurement is presented in the paragraph above.

A summary of deposit accounts with the corresponding weighted-average cost of funds at the dates indicated is presented below (dollars in thousands):

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Rate Amount Wtd.

Noninterest-bearing demand $ 139,919 — % $ 94,973 — %

Interest-bearing demand 185,640 0.49 159,774 0.54

Savings 73,027 0.28 57,936 0.33

Money market 54,332 0.43 50,337 0.49

Time deposits 238,842 2.51 251,387 2.23

2,562 — 2,311 —

Total deposits $ 694,322 1.11 % $ 616,718 1.16 %

(1) Escrow balances shown in noninterest-bearing deposits on the consolidated balance sheets.

FHLB advances remained unchanged at $7.5 million at March 31, 2020 from December 31, 2019 .

Total borrowings consisting of PPPLF and FHLB advances increased $72.3 million, to $79.8 million at June 30, 2020 from $7.5 million at December 31, 2019.

The increase in borrowing is attributable entirely to borrowings from the PPPLF.

The maturity date of any PPPLF borrowing will be the maturity date of the PPP loan pledged to secure such borrowing.

The maturity date of any PPPLF borrowing will be accelerated as of the date and to the extent of (i) any loan forgiveness reimbursement by the SBA for any PPP loan securing such borrowings;

or (ii) the purchase by the SBA from the Bank of any PPP loan securing such borrowings to realize on the SBA’s guarantee of such PPP loan.

In each case, the amount of our PPPLF borrowings outstanding may not exceed the amount of PPP loans pledged to secure such borrowings.

In addition, PPPLF loans may be prepaid by borrowers in full or in part, at any time, without penalty.

The Bank must repay PPPLF borrowings once a borrower under a PPP loan repays or prepays such PPP loan securing such borrowings.

Stockholders’ Equity .

Total stockholders’ equity increased $521,000 , or 0.67% , to $78.2 million at March 31, 2020 from $77.7 million at December 31, 2019 .

This increase primarily reflects $981,000 in net income and stock-based compensation

of $185,000, partially offset by the payment of cash dividends of $903,000 to common stockholders during the current quarter.

Comparison of Results of Operation for the Three Months Ended March 31, 2020 and 2019

Net income decreased $463,000 , or 32.1% , to $1.0 million or $0.38 per diluted common share, for the three months ended March 31, 2020 , compared to $1.4 million , or $0.56 per diluted common share, for the three months ended March 31, 2019 .

The primary reasons for the decrease in net income for the three months ended March 31, 2020 , were decreases in net interest income of $261,000 and noninterest income of $299,000 combined with a $450,000 increase in the provision for loan losses and a $134,000 increase in interest expense as compared to the first quarter of 2019.These increases were partially offset

by a decrease in noninterest expense of $449,000 for the three months ended March 31, 2020 as compared to the same period in 2019.

Total stockholders’ equity increased $2.5 million, or 3.2%, to $80.2 million at June 30, 2020 from $77.7 million at December 31, 2019.

This increase primarily reflects $3.1 million in net income for the six months ended June 30, 2020, partially offset by the payment of cash dividends of $1.3 million to common stockholders during the six months ended June 30, 2020.

Comparison of Results of Operation for the Three and Six Months Ended June 30, 2020 and 2019

Net income increased $311,000, or 17.1%, to $2.1 million or $0.82 per diluted common share, for the three months ended June 30, 2020, compared to $1.8 million, or $0.71 per diluted common share, for the three months ended June 30, 2019.

The primary reasons for the increase in net income for the three months ended June 30, 2020, were increases in net interest income of $368,000 and noninterest income of $724,000, partially offset by a provision for loan losses of $400,000 for the three months ended June 30, 2020, compared to a $200,000 recapture from the allowance for loan losses for the three months ended June 30, 2019, and a $174,000 increase in noninterest expense.

Net income decreased $153,000 to $3.1 million, or $1.20 per diluted common share, for the six months ended June 30, 2020,

compared to $3.3 million, or $1.27 per diluted common share, for the same period in 2019.

The primary reason for the

decrease in net income for the six months ended June 30, 2020 was a $650,000 provision for loan losses of for the six months ended June 30, 2020, compared to a $400,000 recapture from the allowance for loan losses for the same period in 2019, partially offset by increases in net interest income of $129,000 and noninterest income of $470,000 and a decrease of $274,000 in noninterest expense.

Interest Income .

Interest income decreased $127,000 , or 1.4% , to $8.6 million for the three months ended March 31, 2020 , from $8.8 million for the three months ended March 31, 2019 .

Interest income on loans increased $49,000, or 0.6%, to $8.4 million for the three months ended March 31, 2020 , due to higher average loan balances.

The average balance of loans held-for-portfolio was $621.8 million for the three months ended March 31, 2020 , compared to $612.1 million for the three months ended March 31, 2019 .

The weighted average yield on loans held-for-portfolio was 5.43% for the three months ended March 31, 2020 , compared to 5.54% for the three months ended March 31, 2019 .

Interest income on the investment portfolio decreased $176,000, or 42.5%, to $238,000 during the three months ended March 31, 2020, compared to $414,000 during the three months ended March 31, 2019, due to lower average yields compared to the same period a year ago.

Our weighted-average yield on interest-earning assets was 5.08% for the three months ended March 31, 2020 , compared to

5.18% for the three months ended March 31, 2019 .

The weighted-average yield on investments including interest-bearing cash

was 1.58% for the three months ended March 31, 2020 , compared to 2.69% for the three months ended March 31, 2019 .

average balance of investment portfolio, which included interest-bearing cash balances and available-for-sale securities

decreased $1.0 million, or 1.7%, compared to a year ago.

Interest income increased $368,000, or 4.4%, to $8.7 million for the three months ended June 30, 2020, from $8.3 million for the three months ended June 30, 2019.

Interest income on loans increased $715,000, or 9.0%, to $8.6 million for the three months ended June 30, 2020, due to higher average loan balances resulting primarily from PPP loans made by the Bank.

The average balance of loans held-for-portfolio was $683.6 million for three months ended June 30, 2020, compared to $575.9 million for the three months ended June 30, 2019.

The average yield on loans held-for-portfolio was 5.07% for the three months ended June 30, 2020, compared to 5.51% or the three months ended June 30, 2019.

Interest income on the investment portfolio and cash and cash equivalents decreased $347,000, or 81.8%, to $77,000 for the three months ended June 30, 2020, compared to $424,000 for the three months ended June 30, 2019.

The decrease in the interest income on investment securities and cash and cash equivalents compared to the same period a year ago was due to lower average yields.

The average yield on investments including interest-bearing cash was 0.46% for the three months ended June 30, 2020, compared to 2.64% for the three months ended June 30, 2019.

Interest income increased $197,000, or 1.1%, to $17.4 million for the six months ended June 30, 2020, from $17.2 million for the six months ended June 30, 2019.

The increase was primarily a result of increased interest income on loans due to higher average loan balances.

The average balance of loans held-for-portfolio increased $54.8 million, or 9.2%, to $648.7 million for the six months ended June 30, 2020, compared to $593.9 million for the six months ended June 30, 2019.

The average yield on loans held-for-portfolio was 5.24% for the six months ended June 30, 2020, compared to 5.59% for the six months ended June 30, 2019.

The average yield on net loans decreased compared to the same period in the prior year due primarily to decreases in interest rates on adjustable rate instruments following decreases to short-term rates over the last year, including the emergency 150 basis point reduction in the targeted federal funds rate in March 2020 due to the COVID-19 pandemic, and secondarily due to the impact of PPP loans.

For the three months ended June 30, 2020, the average balance of PPP loans was $52.7 million and the average yield on PPP loans was 2.83%, including the recognition of the net deferred fees.

Interest income included $372,000 in fees earned related to PPP loans in the quarter ended June 30, 2020 compared to none in same period a year ago.

The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the two or five year maturity of the loans.

Interest income on the investment portfolio and cash and cash equivalents decreased $524,000, or 62.5%, to $314,000 during the six months ended June 30, 2020, compared to the same period a year ago due to was due to lower average yields.

The average yield on investments including interest-bearing cash was 0.99% for the six months ended June 30, 2020, compared to 2.71% for the six months ended June 30, 2019.

The average balance of investments, which included interest-bearing cash balances and available-for-sale securities increased $6.6 million, or 11.5%, compared to a year ago.

Interest Expense .

Interest expense increased $134,000 , or 7.5% , to $1.9 million for the three months ended March 31, 2020 , from $1.8 million for the three months ended March 31, 2019 .

The increase in interest expense was as a result of both a higher weighted-average cost and balance of deposits, partially offset by a decrease in the average balance of Federal Home Loan Bank ("FHLB") borrowings.

Interest expense on deposits increased $393,000, or 26.8%, to $1.9 million for the three months ended March 31, 2020, compared to the same period a year ago, driven by an increase of $39.8 million, or 8.3%, in the average balance of interest-bearing deposits to $519.3 million, and an 18 basis point increase in the weighted average rate paid on interest-bearing deposits to 1.20% for the three months ended March 31, 2020, from 1.02% for the three months ended March 31, 2019.

Interest expense on FHLB borrowings decreased $259,000, or 81.4%, to $59,000 for the three months ended March 31, 2020, compared to a year ago, due to a $46.3 million, or 85.6% decrease in the average balance of FHLB borrowings to $7.8 million, from $54.1 million for the quarter ended March 31, 2019.

Interest expense decreased $66,000, or 3.5%, to $1.8 million for the three months ended June 30, 2020, from $1.9 million for the three months ended June 30, 2019.

The decrease in interest expense was as a result of lower average balance and cost of borrowings.

Interest expense increased $68,000, or 1.9%, to $3.7 million for the six months ended June 30, 2020, from $3.7 million for the six months ended June 30, 2019.

The increase in interest expense was primarily due to increases in average balance of deposits, partially offset by a lower average balance of borrowings outstanding.

Interest expense on deposits increased $127,000, or 7.8%, to $1.7 million for the three months ended June 30, 2020, compared to $1.6 million for the same period a year ago.

Interest expense on deposits increased $519,000, or 16.8%, to $3.6 million for the six months ended June 30, 2020, compared to $3.1 million for the same period in 2019.

The increase for both periods was

primarily due to the increase in average balance of deposits.

The average balance of deposits was $682.4 million and $651.7 million during the three and six months ended June 30, 2020, respectively, compared to 569.8 million and $572.2 million during the three and six months ended June 30, 2019, respectively.

The average rate paid on deposits was 1.03% and 1.11% for the three and six months ended June 30, 2020, respectively, compared to 1.14% and 1.09% for the three months ended June 30, 2019, respectively.

The average rate paid on deposits declined due to a reduction in market interest rates over the last year.

The cost of borrowings for the three and six months ended June 30, 2020 was 2.07% and 2.47%, respectively, compared to 4.25% and 2.97% for the three and six months ended June 30, 2019.

Net Interest Income.

Net interest income decreased $261,000 , or 3.7% , to $6.7 million for the three months ended March 31, 2020 , from $7.0 million for the three months ended March 31, 2019 .

The decrease in net interest income was primarily a result of an increase in interest expense due to higher average balances of and rates paid on deposits and a decrease in interest income on investments due to lower yields, partially offset by decreased interest expense paid on borrowings and increased interest income on loans.

Net interest income has been significantly impacted by decreases in the targeted Federal Funds Rate since July 2019, including the 150 basis point decrease in March 2020 in response to the COVID-19 pandemic.

The 150 basis-point decrease in the targeted Federal Funds Rate in response to COVID-19 pandemic did not occur until late in the quarter in March 2020, and the full effect of the lower interest rate environment had not yet been realized at quarter end.

Furthermore, the effect of recent changes in the targeted Federal Funds Rate on the cost of funding liabilities typically lags the effect on the yield earned on interest-earning assets because rates on many deposit accounts are decision-based, not tied to a specific market-based index, and are based on competition for deposits while most interest-earning assets adjust earlier because they are tied to a specific market-based index.

Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected in 2020.

Net interest income increased $434,000, or 6.7%, to $6.9 million for the three months ended June 30, 2020, from $6.5 million for the three months ended June 30, 2019.

Net interest income increased $129,000, or 1.0%, to $13.6 million for the six months ended June 30, 2020, from $13.5 million compared to the same period a year ago.

Our net interest margin was 3.69% and 3.81% for three and six months ended June 30, 2020, respectively, compared to 4.03% and 4.13% for the three and six months ended June 30, 2019, respectively.

The decreases in net interest margin were primarily due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities.

The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decreases over the past year typically lags declines in the yield on interest earning assets.

The average yield on PPP loans was 2.83% during the three and six months ended June 30, 2020, including the recognition of the net deferred fees, resulting in a negative impact to the net interest margin.

Provision/(Recapture) for Loan Losse s.

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Loans for which management has concerns about the borrowers’ ability to repay, are evaluated individually and specific loss allocations are provided for these loans when necessary.

The Company recorded a provision for loan losses of $250,000 for the three months ended March 31, 2020, compared to a recapture from the allowance for loan losses of $200,000 for the three months ended March 31, 2019.

The recapture during the first quarter of 2019 was primarily due to a lower balance of loans held-for-portfolio as a result of a $16.2 million one-to-four family loan sale during that quarter.

The increase in the provision for the three months ended March 31, 2020 is primarily related to uncertainty as a result of the COVID-19 pandemic.

Net loan recoveries were $3,000 for both the three months ended March 31, 2020 and 2019.

The Company recorded a provision for loan losses of $400,000 and $650,000 for the three and six months ended June 30, 2020, respectively, compared to a recapture from the allowance for loan losses of $200,000 and $400,000 for the three and six months ended June 30, 2019, respectively.

The increase in the provision primarily reflects potential loan losses due to credit deterioration as a result of the COVID-19 pandemic.

While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.

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Noninterest Income .

Noninterest income decreased $299,000 , or 29.7%, to $709,000 for the three months ended March 31, 2020 , as compared to $1.0 million for the three months ended March 31, 2019 , as reflected below (dollars in thousands):

Three Months Ended March 31,

Noninterest income increased $724,000, or 84.7%, to $1.6 million for the three months ended June 30, 2020, as compared to $855,000 for the three months ended June 30, 2019, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Change Percent

Service charges and fee income $ 429 $ 479 $ (50) (10.4) %

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Total noninterest income $ 1,579 $ 855 $ 724 84.7 %

The decrease in noninterest income during the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to decreases in gain on sale of loans.

The higher gain on sale of loans during the first quarter of 2019 was a result of the sale of $16.2 million of one-to-four family loans held in portfolio during that quarter.

The increase in noninterest income during the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to increases in gain on sale of loans, partially offset by a decrease in the mark-to-market adjustment on fair value of mortgage servicing rights.

Loans sold during the three months ended June 30, 2020, totaled $57.3 million, compared to $9.4 million during the three months ended June 30, 2019, as the volume of loans originated for sale increased significantly due to refinance activity increasing as a result of the recent reductions in market interest rates.

Noninterest income increased $470,000, or 25.9%, to $2.3 million for the six months ended June 30, 2020, as compared to $1.8 million for the six months ended June 30, 2019, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

Change Percent

Service charges and fee income $ 923 $ 925 $ (2) (0.2) %

Earnings on cash surrender value of BOLI 105 186 (81) (43.5)

Mortgage servicing income 479 498 (19) (3.8)

Fair value adjustment on mortgage servicing rights (800) (486) (314) 64.6

Net gain on sale of loans 1,581 695 886 127.5

Total noninterest income $ 2,288 $ 1,818 $ 470 25.9 %

The increase in noninterest income during the six months ended June 30, 2020 compared to the same period in 2019 was primarily due to increases in gain on sale of loans, partially offset by a decrease in the mark-to-market adjustment on fair value of mortgage servicing rights.

Loans sold during the six months ended June 30, 2020, totaled $71.4 million, compared to $35.9 million during the six months ended June 30, 2019.

Noninterest Expense .

Noninterest expense decreased $449,000, or 7.0%, to $5.9 million during the three months ended March 31, 2020 , compared to $6.4 million during the three months ended March 31, 2019 , as reflected below (dollars in thousands):

Three Months Ended March 31,

Noninterest expense increased $174,000, or 3.3%, to $5.4 million during the three months ended June 30, 2020, compared to $5.2 million during the three months ended June 30, 2019, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Change Percent

Salaries and benefits $ 2,818 $ 2,654 $ 164 6.2 %

Operations 1,326 1,450 (124) (8.6)

Regulatory assessments 120 115 5 4.3

Occupancy 497 546 (49) (9.0)

Data processing 645 460 185 40.2

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Total noninterest expense $ 5,406 $ 5,232 $ 174 3.3 %

The decrease in noninterest expense was primarily due to decreases of $404,000 in salaries and benefits and $240,000 operations expense, partially offset by a $137,000 increase in regulatory assessments expense.

Salaries and benefits expense decreased due to higher deferred salaries and lower self-insured medical expense accruals, which accruals factor in the stop loss coverage provided by the Company’s catastrophic loss insurance.

Operations expense decreased due to a $216,000 decrease in professional and consulting fees and $100,000 of operational losses from wire fraud recognized in the quarter ended March 31, 2019.

Regulatory assessments increased to normal levels as the Bank utilized all of its remaining regulatory assessment credits last year and due to costs for the DFI examination paid during the quarter ended March 31, 2020.

The efficiency ratio for the quarter ended March 31, 2020 was 79.95%, compared to 79.97% for the quarter ended March 31, 2019 .

The increase in noninterest expense during the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to increases of $185,000 in data processing and $164,000 in salaries and benefits expense, partially offset by a $124,000 decrease in operations expense.

Data processing expense increased due to recording of software expenses to data processing upon renewal of existing software license agreements and technology investments made in 2020.

Salaries and benefits expense increased due to increase in commissions on higher loan originations compared to a year ago.

Operations expense decreased due to a lower professional and consulting fees and lower travel and conference expenses compared to the same quarter a year ago.

Noninterest expense decreased $274,000, or 2.4%, to $11.4 million during the six months ended June 30, 2020 as compared to

$11.6 million during the six months ended June 30, 2019, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

Change Percent

Salaries and benefits $ 6,053 $ 6,293 $ (240) (3.8) %

Operations 2,720 3,084 (364) (11.8)

Regulatory assessments 369 228 141 61.8

Occupancy 995 1,052 (57) (5.4)

Data processing 1,215 960 255 26.6

Net loss on OREO and repossessed assets — 9 (9) (100.0)

Total noninterest expense $ 11,352 $ 11,626 $ (274) (2.4) %

The decrease in noninterest expense during the six months ended June 30, 2020 compared to the same period in 2019 was primarily due to decreases of $240,000 in salaries and benefits and $364,000 in operations expense, partially offset by increases of $255,000 in data processing and $141,000 in regulatory assessments expense.

Salaries and benefits expense decreased due to an increase in deferred loan origination costs.

Operations expense decreased due to decreases in professional and consulting fees, travel and conference and marketing and advertising expense.

Data processing expense increased for the same reason set forth above.

The efficiency ratio for the quarter ended June 30, 2020 was 63.79%, compared to 71.50% for the quarter ended June 30, 2019 and was 71.34% for the six months ended June 30, 2020, compared to 75.92% for the six months ended June 30, 2019.

The improvement in the efficiency ratio was primarily due to higher interest income and noninterest income, and , for the six month periods, lower noninterest expense.

Income Tax Expense .

For the three months ended March 31, 2020 , we incurred income tax expense of $260,000 as compared $358,000 for the three months ended March 31, 2019 .

The effective tax rates for the three months ended March 31, 2020 and 2019 were 20.95% and 19.87% , respectively.

We incurred income tax expense of $541,000 and $802,000 for the three and six months ended June 30, 2020, respectively, as compared $468,000 and $826,000 for the same periods in 2019, respectively.

The effective tax rates for

the three and six months ended June 30, 2020 were 20.3% and 20.5%, respectively.

The effective tax rates for the three and six months ended June 30, 2019 were 20.5% and 20.2%, respectively.

The Management Discussion and Analysis in Item 7 of the Company’s 2019 Form 10-K contains an overview of Sound Financial Bancorp’s and the Bank’s liquidity management, sources of liquidity and cash flows.

This discussion updates that disclosure for the three months ended March 31, 2020 .

This discussion updates that disclosure for the six months ended June 30, 2020.

The Bank’s primary sources of funds are deposits, principal and interest payments on loans and borrowings.

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The Bank maintains liquidity levels it believes to be adequate to fund loan commitments, investment opportunities, deposit withdrawals and other financial commitments.

At March 31, 2020 , the Bank had $73.2 million in cash and investment securities available-for-sale and $5.9 million in loans held-for-sale generally available for its cash needs.

Also, at March 31, 2020 , the Bank had the ability to borrow an additional $216.3 million in FHLB advances based on existing collateral pledged, and could access $38.2 million through the Federal Reserve’s Discount Window.

At March 31, 2020 , we also had available a total of $20.0 million in credit facilities with other financial institutions, with no balance outstanding.

At June 30, 2020, the Bank had $140.7 million in cash and investment securities available-for-sale and $7.4 million in loans held-for-sale generally available for its cash needs.

Also, at June 30, 2020, the Bank had the ability to borrow an additional $218.7 million in FHLB advances based on existing collateral pledged, and could access $33.4 million through the Federal Reserve’s Discount Window.

At June 30, 2020, we also had available a total of $20.0 million in credit facilities with other financial institutions, with no balance outstanding.

The Bank uses these sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals and loan commitments.

At March 31, 2020 , outstanding loan commitments, including unused lines and letters of credit totaled $120.0 million, including $40.1 million of undisbursed construction and land loans.

Certificates of deposit scheduled to mature in one year or less at March 31, 2020 , totaled $125.6 million.

Based on our competitive pricing, we believe that a majority of maturing deposits will remain with the Bank.

In addition, the Bank’s liquidity is expected to be supplemented in the second quarter of 2020 by its participation in the Federal Reserve’s PPPLF pursuant to which the Bank will pledge PPP loans as collateral at face value to obtain Federal Reserve Bank non-recourse loans.

Cash and cash equivalents increased $6.2 million to $62.0 million as of March 31, 2020 , from $55.8 million as of December 31, 2019.

Net cash used in operating activities was $3.3 million for the three months ended March 31, 2020 .

Net cash used in investing activities totaled $7.7 million during the three months ended March 31, 2020 and consisted primarily of a increases in net loans and available-for-sale securities.

The $17.2 million of net cash provided by financing activities during the three months ended March 31, 2020 was primarily the result of a $17.8 million net increase in deposits.

At June 30, 2020, outstanding loan commitments, including unused lines and letters of credit totaled $136.4 million, including $37.2 million of undisbursed construction and land loans.

Certificates of deposit scheduled to mature in one year or less at June 30, 2020, totaled $158.2 million.

In addition, the Bank’s is utilizing Federal Reserve’s PPPLF for additional borrowing needs.

At June 30, 2020, the Bank had $72.3 million in borrowings from the PPPLF, with the ability to borrow an additional $800,000 based on the remaining PPP loans unpledged at that date.

Cash and cash equivalents increased $74.8 million to $130.5 million as of June 30, 2020, from $55.8 million as of December 31, 2019.

Net cash used in operating activities was $2.5 million for the six months ended June 30, 2020.

Net cash used in investing activities totaled $71.7 million during the six months ended June 30, 2020 and consisted primarily of a increases in net loans and available-for-sale securities.

The $149.0 million of net cash provided by financing activities during the six months ended June 30, 2020 was primarily the result of a $77.6 million net increase in deposits and $72.3 million net increase in borrowings, all of which increase were borrowings from the PPPLF.

As a separate legal entity from the Bank, the Company must provide for its own liquidity.

At March 31, 2020 , the Company, on an unconsolidated basis, had $2.0 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

At June 30, 2020, the Company, on an unconsolidated basis, had $1.6 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

The Company’s principal source of liquidity is dividends and ESOP loan repayments from the Bank.

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These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

A summary of our off-balance sheet loan commitments at March 31, 2020 , is as follows (in thousands):

March 31, 2020

A summary of our off-balance sheet loan commitments at June 30, 2020, is as follows (in thousands):

June 30, 2020

Commitments to make loans $ 55,069

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Capital adequacy requirements are quantitative measures established by regulation that require Sound Community Bank to maintain minimum amounts and ratios of capital.

Prior to January 1, 2020, the Bank followed the FDIC’s prompt corrective actions standards.

Prior to January 1, 2020, Sound Community Bank followed the FDIC’s prompt corrective actions standards.

In order to be considered well-capitalized under the prompt corrective action standards, a bank must have a ratio of CET1 capital to risk-weighted assets of at least 6.5%, a ratio of Tier 1 capital to risk-weighted assets of at least 8%, a ratio of total capital to risk-weighted assets of at least 10%, and a leverage ratio of at least 5%, and the bank must not be subject to a regulatory capital requirement imposed on it as an individual bank.

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To be eligible to utilize the CBLR, the Bank also must have total consolidated assets of less than $10 billion, off-balance sheet exposures of 25% or less of its total consolidated assets, and trading assets and trading liabilities of 5.0% or less of its total consolidated assets, all as of the end of the most recent quarter.

As of March 31, 2020 , the Bank elected to use the CBLR framework.

At March 31, 2020 , the Bank’s CBLR was 10.41%.

Beginning January 2020, the Bank elected to use the CBLR framework.

At June 30, 2020, the Bank’s CBLR was 10.17%.

Management monitors the capital levels to provide for current and future business opportunities and to maintain Sound Community Bank’s “well-capitalized” status.

As of March 31, 2020 and December 31, 2019, Sound Community Bank had regulatory capital in excess of the Federal Reserve’s minimum and well capitalized definitions requirements.

As of June 30, 2020, Sound Community Bank had CBLR in excess of the Federal Reserve’s minimum and well capitalized definitions requirements.

As of December 31, 2019, Sound Community Bank had regulatory capital in excess of the Federal Reserve’s minimum and well capitalized requirement.

The actual regulatory capital amounts and ratios calculated for Sound Community Bank at December 31, 2019, were as follows (dollars in thousands):

Minimum Capital

Minimum Required to be

Actual Minimum Capital

Requirements Minimum Required to be

Well-Capitalized Under Prompt

Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

Tier 1 Capital to average total adjusted assets $ 74,031 10.22 % $ 28,981 4.0 % $ 36,226 5.0 %

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Pursuant to the capital regulations of the FDIC and the other federal banking agencies, the Bank must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based CET1 capital, tier 1 capital and total capital in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.

At March 31, 2020 , the Bank’s CET1 capital exceeded the required capital conservation buffer.

At December 31, 2019, the Bank’s CET1 capital exceeded the required capital conservation buffer.

For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company’s subsidiary banks to be well capitalized under the prompt corrective action regulations.

If Sound Financial Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2020 , Sound Financial Bancorp would have exceeded all regulatory capital requirements.

The estimated Community Bank Leverage Ratio calculated for Sound Financial Bancorp as of March 31, 2020 were 10.41%.

If Sound Financial Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 2020, Sound Financial Bancorp would have exceeded all regulatory capital requirements.

The estimated Community Bank Leverage Ratio calculated for Sound Financial Bancorp as of June 30, 2020 was 10.17%.

Quantitative and Qualitative Disclosures About Market Risk

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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 2. Management’s Discussion and Analysis