What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-07 · 161 added, 183 removed, 252 unchanged (58% of the section changed)

8 unchanged sentences

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 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.

• the effect of the novel coronavirus 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;

1 unchanged sentence

• changes in economic conditions, either nationally or in our market area;

• 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;

• monetary and fiscal policies of the Board of Governors of the Federal Reserve System ("Federal Reserve") and the U.S.

7 unchanged sentences

• 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;

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

23 unchanged sentences

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

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.

At September 30, 2020, Sound Financial Bancorp, on a consolidated basis, had assets of $867.4 million, net loans held-for-portfolio of $683.4 million, deposits of $748.9 million and stockholders’ equity of $82.3 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.

1 unchanged sentence

Our commercial business loans include unsecured lines of credit and secured term loans and lines of credit secured by inventory, equipment and accounts receivable.

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.

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

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.

2 unchanged sentences

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

5 unchanged sentences

COVID 19 Response

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”).

In response to the COVID-19 pandemic, the Company is offering a variety of relief options designed to support our clients and communities we serve.

Paycheck Protection Program ("PPP") Participation.

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.

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

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

4 unchanged sentences

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.

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

Through the conclusion of the PPP on August 8, 2020, we have funded $74.8 million in PPP loans, with an average loan amount of $82,000.

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.

2 unchanged sentences

(ii) 3% for loans of more than $350,000 and less than $2,000,000;

and 1% for loans of at least $2,000,000.

and (iii) 1% for loans of at least $2,000,000.

We may not collect any fees from the loan applicants.

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

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

Total Outstanding Number of Loans Average Loan Amount

Existing clients $ 31,555 363 $ 87

1 unchanged sentence

Total PPP loans $ 74,776 909 $ 82

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.

The SBA processing fees for the approved loans totaled $2.9 million at September 30, 2020.

Loan Modifications.

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 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 are providing payment relief for both consumer and business clients due to the COVID-19 pandemic.

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

The $34.3 million of loans under payment relief at September 30, 2020, include 26 residential loans totaling $9.2 million that have entered into a second payment forbearance agreement and eight residential loans totaling $808,000 with a weighted average loan-to value of 76% that have entered into a third payment forbearance agreement.

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 further modifications 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 June 30, 2020 (dollars in thousands):

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

Payment Relief

Interest only Principal & Interest Forbearance

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

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

Real estate loans:

13 unchanged sentences

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.

This includes short-term (up to twelve 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 and the relief is executed prior to December 31, 2020 or 60 days after the national emergency declared on March 13, 2020 ceases, whichever is earlier.

Support for Clients, Employees and Community during Pandemic.

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.

With the continued partial opening of the communities we serve, our retail locations continue to operate with full service and in compliance with various mandates and recommendations including masks, distancing and capacity management.

The majority of back office and administrative employees continue to work remotely.

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.

We continue to work closely with our borrowers to evaluate pandemic related challenges.

We also continue to support our not-for-profit organizations albeit most activity is virtual.

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

Total assets increased $147.5 million, or 20.5%, to $867.4 million at September 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, cash and cash equivalents, loans held-for-sale, and available-for-sale securities.

Cash and Securities .

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

Cash and cash equivalents increased $60.0 million, or 107.6%, to $115.8 million at September 30, 2020 from $55.8 million at December 31, 2019 primarily due to an increase in deposits, the pay downs in residential loans, including home equity loans and lines of credit, and the proceeds received from the issuance of subordinated debt.

Available-for-sale securities, which consist of treasury bills, municipal bonds and agency mortgage-backed securities increased $4.0 million, or 42.9%, to $13.3 million at September 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 $69.2 million, or 11.3%, to $683.4 million at September 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 September 30, 2020, as compared to December 31, 2019 (dollars in thousands):

September 30, 2020 December 31, 2019 Amount

Change Percent

11 unchanged sentences

Total loans held-for-portfolio, net $ 683,446 $ 614,247 $ 69,199 11.3 %

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.

The largest increase in the loan portfolio was in commercial business loans which increased $72.1 million, or 185.2%, to $111.0 million, at September 30, 2020, compared to $38.9 million at December 31, 2019, driven by our origination of 909 PPP loans totaling $74.8 million at September 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.

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

Commercial and multifamily real estate loans accounted for 39.8% of total loans, one-to-four family loans, including home equity loans accounted for 22.8% of total loans, commercial business loans accounted for 16.0% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for 10.9% of total loans at September 30, 2020.

Construction and land loans accounted for 10.4% of total loans at September 30, 2020.

Allowance for Loan Losses.

4 unchanged sentences

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

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

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

2020 2019 2020 2019

6 unchanged sentences

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Allowance as a percentage of nonperforming loans (end of period) 180.58 % 121.11 %

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

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.

Our allowance for loan losses increased $348,000, or 6.2%, to $6.0 million at September 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 September 30, 2020, but also gives consideration to the inherent losses from impacts of the COVID-19 pandemic.

Specific loan loss reserves decreased to $446,000 at September 30, 2020, compared to $724,000 at December 31, 2019, while general loan loss reserves increased to $4.4 million at September 30, 2020, compared to $4.0 million at December 31, 2019 and the unallocated reserve increased to $1.1 million at September 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 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.

Net charge-offs for the three and nine months ended September 30, 2020 were $318,000 and $577,000 respectively, compared to net charge-offs of $2,000 and $6,000 for the three and nine months ended September 30, 2019, respectively.

At September 30, 2020, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.87% and 180.58%, respectively, compared to 0.91% and 121.11%, respectively, at December 31, 2019.

The allowance for loan losses to total loans increases 10 basis points when the $74.8 million of PPP loans are excluded from the $689.4 million of total loans at September 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 $3.1 million at June 30, 2020, a decrease of $126,000 or 3.9% from $3.2 million at December 31, 2019.

The fair value of mortgage servicing rights was $3.3 million at September 30, 2020, an increase of $100,000 or 3.1% 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.

2 unchanged sentences

Nonperforming Assets.

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.

At September 30, 2020, nonperforming assets totaled $3.9 million, or 0.45% 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

June 30, 2020 December 31, 2019 Amount

September 30, 2020 December 31, 2019 Amount

Change Percent

2 unchanged sentences

Total nonperforming assets $ 3,891 $ 5,232 $ (1,341) (25.6) %

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.

Nonaccrual loans decreased $1.3 million, or 28.8%, to $3.3 million at September 30, 2020 from $4.7 million at December 31, 2019.

The percentage of nonaccrual loans to total loans was 0.48% at September 30, 2020, compared to 0.75% of total loans at December 31, 2019.

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

At September 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 $77.6 million, or 12.6%, to $694.3 million at June 30, 2020 from $616.7 million at December 31, 2019.

Total deposits increased $132.1 million, or 21.4%, to $748.9 million at September 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.

We continue our efforts to grow noninterest-bearing deposits, which increased $55.0 million, or 56.5%, to $152.2 million at September 30, 2020, compared to $97.3 million at December 31, 2019.

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Rate Amount Wtd.

7 unchanged sentences

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

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.

Borrowings and subordinated debt .

Borrowings, consisting of FHLB advances and subordinated debt increased $11.7 million, to $19.2 million at September 30, 2020 from $7.5 million at December 31, 2019.

The increase in borrowing is attributable entirely to our issuance of subordinated debt during the current quarter.

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

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

Stockholders’ Equity .

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.

Total stockholders’ equity increased $4.6 million, or 5.9%, to $82.3 million at September 30, 2020 from $77.7 million at December 31, 2019.

This increase primarily reflects $5.4 million in net income for the nine months ended September 30, 2020, partially offset by the payment of cash dividends of $1.7 million to common stockholders during the nine months ended September 30, 2020.

Comparison of Results of Operation for the Three and Nine Months Ended September 30, 2020 and 2019

Net income increased $787,000, or 50.8%, to $2.3 million or $0.90 per diluted common share, for the three months ended September 30, 2020, compared to $1.5 million, or $0.60 per diluted common share, for the three months ended September 30, 2019.

Net income increased $634,000, or 13.2%, to $5.4 million or $2.09 per diluted common share, for the nine months ended September 30, 2020, compared to $4.8 million, or $1.87 per diluted common share, for the nine months ended September 30, 2019.

The increases primarily were a result of an increase in noninterest income of $1.0 million and $1.5 million for the three and nine months ended September 30, 2020, respectively.

Interest Income .

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.

Interest income decreased $68,000, or 0.8%, to $8.5 million for the three months ended September 30, 2020, from $8.6 million for the three months ended September 30, 2019 and increased $130,000, or 0.5%, to $25.9 million for the nine months ended September 30, 2020.

The decrease for the three months ended period was due to lower interest income on

investments, partially offset by higher interest income on higher average loan balances resulting primarily from loans

made by the Bank through its participation in the U.S.

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

Interest income on loans increased $227,000, or 2.8%, to $8.4 million for the three months ended September 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 $694.1 million for the three months ended September 30, 2020, compared to $585.8 million for the three months ended September 30, 2019.

The average yield on loans held-for-portfolio was 4.82% for three months ended September 30, 2020, compared to 5.54% for the three months ended September 30, 2019.

Interest income on the investment portfolio and cash and cash equivalents decreased $295,000, or 77.4%, compared to $381,000 for the three months ended September 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 investments and cash and cash equivalents was 0.29% for the three months ended September 30, 2020, compared to 2.30% for the three months ended September 30, 2019.

Interest income increased $130,000, or 0.5%, to $25.9 million for the nine months ended September 30, 2020, from $25.7 million for the nine months ended September 30, 2019.

The increase was primarily a result of increased interest income on loans due to higher average loan balances, partially offset by a lower interest income on investments.

Interest income on loans increased $949,000, or 3.9%, to $25.5 million for the nine months ended September 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 $666.6 million for the nine months ended September 30, 2020, compared to $591.9 million for the nine months ended September 30, 2019.

The average yield on loans held-for-portfolio was 5.09% for the nine months ended September 30, 2020, compared to 5.54% for the nine months ended September 30, 2019.

Interest income on the investment portfolio and cash and cash equivalents decreased $819,000, or 67.2%, to $400,000 for the nine months ended September 30, 2020, compared to $1.2 million for the nine months ended September 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 0.65% for the nine months ended September 30, 2020, compared to 2.57% for the nine months ended September 30, 2019.

The average balance of investments, which included interest-bearing cash balances and available-for-sale securities increased $18.2 million, or 28.6%, compared to a year ago.

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.

For the nine months ended September 30, 2020, the average balance of PPP loans was $42.5 million and the average yield on PPP loans was 2.64%, including the recognition of the net deferred fees.

Interest income included $840,000 in fees earned related to PPP loans in the nine months ended September 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 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.

Interest expense decreased $82,000, or 4.2%, to $1.8 million for the three months ended September 30, 2020, from $1.9 million for the three months ended September 30, 2019.

Interest expense decreased $13,000, or 0.2%, to $5.6 million for the nine months ended September 30, 2020, from $5.6 million for the nine months ended September 30, 2019.

The decrease in interest expense compared to the three and nine month periods a year ago was a result of a higher percentage of noninterest bearing deposits to total deposits and a lower cost of borrowings.

Interest expense on deposits decreased $92,000, or 5.0%, to $1.7 million for the three months ended September 30, 2020, compared to $1.8 million for the same period a year ago.

Interest expense on deposits increased $429,000, or 8.7%, to $5.3 million for the nine months ended September 30, 2020, compared to $4.9 million for the same period in 2019.

The decrease for

the three month period primarily was due to the lower weighted average interest rate paid on deposits.

The increase for the nine month period was primarily due to the increase in average balance of deposits.

The average balance of deposits was $715.2 million and $673.0 million during the three and nine months ended September 30, 2020, respectively, compared to $594.4 million and $579.7 million during the three and nine months ended September 30, 2019, respectively.

The weighted average rate paid on deposits was 0.96% and 1.06% for the three and nine months ended September 30, 2020, respectively, compared to 1.22% and 1.13% for the three months ended September 30, 2019, respectively.

The average rate paid on deposits declined due to a reduction in market interest rates over the last year, primarily as a result of the 150 basis point reduction in the targeted federal funds rate discussed above.

Interest expense on borrowings, including the Notes, increased $10,000, or 10.0%, to $110,000 for the three months ended September 30, 2020 and decreased $442,000, or 65.6%, to $232,000 for the nine months ended September 30, 2020, compared to the comparable periods a year ago.

The increase for the three months ended September 30, 2020 was a result of higher weighted-average balance of borrowings, including the Notes, partially offset by a lower weighted average cost of borrowings.

The decrease for the nine months ended September 30, 2020 was a result of a lower weighted average balance of borrowings and lower weighted average cost of borrowings.

The weighted average balance of borrowings outstanding for the three and nine months ended September 30, 2020 was $42.2 million and $20.8 million, respectively, compared to $8.5 million and $28.8 million for the three and nine months ended September 30, 2019, respectively.

On September 18, 2020, the Company completed a private placement of the Notes resulting in net proceeds, after placement fees and offering expenses, of approximately $11.7 million.

The weighted average cost of borrowings was 1.04% and 1.49% for the three and nine months ended September 30, 2020, respectively, compared to 4.65% and 3.13% for the three and nine months ended September 30, 2019, respectively.

Net Interest Income.

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.

Net interest income increased $14,000, or 0.2%, to $6.7 million for the three months ended September 30, 2020, from $6.6 million for the three months ended September 30, 2019.

Net interest income increased $143,000, or 0.7%, to $20.3 million for the nine months ended September 30, 2020, from $20.1 million compared to the same period a year ago.

The increase for the three and nine months ended September 30, 2020 primarily was a result of higher interest income on loans and lower interest expense.

Our net interest margin was 3.26% and 3.61% for three and nine months ended September 30, 2020, respectively, compared to 4.03% and 4.10% for the three and nine months ended September 30, 2019, respectively.

The low interest rate environment putting downward pressure on adjustable rate instruments combined with the impact of the low loan yields of the PPP loan portfolio, and a significant increase in low yielding interest-bearing deposits, adversely impacted net interest margin for the current year.

The decreases were also due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities as changes in the average rate paid on interest-bearing deposits tend to lag changes in market interest rate.

The average yield on PPP loans was 2.79% and 2.64% during the three and nine months ended September 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.

3 unchanged sentences

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 $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.

The Company recorded a provision for loan losses of $275,000 and $925,000 for the three and nine months ended September 30, 2020, respectively, compared to a provision for loan losses of $250,000 for the three months ended September 30, 2019 and a recapture from the allowance for loan losses of $150,000 for the nine months ended September 30, 2019, respectively.

The increase in the provision primarily reflects current economic conditions and gives consideration of probable loan losses due to the potential effects from higher forecasted unemployment rates and lower gross domestic product, as well as the impact on other economic conditions from COVID-19.

will not adversely impact our financial condition and results of operations.

A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations.

1 unchanged sentence

Noninterest Income .

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

Noninterest income increased $1.0 million, or 93.8%, to $2.1 million for the three months ended September 30, 2020, as compared to $1.1 million for the three months ended September 30, 2019, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

5 unchanged sentences

Total noninterest income $ 2,068 $ 1,067 $ 1,001 93.8 %

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

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

Loans sold during the three months ended September 30, 2020, totaled $89.5 million, compared to $16.6 million during the three months ended September 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 $1.5 million, or 51.0%, to $4.4 million for the nine months ended September 30, 2020, as compared to $2.9 million for the nine months ended September 30, 2019, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

5 unchanged sentences

Total noninterest income $ 4,355 $ 2,884 $ 1,471 51.0 %

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.

The increase in noninterest income during the nine months ended September 30, 2020 compared to the same period in 2019 was primarily due to increases in gain on sale of loans, partially offset by an increase in the downward adjustment on the fair value of mortgage servicing rights.

Loans sold during the nine months ended September 30, 2020, totaled $176.0 million, compared to $54.5 million during the nine months ended September 30, 2019, as the volume of loans originated for sale increased significantly primarily due to refinance activity as a result of low market interest rates.

Noninterest Expense .

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

Noninterest expense increased $10,000, or 0.02%, to $5.5 million during the three months ended September 30, 2020, compared to $5.5 million during the three months ended September 30, 2019, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

6 unchanged sentences

Total noninterest expense $ 5,530 $ 5,520 $ 10 0.2 %

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

The slight increase in noninterest expense during the three months ended September 30, 2020 compared to the same period in 2019 was primarily due to increases of $160,000 in regulatory assessments and $120,000 in data processing expense, partially offset by a $195,000 decrease in salaries and benefits expense.

Data processing expense increased due to technology investments and variable costs associated with loan origination activity.

Salaries and benefits expense decreased primarily due to an increase in deferred loan origination costs related to the PPP loans.

Regulatory assessments increased to normal levels as the Bank utilized all of its remaining regulatory assessment credits last year.

Noninterest expense decreased $264,000, or 1.5%, to $16.9 million during the nine months ended September 30, 2020 as compared to $17.1 million during the nine months ended September 30, 2019, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

6 unchanged sentences

Total noninterest expense $ 16,882 $ 17,146 $ (264) (1.5) %

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.

The decrease in noninterest expense during the nine months ended September 30, 2020 compared to the same period in 2019 was primarily due to decreases of $436,000 in salaries and benefits, $372,000 in operations and $123,000 in occupancy expense, partially offset by increases of $376,000 in data processing and $302,000 in regulatory assessments expense.

Salaries and benefits expense decreased primarily due to an increase in deferred loan origination costs related to the PPP loans.

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.

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 six months ended June 30, 2020.

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.

The efficiency ratio for the quarter ended September 30, 2020 was 63.36%, compared to 71.57% for the quarter ended September 30, 2019 and was 68.51% for the nine months ended September 30, 2020, compared to 74.46% for the nine months ended September 30, 2019.

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

Income Tax Expense .

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.

We incurred income tax expense of $588,000 and $1.4 million for the three and nine months ended September 30, 2020, respectively, as compared $395,000 and $1.2 million for the same periods in 2019, respectively.

effective tax rates for the three and nine months ended September 30, 2020 were 20.1% and 20.3%, respectively.

The effective tax rates for the three and nine months ended September 30, 2019 were 20.3% 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 six months ended June 30, 2020.

This discussion updates that disclosure for the nine months ended September 30, 2020.

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

2 unchanged sentences

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

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.

At September 30, 2020, the Bank had $129.1 million in cash and investment securities available-for-sale and $16.1 million in loans held-for-sale generally available for its cash needs.

Also, at September 30, 2020, the Bank had the ability to borrow an additional $198.6 million in FHLB advances based on existing collateral pledged, and could access $29.4 million through the Federal Reserve’s Discount Window.

Additionally, as of September 30, 2020, the Bank was approved to utilize the PPPLF.

The Bank may utilize the PPPLF pursuant to which the Bank will pledge PPP loans at face value as collateral to obtain FRB non-recourse loans.

During the quarter ended and as of September 30, 2020, the Bank did not utilize the PPPLF as it held a substantial cash and cash equivalent position as a result of PPP disbursed funds remaining unused in borrower deposit accounts and due to deposit customers increasing their balances due to COVID-19.

At September 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 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.

At September 30, 2020, outstanding loan commitments, including unused lines and letters of credit totaled $144.6 million, including $27.8 million of undisbursed construction and land loans.

Certificates of deposit scheduled to mature in one year or less at September 30, 2020, totaled $186.6 million.

Cash and cash equivalents increased $60.0 million to $115.8 million as of September 30, 2020, from $55.8 million as of December 31, 2019.

Net cash used in operating activities was $9.6 million for the nine months ended September 30, 2020.

Net cash used in investing activities totaled $73.0 million during the nine months ended September 30, 2020 and consisted primarily of increases in net loans and available-for-sale securities.

The $142.6 million of net cash provided by financing activities during the nine months ended September 30, 2020 primarily was the result of a $132.1 million net increase in deposits and the net proceeds received from the issuance and sale of the Notes as discussed above.

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

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.

During the quarter ended September 30, 2020, the Company completed a private placement of $12.0 million in aggregate principal amount of the Notes resulting in net proceeds, after placement fees and offering expenses, of approximately $11.7 million.

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

At September 30, 2020, the Company, on an unconsolidated basis, had $7.6 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.

4 unchanged sentences

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 June 30, 2020, is as follows (in thousands):

June 30, 2020

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

September 30, 2020

Commitments to make loans $ 73,484

18 unchanged sentences

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

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

At September 30, 2020, the Bank’s CBLR was 10.42%.

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

As of September 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.

12 unchanged sentences

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 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%.

If Sound Financial Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at September 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 September 30, 2020 was 10.42%.

Quantitative and Qualitative Disclosures About Market Risk

2 unchanged sentences

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