What changed in this filing

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Item 1. Business

2021-03-30 compared with 2020-03-12 · 453 added, 282 removed, 754 unchanged (49% of the section changed)

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These statements relate to our financial condition, results of operations, plans, objectives, future performance or business.

Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision.

Forward-looking statements are not statements of historical fact but are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions, or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision.

These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties.

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:

fluctuations in the demand for loans, the number of unsold homes, land and other properties, and fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area;

• 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 United States of America ("U.S.") and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;

• changes in consumer spending, borrowing and savings habits;

• 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.

Government and other governmental initiatives affecting the financial services industry;

• fluctuations in the demand for loans and the number of unsold homes, land and other properties;

• fluctuations in real estate values and residential, commercial and multifamily real estate market conditions in our market area;

• our ability to access cost-effective funding;

• uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the potential transition away from LIBOR toward new interest-rate benchmarks;

• our ability to control operating costs and expenses;

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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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• our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors who perform several of our critical processing functions;

changes in consumer spending, borrowing and savings habits;

changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

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

• changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board ("FASB"), including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods, including as a result of the Coronavirus Aid,

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Relief, and Economic Securities Act of 2020 ("CARES Act") and the Consolidated Appropriations Act, 2021 ("CAA, 2021");

• legislative or regulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations that adversely affect our business, and the availability of resources to address such changes;

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

Government and other governmental initiatives affecting the financial services industry;

• our ability to retain or attract key employees or members of our senior management team;

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• the possibility of other-than-temporary impairments of securities held in our securities portfolio;

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described from time to time in this Form 10-K and our other filings with the U.S.

• other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including as a result of the CAA, 2021 and recent COVID-19 vaccination efforts, and the other risks described from time to time in this Form 10-K and our other filings with the U.S.

Securities and Exchange Commission (the "SEC").

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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 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 the Federal National Mortgage Association ("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.

Table of Conten t s

We serve the Seattle Metropolitan Statistical Area ("MSA"), which includes King County (which includes the city of Seattle), Pierce County and Snohomish County within the Puget Sound region, and also serve Clallam and Jefferson Counties, on the North Olympic Peninsula of Washington.

We serve these markets through our headquarters in Seattle, eight branch offices, five of which are located in the Seattle MSA, two that are located in Clallam County and one that is located in Jefferson County.

We also have two loan production offices, one located in the Madison Park neighborhood of Seattle and one located in Sequim.

We serve these markets through our headquarters in Seattle, eight branch offices, four of which are located in the Seattle MSA, three that are located in Clallam County and one that is located in Jefferson County.

We also have a loan production office located in the Madison Park neighborhood of Seattle.

Based on the most recent branch deposit data provided by the FDIC, our share of deposits was approximately 0.12% in King County, approximately 0.50% in Pierce County and in Snohomish County approximately 0.40%.

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Major employment sectors include information and communications technology, financial services, aerospace, military, manufacturing, maritime, biotechnology, education, health and social services, retail trades, transportation and professional services.

The largest employers headquartered in our market area include U.S.

Joint Base Lewis-McChord, Navy Region Northwest, Microsoft, University of Washington, and Providence Health.

Other significant employers include Costco, Boeing, Nordstrom, Amazon.com, Starbucks, Alaska Air Group and Weyerhaeuser.

Economic conditions in our markets continue to improve over the last year.

Recent trends in housing prices and unemployment rates in our market areas reflect continuing improvement.

For the month of December 2019, the preliminary Seattle metropolitan statistical area (MSA) reported an unemployment rate of 2.9%, as compared to the national average of 3.5%, according to the latest available information from the Bureau of Labor Statistics.

Home prices in our markets also improved over the past year.

Significant employers headquartered in our market area include U.S.

Joint Base Lewis-McChord, Microsoft, University of Washington, Providence Health, Costco, Boeing, Nordstrom, Amazon.com, Starbucks, Alaska Air Group and Weyerhaeuser.

Economic conditions in our markets, and the U.S.

as a whole, were negatively impacted by the restrictions imposed on businesses as a result of the COVID-19 pandemic.

Recent trends in housing prices and unemployment rates in our market areas reflect the continuing impact of these restrictions.

For the month of December 2020, the preliminary Seattle MSA reported an unemployment rate of 5.1%, compared to the national average of 6.4%, according to the latest available information from the Bureau of Labor Statistics.

Home prices in our markets improved over the past year.

Based on information from Case-Shiller, the average home price in the Seattle MSA increased 11.7% in 2020.

This compares to the national average home price index increase in 2019 of 3.3%.

King County has the largest population of any county in the state of Washington with approximately 2.2 million residents and a median household income of approximately $95,000.

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Pierce County has approximately 891,000 residents and a median household income of approximately $75,400.

Based on information from the MLS, the median home sales price in Pierce County in December 2019 was $369,000, an 8.6% increase from December 2018's median home sales price of $340,000.

Based on information from the MLS, the median home sales price in Pierce County in December 2020 was $430,000, a 16.5% increase from December 2019's median home sales price of $369,000.

Snohomish County has approximately 819,000 residents and a median household income of approximately $87,000.

Based on information from the MLS, the median home sales price in Snohomish County as of December 2019 was $495,000, an 8.8% increase from December 2018's median home sales price of $455,000.

Based on information from the MLS, the median home sales price in Snohomish County at December 2020 was $535,000, an 8.1% increase from December 2019's median home sales price of $495,000.

Clallam County, with a population of approximately 77,000, has a median household income of approximately $59,000.

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Jefferson County, with a population of approximately 32,000, has a median household income of approximately $54,000.

Based on information from the MLS, the average home sales price in Jefferson County as of December 2019 was $375,000, an 11.8% increase from December 2018's median home sales price of $335,000.

Based on information from the MLS, the average home sales price in Jefferson County at December 2020 was $406,000, a 8.3% increase from December 2019's median home sales price of $375,000.

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Lending Activities

The following table presents information concerning the composition of our loan portfolio, excluding loans held-for-sale, by the type of loan for the dates indicated (dollars in thousands):

2020 2019 2018 2017 2016

Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

Real estate loans:

One-to-four family $ 130,657 21.2 % $ 149,393 24.0 % $ 169,830 27.3 % $ 157,417 28.5 % $ 152,386 30.3 %

Home equity 16,265 2.6 23,845 3.8 27,655 4.4 28,379 5.2 27,771 5.5

Commercial and multifamily 265,774 43.2 261,268 42.0 252,644 40.6 211,269 38.4 181,004 36.1

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Commercial business loans 64,217 10.4 38,931 6.3 38,804 6.2 40,829 7.4 26,331 5.3

Total loans 615,498 100.0 % 621,907 100.0 % 621,771 100.0 % 550,509 100.0 % 501,829 100.0 %

Deferred fees and discounts (2,135) (2,020) (2,228) (1,914) (1,828)

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Total loans, net $ 607,363 $ 614,247 $ 613,769 $ 543,354 $ 495,179

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The following table shows the composition of our loan portfolio in dollar amounts and in percentages by fixed and adjustable-rate loans for the dates indicated (dollars in thousands):

2020 2019 2018 2017 2016

Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

Fixed-rate loans:

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One-to-four family $ 60,869 9.9 % $ 79,304 12.8 % $ 94,237 15.2 % $ 117,590 21.3 % $ 142,537 28.4 %

Home equity 4,673 0.8 12,505 2.0 11,052 1.8 11,373 2.1 9,102 1.8

Commercial and multifamily 91,885 14.9 106,161 17.1 102,907 16.5 89,094 16.2 77,285 15.4

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Total real estate loans 187,034 30.4 241,163 38.8 259,455 41.7 275,304 50.0 298,322 59.5

Consumer loans:

Manufactured homes 20,941 3.4 20,613 3.3 20,145 3.2 17,111 3.1 15,494 3.1

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Other consumer 14,632 2.3 7,777 1.3 6,090 1.0 4,316 0.8 3,297 0.6

Commercial business

Total consumer loans 67,508 11.0 62,929 10.2 67,041 10.8 50,547 9.2 42,787 8.5

Commercial business loans 49,561 8.1 7,411 1.2 9,705 1.6 16,889 3.1 12,581 2.5

Total fixed-rate loans 304,103 49.5 311,503 50.2 336,201 54.1 % 342,740 62.3 353,690 70.5

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One-to-four family 69,788 11.3 70,089 11.3 75,593 12.2 39,827 7.2 9,849 2.0

Home equity 11,592 1.8 11,340 1.8 16,603 2.7 17,007 3.1 18,669 3.7

Commercial and multifamily 173,889 28.3 155,107 24.8 149,737 24.0 122,175 22.2 103,719 20.7

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Total real estate loans 288,414 46.8 269,099 43.1 255,933 41.2 183,244 33.3 133,754 26.7

Consumer loans:

Floating homes 7,933 1.3 9,260 1.5 — — — — — —

Other consumer 392 0.1 525 0.1 538 0.1 585 0.1 635 0.1

Commercial business

Total consumer loans 8,325 1.4 9,785 1.6 538 0.1 585 0.1 635 0.1

Commercial business loans 14,656 2.3 31,520 5.1 29,099 4.6 23,940 4.3 13,750 2.7

Total adjustable-rate loans 311,395 50.5 310,404 49.8 285,570 45.9 207,769 37.7 148,139 29.5

Total loans 615,498 100.0 % 621,907 100.0 % 621,771 100.0 % 550,509 100.0 % 501,829 100.0 %

Deferred fees and discounts (2,135) (2,020) (2,228) (1,914) (1,828)

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Total loans, net $ 607,363 $ 614,247 $ 613,769 $ 543,354 $ 495,179

As of December 31, 2019 and 2018, we had floating or variable rate loans totaling $310.4 million and $285.6 million, respectively.

As of December 31, 2019, a total of $170.0 million have interest rate floors, of which $67.2 million are at their floors.

At December 31, 2020 and 2019, we had floating or variable rate loans totaling $311.4 million and $310.4 million, respectively.

At December 31, 2020, a total of $177.0 million have interest rate floors, of which $117.2 million are at their floors.

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The following table illustrates the contractual maturity of our construction and land and commercial business loans at December 31, 2020 (dollars in thousands).

Loans that have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due.

The total amount of loans due after December 31, 2020, which have predetermined interest rates, is $14.1 million, while the total amount of loans due after such date, which have floating or adjustable interest rates, is $36.7 million.

The amount of loans due after December 31, 2021 with fixed interest rates totaled $54.7 million, while the amount of loans due after such date with floating or adjustable interest rates totaled $18.8 million.

The table does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

Construction and Land

Commercial Business

Construction and Land Commercial Business Total

Amount Weighted

Average Rate Amount Weighted

$ 46,674 4.85 % $ 6,580 4.61 % $ 53,254 4.82 %

2022 to 2025 10,598 6.17 49,656 1.49 60,254 2.32

2026 and thereafter 5,480 4.93 7,981 5.43 13,461 5.23

$ 62,752 5.08 % $ 64,217 2.30 % $ 126,969 3.67 %

(1) Includes demand loans, loans having no stated maturity and overdraft loans.

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Lending Authority .

Our President and Chief Executive Officer ("CEO") may approve unsecured loans up to $1.0 million and all types of secured loans up to 30% of our legal lending limit, or approximately $4.8 million as of December 31, 2019 .

Our Executive Vice President and Chief Credit Officer ("CCO") may approve unsecured loans up to $400,000 and secured loans up to 15% of our legal lending limit, or approximately $2.4 million as of December 31, 2019 .

Any loans over the CEO's lending authority or loans significantly outside our general underwriting guidelines must be approved by the Loan Committee consisting of four independent directors, the CEO and the CCO.

The Chief Banking Offer may approve unsecured loans up to $50,000 and all types of secured loans up to approximately $1.4 million at December 31, 2020.

Any loans over the CEO's lending authority or loans significantly outside our general underwriting guidelines must be approved by the Loan Committee of the Board of Directors, consisting of four independent directors, the CEO and the CCO.

Lending authority is also granted to certain other lending staff at lower amounts.

The Chief Banking Offer has lending authority of up to 7.5% of our legal lending limit for real estate and other secured loans, and $50,000 for unsecured loans.

Largest Borrowing Relationships .

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Our five largest relationships totaled $58.8 million in the aggregate, or 9.5% of our $615.5 million total loan portfolio, at December 31, 2020.

At December 31, 2019 , the largest lending relationship totaled $13.0 million consisting of an $8.5 million loan to a business and a $4.5 million loan to an individual, both collateralized by separate multifamily real estate properties.

The second largest relationship consisted of two loans to businesses both collateralized by two separate multifamily real estate properties and totaled $11.4 million.

The third largest relationship totaled $11.2 million consisting of two loans to businesses and a loan and line of credit to an individual, all collateralized by separate multifamily real estate properties.

The fourth and fifth largest relationships consisted of a $10.0 million line of credit loan participation to a third party loan originator secured by an assignment of promissory notes from their borrowers for construction projects, and two lines of credit loan participations totaling $10.0 million to third party loan originators with common ownership, collateralized by an assignment of promissory notes from their borrowers for construction projects.

At December 31, 2020, the largest lending relationship totaled $13.3 million and consisted of one loan to a business, collateralized by a multifamily real estate property.

The second largest relationship totaled $13.0 million and consisted of one $8.5 million loan to a business and separately a $4.5 million loan to an individual, both collateralized by a multifamily real estate property.

The third largest relationship totaled $12.1 million and consisted of four loans to two businesses, all collateralized by multifamily real estate properties.

The fourth largest relationship totaled $11.1 million and consisted of two loans totaling $8.2 million to an individual and two loans totaling $2.9 million to two businesses, all collateralized by multifamily real estate.

The fifth top borrowing relationship totaled $9.3 million and consisted of four loans to three businesses secured by multifamily real estate.

These top five borrowers had unused commitments totaling $7.6 million at December 31, 2020.

At December 31, 2019 , we had five other lending relationships that exceeded $6.3 million.

All of the foregoing loans were performing in accordance with their repayment terms as of December 31, 2019 .

At December 31, 2020, we had 15 additional lending relationships in excess of $5.0 million totaling $97.8 million.

All of the foregoing loans were performing in accordance with their repayment terms at December 31, 2020.

One-to-Four Family Real Estate Lending .

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We originate both fixed-rate and adjustable-rate loans.

During 2019, our fixed rate, one-to-four family loan originations increased $36.5 million, or 53.8% to $104.3 million compared to $67.8 million in 2018, while one-to-four family adjustable rate mortgage ("ARM") loan originations decreased $20.1 million, or 44.9% to $24.6 million compared to $44.7 million in 2018.

In 2019, we identified demand in the marketplace for one-to-four family, residential fixed rate mortgage loans, especially jumbo loans (loans above $484,400, the conforming Fannie Mae limit in our market area).

In 2019, the average loan amount was $579,000 for adjustable rate, one-to-four family mortgages.

During 2020, our fixed-rate, one-to-four family loan originations increased $191.2 million, or 183.2%, to $295.5 million compared to $104.3 million in 2019, while one-to-four family adjustable-rate loan originations increased $1.2 million, or 4.6% to $25.8 million compared to $24.6 million in 2019.

In 2019, we identified demand in the marketplace for one-to-four family, residential fixed-rate mortgage loans, especially jumbo loans (generally loans above the conforming Fannie Mae limits of $548,000 or $766,000, depending on location within our market area).

In 2020, our average loan amount was $586,000 for adjustable-rate, one-to-four family mortgages.

Most of our loans are underwritten using generally-accepted secondary market underwriting guidelines.

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We also originate a small portion of government guaranteed and jumbo loans for sale servicing released to certain correspondent purchasers.

The sale of mortgage loans provides a source of non-interest income through the gain on sale, reduces our interest rate risk, provides a stream of servicing

income, enhances liquidity and enables us to originate more loans at our current capital level than if we held the loans in our loan portfolio.

The sale of mortgage loans provides a source of non-interest income through the gain on sale, reduces our interest-rate risk, provides a stream of servicing income, enhances liquidity and enables us to originate more loans at our current capital level than if we held the loans in our loan portfolio.

Our pricing strategy for mortgage loans includes establishing interest rates that are competitive with other financial institutions and consistent with our internal asset and liability management objectives.

At December 31, 2019 , one-to-four family residential mortgage loans (excluding loans held-for-sale) totaled $149.4 million , or 24.0% , of our gross loan portfolio, of which $79.3 million were fixed-rate loans and $70.0 million were ARM loans, compared to $169.8 million (excluding loans held-for-sale), or 27.3 % of our gross loan portfolio as of December 31, 2018 , of which $94.2 million were fixed-rate loans and $75.6 million were ARM loans.

At December 31, 2020, one-to-

Table of Conten t s

four family residential mortgage loans (excluding loans held-for-sale) totaled $130.7 million, or 21.2%, of our gross loan portfolio, of which $60.9 million were fixed-rate loans and $69.8 million were adjustable-rate loans, compared to $149.4 million (excluding loans held-for-sale), or 24.0% of our gross loan portfolio at December 31, 2019, of which $79.3 million were fixed-rate loans and $70.1 million were adjustable-rate loans.

Substantially all of the one-to-four family residential mortgage loans we retain in our portfolio consist of loans that do not satisfy acreage limits, income, credit, conforming loan limits (i.e., jumbo mortgages) or various other requirements imposed by Fannie Mae or private investors.

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We generally underwrite our one-to-four family loans based on the applicant's employment and credit history and the appraised value of the subject property.

We generally lend up to 80% of the lesser of the appraised value or purchase price for one- to four-family first mortgage loans and non-owner occupied first mortgage loans.

For first mortgage loans with a loan-to-value ratio in excess of 80%, we may require private mortgage insurance or other credit enhancement to help mitigate the risk.

We generally lend up to 80% of the lesser of the appraised value or purchase price for one-to-four family first mortgage loans and nonowner-occupied first mortgage loans.

For first mortgage loans with a loan-to-value ratio in excess of 80%, we may require private mortgage insurance or other credit enhancement to help mitigate credit risk.

Properties securing our one-to-four family loans are typically appraised by independent fee appraisers who are selected in accordance with criteria approved by the Loan Committee.

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In addition, we had $8.9 million one-to-four family loans with a five-year call option at December 31, 2020.

Prior to 2012, we originated for portfolio five and seven year balloon reset loans (which are loans that are originated with a fixed interest rate for the initial five or seven years, and thereafter incur one interest rate change based on current market interest rates in which the new rate remains in effect for the remainder of the loan term) based on a 30-year amortization period.

ARM loans are offered with annual adjustments and life-time rate caps that vary based on the product, generally with a maximum annual rate change of 2.0% and a maximum overall rate change of 6.0%.

We generally use the rate on one-year LIBOR to re-price our ARM loans, however, $7.9 million of our ARM loans are to employees and directors that re-price annually based on a margin of 1%-1.50% over our average 12 month cost of funds.

As a consequence of using caps, the interest rates on ARM loans may not be as rate sensitive as our cost of funds.

Furthermore, because loan indexes may not respond perfectly to changes in market interest rates, upward adjustments on loans may occur more slowly than increases in our cost of interest-bearing liabilities, especially during periods of rapidly increasing interest rates.

Because of these characteristics, future yields on ARM loans may not be sufficient to offset increases in our cost of funds.

We continue to offer our fully amortizing ARM loans with a fixed interest rate for the first one, three, five or seven years, followed by a periodic adjustable interest rate for the remaining term.

Given the recent increase in market rates over the past year, the origination of ARM loans has increased significantly as borrowers are beginning to favor ARM loans over fixed-rate mortgages.

Adjustable-rate loans are offered with annual adjustments and lifetime rate caps that vary based on the product, generally with a maximum annual rate change of 2.0% and a maximum overall rate change of 6.0%.

We generally use the rate on one-year LIBOR to re-price our adjustable-rate loans, however, $8.2 million of our adjustable-rate loans are to employees and directors that re-price annually based on a margin of 1%-1.50% over our average 12-month cost of funds.

As a consequence of using annual adjustments and lifetime caps, the interest rates on adjustable-rate loans may not be as rate sensitive as our cost of funds.

Furthermore, because loan indices may not respond perfectly to changes in market interest rates, upward adjustments on loans may occur more slowly than increases in our cost of interest-bearing liabilities, especially during periods of rapidly increasing interest rates.

Because of these characteristics, future yields on adjustable-rate loans may not be sufficient to offset increases in our cost of funds.

We continue to offer our fully amortizing adjustable-rate loans with a fixed interest rate for the first one, three, five or seven years, followed by a periodic adjustable interest rate for the remaining term.

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower.

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Upward adjustments of the contractual interest rate are also limited by our maximum periodic and lifetime rate adjustments.

Moreover, the interest rates on most of our adjustable-rate loans do not adjust within the next year and may not adjust for up to ten years

after origination.

Moreover, the interest rates on most of our adjustable-rate loans do not adjust within the next year and may not adjust for up to ten years after origination.

As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.

At December 31, 2019 , $20.7 million, or 13.9% of our one-to-four family residential portfolio consisted of non-owner occupied loans, compared to $50.2 million, or 29.6% of our one-to-four family residential portfolio at December 31, 2018.

At December 31, 2019, our average non-owner occupied residential loan had a balance of $284,000.

At December 31, 2020, $19.6 million, or 15.0% of our one-to-four family residential portfolio consisted of nonowner-occupied loans, compared to $20.7 million, or 13.9% of our one-to-four family residential portfolio at December 31, 2019.

At December 31, 2020, our average nonowner-occupied residential loan had a balance of $327,000.

Loans secured by rental properties represent potentially higher risk.

As a result, we adhere to more stringent underwriting guidelines which may include, but are not limited to, annual financial statements, a budget factoring in a rental income cash flow analysis of the borrower as well as the net operating income of the property, information concerning the borrower’s expertise, credit history and profitability, and the value of the underlying property.

Table of Conten t s

well as the net operating income of the property, information concerning the borrower’s expertise, credit history and profitability, and the value of the underlying property.

In addition, these loans are generally secured by a first mortgage on the underlying collateral property along with an assignment of rents and leases.

Of primary concern in non-owner occupied real estate lending is the consistency of rental income of the property.

Of primary concern in nonowner-occupied real estate lending is the consistency of rental income of the property.

Payments on loans secured by rental properties may depend primarily on the tenants’ continuing ability to pay rent to the property owner, the character of the borrower or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream.

In addition, successful operation and management of non-owner occupied properties, including property maintenance standards, may affect repayment.

In addition, successful operation and management of nonowner-occupied properties, including property maintenance standards, may affect repayment.

As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy.

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In 2016, in order to enable individuals to secure the purchase of a new residence before selling their existing residence, we commenced a loan program designed to allow borrowers to access the equity in their current residence to apply towards the purchase of a new residence.

The loan or loans to purchase the new residence are generally originated in an amount in excess of $1.0 million and secured by the borrowers existing and/or new residences, with a maximum combined LTV of up to 80%.

The loan or loans to purchase the new residence are generally originated in an amount in excess of $1.0 million and secured by the borrower's existing and/or new residences, with a maximum combined loan-to-value ratio of up to 80%.

These loans provide for repayment upon the earlier of the sale of the current residence or the loan maturity date, which is typically up to 12 months.

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At December 31, 2020, home equity loans totaled $16.3 million, or 2.6% of our total loan portfolio, compared to $23.8 million, or 3.8% of our total loan portfolio at December 31, 2019.

Adjustable-rate home equity lines of credit at December 31, 2019 totaled $11.3 million, or 1.8 % of our total loan portfolio, compared to $16.6 million, or 2.7 % of our total loan portfolio as of December 31, 2018 .

Adjustable-rate home equity lines of credit at December 31, 2020 totaled $11.6 million, or 1.8% of our total loan portfolio, compared to $11.3 million, or 1.8% of our total loan portfolio at December 31, 2019.

At December 31, 2020, unfunded commitments on home equity lines of credit totaled $16.8 million.

Our fixed-rate home equity loans generally have terms of up to 15 years and are fully amortizing.

At December 31, 2019 , fixed-rate home equity loans totaled $12.5 million, or 2.0% of our gross loan portfolio, compared to $11.1 million, or 1.8% of our total loan portfolio as of December 31, 2018 .

At December 31, 2020, fixed-rate home equity loans totaled $4.7 million, or 0.8% of our gross loan portfolio, compared to $12.5 million, or 2.0% of our total loan portfolio at December 31, 2019.

Commercial and Multifamily Real Estate Lending.

We offer a variety of commercial and multifamily real estate loans.

Most of these loans are secured by owner-occupied and non-owner-occupied commercial income producing properties, multifamily apartment buildings, warehouses, office buildings, gas station/convenience stores and mobile home parks located in our market area.

At December 31, 2019 , commercial and multifamily real estate loans totaled $261.3 million , or 42.0% of our total loan portfolio, compared to $252.6 million, or 40.6 % of our total loan portfolio as of December 31, 2018 .

Most of these loans are secured by owner-occupied and nonowner-occupied commercial income producing properties, multifamily apartment buildings, warehouses, office buildings, gas station/convenience stores and mobile home parks located in our market area.

At December 31, 2020, commercial and multifamily real estate loans totaled $265.8 million, or 43.2% of our total loan portfolio, compared to $261.3 million, or 42.0% of our total loan portfolio at December 31, 2019.

Loans secured by commercial and multifamily real estate are generally originated with a variable interest rate, fixed for an initial three- to ten-year term and a 20- to 25-year amortization period.

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Loans secured by commercial and multifamily real estate are generally underwritten based on the net operating income of the property, quality and location of the real estate, the credit history and financial strength of the borrower and the quality of management involved with the property.

The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt plus an additional coverage requirement.

Table of Conten t s

coverage requirement.

We generally impose a minimum debt service coverage ratio of 1.20 for originated loans secured by income producing commercial properties.

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From time to time we also acquire participation interests in commercial and multifamily real estate loans originated by other financial institutions secured by properties located in our market area.

Historically, loans secured by commercial and multifamily properties generally involve different credit risks than one- to four-family properties.

Historically, loans secured by commercial and multifamily properties generally present different credit risks than one-to-four family properties.

These loans typically involve larger balances to single borrowers or groups of related borrowers.

Because payments on loans secured by commercial and multifamily properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy.

Repayments of loans secured by non-owner occupied properties depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream.

Repayments of loans secured by nonowner-occupied properties depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream.

If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower's ability to repay the loan may be impaired.

Commercial and multifamily real estate loans also expose a lender to greater credit risk than loans secured by one-to-four family because the collateral securing these loans typically cannot be sold as easily as one-to-four family.

In addition, most of our commercial and multifamily real estate loans are not fully amortizing and include balloon payments upon maturity.

Balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment.

The largest single commercial and multifamily real estate loan at December 31, 2019 , totaled $7.3 million and is collateralized by multifamily property.

The largest single commercial and multifamily real estate loan at December 31, 2020, totaled $13.3 million and was collateralized by a multifamily property.

At December 31, 2020, this loan was performing in accordance with its repayment terms.

The following table provides information on commercial and multifamily real estate loans by type at December 31, 2020 and 2019 (dollars in thousands):

Amount Percent Amount Percent

Multifamily residential $ 89,364 33.6 % $ 73,891 28.3 %

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Owner-occupied commercial real estate other (1)

21,045 7.9 16,857 6.5

Non-owner occupied commercial real estate retail 7,629 2.9 11,324 4.3

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Non-owner occupied commercial real estate other (1)

78,896 29.7 82,488 31.6

Warehouses 14,683 5.5 15,524 5.9

Gas station/Convenience store 12,481 4.7 13,933 5.3

Mobile Home Parks 5,859 2.2 9,074 3.5

Total $ 265,774 100.0 % $ 261,268 100.0 %

(1) Other commercial real estate loans include schools, churches, storage facilities, restaurants, etc.

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We also originate land acquisition and development loans, which are secured by raw land or developed lots on which the borrower intends to build a residence.

At December 31, 2019 , our construction and land loans totaled $75.8

million , or 12.2% of our total loan portfolio, compared to $65.3 million , or 10.6 % of our total loan portfolio at December 31, 2018.

At December 31, 2020, our construction and land loans totaled $62.8 million, or 10.2% of our total loan portfolio, compared to $75.8 million, or 12.2% of our total loan portfolio at December 31, 2019.

At December 31, 2020, unfunded construction loan commitments totaled $19.0 million.

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Construction loans to individuals and contractors for the construction of personal residences, including speculative residential construction, totaled $13.8 million, or 22.0%, of our construction and land portfolio at December 31, 2020.

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The composition of, and location of underlying collateral securing, our construction and land loan portfolio, excluding loan commitments, at December 31, 2020 was as follows (in thousands):

Olympic Peninsula

Puget Sound Olympic Peninsula Other Total

Commercial and multifamily construction $ 40,557 $ — $ 730 $ 41,287

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Residential construction 2,469 1,527 — 3,996

Total $ 55,152 $ 6,766 $ 834 $ 62,752

Our residential construction loans generally provide for the payment of interest only during the construction phase, which is typically twelve to eighteen months.

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however, we generally do not originate construction loans which exceed these limits without some form of credit enhancement to mitigate the higher loan to value.

At December 31, 2019 , our largest residential construction loan commitment was for $2.8 million, $1.6 million of which had been disbursed.

At December 31, 2020, our largest residential construction loan commitment was for $1.1 million, $742,000 of which had been disbursed.

This loan was performing according to its repayment terms at December 31, 2020.

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We require that developers maintain adequate insurance coverage.

Land acquisition and development loans generally are originated with a loan term up to 24 months, have adjustable rates of interest based on the Wall Street Journal Prime Rate or the three or five- year rate charged by the Federal Home Loan Bank of Des Moines ("FHLB") and require interest only payment during the term of the loan.

Land acquisition and development loans generally are originated with a loan term up to 24 months, have adjustable rates of interest based on the Wall Street Journal Prime Rate or the three- or five-year rate charged by the Federal Home Loan Bank ("FHLB") of Des Moines and require interest-only payment during the term of the loan.

Land acquisition and development loan proceeds are disbursed periodically in increments as construction progresses and as an inspection by our approved inspector warrants.

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Commercial and multifamily construction loans are made up to the lesser of a maximum loan-to-value ratio of 100% of cost or 80% of appraised value at completion.

Most of our commercial and multifamily construction loans provide for disbursement of loan funds during the construction

period and conversion to a permanent loan when the construction is complete, and either tenant lease-up provisions or prescribed debt service coverage ratios are met.

At December 31, 2019 , commercial and multifamily construction loans totaled $39.8 million, or 52.5% of our construction and land portfolio, compared to $30.4 million, or 46.6% of our construction and land portfolio at December 31, 2018 .

The three largest commercial and multifamily construction loans at December 31, 2019 included a $4.8 million loan secured by a multifamily residential and retail building, a $4.3 million loan secured by a multifamily residential and mixed use project and a $3.7 million loans secured by a multifamily residential and mixed use project, all located in Washington.

Most of our commercial and multifamily construction loans provide for disbursement of loan funds during the construction period and conversion to a permanent loan when the construction is complete and either tenant lease-up provisions or prescribed debt service coverage ratios are met.

At December 31, 2020, commercial and multifamily construction loans totaled

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$41.3 million or 65.8% of our construction and land portfolio, compared to $39.8 million, or 52.5% of our construction and land portfolio at December 31, 2019.

The three largest commercial and multifamily construction loans at December 31, 2020 included a $7.3 million loan secured by a commercial self-storage building, a $5.8 million loan secured by a multifamily residential property and a $4.3 million loan secured by a multifamily residential property, all located in King County, Washington.

At December 31, 2020, all of these loans were performing in accordance with their repayment terms.

Our construction and land development loans are based upon estimates of costs in relation to values associated with the completed project.

Construction/land lending involves additional risks when compared with permanent residential lending because funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion.

Construction and land lending involves additional risks when compared with permanent residential lending because funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion.

Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio.

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Our commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance commercial vehicles and equipment and loans secured by accounts receivable and/or inventory.

Approximately $1.0 million or 2.6% of our commercial business loans at December 31, 2019 were unsecured.

Our commercial business lending policy includes an analysis of the borrower's background, capacity to repay the loan, the adequacy of the borrower's capital and collateral, as well as an evaluation of other conditions affecting the borrower.

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Nonetheless, commercial business loans are believed to carry higher credit risk than residential mortgage and commercial real estate loans.

Our interest rates on commercial business loans are dependent on the type of loan.

At December 31, 2020, excluding our Paycheck Protection Program ("PPP") loans, approximately $782,000 of our commercial business loans were unsecured.

Commercial business loans also include loans originated under the PPP, a specialized low-interest loan program funded by the U.S.

Treasury Department and administered by the Small Business Administration ("SBA").

The Bank, as a qualified SBA lender, was authorized to originate PPP loans.

PPP loans have an interest rate of 1.0%, a two-year or five-year loan term to maturity, and principal and interest payments deferred until the lender receives the applicable forgiven amount or ten months after the end of the borrower’s loan forgiveness covered period.

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 reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and the loan proceeds are used for other qualifying expenses.

We originated 909 PPP loans totaling $74.8 million during 2020.

At December 31, 2020, 327 loans totaling $31.5 million had been submitted to and forgiven by the SBA, leaving a total of $43.3 million of PPP loans in our portfolio at December 31, 2020.

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Our interest rates on commercial business loans, excluding PPP loans, are dependent on the type of loan.

Our secured commercial business loans typically have a loan-to-value ratio of up to 80% and are term loans ranging from three to seven years.

Secured commercial business term loans generally have a fixed rated based on the commensurate FHLB amortizing rate or prime rate as reported in the West Coast edition of the Wall Street Journal plus 1% to 3%.

Secured commercial business term loans generally have a fixed interest rate based on the commensurate FHLB amortizing rate or prime rate as reported in the West Coast edition of the Wall Street Journal plus 1% to 3%.

In addition, we typically charge loan fees of 1% to 2% of the principal amount at origination, depending on the credit quality and account relationships of the borrower.

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Our business lines of credit generally have terms ranging from 12 months to 24 months and provide for interest-only monthly payments during the term.

Our commercial business loans are primarily based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.

Our commercial business loans, excluding PPP loans, are primarily based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.

The borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value.

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At December 31, 2020, these loans totaled $20.9 million, or 27.6% of our consumer loans and 3.4% of our total loan portfolio.

For used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $200,000, and with terms typically up to 20 years.

On new manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $200,000, and with terms typically up to 20 years.

For used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $200,000, with terms typically up to 20 years.

On new manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $200,000, with terms typically up to 20 years.

We generally charge a 1% fee at origination.

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We attempt to work out delinquent loans with the borrower and, if that is not successful, any past due manufactured homes are repossessed and sold.

At December 31, 2019 , there were seven nonperforming manufactured home loans totaling $226,000.

At December 31, 2020, there were four nonperforming manufactured home loans totaling $149,000.

We originate floating home, houseboat and house barge loans, typically located on cooperative or condominium moorages.

Terms vary from five to 20 years and have a fixed rate of interest.

Terms vary from five to 20 years and generally have a fixed rate of interest.

We lend up to 90% of the lesser of the appraised value or purchase price.

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Houseboats and house barge loans, which are included in other consumer loans, totaled $12.8 million, or 16.8% of our consumer loan portfolio and 7.1% of our total loan portfolio.

The balance of our consumer loans include loans secured by new and used automobiles, new and used boats, motorcycles and recreational vehicles, loans secured by deposits and unsecured consumer loans, all of which, at December 31, 2019 , totaled $8.3 million , or 11.4 % of our consumer loan portfolio and 1.3 % of our total loan portfolio.

Table of Conten t s

The balance of our consumer loans includes loans secured by new and used automobiles, new and used boats, motorcycles and recreational vehicles, loans secured by deposits and unsecured consumer loans, all of which, at December 31, 2020, totaled $2.3 million, or 3.0% of our consumer loan portfolio and 0.4% of our total loan portfolio.

Our automobile loan portfolio totaled $1.2 million at December 31, 2020, or 1.8% of our consumer loan portfolio and 0.2% of our total loan portfolio.

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These loans may be made with fixed or adjustable interest rates.

Our unsecured consumer loans have either a fixed rate of interest generally for a maximum term of 48 months, or are revolving lines of credit

of generally up to $25,000.

Our unsecured consumer loans have either a fixed rate of interest generally for a maximum term of 48 months, or are revolving lines of credit of generally up to $25,000.

At December 31, 2020, unsecured consumer loans totaled $701,000 and unfunded commitments on our unsecured consumer lines of credit totaled $1.4 million.

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Demand is affected by competition and the interest-rate environment.

During the past few years, we, like many other financial institutions, have experienced significant prepayments on loans due to the prevailing low interest rate environment in the United States.

During the past few years, we, like many other financial institutions, have experienced significant prepayments on loans due to the prevailing low interest-rate environment in the U.S.

In periods of economic uncertainty, the ability of financial institutions, including us, to originate large dollar volumes of real estate loans may be substantially reduced or restricted, with a resultant decrease in interest income.

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From time to time, we also participate with other financial institutions on loans they originate.

We sold commercial loan participations in the amount of $3.7 million in 2019, zero in 2018 and $3.1 million in 2017, respectively.

We sold no commercial loan participations in 2020 or 2018 and $3.7 million in 2019.

We underwrite loan purchases and participations to the same standards as internally originated loans.

We had no purchases of commercial business loan participations from other financial institutions in 2019 and 2018, and purchased two commercial business loan participations from other financial institutions totaling $15.5 million in 2017.

We had no purchases of commercial business loan participations from other financial institutions in 2020 and 2019.

We originate loans that may meet one or more of the credit characteristics commonly associated with subprime lending.

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We also sell whole one-to-four family loans without recourse to Fannie Mae and other investors, subject to a provision for repurchase upon breach of representation, warranty or covenant.

These loans are fixed-rate mortgages, which primarily are sold to reduce our interest rate risk and generate noninterest income.

These loans are fixed-rate mortgages, which primarily are sold

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to reduce our interest-rate risk and generate noninterest income.

These loans are generally sold for cash in amounts equal to the unpaid principal amount of the loans determined using present value yields to the buyer.

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We earned mortgage servicing income of $1.0 million, $1.0 million and $1.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

See Note 6 in the Notes to Consolidated Financial Statements contained in Item 8 of this report on Form 10-K.

See "Note 6 — Mortgage Servicing Rights" in the Notes to Consolidated Financial Statements contained in "Part II.

Financial Statements and Supplementary Data" of this report on Form 10-K.

Sales of whole real estate loans are beneficial to us since these sales may generate income at the time of sale, produce future servicing income on loans where servicing is retained, provide funds for additional lending, and increase liquidity.

$78.9 million of conforming one- to four- family loans during the year ended December 31, 2019 , of which $16.2 million were sale to other investors in first quarter of 2019.

We sold $258.2 million of conforming one-to-four family loans during the year ended December 31, 2020, of which $5.9 million were sales to other investors.

We sold $79.0 million and $50.0 million of conforming one-to-four family loans during the years ended 2019 and 2018, respectively.

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In 2020 and 2019, we sold $5.9 million and $13.2 million, respectively, of loans servicing released.

Table of Conten t s

The following table shows our loan origination, sale and repayment activities, including loans held-for-sale, for the periods indicated (in thousands):

Year Ended December 31,

2020 2019 2018

Originations by type:

One-to-four family $ 295,522 $ 104,343 $ 67,823

Home equity 1,141 7,587 4,459

Commercial and multifamily 23,288 38,458 94,725

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One-to-four family 25,776 24,634 44,726

Home equity 9,187 3,060 9,705

Commercial and multifamily 44,067 53,885 55,945

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Total loans originated 575,162 309,103 352,588

Purchases by type:

Commercial business participations

Total loan participations purchased

Sales, repayments and participations sold:

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Total loans sold and loan participations 258,182 82,612 49,966

Transfers to OREO 19

Total principal repayments 323,485 226,256 231,627

Total reductions 581,686 308,868 281,593

The decrease in overall originations in 2019 compared to 2018 was primarily due to competition for commercial, multifamily and commercial business loans in our market area.

Demand for other loans, particularity one-to-four family loans, grew in 2019 due to refinance activity driven by lower interest rates during the period.

Net (decrease) increase $ (6,524) $ 235 $ 70,995

The increase in total loan originations in 2020 compared to 2019 was primarily due to high levels of loan activity in the one-to-four family, commercial business and construction and land categories.

Demand for one-to-four family loans grew in 2020 as homeowners, taking advantage of historically low interest rates, refinanced their homes.

In addition, the pandemic increased demand for single-family homes outside downtown metropolitan areas.

Demand for construction loans, including new homes and apartment buildings increased due to appreciation in market prices, declining supplies of homes for sale and continued strong rental demand in our market area.

Floating homes, home equity and manufactured home loan originations decreased due to competition for loans in our market area.

Commercial business loans increased due to PPP loan originations.

Asset Quality

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If the account becomes 120 days delinquent and an acceptable foreclosure alternative has not been agreed upon, we generally refer the account to legal counsel with instructions to prepare a notice of default.

The notice of default begins the foreclosure process.

The notice of default begins the

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foreclosure process.

If foreclosure is completed, typically we take title to the property and sell it directly through a real estate broker.

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Delinquent Loans.

The following table sets forth our loan delinquencies by type, by amount and by percentage of type at December 31, 2019 (dollars in thousands):

The following table sets forth our loan delinquencies by type (excluding COVID-19 modified loans), by amount and by percentage of type at December 31, 2020 (dollars in thousands):

Loans Delinquent For:

90 Days and Over

Total Delinquent Loans

Loan Category

30-89 Days 90 Days and Over Total Delinquent Loans

Number Amount Percent of

Loan Category Number Amount Percent of

Loan Category

One-to-four family 8 $ 860 0.7 % 7 $ 1,407 1.1 % 15 $ 2,267 1.8 %

Home equity 4 102 0.6 4 112 0.7 8 214 1.3

Commercial and Multifamily — — — 1 353 0.1 1 353 0.1

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Commercial Business 1 583 0.9 — — — 1 583 0.9

Total 31 $ 2,753 0.5 % 18 $ 2,310 0.4 % 49 $ 5,063 0.9 %

Table of Conten t s

Nonperforming Assets.

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Other real estate owned ("OREO") and repossessed assets include assets acquired in settlement of loans.

2020 2019 2018 2017 2016

Nonaccrual loans (1) :

One-to-four family $ 1,668 $ 2,090 $ 1,120 $ 837 $ 2,216

Home equity 156 261 359 722 553

Commercial and multifamily 353 353 534 201 218

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One-to-four family $ 1,965 $ 6,638 $ 1,511 $ 2,876 $ 1,977

Home equity 137 59 60 158 144

Commercial and multifamily — — — — 361

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Total performing restructured loans $ 2,984 $ 7,294 $ 1,973 $ 3,269 $ 2,765

Nonaccrual loans include $588,000, $817,000, $445,000, $683,000 and $971,000 in nonperforming troubled debt restructurings as of December 31, 2019 , 2018, 2017, 2016 and 2015, respectively.

(1) Nonaccrual loans include $262,000, $588,000, $817,000, $445,000, and $683,000 in nonperforming troubled debt restructurings at December 31, 2020, 2019, 2018, 2017, and 2016, respectively.

We had no accruing loan 90 days or more delinquent for the periods reported.

Nonaccrual loans, including nonaccrual TDRs, increased $2.0 million to $4.7 million at December 31, 2019 from $2.7 million at December 31, 2018 .

Our largest nonperforming loan at December 31, 2019 was a $1.1 million.

Nonperforming one- to four- family loans at December 31, 2019 consisted of 12 loans to different borrowers with an average loan balance of $174,000.

There were seven manufactured home loans, five home equity loans, four commercial business loans, three construction and land loans, one commercial and multifamily real estate loan and one floating home loan classified as nonperforming at December 31, 2019 .

Nonaccrual loans, including nonaccrual troubled debt restructurings ("TDRs"), decreased $1.8 million to $2.9 million at December 31, 2020 from $4.7 million at December 31, 2019.

Our largest nonperforming loan at December 31, 2020 was a one-to-four family home totaling $945,000.

Nonperforming one-to-four family loans at December 31, 2020 consisted of nine loans to different borrowers with an average loan balance of $185,000.

In addition, there were four manufactured home loans, five home equity loans, one commercial and multifamily loan, one construction and land loan, and two floating home loans classified as nonperforming at December 31, 2020.

For the year ended December 31, 2020, gross interest income that would have been recorded had the nonaccrual loans been current in accordance with their original terms amounted to $168,000, all of which was excluded from interest income for the year ended December 31, 2020.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition at December 31, 2020 Compared to December 31, 2019—Delinquencies and Nonperforming Assets" contained in Item 7 of this report on Form 10-K for more information on troubled assets.

Table of Conten t s

Troubled Debt Restructured Loans.

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

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

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

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At December 31, 2020, OREO and repossessed assets totaled $594,000.

Our OREO at December 31, 2019 , consisted 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.

Our OREO at December 31, 2020, consisted of two properties.

The first is 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 local not-for-profit organization at a below-market rate.

The second OREO property is a manufactured home located in Everett, Washington.

Other Loans of Concern.

In addition to the nonperforming assets set forth in the table above, as of December 31, 2019 , there were 43 loans totaling $10.1 million about which known information of possible credit or other problems caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the nonperforming asset categories.

The two largest loans of concern at December 31, 2019 , were a $2.7 million loan and $2.0 million loan both secured by one- to four-family residential real estate located in King County, Washington.

Additionally, other loans of concern included, $2.4 million in commercial and multifamily real estate loans, $1.3 million in commercial business loans, $1.0 million in one-to four-family, $378,000 in home equity loans, $59,000 in manufactured homes, and $52,000 in other consumer loans.

In addition to the nonperforming assets set forth in the table above, at December 31, 2020, there were 13 loans totaling $15.1 million about which known information of possible credit or other problems caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the nonperforming asset categories.

At December 31, 2020, the three largest loans of concern a were a multifamily real estate loan for $3.5 million, a nonowner-occupied commercial real estate loan for $3.4 million and a commercial construction loan of $3.1 million, all located in King County, Washington.

The first two borrowers had requested and were granted COVID-19 loan modifications for six months and have since returned to contractual payment terms and the third borrower completed a restructuring of ownership in 2020 and has successfully renewed its loan to mature in 2021.

The balance of our loans of concern included $4.0 million in commercial and multifamily real estate loans, $834,000 in construction and land loans, and $310,000 in commercial business loans.

Classified Assets.

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Large groups of smaller balance homogeneous loans, such as one-to-four family, small commercial and multifamily real estate, home equity and consumer loans, including floating homes and manufactured homes, are evaluated in the aggregate using historical loss factors and peer group data adjusted for current economic conditions.

More complex loans, such as commercial and multifamily real estate loans and commercial business loans are evaluated individually for impairment, primarily through the evaluation of the borrower's net operating income and available cash flow and their possible impact on collateral values.

At December 31, 2019 , our allowance for loan losses was $5.6 million , or 0.91% of our total loan portfolio, compared to $5.8 million, or 0.93% of our total loan portfolio in 2018 .

More complex loans, such as commercial and multifamily real estate loans

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and commercial business loans are evaluated individually for impairment, primarily through the evaluation of the borrower's net operating income and available cash flow and their possible impact on collateral values.

At December 31, 2020, our allowance for loan losses was $6.0 million, or 0.98% of our total loan portfolio, compared to $5.6 million, or 0.91% of our total loan portfolio, at December 31, 2019.

Specific valuation reserves totaled $378,000 and $724,000 at December 31, 2020 and 2019, respectively.

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In the opinion of management, the allowance, when taken as a whole, properly reflects estimated probable loan losses inherent in our loan portfolio.

See Notes 1 and 5 in the Notes to Consolidated Financial Statements contained in Item 8 of this report on Form 10-K.

See "Note 1—Organization and Significant Accounting Policies" and "Note 5—Loans" in the Notes to Consolidated Financial Statements contained in "Part II.

Financial Statements and Supplementary Data" of this report on Form 10-K.

The following table sets forth an analysis of our allowance for loan losses at the dates indicated (dollars in thousands):

2020 2019 2018 2017 2016

Balance at beginning of period $ 5,640 $ 5,774 $ 5,241 $ 4,822 $ 4,636

One-to-four family (20) — — — (72)

Home equity (2) — (7) (89) (15)

Commercial and multifamily — — — (24) (314)

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One-to-four family 63 6 1 — 47

Home equity 46 10 44 33 78

Commercial and multifamily — — — 1 —

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Allowance as a percentage of total loans (end of period) 0.98 % 0.91 % 0.93 % 0.96 % 0.96 %

Economic conditions have been favorable in our market areas.

Housing prices have experienced continued growth throughout 2019, with historically low inventory levels.

Unemployment rates in many of our market areas remain low as the job market is competitive.

The allowance for loan losses as a percentage of nonperforming loans was 121.11% and 216.50% as of December 31, 2019 and 2018 , respectively.

The recapture from the allowance for loan losses totaled $125,000 for the year ended December 31, 2019 , compared to a provision for loan losses of $525,000 for the year ended December 31, 2018 .

The recapture in the current year was due to changes in the composition and size of our loan portfolio during the year.

Economic conditions in our markets, and the U.S.

as a whole, were negatively impacted by the restrictions imposed on businesses as a result of the COVID-19 pandemic.

Recent trends in housing prices and unemployment rates in our market areas reflect the continuing impact of these restrictions.

Although unemployment in our market area was generally lower than the

Table of Conten t s

national average in 2020 and home prices increased in 2020 compared to 2019, we continue to carefully monitor our loan portfolio for possible deterioration due to the pandemic.

The allowance for loan losses as a percentage of nonperforming loans was 208.04% and 121.11% at December 31, 2020 and 2019, respectively.

The provision for loan losses totaled $925,000 for the year ended December 31, 2020, compared to a recapture from the allowance for loan losses of $125,000 for the year ended December 31, 2019.

Net charge-offs were $565,000 for the year ended December 31, 2020, compared to net charge-offs of $9,000 for the year ended December 31, 2019.

The increase in 2020 charge-offs was primarily related to one commercial borrower who was forced into bankruptcy after a tragic vehicle accident.

Our line of credit with this borrower was approved in July 2019 for $975,000, secured by business assets, including 19 vehicles, and fully advanced at the time of bankruptcy.

Because the vehicles were specialized for offering land and sea tours, their value was depressed due to the pandemic.

As a result, our liquidation of the collateral resulted in a loss of $514,000.

The distribution of our allowance for losses on loans at the dates indicated is summarized as follows (dollars in thousands):

Percent of loans

2020 2019 2018 2017 2016

Amount Percent of Loans

in Each Category

to total loans

Percent of loans

to Total Loans Amount Percent of Loans

in Each Category

to total loans

Percent of loans

to Total Loans Amount Percent of Loans

in Each Category

to total loans

Percent of loans

to Total Loans Amount Percent of Loans

in Each Category

to total loans

Percent of loans

to Total Loans Amount Percent of Loans

in Each Category

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One-to-four family $ 1,063 21.2 % $ 1,120 24.0 % $ 1,314 27.3 % $ 1,436 28.5 % $ 1,542 30.3 %

Home equity 147 2.6 178 3.8 202 4.4 293 5.2 378 5.5

Commercial and multifamily 2,370 43.2 1,696 42.0 1,638 40.6 1,250 38.4 1,144 36.1

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Commercial business 291 10.4 331 6.3 356 6.2 372 7.4 175 5.3

Unallocated 406 — 948 — 1,029 — 908 — 712 —

Total $ 6,000 100.0 % $ 5,640 100.0 % $ 5,774 100.0 % $ 5,241 100.0 % $ 4,822 100.0 %

Investment Activities

State chartered commercial banks have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, including callable agency securities, certain certificates of deposit of insured commercial banks and savings banks, certain bankers' acceptances, repurchase agreements and federal funds.

State chartered commercial banks have the authority to invest in various types of liquid assets, including U.S.

Treasury obligations, securities of various federal agencies, including callable agency securities, certain certificates of deposit of insured commercial banks and savings banks, certain bankers' acceptances, repurchase agreements and federal funds.

Subject to various restrictions, state commercial banks may also invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that the institution is otherwise authorized to make directly.

See "—How We Are Regulated—Sound Community Bank" for a discussion of additional restrictions on our investment activities.

Our Chief Executive Officer and Chief Financial Officer have the responsibility for the management of our investment portfolio, subject to the direction and guidance of the Board of Directors.

Our CEO and Chief Financial Officer ("CFO") have the responsibility for the management of our investment portfolio, subject to the direction and guidance of the Board of Directors.

These officers consider various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment.

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Our investment quality emphasizes safer investments with the yield on those investments secondary to not taking unnecessary risk with the available funds.

See "Quantitative and Qualitative Disclosures About Market Risk" for additional information about our interest rate risk management contained in Item 7A.

of this report on Form 10-K.

At December 31, 2019 , we owned $1.2 million of stock issued by the FHLB.

As a condition of membership in the FHLB, we are required to purchase and hold a certain amount of FHLB stock.

See "Quantitative and Qualitative Disclosures About Market Risk" contained in Item 7A.

of this report on Form 10-K for additional information about our interest-rate risk management.

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At December 31, 2020, we owned $877,000 of stock issued by the FHLB of Des Moines.

As a condition of membership in the FHLB of Des Moines, we are required to purchase and hold a certain amount of FHLB stock.

The following table sets forth the composition of our securities portfolio and other investments at the dates indicated.

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All of our investment securities, other than FHLB stock, are currently categorized as available for sale.

See Note 4 in the Notes to Consolidated Financial Statements contained in Item 8 of this report on Form 10-K.

See "Note 4—Investments" in the Notes to Consolidated Financial Statements contained in "Part II.

Financial Statements and Supplementary Data of this report on Form 10-K for additional information on our investments.

2020 2019 2018

Investments Amortized

Value Amortized

Municipal bonds $ 5,209 $ 5,413 $ 3,197 $ 3,370 $ 3,218 $ 3,317

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Total available-for-sale securities 9,915 10,218 9,085 9,306 4,812 4,957

Total securities

We review investment securities on an ongoing basis for the presence of other-than-temporary impairment ("OTTI") taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.

For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI.

FHLB stock 877 877 1,160 1,160 4,134 4,134

Total investments $ 10,792 $ 11,095 $ 10,245 $ 10,466 $ 8,946 $ 9,091

We review investment securities on an ongoing basis for the presence of OTTI, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.

If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings.

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During the year ended December 31, 2020, we did not recognize any non-cash OTTI charges on our investment securities.

There were five agency securities that had unrealized losses although management determined the decline in value was not related to specific credit deterioration.

At that date, there were six agency securities that had unrealized losses, although management determined the decline in value was not related to specific credit deterioration.

We do not intend to sell these securities and it is more likely than not that we will not be required to sell any securities before anticipated recovery of the remaining amortized cost basis.

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The current market environment significantly limits our ability to mitigate our exposure to valuation changes in these securities by selling them.

If market conditions deteriorate and we determine our holdings of these or other investment securities are OTTI, our future earnings, stockholders' equity, regulatory capital and continuing operations could be materially adversely affected.

If market conditions deteriorate and we determine our holdings of these or other investment securities have OTTI losses, our future earnings, stockholders' equity, regulatory capital and continuing operations could be materially adversely affected.

Sources of Funds

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however, at December 31, 2020, approximately 4.0% of our deposits were from persons outside the State of Washington.

As of December 31, 2019 , core deposits, which we define as our non-time deposit accounts and time deposit accounts less than $250,000 (excluding brokered deposits and public funds), represented approximately 79.7% of total deposits, compared to 84.7% and 90.8% as of December 31, 2018 and December 31, 2017 , respectively.

At December 31, 2020, core deposits, which we define as our non-time deposit accounts and time deposit accounts less than $250,000 (excluding brokered deposits and public funds), represented approximately 89.3% of total deposits, compared to 79.7% and 84.7% at December 31, 2019 and 2018, respectively.

We primarily rely on competitive pricing policies, marketing and client service to attract and retain these deposits and we expect to continue these practices in the future.

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The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition.

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We manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors.

Based on our experience, we

believe that our deposits are relatively stable sources of funds.

Based on our experience, we believe that our deposits are relatively stable sources of funds.

Despite this stability, our ability to attract and maintain these deposits and the rates paid on them is and will continue to be significantly affected by market conditions.

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Year Ended December 31,

2020 2019 2018

Opening balance $ 616,718 $ 553,601 $ 514,400

Net deposits 124,259 56,252 35,362

Interest credited 7,004 6,865 3,839

Ending balance $ 747,981 $ 616,718 $ 553,601

Net increase $ 131,263 $ 63,117 $ 39,201

Percent increase 21.3 % 11.4 % 7.6 %

The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by us at the dates indicated (dollars in thousands):

Percent of total

2020 2019 2018

Amount Percent of total Amount Percent of total Amount Percent of total

Noninterest-bearing demand $ 129,299 17.3 % $ 94,973 15.4 % $ 93,823 17.0 %

Interest-bearing demand 230,492 30.8 159,774 25.8 164,919 29.8

Savings 83,778 11.2 57,936 9.4 54,102 9.8

Money market 65,748 8.8 50,337 8.2 46,689 8.4

Escrow 3,191 0.4 2,311 0.4 2,243 0.4

Total non-maturity deposits 512,508 68.5 365,331 59.2 361,776 65.4

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1.99% or below 98,042 13.1 60,747 9.9 118,478 21.4

2.00 - 3.99% 137,431 18.4 190,640 30.9 73,347 13.2

Total certificates of deposit 235,473 31.5 251,387 40.8 191,825 34.6

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Noninterest-bearing demand accounts increased $34.3 million, or 36.1%, in 2020 compared to 2019.

The certificates of deposits increased $59.6 million, or 31.1%, in 2019 compared to 2018.

The increase in certificate accounts over the past year was as a result of our marketing emphasis on our competitively priced certificates of deposits products.

We are a public funds depository and as of December 31, 2019 , we had $39.1 million in public funds compared to $29.0 million in public funds at December 31, 2018 .

Certificates of deposits decreased $15.9 million, or 6.3%, in 2020 compared to 2019.

The increase in total deposits over the past year was the result of developing relationships with PPP borrowers who were not previously clients, adding new consumer clients, and expanding relationships with existing clients, as well as reduced withdrawals, reflecting changes in customer spending habits due to the COVID-19 pandemic.

We are a public funds depository and at December 31, 2020, we had $44.2 million in public funds compared to $39.1 million at December 31, 2019.

These funds consisted of $44.0 million in certificates of deposit, $100,000 in money market accounts and $60,000 in checking accounts at December 31, 2020.

These accounts must be 50% collateralized if the amount on deposit exceeds FDIC insurance of $250,000.

We use letters of credit from the FHLB as collateral for these funds.

We use letters of credit from the FHLB of Des Moines as collateral for these funds.

The Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $21.6 million and $19.1 million at December 31, 2020 and 2019, respectively, to secure public deposits.

Table of Conten t s

The following table shows rate and maturity information for our certificates of deposit at December 31, 2020 (dollars in thousands):

Percent of Total

0.00-1.99% 2.00-3.99% Total Percent of Total

Certificate accounts maturing in quarter ending:

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December 31, 2023 82 262 344 0.1

Thereafter 3,664 2,835 6,499 2.7

Total $ 98,042 $ 137,431 $ 235,473 100.0 %

Percent of total 41.6 % 58.4 % 100.0 %

The following table indicates the amount of our certificates of deposit and other deposits by time remaining until maturity as of December 31, 2019 (in thousands):

The following table indicates the amount of our certificates of deposit and other deposits by time remaining until maturity at December 31, 2020 (in thousands):

or less Over 3 to

6 months Over 6 to

12 months Over 12

Certificates of deposit less than $100,000 $ 39,947 $ 39,148 $ 46,237 $ 33,528 $ 158,860

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Although deposits are our primary source of funds, we may utilize borrowings as a cost-effective source of funds when they can be invested at a positive interest-rate spread, for additional capacity to fund loan demand, or to meet our asset/liability management goals.

Our borrowings currently consist of advances from the FHLB.

See Note 10 in the Notes to Consolidated Financial Statements contained in Item 8 of this report on Form 10-K.

We are a member of and obtain advances from the FHLB, which is part of the Federal Home Loan Bank System.

The eleven regional Federal Home Loan Banks provide a central credit facility for their member institutions.

See "Note 10—Borrowings, FHLB Stock and Subordinated Notes" in the Notes to Consolidated Financial Statements contained in "Part II.

Financial Statements and Supplementary Data" of this report on Form 10-K.

We are a member of and obtain advances from the FHLB of Des Moines, which is part of the Federal Home Loan Bank System.

The eleven regional FHLBs provide a central credit facility for their member institutions.

These advances are provided upon the security of certain of our mortgage loans and mortgage-backed securities.

These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features, and all long-term advances are required to provide funds for residential home financing.

We have entered into a loan agreement with the FHLB pursuant to which Sound Community Bank may borrow up to approximately 45% of total assets, secured by a blanket pledge on a portion of our residential mortgage portfolio including one-to-four family loans, commercial and multifamily real estate loans and home equity loans.

Based on eligible collateral, the total amount available under this agreement as of December 31, 2019 was $321.9 million.

At the same date, we had $7.5 million in FHLB advances outstanding with maturities within one year.

We also had outstanding letters of credit from the FHLB with a notional amount of $19.1 million at December 31, 2019 .

We have entered into a loan agreement with the FHLB of Des Moines pursuant to which Sound Community Bank may borrow up to approximately 45% of total assets, secured by a blanket pledge on a portion of our residential mortgage portfolio, including one-to-four family loans, commercial and multifamily real estate loans and home equity loans.

Based on eligible collateral, the total amount available under this agreement at December 31, 2020 was $213.7 million.

At the same date, we had no outstanding FHLB advances.

We had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $21.6 million at December 31, 2020.

We plan to rely in part on FHLB advances to fund asset and loan growth.

We also use short-term advances to meet short term liquidity needs.

We are required to own stock in the FHLB based on the amount of our advances.

From time to time, we also may borrow from the Federal Reserve Bank of San Francisco's "discount window" for overnight liquidity needs, although we have not borrowed from the discount window in recent years.

The following table sets forth the maximum balance and average balance of borrowings for the periods indicated (dollars in thousands):

We are required to own stock in the FHLB of Des Moines, the amount of which varies based on the amount of our advances activity.

From time to time, we also may borrow from the Federal Reserve Bank of San Francisco's "discount window" for overnight liquidity needs.

The Company participates in the Federal Reserve's Borrower-in-Custody program, which gives the Company access to the discount window, and beginning in 2020, the Paycheck Protection Program Liquidity Facility (“PPPLF”).

Table of Conten t s

terms of both programs call for a pledge of specific assets.

The Company pledges commercial and consumer loans as collateral for its Borrower-in-Custody line of credit and PPP loans for the PPPLF.

The Company had unused borrowing capacity of $23.6 million and $41.7 million under the Borrower-in-Custody program at December 31, 2020 and 2019, respectively.

The PPPLF had $43.3 million unused borrowing capacity at December 31, 2020.

The Company had no outstanding borrowings with the Federal Reserve programs at December 31, 2020 and 2019.

The Company completed a private placement of $12.0 million in aggregate principal of 5.25% Fixed-to-Floating Rate Subordinated Notes (the "subordinated notes") due 2030 resulting in net proceeds, after placement fees and offering expenses, of approximately $11.6 million during the quarter ended September 30, 2020.

The subordinated notes have a stated maturity of October 1, 2030 and bear interest at a fixed rate of 5.25% per year until October 1, 2025.

From October 1, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term secured overnight financing rate (“SOFR”), plus 513 basis points.

As provided in the subordinated notes, the interest rate on the subordinated notes during the applicable floating rate period may be determined based on a rate other than three-month term SOFR.

Prior to October 1, 2025, the Company may redeem the subordinated notes, in whole but not in part, only under certain limited circumstances set forth in the subordinated notes.

On or after October 1, 2025, the Company may redeem the subordinated notes, in whole or in part, at its option, on any interest payment date.

Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the subordinated notes being redeemed, together with any accrued and unpaid interest on the subordinated notes being redeemed to but excluding the date of redemption.

The following table sets forth the maximum balance and average balance of borrowings and subordinated notes for the periods indicated (dollars in thousands):

Year Ended December 31,

2020 2019 2018

Maximum balance:

FHLB advances $ 10,100 $ 72,750 $ 99,500

Average balances:

Federal Reserve borrowings 72,341 — —

Subordinated notes 11,676 — —

Average balance:

FHLB advances $ 7,141 $ 24,406 $ 69,900

Federal Reserve borrowings 9,469 — —

Subordinated notes 3,345 — —

Weighted average interest rate:

FHLB advances 3.10 % 3.05 % 2.18 %

Federal Reserve borrowings 0.36 — —

Subordinated notes 5.70 — —

The following table sets forth certain information about our borrowings at the dates indicated (dollars in thousands):

As of December 31,

December 31, 2020

2020 2019 2018

Outstanding balance:

FHLB advances $ — $ 7,500 $ 84,000

Weighted-average interest rate:

Federal Reserve borrowings — — —

Subordinated notes 11,592 — —

Interest rate:

FHLB advances — % 3.10 % 2.72 %

Federal Reserve borrowings — — —

Subordinated notes 5.70 — —

Subsidiary and Other Activities

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as a wholly owned subsidiary for purposes of selling a full range of insurance products.

Table of Conten t s

We face competition in attracting deposits and originating loans.

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The five largest financial institutions in that area have 71.7% of those deposits.

In Clallam County there are nine other commercial banks and savings banks.

In Clallam County, there are ten other commercial banks and savings banks.

Our share of deposits in Clallam County was the second highest in the county at approximately 17.0%, with the five largest institutions in that county having 76.1% of the deposits.

In Jefferson County there are six other commercial banks and savings banks.

In Jefferson County there are seven other commercial banks and savings banks.

Our share of deposits in Jefferson County is approximately 7.6%, while the five largest institutions in that county have 82.5% of those deposits.

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This description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

Legislation is introduced from time to time in the United States Congress or the Washington State Legislature that may affect the operations of Sound Financial Bancorp and Sound Community Bank.

Legislation is introduced from time to time in the U.S.

Congress or the Washington State Legislature that may affect the operations of Sound Financial Bancorp and Sound Community Bank.

In addition, the regulations governing us may be amended from time to time.

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The WDFI and FDIC have extensive enforcement authority over Sound Community Bank.

The Federal Reserve has the same type of authority over Sound Financial Bancorp.

The Federal Reserve and the WDFI have the same type of authority over Sound Financial Bancorp.

This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease-and-desist orders and removal orders and initiate injunctive actions.

1 unchanged sentence

Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the regulators.

2018 Regulatory Reform

In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”), was enacted to amend or remove certain rules and regulations and modify certain aspects of the regulatory framework for depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion.

Many of these changes could result in meaningful regulatory changes for community banks such as Sound Community Bank, and their holding companies.

The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single Community Bank Leverage Ratio of between 8 and 10 percent.

Any qualifying depository institution or its holding company that exceeds that ratio will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules.

The Act also expands the category of holding companies that may rely on the Small Bank Holding Company and Savings and Loan Holding Company Policy Statement of the Federal Reserve by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion.

A major effect of this change is to exclude such holding companies from the minimum capital requirements of the Dodd-Frank Act.

In addition, the Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

It is difficult at this time to predict when or how any new standards under the Act will ultimately be applied to us or what specific impact the Act and the implementing rules and regulations will have on community banks.

Regulation of Sound Community Bank

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During state or federal regulatory examinations, the examiners may require Sound Community Bank to provide for higher general or specific loan loss reserves, which can impact our capital and earnings.

This regulation of Sound Community Bank is intended for the protection of depositors and the Deposit Insurance Fund (the “DIF”) of the FDIC and not for the purpose of protecting stockholders of Sound Community Bank or Sound Financial Bancorp.

This regulation of Sound Community Bank is intended for the protection of depositors and the Deposit Insurance Fund ("DIF") of the FDIC and not for the purpose of protecting stockholders of Sound Community Bank or Sound Financial Bancorp.

Sound Community Bank is required to maintain minimum levels of regulatory capital and is subject to certain limitations on the payment of dividends to Sound Financial Bancorp.

See “- Capital Rules” and “-Limitations on Dividends and Other Capital Distributions.”

See “—Capital Rules” and “—Limitations on Dividends and Stock Repurchases.”

Table of Conten t s

Regulation by the WDFI and the FDIC .

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Sound Community Bank is in compliance with the records and reporting requirements.

As of December 31, 2019 , Sound Community Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were $19.9 million and were within the aggregate limits set forth in the preceding paragraph.

At December 31, 2020, Sound Community Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were $11.8 million and were within the aggregate limits set forth in the preceding paragraph.

The FDIC and the WDFI must approve any merger transaction involving Sound Community Bank as the acquirer, including an assumption of deposits from another depository institution.

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No institution may pay a dividend if it is in default on its federal deposit insurance assessment.

For the fiscal year ended December 31, 2020, the Bank paid $59,000 in FDIC premiums.

The FDIC has authority to increase insurance assessments, and any significant increases would have an adverse effect on the operating expenses and results of operations of the Company.

Management cannot predict what assessment rates will be in the future.

In a banking industry emergency, the FDIC may also impose a special assessment.

The FDIC calculates assessments for small institutions (those with assets of less than $10 billion) based on an institution’s weighted average CAMELS component ratings and certain financial ratios.

Currently, assessment rates range from 3 to 16 basis points for institutions with CAMELS composite ratings of 1 or 2, 6 to 30 basis points for those with CAMELS composite ratings of 3, and 16 to 30 basis points for those with CAMELS composite ratings of 4 or 5, all subject to certain adjustments.

Assessment rates are expected to decrease in the future as the reserve ratio increases in specified increments.

As required by the Dodd Frank Act, the FDIC has adopted a rule to offset the effect of the increase in the minimum reserve ratio of the DIF on small institutions by imposing a surcharge on institutions with assets of $10 billion or more commencing on July 1, 2016 and ending when the reserve ratio reaches 1.35%, which, the FDIC announced occurred on September 30, 2018.

When the reserve ratio reaches 1.38%, small institutions will receive credits for the portions of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%.

Subject to certain limitations, the credits will apply to reduce regular assessments until exhausted.

Table of Conten t s

Stronger institutions pay lower rates, while riskier institutions pay higher rates.

Assessments are applied to an institution's assessment base, which is its average consolidated total assets minus average tangible equity.

The FDIC has authority to increase insurance assessments, and any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank.

Management cannot predict what assessment rates will be in the future.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions.

It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF.

The FDIC also has the authority to take enforcement actions against banks and savings associations.

Management is not aware of any existing circumstances which would result in termination of the Bank's deposit insurance.

A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank.

Transactions with Related Parties .

Transactions between Sound Community Bank and its affiliates are required to be on terms as favorable to Sound Community Bank as transactions with non-affiliates, and certain of these transactions, such as loans to an affiliate, are restricted to a percentage of Sound Community Bank’s capital and require eligible collateral in specified amounts.

In addition, the Bank may not lend to any affiliate engaged in activities not permissible for a bank holding company or purchase or invest in the securities of affiliates.

Sound Financial Bancorp is an affiliate of Sound Community Bank.

The Sarbanes-Oxley Act of 2002 generally prohibits loans by Sound Financial Bancorp to its executive officers and directors.

However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws.

Under such laws, Sound Community Bank’s authority to extend credit to executive officers, directors and 10% or greater stockholders (“insiders”), as well as entities such persons' control, is limited.

The laws limit both the individual and aggregate amount of loans that Sound Community Bank may make to insiders based, in part, on Sound Community Bank’s capital level and requires that certain board approval procedures be followed.

Such loans are required to be made on terms substantially the same as those offered to unaffiliated borrowers and must not involve more than the normal risk of repayment.

There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees.

Loans to executive officers are subject to additional limitations based on the type of loan involved.

Capital Rules.

Sound Community Bank is subject to the capital regulations adopted by the Federal Reserve and the FDIC pursuant to the Dodd-Frank Act.

Under these capital regulations, the minimum capital ratios are:

(1) a common equity Tier 1 (“CET1”) capital ratio of 4.5% of risk-weighted assets;

(2) a Tier 1 capital ratio of 6.0% of risk-weighted assets;

(3) a total capital ratio of 8.0% of risk-weighted assets, and (4) a leverage ratio (the ratio of Tier 1 capital to average total adjusted assets) of 4.0%.

CET1 generally consists of common stock, retained earnings, accumulated other comprehensive income (“AOCI”) unless an institution elects to exclude AOCI from regulatory capital, as discussed below, and certain minority interests, all subject to applicable regulatory adjustments and deductions.

Tier 1 capital generally includes CET1 and noncumulative perpetual preferred stock, less most intangible assets, subject to certain adjustments.

Total capital consists of Tier 1 and Tier 2 Capital.

Tier 2 capital, which is limited to 100 percent of Tier 1 capital, includes such items as qualifying general loan loss reserves, cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt and limited life preferred stock;

however, the amount of term subordinated debt and intermediate term preferred stock that may be included in Tier 2 capital is limited to 50 percent of Tier 1 capital.

Risk-weighted assets are determined under the capital regulations, which assign risk-weights to all assets and to certain off-balance sheet items.

These regulations include the phasing-out of certain instruments as qualifying capital.

Mortgage servicing and deferred tax assets over designated percentages of CET1 are deducted from capital.

In addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available for sale debt and equity securities, unless an institution elects to opt out of such inclusion, if eligible to do so.

We have elected to permanently opt-out of the inclusion of AOCI in our capital calculations.

The capital regulations include a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status;

a 20% risk weight for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable;

and a 250% risk weight for mortgage servicing and deferred tax assets that are not deducted from capital.

In addition to the minimum CET1, Tier 1 and total capital ratios, Sound Financial Bancorp and Sound Community Bank must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.

The capital conservation buffer requirement began to phase in on January 1, 2016, when a buffer greater than 0.625% of risk-weighted assets was required, which amount increased each year until the buffer requirement was fully implemented on January 1, 2019.

Under the FDIC’s prompt corrective action standards, in order to be considered well-capitalized, 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.

In order to be considered adequately capitalized, a bank must have the minimum capital ratios described above.

Institutions with lower capital ratios are assigned to lower capital categories.

Based on safety and soundness concerns, the FDIC may assign an institution to a lower capital category than would originally apply based on its capital ratios.

The FDIC is also authorized to require Sound Community Bank to maintain additional amounts of capital in connection with concentrations of assets, interest rate risk, and certain other items.

The FDIC has not imposed such a requirement on Sound Community Bank.

“Effective January 1, 2020, a bank that elects to use the Community Bank Leverage Ratio will generally be considered well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%.

To be eligible to elect the Community

Bank Leverage Ratio, 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.

An institution that is not well capitalized is subject to certain restrictions on brokered deposits and interest rates on deposits.

An institution that is not at least adequately capitalized is subject to numerous additional restrictions, and a guaranty by its holding company is required.

An institution with a ratio of tangible equity to total assets of 2.0% or less is subject to appointment of the FDIC as receiver if its capital level does not improve in timely fashion.

When the FDIC as receiver liquidates an institution, the claims of depositors and the FDIC as their successor have priority over other unsecured claims against the institution.

The Financial Accounting Standards Board has adopted a new accounting standard for US Generally Accepted Accounting Principles that are effective for us beginning January 1, 2023.

This standard, referred to as Current Expected Credit Loss, or CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets.

Sound Community Bank and Sound Financial Bancorp are required to maintain specified levels of regulatory capital under regulations of the FDIC and Federal Reserve, respectively.

In September 2019, the regulatory agencies, including the FDIC and Federal Reserve adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio ("CBLR") for institutions with total consolidated assets of less than $10 billion, and that meet other qualifying criteria related to off-balance sheet exposures and trading assets and liabilities.

The CBLR provides for a simple measure of capital adequacy for qualifying institutions.

Management has elected to use the CBLR framework for the Bank and Company.

The CBLR is calculated as Tier 1 Capital to average consolidated assets as reported on an institution's regulatory reports.

Tier 1 Capital, for the Company and the Bank, generally consists of common stock plus related surplus and retained earnings, adjusted for goodwill and other intangible assets and accumulated other comprehensive amounts (“AOCI”) related amounts.

Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the "well-capitalized" ratio requirements.

In April 2020, as directed by Section 4012 of the CARES Act, the regulatory agencies introduced temporary changes to the CBLR.

These changes, which subsequently were adopted as a final rule, temporarily reduce the CBLR requirement to 8% through the end of 2020.

Beginning in 2021, the CBLR requirement will increase to 8.5% for the calendar year, before returning to 9% in 2022.

A qualifying institution utilizing the CBLR framework whose leverage ratio does not fall more than one percent below the required percentage is allowed a two-quarter grace period in which to increase its leverage ratio back above the required percentage.

During the grace period, a qualifying institution will still be considered well capitalized so long as its leverage ratio does not fall more than one percent below the required percentage.

If an institution either fails to meet all the qualifying criteria within the grace period or has a leverage ratio that falls more than one percent below the required percentage, it becomes ineligible to use the CBLR framework and must instead comply with generally applicable capital rules, sometimes referred to as Basel III rules.

At December 31, 2020, the Bank’s CBLR was 10.4%.

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

At December 31, 2020, Sound Community Bank was considered “well-capitalized” under applicable banking regulations.

See "Note 16—Capital" in Notes to Consolidated Financial Statements in "Part II.

Financial Statements and Supplementary Data" and "Part II.

Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" for additional regulatory capital information.

The FASB has adopted a new accounting standard for accounting principles generally accepted in the U.S.

GAAP") that are effective for the Company and Bank beginning January 1, 2023.

This standard, referred to as Current Expected Credit Loss ("CECL"), requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets.

CECL covers a broader range of assets than the current method of recognizing credit losses and generally results in earlier recognition of credit losses.

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For a banking organization, implementation of CECL is generally likely to reduce retained earnings, and to affect other items, in a manner that reduces its regulatory capital.

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The federal banking regulators (the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC) have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital.

As of December 31, 2019, Sound Community Bank was well capitalized under applicable regulations and met the conservation buffer requirement.

Community Reinvestment and Consumer Protection Laws.

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Sound Community Bank’s compliance with consumer protection rules is examined by the WDFI and the FDIC.

In addition, federal regulations limit the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties.

In addition, federal and state regulations limit the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties.

The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated parties.

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An unsatisfactory rating may be the basis for denial of certain applications by the WDFI.

Sound Community Bank received a “satisfactory” rating from the WDFI in its most recent WDFI CRA evaluation.

Bank Secrecy Act / Anti-Money Laundering Laws.

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In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing mergers and acquisitions.

Sound Community Bank has adopted policies, procedures and controls in order to comply with the USA PATRIOT Act.

Federal Reserve System.

The Federal Reserve requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts.

In response to the COVID-19 pandemic, the Federal Reserve reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses.

At December 31, 2020, Sound Community Bank was in compliance with the reserve requirements.

The Bank is authorized to borrow from the Federal Reserve Bank of San Francisco's "discount window." An eligible institution need not exhaust other sources of funds before going to the discount window, nor are there restrictions on the purposes for which the institution can use primary credit.

Beginning in 2020 in response to the pandemic, the Federal Reserve instituted the

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Paycheck Protection Program Liquidity Facility (“PPPLF”).

At December 31, 2020, the Bank had no outstanding borrowings under either program from the Federal Reserve.

Federal Home Loan Bank System.

Sound Community Bank is a member of the FHLB, one of the 11 regional Federal Home Loan Banks in the Federal Home Loan Bank System.

The Federal Home Loan Bank System provides a central credit facility for member institutions.

As a member of the FHLB, the Bank is required to hold shares of capital stock in that FHLB.

At December 31, 2019 , the Bank had $1.2 million in FHLB stock, which was in compliance with this requirement.

Sound Community Bank received $89,000 in dividends from the FHLB for the year ended December 31, 2019 .

The Federal Home Loan Banks have continued to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects.

These contributions have affected adversely the level of dividends paid by the FHLB and could continue to do so in the future.

Sound Community Bank is a member of one of the 11 regional FHLBs, each of which serves as a reserve, or central bank, for its members within its assigned region and is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System.

The FHLBs make loans to members in accordance with policies and procedures, established by the Boards of Directors of the FHLBs, which are subject to the oversight of the Federal Housing Finance Board.

All borrowings from the FHLBs are required to be fully secured by sufficient collateral as determined by the FHLBs.

In addition, all long-term borrowings are required to provide funds for residential home financing.

Sound Community Bank had no outstanding borrowings with the FHLB of Des Moines and an available line of credit of $21.6 million at December 31, 2020.

We plan to rely in part on FHLB advances to fund asset and loan growth.

We also use short-term funding available on our line of credit with the FHLB of Des Moines.

As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines based on the Bank's asset size and level of borrowings from the FHLB of Des Moines.

At December 31, 2020, the Bank owned $877,000 in FHLB of Des Moines stock, which was in compliance with this requirement.

The FHLB of Des Moines pays dividends quarterly, and the Bank received $46,000 in dividends from the FHLB of Des Moines during the year ended December 31, 2020.

The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on borrowings targeted for community investment and low- and moderate-income housing projects.

These contributions have adversely affected the level of dividends paid by the FHLB of Des Moines and could continue to do so in the future.

These contributions could also have an adverse effect on the value of FHLB stock in the future.

A reduction in value of Sound Community Bank’s FHLB stock may result in a corresponding reduction in its capital.

A reduction in value of the Bank’s FHLB of Des Moines stock may result in a decrease in net income and possibly capital.

Regulation of Sound Financial Bancorp

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The Bank Holding Company Act prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.

A bank holding company that meets certain supervisory and financial standards and elects to be designed as a financial holding company may also engage in certain securities, insurance and merchant banking activities and other activities determined to be financial in nature or incidental to financial activities.

The Federal Reserve must approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank, and may approve an acquisition located in a state other than the holding company's home state, without regard to whether the transaction is prohibited by the laws of any state, but may not approve the acquisition of a bank that has not been in existence for the minimum time period, not exceeding five years, specified by the law of the host state, or an application where the applicant controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch.

A bank holding company that meets certain supervisory and financial standards and elects to be designated as a financial holding company may also engage in certain securities, insurance and merchant banking activities and other activities determined to be financial in nature or incidental to financial activities.

Sound Community Bank has not elected to be designated as a financial holding company.

or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch.

Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies.

Individual states may also waive the 30% state-wide concentration limit contained in the federal law.

The Federal Reserve also takes into consideration the CRA performance of a bank when evaluating acquisition proposals involving the bank’s holding company.

Capital Requirements for Sound Financial Bancorp .

The capital regulations discussed above generally apply to a bank holding company with less than $3.0 billion in assets on a bank only basis.

If Sound Financial Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at December 31, 2019, Sound Financial Bancorp would have exceeded all regulatory capital requirements, with estimated regulatory capital ratio of 9.55% for Tier 1 leverage-based capital, 11.08% for both Common Equity Tier 1 risk-based capital and Tier 1 Capital to risk-based assets, and 11.94% for total risk-based capital.

The Federal Reserve expects a holding company's subsidiary banks to be well capitalized under the prompt corrective action regulations.

In addition, a bank holding company must serve as a source of financial strength for its depository institution subsidiaries.

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Reserve also takes into consideration the CRA performance of a bank when evaluating acquisition proposals involving the bank’s holding company.

Consolidated regulatory capital requirements identical to those applicable to subsidiary banks generally apply to bank holding companies.

However, the Federal Reserve Board has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and bank holding companies with less than $3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the Federal Reserve.

Federal Securities Law.

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Sound Financial Bancorp.

Sound Financial Bancorp’s ability to declare and pay dividends is subject to the Federal Reserve’s limits and Maryland law, and may depend on its ability to receive dividends from Sound Community Bank, which is subject to the capital conservation buffer requirement.

A policy of the Federal Reserve limits the payment of a cash dividend by a bank holding company if the holding company's net income for the past year is not sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with capital needs, asset quality and overall financial condition.

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The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation or regulatory order, condition, or written agreement with the Federal Reserve.

Regardless of its asset size, a bank holding company is

considered well-capitalized if on a consolidated basis it has a total risk-based capital ratio of at least 10.0% and a Tier 1 risk-based capital ratio of 6.0% or more, and is not subject to an agreement, order, or directive to maintain a specific level for any capital measure.

Regardless of its asset size, a bank holding company is considered well-capitalized if on a consolidated basis it has a total risk-based capital ratio of at least 10.0% and a Tier 1 risk-based capital ratio of 6.0% or more, and is not subject to an agreement, order, or directive to maintain a specific level for any capital measure.

Under Maryland corporate law, Sound Financial Bancorp generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total assets would be less than the sum of its total liabilities.

Sound Community Bank.

The amount of dividends payable by Sound Community Bank to Sound Financial Bancorp depends upon Sound Community Bank’s earnings and capital position, and is limited by federal and state laws, regulations and policies, including the capital conservation buffer requirement.

Sound Community Bank may not declare or pay a cash dividend on its capital stock if the payment would cause its net worth to be reduced below the amount required for its liquidation account.

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Federal law further provides that without prior approval, no insured depository institution may pay a cash dividend if it would cause the institution to be less than adequately capitalized as defined in the prompt corrective action regulations.

Moreover, the FDIC has the general authority to limit the dividends paid by insured banks if such payments are deemed to constitute an unsafe and unsound practice.

Moreover, the FDIC has the general authority to limit the dividends paid by insured banks if such

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payments are deemed to constitute an unsafe and unsound practice.

In addition, dividends may not be declared or paid if Sound Community Bank is in default in payment of any assessment due the FDIC.

Recent Regulatory Reform

In response to the COVID-19 pandemic, the U.S.

Congress, through the enactment of the CARES Act, and the federal banking agencies, though rulemaking, interpretive guidance and modifications to agency policies and procedures, have taken a series of actions to provide national emergency economic relief measures including, among others, the following:

• The CARES Act allows banks to elect to suspend requirements under U.S.

GAAP for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due at December 31, 2019) that would otherwise be categorized as a TDR, including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020.

The suspension of U.S.

GAAP is applicable for the entire term of the modification.

The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 by providing that short-term modifications made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification is implemented, is not a TDR.

Sound Community Bank is applying this guidance to qualifying COVID-19 modifications.

Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Response” for further information about the COVID-19 modifications completed by the Bank.

• The CARES Act amended the SBA's lending program, the PPP, to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during COVID-19.

The loans are provided through participating financial institutions, such as the Bank, that process loan applications and service the loans and are eligible for SBA repayment and loan forgiveness if the borrower meets the PPP conditions.

The application period for a SBA PPP loan closed on August 8, 2020.

The SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders on October 2, 2020.

The CAA, 2021 which was signed into law on December 27, 2020, renews and extends the PPP until March 31, 2021.

As a result, as a participating lender, the Bank began originating PPP loans again in January 2021 and will continue to monitor legislative, regulatory, and supervisory developments related to the PPP.

• Pursuant to the CARES Act, the federal banking agencies authorities adopted an interim rule, effective until the earlier of the termination of the coronavirus emergency declaration by the President and December 31, 2020, to (i) reduce the minimum CBLR Ratio from 9% to 8% percent and (ii) give community banks a two-quarter grace period to satisfy such ratio if such ratio falls out of compliance by no more than 1%.

As the on-going COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, life cycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19.

In addition, it is possible that the U.S.

Congress will enact supplementary COVID-19 response legislation.

The Company continues to assess the impact of the CARES Act and other statues, regulations and supervisory guidance related to the COVID-19 pandemic.

For additional information regarding actions taken by regulatory agencies to provide relief to consumers who have been adversely impacted by the COVID-19 pandemic, see the discussion below under "Item 1A.

Risk Factors—Risks Related to our Business."

Federal Taxation

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Therefore, any dividends Sound Financial Bancorp receives from Sound Community Bank will not be included as income to Sound Financial Bancorp.

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State Taxation

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Interest received and servicing income both on loans secured by mortgages or deeds of trust on residential properties and certain investment securities are exempt from business and occupation tax.

Employees and Human Capital

At December 31, 2020, we had a total of 110 full-time employees and 10 part-time employees.

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Management considers its employee relations to be good.

To facilitate talent attraction and retention, we strive to make Sound Community Bank an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by market-based compensation, benefits, health and welfare programs.

At December 31, 2020, approximately 63% of our workforce was female and 37% male, and our average tenure was 4.92 years, an increase of 2.3% from an average tenure of 4.81 years at December 31, 2019.

As part of our compensation philosophy, we offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent.

In addition to strong base wages, additional programs include quarterly or annual bonus opportunities, a Company-augmented Employee Stock Ownership Plan ("ESOP"), a Company-matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources, flexible work schedules, and employee assistance programs including help with student loans and educational opportunities.

The success of our business is fundamentally connected to the well-being of our people.

Accordingly, we are committed to the health, safety, and wellness of our employees.

In support of our commitment, we expanded our gym reimbursement to include all physical and mental wellness activities.

We provide our employees and their families with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health by providing tools and

resources to help them improve or maintain their health status;

and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.

In response to the COVID-19 pandemic, we implemented significant operating environment changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations.

This includes having the vast majority of our back-office employees work from home, while implementing additional safety measures for employees continuing critical on-site work.

In addition, we provided frontline staff with additional compensation for their role working with the public.

A core value of our talent management approach is to both develop talent from within and supplement with external hires.

This approach has yielded loyalty and commitment in our employee base which in turn grows our business, our products, and our customers, while adding new employees and external ideas supports a continuous improvement mindset.

We believe that our average tenure of nearly five years reflects the engagement of our employees in this talent management philosophy.

Executive Officers of Sound Financial Bancorp and Sound Community Bank

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Laura Lee Stewart.

Stewart, age 70, is currently President and Chief Executive Officer of Sound Community Bank and Sound Financial Bancorp.

Stewart, age 72, is currently President, Chief Executive Officer and Interim Chief Financial Officer of Sound Community Bank and Sound Financial Bancorp.

Prior to joining Sound Community Bank as its President in 1989, when it was a credit union, Ms.

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She also served as Chair of the American Bankers Association’s ("ABA") Government Relations Council and is the past Chair of the Washington Bankers Association.

The American Banker magazine honored her as one of the top 25 Women to Watch in banking in 2011, 2015, 2016, 2017, 2018 and as one of the most powerful women in Banking in 2019.

The American Banker magazine honored her as one of the top 25 Women to Watch in banking in 2011, 2015, 2016, 2017, 2018 and as one of the most powerful women in Banking in 2019 and 2020.

Stewart was recognized as a Women of Influence by the Puget Sound Business Journal.

In 2018, she was named Community Banker of the year by

American Banker.

Stewart also is Chair of the National Arthritis Foundation’s board of directors as well as serving as the Past Chair of the board of directors of Woodland Park Zoo.

In 2018, she was named Community Banker of the year by American Banker.

Stewart also served as Chair of the National Arthritis Foundation’s board of directors as well as serving as the Past Chair of the board of directors of Woodland Park Zoo.

In October 2019, Ms.

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Her many years of service in all areas of the financial institution operations and duties as President and Chief Executive Officer of Sound Financial Bancorp and Sound Community Bank bring a special knowledge of the financial, economic and regulatory challenges we face, and she is well suited to educating the Board on these matters.

Elliott Pierce.

Pierce, age 63, was appointed Senior Vice President and Chief Credit Officer of Sound Community Bank in April 2015 and was appointed Executive Vice President in January 2016.

Pierce is responsible for management of the Bank's Credit Administration functions, and is a member of the Bank's Loan Committee.

Charles Turner.

Mr.Turner, age 60, was appointed Senior Vice President and Chief Credit Officer of Sound Community Bank in June 2020 and promoted to Executive Vice President and Chief Credit Officer in January 2021.

Turner is responsible for management of the Bank’s Lending and Credit Administration functions, and is a member of the Bank’s Loan Committee.

Turner, who has 40 years of community banking experience, began his career as a teller and first became a chief credit officer in 2002.

Prior to joining Sound Community Bank, Mr.

Pierce was a Senior Vice President and Credit Administrator with Union Bank N.A.

Pierce received his Bachelor of Arts Degree from the University of Washington and his Master of Business Administration from Seattle Pacific University.

Pierce is also a graduate of the Pacific Coast Banking School.

Turner was the Chief Credit Officer with Liberty Bay Bank in Poulsbo,

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WA, from 2011 until June 2020.

During his career, Mr.

Turner has also managed special assets, assisted a bank through receivership, spent years as a loan officer, a branch manager, and an accounting clerk.

Turner is a graduate of the University of Washington and holds many years of community service with Chambers of Commerce, Rotary and other organizations.

Heidi Sexton .

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She currently holds a number of professional certifications including Certified Internal Auditor, Certified Regulatory Compliance Manager and is a graduate of the Washington Bankers Association’s Executive Development Program.

Sexton is also a member of the Consumer Financial Protection Bureau's (CFPB) Community Bank Advisory Counsel and American Bankers Association's (ABA) Compliance Administrative Committee.

Sexton is also a member of the CFPB Community Bank Advisory Counsel and ABA Compliance Administrative Committee.

She serves on the Board of Financial Beginnings, a non-profit that provides youth to adult financial education programs at no cost.

Kelley, age 48, is currently Executive Vice President, Chief Financial Officer at Sound Financial Bancorp and Sound Community Bank.

Prior to joining the Bank in July 2018, Ms.

Kelley was Senior Vice President, Controller of HomeStreet Bank where she was employed for three years and was responsible for SEC and regulatory reporting, accounting operations, corporate tax and Sarbanes-Oxley.

Additional experience includes Controller at the Federal Home Loan Bank of Seattle for eight years as well as various positions at GE Capital, Toyota and Ernst & Young.

Kelley received a Bachelor's of Science degree from the University of California at Berkeley and a Masters of Business Administration from UCLA Anderson School of Management.

She currently holds a Certified Public Accountant license in the State of Washington and the State of California and serves on the Board of Family Law CASA.

Ochs, age 42, currently serves as Executive Vice President and Chief Strategy Officer at Sound Community Bank.

Ochs is responsible for developing, communicating, executing, and sustaining corporate strategic initiatives, and in November 2020, became responsible for the Bank's economic forecasting, strategic planning and asset liability management functions.

Ochs began his career at Sound Community Bank in April 2009 as a Commercial Loan Officer, was promoted to Senior Vice President Credit Administration Manager in 2015, and to his current position in January 2020.

Ochs received his Bachelor of Arts degree in Economics, Finance and Education from Eastern Washington University, his Master of Business Administration degree in Accounting from the University of Phoenix and is a graduate of the Washington Bankers Association’s Executive Development Program.

We maintain a website;

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Information pertaining to us, including SEC filings, can be found by clicking the link on our site called "Investor Relations." For more information regarding access to these filings on our website, please contact our Corporate Secretary, Sound Financial Bancorp, Inc., 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121 or by calling (206) 448-0884.

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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-K

Item 1. Business