Sound Financial Bancorp, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Certain matters discussed in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. 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: • the effect of the novel coronavirus disease 2019 (“COVID-19”) pandemic, including on our credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity; • 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, the number of unsold homes, land and other properties; • fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area; • our ability to access cost-effective funding; • the potential transition away from LIBOR toward new interest rate benchmarks; • our ability to control operating costs and expenses; • secondary market conditions for loans and our ability to sell loans in the secondary market; • fluctuations in interest rates; • results of examinations of Sound Financial Bancorp and Sound Community Bank by their regulators, including the possibility that the regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets, change Sound Community Bank's regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; • inability of key third-party providers to perform their obligations to us; • our ability to attract and retain deposits; • competitive pressures among financial services companies; • our ability to successfully integrate any assets, liabilities, clients, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all; • the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • 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 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, including as a result of the Coronavirus Aid, 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 and its implementing regulations that adversely affect our business, and the availability of resources to address such changes; • our ability to retain or attract key employees or members of our senior management team; 33 • costs and effects of litigation, including settlements and judgments; • our ability to implement our business strategies; • staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; • our ability to pay dividends on our common stock; • 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, including the CARES Act, CAA 2021 and recent COVID 19 vaccination and stimulus efforts, and • the other risks described from time to time in our filings with the U.S. Securities and Exchange Commission (the "SEC"), including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”). We wish to advise readers not to place undue reliance on any forward-looking statements and that the factors listed above could materially affect our financial performance and could cause our actual results for future periods to differ materially from any such forward-looking statements expressed with respect to future periods and could negatively affect our stock price performance. We do not undertake and specifically decline any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. General Sound Financial Bancorp, a Maryland corporation, is a bank holding company for its wholly owned subsidiary, Sound Community Bank. Substantially all of Sound Financial Bancorp’s business is conducted through Sound Community Bank, a Washington state-chartered commercial bank. As a Washington commercial bank, the Bank’s regulators are the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation (the “FDIC”). The Federal Reserve is the primary federal regulator for Sound Financial Bancorp. We also sell insurance products and services for clients through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank. Sound Community Bank’s deposits are insured up to applicable limits by the FDIC. At September 30, 2021, Sound Financial Bancorp, on a consolidated basis, had assets of $928.1 million, net loans held-for-portfolio of $661.2 million, deposits of $807.7 million and stockholders’ equity of $91.9 million. The shares of Sound Financial Bancorp are traded on NASDAQ Capital Market under the symbol “SFBC.” Our executive offices are located at 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121. Our principal business consists of attracting retail and commercial deposits from the general public and investing those funds, in loans secured by first and second mortgages on one-to-four family residences (including home equity loans and lines of credit), commercial and multifamily real estate, construction and land, consumer and commercial business loans. Our commercial business loans include unsecured lines of credit and secured term loans and lines of credit secured by inventory, equipment and accounts receivable. We also offer a variety of secured and unsecured consumer loan products, including manufactured home loans, floating home loans, automobile loans, boat loans and recreational vehicle loans. As part of our business, we focus on residential mortgage loan originations, a significant portion of which we sell to Fannie Mae and other correspondents and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives. We sell loans which conform to the underwriting standards of Fannie Mae (“conforming”) in which we retain the servicing of the loan in order to maintain the direct customer relationship and to generate noninterest income. Residential loans which do not conform to the underwriting standards of Fannie Mae (“non-conforming”), are held in our loan portfolio. 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. Critical Accounting Policies Certain of our accounting policies require management to make difficult, complex or subjective judgments, which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, accounting for other-than-temporary impairment of securities, accounting for mortgage servicing rights, accounting for other real estate owned and accounting for deferred income taxes. Our methodologies for analyzing the allowance for loan losses, other-than-temporary impairment, mortgage servicing rights, other real estate owned and deferred tax asset accounts are described in our 2020 Form 10-K. 34 COVID-19 Response Paycheck Protection Program ("PPP") Participation. The CARES Act was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a loan program called the Paycheck Protection Program, or PPP. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA. The first round of the program expired on August 8, 2020, and a second round reopened the program beginning January 1, 2021 through May 31, 2021. As of September 30, 2021, we had received SBA forgiveness for 899 PPP loans totaling $74.7 million out of the $76.4 million in PPP loans funded during the first PPP. During the nine months ended September 30, 2021, we began accepting and processing loan applications under the second PPP enacted in December 2020. As of September 30, 2021, we had funded 599 PPP loans totaling $42.8 million and had received SBA forgiveness for 550 PPP loans totaling $32.7 million under the second PPP. We had 66 PPP loans outstanding totaling $11.8 million as of September 30, 2021. The following table summarizes our PPP participation as of September 30, 2021 (dollars in thousands): Funded At September 30, 2021 Total Number of Loans Average Loan Amount Outstanding Number of Loans First PPP $ 76,384 916 $ 83,389 $ 1,674 17 Second PPP 42,787 599 71,431 10,115 49 Total PPP loans $ 119,171 1,515 $ 78,661 $ 11,789 66 During the three and nine months ended September 30, 2021, we recorded in interest income SBA processing fees of $1.0 million and $2.5 million, respectively, and $473 thousand and $521 thousand for the three and nine months ended September 30, 2020. In addition, interest income earned on PPP loans totaled $46 thousand and $323 thousand for the three and nine months ended September 30, 2021 and $49 thousand and $318 thousand for the three and nine months ended September 30, 2020. Loan Modifications. We are continuing to provide payment relief for both consumer and business clients, most of which relief involves interest only or payment deferrals that range from 90 to 180 days. Deferred loans are re-evaluated at the end of the deferral period and will either return to the original loan terms or be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. All of these loan modifications have been made in response to the COVID-19 pandemic. The following table summarizes our loans under payment relief related to COVID-19 as of September 30, 2021 (dollars in thousands): Second Request Third Request Fourth Request Total # of Loans Amount # of Loans Amount # of Loans Amount # of Loans Amount Residential loans (1) 1 $ 67 2 $ 189 3 $ 677 6 $ 933 (1) Entered into a forbearance agreement with a weighted-average loan-to-value of 75%, 37% and 72% for loans under their second, third or fourth request, respectively. The weighted-average loan-to-values are based on appraisals obtained at the time of loan origination and the current loan amount. Of the six total loans presented above, five of these loans, or $777 thousand of the $933 thousand, are not classified as troubled debt restructurings (“TDRs”) pursuant to applicable accounting and regulatory guidance until the earlier of 60 days after the national emergency termination date or January 1, 2022. We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic. 35 Support for Clients, Employees and Community during Pandemic. We remain focused on keeping our employees safe and the Bank running effectively to serve its clients. The Bank is managing branch access and occupancy levels in relation to cases and close contact scenarios, following governmental restrictions and considering public health authority guidelines, and encouraging remote work and supporting employees with paid time off. As of September 30, 2021, all of our branch lobbies were open. The Company is aware of the surge in COVID-19 infections arising out of the so-called Delta variant and is prepared to restore other protocols, as may prove to be necessary. We continue to work closely with our borrowers to evaluate pandemic related challenges. We also continue to support our not-for-profit organizations with volunteering, donations and support of both virtual and live fund raising activities. Comparison of Financial Condition at September 30, 2021 and December 31, 2020 General. Total assets increased $66.7 million, or 7.7%, to $928.1 million at September 30, 2021 from $861.4 million at December 31, 2020. The increase was primarily a result of higher balances in loans held-for-portfolio and cash and cash equivalents, partially offset by a decrease in loans held-for-sale. Cash and Securities. Cash and cash equivalents increased $12.9 million, or 6.6%, to $206.7 million at September 30, 2021 from $193.8 million at December 31, 2020 primarily due to significant deposit growth due to new PPP relationships and growth of existing client balances. Available-for-sale securities, which consist of municipal bonds and agency mortgage-backed securities decreased $3.2 million, or 30.9%, to $7.1 million at September 30, 2021 from $10.2 million at December 31, 2020 as a result of normal pay downs in investment securities during the nine months ended September 30, 2021 and the call of a municipal bond for $950 thousand during the second quarter of 2021. Loans. Loans held-for-portfolio, net, increased $53.9 million, or 8.9%, to $661.2 million at September 30, 2021 from $607.4 million at December 31, 2020, driven by a $63.7 million, or 48.7%, increase in one-to-four family loans, an $18.8 million increase in construction and land loans and an $18.5 million increase in loans for floating homes during 2021, partially offset by a $27.6 million decrease in commercial business loans, resulting from the forgiveness by the SBA of $75.9 million of PPP loans, and a $19.0 million decrease in commercial and multifamily loans during the period. The following table reflects the changes in the loan mix of our loan portfolio at September 30, 2021, as compared to December 31, 2020 (dollars in thousands): September 30, 2021 December 31, 2020 Amount Change Percent Change One-to-four family $ 194,346 $ 130,657 $ 63,689 48.7 % Home equity 14,012 16,265 (2,253) (13.9) Commercial and multifamily 246,794 265,774 (18,980) (7.1) Construction and land 81,576 62,752 18,824 30.0 Manufactured homes 21,459 20,941 518 2.5 Floating homes 58,358 39,868 18,490 46.4 Other consumer 15,732 15,024 708 4.7 Commercial business 36,620 64,217 (27,597) (43.0) Deferred loan fees (1,346) (2,135) 789 (37.0) Total loans held-for-portfolio, gross 667,551 613,363 54,188 8.8 Allowance for loan losses (6,327) (6,000) (327) 5.5 Total loans held-for-portfolio, net $ 661,224 $ 607,363 $ 53,861 8.9 % The increase in one-to-four family loans was driven primarily by the purchase of $24.1 million in jumbo loans during the second quarter of 2021 and the origination of $48.6 million of conforming and non-conforming jumbo loans in our portfolio. The increase in construction and land loans during the period was primarily due to new originations and disbursement of advances on previously originated loans and the increase in loans on floating homes was primarily a result of larger loan sizes, seasonal activity and a small competitive market for these types of loans. The decrease in commercial and multifamily loans was primarily due to increased payoff activity. The decrease in our commercial business loan portfolio was primarily due to SBA loan forgiveness, partially offset by our origination of 599 PPP loans totaling $42.8 million during the nine months ended September 30, 2021. At September 30, 2021, our loan portfolio, net of deferred loan fees, remained well-diversified. Commercial and multifamily real estate loans accounted for 36.9% of total loans, one-to-four family loans, including home equity loans accounted for 31.2% of total loans, commercial business loans accounted for 5.6% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for 14.3% of total loans at 36 September 30, 2021. Construction and land loans accounted for 12.2% of total loans at September 30, 2021. Allowance for Loan Losses. The allowance for loan losses is maintained to cover losses that are probable and can be estimated on the date of evaluation in accordance with generally accepted accounting principles in the United States. It is our best estimate of probable credit losses inherent in our loan portfolio. The following table reflects the adjustments in our allowance during the periods indicated (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Balance at beginning of period $ 6,157 $ 6,031 $ 6,000 $ 5,640 Charge-offs (8) (332) (113) (649) Recoveries 3 14 15 72 Net charge-offs (5) (318) (98) (577) Provision for loan losses during the period 175 275 425 925 Balance at end of period $ 6,327 $ 5,988 $ 6,327 $ 5,988 Ratio of net charge-offs during the period to average loans outstanding during the period — % (0.18) % (0.02) % (0.12) % September 30, 2021 December 31, 2020 Allowance as a percentage of nonperforming loans (end of period) 206.16 % 208.04 % Allowance as a percentage of total loans (end of period) 0.95 % 0.98 % Our allowance for loan losses increased $327 thousand, or 5.5%, to $6.3 million at September 30, 2021, from $6.0 million at December 31, 2020. Specific loan loss reserves decreased to $281 thousand at September 30, 2021, compared to $378 thousand at December 31, 2020, while general loan loss reserves decreased to $5.1 million at September 30, 2021, compared to $5.2 million at December 31, 2020 and the unallocated reserve increased to $962 thousand at September 30, 2021, compared to $406 thousand at December 31, 2020. The increase in the unallocated reserve was primarily a result of the increase in the loan portfolio at September 30, 2021, partially offset by a positive adjustment in the qualitative factors applied to real estate related loans as a result of the improvement in economic conditions related to the strong housing market. The $11.8 million balance of PPP loans was omitted from the calculation for the allowance for loan losses at September 30, 2021, as these loans are 100% guaranteed by the SBA and management expects that the majority of the remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reduce the Bank’s loan balance for the amount forgiven. Net charge-offs for the three and nine months ended September 30, 2021 totaled $5 thousand and $98 thousand, respectively, compared to net charge-offs of $318 thousand and $577 thousand for the three and nine months ended September 30, 2020, respectively. At September 30, 2021, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.95% and 206.16%, respectively, compared to 0.98% and 208.04%, respectively, at December 31, 2020. See “Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 — Provision for Loan Losses.” Mortgage Servicing Rights. The fair value of mortgage servicing rights was $4.2 million at September 30, 2021, an increase of $431 thousand, or 11.4%, from $3.8 million at December 31, 2020. We record mortgage servicing rights on loans sold with servicing retained and upon acquisition of a servicing portfolio. Mortgage servicing rights are carried at fair value. If the fair value of our mortgage servicing rights fluctuates significantly, our financial results could be materially impacted. Nonperforming Assets. At September 30, 2021, nonperforming assets totaled $3.7 million, or 0.40% of total assets, compared to $3.5 million, or 0.40% of total assets at December 31, 2020. 37 The table below sets forth the amounts and categories of nonperforming assets at the dates indicated (dollars in thousands): Nonperforming Assets September 30, 2021 December 31, 2020 Amount Change Percent Change Nonaccrual loans $ 2,658 $ 2,710 $ (52) (1.9) % Nonperforming TDRs 411 174 237 135.9 Total nonperforming loans 3,069 2,884 185 6.4 OREO and repossessed assets 659 594 65 10.9 Total nonperforming assets $ 3,728 $ 3,478 $ 250 7.2 % Nonperforming loans increased $185 thousand, or 6.4%, to $3.1 million at September 30, 2021 from $2.9 million at December 31, 2020. The percentage of nonperforming loans to total loans was 0.46% at September 30, 2021, compared to 0.47% of total loans at December 31, 2020. Deposits. Total deposits increased $59.7 million, or 8.0%, to $807.7 million at September 30, 2021 from $748.0 million at December 31, 2020. The increase was due primarily to stimulus funds deposited, developing further relationships with PPP borrowers who were not previously clients, as well as reduced withdrawals reflecting changes in customer spending habits due to the COVID-19 pandemic. We continue our efforts to grow noninterest-bearing deposits, which increased $62.4 million, or 47.1%, to $194.8 million at September 30, 2021, compared to $132.5 million at December 31, 2020. Noninterest-bearing deposits represented 24.1% of total deposits at September 30, 2021, compared to 17.7% at December 31, 2020. A summary of deposit accounts with the corresponding weighted-average cost of funds at the dates indicated is presented below (dollars in thousands): September 30, 2021 December 31, 2020 Amount Wtd. Avg. Rate Amount Wtd. Avg. Rate Noninterest-bearing demand $ 190,284 — % $ 129,299 — % Interest-bearing demand 311,303 0.21 230,492 0.44 Savings 99,747 0.09 83,778 0.27 Money market 82,314 0.22 65,748 0.39 Time deposits 119,441 1.67 235,473 2.40 Escrow (1) 4,564 — 3,191 — Total deposits $ 807,653 0.47 % $ 747,981 1.06 % (1) Escrow balances shown in noninterest-bearing deposits on the consolidated balance sheets. Scheduled maturities of time deposits at September 30, 2021, are as follows (in thousands): Year Ending December 31, Amount 2021 $ 21,405 2022 49,085 2023 38,421 2024 3,940 2025 4,800 Thereafter 1,790 $ 119,441 Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of five years or less. The aggregate amount of time deposits in denominations of more than $250,000 at September 30, 2021 and December 31, 2020, totaled $25.5 million and $79.9 million, respectively. Deposits in excess of $250,000 are not federally insured. 38 Stockholders’ Equity. Total stockholders’ equity increased $6.4 million, or 7.5%, to $91.9 million at September 30, 2021, from $85.5 million at December 31, 2020. This increase primarily reflects $7.3 million in net income for the nine months ended September 30, 2021, partially offset by the payment of cash dividends of $1.6 million to common stockholders during the nine months ended September 30, 2021. 39 Average Balances, Net Interest Income, Yields Earned and Rates Paid The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis. All average balances are daily average balances. Nonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual (dollars in thousands). Three Months Ended September 30, 2021 2020 Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Interest-earning assets: Loans receivable $ 652,251 $ 8,967 5.45 % $ 693,524 $ 8,422 4.83 % Investments, cash and cash equivalents 229,802 135 0.23 117,660 86 0.29 Total interest-earning assets (1) 882,053 9,102 4.09 811,184 8,508 4.17 Interest-bearing liabilities: Savings and money market accounts 179,164 42 0.09 132,271 85 0.26 Demand and NOW accounts 311,273 141 0.18 199,021 242 0.48 Certificate accounts 135,757 434 1.27 239,296 1,411 2.35 Subordinated notes 11,616 168 5.74 1,692 23 5.41 Borrowings 2 — — 40,527 87 0.85 Total interest-bearing liabilities 637,812 785 0.49 % 612,807 1,848 1.20 % Net interest income $ 8,317 $ 6,660 Net interest rate spread 3.61 % 2.97 % Net earning assets $ 244,241 $ 198,377 Net interest margin 3.74 % 3.27 % Average interest-earning assets to average interest-bearing liabilities 138.29 % 132.37 % Total deposits 808,697 617 0.30 % 715,231 1,738 0.97 % Total funding (2) 820,315 785 0.38 % 757,450 1,848 0.97 % (1) Calculated net of deferred loan fees, loan discounts and loans in process. (2) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding. 40 Nine Months Ended September 30, 2021 2020 Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Interest-earning assets: Loans receivable $ 636,352 $ 25,152 5.28 % $ 666,090 $ 25,463 5.09 % Investments, cash and cash equivalents 236,495 365 0.21 82,799 400 0.64 Total interest-earning assets (1) 872,847 25,517 3.91 % 748,889 25,863 4.60 Interest-bearing liabilities: Savings and money market accounts 167,253 144 0.12 122,545 252 0.27 Demand and NOW accounts 281,933 485 0.23 178,712 688 0.51 Certificate accounts 174,712 2,178 1.67 244,480 4,406 2.40 Subordinated notes 11,606 504 5.81 568 23 5.39 Borrowings 1 — — 20,244 209 1.38 Total interest-bearing liabilities 635,505 3,311 0.70 % 566,549 5,578 1.31 % Net interest income $ 22,206 $ 20,285 Net interest rate spread 3.21 % 3.29 % Net earning assets $ 237,342 $ 182,340 Net interest margin 3.40 % 3.61 % Average interest-earning assets to average interest-bearing liabilities 137.35 % 132.18 % Total deposits 798,384 2,807 0.47 % 673,042 5,346 1.06 % Total funding (2) 809,991 3,311 0.55 % 693,854 5,578 1.07 % (1) Calculated net of deferred loan fees, loan discounts and loans in process. (2) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding. Rate/Volume Analysis The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between changes related to outstanding balances and changes due to interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate (dollars in thousands). 41 Three Months Ended September 30, 2021 vs. 2020 Nine Months Ended September 30, 2021 vs. 2020 Increase (Decrease) due to Total Increase (Decrease) Increase (Decrease) due to Total Increase (Decrease) Volume Rate Volume Rate Interest-earning assets: Loans receivable $ (567) $ 1,112 $ 545 $ (1,175) $ 864 $ (311) Investments, cash and cash equivalents 66 (17) 49 237 (272) (35) Total interest-earning assets (501) 1,095 594 (938) 592 (346) Interest-bearing liabilities: Savings and Money Market accounts 11 (54) (43) 38 (146) (108) Demand and NOW accounts 51 (152) (101) 178 (381) (203) Certificate accounts (331) (646) (977) (870) (1,358) (2,228) Subordinated notes 144 1 145 479 2 481 Borrowings — (87) (87) — (209) (209) Total interest-bearing liabilities $ (125) $ (938) $ (1,063) $ (175) $ (2,092) $ (2,267) Change in net interest income $ 1,657 $ 1,921 Comparison of Results of Operation for the Three and Nine Months Ended September 30, 2021 and 2020 General. Q3 2021 vs Q3 2020 . Net income increased $257 thousand, or 11.0%, to $2.6 million, or $0.98 per diluted common share, for the three months ended September 30, 2021, compared to $2.3 million, or $0.90 per diluted common share, for the three months ended September 30, 2020. The increase in net income was primarily the result of higher interest income, lower interest expense paid on deposits and a lower provision for loan losses, partially offset by a decrease in noninterest income, higher interest expense paid on subordinated notes, and an increase in noninterest expense. YTD 2021 vs. YTD 2020 . Net income increased $1.9 million, or 34.0%, to $7.3 million, or $2.76 per diluted common share, for the nine months ended September 30, 2021, compared to $5.4 million, or $2.09 per diluted common share, for the nine months ended September 30, 2020. The increase was primarily a result of a $2.3 million decrease in interest expense, an increase in noninterest income of $1.5 million and a $500 thousand decrease in the provision for loan losses for the nine months ended September 30, 2021, partially offset by a $1.6 million increase in noninterest expense. Interest Income Q3 2021 vs Q3 2020 . Interest income increased $594 thousand, or 7.0%, to $9.1 million for the three months ended September 30, 2021, from $8.5 million for the three months ended September 30, 2020, primarily due to a 62 basis point increase in the average loan yield, partially offset by lower average loan balances. Interest income on loans increased $545 thousand, or 6.5%, to $9.0 million for the three months ended September 30, 2021, compared to $8.4 million for the three months ended September 30, 2020. The average balance of total loans was $652.3 million for the three months ended September 30, 2021, compared to $693.5 million for the three months ended September 30, 2020 resulting primarily from the decline in commercial and multifamily loans and commercial business loans. The average yield on total loans was 5.45% for three months ended September 30, 2021, compared to 4.83% for the three months ended September 30, 2020. The average yield on loans increased primarily due to the recognition of net deferred fees from SBA’s forgiveness of PPP loans during the period, partially offset by adjustable rate loans resetting downward. For the three months ended September 30, 2021, the average balance of PPP loans was $19.0 million and the average yield on PPP loans was 22.37%, including the recognition of the net deferred fees, with a positive impact on loan yield of 51 basis points. For the three months ended September 30, 2020, the average balance of PPP loans was $74.3 million and the average yield on PPP loans was 2.80%, including the recognition of deferred fees, with a negative impact on loan yield of 24 basis points. Interest income included $1.1 million in fees earned related to PPP loans in the three months ended September 30, 2021, compared to $522 thousand in the same period a year ago. At September 30, 2021, PPP deferred loan origination fees of $300 thousand remain to be accreted into interest income during the remaining life of the loans. The impact of PPP loans on loan yields will change during any period based on the volume of 42 prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the two- or five-year maturity of the loans. Interest income on the investment portfolio and cash and cash equivalents increased $49 thousand, or 57.0%, to $135 thousand for the three months ended September 30, 2021, compared to $86 thousand for the three months ended September 30, 2020. The increase in the interest income on investment securities and cash and cash equivalents was due to significantly higher average balances, partially offset by lower average yields. The average balance on investments and cash and cash equivalents was $229.8 million for the three months ended September 30, 2021, compared to $117.7 million for the three months ended September 30, 2020. The substantial increase was due to higher average cash balances primarily due to the increase in deposit balances related to new and existing clients increasing their deposit balances. This excess liquidity negatively impacted the average yield on investments and cash and cash equivalents, which decreased to 0.23% for the three months ended September 30, 2021, compared to 0.29% for the three months ended September 30, 2020. YTD 2021 vs. YTD 2020 . Interest income decreased $346 thousand, or 1.3%, to $25.5 million for the nine months ended September 30, 2021, from $25.9 million for the nine months ended September 30, 2020. The decrease was primarily due to a 69 basis point decline in average yield on interest-earning assets. Interest income on loans decreased $311 thousand, or 1.2%, to $25.2 million for the nine months ended September 30, 2021, compared to $25.5 million for the nine months ended September 30, 2020, driven by lower average total loans resulting primarily from the decline in commercial and multifamily loans and commercial business loans, partially offset a 19 basis points increase in the average yield on loans. The average balance of total loans was $636.4 million for the nine months ended September 30, 2021, compared to $666.1 million for the nine months ended September 30, 2020. The average yield on total loans was 5.28% for the nine months ended September 30, 2021, compared to 5.09% for the nine months ended September 30, 2020. For the nine months ended September 30, 2021, the average balance of PPP loans was $44.2 million and the average yield on PPP loans was 8.55%, including the recognition of the net deferred fees, with a positive impact on average loan yield of 24 basis points. For the nine months ended September 30, 2020, the average balance of PPP loans was $42.4 million and the average yield on PPP loans was 2.64%, including the recognition of deferred fees, with a negative impact on average loan yield of 17 basis points. Interest income included $2.8 million in fees earned related to PPP loans in the nine months ended September 30, 2021, compared to $840 thousand in the same period a year ago. Interest income on the investment portfolio and cash and cash equivalents decreased $35 thousand, or 8.8%, to $365 thousand for the nine months ended September 30, 2021, compared to $400 thousand for the nine months ended September 30, 2020. The decrease in the interest income on investment securities and cash and cash equivalents was due to lower average yields, partially offset by higher average balances. The average yield on investments and cash and cash equivalents was 0.21% for the nine months ended September 30, 2021, compared to 0.64% for the nine months ended September 30, 2020, primarily due to the substantial increase in cash and cash equivalents earning a nominal yield. Interest Expense Q3 2021 vs Q3 2020 . Interest expense decreased $1.1 million, or 57.5%, to $785 thousand for the three months ended September 30, 2021, from $1.8 million for the three months ended September 30, 2020, primarily as a result of declining deposit costs, a higher percentage of noninterest bearing deposits to total deposits and repayment of FHLB advances, partially offset by the interest expense on subordinated notes issued in the third quarter of 2020. Interest expense on deposits decreased $1.1 million, or 64.5%, to $617 thousand for the three months ended September 30, 2021, compared to $1.7 million for the same period a year ago. The decrease was primarily the result of a decline in the average cost of deposits reflecting reduced rates paid on all deposits and a $103.5 million or 43.3% decline in the average balance of higher cost certificate accounts. In addition, deposit costs were favorably impacted by a $37.9 million increase in average noninterest bearing deposits to $182.5 million for the three months ended September 30, 2021, compared to $144.6 million for the same period last year. The average cost of total deposits decreased 67 basis points to 0.30% for the quarter ended September 30, 2021, from 0.97% for the quarter ended September 30, 2020. Interest expense on borrowings and subordinated notes increased $58 thousand, or 52.7%, to $168 thousand for the three months ended September 30, 2021, comprised solely of interest expense on our subordinated notes, compared to $110 thousand for the three months ended September 30, 2020, comprised primarily of interest expense on our FHLB advances. Average borrowings and subordinated notes decreased $30.6 million, to $11.6 million at September 30, 2021, consisting solely of subordinated notes, from $42.2 million at September 30, 2020, which consisted primarily of FHLB advances. The average cost of subordinated notes was 5.74% for the three months ended September 30, 2021, and the average cost of the subordinated notes and FHLB advances was 1.04% for the three months ended September 30, 2020. 43 YTD 2021 vs. YTD 2020 . Interest expense decreased $2.3 million, or 40.6%, to $3.3 million for the nine months ended September 30, 2021, from $5.6 million for the nine months ended September 30, 2020, primarily as a result of declining deposit costs and a higher percentage of noninterest bearing deposits to total deposits. Interest expense on deposits decreased $2.5 million, or 47.5%, to $2.8 million for the nine months ended September 30, 2021, compared to $5.3 million for the same period a year ago. The decrease was primarily the result of a decline in the average cost of deposits reflecting reduced market rates paid on deposits. The average cost of total deposits decreased 59 basis points to 0.47% for the nine months ended September 30, 2021, from 1.06% for the nine months ended September 30, 2020. Interest expense on borrowings and subordinated notes increased $272 thousand, or 117.2%, to $504 thousand for the nine months ended September 30, 2021, comprised solely of interest expense on our subordinated notes, compared to $232 thousand for the nine months ended September 30, 2020, which was related primarily to FHLB advances. Average borrowings and subordinated notes decreased $9.2 million, to $11.6 million at September 30, 2021, consisting solely of subordinated notes, from $20.8 million at September 30, 2020, which consisted primarily of FHLB advances. The average cost of the subordinated notes and FHLB advances was 5.81% for the nine months ended September 30, 2021, compared to 1.48% for the nine months ended September 30, 2020. Net Interest Income. Q3 2021 vs Q3 2020 . Net interest income increased $1.7 million, or 24.9%, to $8.3 million for the three months ended September 30, 2021, from $6.7 million for the three months ended September 30, 2020. Our net interest margin was 3.74% and 3.27% for the three months ended September 30, 2021 and 2020, respectively. The increase in net interest income primarily resulted from the decline in the average rate paid on deposits and higher interest income. The increase in net interest margin was primarily due to decline in rates paid on interest-bearing liabilities following decreases in the short-term market rates in the second quarter of 2020 exceeding the decline in yields earned on interest-earning assets. During the third quarter of 2021, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of 41 basis points, compared to a negative impact of five basis points from our origination of low yielding PPP loans during the quarter ended September 30, 2020. YTD 2021 vs. YTD 2020 . Net interest income increased $1.9 million, or 9.5%, to $22.2 million for the nine months ended September 30, 2021, from $20.3 million for the nine months ended September 30, 2020. Our net interest margin was 3.40% and 3.61% for the nine months ended September 30, 2021, respectively. The increase in net interest income primarily resulted from the decline in the average rate paid on deposits, partially offset by a decline in the average loan balance. The decrease in net interest margin was primarily due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities as changes in the average rate paid on interest-bearing deposits tend to lag changes in market interest rate. During the nine months ended September 30, 2021, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of 27 basis points, compared to a negative impact of six basis points from our origination of low yielding PPP loans during the same period in 2020. Provision for Loan Losse s. We establish provisions for loan losses, which are charged to earnings, based on our review of the level of the allowance for loan losses required to reflect management’s best estimate of the probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, peer group data, prevailing economic conditions, and current factors. Large groups of smaller balance homogeneous loans, such as one- to four- family, small commercial and multifamily, home equity and consumer loans, are evaluated in the aggregate using historical loss factors adjusted for current economic conditions and other relevant data. Loans for which management has concerns about the borrowers’ ability to repay, are evaluated individually and specific loss allocations are provided for these loans when necessary. A provision for loan losses of $175 thousand and $425 thousand was recorded for the three and nine months ended September 30, 2021, as compared to $275 thousand and $925 thousand for the three and nine months ended September 30, 2020, respectively. The decrease in the provision for loan losses in the current quarter and nine-month period compared to the comparable periods in 2020 was primarily due to a decrease in the average balance of loans held-for-portfolio between the periods, a positive adjustment to the qualitative factors applied to real estate related loans as a result of improvement in economic conditions related to the strong housing market, and to a lesser extent a $247 thousand decrease in non-performing loans from September 30, 2020. Our allowance for loan losses as of September 30, 2021, not only reflects probable and inherent credit losses based upon the economic conditions that existed as of September 30, 2021, but also reflects the inherent economic improvements in our markets as initial COVID-19 restrictions implemented in the second quarter of last year have 44 been lifted. Net charge-offs for the three and nine months ended September 30, 2021 totaled $5 thousand and $98 thousand, respectively, compared to net charge-offs of $318 thousand and $577 thousand for the three and nine months ended September 30, 2020, respectively. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. Recently, we have seen most of our market areas reporting a fairly significant increase in COVID transmissions, which we understand from our public health authorities is largely attributed to lagging vaccination rates and an increase in cases related to the Delta variant. To date, we are not seeing renewed business activity restrictions in our primary markets. To the extent business activity restrictions are renewed, due to COVID-19 or otherwise, this will likely affect our business operations which may, in turn, result in a material increase our provision for loan and lease losses which would adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination. Noninterest Income. Noninterest income decreased $637 thousand, or 30.8%, to $1.4 million for the three months ended September 30, 2021, as compared to $2.1 million for the three months ended September 30, 2020, as reflected below (dollars in thousands): Three Months Ended September 30, Amount Change Percent Change 2021 2020 Service charges and fee income $ 556 $ 510 $ 46 9.0 % Earnings on cash surrender value of BOLI 104 102 2 2.0 Mortgage servicing income 328 260 68 26.2 Fair value adjustment on mortgage servicing rights (125) (623) 498 (79.9) Net gain on sale of loans 568 1,819 (1,251) (68.8) Total noninterest income $ 1,431 $ 2,068 $ (637) (30.8) % The decrease in noninterest income during the three months ended September 30, 2021 compared to the same period in 2020 was primarily due to the decrease in our net gain on sale of loans, partially offset by a $498 thousand improvement in the fair value adjustment on mortgage servicing rights and increases in both our mortgage servicing income of $68 thousand and service charges and fee income of $46 thousand. As a result of refinance activity slowing over the past six months, our residential loans originated for sale decreased. Loans sold during the quarter ended September 30, 2021, totaled $20.3 million, compared to $89.5 million during the quarter ended September 30, 2020. The improvement in the fair value adjustment on mortgage servicing rights resulted from loan prepayment speeds slowing during the quarter as mortgage interest rates moved slightly higher. The increase in the service charges and fee income primarily resulted from an increase in the number of checking accounts and an increase in debit card interchange fees. Noninterest income increased $1.5 million, or 34.2%, to $5.8 million for the nine months ended September 30, 2021, as compared to $4.4 million for the nine months ended September 30, 2020, as reflected below (dollars in thousands): Nine Months Ended September 30, Amount Change Percent Change 2021 2020 Service charges and fee income $ 1,615 $ 1,433 $ 182 12.7 % Earnings on cash surrender value of BOLI 281 207 74 35.7 Mortgage servicing income 961 739 222 30.0 Fair value adjustment on mortgage servicing rights (694) (1,423) 729 (51.2) Net gain on sale of loans 3,683 3,399 284 8.4 Total noninterest income $ 5,846 $ 4,355 $ 1,491 34.2 % The increase in noninterest income during the nine months ended September 30, 2021, compared to the same period in 2020 was primarily due to improvement in the fair value adjustment on mortgage servicing rights, and increases in both gain on sale of loans and in mortgage servicing income. Net gain on sale of loans increased due to higher margins on our sales offsetting the 45 decrease in sales volume. Loans sold during the nine months ended September 30, 2021, totaled $128.3 million, compared to $176.0 million during the nine months ended September 30, 2020. Mortgage servicing income was higher as a result of our mortgage servicing portfolio increasing to $514.0 million at September 30, 2021 compared to $444.3 million at September 30, 2020. Noninterest Expense. Noninterest expense increased $788 thousand, or 14.2%, to $6.3 million during the three months ended September 30, 2021, compared to $5.5 million during the three months ended September 30, 2020, as reflected below (dollars in thousands): Three Months Ended September 30, Amount Change Percent Change 2021 2020 Salaries and benefits $ 3,512 $ 2,880 $ 632 21.9 % Operations 1,466 1,390 76 5.5 Regulatory assessments 91 111 (20) (18.0) Occupancy 441 442 (1) (0.2) Data processing 808 707 101 14.3 Total noninterest expense $ 6,318 $ 5,530 $ 788 14.2 % The increase in noninterest expense during the three months ended September 30, 2021 compared to the same period in 2020 was due to an increase in salaries and benefits of $632 thousand primarily due to higher wages and incentive compensation and lower deferred compensation, partially offset by a decrease in commission expense related to a decline in mortgage activity in third quarter of 2021 as compared to the same period in 2020. Data processing expense also increased $101 thousand due to technology investments. Noninterest expense increased $1.6 million, or 9.4%, to $18.5 million during the nine months ended September 30, 2021, compared to $16.9 million during the nine months ended September 30, 2020, as reflected below (dollars in thousands): Nine Months Ended September 30, Amount Change Percent Change 2021 2020 Salaries and benefits $ 10,470 $ 8,933 $ 1,537 17.2 % Operations 4,033 4,109 (76) (1.8) Regulatory assessments 283 480 (197) (41.0) Occupancy 1,298 1,437 (139) (9.7) Data processing 2,400 1,923 477 24.8 Net gain on OREO and repossessed assets (16) — (16) (100.0) Total noninterest expense $ 18,468 $ 16,882 $ 1,586 9.4 % The increase in noninterest expense during the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to increases of $1.5 million in salaries and benefits and $477 thousand in data processing expense, partially offset by a $76 thousand decrease in operations expense, a $197 thousand decrease in regulatory assessments and a $139 thousand decrease in occupancy expense. Salaries and benefits increased primarily due to discretionary bonuses paid for added efforts associated with the Company's COVID-19 response, higher wages, lower deferred compensation and higher medical expenses during 2021 as compared to 2020. Data processing expense increased due to technology investments and variable costs associated with increased loan originations. Operations expense decreased primarily due to lower loan expenses and office operations, and regulatory assessments decreased as the nine months ended September 30, 2020 included regulatory examination costs. Occupancy expense decreased due to the closure of one branch location in June 2020. The efficiency ratio for the quarter ended September 30, 2021 was 64.81%, compared to 63.36% for the quarter ended September 30, 2020, and was 65.83% for the nine months ended September 30, 2021, compared to 68.51% for the nine months ended September 30, 2020. The weakening in the efficiency ratio for the current quarter compared to the same period in the prior year is primarily due to higher noninterest expense, partially offset by slightly higher revenues. The improvement in the efficiency ratio for the nine months ended September 30, 2021 was primarily due to higher revenues, partially offset by higher noninterest expense. 46 Income Tax Expense . We incurred income tax expense of $663 thousand and $1.9 million for the three and nine months ended September 30, 2021, respectively, as compared $588 thousand and $1.4 million for the same periods in 2020. The effective tax rates for the three and nine months ended September 30, 2021 were 20.37% and 20.36%, respectively. The effective tax rates for the three and nine months ended September 30, 2020 were 20.12% and 20.34%, respectively. Liquidity and Capital Resources The Management Discussion and Analysis in Item 7 of the Company’s 2020 Form 10-K contains an overview of Sound Financial Bancorp’s and the Bank’s liquidity management, sources of liquidity and cash flows. This discussion updates that disclosure for the nine months ended September 30, 2021. The Bank’s primary sources of funds are deposits, principal and interest payments on loans and borrowings. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank’s primary investing activity is loan originations. The Bank maintains liquidity levels it believes to be adequate to fund loan commitments, investment opportunities, deposit withdrawals and other financial commitments. At September 30, 2021, the Bank had $213.8 million in cash and investment securities available-for-sale and $3.9 million in loans held-for-sale generally available for its cash needs. Also, at September 30, 2021, the Bank had the ability to borrow an additional $121.6 million in FHLB advances based on existing collateral pledged, and could access $22.6 million through the Federal Reserve’s Discount Window. At September 30, 2021, we also had available a total of $20.0 million in credit facilities with other financial institutions, with no balance outstanding. The Bank uses these sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals and loan commitments. At September 30, 2021, outstanding loan commitments totaled $84.5 million, including unused lines and letters of credit of $34.5 million and undisbursed construction and land loans of $43.1 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2021, totaled $57.8 million. Cash and cash equivalents increased $12.9 million to $206.7 million as of September 30, 2021, from $193.8 million as of December 31, 2020. Net cash provided by operating activities was $12.0 million for the nine months ended September 30, 2021. Net cash used in investing activities totaled $57.6 million during the nine months ended September 30, 2021 and consisted primarily of increases in loans and the purchase of BOLI, partially offset by principal payments on and maturities of investment securities. The $58.4 million of net cash provided by financing activities during the nine months ended September 30, 2021 primarily was the result of a $59.7 million net increase in deposits, partially offset by the payment of $1.6 million of dividends on our common stock. At September 30, 2021, the Company, on an unconsolidated basis, had $4.6 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs. The Company’s principal source of liquidity is dividends and ESOP loan repayments from the Bank. The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. As long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a Community Bank Leverage Ratio ("CBLR") greater than the required percentage), as discussed below, and operates in a safe and sound manner, it is management's belief that its banking regulators will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard. In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. A summary of our off-balance sheet loan commitments at September 30, 2021, is as follows (in thousands): September 30, 2021 Commitments to make loans $ 6,774 Unfunded construction commitments 43,081 Unused lines of credit 34,467 Irrevocable letters of credit 150 Total loan commitments $ 84,472 47 Regulatory Capital Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action (“PCA”). Qualifying institutions that elect to use the CBLR framework, such as the Bank and the Company, that maintain the required minimum leverage ratio 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 capital requirements for the well capitalized category under the agencies’ PCA framework. As of September 30, 2021, the Bank and Company’s CBLR was 10.56% and 9.80%, respectively, which exceeded the minimum requirements. See "Part I, Item 1. Business – Regulation of Sound Community Bank – Capital Rules " in the Company's 2020 Form 10-K for additional information related to regulatory capital. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company provided information about market risk in Item 7A of its 2020 Form 10-K. There have been no material changes in our market risk since our 2020 Form 10-K.