What changed in this filing

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Item 1. Business

2022-03-15 compared with 2021-03-30 · 303 added, 363 removed, 844 unchanged (44% of the section changed)

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

• the effect of the novel coronavirus disease 2019 (“COVID-19”) 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;

• potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, generally, resulting from the ongoing novel coronavirus disease 2019 (“COVID-19”) and any governmental or societal responses thereto;

• changes in consumer spending, borrowing and savings habits;

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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;

• 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;

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

• the future of the London Interbank Offered Rate (“LIBOR”), and the transition away from LIBOR toward new interest-rate benchmarks;

• our ability to control operating costs and expenses;

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• 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");

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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, 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.

• 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.

Securities and Exchange Commission (the "SEC").

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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.

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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.

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Based on information from Case-Shiller, the average home price in the Seattle MSA increased 23.9% in 2021.

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.

Based on information from the Northwest Multiple Listing Service ("MLS"), the median home sales price in King County in December 2020 was $676,000, a 9.9% increase from December 2019's median home sales price of $615,000.

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 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 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.

King County has the largest population of any county in the state of Washington with approximately 2.3 million residents and a median household income of approximately $97 thousand.

Based on information from the Northwest Multiple Listing Service ("MLS"), the median home sales price in King County in December 2021 was $750 thousand, a 10.9% increase from December 2020's median home sales price of $676 thousand.

Pierce County has approximately 921,000 residents and a median household income of approximately $80 thousand.

Based on information from the MLS, the median home sales price in Pierce County in December 2021 was $500 thousand, a 16% increase from December 2020's median home sales price of $430 thousand.

Snohomish County has approximately 828,000 residents and a median household income of approximately $94 thousand.

Based on information from the MLS, the median home sales price in Snohomish County at December 2021 was $650 thousand, an 21% increase from December 2020's median home sales price of $535 thousand.

Clallam County, with a population of approximately 77,000, has a median household income of approximately $55 thousand.

The economy of Clallam County is primarily manufacturing and shipping.

The Sequim Dungeness Valley continues to be a growing retirement location.

Based on information from the MLS, the median home sales price in Clallam County in December 2020 was $372,000, an 20.4% increase from December 2019's median home sales price of $309,000.

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 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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Based on information from the MLS, the median home sales price in Clallam County in December 2021 was $413 thousand, an 11% increase from December 2020's median home sales price of $372 thousand.

Jefferson County, with a population of approximately 33,000, has a median household income of approximately $66 thousand.

Based on information from the MLS, the average home sales price in Jefferson County in December 2021 was $538 thousand, a 32% increase from December 2020's median home sales price of $406 thousand.

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

Amount Percent Amount Percent

Real estate loans:

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Total loans 687,868 100.0 % 615,498 100.0 %

Premiums 897 —

Deferred fees and discounts (2,367) (2,135)

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Total loans, net $ 680,092 $ 607,363

Table of Conten t s

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

Amount Percent Amount Percent

Fixed-rate loans:

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At December 31, 2021, a total of $206.5 million have interest rate floors, of which $155.7 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 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.

Loan Maturity and Repricing.

The following table sets forth certain information at December 31, 2021, regarding the amount of total loans in our portfolio based on their contractual terms to maturity.

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

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.

(2) Excludes deferred fees of $998,000.

Within One Year After One Year Through Five Years After Five Years Through Fifteen Years After Fifteen Years Total

(in thousands)

Real estate loans:

One-to-four family $ 4,919 $ 13,760 $ 17,744 $ 171,237 $ 207,660

Home equity 166 461 4,347 8,276 13,250

Commercial and multifamily 30,523 62,304 164,466 20,882 278,175

Construction and land 25,407 30,215 7,483 — 63,105

Total real estate loans 61,015 106,740 194,040 200,395 562,190

Consumer loans:

Manufactured homes 40 737 14,463 6,396 21,636

Floating homes — 3,603 16,691 38,974 59,268

Other consumer 211 8,723 2,913 4,901 16,748

Total consumer loans 251 13,063 34,067 50,271 97,652

Commercial business loans 6,821 10,170 11,035 — 28,026

Total $ 68,087 $ 129,973 $ 239,142 $ 250,666 $ 687,868

The following table sets forth the amount of total loans due after at December 31, 2022, with fixed or adjustable interest rates.

Fixed-Rate Adjustable-Rate Total

(in thousands)

Real estate loans:

One-to-four family $ 136,024 $ 66,717 $ 202,741

Home equity 4,297 8,787 13,084

Commercial and multifamily 68,285 179,367 247,652

Construction and land 10,210 27,488 37,698

Total real estate loans 218,816 282,359 501,175

Consumer loans:

Manufactured homes 21,596 — 21,596

Floating homes 53,953 5,315 59,268

Other consumer 16,280 257 16,537

Total consumer loans 91,829 5,572 97,401

Commercial business loans 11,792 9,413 21,205

Total $ 322,437 $ 297,344 $ 619,781

Lending Authority .

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The Chief Banking Offer may approve unsecured loans up to $50,000 and all types of secured loans up to approximately $1.5 million at December 31, 2021.

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.

The Chief Financial/Strategy Officer may approve unsecured loans up to $50,000 and all types of secured loans up to approximately $2.5 million at December 31, 2021.

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.

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At December 31, 2021, the maximum amount under federal law that we could lend to any one borrower and the borrower's related entities was approximately $21.3 million.

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, 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.

Our five largest relationships (including unused commitments) totaled $86.1 million in the aggregate, or 12.5% of our $687.9 million total loan portfolio, at December 31, 2021.

At December 31, 2021, the largest lending relationship totaled $19.5 million and consisted of two loans to a business, collateralized by construction and commercial real estate.

The second largest relationship totaled $18.0 million and consisted of one $6.0 million loan to a business, collateralized by commercial real estate, three loans totaling $11.8 million to two businesses and one business line of credit for $200 thousand, all collateralized by multifamily real estate property.

The third largest relationship totaled $16.3 million and consisted of one construction loan to a business.

The fourth largest relationship totaled $16.3 million and consisted of six loans totaling $16.2 million to five businesses, collateralized by a one-to-four family home and construction, and two loans totaling $122 thousand to one business.

The fifth top borrowing relationship totaled $16.1 million and consisted of six loans to four businesses and an individual, secured by multifamily real estate and construction.

These top five borrowers had unused commitments totaling $42.6 million at December 31, 2021.

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

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.

During 2021, our fixed-rate, one-to-four family loan originations decreased $69.4 million, or 23.5%, to $226.1 million compared to $295.5 million in 2020, while one-to-four family adjustable-rate loan originations decreased $8.0 million, or 31.1% to $17.8 million compared to $25.8 million in 2020.

Since 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 $548,250 or $776,250, depending on location within our market area).

At December 31, 2021, our average loan amount was $702 thousand 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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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, 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.

At December 31, 2021, one-to-four family residential mortgage loans (excluding loans held-for-sale) totaled $207.7 million, or 30.2%, of our gross loan portfolio, of which $140.9 million were fixed-rate loans and $66.7 million were adjustable-rate loans, compared to $130.7 million (excluding loans held-for-sale), or 21.2% of our gross loan portfolio at December 31, 2020, of which $60.9 million were fixed-rate loans and $69.8 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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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.

For loans that are less than $250,000, we may use an automated valuation model, in lieu of an appraisal.

For loans that are less than $250 thousand, we may use an automated valuation model, in lieu of an appraisal.

We require title insurance policies on all first mortgage real estate loans originated.

Homeowners, liability, fire and, if required, flood insurance policies are also required for one-to-four family loans.

Our real estate loans generally contain a "due on sale" clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property.

The average balance of our one-to-four family residential loans was approximately $319,000 at December 31, 2020.

Our real estate loans

generally contain a "due on sale" clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property.

The average balance of our one-to-four family residential loans was approximately $456 thousand at December 31, 2021.

Fixed-rate loans secured by one-to-four family residences have contractual maturities of up to 30 years.

All of these loans are fully amortizing, with payments due monthly.

Our portfolio of fixed-rate loans also includes $1.8 million of loans with an initial seven-year term and a 30-year amortization period with a borrower refinancing option at a fixed rate at the end of the initial term as long as the loan has met certain performance criteria.

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

Our portfolio of fixed-rate loans also includes $4.0 million one-to-four family loans with a five-year call option at December 31, 2021.

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%.

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At December 31, 2021, $25.8 million, or 12.4% of our one-to-four family residential portfolio consisted of nonowner-occupied loans, compared to $19.6 million, or 15.0% of our one-to-four family residential portfolio at December 31, 2020.

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

At December 31, 2021, our average nonowner-occupied residential loan had a balance of $460 thousand.

Loans secured by rental properties represent potentially higher risk.

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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.

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.

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

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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

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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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In order to monitor the adequacy of cash flows on income-producing properties, the borrower is required to provide annual financial information.

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.

We also from time to time 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 present different credit risks than one-to-four family properties.

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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, 2020, totaled $13.3 million and was collateralized by a multifamily property.

The largest single commercial and multifamily real estate loan at December 31, 2021, totaled $12.0 million and was collateralized by a storage facility.

At December 31, 2021, this loan was performing in accordance with its repayment terms.

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At December 31, 2021, unfunded construction loan commitments totaled $89.8 million.

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Construction loans to individuals and contractors for the construction of personal residences, including speculative residential construction, totaled $11.8 million, or 18.7%, of our construction and land portfolio at December 31, 2021.

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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, 2021 was as follows (in thousands):

Puget Sound Olympic Peninsula Other Total

Commercial and multifamily construction $ 40,634

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

At December 31, 2021, our largest residential construction loan commitment was for $3.3 million, $1.3 million of which had been disbursed.

This loan was performing according to its repayment terms at December 31, 2021.

The average outstanding residential construction loan balance was approximately $652,000 at December 31, 2020.

The average outstanding residential construction loan balance was approximately $775 thousand at December 31, 2021.

Before making a commitment to fund a construction loan, we require an appraisal of the subject property by an independent approved appraiser.

During the construction phase, we make periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses.

construction phase, we make periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses.

Loan proceeds are disbursed after inspection based on the percentage of completion method.

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We also require these loans to be paid on an accelerated basis as the lots are sold, so that we are repaid before all the lots are sold.

At December 31, 2020, land acquisition and development and lot loans totaled $7.4 million, or 11.8% of our construction and land portfolio all of which were lot loans.

At December 31, 2021, land acquisition and development and lot loans totaled $4.0 million, or 6.4% of our construction and land portfolio.

We also offer commercial and multifamily construction loans.

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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.

At December 31, 2021, commercial and multifamily construction loans totaled $40.6 million or 64.4% of our construction and land portfolio, compared to $41.3 million, or 65.8% of our construction and land portfolio at December 31, 2020.

The three largest commercial and multifamily construction loans at December 31, 2021 included a $17.5 million loan secured by a commercial self-storage building, a $16.3 million loan secured by a multifamily residential property and a $13.5 million loan secured by a multifamily residential property, all located in King County, Washington.

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This may require us to advance additional funds and/or contract with another builder to complete construction.

Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished project.

Furthermore, in the case of speculative construction loans, there is the added risk

associated with identifying an end-purchaser for the finished project.

Land loans also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral.

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

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

At December 31, 2021, excluding our Paycheck Protection Program ("PPP") loans, approximately $1.8 million 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.

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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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We originated 1,515 PPP loans totaling $119.2 million during 2021 and 2020.

At December 31, 2021, there were 32 PPP loans totaling $4.2 million remaining in our portfolio.

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

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At December 31, 2021, these loans totaled $21.6 million, or 22.2% of our consumer loans and 3.1% 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, 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.

For used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $150 thousand, 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 $150 thousand, 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, 2020, there were four nonperforming manufactured home loans totaling $149,000.

At December 31, 2021, there were four nonperforming manufactured home loans totaling $122 thousand.

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

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At December 31, 2021, floating home loans totaled $59.3 million, or 60.7% of our consumer loan portfolio and 8.7% of our total loan portfolio.

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.

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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, 2021, totaled $3.9 million, or 4.0% of our consumer loan portfolio and 0.6% 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.

Automobile loans may be written for a term up to 72 months and have fixed rates of interest.

Loan-to-value ratios are up to 100% of the lesser of the purchase price or the National Automobile Dealers Association value for used automobiles, including tax, licenses, title and mechanical breakdown and gap insurance.

Loans secured by boats, motorcycles and recreational vehicles typically have terms from five to 20 years depending on the collateral and loan-to-value ratios up to 90%.

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.

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

At that date, the average outstanding balance on these lines was less than $1,000.

Consumer loans (other than our manufactured and floating homes) generally have shorter terms to maturity, which reduces our exposure to changes in interest rates.

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If a proposed loan exceeds our internal lending limits, we may originate the loan on a participation basis with another financial institution.

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

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

We also from time to time, purchase loans from or participate with other financial institutions on loans they originate.

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 2020 and 2019.

We did not sell any commercial loan participations in 2021 or 2020.

We had $4.3 million purchases of commercial business loan participations from other financial institutions in 2021 and none in 2020.

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

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In exchange for the additional risk we take with such borrowers, we may require borrowers to pay a higher interest rates, require a lower debt-to-income ratio or require other enhancements to manage the additional risk.

While no single credit characteristic defines a subprime loan, one commonly used indicator is a loan originated to a borrower with a credit score of 660 or lower.

At December 31, 2020, of the $321.3 million in one-to-four-family loans originated in 2020, $10.1 million or 3.3% were to borrowers with a credit score under 660.

Additionally, of the $4.3 million in manufactured home loans originated in 2020, $845,000 or 19.8% were to borrowers with a credit score of 660 or lower.

At December 31, 2020 and 2019, the total amount of residential and consumer loans held in our loan portfolio to borrowers with a credit score of 660 or lower were $15.6 million and $34.9 million, respectively.

While no single credit characteristic defines a subprime loan, one

commonly used indicator is a loan originated to a borrower with a credit score of 660 or lower.

Of the $243.9 million in one-to-four-family loans originated in 2021, $4.2 million or 1.7% were to borrowers with a credit score under 660.

Additionally, of the $6.3 million in manufactured home loans originated in 2021, $244 thousand or 3.9% were to borrowers with a credit score of 660 or lower.

At December 31, 2021, the total amount of residential and consumer loans held in our loan portfolio to borrowers with a credit score of 660 or lower were $18.3 million.

We do not engage in originating negative amortization or option adjustable-rate loans and have no established program to originate or purchase these loans.

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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

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

These loans are fixed-rate mortgages, which primarily are sold 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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Most one-to-four family loans are sold with servicing retained.

In October 2015, we acquired a $45.9 million loans servicing portfolio from another bank, which loans are 100% owned by Fannie Mae.

At December 31, 2021, we were servicing a $504.1 million portfolio of residential mortgage loans for Fannie Mae and $4.0 million for other investors.

We did not repurchase any loans in 2020 or 2019.

We repurchased one loan for $284 thousand in 2021 and no loans in 2020.

These mortgage servicing rights are carried at fair value and had a value at December 31, 2021 of $4.3 million.

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.

We earned mortgage servicing income of $1.3 million and $1.0 million for the years ended December 31, 2021 and 2020, respectively.

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

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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.

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.

We sold $147.4 million and $258.2 million of conforming one-to-four family loans during the year ended December 31, 2021 and 2020, respectively.

Gains, losses and transfer fees on sales of one-to-four family loans and participations are recognized at the time of the sale.

Our net gain on sales of residential loans for the years ended December 31, 2020, 2019 and 2018 was $6.0 million, $1.4 million, and 1.0 million, respectively.

Our net gain on sales of residential loans for the years ended December 31, 2021 and 2020 was $4.2 million and $6.0 million, respectively.

In addition to loans sold to Fannie Mae and others on a servicing retained basis, we also sell nonconforming residential loans to correspondent banks on a servicing released basis.

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

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In 2020, we sold $5.9 million of loans servicing released.

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:

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Total loans originated 538,457 575,162

Purchases by type:

One-to-four family 24,067 —

Commercial business participations 4,298 —

Total loan participations purchased 28,365 —

Sales, repayments and participations sold:

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Net (decrease) increase $ 72,395 $ (6,524)

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.

Commercial business loans increased due to PPP loan originations.

The decrease in total loan originations in 2021 compared to 2020 was primarily due to slowing levels of loan activity in the one-to-four family and commercial business categories, partially offset by increased demand for floating homes, commercial and multifamily, and construction and land categories.

Demand for one-to-four family loans slowed in 2021 as homeowners, taking advantage of historically low interest rates, refinanced their homes in the prior year.

While the pandemic increased demand for single-family homes outside downtown metropolitan areas, supply of homes available for sale in these areas slowed the ability to purchase.

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

Commercial business loans decreased 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

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foreclosure process.

The notice of default begins the 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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Home equity — — — 3 140 1.1 3 140 1.1

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

Construction and land 2 837 1.3 — — — 2 837 1.3

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Total 23 $ 2,907 0.4 % 9 $ 706 0.1 % 32 $ 3,613 0.5 %

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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) :

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Floating homes 493 518

Other consumer — — — 8 —

Commercial business 176 —

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Home equity 75 137

Commercial and multifamily — — — — 361

Construction and land 35 37

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Total performing restructured loans $ 2,174 $ 2,984

(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.

(1) Nonaccrual loans include $422 thousand and $174 thousand in nonperforming troubled debt restructurings at December 31, 2021 and 2020, respectively.

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

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.

Nonaccrual loans, including nonaccrual troubled debt restructurings ("TDRs"), increased $2.7 million to $5.6 million at December 31, 2021 from $2.9 million at December 31, 2020.

Our largest nonperforming loan at December 31, 2021 was a multi-family loan totaling $2.4 million.

Nonperforming one-to-four family loans at December 31, 2021 consisted of nine loans to different borrowers with an average loan balance of $245 thousand.

In addition, there were four manufactured home loans, three home equity loans, one construction and land loan, two floating home loans, and one commercial business loan classified as nonperforming at December 31, 2021.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition at December 31, 2021 Compared to December 31, 2020—Delinquencies and Nonperforming Assets" contained in Item 7 of this report on Form 10-K for more information on troubled assets.

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Troubled Debt Restructured Loans.

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At December 31, 2021, we had $2.2 million of loans that were classified as performing TDRs and still on accrual, compared to $3.0 million at December 31, 2020.

Included in nonaccrual loans at December 31, 2020 and 2019 were nonaccrual TDRs of $262,000 and $588,000, respectively.

Included in nonaccrual loans at December 31, 2021 and 2020 were nonaccrual TDRs of $422 thousand and $174 thousand, respectively.

OREO and Repossessed Assets.

OREO and repossessed assets include assets acquired in settlement of loans.

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

At December 31, 2021, OREO and repossessed assets totaled $659 thousand.

Our OREO at December 31, 2021, consisted of two properties.

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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, 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.

The second OREO property is a one-to-four family home located in Michigan.

Classified Assets.

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We regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations.

On the basis of management's review of our assets, at December 31, 2020, we had classified $10.1 million of our assets as substandard, of which $9.5 million represented a variety of outstanding loans and $594,000 represented the balance of our OREO and repossessed assets.

On the basis of management's review of our assets, at December 31, 2021, we had classified $14.8 million of our assets as substandard, of which $14.2 million represented a variety of outstanding loans and $659 thousand represented the balance of our OREO and repossessed assets.

At that date, we had no assets classified as doubtful or loss.

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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

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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.

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, 2021, our allowance for loan losses was $6.3 million, or 0.92% of our total loan portfolio, compared to $6.0 million, or 0.98% of our total loan portfolio, at December 31, 2020.

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

Specific valuation reserves totaled $293 thousand and $378 thousand at December 31, 2021 and 2020, respectively.

Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

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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):

The following table shows certain credit ratios at and for the periods indicated and each component of the ratio's calculations.

2021 December 31,

($ in thousands)

Allowance for loan losses as a percentage of total loans outstanding at period end 0.92 % 0.97 %

Allowance for loan losses 6,306 6,000

Total loans outstanding 687,868 615,498

Non-accrual loans as a percentage of total loans outstanding at period end

0.81 % 0.47 %

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)

Construction and land — — — — —

Manufactured homes — — (12) (12) —

Other consumer (48) (52) (31) (18) (42)

Commercial business (620) — — — (29)

Total charge-offs (690) (52) (50) (143) (472)

Total nonaccrual loans 5,552 2,884

Total loans outstanding 687,868 615,498

Allowance for loan losses as a percentage of non-accrual loans at period end

113.59 % 208.04 %

Allowance for loan losses 6,306 6,000

Total nonaccrual loans 5,552 2,884

Net charge-offs during period to average loans outstanding:

One-to-four family:

Home equity 46 10 44 33 78

Commercial and multifamily — — — 1 —

0.05 % (0.03) %

Net charge-offs/(recoveries)

Average loans outstanding

162,816 138,539

0.01 % (0.22) %

Net charge-offs/(recoveries)

Average loans outstanding

14,343 19,710

Commercial and multifamily real estate:

Net charge-offs

Average loans outstanding

253,122 271,225

Construction and land:

Net charge-offs

Average loans outstanding

72,575 74,074

Manufactured homes:

Net (recoveries)

Average loans outstanding

21,067 20,945

Floating homes:

Net charge-offs

Average loans outstanding

46,784 44,333

Other consumer:

0.29 % 0.31 %

Net charge-offs

Average loans outstanding

15,500 10,824

Commercial business:

Total recoveries 125 43 58 62 204

Net (charge-offs) recoveries (565) (9) 8 (81) (268)

(Recapture from)/Provision charged to operations 925 (125) 525 500 454

Balance at end of period $ 6,000 $ 5,640 $ 5,774 $ 5,241 $ 4,822

Net (charge-offs) recoveries during the period as a percentage of average loans outstanding during the period (0.08) % — % — % (0.02) % (0.06) %

Net (charge-offs) recoveries during the period as a percentage of average nonperforming assets (16.24) % (0.17) % 0.30 % (2.12) % (6.27) %

Allowance as a percentage of nonperforming loans 208.04 % 121.11 % 216.50 % 229.57 % 143.98 %

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

Net (recoveries)/charge-offs

Average loans outstanding

58,267 82,089

0.02 % 0.09 %

Net charge-offs

Average loans outstanding

644,473 661,740

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

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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.

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 national average in 2020 and home prices increased in 2021 compared to 2020, 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 113.58% and 208.04% at December 31, 2021 and 2020, 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 provision for loan losses totaled $425 thousand for the year ended December 31, 2021, compared to $925 thousand for the year ended December 31, 2020.

Net charge-offs were $119 thousand for the year ended December 31, 2021, compared to net charge-offs of $565 thousand for the year ended December 31, 2020.

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

2020 2019 2018 2017 2016

Amount Percent of Loans

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in Each Category

to Total Loans Amount Percent of Loans

in Each Category

to Total Loans Amount Percent of Loans

in Each Category

to Total Loans Amount Percent of Loans

in Each Category

to Total Loans

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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.

At December 31, 2021, we owned $1.0 million 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.

At December 31, 2020, our securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity capital.

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

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

Agency mortgage-backed securities 4,706 4,805 5,888 5,936 1,594 1,640

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

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.

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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.

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.

Sources of Funds

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however, at December 31, 2021, approximately 5.9% of our deposits were from persons outside the State of Washington.

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.

At December 31, 2021, core deposits, which we define as our non-time deposit accounts and time deposit accounts less than $250 thousand (excluding brokered deposits and public funds), represented approximately 94.6% of total deposits, compared to 83.4% at December 31, 2020.

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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Year Ended December 31,

2020 2019 2018

Opening balance $ 747,981 $ 616,718

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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):

2020 2019 2018

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

Amount Percent of total Amount Percent of total

Noninterest-bearing demand $ 187,684 23.5 % $ 129,299 17.3 %

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Total deposits $ 798,320 100.0 % $ 747,981 100.0 %

The following table sets forth, for the periods indicated, the average amount of and the average rate paid on deposit categories that are in excess of 10 percent of average total deposits.

At December 31,

Average Balance Outstanding Weighted Average Rate Average Balance Outstanding Weighted Average Rate

(Dollars in thousands)

Demand deposits:

Non-interest bearing $ 178,535 — % $ 130,715 — %

Interest bearing 289,096 0.21 189,643 0.48

Savings 96,050 0.08 71,990 0.27

Money Market 75,356 0.14 56,048 0.27

Certificate accounts 158,649 1.57 242,963 2.36

Total deposits $ 797,686 0.41 % $ 691,359 1.01 %

Noninterest-bearing demand accounts increased $58.4 million, or 45.2%, in 2021 compared to 2020.

We also experienced significant increases in our interest-bearing demand, savings, and money market accounts in 2021 compared to 2020.

Certificates of deposits decreased $129.8 million, or 55.1%, in 2021 compared to 2020.

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.

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, 2021, we had $24.0 million in public funds compared to $44.2 million at December 31, 2020.

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.

These funds consisted of $20.6 million in certificates of deposit, $3.4 million in money market accounts and $3 thousand in checking accounts at December 31, 2021.

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

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 $11.5 million and $21.6 million at December 31, 2021 and 2020, respectively, to secure public deposits.

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The following table shows rate and maturity information for our certificates of deposit at December 31, 2021 (dollars in thousands):

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Percent of total 75.4 % 24.6 % 100.0 %

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

Certificates of deposit of $100,000 or more 20,482 15,957 18,581 21,593 76,613

Total certificates of deposit $ 60,429 $ 55,105 $ 64,818 $ 55,121 $ 235,473

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.

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

As of December 31, 2021 and 2020, approximately $190.0 million and $151.0 million, respectively, of our deposit portfolio was uninsured.

The uninsured amounts are estimates based on the methodologies and assumptions used for Sound Community Bank’s regulatory reporting requirements.

The following table sets forth the portion of our time deposits that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2021 (dollars in thousands).

3 months or less $ 71

Over 3 through 6 months 1,163

Over 6 months through 12 months 1,489

Over 12 months 5,108

For additional information regarding our deposits, see “Note 9 - Deposits” 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.

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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.

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 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.

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

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.

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

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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 participates in the Federal Reserve's Borrower-in-Custody program, which gives the Company access to the discount window.

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

At December 31, 2021 and 2020, the Company had no outstanding borrowings and unused borrowing capacity of $22.4 million and $23.6 million, respectively, under the Borrower-in-Custody program.

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.

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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

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):

December 31, 2020

2020 2019 2018

Outstanding balance:

FHLB advances $ — $ 7,500 $ 84,000

Federal Reserve borrowings — — —

Subordinated notes 11,592 — —

Interest rate:

FHLB advances — % 3.10 % 2.72 %

Federal Reserve borrowings — — —

Subordinated notes 5.70 — —

For additional information regarding our borrowings, 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.

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 72.5% of those deposits.

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

In Clallam County, there are nine other commercial banks and

savings banks.

Our share of deposits in Clallam County was the second highest in the county at approximately 16.72%, with the five largest institutions in that county having 78.1% of the deposits.

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

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

Our share of deposits in Jefferson County is approximately 7.45%, while the five largest institutions in that county have 84.5% of those deposits.

How We Are Regulated

Sound Community Bank is a Washington state-chartered commercial bank.

The regulators of Sound Community Bank as a commercial bank are the WDFI and the FDIC.

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

A brief description of certain laws and regulations that are applicable to Sound Financial Bancorp and Sound Community Bank is set forth below.

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 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.

Any such legislation or regulatory changes in the future could adversely affect our operations and financial condition.

The following is a brief description of certain laws and regulations which are applicable to the Company and Sound Community Bank.

The 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 (“Congress”) or the Washington State Legislature that may affect the Company and Sound Community Bank’s operations.

In addition, the regulations governing the Company and Sound Community Bank may be amended from time to time by the WDFI , the FDIC, the Federal Reserve or the SEC, as appropriate.

Any such legislation or regulatory changes in the future could have an adverse effect on our operations and financial condition.

We cannot predict whether any such changes may occur.

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

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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 Stock Repurchases.”

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

Regulation by the WDFI and the FDIC .

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Among these safety and soundness standards are FDIC regulations that require Sound Community Bank to adopt and maintain written policies that establish appropriate limits and standards for real estate loans.

These standards, which must be consistent with safe and sound banking practices, establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value ratio limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements.

These standards, which must be consistent with safe and sound banking practices, establish loan portfolio diversification standards, prudent underwriting

standards (including loan-to-value ratio limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements.

Sound Community Bank is obligated to monitor conditions in its real estate markets to ensure that its standards continue to be appropriate for current market conditions.

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Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions.

Interstate mergers and branch acquisitions are also be subject to the nationwide and statewide insured deposit concentration amounts described below.

Interstate mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration amounts described below.

The Dodd-Frank Act permits de novo interstate branching for banks.

Insurance of Accounts .

The FDIC insures deposit accounts in Sound Community Bank up to $250,000 per separately insured deposit ownership right or category.

The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution applied to its deposit base, which is their average consolidated total assets minus its Tier 1 capital.

Sound Community Bank’s deposits are insured up to $250 thousand per separately insured deposit ownership right or category by the Deposit Insurance Fund (‘DIF”) of the FDIC.

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

The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution applied to its deposit base, which is its average consolidated total assets minus its Tier 1 capital.

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.

Total base assessment rates currently range from 3 to 30 basis points subject to certain adjustments.

The FDIC has authority to increase insurance assessments, and any significant increases may 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.

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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.

The FDIC conducts examinations of and requires reporting by state non-member banks, such as Sound Community Bank.

The FDIC also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the DIF.

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

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.

Sound Community Bancorp and Sound Community Bank are separate and distinct legal entities.

Sound Community Bank is an affiliate of Sound Community Bancorp and any non-bank subsidiary of Sound Community Bancorp.

Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates.

Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act between a bank and an affiliate are limited to 10% of the bank's capital and surplus and, with respect to all affiliates, to an aggregate of 20% of the bank's capital and surplus.

Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts.

Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.

Capital Rules.

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.

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

In September 2019, the regulatory agencies, including the FDIC and FRB 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.

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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.

to have met the "well-capitalized" ratio requirements.

As required by the CARES Act, the FDIC temporarily lowered the CBLR to 8% beginning in the second quarter of 2020 through the end of that year.

Beginning in 2021, the CBLR was increased to 8.5% for that calendar year.

The CBLR returned to 9% on January 1, 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.

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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.

GAAP") that will be effective for the Company and Bank 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.

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.

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

Bank Secrecy Act / Anti-Money Laundering Laws.

Sound Community Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001.

These laws and regulations require Sound Community Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their clients.

Violations of these requirements can result in substantial civil and criminal sanctions.

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.

Privacy Standards and Cybersecurity.

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers.

Federal banking agencies, including the FDIC, have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors.

These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services.

These regulations require Sound Community Bank to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain practices.

In addition, Washington and other federal and state cybersecurity and data privacy laws and regulations may expose the Sound Community Bank to risk and result in certain risk management costs.

In addition, on November 18, 2021, the federal banking agencies announced the adoption of a final rule providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents.

Specifically, the new rule requires a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after, the banking organization determines that a “computer-security incident” rising to the level of a “notification incident” has occurred.

Notification is required for incidents that have materially affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector.

Service providers are required under the rule to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect the banking organization’s customers for four or more hours.

Compliance with the new rule is required by May 1, 2022.

Non-compliance with federal or similar state privacy and cybersecurity laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private causes of action and/or reputational harm.

Anti-Money Laundering and Customer Identification.

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001.

The USA PATRIOT Act and the Bank Secrecy Act requires financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities.

If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S.

Treasury’s Office of Financial Crimes Enforcement Network.

These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts, and, effective in 2018, the beneficial owners of accounts.

Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications.

Standards for Safety and Soundness.

Each federal banking agency, including the FDIC, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems;

loan documentation;

credit underwriting;

interest rate risk exposure;

asset growth;

asset quality;

and compensation, fees and benefits.

In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.

The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder.

If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance.

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.

The FRB 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 FRB reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses.

At December 31, 2021, 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.

The Bank is authorized to borrow from the Federal Reserve Bank "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.

At December 31, 2021, the Bank had no outstanding borrowings from the discount window.

Federal Home Loan Bank System.

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.

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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.

At December 31, 2021, the Bank owned $1.0 million 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 $30 thousand in dividends from the FHLB of Des Moines during the year ended December 31, 2021.

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.

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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.

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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.

The Federal 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.

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Sound Financial Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”).

Sound Financial Bancorp stock held by persons who are affiliates of Sound Financial Bancorp may not be resold without registration unless sold in accordance with certain resale restrictions.

For this purpose, affiliates are generally considered to be officers, directors and principal stockholders.

If Sound Financial Bancorp meets specified current public information requirements, each affiliate of Sound Financial Bancorp will be able to sell in the public market, without registration, a limited number of shares in any three-month period.

The SEC has adopted regulations and policies under the Sarbanes-Oxley Act of 2002 that apply to Sound Financial Bancorp as a registered company under the Exchange Act.

The stated goals of these requirements are to increase corporate responsibility, provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

The SEC and Sarbanes-Oxley-related regulations and policies include very specific additional disclosure requirements and corporate governance rules.

Limitations on Dividends and Stock Repurchases

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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

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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 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."

COVID-19 Legislation.

In response to the COVID-19 pandemic, Congress, through the enactment of the CARES Act and CAA 2021, 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 CARES Act and CAA 2021.

As the on-going COVID-19 pandemic evolves, federal and state regulatory authorities continue to issue additional guidance with respect to COVID-19.

In addition, it is possible that Congress will enact additional COVID-19 response legislation.

We will continue to assess the impact of the CARES Act, CAA 2021 and other statues, regulations and supervisory guidance related to the COVID-19 pandemic.

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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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.

At December 31, 2021, approximately 61% of our workforce was female and 39% male, and women held 64% of the Bank's management roles.

The average tenure of employees was 4.82 years.

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.

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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.

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Stewart was appointed to the inaugural Consumer Financial Protection Bureau board and completed her term in 2013.

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.

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, 2020 and 2021.

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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.

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.

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

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

Ochs, age 43, currently serves as Executive Vice President and Chief Strategy/Financial 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 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 Chief Strategy Officer in January 2020.

In August 2021, Mr.

Ochs was promoted to Chief Financial Officer, in addition to his current title of Chief Strategy Officer.

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.

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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