What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-15 compared with 2021-03-30 · 207 added, 318 removed, 1203 unchanged (30% of the section changed)

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sound Financial Bancorp, Inc.

We have audited the accompanying consolidated balance sheet s of Sound Financial Bancorp, Inc.

and Subsidiary (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

Accordingly, we express no such opinion.

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Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

We believe that our audits provides a reasonable basis for our opinion.

Critical Audit Matters

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As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for loan losses balance was $6.3 million at December 31, 2021.

The allowance for loan losses is maintained to provide for probable inherent losses in the loan portfolio based on evaluating risks in the loan portfolio.

The allowance for loan losses is maintained to provide for probable incurred losses in the loan portfolio based upon evaluating known and inherent risks in the loan portfolio.

The level of the allowance reflects the Company’s view of trends in loan loss activity, current loan portfolio quality and present economic, political and regulatory conditions.

The allowance is provided based upon management's continuing analysis of the pertinent factors underlying the quality of the loan portfolio.

These factors include, but are not limited to, changes in the size and composition of the loan portfolio, delinquency levels,

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actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectability may not be assured.

We identified management’s internally assigned grades of loans and the estimation of qualitative factors, both of which are used in the allowance for loan losses calculation, as critical audit matters.

The allowance is provided based upon management's ongoing assessments of the pertinent factors underlying the quality of the loan portfolio.

These factors include, but are not limited to, changes in the size and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectability may not be

The Company uses internally assigned loan grades to stratify loans into pools and to estimate inherent loss rates for each of the loan pools, which are used in the calculation of the allowance for loan losses.

Determination of the assigned loan grades involves significant management judgment.

The qualitative factors are used to estimate losses related to factors that are not captured in the historical loss rates and are based on management’s evaluation of available internal and external data and involves significant management judgment.

The Company includes an additional factor to the allowance to account for loans with certain assigned grades that represent a higher credit risk.

Determination of the assigned loan grades involves significant management judgement.

Auditing management’s judgments relating to the determination of internally assigned grades and qualitative factors involved a high degree of subjective auditor judgment.

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We have served as the Company’s auditor since 2002.

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SOUND FINANCIAL BANCORP, INC.

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See notes to consolidated financial statements

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SOUND FINANCIAL BANCORP, INC.

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Borrowings — 255

Subordinated notes 672 191

Total interest expense 3,954 7,450

Net interest income 29,920 27,486

PROVISION (RECAPTURE) FOR LOAN LOSSES 925 ( 125 )

Net interest income after provision (recapture) for loan losses 26,561 27,089

PROVISION FOR LOAN LOSSES 425 925

Net interest income after provision for loan losses 29,495 26,561

NONINTEREST INCOME

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Data processing 3,263 2,658

Net loss and expenses on OREO and repossessed assets 5 35

Net (gain)/loss and expenses on OREO and repossessed assets ( 16 ) 5

Total noninterest expense 25,396 22,678

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See notes to consolidated financial statements

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SOUND FINANCIAL BANCORP, INC.

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Available for sale securities:

Unrealized gains arising during the year 82 78

Income tax expense related to unrealized gains ( 17 ) ( 17 )

Other comprehensive income, net of tax 65 61

Unrealized (losses)/gains arising during the year ( 128 ) 82

Income tax benefit/(expense) related to unrealized losses/gains 27 ( 17 )

Other comprehensive (loss)/income, net of tax ( 101 ) 65

Comprehensive income $ 9,055 $ 9,002

See notes to consolidated financial statements

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SOUND FINANCIAL BANCORP, INC.

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Balance at December 31, 2020

2,592,587 $ 25 $ 27,106 $ ( 113 ) $ 58,226 $ 240 $ 85,484

Net income 9,156 9,156

Other comprehensive income, net of tax 65 65

Other comprehensive loss, net of tax benefit ( 101 ) ( 101 )

Share-based compensation 360 360

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( 2,039 ) ( 2,039 )

Common stock surrendered ( 3,423 ) —

Common stock repurchased ( 3,657 ) — ( 46 ) — ( 106 ) 0 ( 152 )

Common stock surrendered ( 4,091 ) — — —

Restricted shares forfeited ( 1,890 ) —

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Balance at December 31, 2021

2,613,768 $ 26 $ 27,956 $ — $ 65,237 $ 139 $ 93,358

Shares Common Stock Additional

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Balance at December 31, 2019

2,567,389 $ 25 $ 26,343 $ ( 227 ) $ 51,410 $ 175 $ 77,726

Net income 8,937 8,937

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Common stock surrendered ( 3,423 ) —

Common stock repurchased ( 2,477 ) ( 24 ) ( 49 ) ( 73 )

Restricted shares forfeited ( 1,915 ) —

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Balance at December 31, 2020

2,592,587 $ 25 $ 27,106 $ ( 113 ) $ 58,226 $ 240 $ 85,484

See notes to consolidated financial statements

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SOUND FINANCIAL BANCORP, INC.

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Adjustments to reconcile net income to net cash from operating activities:

Amortization of net premiums/discounts on investments 160 50

Provision (recapture) for loan losses 925 ( 125 )

Amortization of net discounts on investments 134 160

Provision for loan losses 425 925

Depreciation and amortization 676 905

Compensation expense related to stock options and restricted stock 360 338

Fair value adjustment on MSRs 1,857 760

Fair value adjustment on mortgage servicing rights 808 1,857

Right of use assets amortization 911 919

Change in lease liabilities ( 892 ) ( 876 )

Earnings on cash surrender value of BOLI ( 348 ) ( 381 )

Increase in cash surrender value of BOLI ( 416 ) ( 348 )

Net change in advances from borrowers for taxes and insurance 198 ( 137 )

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Originations of loans held-for-sale ( 138,926 ) ( 265,448 )

Net loss on sale of OREO and repossessed assets — 21

Net gain on OREO and repossessed assets ( 16 ) —

Change in operating assets and liabilities:

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Other liabilities 897 ( 694 )

Net cash (used in) provided by operating activities ( 484 ) 11,063

Net cash provided by (used in) operating activities 19,073 ( 484 )

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of available-for-sale securities ( 1,950 ) ( 8,889 )

Proceeds from principal payments, maturities and sales of available-for-sale securities 3,529 7,909

Purchases of available for sale securities ( 8,889 ) ( 5,166 )

Net decrease (increase) in loans held-for-portfolio 5,940 ( 847 )

Purchase of BOLI/Company-owned life insurance ( 57 ) ( 437 )

Proceeds from sale of OREO and other repossessed assets — 473

Net increase in loans ( 73,238 ) 5,940

Purchase of BOLI ( 6,091 ) ( 57 )

Purchases of premises and equipment, net ( 225 ) ( 407 )

Net cash provided by (used in) investing activities 4,496 ( 5,786 )

Proceeds from sale of OREO and other repossessed assets 35 —

Net cash (used in) provided by investing activities ( 77,940 ) 4,496

CASH FLOWS FROM FINANCING ACTIVITIES:

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Repayment of borrowings — ( 181,791 )

FHLB stock redeemed 283 2,974

Net proceeds from issuance of subordinated notes 11,582 —

ESOP shares released 324 395

Repurchases of common stock ( 73 ) —

Proceeds from common stock option exercises 239 131

Proceeds from subordinated notes, net — 11,582

FHLB stock purchased ( 169 ) 283

Common stock repurchases ( 152 ) ( 73 )

Allocation of ESOP shares 468 324

Dividends paid on common stock ( 2,039 ) ( 2,072 )

Net cash provided by (used in) financing activities 134,046 ( 11,317 )

Net increase (decrease) in cash and cash equivalents 138,058 ( 6,040 )

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Cash and cash equivalents, beginning of year 55,770 61,810

Cash and cash equivalents, end of year $ 193,828 $ 55,770

Proceeds from common stock option exercises 182 239

Net cash provided by financing activities 48,629 134,046

Net change in cash and cash equivalents ( 10,238 ) 138,058

Cash and cash equivalents, beginning of period 193,828 55,770

Cash and cash equivalents, end of period $ 183,590 $ 193,828

SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for income taxes $ 2,895 $ 1,960

Interest paid on deposits and borrowings 7,307 7,528

Noncash net transfer from loans to OREO and repossessed assets 19 494

Interest paid on deposits, borrowings and subordinated debt 4,123 7,307

Loans transferred from loans held-for-portfolio to OREO and repossessed assets 84 19

Noncash transfer from assets in process to premises and equipment 144 692

Leases right of use assets obtained in exchange for operating lease liabilities:

Right of use assets — 8,490

Lease liabilities $ — $ 8,233

See notes to consolidated financial statements

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SOUND FINANCIAL BANCORP, INC.

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The Company does not intend to sell

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

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When the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest), impairment is recognized by charging off the impaired portion or creating or adjusting a specific allocation of the allowance for loan losses.

The Company recognizes interest income on impaired loans, including cash receipts, based on its existing methods of recognizing interest income on nonaccrual loans.

A loan is classified as a troubled debt restructuring ("TDR") when certain concessions have been made to the contractual terms, such as reductions of interest rates or deferrals of interest or principal payments due to the borrower's deteriorated financial condition.

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The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") and related bank regulatory guidance provides that a short-term modification made in response to COVID-19 and which meets certain criteria does not need to be placed on nonaccrual status or accounted for as a TDR, pursuant to applicable accounting and regulatory guidance until the earlier of 60 days after the national emergency termination date or January 1, 2022.

At December 31, 2020, we have provided payment relief related to COVID-19 on 49 commercial loans totaling $ 37.2 million and 84 residential loans totaling $ 19.0 million, of which 40 commercial loans totaling $ 29.1 million and 55 residential loans totaling $ 14.6 million have resumed their normal loan payments, matured, or have paid-off.

We continue to monitor these loans through our normal credit risk processes.

At December 31, 2021, there were two one-to-four family residential loans totaling $ 64 thousand operating under forbearance agreements due to COVID-19.

Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic, these modifications are not considered TDRs pursuant to applicable accounting and regulatory guidance until January 1, 2022.

The Company continues to monitor these loans through its normal credit risk processes.

Allowance for loan losses – The allowance for loan losses is a reserve established through a provision for loan losses charged to expense and represents management's best estimate of probable losses incurred within the existing loan portfolio as of the balance sheet date.

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The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans (or portions thereof) deemed to be uncollectible.

Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely.

Loan charge-offs are recognized when management believes the collectability of the principal

balance outstanding is unlikely.

Full or partial charge-offs on collateral dependent impaired loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.

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The allowance for loan losses is maintained at a level sufficient to provide for probable credit losses based upon evaluating known and inherent risks in the loan portfolio.

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The general component of the allowance for loan losses covers non-impaired loans and is determined using a formula-based approach.

The formula first incorporates either the historical loss rates of the Company or the historical loss rates of their peer group if minimal loss history exists.

The formula first incorporates either the historical loss rates of the Company or the historical loss rates of its peer group if minimal loss history exists.

This historical loss rate factor is then adjusted for qualitative factors.

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The Company measures its mortgage servicing assets at fair value and reports changes in fair value through earnings under the caption fair value adjustment on MSRs in other income in the period in which the change occurs.

The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimates and actual prepayment speeds and default rates and losses.

Currently, we do not hedge the effects of changes in fair value of our servicing assets.

Premises and equipment – Premises, leasehold improvements and furniture and equipment are carried at cost, less accumulated depreciation and amortization.

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The cost of leasehold improvements is amortized using the straight-line method over the terms of the related leases.

The cost of premises is amortized using the straight-line method over

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the estimated useful life of the building, up to 39 years.

Management reviews premises, leasehold improvements and furniture and equipment for impairment on an annual basis.

The cost of premises is amortized using the straight-line method over the estimated useful life of the building, up to 39 years.

Management reviews premises, leasehold improvements and furniture and equipment for impairment when factors exist indicating potential impairment.

Bank-owned life insurance, net – The carrying amount of BOLI approximates its fair value, and is estimated using the cash surrender value, net of any surrender charges.

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As a member of the FHLB, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances.

At December 31, 2020 and 2019, the Company's minimum required investment in FHLB stock was $ 877,000 and $ 1.2 million, respectively.

At December 31, 2021 and 2020, the Company's minimum required investment in FHLB stock was $ 1.0 million and $ 877 thousand, respectively.

Typically, the Company may request redemption at par value of any stock in excess of the minimum required investment.

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Such financial instruments are recorded when they are funded.

The Company also maintains a separate allowance for off-balance sheet credit commitments.

Management estimates anticipated losses using historical data and utilization assumptions.

The allowance for off-balance sheet credit commitments totaled $ 405 thousand and $ 256 thousand at December 31, 2021 and 2020 and is included in other liabilities on the consolidated balance sheets.

Advertising costs – The Company expenses advertising costs as they are incurred.

Advertising costs, including other marketing expenses were $ 249,000 and $ 376,000 for the years ended December 31, 2020 and 2019, respectively.

Advertising costs, including other marketing expenses were $ 415 thousand and $ 249 thousand for the years ended December 31, 2021 and 2020, respectively.

Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income.

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Such items, along with net income, are components of comprehensive income.

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Intangible assets – At December 31, 2020 and 2019, the Company had $ 128,000 and $ 158,000 , respectively, of identifiable intangible assets included in other assets as a result of the acquisition of deposits from other institutions.

Intangible assets – At December 31, 2021 and 2020, the Company had $ 97 thousand and $ 128 thousand, respectively, of identifiable intangible assets included in other assets as a result of the acquisition of deposits from other institutions.

These assets are amortized using the straight-line method over a period of eight to ten years and have a remaining weighted average life of 3.3 years.

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No impairment losses have been recognized in the periods presented.

Employee stock ownership plan – The Company sponsors a leveraged ESOP.

Employee stock ownership plan – The Company sponsors a internally-leveraged ESOP.

As shares are committed to be released, compensation expense is recorded equal to the market price of the shares, and the shares become outstanding for purposes of earnings per share calculations.

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See "Note 14—Employee Benefits" for further information.

For the calendar year 2020, the ESOP was committed to release 11,340 shares of the Company's common stock to participants and held 11,340 unallocated shares remaining to be released in 2021.

Shares released on December 31, 2020 totaled 11,340 and will be credited to plan participants' accounts in 2021.

Unearned ESOP shares are shown as a reduction of stockholders' equity.

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The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted.

When determining the estimated fair value of stock options granted, the Company utilizes various assumptions regarding the expected volatility of the stock price, estimated forfeitures using historical data on employee terminations, the risk-free interest rate for periods within the contractual life of the stock option, and the expected dividend yield that the Company expects over the expected life of the options granted.

Reductions in compensation expense associated with forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted monthly based on actual forfeiture experience.

The Company measures the fair value of the restricted stock using the closing market price of the Company's common stock on the date of

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When determining the estimated fair value of stock options granted, the Company utilizes various assumptions regarding the expected volatility of the stock price, the risk-free interest rate for periods within the contractual life of the stock option, and the

expected dividend yield that the Company expects over the expected life of the options granted.

Reductions in compensation expense associated with forfeited options are expensed based on actual forfeiture experience.

The Company measures the fair value of the restricted stock using the closing market price of the Company's common stock on the date of grant.

The Company expenses the grant date fair value of the Company's stock options and restricted stock with a corresponding increase in equity.

Reclassifications – Certain amounts reported in prior years' consolidated financial statements have been reclassified to conform to the current presentation.

The results of the reclassifications are not considered material and have no effect on previously reported net income, earnings per share or stockholders' equity.

When shares are required to be issued under share-based awards, it is typically the Company’s policy to issue new shares of stock.

Reclassifications – Certain amounts reported in prior years' consolidated financial statements may be reclassified to conform to the current presentation.

The results of the reclassifications are typically not considered material and have no effect on previously reported net income, earnings per share or stockholders' equity.

There were no reclassifications to prior year amounts in the current year.

Note 2— Accounting Pronouncements Recently Issued or Adopted

On March 27, 2020, President Trump signed into law the CARES Act, which provides relief from certain accounting and financial reporting requirements under U.S.

Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for TDRs under Accounting Standards Codification ("ASC") 310-40 for loan modifications related to the COVID-19 pandemic.

The Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), signed into law on March 27, 2020, provides relief from certain accounting and financial reporting requirements under U.S.

Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for troubled debt restructurings (“TDRs”) under Accounting Standards Codification ("ASC") 310-40 for loan modifications related to the novel coronavirus disease 2019 ("COVID-19") pandemic.

In addition, on April 7, 2020, a group of banking agencies issued an interagency statement (“Interagency Statement”) for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs.

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The Company adopted this guidance effective March 27, 2020.

On December 27, 2020, the Consolidated Appropriations Act 2021 (“CAA 2021”) was signed into law.

Among other purposes, CAA 2021 provides coronavirus emergency response and relief, including extending relief offered under the CARES Act related to restructured loans as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.

In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-08, “ Receivables – Nonrefundable Fees and Other Costs ” (“ASU 2020-08”).

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ASU 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

The Company adopted this ASU effective January 1, 2021.

The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements.

On March 2020, the FASB issued ASU No.

2020-04, " Reference Rate Reform" ("Topic 848").

This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

The amendments in this update apply to contract modifications that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions).

The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance:

1) Modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate;

2) Modifications of contracts within the scope of Topics 840, Leases, and 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (for example, the incremental borrowing rate) or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted for as separate contracts;

and 3) Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives.

The amendments in this update have differing effective dates, beginning with interim period including and subsequent to March 12, 2020 through December 31, 2022.

This ASU applies to contracts, hedging relationships, and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform.

The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract re-measurement or reassessment of a previous accounting determination.

In January 2021, ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

A portion of the Bank’s commercial real estate loans and its interest rate swap-related transactions are the majority of the Company's LIBOR exposure.

Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc.

and recommended by the Alternative Reference Rates Committee.This ASU is effective for all entities as of March 12, 2020 through December 31, 2022.

The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

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2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes ("ASU 2019-12").

This ASU simplifies the accounting for income taxes by removing the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items, removing the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and removing the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

This ASU is effective for fiscal years, and interim periods

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within those fiscal years, beginning after December 15, 2020.

The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements.

Simplifying the Accounting for Income Taxes.

This ASU simplifies the accounting for income taxes by removing the exception to the incremental approach for intra-

period tax allocation when there is a loss from continuing operations and income or a gain from other items, removing the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and removing the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU No.

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This ASU is effective for fiscal years ending after December 15, 2020.

The Company adopted this ASU effective January 1, 2021.

The adoption of ASU No.

2018-14 did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement:

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.

This ASU modifies the disclosure requirements on fair value measurements by removing the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements.

This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

The ASU adds disclosure requirements for Level 3 measurements, including changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

Amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU No.

2018-07, Compensation - Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting.

This ASU amends the accounting for share-based payments awards to nonemployees to align with the accounting for employee awards.

Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost.

The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services.

In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards.

Amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted.

The adoption of ASU No.

2018-07 on January 1, 2019 did not have a material impact on the Company's consolidated financial statements.

In August 2017, the FASB issued ASU No.

2017-12, Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities.

This ASU amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities by better aligning the entity's financial reporting for hedging relationships with those risk management activities and reduce the complexity of and simplify the application of hedge accounting by preparers.

The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships.

In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported.

The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted.

The adoption of ASU No.

2017-12 on January 1, 2019, did not have a material impact on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU No.

2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) .

2017-08 is intended to amend the amortization period for certain purchased callable debt securities held at a premium.

Under ASU No.

2017-08, the FASB is shortening the amortization period for the premium to the earliest call date.

ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

The adoption of ASU No.

2017-08 on January 1, 2019 did not have a material impact on the Company's consolidated financial statements.

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In January 2017, the FASB issued ASU No.

2017-04, Intangibles - Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment (" ASU 2017-04"), which eliminates Step 2 from the goodwill impairment test.

ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.

An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

Adoption of ASU 2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017.

The adoption of ASU 2017-04 did not have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326):

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The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted.

The new guidance may result in an increase in the allowance for loan losses;

however, the Company is still in the process of determining the magnitude of the change and its impact on the Company's consolidated financial statements.

The FASB issued ASU No.

2019-10, Financial Instruments - Credit Losses (Topic 326) , delaying implementation of ASU No.

2016-13 for SEC smaller reporting company filers until fiscal year beginning after December 15, 2022.

The Bank meets the requirements of a smaller reporting company and will delay implementation of ASUNo.

In February 2016, FASB issued ASU No.

2016-02, Leases (Topic 842) .

2016-02 requires lessees to recognize, on the balance sheet, the assets and liabilities arising from operating leases.

A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term.

A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease.

For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income.

For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis.

In July 2018, the FASB issued ASU No.

2018-11, Leases (Topic 842), Targeted Improvements .

This ASU amended the new leases standard to give entities another option for transition and to provide lessors with a practical expedient.

The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption.

The practical expedient provides lessors with an option to not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components.

The Company adopted these ASUs on January 1, 2019.

In March 2019, FASB issued ASU No.

2019-01, Leases (Topic 842), Codification Improvements .

The amendments in this ASU include guidance on determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, requiring cash received from lessors from sales-type and direct financing leases to be presented in the cash flow statement within investing activities, and clarifying interim disclosure requirements.

The adoption of ASU No.

2019-01 did not have a material impact on the Company's consolidated financial statements and have provided the required annual disclosures in this report.

Refer to "Note 12—Leases" for further information.

2016-13 for SEC smaller reporting company filers until fiscal years beginning after December 15, 2022.

The Bank meets the requirements of a smaller reporting company and will delay implementation of ASU No.

Note 3— Restricted Cash

1 unchanged sentence

In March 2020, the Federal Reserve announced that it would be reducing the reserve requirement for all depository institutions to zero percent effective March 26, 2020.

The Company' reserve balances were zero and $ 12.4 million at December 31, 2020 and 2019, respectively.

Table of Conten t s

The Company' reserve balances were zero at December 31, 2021 and 2020, respectively.

Note 4— Investments

29 unchanged sentences

Value Unrealized

Municipal bonds $ 1,632 $ ( 13 ) $ — $ — $ 1,632 $ ( 13 )

Agency mortgage-backed securities $ — $ — $ 402 $ ( 12 ) $ 402 $ ( 12 )

7 unchanged sentences

Total $ 1,618 $ ( 6 ) $ — $ — $ 1,618 $ ( 6 )

Table of Conten t s

There were no credit losses recognized in earnings during the years ended December 31, 2021 and 2020 relating to the Company's securities.

At December 31, 2021, the securities portfolio consisted of 10 agency mortgage-backed securities and 10 municipal securities with a fair value of $ 8.4 million.

At December 31, 2019, the securities portfolio consisted of 13 agency mortgage-backed securities and eight municipal bonds with a fair value of $ 9.3 million.

At December 31, 2020, there were six agency securities in an unrealized loss position for less than 12 months, and there were no securities in an unrealized loss position for more than 12 months.

At December 31, 2019, there were five securities in an unrealized loss position for less than 12 months, and there were no municipal securities in an unrealized loss position for more than 12 months.

At December 31, 2020, the securities portfolio consisted of 16 agency mortgage-backed securities and 10 municipal bonds with a fair value of $ 10.2 million.

At December 31, 2021, there were two securities in an unrealized loss position for less than 12 months, and there was one security in an unrealized loss position for more than 12 months.

At December 31, 2020, there were six securities in an unrealized loss position for less than 12 months, and there were no securities in an unrealized loss position for more than 12 months.

For both the 2021 and 2020 periods, the unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not related to the underlying credit of the issuers or the underlying collateral.

1 unchanged sentence

The unrealized losses on these investments are not considered OTTI losses during the years ended December 31, 2021 and 2020, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis .

Table of Conten t s

Note 5— Loans

13 unchanged sentences

Total loans 687,868 615,498

Premiums for purchased loans (1)

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

2 unchanged sentences

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

The Company was automatically authorized to participate in the Small Business Administration'ss Paycheck Protection Program ("PPP") as a qualified U.S.

At December 31, 2020, the Bank had funded PPP loans totaling $ 74.8 million, $ 43.3 million of which remained outstanding and are included in commercial business loans above.

(1) Includes premiums of $ 556 thousand related to one-to-four family loans, $ 181 thousand related to commercial and multifamily loans, and $ 160 thousand related to commercial business loans as of December 31, 2021.

The Company was automatically authorized to participate in the Small Business Administration's (“SBA”) Paycheck Protection Program (“PPP”) as a qualified U.S.

The Bank began originating PPP loans following the enactment of the CARES Act in April 2020.

PPP loans are fully guaranteed by the SBA, intended for businesses impacted by the COVID-19 pandemic and designed to provide near term relief to help small businesses sustain operations.

These loans have either a two-year or five-year maturity date and earn interest at 1%.

The Bank also earns a fee based on the size of the loan, which is recognized over the life of the loan.

Through December 31, 2021, the Bank had funded PPP loans totaling $ 119.2 million, $ 4.2 million of which remained outstanding at December 31, 2021.

PPP loans are included in commercial business loans above.

During the year ended December 31, 2021, the Company purchased $ 24.1 million of one-to-four family real estate loans and $ 4.3 million of commercial business participations with the United States Department of Agriculture.

The Company purchased no loans during the year ended December 31, 2020.

The following table presents the balance in the allowance for loan losses and the unpaid principal balance in loans, net of partial charge-offs by portfolio segment and based on impairment method at December 31, 2021 (in thousands):

13 unchanged sentences

Total $ 293 $ 6,013 $ 6,306 $ 7,725 $ 680,143 $ 687,868

Table of Conten t s

37 unchanged sentences

$ 5,640 $ ( 690 ) $ 125 $ 925 $ 6,000

Table of Conten t s

Credit Quality Indicators.

41 unchanged sentences

Loans are placed on nonaccrual once the loan is 90 days past due or sooner if, in management's opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions.

Table of Conten t s

The following table presents the recorded investment in nonaccrual loans at December 31, 2021 and 2020, by type of loan (in thousands):

22 unchanged sentences

Total $ 2,773 $ 134 $ 706 $ — $ 3,613 $ 684,255 $ 687,868

The following table represents the aging of the recorded investment in past due loans at December 31, 2019, by type of loan (in thousands):

The following table represents the aging of the recorded investment in past due loans (excluding COVID-19 modified loans) at December 31, 2020, by type of loan (in thousands):

Past Due 60-89 Days

12 unchanged sentences

Total $ 2,047 $ 706 $ 2,310 $ — $ 5,063 $ 610,435 $ 615,498

Table of Conten t s

Nonperforming Loans.

44 unchanged sentences

Total $ 7,836 $ 6,375 $ 1,350 $ 7,725 $ 293

Table of Conten t s

December 31, 2020

10 unchanged sentences

Manufactured homes 268 47 218 265 163

Floating homes 518 518 — 518 —

Other consumer 114 — 114 114 30

2 unchanged sentences

The following table provides the average recorded investment and interest income on impaired loans for the year ended December 31, 2021 and 2020, by type of loan (in thousands):

December 31, 2020 Year Ended

December 31, 2021

December 31, 2020

Investment Interest Income

10 unchanged sentences

Total $ 5,661 $ 398 $ 9,263 $ 293

Forgone interest on nonaccrual loans was $ 168,000 and $ 370,000 for the year ended December 31, 2020 and 2019, respectively.

Forgone interest on nonaccrual loans was $ 312 thousand and $ 168 thousand for the year ended December 31, 2021 and 2020, respectively.

Troubled debt restructurings.

14 unchanged sentences

Any other type of modification, including the use of multiple categories above.

There were four loans totaling $ 795,000 , that were modified as a TDR during the year ended December 31, 2020.

There was one loan totaling $ 25 thousand that was modified as a TDR during the year ended December 31, 2021.

The following TDR loans were paid off during the year ended December 31, 2021:

five one-to-four family residential loans totaling $ 5,236,000 and one manufactured home loan totaling $ 40,000 .

Table of Conten t s

There was one TDR totaling $ 161,000 for which there was a payment default within the first 12 months of modification during the year ended December 31, 2020.

There was one TDR totaling $ 49,000 for which there was a payment default within the first 12 months of modification during the year ended December 31, 2019.

There was one commercial business TDR loan totaling $ 97,000 that was charged off during the year ended December 31, 2020.

one commercial loans totaling $ 429 thousand and one home equity loan totaling $ 57 thousand.

There were no TDRs for which there was a payment default within the first 12 months of modification during the year ended December 31, 2021.

There was one TDR totaling $ 161 thousand for which there was a payment default within the first 12 months of modification during the year ended December 31, 2020.

There was one commercial business TDR loan totaling $ 45 thousand that was charged off during the year ended December 31, 2021 and one commercial business TDR loan totaling $ 97 thousand that was charged off during the year ended December 31, 2020.

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified into TDRs.

In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic.

The CARES Act and related bank regulatory guidance provides that a short-term modification made in response to COVID-19 and which meets certain criteria does not need to be placed on nonaccrual status or accounted for as a TDR, pursuant to applicable accounting and regulatory guidance until the earlier of 60 days after the national emergency termination date or January 1, 2022.

We continue to monitor these loans through our normal credit risk processes.

See “Note 2—Accounting Pronouncements Recently Issued or Adopted.”

In the ordinary course of business, the Company makes loans to its employees, officers and directors.

14 unchanged sentences

Loans serviced for Fannie Mae and others are not included in the Company’s financial statements as they are not assets of the Company.

Table of Conten t s

A summary of the change in the balance of mortgage servicing assets at December 31, 2021 and 2020 were as follows (in thousands):

5 unchanged sentences

Ending balance, at fair value $ 4,273 $ 3,780

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

(1) Includes changes due to collection/realization of expected cash flows and curtailments.

The key economic assumptions used in determining the fair value of mortgage servicing rights at the dates indicated are as follows:

2 unchanged sentences

Yield to maturity discount rate 12.5 % 10.0 %

The amount of contractually specified servicing, late and ancillary fees earned on the mortgage servicing rights are included in mortgage servicing income on the Consolidated Statements of Income and totaled $ 1.0 million for each of the years ended December 31, 2020 and 2019.

The amount of contractually specified servicing, late and ancillary fees earned on the mortgage servicing rights are included in mortgage servicing income on the Consolidated Statements of Income and totaled $ 1.3 million and $ 1.0 million for the years ended December 31, 2021 and 2020, respectively.

See "Note 1—Organization and Significant Accounting Policies" and "Note 11— Fair Measurements" for additional information on MSRs.

7 unchanged sentences

Premises and equipment, net $ 5,819 $ 6,270

Depreciation and amortization expense was $ 905,000 and $ 931,000 for the years ended December 31, 2020 and 2019, respectively.

Depreciation and amortization expense was $ 676 thousand and $ 905 thousand for the years ended December 31, 2021 and 2020, respectively.

The Company leases office space in several buildings as well as certain equipment.

See "Note 12—Leases" for additional information on our leased facilities and equipment.

Table of Conten t s

Note 8— Other Real Estate Owned and Repossessed Assets

6 unchanged sentences

Ending balance, December 31 $ 659 $ 594

As of December 31, 2021, there was one one-to-four family loans totaling $ 39 thousand that was in process of foreclosure.

Note 9— Deposits

15 unchanged sentences

Certificates of deposit have maturities of five years or less.

The aggregate amount of time deposits in denominations of more than $ 250,000 at December 31, 2020 and 2019, totaled $ 79.9 million and $ 78.3 million, respectively.

Deposits in excess of $250,000 are not federally insured.

There were zero and $ 8.0 million of brokered deposits outstanding at December 31, 2020 and 2019, respectively.

The aggregate amount of time deposits in denominations of more than $ 250 thousand at December 31, 2021 and 2020, totaled $ 19.1 million and $ 79.9 million, respectively.

Deposits in excess of $ 250 thousand are not federally insured.

There were no brokered deposits outstanding at December 31, 2021 and 2020, respectively.

Deposits from related parties held by the Company were $ 4.9 million and $ 6.4 million at December 31, 2021 and 2020, respectively.

Table of Conten t s

Note 10— Borrowings, FHLB Stock and Subordinated Notes

2 unchanged sentences

At December 31, 2021, the credit facility was collateralized as follows:

one-to-four family mortgage loans with an advance equivalent of $ 103.6 million, commercial and multifamily mortgage loans with an advance equivalent of $ 128.9 million and home equity loans with an advance equivalent of $ 2.8 million.

one-to-four family mortgage loans with an advance equivalent of $ 59.7 million, commercial and multifamily mortgage loans with an advance equivalent of $ 52.9 million and home equity loans with an advance equivalent of $ 482 thousand.

At December 31, 2020, the credit facility was collateralized as follows:

The Company had no outstanding borrowings under this arrangement at December 31, 2020 and outstanding borrowings of $ 7.5 million at December 31, 2019.

The Company had no outstanding borrowings under this arrangement at December 31, 2021 and 2020.

The weighted-average interest rate of the Company's borrowings under this agreement was — % and 3.10 % for the years ended December 31, 2021 and 2020, respectively.

The maximum amount outstanding from FHLB advances during 2020 was $ 10.1 million and during 2019 was $ 72.8 million.

The maximum amount outstanding from FHLB advances during 2021 was $ — and during 2020 was $ 10.1 million.

The average balance outstanding was $ 0.0 million during 2021 and $ 7.1 million during 2020.

2 unchanged sentences

As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in the FHLB of Des Moines stock based on specific percentages of its outstanding FHLB advances.

At December 31, 2020 and 2019, the Company had an investment of $ 877,000 and $ 1.2 million, respectively, in FHLB of Des Moines stock.

At December 31, 2021 and 2020, the Company had an investment of $ 1.0 million and $ 877 thousand, respectively, in FHLB of Des Moines stock.

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

Extensions of credit under the PPPLF concluded on July 30, 2021.

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

The Company pledges commercial and consumer loans as collateral for this 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 and $ 43.3 million under the PPPLF at December 31, 2020.

The Company had unused borrowing capacity of $ 22.4 million and $ 23.6 million under the borrower-in-custody program at December 31, 2021 and 2020 and $ — and $ 43.3 million under the PPPLF at December 31, 2021 and 2020.

The Company had no outstanding borrowings under either program at December 31, 2021 and 2020.

3 unchanged sentences

There was no balance on this line of credit at December 31, 2021 and 2020, respectively.

The Company has access to an unsecured Fed Funds line of credit from The Independent Bank.

At December 31, 2020, the amount available under this line of credit was $ 10.0 million.

The agreement may be terminated by either party.

There was no balance on this line of credit at December 31, 2020 and 2019, respectively.

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.

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

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

1 unchanged sentence

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

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

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

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

Table of Conten t s

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

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

Any redemption by Sound Financial Bancorp 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 Notes are unsecured obligations and are subordinated in right of payment to all existing and future indebtedness, deposits and other liabilities of Sound Financial Bancorp 's current and future subsidiaries, including the Bank’s deposits as well as Sound Financial Bancorp 's subsidiaries' liabilities to general creditors and liabilities arising during the ordinary course of business.

The Notes may be included in Tier 2 capital for Sound Financial Bancorp under current regulatory guidelines and interpretations.

At December 31, 2021 and 2020, subordinated notes included $ 366 thousand and $ 408 thousand of unamortized debt issuance costs.

Note 11— Fair Value Measurements

27 unchanged sentences

The estimated fair value of these commitments is not significant.

Table of Conten t s

The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether or not recognized or recorded at fair value as December 31, 2021 and 2020 (in thousands):

7 unchanged sentences

Loans held for portfolio, net 680,092 675,154 — — 675,154

Accrued interest receivable 2,217 2,217 2,217 — —

Mortgage servicing rights 4,273 4,273 — — 4,273

4 unchanged sentences

Subordinated notes 11,634 11,634 — 11,634 —

Accrued interest payable 200 200 200 — —

December 31, 2020 Fair Value Measurements Using:

6 unchanged sentences

Loans held for portfolio, net 607,363 608,575 — — 608,575

Accrued interest receivable 2,254 2,254 2,254 — —

Mortgage servicing rights 3,780 3,780 — — 3,780

4 unchanged sentences

Borrowings 11,592 11,592 — 11,592 —

Accrued interest payable 369 369 369 — —

The following tables present the balance of assets measured at fair value on a recurring basis at December 31, 2021 and 2020 (in thousands):

9 unchanged sentences

Mortgage servicing rights 3,780 — — 3,780

Table of Conten t s

For the years ended December 31, 2021 and 2020, there were no transfers between Level 1 and Level 2 or between Level 2 and Level 3.

14 unchanged sentences

An increase in the weighted average life assumptions will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted average life will result in an increase of the constant prepayment rate.

As a result of the difficulty in observing certain significant valuation inputs affecting our “Level 3” fair value assets, we are required to make judgments regarding these items’ fair values.

Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and their fair values.

Such differences may result in significantly different fair value measurements.

There were no assets or liabilities (excluding mortgage servicing rights) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2021 and 2020.

9 unchanged sentences

Impaired loans 5,940 — — 5,940

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2020 or December 31, 2019.

Table of Conten t s

The following table provides a description of the valuation technique, observable input, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at December 31, 2020:

Instrument Valuation

Technique(s) Unobservable Input(s) Range

(Weighted Average)

OREO Market approach Adjusted for difference

between comparable sales 0 - 0 % ( 0 %)

Impaired loans Market approach Adjusted for difference

between comparable sales 0 - 100 % ( 6 %)

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at December 31, 2021 and 2020.

Instrument Valuation

Technique(s) Unobservable Input(s) Range

December 31, 2021

Instrument Valuation Technique(s) Unobservable Input(s) Range (Weighted Average)

OREO Third Party Appraisals No discounts N/A

Impaired loans (1)

Discounted Cash Flow Discount Rate 0 - 10 % ( 4 %)

Impaired loans (2)

Third Party Appraisals No discounts N/A

(1) Represents troubled debt restructurings included within impaired loans.

(2) Excludes troubled debt restructurings.

December 31, 2020

Instrument Valuation Technique(s) Unobservable Input(s) Range

(Weighted Average)

OREO Market approach Adjusted for difference

between comparable sales 0 - 0 % ( 0 %)

Impaired loans Market approach Adjusted for difference

between comparable sales 0 - 100 % ( 6 %)

OREO Third Party Appraisals No discounts N/A

Impaired loans (1)

Discounted Cash Flow Discount Rate 0 - 10 % ( 6 %)

Impaired loans (2)

Third Party Appraisals No discounts N/A

(1) Represents troubled debt restructurings included within impaired loans.

(2) Excludes troubled debt restructurings.

Note 12— Leases

2 unchanged sentences

Generally, our real estate leases have initial terms of three to 10 years and typically include one renewal option.

Our leases have remaining lease terms of one to nine years .

Our leases have remaining lease terms of two months to 7.5 years.

The operating leases require us to pay property taxes and operating expenses for the properties.

9 unchanged sentences

Net lease expense $ 1,123 $ 1,158

Table of Conten t s

The following table represents the maturity of lease liabilities:

December 31, 2020 December 31, 2019

Leases Equipment

Leases Office

December 31, 2021

Leases Equipment

1 unchanged sentence

2022 $ 1,016 $ —

2021 1,042 20 1,042 —

2022 1,016 9 1,016 —

2023 989 — 989 —

2024 968 — 968 —

Thereafter 2,150 —

3 unchanged sentences

Lease term and discount rate by lease type consist of the following:

December 31, 2020 December 31, 2019

Weighted-average remaining lease term:

16 unchanged sentences

The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company's stock for the period.

Table of Conten t s

Earnings per share are summarized for the periods presented in the following table (in thousands, except per share data):

6 unchanged sentences

Earnings per share, diluted $ 3.46 $ 3.42

There were no anti-dilutive securities at December 31, 2020 or 2019.

There were no anti-dilutive securities for the year ended December 31, 2021 or 2020.

Note 14— Employee Benefits

2 unchanged sentences

401(k) costs are accrued and funded on a current basis.

The Company contributed $ 217,000 and $ 180,000 to the plan for the years ended December 31, 2020 and 2019, respectively.

The Company contributed $ 230 thousand and $ 217 thousand to the plan for the years ended December 31, 2021 and 2020, respectively.

The Bank maintains a deferred compensation account for the benefit of Ms.

6 unchanged sentences

The assets in the deferred compensation account consist of cash which is held in a certificate of deposit at the Bank and earns interest at market rates.

At December 31, 2020, the amounts held in the certificates of deposit at the Bank were $ 109,000 , compared to $ 106,000 at December 31, 2019.

At December 31, 2021, the amounts held in the certificates of deposit at the Bank were $ 111 thousand, compared to $ 109 thousand at December 31, 2020.

The Bank maintains a nonqualified deferred compensation plan (the “NQDC Plan”), which was effective on January 1, 2017.

2 unchanged sentences

Discretionary contributions by the Bank become 100 % vested upon the completion of three years of service from a participant’s effective date of participation in the NQDC Plan (with accelerated vesting upon death, disability or a change in control), while other Bank contributions (including matching contributions) vest at the rate of 20 % per year, beginning with the participant’s two-year anniversary of his or her date of hire.

During the years ended December 31, 2020, and 2019, the Bank made discretionary contributions to the NQDC Plan in the amount of $ 90,000 and $ 90,000 , respectively.

During the years ended December 31, 2021, and 2020, the Bank made discretionary contributions to the NQDC Plan in the amount of $ 93 thousand and $ 90 thousand, respectively.

Each participant’s deferred compensation account is credited with an investment return determined as if the account was invested in one or more investment funds.

5 unchanged sentences

The Company may, at any time, in its sole discretion, terminate the NQDC Plan or amend or modify the NQDC Plan, in whole or in part, except that no such termination, amendment or modification shall have any retroactive effect to reduce any amounts deemed to be accrued and vested prior to such amendment.

Table of Conten t s

Supplemental Executive Retirement Plans.

4 unchanged sentences

Under the terms of SERP 1, as amended, Ms.

Stewart is entitled to receive $ 53,320 per year for life commencing on the first day of the month following her separation from service (as defined in SERP 1) for any reason from Sound Community Bank, subject to a six-month delay if required by Section 409A of the Internal Revenue Code.

No payments will be made under SERP 1 in the event of Ms.

1 unchanged sentence

In the event Ms.

Stewart is involuntarily terminated in connection with a change in control (as defined in SERP 1), she will be entitled to receive the annual benefit described in the first sentence of this paragraph commencing upon such termination (subject to any applicable cutback for payments after a change in control as required by Section 280G of the Internal Revenue Code).

Under the terms of SERP 2, as amended, upon Ms.

Stewart's termination of employment with Sound Community Bank for any reason other than death, she will be entitled to receive additional retirement benefits of $ 96,390 per year for life commencing on the first day of the month following the later of age 70 or her separation from service (as defined in SERP 2) from Sound Community Bank.

Stewart's termination of employment with Sound Community Bank for any reason other than death, she will be entitled to receive additional retirement benefits of $ 96,390 per year for life commencing on the first day of the month following her separation from service (as defined in SERP 2) from Sound Community Bank, subject to a six-month delay if required by Section 409A of the Internal Revenue Code.

In the event of Ms.

Stewart's death, her beneficiary will be entitled to a single lump sum payment within 90 days thereafter in an amount equal to the account value as of the death benefit valuation date, or approximately $ 1.1 million at December 31, 2020.

Stewart's death, her beneficiary will be entitled to a single lump sum payment within 90 days thereafter in an amount equal to the Bank's accrual for her retirement benefit under SERP 2 as of the date of death, or approximately $ 1.1 million at December 31, 2021.

If a change in control occurs (as defined in SERP 2), Ms.

Stewart will receive her full retirement benefit under SERP 2 commencing upon the first day of the month following her separation from service from Sound Community Bank.

Confidentiality, Non-Competition, and Non-Solicitation Agreement.

On December 13, 2019, the Bank entered into an Amended and Restated Confidentiality, Non-competition, and Non-solicitation Agreement (the “Amended Non-Compete Agreement”) with Ms.

The Amended Non-Compete Agreement provides that the term of the non-compete and non-solicitation periods applicable to Ms.

Stewart is a fixed period of 18 months following the date of Ms.

Stewart’s separation from service with the Company and the Bank (the “Restricted Period”).

Under the terms of the Amended Non-compete Agreement, upon Ms.

Stewart's termination of employment by the Bank for cause or voluntarily by Ms.

Stewart (other than for good reason), Ms.

Stewart will be entitled to receive a bi-monthly payment, in an amount equal to $ 3,542 , which amount shall be paid in equal bi-monthly payments during the Restricted Period beginning on the fifth day of the month following her separation from service with the Bank.

Stewart’s termination of employment with the Bank for any reason other than set forth in the preceding sentence, she will be entitled to receive an amount equal to 150 % of her then-base salary plus the average of her past three years short term bonus pay, or approximately $ 804,000 at December 31, 2020, payable in 12 monthly installments beginning on the first day of the month following her termination.

Stewart breaches any of the covenants contained in the Amended Non-compete Agreement, her right to any of the payments specified above after the date of the breach shall be forever forfeited.

Notwithstanding the foregoing, under her Amended Non-compete Agreement, if Ms.

Stewart’s employment with the Bank is involuntarily terminated or she terminates her employment with the Bank for good reason at any time within 24 months following a change in control, Ms.

Stewart will be entitled to receive an amount equal to 150 % of her then-base salary plus the average of her past three years short term bonus, payable in a lump sum.

Stock Options and Restricted Stock

5 unchanged sentences

At December 31, 2021, on an adjusted basis, awards for stock options totaling 271,854 shares and awards for restricted stock totaling 142,201 shares of Company common stock have been granted in the aggregate, net of any forfeitures, under the 2008 Plan and 2013 Plan to participants.

During the years ended December 31, 2020 and 2019, share-based compensation expense totaled $ 338,000 and $ 267,000 , respectively.

Table of Conten t s

During the years ended December 31, 2021 and 2020, share-based compensation expense totaled $ 360 thousand and $ 338 thousand, respectively.

Stock Option Awards

All stock option awards granted under the 2008 Plan vest in 20 percent annual increments commencing one year from the grant date in accordance with the requirements of the 2008 Plan.

The stock option awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary date of each grant date in equal annual installments over periods of one -to- four years subject to the continued service of the participant with the Company.

All of the options granted under the 2008 Plan and the 2013 Plan are exercisable for a period of 10 years from the date of grant, subject to vesting.

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Outstanding at January 1, 2021

100,977 $ 22.00 4.71 $ 1,045,041

Granted 12,250 32.46

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Outstanding at December 31, 2021

91,316 24.59 4.77 1,772,667

Exercisable 73,393 22.38 3.89 1,586,949

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91,316 $ 24.59 4.77 $ 1,772,667

At December 31, 2020, there was $ 73,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plan.

At December 31, 2021, there was $ 81 thousand of total unrecognized compensation cost related to non-vested stock options granted under the Plan.

The cost is expected to be recognized over the remaining weighted-average vesting period of 2.4 years.

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The fair value of options granted in 2021 and 2020 were determined using the following weighted-average assumptions as of the grant date.

Year Ended December 31,

Annual dividend yield 1.60 % 1.60 %

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The restricted stock awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary date of each of the grant date in equal annual installments over periods of one to four years subject to the continued service of the participant with the Company.

Table of Conten t s

The following is a summary of the Company's non-vested restricted stock awards for the year ended December 31, 2021:

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Non-vested at January 1, 2021

17,114 $ 35.03

Granted 10,168 32.46

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Non-vested at December 31, 2021

17,586 34.02 $ 44.00

Expected to vest assuming a 0 % forfeiture rate over the vesting term

17,586 $ 34.02 $ 44.00

At December 31, 2020, there was $ 440,000 of unrecognized compensation cost related to non-vested restricted stock granted under the Plan.

At December 31, 2021, there was $ 401 thousand of unrecognized compensation cost related to non-vested restricted stock granted under the Plan.

The cost is expected to be recognized over the weighted-average vesting period of 2.2 years.

The total fair value of shares vested for the years ended December 31, 2020 and 2019 was $ 237,000 and $ 118,000 , respectively.

The total fair value of shares vested for the years ended December 31, 2021 and 2020 was $ 265 thousand and $ 237 thousand, respectively.

Employee Stock Ownership Plan

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The interest rate on the loan is fixed at 2.25 %, per annum.

At December 31, 2020, the remaining balance of the ESOP loan was $ 126,000 .

At December 31, 2021, the remaining balance of the ESOP loan was zero .

Neither the loan balance nor the related interest expense is reflected on the consolidated financial statements.

For the each of calendar years 2020 and 2019, the ESOP was committed to release 11,340 shares of the Company's common stock to participants.

The ESOP held 11,340 unallocated shares remaining to be released in 2021.

For the years ended December 31, 2021 and 2020, the ESOP was committed to release 11,340 shares of the Company's common stock to participants.

There are no unallocated ESOP shares remaining to be released in 2022.

The funds to purchase shares in the ESOP come from contributions the Bank makes twice a year to the Plan.

For the year ended December 31, 2020, the ESOP trustee purchased 10,483 shares of the Company's common stock for inclusion in the Plan.

For the years ended December 31, 2021 and 2020, the ESOP trustee purchased 7,343 shares and 10,483 shares of the Company's common stock for inclusion in the Plan.

The number of allocated shares was 131,805 and 139,678 at December 31, 2021 and 2020, respectively.

The fair value of the 150,497 restricted shares held by the ESOP trust was $ 6.6 million at December 31, 2021.

ESOP compensation expense included in salaries and benefits was $ 606,000 and $ 627,000 for the years ended December 31, 2020 and 2019, respectively.

ESOP compensation expense included in salaries and benefits was $ 781 thousand and $ 606 thousand for the years ended December 31, 2021 and 2020, respectively.

Note 15— Income Taxes

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Total tax expense $ 2,272 $ 2,391

Table of Conten t s

A reconciliation of the provision for income taxes for the years ended December 31, 2021 and 2020, with amounts determined by applying the statutory U.S.

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Note 16— Capital

The Company is a bank holding company under the supervision of the Federal Reserve.

Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve, except that, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act, effective August 30, 2018, a bank holding company with consolidated assets of less than $3.0 billion is generally not

Table of Conten t s

subject to the Federal Reserve’s capital regulations, which parallel the FDIC’s capital regulations.The Bank is a state-chartered, federally insured institution and thereby is subject to the capital requirements established by the FDIC.

Sound Financial Bancorp is a bank holding company under the supervision of the Federal Reserve.

generally not subject to the Federal Reserve’s capital regulations, which parallel the FDIC’s capital regulations.The Bank is a state-chartered, federally insured institution and thereby is subject to the capital requirements established by the FDIC.

Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

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

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

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

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

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

Effective January 1, 2020, a bank that elects to use the Community Bank Leverage Ratio (“CBLR”) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act will generally be considered well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%.

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

Beginning in 2021, the CBLR will increase to 8.5% for that calendar year.

The CBLR will return to 9% on January 1, 2022.

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

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

Effective January 1, 2020, the Bank elected to use the Community Bank Leverage Ratio (“CBLR”) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act.

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

Under the CBLR framework, a bank will generally be considered well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a CBLR greater than 9.0%.

A bank electing the framework that ceases to meet any qualifying criteria in a future period and that has a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or comply with the generally applicable capital requirements.

A bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rule.

At December 31, 2021, the Bank’s CBLR was 10.92 %.

The following table shows the capital ratios of Sound Community Bank at December 31, 2019 (dollars in thousands):

Actual Minimum Capital

Requirements Minimum Required to be

Well-Capitalized Under Prompt

Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

Tier 1 Capital to average total adjusted assets (1)

$ 74,031 10.22 % $ 28,981 4.00 % $ 36,226 5.00 %

Common Equity Tier 1 to risk-weighted assets (2)

74,031 12.07 % 27,601 4.50 % 39,868 6.50 %

Tier 1 Capital to risk-weighted assets (2)

74,031 12.07 % 36,801 6.00 % 49,068 8.00 %

Total Capital to risk-weighted assets (2)

$ 79,974 13.04 % $ 49,067 8.00 % $ 61,335 10.00 %

(1) Based on total adjusted assets of $ 724,527 at December 31, 2019.

(2) Based on risk-weighted assets of $ 613,354 at December 31, 2019.

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

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The estimated CBLR calculated for Sound Financial Bancorp at December 31, 2021 was 10.09 %

Table of Conten t s

During the quarter ended December 31, 2020, the Company repurchased a total of 2,477 shares of Company common stock at an average price of $ 29.42 per share pursuant to the Company’s stock repurchase program, leaving $ 1.9 million available for future repurchase under the existing program.

During the years ended December 31, 2021 and 2020, the Company repurchased a total of 3,657 and 2,477 shares of Company common stock at an average price of $ 41.68 and $ 29.42 per share pursuant to the Company’s stock repurchase program, leaving $ 1.8 million available for future repurchase under the existing program.

Note 17— Concentrations of Credit Risk

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Financial instruments whose contract amount represents credit risk were as follow (in thousands):

At December 31,

Residential mortgage commitments $ 6,663 $ 3,312

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These amounts represent the unpaid principal balances of the Company's loans serviced for others' portfolios.

There were no loans repurchased during the years ended December 31, 2020 and 2019.

There was $ 284 thousand of loans repurchased during the year ended December 31, 2021 and no loans repurchased during the year ended 2020.

The Company pays certain medical, dental, prescription, and vision claims for its employees, on a self-insured basis.

The Company has purchased stop-loss insurance to cover claims that exceed stated limits and has recorded estimated reserves for the ultimate costs for both reported claims and claims incurred but not reported, which were not considered significant at

Table of Conten t s

December 31, 2020.

At December 31, 2021, the Company recorded no stop loss medical insurance claims exceeding stated coverage limits.

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Other expenses ( 550 ) ( 572 )

Income before income tax benefit and equity in undistributed net

Loss before income tax benefit and equity in undistributed net

income of subsidiary ( 1,223 ) ( 762 )

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Net income $ 8,724 $ 8,937

Table of Conten t s

Statements of Cash Flows Year Ended December 31,

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Expense allocation to holding company — 129

Change in undistributed equity of subsidiary ( 9,539 ) ( 7,305 )

Equity in undistributed earnings of subsidiary ( 9,690 ) ( 9,539 )

Net cash used in operating activities ( 1,044 ) ( 403 )

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Dividends paid ( 2,039 ) ( 2,072 )

Dividends received from subsidiary — 2,155

Stock repurchase funding from subsidiary — 1,750

Repurchase of stock ( 152 ) ( 73 )

Stock options exercised 182 239

Net cash provided by (used in) financing activities 4,176 2,602

Net increase (decrease) in cash 4,097 2,722

Net cash (used in) provided by financing activities ( 2,009 ) 4,176

Net (decrease) increase in cash ( 2,622 ) 4,097

Cash and cash equivalents at beginning of year 6,837 2,740

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Total noninterest income $ 7,329 $ 7,445

Table of Conten t s

(a) Not within scope of ASC 606

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In determining the gain or loss on sale, we adjust the transaction price and related gain or loss on sale if a significant financing component is present.

The Company incurred expenses on our OREO properties of $ 5,000 and $ 35,000 for the years ended December 31, 2020 and 2019, respectively, included in noninterest expense on the Consolidated Statements of Income.

The Company generated income/incurred expenses, net of gain/losses on sale of OREO, on our OREO properties of $( 16 ) thousand and $ 5 thousand for the years ended December 31, 2021 and 2020, respectively, included in noninterest expense on the Consolidated Statements of Income.

Note 21— Subsequent Events

On January 28, 2022, the Company declared on Company common stock a quarterly cash dividend of $ 0.17 per common share and a special cash dividend of $ 0.10 per share, payable on February 24, 2022 to stockholders of record at the close of business February 10, 2022.

Table of Conten t s

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data