What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-12 compared with 2022-05-10 · 221 added, 134 removed, 301 unchanged (54% of the section changed)

10 unchanged sentences

• changes in consumer spending, borrowing and savings habits;

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

• changes in economic conditions, either nationally or in our market area, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions;

• the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of our allowance for loan losses;

34 unchanged sentences

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

At March 31, 2022, Sound Financial Bancorp, on a consolidated basis, had assets of $958.9 million, net loans held-for-portfolio of $703.1 million, deposits of $836.1 million and stockholders’ equity of $93.9 million.

At June 30, 2022, Sound Financial Bancorp, on a consolidated basis, had assets of $937.0 million, net loans held-for-portfolio of $799.0 million, deposits of $786.0 million and stockholders’ equity of $93.1 million.

The shares of Sound Financial Bancorp are traded on NASDAQ Capital Market under the symbol “SFBC.” Our executive offices are located at 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121.

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Management believes that its critical accounting policies include determining the allowance for loan losses, accounting for other-than-temporary impairment of securities, accounting for mortgage servicing rights, accounting for other real estate owned and accounting for deferred income taxes.

Our methodologies for analyzing the allowance for loan losses, other-than-temporary impairment, mortgage servicing rights, other real estate owned and deferred tax asset accounts are described in our 2021 Form 10-K.

COVID-19 Impact to the Company

The Company is actively monitoring and responding to the effects of the rapidly-changing COVID 19 pandemic.

The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers.

As of March 31, 2022, all banking branches are open with normal hours and substantially all employees have returned to their routine working environments.

The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guideline.

Comparison of Financial Condition at March 31, 2022 and December 31, 2021

Total assets increased $39.2 million, or 4.3%, to $958.9 million at March 31, 2022 from $919.7 million at December 31, 2021.

The increase was primarily a result of increases in cash and cash equivalents, investment securities, and loans held-for-portfolio.

There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2021 Form 10-K

Comparison of Financial Condition at June 30, 2022 and December 31, 2021

Total assets increased $17.3 million, or 1.9%, to $937.0 million at June 30, 2022 from $919.7 million at December 31, 2021.

The increase primarily was a result of increases in investment securities and loans held-for-portfolio, partially offset by a decrease in cash and cash equivalents and loans held-for-sale.

Cash and Securities.

Cash and cash equivalents increased $13.5 million, or 7.4%, to $197.1 million at March 31, 2022 from $183.6 million at December 31, 2021 primarily due to increases in noninterest-bearing and interest-bearing deposits, partially related to temporary increases in lawyer trust accounts.

These increases were partially offset by the redeployment of excess liquidity into higher earning loans and investments.

Investment securities increased $4.0 million, or 47.8%, to $12.4 million at March 31, 2022, compared to $8.4 million at December 31, 2021.

Held-to-maturity securities totaled $2.2 million at March 31, 2022, compared to none at December 31, 2021, due to the purchase of $2.2 million in municipal bonds and agency mortgage-backed securities.

Available-for-sale securities totaled $10.2 million at March 31, 2022, compared to $8.4 million at December 31, 2021, and $9.1 million at March 31, 2021.

Cash and cash equivalents decreased $103.5 million, or 56.4%, to $80.1 million at June 30, 2022 from $183.6 million at December 31, 2021, primarily due to the redeployment of excess liquidity into higher earning loans and investments.

Investment securities increased $3.2 million, or 37.7%, to $11.6 million at June 30, 2022, compared to $8.4 million at December 31, 2021.

Held-to-maturity securities totaled $2.2 million at June 30, 2022, compared to none at December 31, 2021, due to the purchase of $2.2 million in municipal bonds and agency mortgage-backed securities.

Available-for-sale securities totaled $9.4 million at June 30, 2022, compared to $8.4 million at December 31, 2021.

The increase in available-for-sale securities was primarily due the purchase of $2.8 million in municipal bonds and agency mortgage-backed securities, partially offset by regularly scheduled payments and maturities.

Loans held-for-portfolio, net, increased $23.0 million, or 3.4%, to $703.1 million at March 31, 2022 from $680.1 million at December 31, 2021, driven by increases across all loan classes, excluding commercial business loans.

The increases primarily resulted from focused marketing campaigns, increased utilization of digital marketing tools and the addition of experienced lending staff during 2021.

These increases were partially offset by the decrease in commercial business loans resulting from the forgiveness by the SBA.

The following table reflects the changes in the loan mix of our loan portfolio at March 31, 2022, as compared to December 31, 2021 (dollars in thousands):

Loans held-for-portfolio, net, increased $118.9 million, or 17.5%, to $799.0 million at June 30, 2022 from $680.1 million at December 31, 2021, driven by increases across all loan classes, excluding commercial business loans.

The increases primarily resulted from focused marketing campaigns, increased utilization of digital marketing tools and the addition of experienced lending staff during 2021, as well as United States Department of Agriculture guaranteed loan purchases.

These increases were partially offset by the decrease in commercial business loans resulting from forgiveness by the U.S.

Small Business Administration (“SBA”) of loans originated under the Paycheck Protection Program (“PPP”).

The following table reflects the changes in the loan mix of our loan portfolio at June 30, 2022, as compared to December 31, 2021 (dollars in thousands):

2022 December 31,

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Total loans held-for-portfolio, net $ 798,961 $ 680,092 $ 118,869 17.5 %

The increase in one-to-four family loans was driven primarily by the origination of $13.0 million in conforming and non-conforming jumbo loans during the first quarter of 2022 and the origination of $8.5 million of conforming and non-conforming conventional loans in our portfolio.

The increase in construction and land loans during the period was primarily due to disbursement of advances on previously originated loans and the increase in other consumer loans was primarily a result of larger loan sizes.

The decrease in our commercial business loan portfolio was primarily due to SBA loan forgiveness.

At March 31, 2022, our loan portfolio, net of deferred loan fees, remained well-diversified.

Commercial and multifamily real estate loans accounted for 39.4% of total loans, one-to-four family loans, including home equity loans accounted for 33.1% of total

loans, commercial business loans accounted for 3.4% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for 14.2% of total loans at March 31, 2022.

Construction and land loans accounted for 9.9% of total loans at March 31, 2022.

Loans held-for-sale totaled $1.3 million at March 31, 2022, compared to $3.1 million at December 31, 2021.

The increase in one-to-four family loans was driven primarily by the origination of $38.4 million in conforming and non-conforming jumbo loans during the first half of 2022 and the origination of $26.9 million of conforming and non-conforming conventional loans in our portfolio.

The increase in construction and land loans during the period was primarily due to the origination of new commercial construction loans.

The decrease in our commercial business loan portfolio was primarily due to SBA forgiveness of PPP loans.

At June 30, 2022, our loan portfolio, net of deferred loan fees, remained well-diversified.

Commercial and multifamily real estate loans accounted for 38.1% of total loans, one-to-four family loans, including home equity loans accounted for 33.0% of total loans, commercial business loans accounted for 3.0% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for 13.4% of total loans at June 30, 2022.

Construction and land loans accounted for 12.6% of total loans at June 30, 2022.

Loans held-for-sale totaled $100 thousand at June 30, 2022, compared to $3.1 million at December 31, 2021.

The decrease was primarily due to a decline in mortgage originations reflecting reduced refinance activity.

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

Three Months Ended March 31,

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

2022 2021 2022 2021

Balance at beginning of period $ 6,407 $ 5,935 $ 6,306 $ 6,000

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Recoveries 121 5 127 12

Net charge-offs (24) (65)

Net recoveries (charge-offs) 110 (28) 86 (93)

Provision for loan losses during the period 600 250 725 250

Balance at end of period $ 7,117 $ 6,157 $ 7,117 $ 6,157

Our allowance for loan losses increased $101 thousand, or 1.6%, to $6.4 million at March 31, 2022, from $6.3 million at December 31, 2021.

Specific loan loss reserves decreased to $261 thousand at March 31, 2022, compared to $293 thousand at December 31, 2021, while general loan loss reserves remained mostly flat at $5.6 million at both March 31, 2022 and December 31, 2021 and the unallocated reserve increased to $517 thousand at March 31, 2022, compared to $395 thousand at December 31, 2021.

The increase in the unallocated reserve was primarily a result of the increase in the loan portfolio at March 31, 2022.

The $2.1 million balance of PPP loans was omitted from the calculation for the allowance for loan losses at March 31, 2022, as these loans are 100% guaranteed by the SBA and management expects that the majority of the remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reduce the Bank’s loan balance for the amount forgiven.

Net charge-offs for the three months ended March 31, 2022 totaled $24 thousand compared to net charge-offs of $65 thousand for the three months ended March 31, 2021.

At March 31, 2022, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.90% and 134.97%, respectively, compared to 0.92% and 113.58%, respectively, at December 31, 2021.

See “Comparison of Results of Operations for the Three Months Ended March 31, 2022 and 2021 — Provision for Loan Losses.”

Our allowance for loan losses increased $811 thousand, or 12.9%, to $7.1 million at June 30, 2022, from $6.3 million at December 31, 2021.

Specific loan loss reserves decreased to $241 thousand at June 30, 2022, compared to $293 thousand at December 31, 2021, while general loan loss reserves increased to $6.3 million at June 30, 2022, compared to $5.6 million at December 31, 2021, and the unallocated reserve increased to $605 thousand at June 30, 2022, compared to $395 thousand at December 31, 2021.

The increase in general loss reserves and the unallocated reserve was primarily a result of the increase in the loan portfolio at June 30, 2022.

Net recoveries for the three and six months ended June 30, 2022 totaled $110 thousand and $86 thousand, compared to net charge-offs of $28 thousand and $93 thousand for the three and six months ended June 30, 2021, respectively.

At June 30, 2022, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.88% and 157.85%, compared to 0.92% and 113.58%, at December 31, 2021, respectively.

See “Comparison of Results of Operations for the Three and Six Months Ended June 30, 2022 and 2021 — Provision for Loan Losses.”

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

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Total nonaccrual loans 4,509 5,552

Three Months Ended March 31,

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

2022 2021 2022 2021

($ in thousands)

Net charge-offs during period to average loans outstanding:

Net recoveries (charge-offs) during period to average loans outstanding:

One-to-four family:

Net charge-offs

0.08 % (0.04) % 0.04 % (0.11) %

Net recoveries (charge-offs)

45 (15) 45 (76)

Average loans outstanding

232,288 137,195 221,801 133,858

Net (recoveries)

1.51 % (0.17) % 0.82 % (0.08) %

Net recoveries (charge-offs)

57 (6) 58 (6)

Average loans outstanding

1 unchanged sentence

Commercial and multifamily real estate:

Net charge-offs

— % — % — % — %

Net (charge-offs) recoveries

Average loans outstanding

1 unchanged sentence

Construction and land:

Net charge-offs

— % — % — % — %

Net (charge-offs) recoveries

Average loans outstanding

1 unchanged sentence

Manufactured homes:

0.21 % 0.02 % 0.11 % — %

Net recoveries

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Floating homes:

Net charge-offs

— % — % — % — %

Net (charge-offs) recoveries

Average loans outstanding

3 unchanged sentences

Net (charge-offs)

(10) (9) (29) (13)

Average loans outstanding

2 unchanged sentences

0.10 % — % — % 0.01 %

Net charge-offs/(recoveries)

Net recoveries

Average loans outstanding

1 unchanged sentence

0.06 % (0.02) % 0.02 % (0.03) %

Net charge-offs

Net recoveries (charge-offs)

110 (28) 86 (93)

Average loans outstanding

742,774 624,744 718,165 620,239

Mortgage Servicing Rights.

The fair value of mortgage servicing rights was $4.7 million at March 31, 2022, an increase of $395 thousand, or 9.2%, from $4.3 million at December 31, 2021.

We record mortgage servicing rights on loans sold with servicing retained and upon acquisition of a servicing portfolio.

Mortgage servicing rights are carried at fair value.

If the fair value of our mortgage servicing rights fluctuates significantly, our financial results could be materially impacted.

Nonperforming Assets.

At March 31, 2022, nonperforming assets totaled $5.4 million, or 0.56% of total assets, compared to $6.2 million, or 0.68% of total assets at December 31, 2021.

At June 30, 2022, nonperforming assets, which are comprised of nonaccrual loans including nonperforming troubled debt restructurings (“TDRs”), and other real estate owned (“OREO”), totaled $5.2 million, or 0.55% of total assets, compared to $6.2 million, or 0.68% of total assets at December 31, 2021.

The table below sets forth the amounts and categories of nonperforming assets at the dates indicated (dollars in thousands):

Nonperforming Assets

March 31, 2022 December 31, 2021 Amount

2022 December 31,

Change Percent

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Total nonperforming assets $ 5,168 $ 6,211 $ (1,043) (16.8) %

Nonperforming loans decreased $805 thousand, or 14.5%, to $4.7 million at March 31, 2022 from $5.6 million at December 31, 2021.

The decrease in nonperforming assets primarily was due to decreases in one-to-four family loans and floating homes.

The percentage of nonperforming loans to total loans was 0.67% at March 31, 2022, compared to 0.81% of total loans at December 31, 2021.

Nonperforming loans, which are comprised of nonaccrual loans and nonperforming TDRs, decreased $1.0 million, or 18.8%, to $4.5 million at June 30, 2022 from $5.6 million at December 31, 2021.

The decrease in nonperforming loans primarily was due to decreases in nonperforming one-to-four family loans, floating homes and commercial business loans, partially offset by an increase in nonperforming other consumer loans.

The percentage of nonperforming loans to total loans was 0.56% at June 30, 2022, compared to 0.81% of total loans at December 31, 2021.

Loans classified as TDRs totaled $2.0 million and $2.6 million at June 30, 2022 and December 31, 2021, of which $128 thousand and $422 thousand were nonperforming pursuant to their contractual repayment terms at those dates, respectively.

Mortgage Servicing Rights.

The fair value of mortgage servicing rights was $4.8 million at June 30, 2022, an increase of $481 thousand, or 11.3%, from $4.3 million at December 31, 2021.

We record mortgage servicing rights on loans sold with servicing retained and upon acquisition of a servicing portfolio.

Mortgage servicing rights are carried at fair value.

If the fair value of our mortgage servicing rights fluctuates significantly, our financial results could be materially impacted.

Deposits and Borrowings.

Total deposits increased $37.8 million, or 4.7%, to $836.1 million at March 31, 2022 from $798.3 million at December 31, 2021.

The increase was primarily a result of deposit growth from specialty business relationships and temporary increases in lawyer trust accounts, partially offset by a managed run-off of higher costing maturing certificates of deposits.

We continue our efforts to grow noninterest-bearing deposits, which increased $18.3 million, or 9.6%, to $208.8 million at March 31, 2022, compared to $190.5 million at December 31, 2021.

Noninterest-bearing deposits represented 25.0% of total deposits at March 31, 2022, compared to 23.9% at December 31, 2021.

Total deposits decreased $12.3 million, or 1.5%, to $786.0 million at June 30, 2022 from $798.3 million at December 31, 2021.

The decrease was primarily a result of managed run-off of public funds.

Noninterest-bearing deposits decreased $3.9 million, or 2.0%, to $186.6 million at June 30, 2022, compared to $190.5 million at December 31, 2021.

Noninterest-bearing deposits represented 23.7% of total deposits at June 30, 2022, compared to 23.9% at December 31, 2021.

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Rate Amount Wtd.

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

Scheduled maturities of time deposits at March 31, 2022, are as follows (in thousands):

Scheduled maturities of time deposits at June 30, 2022, are as follows (in thousands):

Year Ending December 31, Amount

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Certificates of deposit have maturities of five years or less.

The aggregate amount of time deposits in denominations of more than $250,000 at March 31, 2022 and December 31, 2021, totaled $18.7 million and $19.1 million, respectively.

The aggregate amount of time deposits in denominations of more than $250,000 at June 30, 2022 and December 31, 2021, totaled $17.5 million and $19.1 million, respectively.

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

There were no outstanding FHLB advances at March 31, 2022 and December 31, 2021.

Subordinated notes, net totaled $11.6 million at March 31, 2022 and December 31, 2021.

Borrowings comprised of FHLB advances increased $30.0 million at June 30, 2022 from zero at December 31, 2021, primarily due to funds needed to support loan growth.

Subordinated notes, net totaled $11.7 million and $11.6 million at June 30, 2022 and December 31, 2021.

Stockholders’ Equity.

Total stockholders’ equity increased $492 thousand, or 0.5%, to $93.9 million at March 31, 2022, from $93.4 million at December 31, 2021.

This increase primarily reflects $1.7 million in net income for the three months ended March 31, 2022, partially offset by the payment of cash dividends of $709 thousand in dividends to common stockholders during the three months ended March 31, 2022 and an unrealized loss, net of tax, of $608 thousand on our available-for-sale securities as a result of declining market values.

Total stockholders’ equity decreased $301 thousand, or 0.3%, to $93.1 million at June 30, 2022, from $93.4 million at December 31, 2021.

This decrease primarily reflects the payment of cash dividends of $1.2 million to common stockholders, repurchases of common stock of $1.7 million, and an unrealized loss, net of tax, of $1.1 million on our available-for-sale securities as a result of declining market values related to increases in market interest rates, offset by $3.3 million in net income for the six months ended June 30, 2022.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

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Nonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual (dollars in thousands).

Three Months Ended March 31,

Three Months Ended June 30,

Balance Interest

12 unchanged sentences

Subordinated notes 11,648 168 5.79 11,606 168 5.81

Borrowings 2,418 12 1.99 — — —

Total interest-bearing liabilities 617,320 594 0.39 % 637,769 1,064 0.67 %

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The cost of total funding is calculated as annualized total interest expense divided by average total funding.

Six Months Ended June 30,

Balance Interest

Rate Annualized Average

Balance Interest

Rate Annualized

Interest-earning assets:

Loans receivable $ 718,402 $ 16,772 4.71 % $ 628,270 $ 16,184 5.19 %

Investments, cash and cash equivalents 162,304 427 0.53 239,733 229 0.19

Total interest-earning assets (1)

880,706 17,199 3.94 % 868,003 16,413 3.81

Interest-bearing liabilities:

Savings and money market accounts 195,731 59 0.06 161,198 102 0.13

Demand and NOW accounts 313,552 247 0.16 267,019 344 0.26

Certificate accounts 99,127 535 1.09 194,512 1,744 1.81

Subordinated notes 11,643 336 5.82 11,601 336 5.84

Borrowings 1,215 12 1.99 — — —

Total interest-bearing liabilities 621,268 1,189 0.39 % 634,330 2,526 0.80 %

Net interest income $ 16,010 $ 13,887

Net interest rate spread 3.55 % 3.01 %

Net earning assets $ 259,438 $ 233,673

Net interest margin 3.67 % 3.23 %

Average interest-earning assets to average interest-bearing liabilities 141.76 % 136.84 %

Total deposits 802,105 841 0.21 % 793,139 2,190 0.56 %

Total funding (2)

814,963 1,189 0.29 % 804,740 2,526 0.63 %

Rate/Volume Analysis

3 unchanged sentences

For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate (dollars in thousands).

Three Months Ended March 31, 2022 vs.

Three Months Ended June 30, 2022 vs.

Six Months Ended June 30, 2022 vs.

Increase (Decrease) due to Total

Increase (Decrease) Increase (Decrease) due to Total

Increase (Decrease)

Volume Rate Volume Rate

Interest-earning assets:

7 unchanged sentences

Subordinated notes 1 (1) — 1 (1) —

Borrowings 12 — 12 12 — 12

Total interest-bearing liabilities $ (185) $ (285) $ (470) $ (455) $ (882) $ (1,337)

Change in net interest income $ 1,041 $ 2,123

Comparison of Results of Operation for the Three Months Ended March 31, 2022 and 2021

Comparison of Results of Operation for the Three and Six Months Ended June 30, 2022 and 2021

Q2 2022 vs Q2 2021 .

Net income decreased $728 thousand, or 29.7%, to $1.7 million, or $0.65 per diluted common share, for the three months ended March 31, 2022, compared to $2.5 million, or $0.93 per diluted common share, for the three months ended March 31, 2021.

The decrease in net income was primarily the result of lower interest income earned on loans, coupled with lower noninterest income and higher noninterest expense, partially offset by lower interest expense paid on deposits.

Net income decreased $637 thousand, or 28.3%, to $1.6 million, or $0.61 per diluted common share, for the three months ended June 30, 2022, compared to $2.3 million, or $0.85 per diluted common share, for the three months ended June 30, 2021.

The decrease was primarily the result of a $697 thousand decrease in noninterest income, a $796 thousand increase in noninterest expense, and a $350 thousand increase in the provision for loan losses, partially offset by a $1.0 million increase in net interest income.

Net income decreased $1.4 million, or 29.1%, to $3.3 million, or $1.26 per diluted common share, for the six months ended June 30, 2022, compared to $4.7 million, or $1.78 per diluted common share, for the six months ended June 30, 2021.

The decrease was primarily a result of a $1.9 million decrease in noninterest income, a $1.5 million increase in noninterest expense and a $475 thousand increase in the provision for loan losses, partially offset by a $2.1 million increase in net interest income.

Interest Income

Q2 2022 vs Q2 2021 .

Interest income increased $214 thousand, or 2.7%, to $8.2 million for the three months ended March 31, 2022, from $8.0 million for the three months ended March 31, 2021, primarily due to higher average loan balances, partially offset by a 38 basis point decline in the average loan yield.

Interest income on loans increased $189 thousand, or 2.4%, to $8.1 million for the three months ended March 31, 2022, compared to $7.9 million for the three months ended March 31, 2021.

The average balance of total loans was $694.9 million for the three months ended March 31, 2022, compared to $628.4 million for the three months ended March 31, 2021 resulting from increased balances in all loan categories, except for commercial business loans which declined as a result of the SBA’s repayment of PPP loans.

The average yield on total loans was 4.71% for three months ended March 31, 2022, compared to 5.09% for the three months ended March 31, 2021.

The average yield on total loans decreased primarily due to the decrease in the recognition of net deferred fees due to loan repayments from SBA loan forgiveness of PPP loans during the period and lower rates on new originations.

Interest income included $84 thousand in fees earned related to PPP loans in the three months ended March 31, 2022, compared to $768 thousand in the same period a year ago.

For the three months ended March 31, 2022, the average balance of PPP loans was $3.1 million and the average yield on PPP loans was 11.05%, including the recognition of the net deferred fees, with a positive impact on loan yield of three basis points.

For the three months ended March 31, 2021, the average balance of PPP loans was $53.9 million and the average yield on PPP loans was 5.78%, including the recognition of deferred fees, with a positive impact on loan yield of six basis points.

At March 31, 2022, PPP deferred loan origination fees of $60 thousand remain to be accreted into interest income during the remaining life of the loans.

Interest income increased $571 thousand, or 6.8%, to $9.0 million for the three months ended June 30, 2022, from $8.4 million for the three months ended June 30, 2021, primarily due to higher average loan balances and a 66 basis point increase in the average yield earned on investments and cash balances, partially offset by a 60 basis point decline in the average loan yield and lower average investment and cash balances and the rising interest rate environment.

Interest income on loans increased $398 thousand, or 4.8%, to $8.7 million for the three months ended June 30, 2022, compared to $8.3 million for the three months ended June 30, 2021.

The average balance of total loans was $741.6 million for the three months ended June 30, 2022, compared to $628.1 million for the three months ended June 30, 2021 resulting from increased balances in all loan categories, except for commercial business loans which declined as a result of the SBA’s repayment of PPP loans.

The average yield on total loans was 4.70% for three months ended June 30, 2022, compared to 5.30% for the three months ended June 30, 2021.

Interest income included $40 thousand in fees earned related to PPP loans in the three months ended June 30, 2022, compared to $1.0 million in the same quarter a year ago.

For the three months ended June 30, 2022, the average balance of PPP loans was $1.2 million and the average yield on PPP loans was 13.38%, including the recognition of the net deferred fees, with a positive impact on loan yield of one basis point.

For the three months ended June 30, 2021, the average balance of PPP loans was $60.0 million and the average yield on PPP loans was 6.68%, including the recognition of deferred fees, with a positive impact on loan yield of 15 basis points.

At June 30, 2022, PPP deferred loan origination fees of $23 thousand remain to be accreted into interest income during the remaining life of the loans.

The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the two- or five-year maturity of the loans.

Interest income on the investment portfolio and cash and cash equivalents increased $25 thousand, or 22.1%, to $138 thousand for the three months ended March 31, 2022, compared to $113 thousand for the three months ended March 31, 2021.

Interest income on the investment portfolio and cash and cash equivalents increased $173 thousand, or 149.1%, to $289 thousand for the three months ended June 30, 2022, compared to $116 thousand for the three months ended June 30, 2021.

The increase in the interest income on investment securities and cash and cash equivalents was due to higher average yields, partially offset by lower average balances.

The average balance on investments and cash and cash equivalents was $189.6 million for the three months ended March 31, 2022, compared to $228.8 million for the three months ended March 31, 2021.

The decrease was due to lower average cash balances as we redeployed funds into higher interest-earning assets.

The average yield on investments and cash and cash equivalents increased to 0.30% for the three months ended March 31, 2022, compared

to 0.20% for the three months ended March 31, 2021, as a result of the rising interest rate environment and the increase in the average balance of our investment securities portfolio.

The average balance on investments and cash and cash equivalents was $136.7 million for the three months ended June 30, 2022, compared to $249.9 million for the three months ended June 30, 2021.

The decrease in average balances was due to lower average cash balances as we redeployed funds into higher interest-earning assets, specifically loans and, to a lesser extent, investment securities.

The average yield on investments and cash and cash equivalents increased to 0.85% for the three months ended June 30, 2022, compared to 0.19% for the three months ended June 30, 2021, as a result of the rising interest rate environment and the increase in the average balance of our investment securities portfolio.

Interest income increased $786 thousand, or 4.8%, to $17.2 million for the six months ended June 30, 2022, from $16.4 million for the six months ended June 30, 2021.

The increase primarily was due to higher average loan balances and a 34 basis point increase in the average yield earned on investments and cash balances, partially offset by a 48 basis point decline in the average loan yield and lower average investment and cash balances.

Interest income on loans increased $588 thousand, or 3.6%, to $16.8 million for the six months ended June 30, 2022, compared to $16.2 million for the six months ended June 30, 2021, driven by higher average total loans, partially offset a 48 basis points decline in the average yield on loans.

The average balance of total loans was $718.4 million for the six months ended June 30, 2022, compared to $628.3 million for the six months ended June 30, 2021.

The average yield on total loans was 4.71% for the six months ended June 30, 2022, compared to 5.19% for the six months ended June 30, 2021.

For the six months ended June 30, 2022, the average balance of PPP loans was $2.1 million and the average yield on PPP loans was 11.70%, including the

recognition of the net deferred fees, with a positive impact on average loan yield of two basis points.

For the six months ended June 30, 2021, the average balance of PPP loans was $57.0 million and the average yield on PPP loans was 6.21%, including the recognition of deferred fees, with a positive impact on average loan yield of 10 basis points.

Interest income included $124 thousand in fees earned related to PPP loans in the six months ended June 30, 2022, compared to $1.8 million in the same period a year ago.

Interest income on the investment portfolio and cash and cash equivalents increased $198 thousand, or 86.5%, to $427 thousand for the six months ended June 30, 2022, compared to $229 thousand for the six months ended June 30, 2021.

The increase in the interest income on investment securities and cash and cash equivalents was due to higher average yields, partially offset by lower average balances.

The average yield on investments and cash and cash equivalents was 0.53% for the six months ended June 30, 2022, compared to 0.19% for the six months ended June 30, 2021, primarily due to the deployment of cash balances into higher-yielding investment balances.

Interest Expense

Q2 2022 vs Q2 2021 .

Interest expense decreased $868 thousand, or 59.3%, to $595 thousand for the three months ended March 31, 2022, from $1.5 million for the three months ended March 31, 2021.

Interest expense on deposits decreased $868 thousand, or 67.0%, to $427 thousand for the three months ended March 31, 2022, compared to $1.3 million for the same period a year ago.

The decrease was primarily the result of a 46 basis point decline in the average cost of deposits reflecting reduced rates paid on all deposits and a $112.2 million, or 52.3%, decline in the average balance of certificate accounts, partially offset by a $106.6 million, or 26.3%, increase in the average balance of interest-bearing deposits other than certificate accounts.

In addition, total deposit costs were favorably impacted by a $33.4 million increase in the average balance of noninterest bearing deposits to $194.6 million for the three months ended March 31, 2022, compared to $161.1 million for the same period last year.

The increase in the average balance of noninterest bearing deposits contributed to the 46 basis point decrease in the average cost of total deposits to 0.21% for the quarter ended March 31, 2022, from 0.67% for the quarter ended March 31, 2021.

Interest expense decreased $470 thousand, or 44.2%, to $594 thousand for the three months ended June 30, 2022, from $1.1 million for the three months ended June 30, 2021.

Interest expense on deposits decreased $482 thousand, or 53.8%, to $414 thousand for the three months ended June 30, 2022, compared to $896 thousand for the same period a year ago.

While rates paid on all categories of deposits declined, the decrease primarily was the result of a 51 b asis point decline in rates paid on certificates of deposit and a $78.8 million, or 45.1%, decline in the average balance of certificate accounts.

In addition, total deposit costs were favorably impacted by a $13.2 million increase in the average balance of noninterest bearing deposits to $192.8 million for the three months ended June 30, 2022, compared to $179.6 million for the same period last year.

The increase in the average balance of noninterest bearing deposits contributed to a 24 basis point decrease in the average cost of total deposits to 0.21% for the quarter ended June 30, 2022, from 0.45% for the quarter ended June 30, 2021.

Interest expense on borrowings, comprised solely of FHLB advances, was $12 thousand for the three months ended June 30, 2022, compared to zero for the three months ended June 30, 2021.

Interest expense on subordinated notes was $168 thousand for both the three months ended June 30, 2022 and 2021.

Interest expense decreased $1.3 million, or 52.9%, to $1.2 million for the six months ended June 30, 2022, from $2.5 million for the six months ended June 30, 2021, primarily as a result of declining deposit costs and a higher percentage of noninterest bearing deposits to total deposits.

Interest expense on deposits decreased $1.3 million, or 61.6%, to $841 thousand for the six months ended June 30, 2022, compared to $2.2 million for the same period a year ago.

The decrease was primarily the result of a decline in the average cost of deposits reflecting reduced market rates paid on deposits.

The average cost of total deposits decreased 35 basis points to 0.21% for the six months ended June 30, 2022, from 0.56% for the six months ended June 30, 2021.

Net Interest Income.

Q2 2022 vs Q2 2021 .

Net interest income increased $1.1 million, or 16.6%, to $7.6 million for the three months ended March 31, 2022, from $6.5 million for the three months ended March 31, 2021.

Our net interest margin was 3.49% and 3.09% for the three months ended March 31, 2022 and 2021, respectively.

The increase in net interest income primarily resulted from the decline in the average rate paid on deposits and, to a lesser extent, higher interest income.

The increase in net interest margin was primarily due to the decline in rates paid on interest-bearing liabilities as a result of the managed runoff of higher costing deposits.

During the first quarter of 2022, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of three basis points, compared to a positive impact of 18 basis points during the quarter ended March 31, 2021.

Net interest income increased $1.0 million, or 14.2%, to $8.4 million for the three months ended June 30, 2022, from $7.4 million for the three months ended June 30, 2021.

Our net interest margin was 3.83% and 3.36% for the three months ended June 30, 2022 and 2021, respectively.

The increase in net interest income primarily was the result of lower interest expense paid on deposits and, higher interest income earned on loans, investments and interest-bearing cash.

The increase in net interest margin primarily was due to the higher interest income earned on interest-earning assets, driven by the higher average balance of loans and the higher average yield earned on investments and interest-bearing cash and the decline in rates paid on interest-bearing liabilities.

During the second quarter of 2022, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of one basis point, compared to a positive impact of 24 basis points during the quarter ended June 30, 2021.

Net interest income increased $2.1 million, or 15.3%, to $16.0 million for the six months ended June 30, 2022, from $13.9 million for the six months ended June 30, 2021.

Our net interest margin was 3.67% and 3.23% for the six months ended June 30, 2022 and 2021, respectively.

The increase in net interest income primarily resulted from the decline in the average rate paid on deposits, higher average interest-earning assets balances, partially offset by a decline in the average loan yield.

The increase in net interest margin primarily was due to average yields earned on interest-earning assets increasing coupled with the declines in average interest rates paid on interest-bearing liabilities.

During the six months ended June 30, 2022, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of two basis points, compared to a positive impact of 21 basis points for the six months ended June 30, 2021.

Provision for Loan Losse s.

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Loans for which management has concerns about the borrowers’ ability to repay, are evaluated individually and specific loss allocations are provided for these loans when necessary.

A provision for loan losses of $125 thousand was recorded for the three months ended March 31, 2022, as compared to no provision for loan losses for the three months ended March 31, 2021.

Our allowance for loan losses as of March 31, 2022, not only reflects probable and inherent credit losses based upon the economic conditions that existed as of March 31, 2022, but also reflects the inherent uncertainty related to the economic environment as a result of local, national and global events.

Net charge-offs for the three months ended March 31, 2022 totaled $24 thousand, compared to net charge-offs of $65 thousand for the three months ended March 31, 2021.

A provision for loan losses of $600 thousand and $725 thousand was recorded for the three and six months ended June 30, 2022, compared to $250 thousand and $250 thousand, for the three and six months ended June 30, 2021, respectively.

The increase in the provision for loan losses resulted primarily from the increase in our loan portfolio, partially offset by a shift in the loan portfolio composition to loan types requiring a lower general loan allowance as balances of lower risk one-to-four family loans and multifamily residential loans increased, thereby reducing the related general loan allowance.

The allowance for loan losses as of June 30, 2022, not only reflects probable and inherent credit losses based upon the economic conditions that existed as of June 30, 2022, but also reflects the inherent uncertainty related to the economic environment as a result of local, national and global events.

Net recoveries for the six months ended June 30, 2022 totaled $86 thousand, compared to net charge-offs of $93 thousand for the six months ended June 30, 2021.

While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.

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Noninterest Income.

Noninterest income decreased $1.2 million, or 43.7%, to $1.5 million for the three months ended March 31, 2022, as compared to $2.7 million for the three months ended March 31, 2021, as reflected below (dollars in thousands):

Three Months Ended March 31, Amount

Noninterest income decreased $697 thousand, or 40.7%, to $1.0 million for the three months ended June 30, 2022, as compared to $1.7 million for the three months ended June 30, 2021, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Change Percent

Service charges and fee income $ 596 $ 526 $ 70 13.3 %

Earnings on cash surrender value of BOLI 21 82 (61) (74.4)

(Loss) earnings on cash surrender value of BOLI (35) 96 (131) (136.5)

Mortgage servicing income 313 321 (8) (2.5)

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Total noninterest income $ 1,015 $ 1,712 $ (697) (40.7) %

The decrease in noninterest income during the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to a $1.7 million decrease in net gain on sale of loans due to a decline in both the amount of loans originated for sale and gross margins for loans sold, partially offset by a $543 thousand improvement in the fair value adjustment on mortgage servicing rights.

Loans sold during the quarter ended March 31, 2022, totaled $12.2 million, compared to $68.1 million during the quarter ended March 31, 2021.

The improvement in the fair value adjustment on mortgage servicing rights resulted from loan prepayment speeds slowing during the quarter as mortgage interest rates moved slightly higher.

The decrease in noninterest income during the three months ended June 30, 2022 compared to the same quarter in 2021 primarily was due to a $979 thousand decrease in net gain on sale of loans as a result of a decline in both the amount of loans originated for sale and gross margins earned on loans sold and a $131 thousand decline to a $35 thousand loss on earnings on cash surrender value of BOLI due to the recent higher market interest rates, partially offset by a $351 thousand increase in the fair value adjustment on mortgage servicing rights due primarily from the effects of recent higher market interest rates causing a reduction in prepayment speeds and a $70 thousand increase in service fees and income primarily resulting from higher commercial loan fees and consumer deposit activity fees .

Loans sold during the quarter ended June 30, 2022, totaled $2.9 million, compared to $39.9 million during the quarter ended June 30, 2021.

Noninterest income decreased $1.9 million, or 42.5%, to $2.5 million for the six months ended June 30, 2022, as compared to $4.4 million for the six months ended June 30, 2021, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

Change Percent

Service charges and fee income $ 1,146 $ 1,059 $ 87 8.2 %

(Loss) earnings on cash surrender value of BOLI (14) 178 (192) (107.9)

Mortgage servicing income 633 633 — —

Fair value adjustment on mortgage servicing rights 325 (569) 894 (157.1)

Net gain on sale of loans 450 3,116 (2,666) (85.6)

Total noninterest income $ 2,540 $ 4,417 $ (1,877) (42.5) %

The decrease in noninterest income during the six months ended June 30, 2022, compared to the same period in 2021 primarily was due to a $2.7 million decrease in net gain on sale of loans, and a $192 thousand decrease in earnings on cash surrender value of BOLI, partially offset by an $894 thousand improvement in the fair value adjustment on mortgage servicing rights for the same reasons as set forth for the three months ended June 30, 2022, discussed above.

Loans sold during the six months ended June 30, 2022, totaled $15.1 million, compared to $108.0 million during the six months ended June 30, 2021.

Noninterest Expense.

Noninterest expense increased $673 thousand, or 10.9%, to $6.8 million during the three months ended March 31, 2022, compared to $6.2 million during the three months ended March 31, 2021, as reflected below (dollars in thousands):

Three Months Ended March 31, Amount

Noninterest expense increased $796 thousand, or 13.3%, to $6.8 million during the three months ended June 30, 2022, compared to $6.0 million during the three months ended June 30, 2021, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Change Percent

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Data processing 849 813 36 4.4

Total noninterest expense $ 6,784 $ 5,988 $ 796 13.3 %

The increase in noninterest expense during the three months ended June 30, 2022 compared to the same quarter in 2021 primarily was due to an increase in salaries and benefits of $655 thousand as a result of higher wages and incentive compensation, higher medical expenses and lower deferred compensation, partially offset by a decrease in commission expense related to a decline in mortgage activity in second quarter of 2022 as compared to the same quarter in 2021.

Operations expense increased $67 thousand due to increases in various accounts including marketing and travel expenses, legal fees associated with higher commercial loan volume, and debit card processing, partially offset by lower loan origination costs due to lower mortgage origination volume.

The efficiency ratio for the quarter ended June 30, 2022 was 72.12%, compared to 66.07% for the quarter ended June 30, 2021.

The weakening in the efficiency ratio for the current quarter compared to the same quarter in the prior year is primarily due to higher noninterest expense related to increased salaries and benefits and lower noninterest income primarily due to lower gain on sale of loans from mortgage banking, partially offset by higher net interest income primarily as a result of a higher average balance of loans held-for-portfolio at higher yields than prior investments and a reduction in the rate paid on interest bearing deposits.

Noninterest expense increased $1.5 million, or 12.1%, to $13.6 million during the six months ended June 30, 2022, compared to $12.2 million during the six months ended June 30, 2021, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

Change Percent

Salaries and benefits $ 8,137 $ 6,958 $ 1,179 16.9 %

Operations 2,743 2,567 176 6.9

Regulatory assessments 200 192 8 4.2

Occupancy 872 857 15 1.8

Data processing 1,670 1,593 77 4.8

Net gain on OREO and repossessed assets — (16) 16 (100.0)

Total noninterest expense $ 13,622 $ 12,151 $ 1,471 12.1 %

The increase in noninterest expense during the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to an increase in salaries and benefits of $523 thousand as a result of higher wages and incentive compensation, higher medical expenses and lower deferred compensation, partially offset by a decrease in commission expense related to a decline in mortgage activity in first quarter of 2022 as compared to the same period in 2021.

Operations expense also increased $108 thousand due to increases in various accounts including marketing expenses, office related expenses, and professional fees.

The efficiency ratio for the quarter ended March 31, 2022 was 74.77%, compared to 66.69% for the quarter ended March 31, 2021.

The weakening in the efficiency ratio for the current quarter compared to the same period in the prior year is primarily due to higher noninterest expense and lower revenues.

The increase in noninterest expense during the six months ended June 30, 2022 compared to the same period in 2021 was primarily due to increases of $1.2 million in salaries and benefits, $176 thousand in operations expense and $77 thousand in data processing expense.

Salaries and benefits increased primarily due to higher wages and incentive compensation, hiring for strategic initiatives, higher medical expenses and lower deferred compensation, partially offset by a decrease in commission expense related to a decline in mortgage activity in the first half of 2022 as compared to the same period in 2021.

Operations expense increased primarily due to increases in various accounts including marketing expenses, travel related expenses, and professional fees.

Data processing expense increased due to technology investments and contract rate increases.

The efficiency ratio was 73.43% for the six months ended June 30, 2022, compared to 66.38% for the six months ended June 30, 2021.

The weakening in the efficiency ratio for the six months ended June 30, 2022 was primarily due to the increase in noninterest expense outpacing the increase in total revenues as described above.

Income Tax Expense .

Income tax expense declined to $458 thousand from $627 thousand for the three months ended March 31, 2022 and March 31, 2021, respectively, primarily due to lower pre-tax income.

The effective tax rate for both the three months ended March 31, 2022 and 2021 was 21.0% and 20.4%.

We incurred income tax expense of $409 thousand and $867 thousand for the three and six months ended June 30, 2022, compared $574 thousand and $1.2 million for the same periods in 2021, respectively.

The effective tax rates for the three and six months ended June 30, 2022 were 20.22% and 20.63%, respectively.

The effective tax rates for the three and six months ended June 30, 2021 were 20.32% and 20.35%, respectively.

Capital and Liquidity

The Management Discussion and Analysis in Item 7 of the Company’s 2021 Form 10-K contains an overview of Sound Financial Bancorp’s and the Bank’s liquidity management, sources of liquidity and cash flows.

This discussion updates that disclosure for the three months ended March 31, 2022.

Shareholders’ equity totaled $93.9 million at March 31, 2022 and $93.4 million at December 31, 2021.

In addition to net income of $1.7 million, other sources of capital during the three months ended March 31, 2022 included $43 thousand in proceeds from stock option exercises and $203 thousand related to stock-based compensation.

Uses of capital during the three months ended March 31, 2022 included $709 thousand of dividends paid on common stock, other comprehensive loss, net of tax, of $608 thousand and $160 thousand of stock repurchases.

We paid regular quarterly dividends of $0.17 per common share and a special dividend of $0.10 per common share during the three months ended March 31, 2022 and 2021, which equates to a dividend payout ratio of 41.15% in 2022 and 28.64% in 2021.

This discussion updates that disclosure for the six months ended June 30, 2022.

Shareholders’ equity totaled $93.1 million at June 30, 2022 and $93.4 million at December 31, 2021.

In addition to net income of $3.3 million, other sources of capital during the six months ended June 30, 2022 included $81 thousand in proceeds from stock option exercises and $294 thousand related to stock-based compensation.

Uses of capital during the six months ended June 30, 2022 primarily included $1.2 million of dividends paid on common stock, other comprehensive loss, net of tax, of $1.1 million and $1.7 million of stock repurchases.

We paid regular quarterly dividends of $0.17 per common share and a special dividend of $0.10 per common share during the six months ended June 30, 2022 and 2021, which equates to a dividend payout ratio of 34.53% in 2022 and 24.44% in 2021.

The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice.

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Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.

The Company’s current stock repurchase program authorizes the Company to repurchase, during the period ending October 29, 2022, up to $2.0 million of the Company’s outstanding shares in the open market, based on prevailing market prices, or in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission.

As of June 30, 2022, the Company’s existing stock repurchase program authorized it to repurchase, during the period ending October 29, 2022, up to $2.0 million of the Company’s outstanding shares in the open market, based on prevailing market prices, or in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission.

On July 26, 2022, subsequent to quarter end, the Company announced that its Board of Directors amended its existing stock repurchase program to increase the authorized repurchase amount to $4.0 million effective immediately and to extend the program maturity to January 31, 2023.

The timing, volume and price of purchases are made at our discretion, and are contingent upon our overall financial condition, as well as general market conditions.

As of May 6, 2022, approximately $1.5 million of our common stock remains available for repurchase under this program.

As of August 10, 2022, approximately $2.1 million of our common stock remains available for repurchase under this program.

See “Unregistered Sales of Equity Securities and Use of Proceeds” contained in Item 2, Part II of this Form 10-Q for additional information relating to stock repurchases.

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Liquidity risk management is an important element in our asset/liability management process.

We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management.

regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management.

These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.

As of March 31, 2022, we had $207.3 million in cash and available-for-sale investment securities and $1.3 million in loans held-for-sale.

At March 31, 2022, we had the ability to borrow $95.8 million in FHLB advances and access to additional borrowings of $20.5 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had no outstanding advances or borrowings with the FHLB or Federal Reserve at March 31, 2022.

In addition, we also had available $20.0 million of credit facilities with PCBB, with no balance outstanding at March 31, 2022.

As of June 30, 2022, we had $89.4 million in cash and available-for-sale investment securities and $100 thousand in loans held-for-sale.

At June 30, 2022, we had the ability to borrow $178.5 million in FHLB advances and access to additional borrowings of $21.9 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had $30.0 million in outstanding advances with the FHL B and none with the Federal Reserve at June 30, 2022.

We also had a $20.0 million credit facility with PCBB available, with no balance outstanding at June 30, 2022.

Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

As of March 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

As of June 30, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

For additional details, see “Note 8—Borrowings, FHLB Stock and Subordinated Notes” in the Notes to Consolidated Financial Statements contained in "Item 1.

Financial Statements and Supplementary Data" of this Form 10-Q.

For additional details, see “Note 8—Borrowings, FHLB Stock and Subordinated Notes” in the Notes to Condensed Consolidated Financial Statements contained in "Item 1.

Financial Statements" of this Form 10-Q.

In the ordinary course of business, we have entered into contractual obligations and have made other commitments to make future payments.

Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such payments as of March 31, 2022.

Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such payments as of June 30, 2022.

These include payments related to (i) long-term borrowings (Note 8—Borrowings, FHLB Stock and Subordinated Notes) and (ii) operating leases (Note 11—Leases).

Refer to the Financial Condition discussion within this Item 2 for the expected timing of such payments as of March 31, 2022 related to time deposits with stated maturity dates and the discussion below for commitments to extend credit and standby letters of credit.

See the discussion below for commitments to extend credit and standby letters of credit.

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its clients.

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Residential mortgage commitments $ 11,490 $ 6,663

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See, “Business — How We Are Regulated — Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the Company’s 2021 Form 10-K.

At March 31, 2022 Sound Financial Bancorp, on an unconsolidated basis, had $3.1 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

At June 30, 2022 Sound Financial Bancorp, on an unconsolidated basis, had $1.1 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

See also the "Consolidated Statements of Cash Flows" included in “Item 1.

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Qualifying institutions that elect to use the Community Bank Leverage Ratio, or CBLR, framework, such as the Bank and the Company, that maintain the required minimum leverage ratio will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies’ PCA framework.

As of March 31, 2022, the Bank and Company’s CBLR was 10.96% and 10.05%, respectively, which exceeded the minimum requirements.

As of June 30, 2022, the Bank and Company’s CBLR was 11.31% and 10.13%, respectively, which exceeded the minimum requirements.

See "Part I, Item 1.

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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-Q

Item 2. Management’s Discussion and Analysis