Sound Financial Bancorp, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Certain matters discussed in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: • potential adverse impacts to economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing oil prices and supply chain disruptions, and any governmental or societal responses to the novel coronavirus disease 2019 (“COVID-19”) pandemic, including the possibility of new COVID-19 variants; • changes in consumer spending, borrowing and savings habits; • the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of our allowance for loan losses; • monetary and fiscal policies of the Board of Governors of the Federal Reserve System ("Federal Reserve") and the U.S. Government and other governmental initiatives affecting the financial services industry; • fluctuations in the demand for loans, the number of unsold homes, land and other properties; • fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area; • our ability to access cost-effective funding; • the future of the London Interbank Offered Rate (“LIBOR”), and the transition away from LIBOR toward new interest-rate benchmarks; • our ability to control operating costs and expenses; • secondary market conditions for loans and our ability to sell loans in the secondary market; • fluctuations in interest rates; • results of examinations of Sound Financial Bancorp and Sound Community Bank by their regulators, including the possibility that the regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets, change Sound Community Bank's regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; • inability of key third-party providers to perform their obligations to us; • our ability to attract and retain deposits; • competitive pressures among financial services companies; • our ability to successfully integrate any assets, liabilities, clients, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all; • the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors who perform several of our critical processing functions; • changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board; • legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other 32 governmental initiatives affecting the financial services industry and the availability of resources to address such changes; • our ability to retain or attract key employees or members of our senior management team; • costs and effects of litigation, including settlements and judgments; • our ability to implement our business strategies; • staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; • our ability to pay dividends on our common stock; • the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets; • the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; • other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and • the other risks described from time to time in our filings with the U.S. Securities and Exchange Commission (the "SEC"), including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”). We wish to advise readers not to place undue reliance on any forward-looking statements and that the factors listed above could materially affect our financial performance and could cause our actual results for future periods to differ materially from any such forward-looking statements expressed with respect to future periods and could negatively affect our stock price performance. We do not undertake and specifically decline any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. General Sound Financial Bancorp, a Maryland corporation, is a bank holding company for its wholly owned subsidiary, Sound Community Bank. Substantially all of Sound Financial Bancorp’s business is conducted through Sound Community Bank, a Washington state-chartered commercial bank. As a Washington commercial bank, the Bank’s regulators are the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation (the “FDIC”). The Federal Reserve is the primary federal regulator for Sound Financial Bancorp. We also sell insurance products and services for clients through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank. Sound Community Bank’s deposits are insured up to applicable limits by the FDIC. At September 30, 2022, Sound Financial Bancorp, on a consolidated basis, had assets of $982.2 million, net loans held-for-portfolio of $844.0 million, deposits of $815.4 million and stockholders’ equity of $95.0 million. The shares of Sound Financial Bancorp are traded on NASDAQ Capital Market under the symbol “SFBC.” Our executive offices are located at 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121. Our principal business consists of attracting retail and commercial deposits from the general public and investing those funds in loans secured by first and second mortgages on one-to-four family residences (including home equity loans and lines of credit), commercial and multifamily real estate, construction and land, consumer and commercial business loans. Our commercial business loans include unsecured lines of credit and secured term loans and lines of credit secured by inventory, equipment and accounts receivable. We also offer a variety of secured and unsecured consumer loan products, including manufactured home loans, floating home loans, automobile loans, boat loans and recreational vehicle loans. As part of our business, we focus on residential mortgage loan originations, a significant portion of which we sell to Fannie Mae and other correspondents and the remainder of which we retain for our loan portfolio consistent with our asset/liability objectives. We sell loans which conform to the underwriting standards of Fannie Mae (“conforming”) in which we retain the servicing of the loan in order to maintain the direct customer relationship and to generate noninterest income. Residential loans which do not conform to the underwriting standards of Fannie Mae (“non-conforming”), are held in our loan portfolio. We originate and retain a significant amount of commercial real estate loans, including those secured by owner-occupied and nonowner-occupied commercial real estate, multifamily property, mobile home parks and construction and land development loans. Critical Accounting Policies Certain of our accounting policies require management to make difficult, complex or subjective judgments, which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, accounting for other-than-temporary impairment of securities, accounting for mortgage servicing rights, accounting for other 33 real estate owned and accounting for deferred income taxes. 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 September 30, 2022 and December 31, 2021 General. Total assets increased $62.6 million, or 6.8%, to $982.2 million at September 30, 2022 from $919.7 million at December 31, 2021. The increase primarily was a result of increases in loans held-for-portfolio and investment securities, partially offset by lower balances in cash and cash equivalents. Cash and Securities. Cash and cash equivalents decreased $107.5 million, or 58.6%, to $76.1 million at September 30, 2022 from $183.6 million at December 31, 2021, primarily due to deploying cash earning a nominal yield into higher interest-earning loans and investments securities. Investment securities increased $4.2 million, or 49.7%, to $12.6 million at September 30, 2022, compared to $8.4 million at December 31, 2021. Held-to-maturity securities totaled $2.2 million at September 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 $10.4 million at September 30, 2022, compared to $8.4 million at December 31, 2021. The increase in available-for-sale securities was primarily due the purchase of $4.4 million in treasury bills, municipal bonds and agency mortgage-backed securities, partially offset by regularly scheduled payments and maturities. Loans. Loans held-for-portfolio, net, increased $163.9 million, or 24.1%, to $844.0 million at September 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. 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 September 30, 2022, as compared to December 31, 2021 (dollars in thousands): September 30, 2022 December 31, 2021 Amount Change Percent Change One-to-four family $ 270,009 $ 207,660 $ 62,349 30.0 % Home equity 17,642 13,250 4,392 33.1 Commercial and multifamily 315,677 278,175 37,502 13.5 Construction and land 112,980 63,105 49,875 79.0 Manufactured homes 25,375 21,636 3,739 17.3 Floating homes 69,968 59,268 10,700 18.1 Other consumer 17,565 16,748 817 4.9 Commercial business 23,986 28,026 (4,040) (14.4) Premiums for purchased loans 984 897 87 9.7 Deferred loan fees (2,739) (2,367) (372) 15.7 Total loans held-for-portfolio, gross 851,447 686,398 165,049 24.0 Allowance for loan losses (7,489) (6,306) (1,183) 18.8 Total loans held-for-portfolio, net $ 843,958 $ 680,092 $ 163,866 24.1 % The increase in one-to-four family loans was driven primarily by the origination of $57.8 million in jumbo loans during 2022 and the origination of $33.4 million of conforming and non-conforming conventional loans in our portfolio. The increase in commercial and multifamily loans during the period was primarily due to the origination of $45.7 million of multifamily loans and $30.2 million of commercial non-owner occupied loans. The increase in construction and land loans during the period was primarily due to the origination and advances of new commercial construction loans. These increases were partially offset by payoffs and paydowns during the period. The decrease in our commercial business loan portfolio was primarily due to SBA forgiveness of PPP loans. At September 30, 2022, our loan portfolio, net of deferred loan fees, remained well-diversified. Commercial and multifamily real estate loans accounted for 37.0% of total loans, one-to-four family loans, including home equity loans accounted for 33.7% of total loans, commercial business loans accounted for 2.8% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for 13.4% of total loans at September 30, 2022. Construction and land loans accounted for 13.2% of total loans at September 30, 2022. 34 Loans held-for-sale totaled $1.9 million at September 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. Allowance for Loan Losses. The allowance for loan losses is maintained to cover losses that are probable and can be estimated on the date of evaluation in accordance with generally accepted acco unting principles in the United States. It is our best estimate of probable credit losses inherent in our loan portfolio. The following table reflects the adjustments in our allowance during the periods indicated (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Balance at beginning of period $ 7,117 $ 6,157 $ 6,306 $ 6,000 Charge-offs (6) (8) (48) (113) Recoveries 3 3 130 15 Net (charge-offs) recoveries (3) (5) 82 (98) Provision for loan losses during the period 375 175 1,101 425 Balance at end of period $ 7,489 $ 6,327 $ 7,489 $ 6,327 Our allowance for loan losses increased $1.2 million, or 18.8%, to $7.5 million at September 30, 2022, from $6.3 million at December 31, 2021. Specific loan loss reserves decreased to $239 thousand at September 30, 2022, compared to $293 thousand at December 31, 2021, while general loan loss reserves increased to $6.6 million at September 30, 2022, compared to $5.6 million at December 31, 2021, and the unallocated reserve increased to $653 thousand at September 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 September 30, 2022. Net charge-offs for the three months ended September 30, 2022 totaled $3 thousand and net recoveries totaled $82 thousand for the nine months ended September 30, 2022, compared to net charge-offs of $5 thousand and $98 thousand for the three and nine months ended September 30, 2021, respectively. At September 30, 2022, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.88% and 301.24%, compared to 0.92% and 113.58%, at December 31, 2021, respectively. See “Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 — Provision for Loan Losses.” The following tables show certain credit ratios at and for the periods indicated and each component of the ratio's calculations. September 30, 2022 December 31, 2021 Allowance for loan losses as a percentage of total loans outstanding at period end 0.88 % 0.92 % Allowance for loan losses 7,489 6,306 Total loans outstanding 853,202 687,868 Non-accrual loans as a percentage of total loans outstanding at period end 0.29 % 0.81 % Total nonaccrual loans 2,486 5,552 Total loans outstanding 853,202 687,868 Allowance for loan losses as a percentage of non-accrual loans at period end 301.24 % 113.58 % Allowance for loan losses 7,489 6,306 Total nonaccrual loans 2,486 5,552 35 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 ($ in thousands) Net recoveries (charge-offs) during period to average loans outstanding: One-to-four family: — % — % 0.03 % (0.07) % Net recoveries (charge-offs) — — 45 (76) Average loans outstanding 260,712 178,802 234,914 149,004 Home equity: — % 0.05 % 0.51 % (0.04) % Net recoveries (charge-offs) — 2 58 (4) Average loans outstanding 17,013 14,604 15,223 14,508 Commercial and multifamily real estate: — % — % — % — % Net (charge-offs) recoveries — — — — Average loans outstanding 313,616 247,460 294,055 250,648 Construction and land: — % — % — % — % Net (charge-offs) recoveries — — — — Average loans outstanding 107,824 79,753 84,163 69,782 Manufactured homes: — % 0.02 % 0.07 % 0.01 % Net recoveries — 1 12 1 Average loans outstanding 24,299 21,145 22,919 20,928 Floating homes: — % — % — % — % Net (charge-offs) recoveries — — — — Average loans outstanding 68,610 48,257 63,636 42,869 Other consumer: (0.07) % (0.20) % (0.25) % (0.19) % Net (charge-offs) (3) (8) (33) (21) Average loans outstanding 17,930 15,548 17,756 15,158 Commercial business: — % — % — % — % Net recoveries — — — 2 Average loans outstanding 24,537 43,039 24,717 66,903 Total loans: — % — % 0.01 % (0.02) % Net (charge-offs) recoveries (3) (5) 82 (98) Average loans outstanding 834,539 648,609 757,383 629,800 Nonperforming Assets. At September 30, 2022, nonperforming assets, which are comprised of nonaccrual loans including nonperforming troubled debt restructurings (“TDRs”), and other real estate owned (“OREO”), totaled $3.1 million, or 0.32% of total assets, compared to $6.2 million, or 0.68% of total assets at December 31, 2021. 36 The table below sets forth the amounts and categories of nonperforming assets at the dates indicated (dollars in thousands): Nonperforming Assets September 30, 2022 December 31, 2021 Amount Change Percent Change Nonaccrual loans $ 2,378 $ 5,130 $ (2,752) (53.6) % Nonperforming TDRs 108 422 (314) (74.4) Total nonperforming loans 2,486 5,552 (3,066) (55.2) OREO and repossessed assets 659 659 — — Total nonperforming assets $ 3,145 $ 6,211 $ (3,066) (49.4) % Nonperforming loans, which are comprised of nonaccrual loans and nonperforming TDRs, decreased $3.1 million, or 55.2%, to $2.5 million at September 30, 2022 from $5.6 million at December 31, 2021. The decrease in nonperforming loans primarily was due to the payoff of a $2.3 million nonperforming multifamily loan during the three months ended September 30, 2022.The percentage of nonperforming loans to total loans was 0.29% at September 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 September 30, 2022 and December 31, 2021, of which $108 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 September 30, 2022, an increase of $514 thousand, or 12.0%, 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 $17.1 million, or 2.1%, to $815.4 million at September 30, 2022 from $798.3 million at December 31, 2021. The increase was primarily a result of an increase in certificate accounts. The increase in our certificate accounts was primarily used to fund organic loan growth. Noninterest-bearing deposits increased $1.8 million, or 0.9%, to $192.3 million at September 30, 2022, compared to $190.5 million at December 31, 2021. Noninterest-bearing deposits represented 23.6% of total deposits at September 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): September 30, 2022 December 31, 2021 Amount Wtd. Avg. Rate Amount Wtd. Avg. Rate Noninterest-bearing demand $ 187,787 — % $ 187,684 — % Interest-bearing demand 284,267 0.16 307,061 0.19 Savings 99,602 0.05 103,401 0.08 Money market 84,692 0.22 91,670 0.21 Time deposits 154,561 0.90 105,722 1.57 Escrow (1) 4,488 — 2,782 — Total deposits $ 815,397 0.26 % $ 798,320 0.41 % (1) Escrow balances shown in noninterest-bearing deposits on the consolidated balance sheets. 37 Scheduled maturities of time deposits at September 30, 2022, are as follows (in thousands): Year Ending December 31, Amount 2022 $ 19,569 2023 113,945 2024 13,453 2025 4,982 2026 2,142 Thereafter 470 $ 154,561 Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of five years or less. The aggregate amount of time deposits in denominations of more than $250,000 at September 30, 2022 and December 31, 2021, totaled $37.3 million and $19.1 million, respectively. Deposit amounts in excess of $250,000 are not federally insured. Borrowings comprised of FHLB advances increased $44.5 million at September 30, 2022 from zero at December 31, 2021, primarily to support loan growth. Subordinated notes, net totaled $11.7 million and $11.6 million at September 30, 2022 and December 31, 2021. Stockholders’ Equity. Total stockholders’ equity increased $1.6 million, or 1.7%, to $95.0 million at September 30, 2022, from $93.4 million at December 31, 2021. This increase primarily reflects $5.9 million in net income for the nine months ended September 30, 2022 and $384 thousand related to stock-based compensation, partially offset by the payment of cash dividends of $1.6 million to common stockholders, repurchases of common stock of $1.7 million, and an unrealized loss, net of tax, of $1.4 million on our available-for-sale securities as a result of declining fair market values related to increases in market interest rates this year. 38 Average Balances, Net Interest Income, Yields Earned and Rates Paid The following tables present, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis. All average balances are daily average balances. Nonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual (dollars in thousands). Three Months Ended September 30, 2022 2021 Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Interest-earning assets: Loans receivable $ 833,195 $ 10,327 4.92 % $ 652,251 $ 8,967 5.45 % Investments, cash and cash equivalents 88,812 449 2.01 230,905 135 0.23 Total interest-earning assets (1) 922,007 10,776 4.64 883,156 9,102 4.09 Interest-bearing liabilities: Savings and money market accounts 188,276 63 0.13 179,164 42 0.09 Demand and NOW accounts 290,106 164 0.22 311,273 141 0.18 Certificate accounts 130,541 503 1.53 135,757 434 1.27 Subordinated notes 11,658 168 5.72 11,616 168 5.74 Borrowings 46,462 281 2.40 2 — — Total interest-bearing liabilities 667,043 1,179 0.70 % 637,812 785 0.49 % Net interest income $ 9,597 $ 8,317 Net interest rate spread 3.94 % 3.60 % Net earning assets $ 254,964 $ 245,344 Net interest margin 4.13 % 3.74 % Average interest-earning assets to average interest-bearing liabilities 138.22 % 138.47 % Noninterest-bearing deposits $ 189,379 $ 182,503 Total deposits 798,302 730 0.36 % 808,697 617 0.30 % Total funding (2) 856,422 1,179 0.55 % 820,315 785 0.38 % (1) Calculated net of deferred loan fees, loan discounts and loans in process. (2) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding. 39 Nine Months Ended September 30, 2022 2021 Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Interest-earning assets: Loans receivable $ 757,086 $ 27,099 4.79 % $ 636,352 $ 25,152 5.28 % Investments, cash and cash equivalents 136,899 876 0.86 236,495 365 0.21 Total interest-earning assets (1) 893,985 27,975 4.18 % 872,847 25,517 3.91 Interest-bearing liabilities: Savings and money market accounts 193,219 122 0.08 167,253 144 0.12 Demand and NOW accounts 305,651 412 0.18 281,933 485 0.23 Certificate accounts 109,713 1,037 1.26 174,712 2,178 1.67 Subordinated notes 11,648 504 5.79 11,606 504 5.81 Borrowings 16,463 293 2.38 1 — — Total interest-bearing liabilities 636,694 2,368 0.50 % 635,505 3,311 0.70 % Net interest income $ 25,607 $ 22,206 Net interest rate spread 3.69 % 3.21 % Net earning assets $ 257,291 $ 237,342 Net interest margin 3.83 % 3.40 % Average interest-earning assets to average interest-bearing liabilities 140.41 % 137.35 % Noninterest-bearing deposits $ 192,240 $ 174,486 Total deposits 800,823 1,571 0.26 % 798,384 2,807 0.47 % Total funding (2) 828,934 2,368 0.38 % 809,991 3,311 0.55 % (1) Calculated net of deferred loan fees, loan discounts and loans in process. (2) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding. Rate/Volume Analysis The following table presents, for the periods indicated, the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between changes related to outstanding balances and changes due to interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate (dollars in thousands). 40 Three Months Ended September 30, 2022 vs. 2021 Nine Months Ended September 30, 2022 vs. 2021 Increase (Decrease) due to Total Increase (Decrease) Increase (Decrease) due to Total Increase (Decrease) Volume Rate Volume Rate Interest-earning assets: Loans receivable $ 2,243 $ (883) $ 1,360 $ 4,322 $ (2,375) $ 1,947 Investments, cash and cash equivalents (718) 1,032 314 (637) 1,148 511 Total interest-earning assets 1,525 149 1,674 3,685 (1,227) 2,458 Interest-bearing liabilities: Savings and Money Market accounts 3 18 21 16 (38) (22) Demand and NOW accounts (12) 35 23 32 (105) (73) Certificate accounts (20) 89 69 (614) (527) (1,141) Subordinated notes 1 (1) — 2 (2) — Borrowings 281 — 281 293 — 293 Total interest-bearing liabilities $ 253 $ 141 $ 394 $ (271) $ (672) $ (943) Change in net interest income $ 1,280 $ 3,401 Comparison of Results of Operation for the Three and Nine Months Ended September 30, 2022 and 2021 General. Q3 2022 vs Q3 2021 . Net income decreased $46 thousand, or 1.8%, to $2.5 million, or $0.97 per diluted common share, for the three months ended September 30, 2022, compared to $2.6 million, or $0.98 per diluted common share, for the three months ended September 30, 2021. The decrease was primarily the result of a $405 thousand decrease in noninterest income, a $718 thousand increase in noninterest expense, and a $200 thousand increase in the provision for loan losses, partially offset by a $1.3 million increase in net interest income. YTD 2022 vs. YTD 2021 . Net income decreased $1.4 million, or 19.4%, to $5.9 million, or $2.23 per diluted common share, for the nine months ended September 30, 2022, compared to $7.3 million, or $2.76 per diluted common share, for the nine months ended September 30, 2021. The decrease was primarily a result of a $2.3 million decrease in noninterest income, a $2.2 million increase in noninterest expense and a $676 thousand increase in the provision for loan losses, partially offset by a $3.4 million increase in net interest income. Interest Income Q3 2022 vs Q3 2021 . Interest income increased $1.7 million, or 18.4%, to $10.8 million for the three months ended September 30, 2022, from $9.1 million for the three months ended September 30, 2021, primarily due to higher average loan balances and a 177 basis point increase in average yield on investments and interest-bearing cash, partially offset by a 54 basis point decline in the average loan yield and a lower average balance of investments and interest-bearing cash. Interest income on loans increased $1.4 million, or 15.2%, to $10.3 million for the three months ended September 30, 2022, compared to $9.0 million for the three months ended September 30, 2021. The average balance of total loans was $833.2 million for the three months ended September 30, 2022, compared to $652.3 million for the three months ended September 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 4.92% for three months ended September 30, 2022, compared to 5.45% for the three months ended September 30, 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 quarter. Interest income included $24 thousand in fees earned related to PPP loans in the three months ended September 30, 2022, compared to $1.1 million in the same quarter a year ago. For the three months ended September 30, 2022, the average balance of PPP loans was $157 thousand and the average yield on PPP loans was 60.68%, including the recognition of the net deferred fees, with a positive impact on loan yield of one basis point. For the three months ended September 30, 2021, the average balance of PPP loans was $19.0 million and the average yield on PPP loans was 22.37%, including the recognition of 41 deferred fees, with a positive impact on loan yield of 51 basis points. At September 30, 2022, no PPP deferred loan origination fees remain to be accreted into interest income. Interest income on the investment portfolio and cash and cash equivalents increased $314 thousand, or 232.6%, to $449 thousand for the three months ended September 30, 2022, compared to $135 thousand for the three months ended September 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 $88.8 million for the three months ended September 30, 2022, compared to $230.9 million for the three months ended September 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 2.01% for the three months ended September 30, 2022, compared to 0.23% for the three months ended September 30, 2021, as a result of the rising interest rate environment and the increase in the average balance of our investment securities portfolio. YTD 2022 vs. YTD 2021 . Interest income increased $2.5 million, or 9.6%, to $28.0 million for the nine months ended September 30, 2022, from $25.5 million for the nine months ended September 30, 2021. The increase primarily was due to higher average loan balances and a 65 basis point increase in the average yield earned on investments and cash balances, partially offset by a 49 basis point decline in the average loan yield and lower average investment and cash balances. Interest income on loans increased $1.9 million, or 7.7%, to $27.1 million for the nine months ended September 30, 2022, compared to $25.2 million for the nine months ended September 30, 2021, driven by higher average total loans, partially offset a 49 basis points decline in the average yield on loans. The average balance of total loans was $757.1 million for the nine months ended September 30, 2022, compared to $636.4 million for the nine months ended September 30, 2021. The average yield on total loans was 4.79% for the nine months ended September 30, 2022, compared to 5.28% for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the average balance of PPP loans was $1.5 million and the average yield on PPP loans was 12.83%, including the recognition of the net deferred fees, with a positive impact on average loan yield of two basis points. For the nine months ended September 30, 2021, the average balance of PPP loans was $44.2 million and the average yield on PPP loans was 8.55%, including the recognition of deferred fees, with a positive impact on average loan yield of 24 basis points. Interest income included $141 thousand in fees earned related to PPP loans in the nine months ended September 30, 2022, compared to $2.8 million in the same period a year ago. Interest income on the investment portfolio and cash and cash equivalents increased $511 thousand, or 140.0%, to $876 thousand for the nine months ended September 30, 2022, compared to $365 thousand for the nine months ended September 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 0.86% for the nine months ended September 30, 2022, compared to 0.21% for the nine months ended September 30, 2021, primarily due to the deployment of cash balances into higher-yielding investment balances. Interest Expense Q3 2022 vs Q3 2021 . Interest expense increased $394 thousand, or 50.2%, to $1.2 million for the three months ended September 30, 2022, from $785 thousand for the three months ended September 30, 2021. Interest expense on deposits increased $113 thousand, or 18.3%, to $730 thousand for the three months ended September 30, 2022, compared to $617 thousand for the same period a year ago. The increase was primarily the result of a $46.5 million increase in the average balance of borrowings and higher rates paid on all interest-bearing deposits, partially offset by a $17.3 million decrease in the average balance of interest-bearing deposits.Compared to the same period last year, total deposit costs were negatively impacted by the higher rates paid on deposits and favorably impacted by the $6.9 million increase in the average balance of noninterest bearing deposits from $182.5 million at September 30, 2021. The increase in the rate paid on certificate accounts contributed to a six basis point increase in the average cost of total deposits to 0.36% for the quarter ended September 30, 2022, from 0.30% for the quarter ended September 30, 2021. Interest expense on borrowings, comprised solely of FHLB advances, was $281 thousand for the three months ended September 30, 2022, compared to none for the three months ended September 30, 2021, reflecting the increased use of lower cost FHLB advances during the third quarter of 2022 to supplement our liquidity needs. Interest expense on subordinated notes was $168 thousand for both the three months ended September 30, 2022 and 2021. YTD 2022 vs. YTD 2021 . Interest expense decreased $943 thousand, or 28.5%, to $2.4 million for the nine months ended September 30, 2022, from $3.3 million for the nine months ended September 30, 2021, primarily as a result of a decline in the average balance of certificate accounts and rates paid on all deposits, partially offset by a lower percentage of noninterest bearing deposits to total deposits and an increase in the average balance of borrowings. 42 Interest expense on deposits decreased $1.2 million, or 44.0%, to $1.6 million for the nine months ended September 30, 2022, compared to $2.8 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 for the majority of 2022. The average cost of total deposits decreased 21 basis points to 0.26% for the nine months ended September 30, 2022, from 0.47% for the nine months ended September 30, 2021. Net Interest Income. Q3 2022 vs Q3 2021 . Net interest income increased $1.3 million, or 15.4%, to $9.6 million for the three months ended September 30, 2022, from $8.3 million for the three months ended September 30, 2021. Our net interest margin was 4.13% and 3.74% for the three months ended September 30, 2022 and 2021, respectively. The increase in net interest income primarily was the result of higher interest income earned on loans, investments and interest-bearing cash, partially offset by higher interest expense paid on deposits and borrowings. 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, partially offset by lower recognition of net deferred fees related to PPP loan repayments from SBA loan forgiveness, the increase in rates paid on interest-bearing liabilities and the higher average balance of borrowings. During the third 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 41 basis points during the quarter ended September 30, 2021. YTD 2022 vs. YTD 2021 . Net interest income increased $3.4 million, or 15.3%, to $25.6 million for the nine months ended September 30, 2022, from $22.2 million for the nine months ended September 30, 2021. Our net interest margin was 3.83% and 3.40% for the nine months ended September 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, partially offset by an increase in average borrowings. During the nine months ended September 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 one basis points, compared to a positive impact of 27 basis points for the nine months ended September 30, 2021. Since March 2022, in response to inflation, the Federal Open Market Committee of the Federal Reserve has increased the target range for the federal funds rate by 300 basis points, including 150 basis points during the third quarter of 2022, to a range of 3.00% to 3.25% as of September 30, 2022. In November 2022, the FOMC increased the target range for the federal funds rate another 75 basis points to a range of 3.75% to 4.00%. Provision for Loan Losse s. We establish provisions for loan losses, which are charged to earnings, based on our review of the level of the allowance for loan losses required to reflect management’s best estimate of the probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, peer group data, prevailing economic conditions, and current factors. Large groups of smaller balance homogeneous loans, such as one- to four- family, small commercial and multifamily, home equity and consumer loans, are evaluated in the aggregate using historical loss factors adjusted for current economic conditions and other relevant data. Loans for which management has concerns about the borrowers’ ability to repay, are evaluated individually and specific loss allocations are provided for these loans when necessary. A provision for loan losses of $375 thousand and $1.1 million was recorded for the three and nine months ended September 30, 2022, compared to $175 thousand and $425 thousand, for the three and nine months ended September 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 September 30, 2022, not only reflects probable and inherent credit losses based upon the economic conditions that existed as of September 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 nine months ended September 30, 2022 totaled $82 thousand, compared to net charge-offs of $98 thousand for the nine months ended September 30, 2021. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance for loan losses 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. A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowed economic growth, and any governmental or societal responses to the COVID- 19 pandemic or, among other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, 43 the determination of the amount of our allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination. Noninterest Income. Noninterest income decreased $405 thousand, or 28.3%, to $1.0 million for the three months ended September 30, 2022, as compared to $1.4 million for the three months ended September 30, 2021, as reflected below (dollars in thousands): Three Months Ended September 30, Amount Change Percent Change 2022 2021 Service charges and fee income $ 604 $ 556 $ 48 8.6 % Earnings on cash surrender value of BOLI 59 104 (45) (43.3) Mortgage servicing income 306 328 (22) (6.7) Fair value adjustment on mortgage servicing rights 9 (125) 134 (107.2) Net gain on sale of loans 48 568 (520) (91.5) Total noninterest income $ 1,026 $ 1,431 $ (405) (28.3) % The decrease in noninterest income during the three months ended September 30, 2022 compared to the same quarter in 2021 primarily was due to a $520 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 $45 thousand decrease in earnings on cash surrender value of BOLI reflecting recent declines in the securities markets, partially offset by a $134 thousand increase in the fair value adjustment on mortgage servicing rights due primarily from recent higher market interest rates causing a reduction in prepayment speeds and a $48 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 September 30, 2022, totaled $2.3 million, compared to $20.3 million during the quarter ended September 30, 2021. Noninterest income decreased $2.3 million, or 39.0%, to $3.6 million for the nine months ended September 30, 2022, as compared to $5.8 million for the nine months ended September 30, 2021, as reflected below (dollars in thousands): Nine Months Ended September 30, Amount Change Percent Change 2022 2021 Service charges and fee income $ 1,749 $ 1,615 $ 134 8.3 % Earnings on cash surrender value of BOLI 45 281 (236) (84.0) Mortgage servicing income 939 961 (22) (2.3) Fair value adjustment on mortgage servicing rights 334 (694) 1,028 (148.1) Net gain on sale of loans 497 3,683 (3,186) (86.5) Total noninterest income $ 3,564 $ 5,846 $ (2,282) (39.0) % The decrease in noninterest income during the nine months ended September 30, 2022, compared to the same period in 2021 primarily was due to a $3.2 million decrease in net gain on sale of loans and a $236 thousand decrease in earnings on cash surrender value of BOLI, partially offset by an $1.0 million improvement in the fair value adjustment on mortgage servicing rights and a $134 thousand increase in service fees and fee income for the same reasons as set forth for the three months ended September 30, 2022, discussed above. Loans sold during the nine months ended September 30, 2022, totaled $17.4 million, compared to $128.3 million during the nine months ended September 30, 2021. 44 Noninterest Expense. Noninterest expense increased $718 thousand, or 11.4%, to $7.0 million during the three months ended September 30, 2022, compared to $6.3 million during the three months ended September 30, 2021, as reflected below (dollars in thousands): Three Months Ended September 30, Amount Change Percent Change 2022 2021 Salaries and benefits $ 4,044 $ 3,512 $ 532 15.1 % Operations 1,581 1,466 115 7.8 Regulatory assessments 116 91 25 27.5 Occupancy 447 441 6 1.4 Data processing 848 808 40 5.0 Total noninterest expense $ 7,036 $ 6,318 $ 718 11.4 % The increase in noninterest expense during the three months ended September 30, 2022 compared to the same quarter in 2021 primarily was due to an increase in salaries and benefits of $532 thousand as a result of upward market pressure on wages and increased medical expenses and lower deferred compensation as a result of a decline in mortgage originations, partially offset by a decrease in incentive compensation as a result of a lower percentage allocated and changes to the incentive compensation programs and lower commission expense related to a decline in mortgage originations. Operations expense increased $115 thousand compared to the quarter ended September 30, 2021 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 September 30, 2022 was 66.23%, compared to 64.81% for the quarter ended September 30, 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 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. Noninterest expense increased $2.2 million, or 11.8%, to $20.7 million during the nine months ended September 30, 2022, compared to $18.5 million during the nine months ended September 30, 2021, as reflected below (dollars in thousands): Nine Months Ended September 30, Amount Change Percent Change 2022 2021 Salaries and benefits $ 12,181 $ 10,470 $ 1,711 16.3 % Operations 4,323 4,033 290 7.2 Regulatory assessments 316 283 33 11.7 Occupancy 1,318 1,298 20 1.5 Data processing 2,518 2,400 118 4.9 Net gain on OREO and repossessed assets — (16) 16 (100.0) Total noninterest expense $ 20,656 $ 18,468 $ 2,188 11.8 % The increase in noninterest expense during the nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to increases of $1.7 million in salaries and benefits, $290 thousand in operations expense and $118 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 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 70.81% for the nine months ended September 30, 2022, compared to 65.83% for the nine months ended September 30, 2021. The weakening in the efficiency ratio for the nine months ended September 30, 2022 was primarily due to the increase in noninterest expense outpacing the increase in total revenues as described above. 45 Income Tax Expense . We incurred income tax expense of $666 thousand and $1.5 million for the three and nine months ended September 30, 2022, compared to $663 thousand and $1.9 million for the same periods in 2021, respectively. The effective tax rates for the three and nine months ended September 30, 2022 were 20.73% and 20.68%, respectively. The effective tax rates for the three and nine months ended September 30, 2021 were 20.37% and 20.36%, 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. Although, there have been no material changes in our liquidity management, sources of liquidity and cash flows since our 2021 Form 10-K, this discussion updates that disclosure for the nine months ended September 30, 2022. Capital. Shareholders’ equity totaled $95.0 million at September 30, 2022 and $93.4 million at December 31, 2021. In addition to net income of $5.9 million, other sources of capital during the nine months ended September 30, 2022 included $195 thousand in proceeds from stock option exercises and $384 thousand related to stock-based compensation. Uses of capital during the nine months ended September 30, 2022 primarily included $1.6 million of dividends paid on common stock, other comprehensive loss, net of tax, of $1.4 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 nine months ended September 30, 2022 and 2021, which equates to a dividend payout ratio of 27.05% in 2022 and 21.85% 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. Assuming continued payment of the regular quarterly cash dividend during the remainder of 2022 at this rate of $0.17 per share, our average total dividend paid each quarter would be approximately $439 thousand based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards). The dividends, if any, we may pay may be limited as more fully discussed under “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. Stock Repurchase Plans. From time to time, our board of directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. As of September 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 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 actual timing, number and value of shares repurchased under the stock repurchase program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission, price, general business and market conditions, and alternative investment opportunities. As of November 9, 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. Liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet. Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets. Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities, sales of fixed rate residential mortgage loans in the secondary market and federal funds sold. Liability liquidity generally is provided by access to funding sources which include core deposits and advances from the FHLB and other borrowing relationships with third party financial institutions. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We 46 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 September 30, 2022, we had $86.5 million in cash and available-for-sale investment securities and $1.9 million in loans held-for-sale. At September 30, 2022, we had the ability to borrow $180.9 million in FHLB advances and access to additional borrowings of $21.2 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements. We had $44.5 million in outstanding advances with the FHL B and none with the Federal Reserve at September 30, 2022. We also had a $20.0 million credit facility with PCBB available, with no balance outstanding at September 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 September 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 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 September 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). 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. These financial instruments generally represent a commitment to extend credit in the form of loans. The instruments involve, to varying degrees, elements of credit- and interest-rate risk in excess of the amount recognized in the consolidated balance sheets. The Company's exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established by the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These commitments are not reflected in the consolidated financial statements. The Company evaluates each client's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the client. Financial instruments whose contract amount represents credit risk were as follow (in thousands): September 30, 2022 December 31, 2021 Residential mortgage commitments $ 11,261 $ 6,663 Unfunded construction commitments 74,755 89,797 Unused lines of credit 37,249 35,036 Irrevocable letters of credit 275 151 Total loan commitments $ 123,539 $ 131,647 Sound Financial Bancorp is a separate legal entity from Sound Community Bank and must provide for its own liquidity. In addition to its own operating expenses (many of which are paid to Sound Community Bank), Sound Financial Bancorp is responsible for paying for any stock repurchases, dividends declared to its stockholders, interest and principal on outstanding debt, and other general corporate expenses. Sound Financial Bancorp is a holding company and does not conduct operations; its sources of liquidity are generally dividends up-streamed from Sound Community Bank, interest on investment securities, if any, and borrowings from outside sources. Banking regulations may limit the dividends that may be paid to us by Sound Community Bank. 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 September 30, 2022 Sound Financial Bancorp, on an unconsolidated basis, had $2.6 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs. 47 See also the "Consolidated Statements of Cash Flows" included in “Item 1. Financial Statements and Supplementary Data” of this Form 10-Q, for further information. Regulatory Capital Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action (“PCA”). Qualifying institutions that elect to use the 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 September 30, 2022, the Bank and Company’s CBLR was 10.79% and 9.87%, respectively, which exceeded the minimum requirement of 9%. See "Part I, Item 1. Business – Regulation of Sound Community Bank – Capital Rules " in the Company's 2021 Form 10-K for additional information related to regulatory capital. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company provided information about market risk in Item 7A of its 2021 Form 10-K. There have been no material changes in our market risk since our 2021 Form 10-K.