What changed in this filing

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Item 1. Business

2023-03-14 compared with 2022-03-15 · 197 added, 188 removed, 959 unchanged (29% of the section changed)

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

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

• 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 or deflation, 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 energy 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;

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

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

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• 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;

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

• our ability to control operating costs and expenses;

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• 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 ("FASB"), including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods, including as a result of the Coronavirus Aid,

Relief, and Economic Securities Act of 2020 ("CARES Act") and the Consolidated Appropriations Act, 2021 ("CAA, 2021");

• legislative or regulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations that adversely affect our business, and the availability of resources to address such changes;

• 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 that 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 ("FASB");

• legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax laws, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other 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;

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• our ability to pay dividends on our common stock;

• the possibility of other-than-temporary impairments of securities held in our securities portfolio;

• other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, and the other risks described from time to time in this Form 10-K and our other filings with the U.S.

Securities and Exchange Commission (the "SEC").

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.

• 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;

• the other risks described from time to time in our documents filed with or furnished to the U.S.

Securities and Exchange Commission (the “SEC”), including this Form 10-K.

We caution 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.

References in this document to Sound Financial Bancorp or the "Company" refer to Sound Financial Bancorp, Inc.

References in this document to Sound Financial Bancorp refer to Sound Financial Bancorp, Inc.

and references to the "Bank" refer to Sound Community Bank.

References to "we," "us," and "our" means Sound Financial Bancorp and its wholly-owned subsidiary, Sound Community Bank, unless the context otherwise requires.

References to the “Company,” “we,” “us,” and “our” means Sound Financial Bancorp and its wholly-owned subsidiary, Sound Community Bank, unless the context otherwise requires.

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 State Department of Financial Institutions ("WDFI") and the Federal Deposit Insurance Corporation ("FDIC").

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

We also sell insurance products and services for consumer clients through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank.

As a Washington commercial bank that is not a member of the Federal Reserve System, the Bank's regulators are the Washington State Department of Financial Institutions (“WDFI”) and the Federal Deposit Insurance Corporation (“FDIC”).

As a bank holding company, Sound Financial Bancorp is regulated by the Federal Reserve.

We also sell insurance products and services to consumers 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 December 31, 2022, Sound Financial Bancorp had total consolidated assets of $976.4 million, including $866.0 million of loans held-for-portfolio, deposits of $808.8 million and stockholders' equity of $97.7 million.

The shares of Sound Financial Bancorp are traded on The NASDAQ Capital Market under the symbol "SFBC." Our executive offices are located at 2400 3 rd Avenue, Suite 150, Seattle, Washington, 98121 and our telephone number is 206-448-0884.

The common stock of Sound Financial Bancorp is listed on The NASDAQ Capital Market under the symbol "SFBC." Our executive offices are located at 2400 3 rd Avenue, Suite 150, Seattle, Washington, 98121 and our telephone number is 206-448-0884.

Our principal business consists of attracting retail and commercial deposits from the general public and investing those funds, along with borrowed 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.

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As part of our business, we focus on residential mortgage loan originations, a significant portion of which we sell to the Federal National Mortgage Association ("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 either held in our loan portfolio or sold with servicing released.

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.

We sell loans that conform to the underwriting standards of Fannie Mae ("conforming") but generally retain the servicing of the loan in order to maintain the direct customer relationship and to generate noninterest income.

Residential loans that do not conform to the underwriting standards of Fannie Mae ("non-conforming"), are either held in our loan portfolio or sold with servicing released.

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.

We serve the Seattle Metropolitan Statistical Area ("MSA"), which includes King County (which includes the city of Seattle), Pierce County and Snohomish County within the Puget Sound region, and also serve Clallam and Jefferson Counties, on the North Olympic Peninsula of Washington.

We serve these markets through our headquarters in Seattle, eight branch offices, four of which are located in the Seattle MSA, three that are located in Clallam County and one that is located in Jefferson County.

We also have a loan production office located in the Madison Park neighborhood of Seattle.

Based on the most recent branch deposit data provided by the FDIC, our share of deposits was approximately 0.14% in King County, approximately 0.45% in Pierce County and in Snohomish County approximately 0.41%.

In Clallam County and Jefferson County, we have approximately 16.72% and 7.45%, respectively, of the deposits in those markets.

We serve these markets through our headquarters in Seattle and eight branch offices, four of which are located in the Seattle MSA, three that are located in Clallam County and one that is located in Jefferson County.

We also have a loan production office in the Madison Park neighborhood of Seattle.

Based on the most recent branch deposit data provided by the FDIC, our share of deposits was approximately 0.14% in King County, 0.37% in Pierce County and 0.31% in Snohomish County.

In Clallam and Jefferson Counties, we have approximately 16.33% and 6.04%, respectively, of the deposits in those markets.

See "—Competition."

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Economic conditions in our markets, and the U.S.

as a whole, were negatively impacted by the restrictions imposed on businesses as a result of the COVID-19 pandemic.

Recent trends in housing prices and unemployment rates in our market areas reflect the continuing impact of these restrictions.

For the month of December 2021, the preliminary Seattle MSA reported an unemployment rate of 3.5%, compared to the national average of 3.7%, according to the latest available information from the Bureau of Labor Statistics.

Home prices in our markets improved over the past year.

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

as a whole, have been negatively impacted by inflation and the rising interest rate environment, partially offset by the continued trend of low unemployment rates.

Recent trends in housing prices in our market areas reflect the impact rising interest rates have had on housing prices.

For December 2022, the preliminary Seattle MSA reported an unemployment rate of 3.4%, compared to the national average of 3.3%, according to the latest available information from the Bureau of Labor Statistics.

Home prices in our markets decreased over the past year.

Based on information from Case-Shiller, the average home price in the Seattle MSA decreased 1.8% in 2022.

King County has the largest population of any county in the state of Washington with approximately 2.2 million residents and a median household income of approximately $108 thousand.

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

Based on information from the Northwest Multiple Listing Service ("MLS"), the median home sales price in King County in December 2022 was $815 thousand, an 9% increase from December 2021's median home sales price of $750 thousand.

Pierce County has approximately 910,225 residents and a median household income of approximately $86 thousand.

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Lending Activities

The following table presents information concerning the composition of our loan portfolio, excluding loans held-for-sale, by the type of loan for the dates indicated (dollars in thousands):

The following table presents information concerning the composition of our loan portfolio, excluding loans held-for-sale, by the type of loan as of the dates indicated (dollars in thousands):

Amount Percent Amount Percent

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Total loans, net $ 858,382 $ 680,092

The following table shows the composition of our loan portfolio in dollar amounts and in percentages by fixed and adjustable-rate loans for the dates indicated (dollars in thousands):

The following table shows the composition of our loan portfolio in dollar amounts and in percentages by fixed and adjustable-rate loans as of the dates indicated (dollars in thousands):

Amount Percent Amount Percent

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Total loans 867,556 100.0 % 687,868 100.0 %

Premiums 973 897

Deferred fees and discounts (2,548) (2,367)

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At December 31, 2022 and 2021, we had floating or variable rate loans totaling $428.0 million and $328.9 million, respectively.

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

At December 31, 2022, a total of $294.1 million of our floating or variable rate loans had interest rate floors below which the loan's contractual interest rate may not adjust, of which $145.6 million were at their floors.

Loan Maturity and Repricing.

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

The following table sets forth certain information at December 31, 2022, regarding the amount of total loans in our portfolio based on their contractual terms to maturity (in thousands).

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

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

(in thousands)

Real estate loans:

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Total $ 85,450 $ 162,820 $ 267,989 $ 351,297 $ 867,556

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

The following table sets forth the amount of total loans due after at December 31, 2023, with fixed or adjustable interest rates (in thousands).

Fixed-Rate Adjustable-Rate Total

(in thousands)

Real estate loans:

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Our President and Chief Executive Officer ("CEO") may approve unsecured loans up to $1.0 million and all types of secured loans up to 30% of our legal lending limit, or approximately $6.9 million at December 31, 2022.

Our Executive Vice President and Chief Credit Officer ("CCO") may approve unsecured loans up to $400,000 and secured loans up to 15% of our legal lending limit, or approximately $3.2 million at December 31, 2021.

Our Senior Vice President and Chief Credit Officer ("CCO") may approve unsecured loans up to $400,000 and secured loans up to 15% of our legal lending limit, or approximately $3.5 million at December 31, 2022.

The Chief Banking Offer may approve unsecured loans up to $50,000 and all types of secured loans up to approximately $1.5 million at December 31, 2022.

The Chief Financial/Strategy Officer may approve unsecured loans up to $400,000 and all types of secured loans up to approximately $2.5 million at December 31, 2022.

Any loans over the CEO's lending authority or loans significantly outside our general

underwriting guidelines must be approved by the Loan Committee of the Board of Directors, consisting of four independent directors, the CEO and the CCO.

Any loans over the CEO's lending authority or loans significantly outside our general underwriting

guidelines must be approved by the Management Loan Committee and approved loans are subsequently reviewed by the Board of Directors Loan Committee, consisting of four independent directors, and the CEO.

Lending authority is also granted to certain other lending staff at lower amounts.

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Our five largest relationships (including unused commitments) totaled $88.9 million in the aggregate, or 10.3% of our $867.6 million total loan portfolio, at December 31, 2022.

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

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

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

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

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

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

At December 31, 2021, we had 15 additional lending relationships in excess of $5.0 million totaling $145.3 million.

At December 31, 2022, the largest lending relationship totaled $19.4 million and consisted of two loans to a business, a construction and land loan totaling $17.5 million, of which $13.2 million remained unfunded at December 31, 2022, and a $1.9 million commercial real estate loan.

The second largest relationship totaled $18.2 million and consisted of one construction loan, of which $5.1 million remained unfunded at December 31, 2022, secured by a multifamily real estate property being renovated.

The third largest relationship totaled $17.8 million and consisted of three loans to a business totaling $11.5 million collateralized by multifamily and commercial real estate, and two loans to a business with related guarantors totaling $6.3 million, both collateralized by multifamily real estate.

The fourth largest relationship totaled $17.0 million and consisted of two loans for the construction of a housing development of one-to-four family homes, of which $7.0 million remained unfunded at December 31, 2022.

The fifth largest borrowing relationship totaled $16.6 million, of which $2.3 million remained unfunded at December 31, 2022, and consisted of six loans to four businesses, all with related guarantors, collateralized by one-to-four family homes, commercial real estate, and one-to-four family construction properties.

At December 31, 2022, we had 15 additional lending relationships in excess of $7.0 million each, totaling $161.9 million.

All of the foregoing loans were performing in accordance with their repayment terms at December 31, 2022.

One-to-Four Family Real Estate Lending .

One of our primary lending activities is the origination of loans secured by first mortgages on one-to-four family residences, substantially all of which are secured by property located in our geographic lending area.

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

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

During 2022, our fixed-rate, one-to-four family loan originations decreased $143.0 million, or 63.2%, to $83.1 million compared to $226.1 million in 2021, while one-to-four family adjustable-rate loan originations increased $24.8 million, or 139.4% to $42.5 million compared to $17.8 million in 2021.

Since 2019, we identified demand in the marketplace for one-to-four family, residential fixed-rate mortgage loans, especially jumbo loans (generally loans above the conforming Fannie Mae limits of $647,200 or $970,800, depending on location within our market area).

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For first mortgage loans with a loan-to-value ratio in excess of 80%, we may require private mortgage insurance or other credit enhancement to help mitigate credit risk.

Properties securing our one-to-four family loans are typically appraised by independent fee appraisers who are selected in accordance with criteria approved by the Loan Committee.

Properties securing our one-to-four family loans are typically appraised by independent fee appraisers who are selected in accordance with

criteria approved by the Loan Committee.

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

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

Our real estate loans

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

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

The average balance of our one-to-four family residential loans was approximately $478 thousand at December 31, 2022.

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

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

At December 31, 2022, our portfolio of fixed-rate loans also included $582 thousand of one-to-four family loans with a five-year call option.

Adjustable-rate loans are offered with annual adjustments and lifetime rate caps that vary based on the product, generally with a maximum annual rate change of 2.0% and a maximum overall rate change of 6.0%.

We generally use the rate on one-year LIBOR to re-price our adjustable-rate loans, however, $8.2 million of our adjustable-rate loans are to employees and directors that re-price annually based on a margin of 1%-1.50% over our average 12-month cost of funds.

We generally use the rate on one-year LIBOR and 30-day secured overnight financing rate (“SOFR”), to re-price our adjustable-rate loans, however, $9.5 million of our adjustable-rate loans are to employees and directors that re-price annually based on a margin of 1%-1.50% over our average 12-month cost of funds.

As a consequence of using annual adjustments and lifetime caps, the interest rates on adjustable-rate loans may not be as rate sensitive as our cost of funds.

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The primary focus of our underwriting guidelines for interest-only residential loans is on the value of the collateral rather than the ability of the borrower to repay the loan.

As a result, this type of lending exposes us to an increased risk of loss due to the larger loan balance and our inability to sell them to Fannie Mae, similar to the risks associated with jumbo one-to-four family residential loans.

residential loans.

In addition, a decline in residential real estate values resulting from a downturn in the Washington housing market may reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowers default on their loans.

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We offer a variety of commercial and multifamily real estate loans.

Most of these loans are secured by owner-occupied and nonowner-occupied commercial income producing properties, multifamily apartment buildings, warehouses, office buildings, gas station/convenience stores and mobile home parks located in our market area.

Most of these loans are secured by owner-occupied and nonowner-occupied commercial income producing properties, apartment buildings, warehouses, office buildings, gas station/convenience stores and mobile home parks located in our market area.

At December 31, 2022, commercial and multifamily real estate loans totaled $313.4 million, or 36.1% of our total loan portfolio, compared to $278.2 million, or 40.4% of our total loan portfolio at December 31, 2021.

Loans secured by commercial and multifamily real estate are generally originated with a variable interest rate, fixed for an initial three- to ten-year term and a 20- to 25-year amortization period.

Loans secured by commercial and multifamily real estate are generally originated with a variable interest rate, fixed for an initial three- to ten-year term and have a 20- to 25-year amortization period.

At the end of the initial term, the balance is due in full or the loan re-prices based on an independent index plus a margin over the applicable index of 1% to 4% for another five years.

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We generally impose a minimum debt service coverage ratio of 1.20 for originated loans secured by income producing commercial properties.

If the borrower is other than an individual, we typically require the personal guaranty of the principal owners of the borrowing entity.

If the borrower is not an individual, we typically require the personal guaranties of the principal owners of the borrowing entity.

We also generally require an assignment of rents in order to be assured that the cash flow from the project will be used to repay the debt.

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Balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment.

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

The largest single commercial and multifamily real estate loan at December 31, 2022, totaled $11.8

million and was collateralized by a storage facility.

At December 31, 2022, this loan was performing in accordance with its repayment terms.

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Mobile Home Parks 4,598 1.5 5,528 2.0

Government guaranteed 3,491 1.1 — —

Total $ 313,358 100.0 % $ 278,175 100.0 %

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We originate construction loans secured by single-family residences and commercial and multifamily real estate.

We also originate land acquisition and development loans, which are secured by raw land or developed lots on which the borrower intends to build a residence.

We also originate land acquisition and development loans, which are secured by raw land or developed lots on which the borrower intends to build a residence, or a commercial or multifamily property.

At December 31, 2022, our construction and land loans totaled $116.9 million, or 13.5% of our total loan portfolio, compared to $63.1 million, or 9.2% of our total loan portfolio at December 31, 2021.

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In addition to custom home construction loans to individuals, we originate loans that are termed "speculative" which are those loans where the builder does not have, at the time of loan origination, a signed contract with a buyer for the home or lot who has a commitment for permanent financing with either us or another lender.

At December 31, 2021, construction loans to contractors for homes that were considered speculative totaled $6.4 million, or 10.1%, of our construction and land portfolio.

At December 31, 2022, construction loans to contractors for homes that were considered speculative totaled $8.1 million, or 6.9%, of our construction and land loan portfolio.

The composition of, and location of underlying collateral securing, our construction and land loan portfolio, excluding loan commitments, at December 31, 2022 was as follows (in thousands):

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

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

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

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

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At December 31, 2022, commercial and multifamily construction loans totaled $85.7 million or 73.4% of our construction and land portfolio, compared to $40.6 million, or 64.4% of our construction and land portfolio at December 31, 2021.

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

The three largest commercial and multifamily construction loans at December 31, 2022 included a $13.1 million loan secured by the renovation of a multifamily real estate property, an $8.2 million loan secured by construction of a multifamily real estate property and a $7.3 million loan secured by a townhome development, located in Pierce and King Counties, Washington.

At December 31, 2022, all of these loans were performing in accordance with their repayment terms.

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Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio.

Changes in the demand, such as for new housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated.

Changes in demand, such as for new housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated.

For these reasons, this type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders.

A downturn in housing, or the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure.

Some of our builders have more than one loan outstanding with us and also have residential mortgage loans for rental properties with us.

Some of our builders have more than one loan outstanding with us and have residential mortgage loans for rental properties with us.

Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.

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If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.

Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor.

Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more

difficult and costly to monitor.

Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end purchasers' borrowing costs, thereby reducing the overall demand for the project.

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

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

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

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

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

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

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

Commercial business loans also include loans originated under the PPP, a specialized low-interest loan program funded by the U.S.

Treasury Department and administered by the Small Business Administration ("SBA").

The Bank, as a qualified SBA lender, was authorized to originate PPP loans.

PPP loans have an interest rate of 1.0%, a two-year or five-year loan term to maturity, and principal and interest payments deferred until the lender receives the applicable forgiven amount or ten months after the end of the borrower’s loan forgiveness covered period.

The SBA guarantees 100% of the PPP loans made to eligible borrowers.

The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and the loan proceeds are used for other qualifying expenses.

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

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

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

At December 31, 2022, approximately $1.7 million of our commercial business loans were unsecured.

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

Our secured commercial business loans typically have a loan-to-value ratio of up to 80% and are term loans ranging from three to seven years.

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Our business lines of credit generally have terms ranging from 12 months to 24 months and provide for interest-only monthly payments during the term.

Our commercial business loans, excluding PPP loans, are primarily based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.

Our commercial business loans are primarily based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.

The borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value.

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Our weighted-average yield on manufactured home loans at December 31, 2022 was 8.36%, compared to 3.70% for one-to-four family mortgages, excluding loans held-for-sale.

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

For used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $150 thousand, with terms typically up to 20 years.

On new manufactured homes, loans are generally made

up to 90% of the lesser of the appraised value or purchase price up to $150 thousand, with terms typically up to 20 years.

At December 31, 2022, manufactured home loans totaled $27.0 million, or 22.6% of our consumer loans and 3.1% of our total loan portfolio.

For both new and used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $150 thousand, with terms typically up to 20 years.

We generally charge a 1% fee at origination.

We underwrite these loans based on our review of creditworthiness of the borrower, including credit scores, and the value of the collateral, for which we hold a security interest under Washington law.

Manufactured home loans are higher risk than loans secured by residential real property, though this risk is reduced if the owner also owns the land on which the home is located.

We underwrite these loans based on our review of creditworthiness of the borrower, including credit scores, and the value of the collateral, in which we hold a security interest.

Manufactured home loans are higher risk than loans secured by residential real property, though this risk may be reduced if the owner also owns the land on which the home is located.

A small portion of our manufactured home loans involve properties on which we also have financed the land for the owner.

The primary risk in manufactured home loans is the difficulty in obtaining adequate value for the collateral due to the cost and limited ability to move the collateral.

These loans tend to be made to retired individuals and first-time homebuyers.

These loans tend to be made to retired

individuals and first-time homebuyers.

First-time homebuyers of manufactured homes tend to be a higher credit risk than first-time homebuyers of single-family residences, due to more limited financial resources.

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We attempt to work out delinquent loans with the borrower and, if that is not successful, any past due manufactured homes are repossessed and sold.

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

At December 31, 2022, there were three nonperforming manufactured home loans totaling $96 thousand.

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

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At December 31, 2022, floating home loans totaled $74.4 million, or 62.4% of our consumer loan portfolio and 8.6% of our total loan portfolio.

The balance of our consumer loans includes loans secured by new and used automobiles, new and used boats, motorcycles and recreational vehicles, loans secured by deposits and unsecured consumer loans, all of which, at December 31, 2021, totaled $3.9 million, or 4.0% of our consumer loan portfolio and 0.6% of our total loan portfolio.

At December 31, 2022, the average principal balance of our floating home loans was $702 thousand.

At December 31, 2022, house barge loans totaled $10.7 million, or 9.0% of our consumer loan portfolio and 1.2% of our total loan portfolio.

The balance of our consumer loans includes loans secured by new and used automobiles, boats, motorcycles and recreational vehicles, loans secured by deposits and unsecured consumer loans, all of which, at December 31, 2022, totaled $7.2 million, or 6.0% of our consumer loan portfolio and 0.8% of our total loan portfolio.

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

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We did not sell any commercial loan participations in 2022 or 2021.

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

We had $2.6 million in purchases of commercial business loan participations from other financial institutions in 2022 and $4.3 million in 2021.

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

The term ‘subprime’ refers to the credit characteristics of individual borrowers which may include payment delinquencies, judgements, foreclosures, bankruptcies, low credit scores and/or high debt-to-income ratios.

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

While no single credit characteristic defines a subprime loan, one

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

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

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

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

Of the $125.6 million in one-to-four-family loans originated in 2022, $753 thousand or 0.6% were to borrowers with a credit score under 660.

Additionally, of the $9.6 million in manufactured home loans originated in 2022, $352 thousand or 3.7% were to borrowers with a credit score of 660 or lower.

At December 31, 2022, the total amount of residential and consumer loans held in our loan portfolio to borrowers with a credit score of 660 or lower were $16.2 million.

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

We generally do not originate or purchase negative amortization or option adjustable-rate loans.

In addition to interest earned on loans and loan origination fees, we receive fees for loan commitments, late payments and other miscellaneous services.

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At December 31, 2022, we were servicing a $470.3 million portfolio of residential mortgage loans for Fannie Mae and $2.2 million for other investors.

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

These mortgage servicing rights are carried at fair value and had a value at December 31, 2022 of $4.7 million.

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Financial Statements and Supplementary Data” of this report on Form 10-K.

We repurchased no loans in 2022 and one loan totaling $284 thousand in 2021.

Sales of whole real estate loans are beneficial to us since these sales may generate income at the time of sale, produce future servicing income on loans where servicing is retained, provide funds for additional lending, and increase liquidity.

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

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

Our net gains on sales of residential loans for the years ended December 31, 2022 and 2021 were $546 thousand and $4.2 million, respectively.

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

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

During the year ended December 31, 2022, we sold $636 thousand of loans with servicing released and sold none during the year ended December 31, 2021.

The following table shows our loan origination, sale and repayment activities, including loans held-for-sale, for the periods indicated (in thousands):

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Total reductions 134,255 494,427

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

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

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

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

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

Commercial business loans decreased due to PPP loan originations.

Net increase in loans $ 176,489 $ 72,395

The decrease in total loan originations in 2022 compared to 2021 was primarily due to slowing levels of loan activity in nearly all loan categories, partially offset by a decrease in loan sales and paydowns.

Demand for one-to-four family loans slowed in 2022 as homeowners, taking advantage of historically low interest rates in prior years, refinanced their homes to lower rates.

Additionally, with the rising interest rate environment, the pace of new home loans declined.

While the demand for single-family homes remains high, supply of homes available for sale, coupled with the rising rate environment, slowed the ability to purchase.

While the demand for construction loans, including new homes and apartment buildings continued to increase in 2022 due to appreciation in market prices, declining supplies of homes for sale and continued strong rental demand in our market area, some borrowers are being priced out of the market as a result of the rising interest rate environment causing a decline in construction loans originated.

Commercial business loans decreased due to U.S.

Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loan originations in the prior year.

The SBA PPP expired on May 31, 2021.

Asset Quality

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Delinquent Loans.

The following table sets forth our loan delinquencies by type (excluding COVID-19 modified loans), by amount and by percentage of type at December 31, 2021 (dollars in thousands):

The following table sets forth our loan delinquencies by type, by amount and by percentage of type at December 31, 2022 (dollars in thousands):

Loans Delinquent For:

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Home equity 2 115 0.6 3 116 0.6 5 231 1.2

Commercial and Multifamily 2 7,198 2.3 — — — 2 7,198 2.3

Construction and land 4 1,210 1.0 1 296 0.3 5 1,506 1.3

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Floating homes — 493

Other consumer 262 —

Commercial business — 176

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Commercial and multifamily 575 575

Manufactured homes — 19

Total OREO and repossessed assets 659 659

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Other consumer 81 106

Commercial business — 615

Total performing restructured loans $ 1,885 $ 2,174

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

(1) Nonaccrual loans include $103 thousand and $422 thousand in nonperforming troubled debt restructurings (“TDRs”) at December 31, 2022 and 2021, respectively.

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

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

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

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

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

Nonaccrual loans, including nonaccrual TDRs, decreased $2.6 million to $3.0 million at December 31, 2022 from $5.6 million at December 31, 2021, primarily due to the payoff of a $2.3 million nonperforming multifamily loan during the third quarter of 2022.

Our largest nonperforming loan relationship at December 31, 2022 consisted of three one-to-four family loans totaling $1.5 million, which were paid off in full subsequent to December 31, 2022.

In addition, there were three manufactured home loans, four home equity loans, two construction and land loans, one other consumer loan, and six additional one-to-four family loans classified as nonperforming at December 31, 2022.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition at December 31, 2022 Compared to December 31, 2021—Delinquencies and Nonperforming Assets" contained in Item 7 of this report on Form 10-K for more information on troubled assets.

Troubled Debt Restructured Loans.

TDRs, which are accounted for under ASC 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans.

TDRs, which are accounted for under Accounting Standards Codification (“ASC”) 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans.

Such modifications to loan terms may include a lower interest rate, a reduction in principal, or a longer term to maturity.

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Financial Statements and Supplementary Data" of this report on Form 10-K.

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

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

2022 December 31,

($ in thousands)

Allowance for loan losses as a percentage of total loans outstanding at period end 0.88 % 0.92 %

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Total loans outstanding 867,556 687,868

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

Nonaccrual loans as a percentage of total loans outstanding at period end

0.34 % 0.81 %

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Total loans outstanding 867,556 687,868

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

Allowance for loan losses as a percentage of nonaccrual loans at period end

256.81 % 113.58 %

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Total nonaccrual loans 2,959 5,552

Net charge-offs during period to average loans outstanding:

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

One-to-four family:

0.04 % (0.05) %

Net charge-offs/(recoveries)

Net recoveries (charge-offs)

Average loans outstanding

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0.36 % (0.01) %

Net charge-offs/(recoveries)

Net recoveries (charge-offs)

Average loans outstanding

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Commercial and multifamily real estate:

Net charge-offs

Net (charge-offs) recoveries

Average loans outstanding

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Construction and land:

Net charge-offs

Net (charge-offs) recoveries

Average loans outstanding

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Floating homes:

Net charge-offs

Net (charge-offs) recoveries

Average loans outstanding

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Commercial business:

Net (recoveries)/charge-offs

Net recoveries

Average loans outstanding

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0.01 % (0.02) %

Net charge-offs

Net recoveries (charge-offs)

Average loans outstanding

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Economic conditions in our markets, and the U.S.

as a whole, were negatively impacted by the restrictions imposed on businesses as a result of the COVID-19 pandemic.

Recent trends in housing prices and unemployment rates in our market areas

reflect the continuing impact of these restrictions.

Although unemployment in our market area was generally lower than the national average in 2020 and home prices increased in 2021 compared to 2020, we continue to carefully monitor our loan portfolio for possible deterioration due to the pandemic.

as a whole, were negatively impacted by inflation and the rising interest rate environment, partially offset by the continued trend of low unemployment rates.

Recent trends in housing prices in our market areas reflect the impact rising interest rates have had on housing prices, although we continued to see strong demand for loans

despite this increase.

We continually monitor our loan portfolio for possible deterioration due to inflation and other economic factors.

The allowance for loan losses as a percentage of nonperforming loans was 256.81% and 113.58% at December 31, 2022 and 2021, respectively.

The provision for loan losses totaled $425 thousand for the year ended December 31, 2021, compared to $925 thousand for the year ended December 31, 2020.

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

The provision for loan losses totaled $1.2 million for the year ended December 31, 2022, compared to $425 thousand for the year ended December 31, 2021.

Net recoveries were $68 thousand for the year ended December 31, 2022, compared to net charge-offs of $119 thousand for the year ended December 31, 2021.

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

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As a condition of membership in the FHLB of Des Moines, we are required to purchase and hold a certain amount of FHLB stock.

We review investment securities on an ongoing basis for the presence of OTTI, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.

We review investment securities on an ongoing basis for the presence of other than temporary impairment (“OTTI”), taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.

For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI loss.

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During the year ended December 31, 2022, we did not recognize any non-cash OTTI charges on our investment securities.

At that date, there were six agency securities that had unrealized losses, although management determined the decline in value was not related to specific credit deterioration.

At December 31, 2022, there were 16 securities in an unrealized loss position for less than 12 months, and three securities in an unrealized loss position for more than 12 months, although management determined the decline in value was not related to specific credit deterioration.

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

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At December 31, 2022, core deposits, which we define as our non-time deposit accounts and time deposit accounts less than $250 thousand (excluding brokered deposits and public funds), represented approximately 92.2% of total deposits, compared to 94.6% at December 31, 2021.

We did not have any brokered deposits at December 31, 2022 and 2021.

We primarily rely on competitive pricing policies, marketing and client service to attract and retain these deposits and we expect to continue these practices in the future.

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2.00 — 3.99% 153,356 19.0 25,959 3.3

4.00 — 5.99% 18,166 2.2 — —

Total certificates of deposit 210,305 26.0 105,722 13.2

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

At December 31,

Year Ended December 31,

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

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Total deposits $ 803,521 0.37 % $ 797,686 0.41 %

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

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

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

The increase in total deposits over the past year was the result of developing relationships with PPP borrowers who were not previously clients, adding new consumer

clients, and expanding relationships with existing clients, as well as reduced withdrawals, reflecting changes in customer spending habits due to the COVID-19 pandemic.

Noninterest-bearing demand accounts decreased $17.1 million, or 9.1%, in 2022 compared to 2021.

We also experienced decreases in our interest-bearing demand, savings, money market, and escrow accounts in 2022 compared to 2021.

of deposits increased $104.6 million, or 98.9%, in 2022 compared to 2021.

The increase in total deposits over the past year was the result of an increase in certificate accounts, which was primarily used to fund organic loan growth in 2022.

We are a public funds depository and at December 31, 2022, we had $7.0 million in public funds compared to $24.0 million at December 31, 2021.

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Based on eligible collateral, the total amount available under this agreement at December 31, 2022 was $199.0 million.

At the same date, we had no outstanding FHLB advances.

At the same date, we had $43.0 million of outstanding FHLB overnight advances.

We had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $8.0 million at December 31, 2022.

We plan to rely in part on FHLB advances to fund asset and loan growth.

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

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

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

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At December 31, 2022 and 2021, the Company had no outstanding borrowings and unused borrowing capacity of $20.8 million and $22.4 million, respectively, under the Borrower-in-Custody program.

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

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

From October 1, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term secured overnight financing rate (“SOFR”), plus 513 basis points.

From October 1, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR, plus 513 basis points.

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

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We attract our deposits through our branch offices and web site.

Competition for those deposits is principally from savings banks, commercial banks and credit unions, as well as mutual funds, FinTech companies and other alternative investments.

Competition for those deposits is principally from commercial banks and credit unions, as well as mutual funds, FinTech companies and other alternative investments.

We compete for these deposits by offering superior service, online and mobile access and a variety of deposit accounts at competitive rates.

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The five largest financial institutions in that area have 72.0% of those deposits.

In Clallam County, there are nine other commercial banks and

savings banks.

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

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

deposits in Clallam County was the second highest in the county at approximately 16.33%, with the five largest institutions in that county having 79.5% of the deposits.

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

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We cannot predict whether any such changes may occur.

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

The WDFI and, as the Bank's primary federal regulator, FDIC have extensive enforcement authority over Sound Community Bank.

The Federal Reserve and the WDFI have the same type of authority over Sound Financial Bancorp.

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Regulation by the WDFI and the FDIC .

State law and regulations govern Sound Community Bank’s ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make other loans, to invest in securities, to offer various banking services, and to establish branch offices.

As a state commercial bank, Sound Community Bank must pay semi-annual assessments, examination costs and certain other charges to the WDFI.

State laws and regulations govern Sound Community Bank’s ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make other loans, to invest in securities, to offer various banking services, and to establish branch offices.

As a state-chartered commercial bank, Sound Community Bank must pay semi-annual assessments, examination costs and certain other charges to the WDFI.

Washington law generally provides the same powers for Washington commercial banks as federally and other-state chartered savings banks with branches in Washington.

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In addition, the WDFI may approve applications by Washington commercial banks to engage in an otherwise unauthorized activity, if it determines that the activity is closely related to banking, and Sound Community Bank is otherwise qualified under the statute.

Federal law and regulations generally limit the activities and equity investments of Sound Community Bank to those that are permissible for national banks, unless approved by the FDIC, and govern our relationship with our depositors and borrowers to a great extent, especially with respect to disclosure requirements.

Federal laws and regulations generally limit the activities and equity investments of Sound Community Bank to those that are permissible for national banks, unless approved by the FDIC, and govern our relationship with our depositors and borrowers to a great extent, especially with respect to disclosure requirements.

The FDIC has adopted regulatory guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and information systems, audit systems, interest-rate risk exposure and compensation and other benefits.

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

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

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

These standards, which must

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

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

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Insurance of Accounts .

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

Sound Community Bank’s deposits are insured up to $250 thousand per separately insured deposit ownership right or category by the DIF of the FDIC.

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

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

The FDIC has authority to increase insurance assessments, and any significant increases may have an adverse effect on the operating expenses and results of operations of the Company.

The FDIC has authority to increase insurance assessments.

Extraordinary growth in insured deposits during the first and second quarters of 2020 caused the DIF reserve ratio to decline below the statutory minimum of 1.35 percent as of June 30, 2020.

In September 2020, the FDIC Board of Directors adopted a Restoration Plan to restore the reserve ratio to at least 1.35 percent within eight years, absent extraordinary circumstances, as required by the Federal Deposit Insurance Act.

The Restoration Plan maintained the assessment rate schedules in place at the time and required the FDIC to update its analysis and projections for the deposit insurance fund balance and reserve ratio at least semiannually.

In the semiannual update for the Restoration Plan in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the statutory minimum of 1.35 percent by September 30, 2028, the statutory deadline to restore the reserve ratio.

Based on this update, the FDIC Board approved an Amended Restoration Plan, and concurrently proposed an increase in initial base deposit insurance assessment rate schedules uniformly by 2 basis points, applicable to all insured depository institutions.

In October 2022, the FDIC Board finalized the increase with an effective date of January 1, 2023, applicable to the first quarterly assessment period of 2023.

The revised assessment rate schedules are intended to increase the likelihood that the reserve ratio of the DIF reaches the statutory minimum level of 1.35 percent by September 30, 2028.

Management cannot predict what assessment rates will be in the future.

In a banking industry emergency, the FDIC may also impose a special assessment.

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

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

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

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Management is not aware of any existing circumstances which would result in termination of the Bank's deposit insurance.

Commercial Real Estate Lending Concentrations.

The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending.

The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution).

The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations.

The guidance directs the FDIC and other federal bank regulatory agencies to focus their supervisory resources

on institutions that may have significant commercial real estate loan concentration risk.

A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:

• Total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital (or in the case of a bank that has elected to follow the Community Bank Leverage Ratio (“CBLR”) framework, Tier 1 capital plus the entire allowance for loan and lease losses (“CBLR Capital”));

• Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital or CBLR Capital, as appropriate, and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.

The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy.

At December 31, 2022, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 101.5% of CBLR capital.

In addition, at December 31, 2022, Sound Community Bank’s loans on all commercial real estate, including construction, owner and non-owner occupied commercial real estate, and multi-family lending, as defined by the FDIC, were 364.2% of CBLR capital.

Transactions with Related Parties.

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The CBLR is calculated as Tier 1 Capital to average consolidated assets as reported on an institution's regulatory reports.

Tier 1 Capital, for the Company and the Bank, generally consists of common stock plus related surplus and retained earnings, adjusted for goodwill and other intangible assets and accumulated other comprehensive amounts (“AOCI”) related amounts.

Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and

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

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

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

The CBLR returned to 9% on January 1, 2022.

A qualifying institution utilizing the CBLR framework whose leverage ratio does not fall more than one percent below the required percentage is allowed a two-quarter grace period in which to increase its leverage ratio back above the required percentage.

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The FASB has adopted a new accounting standard for accounting principles generally accepted in the U.S.

GAAP") that will be effective for the Company and Bank beginning January 1, 2023.

This standard, referred to as Current Expected Credit Loss or CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets.

GAAP") that became effective for the Company and Bank on January 1, 2023.

This standard, referred to as Current Expected Credit Loss or

CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets.

CECL covers a broader range of assets than the current method of recognizing credit losses and generally results in earlier recognition of credit losses.

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

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

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

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

In addition, on November 18, 2021, the federal banking

agencies announced the adoption of a final rule providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents.

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

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

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

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

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

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In addition, all long-term borrowings are required to provide funds for residential home financing.

Sound Community Bank had no outstanding borrowings with the FHLB of Des Moines and an available line of credit of $11.5 million at December 31, 2021.

Sound Community Bank had $43.0 million of outstanding borrowings with the FHLB of Des Moines and an available line of credit of $199.0 million at December 31, 2022.

We plan to rely in part on FHLB advances to fund asset and loan growth.

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This regulation and oversight is generally intended to ensure that Sound Financial Bancorp limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of Sound Community Bank.

A bank holding company must serve as a source of financial strength to its subsidiary banks, with the ability to provide financial assistance to a subsidiary bank in financial distress.

A bank holding company must serve as a source of financial and managerial strength to its subsidiary banks, with the ability to provide financial assistance to a subsidiary bank in financial distress.

As a bank holding company, Sound Financial Bancorp is required to file quarterly and annual reports with the Federal Reserve and any additional information required by the Federal Reserve and is subject to regular examinations by the Federal Reserve and to examination by the WDFI.

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or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch.

Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding

Individual states may also waive the 30% state-wide concentration limit contained in the federal law.

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Federal Securities Law.

The stock of Sound Financial Bancorp is registered with the SEC under the Securities Exchange Act of 1934, as amended.

The common stock of Sound Financial Bancorp is registered with the SEC under the Securities Exchange Act of 1934, as amended.

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

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Dividends on Sound Community Bank’s capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of Sound Community Bank without the approval of the WDFI.

The amount of dividends actually paid during any one period will be strongly affected by Sound Community Bank’s policy of maintaining a strong capital position.

The amount of dividends actually paid during any one period will be significantly affected by Sound Community Bank’s policy of maintaining a strong capital position.

Federal law further provides that without prior approval, no insured depository institution may pay a cash dividend if it would cause the institution to be less than adequately capitalized as defined in the prompt corrective action regulations.

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In addition, dividends may not be declared or paid if Sound Community Bank is in default in payment of any assessment due the FDIC.

COVID-19 Legislation.

In response to the COVID-19 pandemic, Congress, through the enactment of the CARES Act and CAA 2021, and the federal banking agencies, though rulemaking, interpretive guidance and modifications to agency policies and procedures, have taken a series of actions to provide national emergency economic relief measures including, among others, the CARES Act and CAA 2021.

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

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

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

Federal Taxation

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As part of our compensation philosophy, we offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent.

In addition to strong base wages, additional programs include quarterly or annual bonus opportunities, a Company-augmented Employee Stock Ownership Plan ("ESOP"), a Company-matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources, flexible work schedules, and employee assistance programs including help with student loans and educational opportunities.

resources, flexible work schedules, and employee assistance programs including help with student loans and educational opportunities.

The success of our business is fundamentally connected to the well-being of our people.

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This includes having the vast majority of our back-office employees work from home, while implementing additional safety measures for employees continuing critical on-site work.

In addition, we provided frontline staff with additional compensation for their role working with the public.

A core value of our talent management approach is to both develop talent from within and supplement with external hires.

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Laura Lee Stewart.

Stewart, age 73, is currently President, Chief Executive Officer and Interim Chief Financial Officer of Sound Community Bank and Sound Financial Bancorp.

Stewart, age 73, is the President and Chief Executive Officer of Sound Community Bank and Sound Financial Bancorp.

Prior to joining Sound Community Bank as its President in 1989, when it was a credit union, Ms.

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

She also served as Chair of the American Bankers Association’s ("ABA") Government Relations Council and is the past Chair of the

Washington Bankers Association.

The American Banker magazine honored her as one of the top 25 Women to Watch in banking in 2011, 2015, 2016, 2017, 2018 and as one of the most powerful women in Banking in 2019, 2020 and 2021.

She also served as Chair of the American Bankers Association’s (“ABA”) Government Relations Council and is the past Chair of the Washington Bankers Association.

The American Banker magazine honored her as one of the top 25 Women to Watch in banking in 2011, 2015, 2016, 2017 and 2018, and as one of the most powerful women in Banking in 2019 and 2020.

Stewart was recognized as a Women of Influence by the Puget Sound Business Journal.

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Stewart also served as Chair of the National Arthritis Foundation’s board of directors as well as serving as the Past Chair of the board of directors of Woodland Park Zoo.

Stewart is serving her second term as a Director of the Seattle Board of the Federal Reserve.

She is also the only non-native Board member of the Jamestown Sklallan Community Development Financial Institution.

In October 2019, Ms.

Stewart was elected Chair of the ABA.

In 2021, she was named as one of The Power 100 by the Puget Sound Business Journal and one of the Most Powerful Women in Banking by the American Bankers Association.

In 2022, she was named one of the Most Powerful Women to Watch in Banking by the American Bankers Association.

Her many years of service in all areas of the financial institution operations and duties as President and Chief Executive Officer of Sound Financial Bancorp and Sound Community Bank bring a special knowledge of the financial, economic and regulatory challenges we face, and she is well suited to educating the Board on these matters.

Heidi Sexton .

Sexton, age 46, was appointed Executive Vice President and Chief Operating Officer of Sound Community Bank during 2018.

Sexton, age 47, was appointed Executive Vice President and Chief Operating Officer of Sound Community Bank during 2018 and corporate secretary of Sound Financial Bancorp.

Sexton is responsible for identification and mitigation of risk through oversight of the Enterprise Risk management and Compliance Management functions.

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Sexton received a Bachelor's of Arts in Accounting from the University of Wisconsin-Eau Claire.

She currently holds a number of professional certifications including Certified Internal Auditor, Certified Regulatory Compliance Manager and is a graduate of the Washington Bankers Association’s Executive Development Program.

Sexton is also a member of the CFPB Community Bank Advisory Counsel and ABA Compliance Administrative Committee.

Sexton is also a member of the CFPB Community Bank Advisory Council and ABA Compliance Administrative Committee.

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

Ochs, age 43, currently serves as Executive Vice President and Chief Strategy/Financial Officer at Sound Community Bank.

Ochs, age 44, currently serves as Executive Vice President and Chief Strategy/Financial Officer at Sound Community Bank and Sound Financial Bancorp.

Ochs is responsible for developing, communicating, executing, and sustaining corporate strategic initiatives, and in November 2020, became responsible for the Bank’s economic forecasting, strategic planning and asset liability management functions.

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

Ochs received his Bachelor of Arts degree in Economics, Finance and Education from Eastern Washington University, his Master of Business Administration degree in Accounting from the University of Phoenix and is a graduate of the Washington Bankers Association’s Executive Development Program.

We maintain a website;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business