What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-15 · 231 added, 136 removed, 316 unchanged (54% of the section changed)

8 unchanged sentences

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, the failure of the U.S.

Congress to increase the debt ceiling, 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 recent bank failures or new COVID-19 variants;

• changes in consumer spending, borrowing and savings habits;

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Government and other governmental initiatives affecting the financial services industry;

• the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;

• fluctuations in the demand for loans, the number of unsold homes, land and other properties;

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• the possibility that unexpected outflows of uninsured deposits may require us to sell investment securities at a loss;

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

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

• our ability to control operating costs and expenses;

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• 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 credit 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;

• the 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 successfully integrate into our operations any assets, liabilities, clients, systems, and management personnel we may acquire 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 the fair values 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;

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

At March 31, 2023, Sound Financial Bancorp, on a consolidated basis, had assets of $1.00 billion, net loans held-for-portfolio of $862.0 million, deposits of $841.6 million and stockholders’ equity of $98.6 million.

At June 30, 2023, Sound Financial Bancorp, on a consolidated basis, had assets of $1.01 billion, net loans held-for-portfolio of $847.2 million, deposits of $822.3 million and stockholders’ equity of $99.9 million.

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 3rd Avenue, Suite 150, Seattle, Washington, 98121.

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There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2022 Form 10-K, except as disclosed in “Note 1 —Basis of Presentation” in the Notes to Condensed Consolidated Financial Statements in this report.

Comparison of Financial Condition at March 31, 2023 and December 31, 2022

Total assets increased $28.0 million, or 2.9%, to $1.00 billion at March 31, 2023 from $976.4 million at December 31, 2022.

The increase primarily was a result of loan growth and an increase in cash and cash equivalents.

Cash and Securities.

Cash and cash equivalents increased $23.7 million, or 41.1%, to $81.6 million at March 31, 2023 from $57.8 million at December 31, 2022, primarily due to due to an increase in deposits, primarily certificate and money market accounts, partially offset by the repayment of FHLB overnight advances.

Investment securities decreased $1.6 million, or 13.0%, to $10.8 million at March 31, 2023, compared to $12.4 million at December 31, 2022.

Held-to-maturity securities totaled $2.2 million at March 31, 2023 and December 31, 2022.

Available-for-sale securities totaled $8.6 million at March 31, 2023, compared to $10.2 million at December 31, 2022.

The decrease in available-for-sale securities was primarily due the maturity of $1.6 million in treasury bills and regularly scheduled payments and maturities.

Loans held-for-portfolio, net, increased $3.6 million, or 0.4%, to $862.0 million at March 31, 2023 from $858.4 million at December 31, 2022, driven by increases in construction and land, commercial business and manufactured home loans, partially offset by declines in commercial real estate, multifamily, floating homes and other consumer loans.

The increase from December 31, 2022 in total loans held-for-portfolio primarily resulted from the funding of commercial construction projects and a new commercial and industrial relationship.

The following table reflects the changes in the loan mix of our loan portfolio at March 31, 2023, as compared to December 31, 2022 (dollars in thousands):

Comparison of Financial Condition at June 30, 2023 and December 31, 2022

Total assets increased $34.4 million, or 3.5%, to $1.01 billion at June 30, 2023 from $976.4 million at December 31, 2022.

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

Cash and Securities, and Investment Securities.

Cash and cash equivalents increased $42.3 million, or 73.2%, to $100.2 million at June 30, 2023 from $57.8 million at December 31, 2022, consistent with management’s strategy to increase liquidity in light of the continued volatility in the banking sector.

The increase was primarily from an increase in deposits, primarily certificate and money market accounts, and FHLB advances.

Investment securities decreased $1.8 million, or 14.7%, to $10.6 million at June 30, 2023, compared to $12.4 million at December 31, 2022.

Held-to-maturity securities totaled $2.2 million, both at June 30, 2023 and at December 31, 2022.

Available-for-sale securities totaled $8.4 million at June 30, 2023, compared to $10.2 million at December 31, 2022.

The decrease in available-for-sale securities was primarily due to the maturity of $1.6 million in treasury bills and regularly scheduled payments and maturities.

Loans held-for-portfolio, net, decreased $11.2 million, or 1.3%, to $847.2 million at June 30, 2023 from $858.4 million at December 31, 2022, driven by declines in commercial and multifamily real estate and floating home loans, partially offset by an increase in manufactured home loans.

The following table reflects the changes in the mix of our loan portfolio at June 30, 2023, as compared to December 31, 2022 (dollars in thousands):

2023 December 31,

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Total loans held-for-portfolio, net $ 847,212 $ 858,382 $ (11,170) (1.3) %

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

The increase in commercial business loans was primarily the result of a new commercial business relationship.

These increases were partially offset by payoffs and paydowns during the period, including the payoff of $2.7 million related to two multifamily loans.

At March 31, 2023, our loan portfolio, net of deferred loan fees, remained well-diversified.

Commercial and multifamily real estate loans accounted for 35.3% of total loans, one-to-four family loans, including home equity loans, accounted for 33.7% of total loans, commercial business loans accounted for 2.9% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounted for 13.6% of total loans at March 31, 2023.

Construction and land loans accounted for 14.4% of total loans at March 31, 2023.

Loans held-for-sale totaled $1.4 million at March 31, 2023, compared to none at December 31, 2022.

The decrease in commercial and multifamily real estate and floating home loans was primarily due to payoffs and paydowns during the period, including the payoff of $10.0 million related to three multifamily loans and $3.7 million related to two floating homes loans.

These decreases were partially offset by the increase in manufactured home loans during the period as a result of high demand.

At June 30, 2023, our loan portfolio, net of deferred loan fees, remained well-diversified.

At that date, commercial and multifamily real estate loans accounted for 35.2% of total loans, one-to-four family loans, including home equity loans, accounted for 34.1% 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 14.0% of total loans.

Construction and land loans accounted for 13.7% of total loans at June 30, 2023.

Loans held-for-sale totaled $1.7 million at June 30, 2023, compared to none at December 31, 2022.

The increase was primarily due to timing of mortgage originations and sales.

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The following table reflects the adjustments in our allowance for credit losses (“ACL”) during the periods indicated (dollars in thousands):

Three Months Ended March 31,

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

2023 2022 2023 2022

Allowance for Credit Losses — Loans:

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Net charge-offs (73) 110 (145) 86

Provision for credit losses during the period 245 125

(Release of) provision for credit losses (242) 600 3 725

Balance at end of period 8,217 $ 7,117 $ 8,217 $ 7,117

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Balance at beginning of period 795 419 335 404

Adoption of ASU 2016-13 695 —

(Reversal of) provision for credit losses (235) 15

Impact of Adoption of ASU 2016-13 — — 695 —

(Release of) provision for credit losses (89) (8) (324) 7

Balance at end of period 706 411 706 411

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Ratio of net charge-offs during the period to average loans outstanding during the period (0.03) % 0.06 % (0.03) % 0.02 %

Our ACL — loans increased $933 thousand, or 12.3%, to $8.5 million at March 31, 2023, from $7.6 million at December 31, 2022.

The change in the ACL - loans from December 31, 2022 to March 31, 2023 was primarily a result of the adjustment for the adoption of ASU 2016-16.

The provision for credit losses had a minimal impact on the change in the ACL as a result of the growth in the loan portfolio primarily related to construction advances that were outstanding at December 31, 2022 funding during the three months ended March 31, 2023, thus reducing the reserve for unfunded commitments and increasing the ACL - loans.

Net charge-offs for the three months ended March 31, 2023 totaled $72 thousand, compared to net charge-offs of $24 thousand for the three months ended March 31, 2022.

At March 31, 2023, the ACL - loans as a percentage of total loans and nonperforming loans was 0.98% and 659.97%, compared to 0.88% and 256.81%, at December 31, 2022, respectively.

See “Comparison of Results of Operations for the Three Months Ended March 31, 2023 and 2022 — Provision for Credit Losses.”

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

2023 December 31,

Allowance for credit losses - loans as a percentage of total loans outstanding at period end 0.98 % 0.88 %

Our ACL — loans increased $618 thousand, or 8.1%, to $8.2 million at June 30, 2023, from $7.6 million at December 31, 2022.

The change in the ACL - loans from December 31, 2022 to June 30, 2023 was primarily a result of the adjustment for the adoption of ASU 2016-16.

The provision for credit losses had a minimal impact on the change in the ACL, as a result of the decline in the loan portfolio from the payoff of three large multifamily loans and the completion of construction projects decreasing the ACL - loans, partially offset by construction advances that were outstanding at December 31, 2022 and funded during the six months ended June 30, 2023, thus reducing the reserve for unfunded commitments and increasing the ACL - loans.

See “Comparison of Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022 — Provision for Credit Losses.”

The following tables show certain credit ratios at and for the dates and periods indicated and the components of each ratio's calculation (dollars in thousands).

At June 30, 2023 At December 31, 2022

Allowance for credit losses - loans as a percentage of total loans outstanding 0.96 % 0.88 %

Allowance for credit losses — loans $ 8,217 $ 7,599

Total loans outstanding $ 856,759 $ 867,556

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

Nonaccrual loans as a percentage of total loans outstanding

0.18 % 0.34 %

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Total loans outstanding $ 856,759 $ 867,556

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

Allowance for credit losses - loans as a percentage of nonaccrual loans

543.94 % 256.81 %

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Total nonaccrual loans $ 1,511 $ 2,959

Allowance for credit losses as a percentage of total loans outstanding at period end 1.07 % 0.91 %

Allowance for credit losses as a percentage of total loans outstanding 1.04 % 0.91 %

Allowance for credit losses $ 8,923 $ 7,934

Total loans outstanding $ 856,759 $ 867,556

Allowance for credit losses as a percentage of nonaccrual loans at period end 721.46 % 268.13 %

Allowance for credit losses as a percentage of nonaccrual loans 590.67 % 268.13 %

Allowance for credit losses $ 8,923 $ 7,934

Total nonaccrual loans $ 1,511 $ 2,959

Three Months Ended March 31,

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

2023 2022 2023 2022

($ in thousands)

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One-to-four family:

Net recoveries (charge-offs)

— % 0.08 % — % 0.04 %

Net recoveries

$ — $ 45 — 45

Average loans outstanding

$ 274,066 $ 232,173 274,163 221,801

Net recoveries (charge-offs)

(0.51) % 1.51 % (0.26) % 0.82 %

Net (charge-offs) recoveries

$ (25) $ 57 (25) 58

Average loans outstanding

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Commercial and multifamily real estate:

— % — % — % — %

Net (charge-offs) recoveries

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Construction and land:

— % — % — % — %

Net (charge-offs) recoveries

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Manufactured homes:

— % 0.21 % — % 0.11 %

Net recoveries

$ — $ 12 — 12

Average loans outstanding

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Floating homes:

— % — % — % — %

Net (charge-offs) recoveries

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Commercial business:

Net (charge-offs)

— % 0.10 % — % — %

Net recoveries

Average loans outstanding

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

Net recoveries (charge-offs)

Net (charge-offs) recoveries

$ (73) $ 110 (145) 86

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Nonperforming Assets.

At March 31, 2023, nonperforming assets, which are comprised of nonaccrual loans and other real estate owned (“OREO”), totaled $1.9 million, or 0.19% of total assets, compared to $3.6 million, or 0.37% of total assets at December 31, 2022.

At June 30, 2023, nonperforming assets, which are comprised of nonaccrual loans and other real estate owned (“OREO”), totaled $2.1 million, or 0.21% of total assets, compared to $3.6 million, or 0.37% of total assets at December 31, 2022.

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

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Total nonperforming assets $ 2,086 $ 3,617 $ (1,531) (42.3) %

Nonperforming assets, which are comprised of nonaccrual loans, nonperforming modified loans and OREO, decreased $1.7 million, or 48.4%, to $1.9 million at March 31, 2023 from $3.6 million at December 31, 2022.

The decrease in nonperforming

assets primarily was due to the payoff of $1.5 million in nonperforming one-to-four family loans related to a single borrower and the write-off of one residential property for $84 thousand during the three months ended March 31, 2023.

The percentage of nonperforming loans to total loans was 0.15% at March 31, 2023, compared to 0.34% of total loans at December 31, 2022.

Nonperforming assets, which are comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans) and other real estate owned (“OREO”) and repossessed assets, decreased $1.5 million, or 42.3%, to $2.1 million, or 0.21% of total assets, at June 30, 2023 from $3.6 million, or 0.37% of total assets, at December 31, 2022.

The decrease in nonperforming assets primarily was due to the payoff of $1.5 million in nonperforming one-to-four family loans related to a single borrower and the write-off of one residential property for $84 thousand.

The percentage of nonperforming loans to total loans was 0.18% at June 30, 2023, compared to 0.34% of total loans at December 31, 2022.

Mortgage Servicing Rights.

The fair value of mortgage servicing rights was $4.6 million at March 31, 2023, a decrease of $100 thousand, or 2.1%, from $4.7 million at December 31, 2022.

The fair value of mortgage servicing rights was $4.7 million at June 30, 2023, an increase of $39 thousand, or 0.8%, from $4.7 million at December 31, 2022.

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

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Deposits and Borrowings.

Total deposits increased $32.9 million, or 4.1%, to $841.6 million at March 31, 2023 from $808.8 million at December 31, 2022.

Total deposits increased $13.5 million, or 1.7%, to $822.3 million at June 30, 2023 from $808.8 million at December 31, 2022.

The increase was primarily a result of higher balances in certificate and money market accounts, partially offset by lower balances in all other deposit products, largely driven by consumer behavior to move funds from lower rate deposit products into higher rate deposit products.

Noninterest-bearing deposits decreased $117 thousand, or 0.1%, to $173.1 million at March 31, 2023, compared to $173.2 million at December 31, 2022.

Noninterest-bearing deposits represented 20.6% of total deposits at March 31, 2023, compared to 21.4% at December 31, 2022.

Noninterest-bearing deposits decreased $14.7 million, or 8.5%, to $158.5 million at June 30, 2023, compared to $173.2 million at December 31, 2022.

Noninterest-bearing deposits represented 19.3% of total deposits at June 30, 2023, compared to 21.4% at December 31, 2022.

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Rate Amount Wtd.

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(1) Escrow balances shown in noninterest-bearing deposits on the Condensed Consolidated Balance Sheets.

Scheduled maturities of time deposits at March 31, 2023, are as follows (in thousands):

Scheduled maturities of time deposits at June 30, 2023, are as follows (in thousands):

Year Ending December 31, Amount

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Savings, demand, and money market accounts have no contractual maturity.

Certificates of deposit have maturities of six years or less.

The aggregate amount of time deposits in denominations of more than $250,000 at March 31, 2023 and December 31, 2022, totaled $82.1 million and $56.1 million, respectively.

Certificates of deposit have maturities of five years or less.

The aggregate amount of time deposits in denominations of more than $250,000 at June 30, 2023 and December 31, 2022, totaled $80.4 million and $56.1 million, respectively.

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

As of March 31, 2023, uninsured deposits totaled $174.1 million, which represented 20.7% of total deposits, as compared to uninsured deposits of $161.9 million, or 20.0% of total deposits as of December 31, 2022.

As of June 30, 2023, uninsured deposits totaled $140.0 million, which represented 17.0% of total deposits, as compared to uninsured deposits of $161.9 million, or 20.0% of total deposits as of December 31, 2022.

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

The increase in uninsured deposits primarily related to the increase in certificates of deposit.

Borrowings, comprised of FHLB advances, decreased $8.0 million to $35.0 million at March 31, 2023 from $43.0 million at December 31, 2022, primarily as a result of paydowns of our FHLB advances due to the increase in deposits.

Subordinated notes, net totaled $11.7 million at both March 31, 2023 and December 31, 2022.

The decrease in uninsured deposits primarily related to the increased customer use of deposit insurance products, such as ICS® (Insured Cash Sweep) and CDARS® (Certificate of Deposit Registry Service), that reduced the level of uninsured deposits following the recent failures of some banks during 2023.

Borrowings, comprised of FHLB advances, increased $17.0 million to $60.0 million at June 30, 2023 from $43.0 million at December 31, 2022, consistent with management’s strategy to maintain higher liquidity levels.

Subordinated notes, net totaled $11.7 million at both June 30, 2023 and December 31, 2022.

Stockholders’ Equity.

Total stockholders’ equity increased $900 thousand, or 0.9%, to $98.6 million at March 31, 2023, from $97.7 million at December 31, 2022.

This increase primarily reflects $2.2 million of net income earned during the current quarter, a $83 thousand decrease in accumulated other comprehensive loss, net of tax, and $247 thousand in proceeds from exercises of stock options, partially offset by the payment of $442 thousand in dividends to the Company’s stockholders.

In addition, stockholders' equity was impacted by the adoption of CECL in the first quarter of 2023, which as of January 1, 2023, resulted in an after-tax decrease to opening retained earnings of $1.1 million.

Total stockholders’ equity increased $2.2 million, or 2.3%, to $99.9 million at June 30, 2023, from $97.7 million at December 31, 2022.

This increase primarily reflects $5.1 million of net income earned during the six months ended June 30, 2023 and $303 thousand in proceeds from exercises of stock options, partially offset by $1.2 million in stock repurchases and the cash payment of $936 thousand in dividends to the Company’s stockholders.

In addition, stockholders' equity was negatively impacted by the adoption of CECL in the first quarter of 2023, which as of January 1, 2023, resulted in an after-tax decrease to opening retained earnings of $1.1 million.

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

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

Three Months Ended March 31,

Three Months Ended June 30,

Balance Interest

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

Six Months Ended June 30,

Balance Interest

Rate Annualized Average

Balance Interest

Rate Annualized

Interest-earning assets:

Loans receivable $ 866,862 $ 22,932 5.33 % $ 718,402 $ 16,772 4.71 %

Investments, cash and cash equivalents 78,499 1,654 4.25 162,304 427 0.53

Total interest-earning assets (1)

945,361 24,586 5.24 % 880,706 17,199 3.94

Interest-bearing liabilities:

Savings and money market accounts 163,714 477 0.59 195,731 59 0.06

Demand and NOW accounts 228,032 414 0.37 313,552 247 0.16

Certificate accounts 263,268 4,197 3.21 99,127 535 1.09

Subordinated notes 11,688 336 5.80 11,643 336 5.82

Borrowings 46,533 1,046 4.53 1,215 12 1.99

Total interest-bearing liabilities 713,235 6,470 1.83 % 621,268 1,189 0.39 %

Net interest income $ 18,116 $ 16,010

Net interest rate spread 3.42 % 3.55 %

Net earning assets $ 232,126 $ 259,438

Net interest margin 3.86 % 3.67 %

Average interest-earning assets to average interest-bearing liabilities 132.55 % 141.76 %

Noninterest-bearing deposits $ 166,007 $ 193,695

Total deposits 821,021 5,088 1.25 % 802,105 841 0.21 %

Total funding (2)

879,242 6,470 1.48 % 814,963 1,189 0.29 %

(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

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

Three Months Ended March 31, 2023 vs.

Three Months Ended June 30, 2023 vs.

Six Months Ended June 30, 2023 vs.

Increase (Decrease) due to Total

Increase (Decrease) Increase (Decrease) due to Total

Increase (Decrease)

Volume Rate Volume Rate

Interest-earning assets:

10 unchanged sentences

Change in net interest income $ 352 $ 2,106

Comparison of Results of Operation for the Three Months Ended March 31, 2023 and 2022

Comparison of Results of Operation for the Three and Six Months Ended June 30, 2023 and 2022

Q2 2023 vs Q2 2022 .

Net income increased $445 thousand, or 25.8%, to $2.2 million, or $0.83 per diluted common share, for the three months ended March 31, 2023, compared to $1.7 million, or $0.65 per diluted common share, for the three months ended March 31, 2022.

The increase was primarily the result of a $1.8 million increase in net interest income and a $130 thousand decrease in the provision for credit losses, partially offset by a $554 thousand decrease in noninterest income and a $795 thousand increase in noninterest expense.

Net income increased $1.3 million, or 79.2%, to $2.9 million, or $1.11 per diluted common share, for the three months ended June 30, 2023, compared to $1.6 million, or $0.61 per diluted common share, for the three months ended June 30, 2022.

The increase was primarily the result of a $352 thousand increase in net interest income, a $923 thousand decrease in the provision for credit losses and a $876 thousand increase in noninterest income, partially offset by a $705 thousand increase in noninterest expense.

Net income increased $1.7 million, or 51.6%, to $5.1 million, or $1.94 per diluted common share, for the six months ended June 30, 2023, compared to $3.3 million, or $1.26 per diluted common share, for the six months ended June 30, 2022.

The increase was primarily a result of a $2.1 million increase in net interest income, a $1.1 million decrease in the provision for credit losses and a $318 thousand increase in noninterest income, partially offset by a $1.5 million increase in noninterest expense.

Interest Income

Q2 2023 vs Q2 2022 .

Interest income increased $4.0 million, or 48.2%, to $12.2 million for the three months ended March 31, 2023, from $8.2 million for the three months ended March 31, 2022, primarily due to higher average loan balances, a 61 basis point increase in the average loan yield and a 371 basis point increase in the average yield on investments and interest-bearing cash, partially offset by a lower average balance of investments and interest-bearing cash.

Interest income on loans increased $3.3 million, or 40.9%, to $11.4 million for the three months ended March 31, 2023, compared to $8.1 million for the three months ended March 31, 2022.

The average balance of total loans was $867.7 million for the three months ended March 31, 2023, compared to $694.9 million for the three months ended March 31, 2022 primarily resulting from increased balances related to construction advances, partially offset by a decrease in commercial and multifamily loans resulting from the payoff of a few large multifamily loans during the past year.

The average yield on total loans was 5.32% for three months ended March 31, 2023, compared to 4.71% for the three months ended March 31, 2022.

Interest income increased $3.4 million, or 38.1%, to $12.4 million for the three months ended June 30, 2023, from $9.0 million for the three months ended June 30, 2022, primarily due to higher average loan balances, a 65 basis point increase in the average loan yield and a 354 basis point increase in the average yield on investments, cash and cash equivalents, partially offset by a lower average balance of investments, cash and cash equivalents.

Interest income on loans increased $2.9 million, or 32.8%, to $11.6 million for the three months ended June 30, 2023, compared to $8.7 million for the three months ended June 30, 2022.

The average balance of total loans was $866.0 million for the three months ended June 30, 2023, compared to $741.6 million for the three months ended June 30, 2022, primarily resulting from increased balances in all loan categories, excluding commercial business loans.

The average yield on total loans was 5.35% for three months ended June 30, 2023, compared to 4.70% for the three months ended June 30, 2022.

The average yield on total loans increased primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates.

Interest income on the investment portfolio and cash and cash equivalents increased $655 thousand, or 474.6%, to $793 thousand for the three months ended March 31, 2023, compared to $138 thousand for the three months ended March 31, 2022.

Interest income on the investment portfolio and cash and cash equivalents increased $572 thousand, or 197.9%, to $861 thousand for the three months ended June 30, 2023, compared to $289 thousand for the three months ended June 30, 2022.

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 $80.2 million for the three months ended March 31, 2023, compared to $190.4 million for the three months ended March 31, 2022.

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 4.01% for the three months ended March 31, 2023, compared to 0.29% for the three months ended March 31, 2022, as a result of the rising interest rate environment.

The average balance on investments and cash and cash equivalents was $79.0 million for the three months ended June 30, 2023, compared to $138.9 million for the three months ended June 30, 2022.

decrease in average balance was due to lower average cash balances as we redeployed funds into higher interest-earning assets, specifically loans.

The average yield on investments and cash and cash equivalents increased to 4.37% for the three months ended June 30, 2023, compared to 0.83% for the three months ended June 30, 2022, as a result of the rising interest rate environment.

Interest income increased $7.4 million, or 43.0%, to $24.6 million for the six months ended June 30, 2023, from $17.2 million for the six months ended June 30, 2022, primarily due to higher average loan balances, a 62 basis point increase in the average loan yield and a 372 basis point increase in the average yield earned on investments, cash and cash equivalents, partially offset by a lower average balance of investments, cash and cash equivalents.

Interest income on loans increased $6.2 million, or 36.7%, to $22.9 million for the six months ended June 30, 2023, compared to $16.8 million for the six months ended June 30, 2022, driven by higher average total loans and a 62 basis points increase in the average yield on loans.

The average balance of total loans was $866.9 million for the six months ended June 30, 2023, compared to $718.4 million for the six months ended June 30, 2022, primarily resulting from increased balances related to all loan categories, excluding other consumer and commercial business loans.

The average yield on total loans was 5.33% for the six months ended June 30, 2023, compared to 4.71% for the six months ended June 30, 2022.

The average yield on total loans increased primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates

Interest income on the investment portfolio and cash and cash equivalents increased $1.2 million, or 287.4%, to $1.7 million for the six months ended June 30, 2023, compared to $427 thousand for the six months ended June 30, 2022.

The increase in 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 4.25% for the six months ended June 30, 2023, compared to 0.53% for the six months ended June 30, 2022, as a result of the rising interest rate environment.

Interest Expense

Q2 2023 vs Q2 2022 .

Interest expense increased $2.2 million, or 371.1%, to $2.8 million for the three months ended March 31, 2023, from $595 thousand for the three months ended March 31, 2022.

Interest expense on deposits increased $1.7 million, or

400.2%, to $2.1 million for the three months ended March 31, 2023, compared to $427 thousand for the same period a year ago.

The increase was primarily the result of a $44.9 million increase in the average balance of borrowings and a $144.3 million increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a $106.0 million decrease in the average balance of interest-bearing deposits other than certificate accounts.

The increase in the rate paid on certificate accounts contributed to a 84 basis point increase in the average cost of total deposits to 1.05% for the quarter ended March 31, 2023, from 0.21% for the quarter ended March 31, 2022.

Interest expense on borrowings, comprised solely of FHLB advances, was $499 thousand for the three months ended March 31, 2023, compared to none for the three months ended March 31, 2022, reflecting the increased use of FHLB advances to supplement our liquidity needs.

Interest expense on subordinated notes was $168 thousand for both three month periods ended March 31, 2023 and 2022.

Interest expense increased $3.1 million, or 517.5%, to $3.7 million for the three months ended June 30, 2023, from $594 thousand for the three months ended June 30, 2022.

Interest expense on deposits increased $2.5 million, or 613.3%, to $3.0 million for the three months ended June 30, 2023, compared to $414 thousand for the same period a year ago.

The increase was primarily the result of a $183.8 million increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a $129.0 million decrease in the average balance of interest-bearing deposits other than certificate accounts.

The increase in the rate paid on certificate accounts contributed to a 124 basis point increase in the average cost of total deposits to 1.45% for the quarter ended June 30, 2023, from 0.21% for the quarter ended June 30, 2022.

Interest expense on borrowings, comprised solely of FHLB advances, was $547 thousand for the three months ended June 30, 2023, compared to $12 thousand for the three months ended June 30, 2022, reflecting the increased use of FHLB advances to supplement our liquidity needs.

Interest expense on subordinated notes was $168 thousand for both the three months ended June 30, 2023 and 2022.

Interest expense increased $5.3 million, or 444.2%, to $6.5 million for the six months ended June 30, 2023, from $1.2 million for the six months ended June 30, 2022.

Interest expense on deposits increased $4.2 million, or 505.0%, to $5.1 million for the six months ended June 30, 2023, compared to $841 thousand for the six months ended June 30, 2022.

The increase was primarily the result of an increase in the average balance of certificate accounts, as well as higher average rates paid on all interest-bearing deposits, partially offset by a decrease in the average balance of interest-bearing deposits other than certificate accounts.

The average cost of total deposits increased 104 basis points to 1.25% for the six months ended June 30, 2023, from 0.21% for the six months ended June 30, 2022.

Interest expense on borrowings, comprised solely of FHLB advances, was $1.0 million for the six months ended June 30, 2023, compared to $12 thousand for the six months ended June 30, 2022, reflecting the increased use of FHLB advances to supplement our liquidity needs.

Interest expense on subordinated notes was $336 thousand for both the six months ended June 30, 2023 and 2022.

Net Interest Income.

Q2 2023 vs Q2 2022 .

Net interest income increased $1.8 million, or 23.0%, to $9.4 million for the three months ended March 31, 2023, from $7.6 million for the three months ended March 31, 2022.

Our net interest margin was 4.01% and 3.49% for the three months ended March 31, 2023 and 2022, 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 and yield earned on loans, the increase in rates paid on interest-bearing liabilities and the higher average balance of borrowings.

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 475 basis points, including 50 basis points during the first quarter of 2023, to a range of 4.75% to 5.00% as of March 31, 2023.

In May 2023, the FOMC increased the target range for the federal funds rate another 25 basis points to a range of 5.00% to 5.25%.

Net interest income increased $352 thousand, or 4.2%, to $8.7 million for the three months ended June 30, 2023, from $8.4 million for the three months ended June 30, 2022.

Our net interest margin was 3.71% and 3.82% for the three months ended June 30, 2023 and 2022, respectively.

The increase in net interest income primarily was the result of a higher average balance of and yield earned on interest-earning assets, partially offset by a higher average balance of and rate paid on interest-bearing liabilities.

The decrease in net interest margin primarily was due to the higher interest expense on interest-bearing liabilities, driven by the increase in rates paid on interest-bearing liabilities and the higher average balances of certificates of deposits and borrowings, partially offset by higher interest income earned on interest-earning assets.

Net interest income increased $2.1 million, or 13.2%, to $18.1 million for the six months ended June 30, 2023, from $16.0 million for the six months ended June 30, 2022.

Our net interest margin was 3.86% and 3.67% for the six months ended June 30, 2023 and 2022, respectively.

The increase in net interest income primarily resulted from higher average balances and yield earned on interest-earning assets, partially offset by an increase in the average balances of and rate paid on deposits and borrowings The increase in net interest margin primarily was due to average yields earned on interest-earning assets increasing at a faster pace than the average interest rates paid on interest-bearing liabilities, partially offset by an increase in average borrowings.

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 500 basis points, including 75 basis points during 2023, to a range of 5.00% to 5.25% as of June 30, 2023.

In July 2023, the FOMC increased the target range for the federal funds rate another 25 basis points to a range of 5.25% to 5.50%.

Provision for Credit Losse s.

A provision for credit losses of $10 thousand was recorded for the three months ended March 31, 2023, consisting of a provision for credit losses on loans of $245 thousand and a release of reserve for unfunded loan commitments of $235 thousand.

This compared to a provision for credit losses of $140 thousand for the three months ended March 31, 2022, consisting of a provision for loan losses and unfunded loan commitments of $125 thousand and $15 thousand respectively.

The decrease in the provision for credit losses resulted primarily from changes in methodology used to reserve for credit losses.

The Company adopted the CECL standard as of January 1, 2023, which resulted in a one-time upward adjustment to the ACL - loans of $760 thousand and an ACL - unfunded loan commitments of $695 thousand, and an after-tax decrease to opening retained earnings of $1.1 million.

The following table reflects the components of the (release of) provision for credit losses during the periods indicated (dollars in thousands):

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

2023 2022 2023 2022

(Release of) provision for credit losses on loans $ (242) $ 600 $ 3 $ 725

(Release of) provision for credit losses on unfunded loan commitments (89) (8) (324) 7

(Release of) provision for credit losses $ (331) $ 592 $ (321) $ 732

The change in the provision for credit losses for both periods in 2023 from the comparable periods in 2022 resulted primarily from changes in methodology used to reserve for credit losses.

The Company adopted the CECL standard as of January 1, 2023.

All amounts prior to January 1, 2023 were calculated using the previous incurred loss methodology to compute our allowance for loan losses, which is not directly comparable to the new current expected credit losses methodology.

The provision for credit losses for the three months ended March 31, 2023 also reflects assumptions related to our forecast concerning the economic environment as a result of local, national and global events, including recent bank failures.

During the three months ended June 30, 2023, the release of credit losses on loans resulted primarily from the decrease in our loans held-for-portfolio, with most of the decline occurring within our commercial construction portfolio as projects were completed, while the release of credit losses on unfunded loan commitments related to construction advances funding and moving into the ACL - loans.

During the six months ended June 30, 2023, the provision for credit losses on loans primarily relates to the mix of the loan portfolio, partially offset by the decline in the balance of the loan portfolio, while the release of credit losses on unfunded loan commitments occurred for the same reasons discussed above for the three months ended June 30, 2023.

Under CECL, the provision for credit losses for the three and six months ended June 30, 2023 reflects assumptions related to our forecast concerning the economic environment as a result of local, national and global events, including recent bank failures.

In addition, expected loss estimates consider various factors, including customer-specific information, changes in risk ratings, projected delinquencies, and the impact of economic conditions on borrowers' ability to repay.

Net charge-offs for the three months ended March 31, 2023 totaled $72 thousand, compared to net charge-offs of $24 thousand for the three months ended March 31, 2022.

Net charge-offs for the six months ended June 30, 2023 totaled $145 thousand, compared to net recoveries of $86 thousand for the six months ended June 30, 2022.

While we believe the estimates and assumptions used in our determination of the adequacy of the ACL 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 have a material adverse impact on our financial condition and results of operations.

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Noninterest Income.

Noninterest income decreased $554 thousand, or 36.4%, to $1.0 million for the three months ended March 31, 2023, as compared to $1.5 million for the three months ended March 31, 2022, as reflected below (dollars in thousands):

Three Months Ended March 31, Amount

Noninterest income increased $876 thousand, or 86.3%, to $1.9 million for the three months ended June 30, 2023, as compared to $1.0 million for the three months ended June 30, 2022, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Change Percent

Service charges and fee income $ 670 $ 596 $ 74 12.4 %

Earnings on cash surrender value of BOLI 151 21 130 619.0

Earnings on BOLI 718 (35) 753 (2,151.4)

Mortgage servicing income 297 313 (16) (5.1)

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Total noninterest income $ 1,891 $ 1,015 $ 876 86.3 %

The decrease in noninterest income during the three months ended March 31, 2023 compared to the same quarter in 2022 primarily was due to a $287 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 $408 thousand decrease in the fair value adjustment on mortgage servicing rights due primarily to a decrease in the servicing portfolio, partially offset by a $130 thousand increase in earnings on cash surrender value of BOLI, reflecting recent price increases in the securities markets.

Loans sold during the quarter ended March 31, 2023, totaled $3.9 million, compared to $12.2 million during the quarter ended March 31, 2022.

The increase in noninterest income during the three months ended June 30, 2023 compared to the same quarter in 2022 primarily was due to a $753 thousand increase in earnings on BOLI, reflecting $567 thousand in earnings on death benefits paid under our BOLI policies and an increase in the cash surrender value due to recent price increases in the securities market, an insurance settlement received during the current quarter on a prior OREO property included in service charges and fee income, a $26 thousand increase in net gain on sale of loans as a result of an increase in both the amount of loans originated for sale and gross margins earned on loans sold and a $39 thousand increase in the fair value adjustment on mortgage servicing rights due primarily to an increase in market values, partially offset by a decrease in mortgage servicing income as our servicing loan portfolio continues to pay down.

Loans sold during the quarter ended June 30, 2023, totaled $6.4 million, compared to $2.9 million during the quarter ended June 30, 2022.

Noninterest income increased $318 thousand, or 12.5%, to $2.9 million for the six months ended June 30, 2023, as compared to $2.5 million for the six months ended June 30, 2022, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

Change Percent

Service charges and fee income $ 1,251 $ 1,146 $ 105 9.2 %

Earnings on BOLI 868 (14) 882 (6,300.0)

Mortgage servicing income 596 633 (37) (5.8)

Fair value adjustment on mortgage servicing rights (44) 325 (369) (113.5)

Net gain on sale of loans 187 450 (263) (58.4)

Total noninterest income $ 2,858 $ 2,540 $ 318 12.5 %

The increase in noninterest income during the six months ended June 30, 2023, compared to the same period in 2022 primarily was due to a $882 thousand increase in earnings on BOLI, reflecting $567 thousand in earnings on death benefits paid under our BOLI policies and an increase in the cash surrender value due to recent price increases in the securities market and a $105 thousand increase in service fees and fee income for the same reasons discussed above for the three months ended June 30, 2023.

These increases were partially offset by a $369 thousand downward adjustment in the fair value of mortgage servicing rights, a $263 thousand decrease in net gain on sale of loans resulting from lower mortgage activity and a $37 thousand decline in mortgage servicing income for the same reasons discussed above for the three months ended June 30, 2023.

Loans sold during the six months ended June 30, 2023, totaled $10.3 million, compared to $15.1 million during the six months ended June 30, 2022.

Noninterest Expense.

Noninterest expense increased $795 thousand, or 11.7%, to $7.6 million during the three months ended March 31, 2023, compared to $6.8 million during the three months ended March 31, 2022, as reflected below (dollars in thousands):

Three Months Ended March 31, Amount

Noninterest expense increased $705 thousand, or 10.4%, to $7.5 million during the three months ended June 30, 2023, compared to $6.8 million during the three months ended June 30, 2022, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Change Percent

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Data processing 788 849 (61) (7.2)

Net gain on OREO and repossessed assets (71) — (71) (100.0)

Total noninterest expense $ 7,497 $ 6,792 $ 705 10.4 %

The increase in noninterest expense during the three months ended March 31, 2023 compared to the same quarter in 2022 was mainly attributable to an increase in salaries and benefits of $318 thousand, primarily due to higher wages and lower deferred compensation, partially offset by a decrease in incentive compensation as a result of a lower percentage earned on loans originated, changes to incentive compensation programs, such as the addition of non-production performance requirements, and lower commission expense related to a decline in mortgage originations.

Operations expense increased $142 thousand compared to the quarter ended March 31, 2022 due to increases in various accounts including travel expenses, debit card processing, audit fees, fixed assets, state and local taxes, charitable contributions and office expenses.

These increases were partially offset by lower loan origination costs due to lower mortgage origination volume and decreases in various accounts, including marketing, legal and professional fees.

The efficiency ratio for the quarter ended March 31, 2023 was 73.65%, compared to 74.61% for the quarter ended March 31, 2022.

The improvement in the efficiency ratio for the current quarter compared to the same period in the prior year is primarily due to net interest income rising at a faster rate than the increase in noninterest expense and the decline in noninterest income.

The increase in noninterest expense during the three months ended June 30, 2023 compared to the same quarter in 2022 was mainly attributable to an increase in salaries and benefits of $731 thousand, reflecting higher wages, lower deferred compensation and higher medical expense, partially offset by a decrease in incentive compensation as a result of a lower percentage earned on loans originated, changes to incentive compensation programs, such as the addition of non-production performance requirements, and lower commission expense related to a decline in mortgage originations.

Operations expense increased $55 thousand compared to the quarter ended June 30, 2022 due to increases in various accounts including loan origination costs, legal fees, audit fees, state and local taxes, charitable contributions and office expenses.

Regulatory assessments rose due to our increased asset size.

These increases were partially offset by decreases in various accounts, including marketing, travel and costs related to our deposit products, specifically debit card processing expenses.

Data processing expense decreased as a result of the recovery of expenses written off in the first quarter of 2023, partially offset by higher expenses as a result of increased data processing costs related to contract rate increases.

The net gain on OREO relates to the sale of a former OREO property that was charged off during the first quarter of 2023.

The efficiency ratio for the quarter ended June 30, 2023 was 70.49%, compared to 72.20% for the quarter ended June 30, 2022.

The improvement in the efficiency ratio for the current quarter compared to the prior quarter is primarily due to the increase in noninterest income, largely related to the death benefits paid on BOLI, and net interest income rising at a faster rate than the increase in noninterest expense.

Noninterest expense increased $1.5 million, or 11.1%, to $15.1 million during the six months ended June 30, 2023, compared to $13.6 million during the six months ended June 30, 2022, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

Change Percent

Salaries and benefits $ 9,185 $ 8,137 $ 1,048 12.9 %

Operations 2,933 2,720 213 7.8

Regulatory assessments 307 200 107 53.5

Occupancy 894 872 22 2.5

Data processing 1,780 1,670 110 6.6

Net loss on OREO and repossessed assets 13 — 13 (100.0)

Total noninterest expense $ 15,112 $ 13,599 $ 1,513 11.1 %

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 loan origination activity in 2023 as compared to the same period in 2022.

Operations expense increased primarily due to increases in various accounts including legal fees, audit fees, state and local taxes, charitable contributions and office expenses, partially offset by marketing costs and professional fees.

Regulatory assessments increased due to our increased asset size.

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

Income Tax Expense .

We incurred income tax expense of $547 thousand for the three months ended March 31, 2023, compared to $458 thousand for the same period in 2022.

The effective tax rates for the three months ended March 31, 2023 and March 31, 2022 were 20.15% and 21.00%, respectively.

We incurred income tax expense of $577 thousand and $1.1 million for the three and six months ended June 30, 2023, compared to $409 thousand and $867 thousand for the same periods in 2022, respectively.

The effective tax rates for the three and six months ended June 30, 2023 were 16.63% and 18.18%, respectively.

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

Capital and Liquidity

The Management Discussion and Analysis in Item 7 of the Company’s 2022 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 2022 Form 10-K, this discussion updates that disclosure for the three months ended March 31, 2023.

Stockholders’ equity totaled $98.6 million at March 31, 2023 and $97.7 million at December 31, 2022.

In addition to net income of $2.2 million, other sources of capital during the three months ended March 31, 2023 included $247 thousand in proceeds from stock option exercises and other comprehensive income, net of tax, of $83 thousand.

Uses of capital during the three months ended March 31, 2023 primarily included $442 thousand of dividends paid on common stock and $9 thousand of stock repurchases.

We paid regular quarterly dividends of $0.17 per common share during the three months ended March 31, 2023 and regular quarterly dividends of $0.17 per common share and a special dividend of $0.10 per common share during the three months ended March 31, 2022, which equates to a dividend payout ratio of 20.39% in the first quarter of 2023 and 41.15% in the first quarter of 2022.

The Management’s Discussion and Analysis in Item 7 of the Company’s 2022 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 2022 Form 10-K, this discussion updates that disclosure for the six months ended June 30, 2023.

Stockholders’ equity totaled $99.9 million at June 30, 2023 and $97.7 million at December 31, 2022.

In addition to net income of $5.1 million, other sources of capital during the six months ended June 30, 2023 included $303 thousand in proceeds from stock option exercises and other comprehensive income, net of tax, of $23 thousand.

Uses of capital during the six months ended June 30, 2023 primarily included $936 thousand of dividends paid on common stock and $1.2 million of stock repurchases.

We paid regular quarterly dividends of $0.36 per common share during the six months ended June 30, 2023 and regular quarterly dividends of $0.34 per common share and a special dividend of $0.10 per common share during the six months ended June 30, 2022, which equates to a dividend payout ratio of 18.50% in the first half of 2023 and 34.53% in the first half of 2022.

The Company expects to continue paying quarterly cash dividends on its common stock, subject to the Board of Directors' discretion to change 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 2023 at the new rate of $0.19 per share, which the Company announced in April 2023, our average total dividend paid each quarter would be approximately $494 thousand based on the number of our current outstanding shares as of March 31, 2023.

Assuming continued payment of the regular quarterly cash dividend during the remainder of 2023 at the new rate of $0.19 per share, which the Company announced in April 2023, our average total dividend paid each quarter would be approximately $489 thousand based on the number of outstanding shares as of June 30, 2023.

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 2022 Form 10-K.

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In general, stock repurchases allow us to proactively manage our capital position and return excess capital to stockholders.

Stock repurchases may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.

As of March 31, 2023, approximately $2.1 million of our common stock remained available for repurchase under our existing stock repurchase program.

Stock repurchases may also offset the dilutive effects of stock compensation awards.

As of June 30, 2023, approximately $969 thousand of our common stock remained available for repurchase under our existing stock repurchase program.

Purchases under the Company’s existing stock repurchase program may be made through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as well as any constraints specified in any trading plan that may be adopted in accordance with SEC Rule 10b5-1.

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The Company’s stock repurchase program does not obligate the Company to purchase any particular number of shares.

For additional details on our stock repurchase program, see “Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II, Item 2 of this Form 10-Q.

Liquidity measures the ability to meet current and future cash flow needs as they become due.

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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.

Asset liquidity is provided by assets that are readily marketable or pledgeable or that 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.

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

As of March 31, 2023, we had $92.4 million in cash and available-for-sale investment securities and $1.4 million in loans held-for-sale.

At March 31, 2023, we had the ability to borrow $197.0 million in FHLB advances and access to additional borrowings of $22.0 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had $35.0 million in outstanding advances with the FHL B and none with the Federal Reserve at March 31, 2023.

We also had a $20.0 million credit facility with PCBB available, with no balance outstanding at March 31, 2023.

As of June 30, 2023, we had $110.7 million in cash and cash equivalents and available-for-sale investment securities, and $1.7 million in loans held-for-sale.

At June 30, 2023, we had the ability to borrow $169.3 million in FHLB advances and access to additional borrowings of $18.4 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.

We had $60.0 million in outstanding advances from the FHL B and none from the Federal Reserve at June 30, 2023.

We also had a $20.0 million credit facility with Pacific Coast Banker’s Bank available, with no balance outstanding at June 30, 2023.

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

As of March 31, 2023, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

As of June 30, 2023, management was not aware of any events 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.

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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 Condensed Consolidated Financial Statements elsewhere in this report for the expected timing of such payments as of March 31, 2023.

Refer to the accompanying Notes to Condensed Consolidated Financial Statements elsewhere in this report for the expected timing of such payments as of June 30, 2023.

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

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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):

March 31, 2023 December 31, 2022

At June 30, 2023 and December 31, 2022, financial instrument contract amounts representing credit risk were as follows (in thousands):

June 30, 2023 December 31, 2022

Residential mortgage commitments $ 6,502 $ 3,184

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See “Business — How We Are Regulated — Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of the Company’s 2022 Form 10-K.

At March 31, 2023 Sound Financial Bancorp, on an unconsolidated basis, had $2.2 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

At June 30, 2023 Sound Financial Bancorp, on an unconsolidated basis, had $603 thousand in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

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

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

As of March 31, 2023, the Bank and Company’s CBLR was 10.94% and 9.93%, respectively, which exceeded the minimum requirement of 9%.

As of June 30, 2023, the Bank and Company’s CBLR was 11.31% and 10.11%, respectively, which exceeded the minimum requirement of 9%.

In February 2019, the U.S.

9 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis