What changed in this filing

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Item 1. Business

2024-03-22 compared with 2023-03-14 · 248 added, 293 removed, 863 unchanged (39% 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 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 the interest rate environment, including the recent increases in the Board of Governors of the Federal Reserve System (the “Federal Reserve”) benchmark rate and duration at which such increased rate levels are maintained, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;

• the impact of continuing high inflation;

• the effects of any federal government shutdown;

• changes in consumer spending, borrowing and savings habits;

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

• monetary and fiscal policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the U.S.

• monetary and fiscal policies of the Federal Reserve and the U.S.

Government and other governmental initiatives affecting the financial services industry;

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• our ability to access cost-effective funding;

• 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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• fluctuations in interest rates;

• results of examinations of Sound Financial Bancorp and Sound Community Bank by their regulators, including the possibility that the regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets, change Sound Community Bank's regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

• 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 ACL 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;

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• the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets;

• disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;

• 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;

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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 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.

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 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 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 operate in the Seattle Metropolitan Statistical Area (“MSA”), which includes King County (which includes the city of Seattle), Pierce County and Snohomish County in the Puget Sound region.

We also operate in Clallam and Jefferson Counties on the North Olympic Peninsula of Washington.

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

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

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See “—Competition.”

Our market area includes a diverse population of management, professional and sales personnel, office employees, health care workers, manufacturing and transportation workers, service industry workers and government employees, as well as retired and self-employed individuals.

Our market area includes a diverse population of management, professional and sales personnel, office employees, health care workers, software and technology workers, manufacturing and transportation workers, service industry workers and government employees, as well as retired and self-employed individuals.

The population has a skilled work force with a wide range of education levels and ethnic backgrounds.

Major employment sectors include information and communications technology, financial services, aerospace, military, manufacturing, maritime, biotechnology, education, health and social services, retail trades, transportation and professional services.

Significant employers headquartered in our market area include U.S.

Joint Base Lewis-McChord, Microsoft, University of Washington, Providence Health, Costco, Boeing, Nordstrom, Amazon.com, Starbucks, Alaska Air Group and Weyerhaeuser.

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

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.

Major employment sectors in our market area include information and communications technology, financial services, aerospace, military, manufacturing, maritime, biotechnology, education, health and social services, retail trades, transportation and professional services.

Significant employers headquartered in our market area include Microsoft, Amazon.com, Starbucks, University of Washington, Providence Health, Costco, Boeing, Nordstrom, Alaska Air Group, Weyerhaeuser and the U.S.

Joint Base Lewis-McChord.

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

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.

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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.

Based on information from Case-Shiller, the average home price in the Seattle MSA increased 3.0% in 2023.

King County has the largest population of any county in the state of Washington with approximately 2.3 million residents and a median household income of approximately $116 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.

Based on information from the MLS, the median home sales price in Pierce County in December 2022 was $545 thousand, a 9% increase from December 2021's median home sales price of $500 thousand.

Snohomish County has approximately 820,024 residents and a median household income of approximately $100 thousand.

Based on information from the MLS, the median home sales price in Snohomish County at December 2022 was $730 thousand, an 12% increase from December 2021's median home sales price of $650 thousand.

Clallam County, with a population of approximately 76,727, has a median household income of approximately $63 thousand.

The economy of Clallam County is primarily manufacturing and shipping.

Based on information from the Northwest Multiple Listing Service (“MLS”), the median home sales price in King County in December 2023 was $795 thousand, a 2% decrease from December 2022's median home sales price of $815 thousand.

Pierce County has approximately 919 thousand residents and a median household income of approximately $93 thousand.

Based on information from the MLS, the median home sales price in Pierce County in December 2023 was $525 thousand, a 4% decrease from December 2022's median home sales price of $545 thousand.

Snohomish County has approximately 828 thousand residents and a median household income of approximately $101 thousand.

Based on information from the MLS, the median home sales price in Snohomish County at December 2023 was $700 thousand, a 4% decrease from December 2022's median home sales price of $730 thousand.

Clallam County, with a population of approximately 77 thousand, has a median household income of approximately $67 thousand.

The economy of Clallam County is primarily medical, retail and construction.

The Sequim Dungeness Valley continues to be a growing retirement location.

Based on information from the MLS, the median home sales price in Clallam County in December 2022 was $446 thousand, an 8% increase from December 2021's median home sales price of $413 thousand.

Jefferson County, with a population of approximately 32,590, has a median household income of approximately $62 thousand.

Based on information from the MLS, the median home sales price in Clallam County in December 2023 was $455 thousand, a 2% increase from December 2022's median home sales price of $446 thousand.

Jefferson County, with a population of approximately 33 thousand, has a median household income of approximately $69 thousand.

Based on information from the MLS, the average home sales price in Jefferson County in December 2023 was $625 thousand, a 3% increase from December 2022's median home sales price of $608 thousand.

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Deferred fees and discounts (2,511) (2,548)

Allowance for loan losses (7,599) (6,306)

Allowance for credit losses on loans

(8,760) (7,599)

Total loans, net $ 885,718 $ 858,382

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Deferred fees and discounts (2,511) (2,548)

Allowance for loan losses (7,599) (6,306)

Allowance for credit losses on loans

(8,760) (7,599)

Total loans, net $ 885,718 $ 858,382

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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

One Year or Less After One Year Through Five Years After Five Years Through Fifteen Years After Fifteen Years Total

Real estate loans:

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Total $ 127,706 $ 123,945 $ 269,833 $ 374,676 $ 896,160

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

The following table sets forth the amount of total loans due after December 31, 2024, with fixed or adjustable interest rates (in thousands).

Fixed-Rate Adjustable-Rate Total

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Our five largest relationships (including unused commitments) totaled $93.3 million in the aggregate, or 10.4% of our $896.2 million total loan portfolio, at December 31, 2023.

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, 2023, the largest lending relationship totaled $22.8 million and consisted of six loans to four businesses totaling $22.7 million , of which $11.4 million remained unfunded at December 31, 2023, and two loans to a business totaling $106 thousand, of which $48 thousand remains unfunded.

The second largest relationship totaled $18.6 million and consisted of two loans to a business, a construction loan totaling $16.7 million, of which $4.2 million remained unfunded at December 31, 2023, and a $1.9 million commercial real estate loan.

The third largest relationship totaled $18.2 million and consisted of one construction and land loan, of which $3.4 million remained unfunded at December 31, 2023, secured by a multifamily real estate property being renovated.

The fourth largest relationship totaled $17.4 million and consisted of three loans to a business totaling $11.3 million collateralized by multifamily and commercial real estate, and two loans to a business with related guarantors totaling $6.1 million , both collateralized by multifamily real estate.

The fifth largest borrowing relationship totaled $16.3 million, and consisted of one construction loan, of which $2.3 million remained unfunded at December 31, 2023.

At December 31, 2023, we had 14 additional lending relationships in excess of $6.9 million each, totaling $144.3 million.

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

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 $726,200 or $977,500, depending on location within our market area).

At December 31, 2022, our average loan amount was $716 thousand for adjustable-rate, one-to-four family mortgages.

During 2023, our fixed-rate, one-to-four family loan originations decreased $47.1 million, or 56.6%, to $36.0 million compared to $83.1 million in 2022, while one-to-four family adjustable-rate loan originations decreased $25.4 million, or 59.8% to $17.1 million compared to $42.5 million in 2022.

The decreased originations in both fixed and adjustable-rate residential loans can be attributed to a combination of factors, including the high interest rate environment, economic uncertainty, and the limited housing supply and elevated housing prices in our market area.

At December 31, 2023, our average adjustable-rate, one-to-four family residential loan was $657 thousand.

Most of our loans are underwritten using generally accepted secondary market underwriting guidelines.

A portion of the one-to-four family loans we originate are retained in our portfolio and the remaining loans are sold into the secondary market to Fannie Mae or other private investors.

Loans that are sold into the secondary market to Fannie Mae are sold with the servicing retained to maintain the client relationship and to generate noninterest income.

Loans that are sold into the secondary market to Fannie Mae are generally sold with the servicing retained to maintain the client relationship and to generate noninterest income.

We also originate a small portion of government guaranteed and jumbo loans for sale servicing released to certain correspondent purchasers.

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We generally lend up to 80% of the lesser of the appraised value or purchase price for one-to-four family first mortgage loans and nonowner-occupied first mortgage loans.

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.

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.

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

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Fixed-rate loans secured by one-to-four family residences have contractual maturities of up to 30 years.

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

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

At December 31, 2023, our portfolio of fixed-rate loans also included $302 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 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.

We generally use the 30-day secured overnight financing rate (“SOFR”) to re-price our adjustable-rate loans;

however, $10.9 million of our adjustable-rate loans are loans to employees and directors that re-price annually based on a margin of 1%-1.50% over our average 12-month cost of funds.

Due to the utilization of annual adjustments and lifetime caps, the interest rates on adjustable-rate loans may not be as rate sensitive as our cost of funds.

Furthermore, because loan indices may not respond perfectly to changes in market interest rates, upward adjustments on loans may occur more slowly than increases in our cost of interest-bearing liabilities, especially during periods of rapidly increasing interest rates.

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If the borrower has multiple rental property loans with us, the loans are typically not cross collateralized.

In 2016, in order to enable individuals to secure the purchase of a new residence before selling their existing residence, we commenced a loan program designed to allow borrowers to access the equity in their current residence to apply towards the purchase of a new residence.

The loan or loans to purchase the new residence are generally originated in an amount in excess of $1.0 million and secured by the borrower's existing and/or new residences, with a maximum combined loan-to-value ratio of up to 80%.

These loans provide for repayment upon the earlier of the sale of the current residence or the loan maturity date, which is typically up to 12 months.

Upon the sale of the borrower's current residence, we may refinance the new residence using our traditional jumbo mortgage loan underwriting guidelines.

In 2016, we introduced a loan program aimed at assisting individuals in acquiring a new residence before selling their existing one.

This program enables borrowers to leverage the equity in their current residence for the purchase of a new one.

Typically, the loan or loans for the new residence are originated at amounts exceeding $1.0 million and are secured by the borrower’s existing and/or new residences.

The maximum combined loan-to-value ratio allowed is up to 80%.

Repayment is structured to occur upon the earlier of the sale of the current residence or the loan maturity date, which is typically up to 12 months.

Upon the sale of the borrower's current residence, there is an option for the borrower to refinance the new residence using our traditional jumbo mortgage loan underwriting guidelines.

During 2023, we originated $12.6 million of loans under this program, compared to $6.9 million in 2022.

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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.

This approach exposes us to an increased risk of loss due to the larger loan balance and the inability to sell these loans to Fannie Mae, similar to the risks associated with jumbo one-to-four family 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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Home equity lines of credit are typically originated for up to $250,000 with an adjustable rate of interest, based on the one-year Treasury Bill rate or the Wall Street Journal Prime rate, plus a margin .

Home equity lines of credit generally have a three-, five- or 12-year draw period, during which time the funds may be paid down and redrawn up to the committed amount.

Home equity lines of credit generally have a three-, five-, ten- or 12-year draw period, during which time the funds may be paid down and redrawn up to the committed amount.

Once the draw period has lapsed, the payment is amortized over either a 12-, 15-, 19- or 21-year period based on the loan balance at that time.

We charge a $50 annual fee on each home equity line of credit and require monthly interest-only payments on the entire amount drawn during the draw period.

Certain home equity line of credit products allow an amount up to the credit limit to be converted to up to three installment loans at a fixed rate prior to the lapse of the draw period.

The option to convert a portion of a home equity line of credit into fixed-rate installment loans prior to the end of the draw period offers borrowers valuable financial flexibility, stability, and tailored financing options, enhancing the overall appeal and usefulness of the home equity product.

At December 31, 2023, home equity loans totaled $23.1 million, or 2.6% of our total loan portfolio, compared to $19.5 million, or 2.3% of our total loan portfolio at December 31, 2022.

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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.

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

Appraisals on properties securing commercial and multifamily real estate loans are performed by independent state certified licensed fee appraisers.

In order to monitor the adequacy of cash flows on income-producing properties, the borrower is required to provide annual financial information.

To monitor the adequacy of cash flows on income-producing properties, the borrower is required to provide annual financial information.

We also from time to time acquire participation interests in commercial and multifamily real estate loans originated by other financial institutions secured by properties located in our market area.

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Because payments on loans secured by commercial and multifamily properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy.

Repayments of loans secured by nonowner-occupied properties depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream.

ability to repay the loan without the benefit of a rental income stream.

If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower's ability to repay the loan may be impaired.

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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, 2022, totaled $11.8

million and was collateralized by a storage facility.

The largest single commercial and multifamily real estate loan at December 31, 2023, totaled $11.5 million and was collateralized by a storage facility.

At December 31, 2023, this loan was performing in accordance with its repayment terms.

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Construction loans to individuals and contractors for the construction of personal residences, including speculative residential construction, totaled $26.1 million, or 20.6%, of our construction and land portfolio at December 31, 2023.

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.

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 but has a commitment for permanent financing with either us or another lender.

At December 31, 2023, construction loans to contractors for homes that were considered speculative totaled $17.6 million, or 13.9%, 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):

The composition of, and location of underlying collateral securing, our construction and land loan portfolio, excluding loan commitments, at December 31, 2023 and 2022 was as follows (in thousands):

Commercial and multifamily construction $ 78,366 $ 85,747

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Total $ 126,758 $ 116,877

Our residential construction loans generally provide for the payment of interest only during the construction phase, which is typically twelve to eighteen months.

Our residential construction loans generally provide for the payment of interest only during the construction phase, which is typically 12 to 18 months.

At the end of the construction phase, the construction loan generally either converts to a longer-term mortgage loan or is paid off with a permanent loan from another lender.

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

We also require general liability, builder's risk hazard insurance, title insurance, and flood insurance, for properties located in or to be built in a designated flood hazard area, on all construction loans.

We require general liability, builder's risk hazard insurance, title insurance, and flood insurance, for properties located in or to be built in a designated flood hazard area, on all construction loans.

We also originate developed lot and raw land loans to individuals intending to construct a residence in the future on the property.

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Land acquisition and development loan proceeds are disbursed periodically in increments as construction progresses and as an inspection by our approved inspector warrants.

We also require these loans to be paid on an accelerated basis as the lots are sold, so that we are repaid before all the lots are sold.

We require these loans to be paid on an accelerated basis as the lots are sold, so that we are repaid before all the lots are sold.

At December 31, 2023, land acquisition and development and lot loans totaled $19.4 million, or 15.3% of our construction and land portfolio.

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Most of our commercial and multifamily construction loans provide for disbursement of loan funds during the construction period and conversion to a permanent loan when the construction is complete and either tenant lease-up provisions or prescribed debt service coverage ratios are met.

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, 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.

Our construction and land development loans are based upon estimates of costs in relation to values associated with the completed project.

Construction and land lending involves additional risks when compared with permanent residential lending because funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion.

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 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 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.

In addition, during the term of most of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve.

As a result, these loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest.

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.

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.

Properties under construction may be difficult to sell and typically must be completed in order to be successfully sold, which also complicates the process of resolving problem construction loans.

At December 31, 2023, commercial and multifamily construction loans totaled

$78.4 million or 61.8% of our construction and land portfolio, compared to $85.7 million, or 73.4% of our construction and land portfolio at December 31, 2022.

The three largest commercial and multifamily construction loans at December 31, 2023 included a $14.8 million loan secured by the renovation of a multifamily real estate property, an $14.0 million loan secured by construction of a multifamily real estate property and a $12.9 million loan secured by a construction of a multifamily real estate, located in Pierce and King Counties, Washington.

At December 31, 2023, all these loans were performing in accordance with their repayment terms.

Our construction and land development loans are structured based on estimates of costs relative to the anticipated values of completed projects.

Construction and land lending entail higher risks compared to permanent residential lending as funds are disbursed against the project’s collateral based on estimated costs, which are expected to yield future value upon completion.

Due to uncertainties inherent in estimating construction costs, market values of completed projects, and the impact of governmental regulations on real property, accurately evaluating the total funds required to complete a project and the completed project loan-to-value ratio can be challenging.

Actual results may significantly differ from estimates due to changes in demand, unexpected building costs, and other factors.

This type of lending often involves higher loan principal amounts and may be concentrated with a small number of builders.

A downturn in housing or the real estate market could escalate loan delinquencies, defaults, and foreclosures, adversely affecting the value of our collateral and our ability to sell it upon foreclosure.

Some builders have multiple loans outstanding with us, including residential mortgage loans for rental properties exposing us to a greater risk if an adverse development occurs in one credit relationship.

During the term of most construction loans, no borrower payment is required as accumulated interest is added to the loan principal through an interest reserve.

Consequently, the success of these loans relies heavily on the project’s ultimate outcome and the borrower’s ability to sell or lease the property or secure permanent take-out financing.

If our appraisal of the completed project’s value proves overstated, we may lack sufficient security for the loan repayment, leading to potential losses.

Construction loans necessitate active monitoring of the building process, including cost comparisons and on-site inspections, making them more challenging and costly to oversee.

Increases in market interest rates can disproportionately impact construction loans by rapidly escalating end purchasers’ borrowing costs, potentially reducing overall project demand.

Selling properties under construction can be challenging, requiring completion for successful sales, complicating the resolution of problem construction loans.

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.

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.

These risks can also be significantly impacted by supply and demand conditions.

In the case of speculative construction loans, identifying an end purchaser for the finished project is an added risk.

Land loans pose risks due to the lack of income from the property and the potential illiquid nature of the collateral.

These risks can be significantly influenced by supply and demand conditions.

A downturn in housing or the real estate market may elevate loan delinquencies, defaults, and foreclosures, impairing collateral value and our ability to sell the collateral upon foreclosure.

Commercial Business Lending.

At December 31, 2023, commercial business loans totaled $20.7 million, or 2.3% of our total loan portfolio, compared to $23.8 million, or 2.7% of our total loan portfolio at December 31, 2022.

Substantially all of our commercial business loans have been to borrowers in our market area.

Substantially all our commercial business loans have been to borrowers in our market area.

Our commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance commercial vehicles and equipment and loans secured by accounts receivable and/or inventory.

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Other collateral securing loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the specific type of business and equipment.

As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself which, in turn, is often dependent in part upon general economic conditions.

result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself which, in turn, is often dependent in part upon general economic conditions.

Consumer Lending.

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We originate our consumer loans primarily in our market area.

All of our consumer loans are originated on a direct basis.

All our consumer loans are originated on a direct basis.

At December 31, 2023, our consumer loans totaled $130.9 million, or 14.6% of our total loan portfolio, compared to $119.3 million, or 13.8% of our total loan portfolio at December 31, 2022.

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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.

A small portion of our manufactured home loans involve properties on which we have also 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.

As a result, these loans may have a higher probability of default and higher delinquency rates than single-family residential loans and other types of consumer loans.

We take into account this additional risk as a component of our allowance for loan losses.

We consider this additional risk as a component of our ACL.

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

At December 31, 2023, there were five nonperforming manufactured home loans totaling $228 thousand.

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

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As a result, these loans may have higher collateral recovery costs than for one-to-four family mortgage loans and other types of consumer loans.

We take into account these additional risks as a part of our underwriting criteria.

We consider these additional risks as a component of our ACL.

At December 31, 2023, floating home loans totaled $75.1 million, or 57.4% of our consumer loan portfolio and 8.4% of our total loan portfolio.

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Our ability to originate loans, however, is dependent upon client demand for loans in our market area.

Over the past several years, we have continued to originate residential and consumer loans, and increased our emphasis on commercial and multifamily real estate, construction and land, and commercial business lending.

Over the past several years, we have continued to originate residential and consumer loans, and

increased our emphasis on commercial and multifamily real estate, construction and land, and commercial business lending.

Demand is affected by competition and the interest-rate environment.

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We did not sell any commercial loan participations in 2023 or 2022.

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 had no purchases of commercial business loan participations from other financial institutions in 2023 and $2.6 million in 2022.

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

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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.

We repurchased one loan totaling $448 thousand in 2023 and no loans in 2022.

Sales of whole real estate loans 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.

We sold $17.1 million and $20.3 million of conforming one-to-four family loans during the year ended December 31, 2023 and 2022, respectively.

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

Our net gains on sales of residential loans for the years ended December 31, 2023 and 2022 were $340 thousand and $546 thousand, 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.

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):

Year Ended December 31,

Originations by type:

One-to-four family $ 83,122 $ 226,125

Home equity 3,770 1,785

Commercial and multifamily 28,827 24,338

Construction and land 6,344 28,313

Manufactured homes 9,590 6,302

Floating homes 18,282 29,226

Other consumer 3,055 5,668

Commercial business 701 27,129

Total fixed-rate 153,691 348,886

Adjustable rate:

One-to-four family 42,513 17,760

Home equity 7,024 8,021

Commercial and multifamily 54,218 58,371

Construction and land 46,483 65,623

Floating homes 3,945 2,879

Other consumer 58 105

Commercial business 256 36,812

Total adjustable-rate 154,497 189,571

Total loans originated 308,188 538,457

Purchases by type:

One-to-four family — 24,067

Commercial business participations 2,556 4,298

Total loan participations purchased 2,556 28,365

Sales, repayments and participations sold:

One-to-four family 20,274 147,436

Commercial and multifamily 636 1,975

Total loans sold and loan participations 20,910 149,411

Transfers to OREO — 84

Total principal repayments 113,345 344,932

Total reductions 134,255 494,427

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.

During the year ended December 31, 2023 and 2022, we sold $2.0 million and $636 thousand, respectively, of loans with servicing released.

Asset Quality

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If the account becomes 120 days delinquent and an acceptable foreclosure alternative has not been agreed upon, we generally refer the account to legal counsel with instructions to prepare a notice of default.

The notice of default begins the foreclosure process.

The notice of default begins the

foreclosure process.

If foreclosure is completed, typically we take title to the property and sell it directly through a real estate broker.

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The table below sets forth the amounts and categories of nonperforming assets in our loan portfolio (in thousands).

Loans are placed on nonaccrual status when the collection of principal and/or interest become doubtful or when the loan is more than 90 days past due.

Loans are placed on nonaccrual status when the collection of principal and/or interest become doubtful or when the loan is 90 days or more past due.

Other real estate owned ("OREO") and repossessed assets include assets acquired in settlement of loans.

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Home equity 84 142

Commercial and multifamily — 2,380

Construction and land — 324

Manufactured homes 228 96

Floating homes — 493

Other consumer 1 262

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Nonperforming assets as a percentage of total assets 0.42 % 0.37 %

Performing restructured loans:

One-to-four family $ 1,610 $ 1,859

Home equity 68 75

Construction and land 34 35

Manufactured homes 92 99

Other consumer 81 106

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

(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 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.

(1) Nonaccrual loans included $333 thousand and $103 thousand in nonperforming modified loans to borrowers experiencing financial difficulty at December 31, 2023 and 2022, respectively.

We had no accruing loan 90 days or more delinquent at December 31, 2023 and 2022.

Nonaccrual loans, including nonaccrual modified loans to borrowers experiencing financial difficulty, increased $597 thousand to $3.6 million at December 31, 2023 from $3.0 million at December 31, 2022.

The increase was primarily due to the placement on nonaccrual status of a $2.1 million business term loan, $649 thousand in four one-to-four family real estate loans, and $142 thousand in two manufactured home loans, partially offset by the payoff of $1.5 million in nonperforming one-to-four family real estate loans related to a single borrower, the write-off of one residential property for $84 thousand, and other payoffs and normal amortization.

Our largest nonperforming loan relationship at December 31, 2023 consisted of one business term loan totaling $2.1 million, which is well secured, where the collateral is listed for sale and we expect to be repaid in full.

In addition, there were five manufactured home loans, two home equity loans, two other consumer loans, and nine additional one-to-four family loans classified as nonperforming at December 31, 2023.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition at December 31, 2023 Compared to December 31, 2022—Delinquencies and Nonperforming Assets" contained in Item 7 of this report on Form 10-K for more information on troubled assets.

Modified Loans to Borrowers Experiencing Financial Difficulty.

We occasionally modify loans to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize our potential losses.

We refer to these modifications as modified loans to troubled borrowers.

Modifications may include changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and, in very limited cases, reductions to the outstanding loan balance.

Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been past due for a period of 90 days or more.

Such loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt.

In March 2022, the FASB issued Accounting Standards Update ("ASU") 2022-02, Financial Instruments — Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures.

This ASU eliminated the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

We typically measure the ACL on modified loans to troubled borrowers on an individual basis when the loans are deemed to no longer share risk characteristics that are

similar with other loans in the portfolio.

The determination of the ACL for these loans is based on a discounted cash flow approach for loans measured individually, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated fair value of the underlying collateral, less estimated costs to sell.

GAAP requires us to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications.

Modified loans to borrowers experiencing financial difficulty totaled $1.7 million at December 31, 2023.

Troubled Debt Restructured 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.

All TDRs are initially classified as impaired regardless of whether the loan was performing at the time it was restructured.

At December 31, 2022, we had $1.9 million of loans that were classified as performing TDRs and still on accrual, compared to $2.2 million at December 31, 2021.

Included in nonaccrual loans at December 31, 2022 and 2021 were nonaccrual TDRs of $103 thousand and $422 thousand, respectively.

Prior to the adoption of ASU 2022-02, Financial Instruments—Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures , the Company had granted a variety of concessions to borrowers in the form of loan modifications that were considered TDRs.

Loans classified as TDRs totaled $2.0 million at December 31, 2022, and were previously included in impaired loans.

OREO and Repossessed Assets.

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At December 31, 2023, OREO and repossessed assets totaled $575 thousand.

Our OREO at December 31, 2022, consisted of two properties.

The first is a former bank branch property located in Port Angeles, Washington which was acquired in 2015 as a part of three branches purchased from another financial institution.

Our OREO at December 31, 2023, consisted of one property.

This property is a former bank branch property located in Port Angeles, Washington, which was acquired in 2015 as a part of three branches purchased from another financial institution.

It is currently leased to a local not-for-profit organization at a below-market rate.

The second OREO property is a one-to-four family home located in Michigan.

Classified Assets.

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We regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations.

On the basis of management's review of our assets, at December 31, 2022, we had classified $18.7 million of our assets as substandard, of which $18.1 million represented a variety of outstanding loans and $659 thousand represented the balance of our OREO and repossessed assets.

Based on management’s review of our assets at December 31, 2023, we had classified $14.4 million of our assets as substandard, of which $13.8 million represented a variety of outstanding loans and $575 thousand represented the balance of our OREO and repossessed assets.

At that date, we had no assets classified as doubtful or loss.

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Classified assets totaled $18.7 million, or 19.2% of our equity capital and 1.9% of our assets at December 31, 2022.

Allowance for Loan Losses .

We maintain an allowance for loan losses to absorb probable loan losses in the loan portfolio.

The allowance is based on ongoing, monthly assessments of the estimated probable incurred losses in the loan portfolio.

In evaluating the level of the allowance for loan losses, management considers the types of loans and the amount of loans in the loan portfolio, peer group information, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.

Large groups of smaller balance homogeneous loans, such as one-to-four family, small commercial and multifamily real estate, home equity and consumer loans, including floating homes and manufactured homes, are evaluated in the aggregate using historical loss factors and peer group data adjusted for current economic conditions.

More complex loans, such as commercial and multifamily real estate loans and commercial business loans are evaluated individually for impairment, primarily through the evaluation of the borrower's net operating income and available cash flow and their possible impact on collateral values.

At December 31, 2022, our allowance for loan losses was $7.6 million, or 0.88% of our total loan portfolio, compared to $6.3 million, or 0.92% of our total loan portfolio, at December 31, 2021.

Specific valuation reserves totaled $184 thousand and $293 thousand at December 31, 2022 and 2021, respectively.

Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

In the opinion of management, the allowance, when taken as a whole, properly reflects estimated probable loan losses inherent in our loan portfolio.

Allowance for Credit Losses on Loans .

We maintain an ACL in accordance with ASC 326.

The ACL is measured using the CECL approach for financial instruments measured at amortized cost and other commitments to extend credit.

CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset.

The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts.

The ACL consists of two elements:

(1) identification of loans that do not share risk characteristics with collectively evaluated loan pools are individually analyzed for expected credit loss and (2) establishment of an ACL for collectively evaluated loan pools based upon loans that share similar risk characteristics.

We estimate the ACL using relevant and reliable information from internal and external sources, related to past events, current conditions, and a reasonable and supportable forecast.

The ACL is measured on a collective (segment) basis when similar risk characteristics exist.

Historical credit loss experience for both the Company and segment-specific peers provides the basis for the estimate of expected credit losses.

Segments are based upon federal call report segmentation.

While our policies and procedures used to estimate the ACL, as well as the resulting provision for credit losses reported in the Consolidated Statements of Income, are reviewed periodically by regulators, model validators and internal audit, they are

necessarily approximate and imprecise.

There are factors beyond our control, such as changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact asset quality and the adequacy of the ACL and thus the resulting provision for credit losses.

At December 31, 2023, our ACL for loans was $8.8 million, or 0.98% of our total loan portfolio, compared to $7.6 million, or 0.88% of our total loan portfolio, at December 31, 2022.

See “Note 1—Organization and Significant Accounting Policies” and “Note 5—Loans” in the Notes to Consolidated Financial Statements contained in “Part II.

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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,

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

Allowance for loan losses 7,599 6,306

At and For December 31,

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

Allowance for credit losses — loans 8,760 7,599

Total loans outstanding 896,160 867,556

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

Nonaccrual loans as a percentage of total loans outstanding

0.40 % 0.34 %

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Total loans outstanding 896,160 867,556

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

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

246.34 % 256.81 %

Allowance for loan losses 7,599 6,306

Allowance for credit losses — loans 8,760 7,599

Total nonaccrual loans 3,556 2,959

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One-to-four family:

0.04 % (0.05) %

Net recoveries (charge-offs)

Net recoveries

Average loans outstanding

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(0.12) % 0.36 %

Net recoveries (charge-offs)

Net (charge-offs) recoveries

Average loans outstanding

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Commercial business:

Net recoveries

Net (charge-offs) recoveries

Average loans outstanding

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(0.02) % 0.01 %

Net recoveries (charge-offs)

Net (charge-offs) recoveries

Average loans outstanding

870,511 783,963

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

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 $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):

Economic conditions in both our local markets and the broader U.S.

have been and continue to be adversely impacted by inflation and the rising interest rate environment.

This impact has been partially mitigated by the persistent trend of low unemployment rates.

Recent trends in housing prices within our market areas indicate the influence of rising interest rates on

housing prices;

despite this, we continued to see strong demand for loans despite this increase.

In response to these economic challenges, we consistently monitor our loan portfolio for potential deterioration attributable to inflation and other economic factors.

The ACL as a percentage of nonperforming loans was 246.34% and 256.81% at December 31, 2023 and 2022, respectively.

We recorded a provision for credit losses on loans of $564 thousand for the year ended December 31, 2023, compared to $1.2 million for the year ended December 31, 2022.

Net charge-offs were $163 thousand for the year ended December 31, 2023, compared to $68 thousand for the year ended December 31, 2022.

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

Amount Percent of Loans

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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 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.

If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings.

The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected.

Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI.

The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and the fair value, is recognized as a charge to other comprehensive income.

Impairment losses related to all other factors are presented as separate categories within other comprehensive income.

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

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.

The ACL on investment securities is determined for both the HTM and AFS securities in accordance with Accounting Standards Codification (“ASC”) 326 - Financial Instruments - Credit Losses .

For AFS securities, we perform a quarterly qualitative evaluation for securities in an unrealized loss position to determine if, for those investments in an unrealized loss position, the decline in fair value is credit related or non-credit related.

In determining whether a security’s decline in fair value is credit related, we consider a number of factors including, but not limited to:

(i) the extent to which the fair value of the investment is less than its amortized cost;

(ii) the financial condition and near-term prospects of the issuer;

(iii) downgrades in credit ratings;

(iv) payment structure of the security, (v) the ability of the issuer of the security to make scheduled principal and interest payments and (vi) general market conditions, which reflect prospects for the economy as a whole, including interest rates and sector credit spreads.

If it is determined that the unrealized loss can be attributed to credit loss, we record the amount of credit loss through a charge to provision for credit losses in current period earnings.

However, the amount of credit loss recorded in current period earnings is limited to the amount of the total unrealized loss on the security, which is measured as the amount by which the security’s fair value is below its amortized cost.

If we intend to sell, or it is likely we will be required to sell the security in an unrealized loss position, the total amount of the loss is recognized in current period earnings.

For unrealized losses deemed non-credit related, we record the loss, net of tax, through accumulated other comprehensive income.

For HTM securities, we evaluate at the end of each quarter whether any expected credit losses exist.

We determine expected credit losses on investment securities through a discounted cash flow approach, using the security’s effective interest rate.

However, the measurement of credit losses on (“AFS”) securities only occurs when, through our qualitative assessment, all or a portion of the unrealized loss is determined to be credit related.

Our discounted cash flow approach incorporates assumptions about the collectability of future cash flows.

The amount of credit loss is measured as the amount by which the security’s amortized cost exceeds the present value of expected future cash flows.

Credit losses on AFS securities are measured on an individual basis, while credit losses on held-to-maturity (“HTM”) securities are measured on a collective basis according to shared risk characteristics.

Credit losses on HTM securities are only recognized at the individual security level when we determine a security no longer possesses risk characteristics similar to others in the portfolio.

We do not measure credit losses on an investment’s accrued interest receivable, but rather promptly reverse from current period earnings the amount of accrued interest that is no longer deemed collectable.

During the year ended December 31, 2023, we did not recognize any credit losses on investment securities.

At December 31, 2023, there was one security in an unrealized loss position for less than 12 months, and 16 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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The current market environment significantly limits our ability to mitigate our exposure to valuation changes in these securities by selling them.

If market conditions deteriorate and we determine our holdings of these or other investment securities have OTTI losses, our future earnings, stockholders' equity, regulatory capital and continuing operations could be materially adversely affected.

If market conditions deteriorate and we determine our holdings of these or other investment securities have credit losses, our future earnings, stockholders' equity, regulatory capital and continuing operations could be materially adversely affected.

See "Note 4—Investments" in the Notes to Consolidated Financial Statements contained in "Part II.

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At December 31, 2023, 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 86.6% of total deposits, compared to 92.2% at December 31, 2022.

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

We did not have any brokered time deposits at December 31, 2023 and 2022, and $5.0 million of brokered money market accounts at December 31, 2023 as compared to none at December 31, 2022.

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.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition.

The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand.

The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds and

to respond with flexibility to changes in consumer demand.

We manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors.

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Despite this stability, our ability to attract and maintain these deposits and the rates paid on them is and will continue to be significantly affected by market conditions.

The following table sets forth our deposit flows during the periods indicated (dollars in thousands):

Year Ended December 31,

Opening balance $ 798,320 $ 747,981

Net deposits 7,493 47,057

Interest credited 2,950 3,282

Ending balance $ 808,763 $ 798,320

Net increase $ 10,443 $ 50,339

Percent increase 1.3 % 6.7 %

The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by us at the dates indicated (dollars in thousands):

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Money market 154,044 18.6 74,639 9.2

Escrow 2,647 0.3 2,782 0.3

2,592 0.3 2,647 0.3

Total non-maturity deposits 518,577 62.7 598,458 74.0

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Total deposits $ 826,539 100.0 % $ 808,763 100.0 %

(1) Noninterest-bearing

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.

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Savings 80,673 0.07 102,202 0.05

Money Market 86,276 0.19 75,356 0.14

114,137 2.10 86,276 0.19

Certificate accounts 280,238 3.79 129,011 1.59

Total deposits $ 834,418 1.69 % $ 803,521 0.37 %

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.

Total deposits increased $17.8 million to $826.5 million at December 31, 2023, compared to the prior year-end.

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 2023.

Noninterest-bearing demand accounts (excluding escrow accounts) decreased $46.4 million, or 27.2%, in 2023 compared to 2022.

We also experienced decreases in our interest-bearing demand and savings accounts in 2023 compared to 2022.

The decrease in these accounts was primarily due to interest rate sensitive clients moving a portion of their non-operating deposit balances from lower costing deposits, including noninterest-bearing deposits, into higher costing money market and time deposits.

Certificates of deposits increased $97.7 million, or 46.4%, in 2023 compared to 2022.

We are a public funds depository and at December 31, 2023, we had $17.5 million in public funds compared to $7.0 million at December 31, 2022.

These funds consisted of $3.4 million in certificates of deposit, $3.4 million in money market accounts and $126 thousand in checking accounts at December 31, 2022.

These funds consisted of $13.7 million in certificates of deposit, $3.7 million in money market accounts

and $17 thousand in checking accounts at December 31, 2023.

These accounts must be 50% collateralized if the amount on deposit exceeds FDIC insurance of $250 thousand.

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

The following table sets forth the portion of our time deposits that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2022 (dollars in thousands).

The following table sets forth the portion of our certificate accounts that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2023 (dollars in thousands).

3 months or less $ 13,122

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These advances are provided upon the security of certain of our mortgage loans and mortgage-backed securities.

These advances may be made pursuant to

several different credit programs, each of which has its own interest rate, range of maturities and call features, and all long-term advances are required to provide funds for residential home financing.

We have entered into a loan agreement with the FHLB of Des Moines pursuant to which Sound Community Bank may borrow up to approximately 45% of total assets, secured by a blanket pledge on a portion of our residential mortgage portfolio, including one-to-four family loans, commercial and multifamily real estate loans and home equity loans.

These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features, and all long-term advances are required to provide funds for residential home financing.

multifamily real estate loans and home equity loans.

Based on eligible collateral, the total amount available under this agreement at December 31, 2023 was $181.4 million.

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.

At the same date, we had $40.0 million of outstanding FHLB fixed-rate advances, comprised of $15.0 million of short-term advances (with a maturity of November 2024 ) and $25.0 million of long-term advances (with maturities ranging from January 2026 to January 2028).

Additionally, we had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $10.0 million at December 31, 2023.

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

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We face competition in attracting deposits and originating loans.

Competition in originating real estate loans comes primarily from commercial banks, credit unions, life insurance companies, mortgage brokers and more recently financial technology (or "FinTech") companies.

Competition in originating real estate loans comes primarily from commercial banks, credit unions, life insurance companies, mortgage brokers and financial technology (or “FinTech”) companies.

Commercial banks, credit unions and finance companies, including FinTech companies, provide vigorous competition in consumer lending.

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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.

Our share of deposits in Clallam County was the second highest in the county at approximately 16.55%, with the five largest institutions in that county having 80.9% of the deposits.

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

Our share of deposits in Jefferson County is approximately 6.04%, while the five largest institutions in that county have 86.7% of those deposits.

share of deposits in Jefferson County is approximately 5.66%, while the five largest institutions in that county have 86.1% of those deposits.

How We Are Regulated

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We cannot predict whether any such changes may occur.

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

The WDFI and, as the Bank's primary federal regulator, the 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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Sound Community Bank, as a state-chartered commercial bank, is subject to applicable provisions of Washington law and to regulations and examinations of the WDFI.

As an insured institution, it also is subject to examination and regulation by the FDIC, which insures the deposits of Sound Community Bank to the maximum permitted by law.

As an insured institution, it also is subject to examination and regulation by the FDIC, which insures the deposits of Sound Community Bank to the maximum amount permitted by law.

During state or federal regulatory examinations, the examiners may require Sound Community Bank to provide for higher general or specific loan loss reserves, which can impact our capital and earnings.

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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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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.

Revised assessment rate schedules will remain in effect unless and until the reserve ratio meets or exceeds the FDIC’s target minimum level, absent further action by the FDIC Board.

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

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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:

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”));

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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.

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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Sound Community Bank received a “satisfactory” rating in its most recent CRA evaluation.

Under the law of the state of Washington, Sound Community Bank has a similar obligation to meet the credit needs of the communities it serves, and is subject to examination by the WDFI for this purpose, including assignment of a rating.

On October 24, 2023, the federal banking agencies, including the FDIC, issued a final rule designed to strengthen and modernize regulations implementing the CRA.

The changes are designed to encourage banks to expand access to credit, investment and banking services in low- and moderate-income communities, adapt to changes in the banking industry including mobile and internet banking, provide greater clarity and consistency in the application of the CRA regulations and tailor CRA evaluations and data collection to bank size and type.

Sound Community Bank cannot predict the impact the changes to the CRA will have on its operations at this time.

Under the laws of the state of Washington, Sound Community Bank has a similar obligation to meet the credit needs of the communities it serves, and is subject to examination by the WDFI for this purpose, including assignment of a rating.

An unsatisfactory rating may be the basis for denial of certain applications by the WDFI.

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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.

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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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.

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

In July 2023, the SEC adopted rules requiring registrants to disclose material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance.

The new rules require registrants to disclose on Form 8-K any cybersecurity incident they determine to be material and to describe the material aspects of the incident's nature, scope, and timing, as well as its material impact or reasonably likely material impact on the registrant.

For information regarding the Company’s cybersecurity risk management, strategy, and governance, see “Item 1C.” in this Form 10-K.

Anti-Money Laundering and Customer Identification.

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Federal Reserve System.

The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts.

In response to the COVID-19 pandemic, the FRB reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses.

At December 31, 2022, Sound Community Bank was in compliance with the reserve requirements.

The Federal Reserve historically required all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts.

The FRB reduced reserve requirement ratios to zero percent effective on March 26, 2020, thereby effectively eliminating the requirements.

The Federal Reserve took that action due to a change in its approach to monetary policy;

it has indicated that it has no plans to re-impose reserve requirements but could in the future if conditions warrant.

The Bank is authorized to borrow from the Federal Reserve Bank "discount window." An eligible institution need not exhaust other sources of funds before going to the discount window, nor are there restrictions on the purposes for which the institution can use primary credit.

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Sound Community Bank had $40.0 million of outstanding borrowings with the FHLB of Des Moines and an available line of credit of $181.4 million at December 31, 2023.

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

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

We also use short-term funding available on our line of credit with the FHLB of Des Moines.

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At December 31, 2023, the Bank owned $2.4 million in FHLB of Des Moines stock, which was in compliance with this requirement.

The FHLB of Des Moines pays dividends quarterly, and the Bank received $64 thousand in dividends from the FHLB of Des Moines during the year ended December 31, 2022.

The FHLB of Des Moines has historically paid quarterly dividends, and the Bank received $191 thousand in dividends from the FHLB of Des Moines during the year ended December 31, 2023.

The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on borrowings targeted for community investment and low- and moderate-income housing projects.

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

The Federal Reserve also takes into consideration the CRA performance of a bank when evaluating acquisition proposals involving the bank’s holding company.

The Federal Reserve takes into consideration the CRA performance of a bank when evaluating acquisition proposals involving the bank’s holding company.

Consolidated regulatory capital requirements identical to those applicable to subsidiary banks generally apply to bank holding companies.

However, the Federal Reserve Board has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and bank holding companies with less than $3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the Federal Reserve.

However, the Federal Reserve Board has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and bank holding companies, such as Sound Financial Bancorp, with less than $3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the Federal Reserve.

Federal Securities Law.

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To facilitate talent attraction and retention, we strive to make Sound Community Bank an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by market-based compensation, benefits, health and welfare programs.

At December 31, 2022, approximately 61% of our workforce was female and 39% male, and women held 64% of the Bank's management roles.

At December 31, 2023, approximately 61% of our workforce was female and approximately 39% was male, and women held 66% of the Bank's management roles.

The average tenure of employees was 4.55 years.

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.

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.

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

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and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.

In response to the COVID-19 pandemic, we implemented significant operating environment changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations.

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.

The employment practices developed during the pandemic continue to apply to our remote workers and allow us to recruit and retain skilled workers from areas outside our geographic footprint

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

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We believe that our average tenure of nearly five years reflects the engagement of our employees in this talent management philosophy.

Executive Officers of Sound Financial Bancorp and Sound Community Bank

Officers are elected annually to serve for a one year term.

There are no arrangements or understandings between the officers and any other person pursuant to which he or she was or is to be selected as an officer.

Laura Lee Stewart.

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.

Stewart was Senior Vice President/Retail Banking at Great Western Bank.

Stewart was selected as an inaugural member of the FDIC Community Bank Advisory Board and completed her term in 2011.

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 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.

In 2018, she was named Community Banker of the year by American Banker.

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 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.

In addition, Ms .

Sexton is responsible for Information Technology, Systems Support and Operations, Project Management and Policies and Procedures.

Sexton joined Sound Community Bank in 2007 and previously served as the Vice President of Operations managing deposit, electronic, and lending operations.

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 and the Pacific Coast Banking School.

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 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.

Ochs began his career at Sound Community Bank in April 2009 as a Commercial Loan Officer, was promoted to Senior Vice President Credit Administration Manager in 2015, and to Chief Strategy Officer in January 2020.

In August 2021, Mr.

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 and the Pacific Coast Banking School.

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