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Sound Financial Bancorp, Inc.

Sound Financial Bancorp, Inc.SFBCEarnings & Financial Report

Nasdaq · Financials · Savings Institution, Federally Chartered

U.S. Bancorp is an American multinational banking institution headquartered in Minneapolis, Minnesota and incorporated in Delaware. It is the 5th-largest bank in the United States as of 2025. As the largest bank in the Midwestern United States, it is considered systemically important by the Financial Stability Board. It is the parent company of its primary operating entity, U.S. Bank National Association, which does business as U.S. Bank. The company provides banking, investment, mortgage, tr...

What changed in Sound Financial Bancorp, Inc.'s 10-K — 2022 vs 2023

Top changes in Sound Financial Bancorp, Inc.'s 2023 10-K

543 paragraphs added · 548 removed · 380 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

197 edited+49 added−44 removed194 unchanged
We offer a variety of secured and unsecured consumer loans, including new and used manufactured homes, floating homes, automobiles, boats and recreational vehicle loans, and loans secured by deposit accounts. We also offer unsecured consumer loans. We originate our consumer loans primarily in our market area. All of our consumer loans are originated on a direct basis.
We offer a variety of secured and unsecured consumer loans, including new and used manufactured homes, floating homes, automobiles, boats and recreational vehicle loans, and loans secured by deposit accounts. We also offer unsecured consumer loans. We originate our consumer loans primarily in our market area. All our consumer loans are originated on a direct basis.
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.
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 have also financed the land for the owner.
Any such legislation or regulatory changes in the future could have an adverse effect on our operations and financial condition. 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.
Any such legislation or regulatory changes in the future could have an adverse effect on our operations and financial condition. We cannot predict whether any such changes may occur. The WDFI and, as the Bank's primary federal regulator, the FDIC have extensive enforcement authority over Sound Community Bank.
These standards, which must 28 Table of Contents 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 28 Table of Contents documentation, approval and reporting requirements.
This standard, referred to as Current Expected Credit Loss or 30 Table of Contents 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.
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 30 Table of Contents 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.
Federal Home Loan Bank System. Sound Community Bank is a member of one of the 11 regional FHLBs, each of which serves as a reserve, or central bank, for its members within its assigned region and is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System.
Sound Community Bank is a member of one of the 11 regional FHLBs, each of which serves as a reserve, or central bank, for its members within its assigned region and is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System.
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.
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.
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. 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.
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.
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. Other real estate owned ("OREO") and repossessed assets include assets acquired in settlement of loans.
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 90 days or more past due. Other real estate owned ("OREO") and repossessed assets include assets acquired in settlement of loans.
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.
Land acquisition and development loan proceeds are disbursed periodically in increments as construction progresses and as an inspection by our approved inspector warrants. 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.
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. We also originate a small portion of government guaranteed and jumbo loans for sale servicing released to certain correspondent purchasers.
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.
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”)); or • Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital or CBLR Capital, as appropriate, and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
A bank that has experienced rapid 29 Table of Contents 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”)); or • Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital or CBLR Capital, as appropriate, and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
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. Once the draw period has lapsed, the payment is amortized over either a 12-, 19- or 21-year period based on the loan balance at that time.
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.
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.
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 credit losses, our future earnings, stockholders' equity, regulatory capital and continuing operations could be materially adversely affected.
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. An unsatisfactory rating may be the basis for denial of certain applications by the WDFI.
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.
The following table sets forth certain information at December 31, 2022, regarding the amount of total loans in our portfolio based on their contractual terms to maturity (in thousands). The table does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
The following table sets forth certain information at December 31, 2023, regarding the amount of total loans in our portfolio based on their contractual terms to maturity (in thousands). The table does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
One of our primary lending activities is the origination of loans secured by first mortgages on one-to-four family residences, substantially all of which are secured by properties located in our geographic lending area. We originate both fixed-rate and adjustable-rate loans.
One-to-Four Family Real Estate Lending . One of our primary lending activities is the origination of loans secured by first mortgages on one-to-four family residences, substantially all of which are secured by properties located in our geographic lending area. We originate both fixed-rate and adjustable-rate loans.
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.
Appraisals on properties securing commercial and multifamily real estate loans are performed by independent state certified licensed fee appraisers. 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, purchase loans from or participate with other financial institutions on loans they originate. We underwrite loan purchases and participations to the same standards as internally originated loans. We did not sell any commercial loan participations in 2022 or 2021.
We also, from time to time, purchase loans from or participate with other financial institutions on loans they originate. We underwrite loan purchases and participations to the same standards as internally originated loans. We did not sell any commercial loan participations in 2023 or 2022.
Our CEO and Chief Financial Officer ("CFO") have the responsibility for the management of our investment portfolio, subject to the direction and guidance of the Board of Directors. These officers consider various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment.
Our CEO and Chief Financial Officer (“CFO”) have the responsibility for the management of our investment portfolio, subject to the direction and guidance of the Board of Directors. These officers consider various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment.
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.
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 to be assured that the cash flow from the project will be used to repay the debt.
Subject to various restrictions, state commercial banks may also invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that the institution is otherwise authorized to make directly. See "—How We Are Regulated—Sound Community Bank" for a discussion of additional restrictions on our investment activities.
Subject to various restrictions, state commercial banks may also invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that the institution is otherwise authorized to make directly. See “—How We Are Regulated—Sound Community Bank” for a discussion of additional restrictions on our investment activities.
Our deposits consist of savings accounts, money market deposit accounts, NOW accounts, demand accounts and certificates of deposit. We solicit deposits primarily in our market area; however, at December 31, 2022, approximately 6.9% of our deposits were from persons outside the State of Washington.
Our deposits consist of savings accounts, money market deposit accounts, NOW accounts, demand accounts and certificates of deposit. We solicit deposits primarily in our market area; however, at December 31, 2023, approximately 6.9% of our deposits were from persons outside the State of Washington.
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.
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 26 Table of Contents multifamily real estate loans and home equity loans.
Sound Community Bank received a “satisfactory” rating from the WDFI in its most recent WDFI CRA evaluation. Privacy Standards and Cybersecurity. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers.
Sound Community Bank received a “satisfactory” rating from the WDFI in its most recent WDFI CRA evaluation. 31 Table of Contents Privacy Standards and Cybersecurity. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers.
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. Capital . Consolidated regulatory capital requirements identical to those applicable to subsidiary banks generally apply to bank holding companies.
Individual states may also waive the 30% state-wide concentration limit contained in the federal law. The Federal Reserve takes into consideration the CRA performance of a bank when evaluating acquisition proposals involving the bank’s holding company. 33 Table of Contents Capital . Consolidated regulatory capital requirements identical to those applicable to subsidiary banks generally apply to bank holding companies.
The Chief Banking Offer may approve unsecured loans up to $50,000 and all types of secured loans up to approximately $1.5 million at December 31, 2022. The Chief Financial/Strategy Officer may approve unsecured loans up to $400,000 and all types of secured loans up to approximately $2.5 million at December 31, 2022.
The Chief Banking Offer may approve unsecured loans up to $50,000 and all types of secured loans up to approximately $1.5 million at December 31, 2023. The Chief Financial/Strategy Officer may approve unsecured loans up to $400,000 and all types of secured loans up to approximately $2.5 million at December 31, 2023.
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. The population has a skilled work force with a wide range of education levels and ethnic backgrounds.
See “—Competition.” 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.
We earned mortgage servicing income of $1.2 million and $1.3 million for the years ended December 31, 2022 and 2021, respectively. See “Note 6 — Mortgage Servicing Rights” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” of this report on Form 10-K.
We earned mortgage servicing income of $1.2 million and $1.2 million for the years ended December 31, 2023 and 2022, respectively. See “Note 6 — Mortgage Servicing Rights” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” of this report on Form 10-K.
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.
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 10 Table of Contents excess of 80%, we may require private mortgage insurance or other credit enhancement to help mitigate credit risk.
Government and other governmental initiatives affecting the financial services industry; • fluctuations in the demand for loans, the number of unsold homes, land and other properties; • fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area; • our ability to access cost-effective funding; • the transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest-rate benchmarks; • our ability to control operating costs and expenses; • secondary market conditions for loans and our ability to sell loans in the secondary market; • fluctuations in interest rates; • results of examinations of Sound Financial Bancorp and Sound Community Bank by their regulators, including the possibility that the regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets, change Sound Community Bank's regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; • inability of key third-party providers to perform their obligations to us; • our ability to attract and retain deposits; • competitive pressures among financial services companies; • our ability to successfully integrate any assets, liabilities, clients, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all; • the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors that perform several of our critical processing functions; • changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board ("FASB"); 4 Table of Contents • legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax laws, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other governmental initiatives affecting the financial services industry and the availability of resources to address such changes; • our ability to retain or attract key employees or members of our senior management team; • costs and effects of litigation, including settlements and judgments; • our ability to implement our business strategies; • staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; • our ability to pay dividends on our common stock; • the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets; • the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; • other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and • the other risks described from time to time in our documents filed with or furnished to the U.S.
Government and other governmental initiatives affecting the financial services industry; • fluctuations in the demand for loans, the number of unsold homes, land and other properties; • fluctuations in real estate values and both residential and commercial and multifamily real estate market conditions in our market area; • our ability to access cost-effective funding; • our ability to control operating costs and expenses; • secondary market conditions for loans and our ability to sell loans in the secondary market; • fluctuations in interest rates; • results of examinations of Sound Financial Bancorp and Sound Community Bank by their regulators, including the possibility that the regulators may, among other things, require us to increase our 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; • our ability to attract and retain deposits; • competitive pressures among financial services companies; • our ability to successfully integrate any assets, liabilities, clients, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all; • the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors that perform several of our critical processing functions; 4 Table of Contents • changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board ("FASB"); • legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax laws, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and other governmental initiatives affecting the financial services industry and the availability of resources to address such changes; • our ability to retain or attract key employees or members of our senior management team; • costs and effects of litigation, including settlements and judgments; • our ability to implement our business strategies; • staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; • our ability to pay dividends on our common stock; • the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets; • 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; • other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and • the other risks described from time to time in our documents filed with or furnished to the U.S.
Our federal income tax returns have never been audited by the Internal Revenue Service. Method of Accounting . For federal income tax purposes, we currently report our income and expenses on the accrual method of accounting and use a fiscal year ending on December 31 for filing our federal income tax return. Intercompany Dividends-Received Deduction .
Our federal income tax returns have never been audited by the Internal Revenue Service. Method of Accounting . For federal income tax purposes, we currently report our income and expenses on the accrual method of accounting and use a fiscal year ending on December 31 for filing our federal income tax return. 34 Table of Contents Intercompany Dividends-Received Deduction .
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.
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 12 Table of Contents ability to repay the loan without the benefit of a rental income stream.
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. Delinquent consumer loans are handled in a similar manner to one-to-four family loans.
The notice of default begins the 17 Table of Contents foreclosure process. If foreclosure is completed, typically we take title to the property and sell it directly through a real estate broker. Delinquent consumer loans are handled in a similar manner to one-to-four family loans.
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.
The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds and 24 Table of Contents 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.
Each federal banking agency, including the FDIC, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits.
Standards for Safety and Soundness. Each federal banking agency, including the FDIC, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits.
These advances may be made pursuant to 26 Table of Contents 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.
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.
At December 31, 2022, Sound Community Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were $16.4 million and were within the aggregate limits set forth in the preceding paragraph. The FDIC and the WDFI must approve any merger transaction involving Sound Community Bank as the acquirer, including an assumption of deposits from another depository institution.
At December 31, 2023, Sound Community Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were $9.4 million and were within the aggregate limits set forth in the preceding paragraph. The FDIC and the WDFI must approve any merger transaction involving Sound Community Bank as the acquirer, including an assumption of deposits from another depository institution.
These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank’s FHLB of Des Moines stock may result in a decrease in net income and possibly capital. 32 Table of Contents Regulation of Sound Financial Bancorp General .
These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank’s FHLB of Des Moines stock may result in a decrease in net income and possibly capital. Regulation of Sound Financial Bancorp General .
At December 31, 2022, the Bank’s CBLR was 10.83%. Management monitors the Bank's capital levels to provide for current and future business opportunities and to maintain Sound Community Bank’s “well-capitalized” status. At December 31, 2022, Sound Community Bank was considered “well-capitalized” under applicable banking regulations. See "Note 16—Capital" in Notes to Consolidated Financial Statements in "Part II. Item 8.
At December 31, 2023, the Bank’s CBLR was 10.99%. Management monitors the Bank's capital levels to provide for current and future business opportunities and to maintain Sound Community Bank’s “well-capitalized” status. At December 31, 2023, Sound Community Bank was considered “well-capitalized” under applicable banking regulations. See "Note 16—Capital" in Notes to Consolidated Financial Statements in "Part II. Item 8.
At December 31, 2022, our portfolio of fixed-rate loans also included $582 thousand of one-to-four family loans with a five-year call option. Adjustable-rate loans are offered with annual adjustments and lifetime rate caps that vary based on the product, generally with a maximum annual rate change of 2.0% and a maximum overall rate change of 6.0%.
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%.
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. Consumer Lending.
As a 15 Table of Contents 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.
If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance. Federal Reserve System. The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts.
If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance. Federal Reserve System. The Federal Reserve historically required all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts.
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. Recent trends in housing prices in our market areas reflect the impact rising interest rates have had on housing prices.
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.
The average balance of our one-to-four family residential loans was approximately $478 thousand at December 31, 2022. 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.
The average balance of our one-to-four family residential loans was approximately $472 thousand at December 31, 2023. Fixed-rate loans secured by one-to-four family residences have contractual maturities of up to 30 years. All these loans are fully amortizing, with payments due monthly.
We generally require personal guarantees on both our secured and unsecured commercial business loans. Nonetheless, commercial business loans are believed to carry higher credit risk than residential mortgage and commercial real estate loans. At December 31, 2022, approximately $1.7 million of our commercial business loans were unsecured.
We generally require personal guarantees on both our secured and unsecured commercial business loans. Nonetheless, commercial business loans are believed to carry higher credit risk than residential mortgage and commercial real estate loans. At December 31, 2023, approximately $1.5 million of our commercial business loans were unsecured.
Based on the most recent data provided by the FDIC, there are approximately 50 other commercial banks and savings banks operating in the Seattle MSA, which includes King, Snohomish and Pierce Counties. Based on the most recent branch deposit data provided by the FDIC, our share of deposits in the Seattle MSA is approximately 0.18%.
Based on the most recent data provided by the FDIC, there are approximately 47 other commercial banks and savings banks operating in the Seattle MSA, which includes King, Snohomish and Pierce Counties. Based on the most recent branch deposit data provided by the FDIC, our share of deposits in the Seattle MSA is approximately 0.22%.
No institution may pay a dividend if it is in default on its federal deposit insurance assessment. Total base assessment rates currently range from 3 to 30 basis points subject to certain adjustments. The FDIC has authority to increase insurance assessments.
No institution may pay a dividend if it is in default on its federal deposit insurance assessment. Total base assessment rates currently range from 5 to 32 basis points subject to certain adjustments. The FDIC has authority to increase insurance assessments.
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.
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 34 Table of Contents 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.
We serve these markets through our headquarters in Seattle and eight branch offices, four of which are located in the Seattle MSA, three that are located in Clallam County and one that is located in Jefferson County. We also have a loan production office in the Madison Park neighborhood of Seattle.
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.
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.
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.
Our fixed-rate home equity loans generally have terms of up to 20 years and are fully amortizing. At December 31, 2022, fixed-rate home equity loans totaled $7.6 million, or 0.9% of our gross loan portfolio, compared to $4.5 million, or 0.6% of our total loan portfolio at December 31, 2021. Commercial and Multifamily Real Estate Lending.
Our fixed-rate home equity loans generally have terms of up to 20 years and are fully amortizing. At December 31, 2023, fixed-rate home equity loans totaled $9.9 million, or 1.1% of our gross loan portfolio, compared to $7.6 million, or 0.9% of our total loan portfolio at December 31, 2022. Commercial and Multifamily Real Estate Lending.
We generally do not originate or purchase negative amortization or option adjustable-rate loans. 16 Table of Contents In addition to interest earned on loans and loan origination fees, we receive fees for loan commitments, late payments and other miscellaneous services.
We generally do not originate or purchase negative amortization or option adjustable-rate loans. In addition to interest earned on loans and loan origination fees, we receive fees for loan commitments, late payments and other miscellaneous services.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. At December 31, 2022, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 101.5% of CBLR capital.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. At December 31, 2023, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 106.7% of CBLR capital.
Interest received and servicing income both on loans secured by mortgages or deeds of trust on residential properties and certain investment securities are exempt from business and occupation tax. Employees and Human Capital At December 31, 2022, we had a total of 130 full-time employees and 10 part-time employees. Our employees are not represented by any collective bargaining group.
Interest received and servicing income both on loans secured by mortgages or deeds of trust on residential properties and certain investment securities are exempt from business and occupation tax. Employees and Human Capital At December 31, 2023, we had a total of 128 full-time employees and 18 part-time employees. Our employees are not represented by any collective bargaining group.
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. Federal Securities Law.
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.
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 15 Table of Contents individuals and first-time homebuyers.
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.
King County has the largest population of any county in the state of Washington with approximately 2.2 million residents and a median household income of approximately $108 thousand.
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.
At December 31, 2022, approximately 61% of our workforce was female and 39% male, and women held 64% of the Bank's management roles. The average tenure of employees was 4.26 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.
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, at December 31, 2022, Sound Community Bank’s loans on all commercial real estate, including construction, owner and non-owner occupied commercial real estate, and multi-family lending, as defined by the FDIC, were 364.2% of CBLR capital. Transactions with Related Parties. Sound Community Bancorp and Sound Community Bank are separate and distinct legal entities.
In addition, at December 31, 2023, Sound Community Bank’s loans on all commercial real estate, including construction, owner and non-owner occupied commercial real estate, and multi-family lending, as defined by the FDIC, were 352.9% of CBLR capital. Transactions with Related Parties. Sound Community Bancorp and Sound Community Bank are separate and distinct legal entities.
We had $2.6 million in purchases of commercial business loan participations from other financial institutions in 2022 and $4.3 million in 2021. We originate loans that may meet one or more of the credit characteristics commonly associated with subprime lending.
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.
The guidance directs the FDIC and other federal bank regulatory agencies to focus their supervisory resources 29 Table of Contents on institutions that may have significant commercial real estate loan 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.
At December 31, 2022, land acquisition and development and lot loans totaled $15.6 million, or 13.4% of our construction and land portfolio. We also offer commercial and multifamily construction loans. These loans are underwritten as interest only with financing typically up to 24 months under terms similar to our residential construction loans.
At December 31, 2023, land acquisition and development and lot loans totaled $19.4 million, or 15.3% of our construction and land portfolio. We also offer commercial and multifamily construction loans. These loans are underwritten as interest only with financing typically up to 24 months under terms similar to our residential construction loans.
At December 31, 2022, this loan was performing in accordance with its repayment terms.
At December 31, 2023, this loan was performing in accordance with its repayment terms.
Our net gains on sales of residential loans for the years ended December 31, 2022 and 2021 were $546 thousand and $4.2 million, respectively. In addition to loans sold to Fannie Mae and others on a servicing retained basis, we also sell nonconforming residential loans to correspondent banks on a servicing released basis.
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.
Lending authority is also granted to certain other lending staff at lower amounts. Largest Borrowing Relationships . At December 31, 2022, the maximum amount under federal law that we could lend to any one borrower and the borrower's related entities was approximately $23.0 million.
Lending authority is also granted to certain other lending staff at lower amounts. Largest Borrowing Relationships . At December 31, 2023, the maximum amount under federal law that we could lend to any one borrower and the borrower's related entities was approximately $24.5 million.
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 12 Table of Contents million and was collateralized by a storage facility.
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, 2023, totaled $11.5 million and was collateralized by a storage facility.
The yields on these loans are higher than that on our other residential lending products and the portfolio has performed reasonably well with an acceptable level of risk and loss in exchange for the higher yield. Our weighted-average yield on manufactured home loans at December 31, 2022 was 8.36%, compared to 3.70% for one-to-four family mortgages, excluding loans held-for-sale.
The yields on these loans are higher than that on our other residential lending products and the portfolio has performed reasonably well with an acceptable level of risk and loss in exchange for the higher yield. Our weighted-average yield on manufactured home loans at December 31, 2023 was 8.57%, compared to 6.27% for one-to-four family mortgages, excluding loans held-for-sale.
In addition, all long-term borrowings are required to provide funds for residential home financing. Sound Community Bank had $43.0 million of outstanding borrowings with the FHLB of Des Moines and an available line of credit of $199.0 million at December 31, 2022. We plan to rely in part on FHLB advances to fund asset and loan growth.
In addition, all long-term borrowings are required to provide funds for residential home financing. 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 rely in part on FHLB advances to fund asset and loan growth.
At December 31, 2022, $162.6 million or 59.2% of our one-to-four family loan portfolio consisted of jumbo loans. We generally underwrite our one-to-four family loans based on the applicant's employment and credit history and the appraised value of the subject property.
At December 31, 2023, $167.2 million or 59.8% of our one-to-four family loan portfolio consisted of jumbo loans. We generally underwrite our one-to-four family loans based on the applicant’s employment and credit history and the appraised value of the subject property.
The balance of our consumer loans includes loans secured by new and used automobiles, boats, motorcycles and recreational vehicles, loans secured by deposits and unsecured consumer loans, all of which, at December 31, 2022, totaled $7.2 million, or 6.0% of our consumer loan portfolio and 0.8% of our total loan portfolio.
The balance of our consumer loans includes loans secured by new and used automobiles, boats, motorcycles and recreational vehicles, loans secured by deposits and unsecured consumer loans, all of which, at December 31, 2023, totaled $10.7 million, or 8.2% of our consumer loan portfolio and 1.2% of our total loan portfolio.
We sold $20.3 million and $147.4 million of conforming one-to-four family loans during the year ended December 31, 2022 and 2021, respectively. Gains, losses and transfer fees on sales of one-to-four family loans and participations are recognized at the time of the sale.
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.
Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated as special mention. At December 31, 2022, special mention assets totaled $4.1 million.
Assets which do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated as special mention. At December 31, 2023, special mention assets totaled $3.7 million.
In addition, on November 18, 2021, the federal banking 31 Table of Contents 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.
At December 31, 2022, manufactured home loans totaled $27.0 million, or 22.6% of our consumer loans and 3.1% of our total loan portfolio. For both new and used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $150 thousand, with terms typically up to 20 years.
At December 31, 2023, manufactured home loans totaled $36.2 million, or 27.6% of our consumer loans and 4.0% of our total loan portfolio. For both new and used manufactured homes, loans are generally made up to 90% of the lesser of the appraised value or purchase price up to $150 thousand, with terms typically up to 20 years.
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.
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.
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.
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.
Our Senior Vice President and Chief Credit Officer ("CCO") may approve unsecured loans up to $400,000 and secured loans up to 15% of our legal lending limit, or approximately $3.5 million at December 31, 2022.
Our Senior Vice President and Chief Credit Officer (“CCO”) may approve unsecured loans up to $400,000 and secured loans up to 15% of our legal lending limit, or approximately $3.7 million at December 31, 2023.
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 $17.4 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.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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The Company's ability to pay dividends and make subordinated debt payments is subject to the ability of the Bank to make capital distributions to the Company. The Company is a separate legal entity from its subsidiary and does not have significant operations of its own.
The Company's ability to pay dividends and make subordinated debt payments is subject to the ability of the Bank to make capital distributions to the Company. The Company is a separate legal entity from its subsidiary bank and does not have significant operations of its own.
Our failure to comply with laws, regulations or policies could result in civil or criminal sanctions and money penalties by state and federal agencies, and/or reputational damage, which could have a material adverse effect on our business, financial condition and results of operations. See “Part I, Item 1.
Moreover, our failure to comply with laws, regulations or policies could result in civil or criminal sanctions and money penalties by state and federal agencies, and/or reputational damage, which could have a material adverse effect on our business, financial condition and results of operations. See “Part I, Item 1.
If any of the circumstances described in the following risk factors actually occur to a significant degree, the value of our common stock could decline, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors.
If any of the circumstances described in the following risk factors occur to a significant degree, the value of our common stock could decline, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors.
Other collateral securing loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. • Consumer Loans. Generally, we consider these loans to involve a different degree of risk compared to first mortgage loans on one-to-four family residential properties.
Other collateral securing commercial business loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. • Consumer Loans. Generally, we consider consumer loans to involve a different degree of risk compared to first mortgage loans on one-to-four family residential properties.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed, or the cost of that capital may be very high. We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed, or the cost of that capital may be exceedingly high. We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations.
We believe that these loans satisfy a need in our local market areas. As a result, subject to market conditions, we intend to continue to originate these types of loans. Our allowance for loan losses may prove inadequate or we may be negatively affected by credit risk exposures.
We believe that these loans satisfy a need in our local market areas. As a result, subject to market conditions, we intend to continue to originate these types of loans. Our allowance for credit losses on loans may prove inadequate or we may be negatively affected by credit risk exposures.
Congress, state legislatures and federal and state regulatory agencies continue to propose numerous initiatives to supplement the global effort to combat climate change.
Congress, state legislatures and federal and state regulatory agencies continue to propose initiatives to supplement the global effort to combat climate change.
Legislation has previously been introduced in Congress that would allow banks and financial institutions to serve cannabis businesses in states where it is legal without any risk of federal prosecution but has yet to be enacted. At December 31, 2022, approximately 2.3% of our total deposits and a portion of our service charges from deposits are from legal cannabis-related businesses.
Legislation has previously been introduced in Congress that would allow banks and financial institutions to serve cannabis businesses in states where it is legal without any risk of federal prosecution but has yet to be enacted. At December 31, 2023, approximately 3.0% of our total deposits and a portion of our service charges from deposits are from legal cannabis-related businesses.
In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.
In addition, any additional capital we obtain may dilute of the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.
Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes.
Changes in interest rates can also have an adverse effect on our financial condition, as our AFS securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the AFS securities, net of taxes.
Specifically, unpredictable and more frequent weather disasters may adversely impact the real property, and/or the value of the real property, securing the loans in our portfolios.
Specifically, unpredictable and more frequent weather disasters may adversely impact the real property, and/or the value of the real property, securing the loans in our portfolio.
Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, and future prospects and the value of the Company's common stock. At December 31, 2022 , Sound Financial Bancorp had $2.2 million in unrestricted cash to support dividend and debt payments. See "Part I. Item 1.
Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, and future prospects and the value of the Company's common stock. At December 31, 2023 , Sound Financial Bancorp had $156 thousand in unrestricted cash to support dividend and debt payments. See "Part I. Item 1.
Business - How We Are Regulated” in this Form 10-K for more information about the regulations to which we are subject. 43 Table of Contents The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
Business - How We Are Regulated” in this Form 10-K for more information about the laws and regulations to which we are subject. The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.
Failure to manage data effectively and to aggregate data in 45 Table of Contents an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.
Any future changes in its program, our eligibility to participate in such program, the criteria for loans to be accepted or laws that significantly affect the activity of Fannie Mae could, in turn, materially adversely affect our results of operations if we could not find other purchasers.
Future changes in Fannie Mae’s program, including our eligibility to participate, the criteria for loans to be accepted or laws that significantly affect the activity of Fannie Mae could materially adversely affect our results of operations if we could not find other purchasers.
Before making an investment decision, you should carefully consider the risks described below together with all of the other information included in this Form 10-K and our other filings with the SEC.
Before making an investment decision, you should carefully consider the risks described below together with all of the other information included in this Form 10-K and our other documents filed with and furnished to the SEC.
Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans and leases, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. Inflationary pressures and rising prices may affect our results of operations and financial condition.
Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans and leases, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses.
Declines in market value could result in OTTI losses on these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels. At December 31, 2022, we had no securities that were deemed impaired.
Declines in market value could result in credit losses on these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels. At December 31, 2023, we had no allowance for credit losses on securities.
Any new regulations or legislation, change in existing regulation or oversight, whether a change in regulatory policy or a change in a regulator's interpretation of a law or regulation, could have a material impact on our operations, increase our costs of regulatory compliance and of doing business and adversely affect our profitability. In this regard, the U.S.
Any new regulations or legislation, change in existing regulation or oversight, whether a change in regulatory policy or a change in a regulator’s interpretation of a law or regulation, could have a material impact on our operations, impact the capital or liquidity requirements applicable to us, increase our costs of regulatory compliance and of doing business and adversely affect our profitability.
Risks Related to Our Lending Our loan portfolio includes loans with a higher risk of loss. Our origination of commercial and multifamily real estate, construction and land, consumer and commercial business loans, typically present different risks to us than our one-to-four family residential loans for a number of reasons, including as follows: • Construction and Land Loans .
Our origination of commercial and multifamily real estate, construction and land, consumer and commercial business loans, typically present different risks to us than our one-to-four family residential loans for a number of reasons, including as follows: • Construction and Land Loans .
Since March 2022, in response to inflationary pressures, the Federal Open Market Committee (“FOMC”) of the Federal Reserve has increased the target range for the federal funds rate by 425 basis points, including 125 basis points during the fourth calendar quarter of 2022, to a range of 4.25% to 4.50% as of December 31, 2022.
Since March 2022, in response to inflationary pressures, the Federal Open Market Committee (“FOMC”) of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points, including 100 basis points during 2023, to a range of 5.25% to 5.50% as of December 31, 2023 .
Climate change and related legislative and regulatory initiatives may materially affect the Company's business and results of operations. The effects of climate change continue to create an alarming level of concern for the state of the global environment.
Consequently, this could significantly affect our business, financial condition, and results of operations. Climate change and related legislative and regulatory initiatives may materially affect the Company's business and results of operations. The effects of climate change continue to create an alarming level of concern for the state of the environment.
If these vendors encounter any of these issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage, and litigation risk that could have a material adverse effect on our business and, in turn, our financial condition and results of operations. 42 Table of Contents We continually encounter technological change, and we may have fewer resources than many of our competitors to invest in technological improvements.
If these vendors encounter any of these issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage, and litigation risk that could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
The failure to protect our customers' confidential information and privacy could adversely affect our business. We are subject to federal and state privacy regulations and confidentiality obligations that, among other things restrict the use and dissemination of, and access to, certain information that we produce, store or maintain in the course of our business.
We are subject to federal and state privacy regulations and confidentiality obligations that, among other things, restrict the use and dissemination of, and access to, certain information that we produce, store or maintain in the course of our business. We also have contractual obligations to protect certain confidential information we obtain from our existing vendors and customers.
The yields we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many financial institutions, our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility because market interest rates change over time.
The yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities are generally fixed for a contractual period of time. Like many financial institutions, our liabilities generally have shorter contractual maturities than our assets. This mismatch exposes us to significant earnings volatility as market interest rates fluctuate.
These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time.
These regulations may sometimes impose significant limitations on our operations. These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures.
At December 31, 2022, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 101.5% of CBLR Capital. In addition, at December 31, 2022, Sound Community Bank’s loans on all commercial real estate, including construction, owner and non-owner occupied commercial real estate, and multi-family lending, as defined by the FDIC, were 364.2% of CBLR Capital.
In addition, at December 31, 2023, Sound Community Bank’s loans on all commercial real estate, including construction, owner and non-owner occupied commercial real estate, and multi-family lending, as defined by the FDIC, were 352.9% of CBLR Capital.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.
We continually encounter technological change, and we may have fewer resources than many of our competitors to invest in technological improvements. The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.
Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN"), published guidelines in 2014 for financial institutions servicing cannabis businesses that are legal under state law. These guidelines generally allow us to work with cannabis-related businesses that are operating in accordance with state laws and regulations, so long as we comply with required regulatory oversight of their accounts with us.
These guidelines generally allow us to work with cannabis-related businesses that are operating in accordance with state laws and regulations, so long as we comply with required regulatory oversight of their accounts with us.
A deterioration in economic conditions in the markets we serve, in particular the Puget Sound area of Washington State, could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations: • demand for our products and services may decline; • loan delinquencies, problem assets and foreclosures may increase; • we may increase our allowance for loan losses; • collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; • the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and • the amount of our low-cost or noninterest-bearing deposits may decrease.
A deterioration in economic conditions in the markets we serve, in particular the Puget Sound area and western region of Washington State, could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations: • Reduced demand for our products and services, potentially leading to a decline in our overall loans or assets. • Elevated instances of loan delinquencies, problematic assets, and foreclosures. • An increase in our allowance for credit losses on loans. • Depreciation in collateral values linked to our loans, thereby diminishing borrowing capacities and asset values tied to existing loans. • Reduced net worth and liquidity of loan guarantors, possibly impairing their ability to meet commitments to us. • Reduction in our low-cost or noninterest-bearing deposits.
We may not be able, however, to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
We may not be able, however, to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
Management evaluates securities for OTTI on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts’ reports.
In analyzing a debt issuer’s financial condition, management considers 40 Table of Contents whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts’ reports.
We use financial models to value certain of these assets. These models are complex and use asset-specific collateral data and market inputs for interest rates. Although we have processes and procedures in place governing valuation models and their review, such assumptions are complex, as we must make judgments about the effect of matters that are inherently uncertain.
Although we have processes and procedures in place governing valuation models and their review, such assumptions are complex, as we must make judgments about the effect of matters that are inherently uncertain.
Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s net interest margin and create financial risk for financial institutions that originate longer-term, fixed-rate mortgage loans.
Moreover, an inverted interest rate yield curve, wherein short-term interest rates (which are usually the rates at which financial institutions borrow funds) surpass long-term rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans), can compress a financial institution's net interest margin.
A portion of our assets are carried on the balance sheet at fair value, including investment securities available for sale, mortgage servicing rights related to single-family loans, and single-family loans held for sale.
A portion of our assets are carried on the balance sheet at fair value, including investment securities available for sale and mortgage servicing rights related to single-family loans. Generally, for assets that are reported at fair value, we use quoted market prices or valuation models that use observable market data inputs to estimate their fair value.
Weakness in the global economy and global supply chain issues have adversely affected many businesses operating in our markets that are dependent upon international trade, and it is not known how changes in tariffs being imposed on international trade may also affect these businesses.
Weakness in the global economy and global supply chain issues have adversely affected many businesses operating in our markets that are dependent upon international trade. Changes in agreements or relationships between the United States and other countries may also affect these businesses.
Generally, for assets that are reported at fair value, we use quoted market prices or valuation models that use observable market data inputs to estimate their fair value. In certain cases, observable market prices and data may not be readily available, or their availability may be diminished due to market conditions.
In certain cases, observable market prices and data may not be readily available, or their availability may be diminished due to market conditions. We use financial models to value certain of these assets. These models are complex and use asset-specific collateral data and market inputs for interest rates.
While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur. Regulatory and Accounting-Related Risks We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that could increase our costs of operations. The banking industry is extensively regulated.
Regulatory and Accounting-Related Risks We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that could increase our costs of operations. The banking industry is extensively regulated. Federal banking regulations are designed primarily to protect the deposit insurance funds and customers, not to benefit a company’s shareholders.
As with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified.
As with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business, financial condition and results of operations could be materially adversely affected.
Consequently, if prepayment rates increase, we would expect the fair value of portfolios of residential mortgage loan servicing rights to decrease along with the amount of loan administration income received. 41 Table of Contents Risks Related to Cybersecurity, Data and Fraud A failure in or breach of our security systems or infrastructure, including breaches resulting from cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.
Risks Related to Cybersecurity, Data and Fraud A failure in or breach of our security systems or infrastructure, including breaches resulting from cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. The integrity of our security systems and infrastructure is crucial.
Information security risks for financial institutions have increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties.
The landscape of information security risks for financial institutions has expanded significantly due to the proliferation of new technologies, the widespread use of the Internet and telecommunications for financial transactions, and the escalating activities of organized crime, hackers, terrorists, activists, and other external entities.
While we continuously update our policies, programs, processes and practices, many of our data management and aggregation processes are manual and subject to human error or system failure.
Our ability to manage and aggregate data may be limited by the effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected and processed. While we continuously update our policies, programs, processes and practices, many of our data management and aggregation processes are manual and subject to human error or system failure.
Our foreclosure on these loans requires that the value of the property be sufficient to cover the repayment of the first mortgage loan, as well as the costs associated with foreclosure. 39 Table of Contents This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict.
This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict.
Changes in the valuation of our securities portfolio could hurt our profits and reduce our capital levels. Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for credit losses on a quarterly basis, with more frequent evaluation for selected issues.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires us to make estimates of current credit risks and future trends, all of which may undergo material changes.
The determination of the appropriate allowance for credit losses involves a significant degree of subjectivity, relying on substantial estimates of both current credit risks and future trends, all of which are subject to potential material changes.
Risks Related to Market and Interest Rate Changes Fluctuating interest rates can adversely affect our profitability. Net income is the amount by which net interest income and noninterest income exceed noninterest expense, the provision for loan losses and taxes.
Risks Related to Market and Interest Rate Changes Fluctuating interest rates can adversely affect our profitability. Our net income is primarily derived from the excess of net interest income and non-interest income over non-interest expenses, provisions for credit losses, and taxes.
Future additions to our allowance for loan losses, as well as charge-offs in excess of reserves, will reduce our earnings. Our business depends on the creditworthiness of our customers.
Future additions to our allowance for credit losses on loans, as well as charge-offs in excess of reserves, will reduce our earnings. Our business relies significantly on the creditworthiness of our customers. To account for potential defaults and nonperformance in our loan portfolio, we maintain an allowance for credit losses on loans using the Current Expected Credit Loss (“CECL”) methodology.
Net interest income makes up a majority of our net income and is based on the difference between the interest income we earn on interest-earning assets, such as loans and securities, and the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.
The core component of our net income is net interest income, which centers on the variance between the interest income accrued from interest-earning assets, such as loans and securities, and the interest expense incurred on interest-bearing liabilities, mainly deposits and borrowings.
As a result, these loans tend to have a higher probability of default, higher delinquency rates and greater servicing costs than other types of consumer loans. Our floating home, houseboat and house barge loans are typically located on cooperative or condominium moorages.
A significant portion of our manufactured home loan borrowers are first-time home buyers, typically exhibiting higher credit risk due to limited financial resources. Consequently, these loans tend to experience increased default probabilities, higher delinquency rates and greater servicing costs compared to other consumer loans. Floating home, houseboat, and house barge loans are typically located on cooperative or condominium moorages.
We require sufficient liquidity to meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress.
We must maintain ample liquidity to meet various financial obligations, including: (i) fulfilling customer loan requests and handling deposit maturities and withdrawals; and (ii) making timely payments on debt obligations and other cash commitments under normal and unpredictable circumstances, including times of industry or financial market stress.
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. Our business may be adversely affected by credit risk associated with residential property and declining property values.
The process for securing deeds or rights within condominium or cooperative docks in this lending area differs significantly from our other loan types, potentially resulting in higher costs associated with collateral recovery compared to one-to-four family mortgage loans and other consumer loans. Our business may be adversely affected by credit risk associated with residential property and declining property values.
If the credit quality of our loan portfolio materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for loan losses is not adequate, our business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.
A material decrease in the credit quality of our loan portfolio, significant changes in the risk profile of markets, industries, or customer groups, or inadequacy in the allowance for credit losses could have a materially adverse impact on our business, financial condition, liquidity, capital, and results of operations.
The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing.
The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate 43 Table of Contents concentrations.
Disruptions or failures in the physical infrastructure or operating systems that support our business and customers, or cyber-attacks or security breaches of the networks, systems or devices that our customers use to access our products and services could result in customer attrition, uninsured financial losses, the inability of our customers to transact business with us, employee productivity losses, technology replacement costs, incident response costs, violations of applicable privacy and other laws, regulatory fines, penalties or intervention, additional regulatory scrutiny, reputational damage, litigation, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially and adversely affect our results of operations or financial condition.
Disruptions or failures in the physical infrastructure or operating systems supporting our business and customers, or breaches in the networks, systems, or devices used by customers accessing our services, could result in customer attrition, uninsured financial losses, customer transaction disruptions, productivity losses, technology replacement costs, incident response expenses, legal and regulatory repercussions, reputational damage, litigation, reimbursement or compensation costs, and additional compliance expenses.
These loans typically involve higher principal amounts than other types of loans and some of our commercial borrowers have more than one loan outstanding with us.
Our commercial and multifamily real estate loans generally involve higher principal amounts compared to other loan types, and some commercial borrowers maintain multiple loans with us.
Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks, either managed directly by us or through our data processing vendors. In addition, to access our products and services, our customers may use personal computers, smartphones, tablet PCs, and other mobile devices that are beyond our control systems.
These parties may attempt to deceive employees, customers, or system users to extract confidential information, thereby gaining access to our data or that of our customers. Our operations heavily rely on the secure processing, transmission, and storage of confidential information within our computer systems and networks, managed directly by us or through third-party data processing vendors.
An inability to raise funds through deposits, borrowings, the sale of loans or investment securities and other sources could have a substantial negative effect on our liquidity. We rely on customer deposits and at times, borrowings from the FHLB of Des Moines and the Federal Reserve and certain other wholesale funding sources to fund our operations.
Raising funds through deposits, borrowings, loan sales, or sales of investment securities is essential for our liquidity. We primarily rely on customer deposits and occasionally borrow from entities like the FHLB of Des Moines, the Federal Reserve, and other wholesale funding sources.
Different assumptions could result in significant changes in valuation, which in turn could affect earnings or result in significant changes in the dollar amount of assets reported on the balance sheet. Risks Related to our Business and Industry Generally We will be required to transition from the use of the London Interbank Offered Rate (“LIBOR”) in the future.
Different assumptions could result in significant changes in valuation, which in turn could affect earnings or result in significant changes in the dollar amount of assets reported on the balance sheet. We are subject to an extensive body of accounting rules and best practices.
Inflation has risen sharply since the end of 2021 to levels not seen in more than 40 years. Small to medium-sized businesses may be impacted more during periods of high inflation, as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses.
Small to medium-sized businesses may be impacted more during periods of high inflation, as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business customers to repay their loans may deteriorate quickly, which would adversely impact our results of operations and financial condition.
Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition. The economic impact of the COVID-19 pandemic could continue to affect our financial condition and results of operations.
Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition. Virtually all our assets and liabilities are monetary in nature. As a result, interest rates tend to have a more significant impact on our performance than general levels of inflation or deflation.
As cyber threats continue to evolve, we may be required to expend significant additional resources to insure, modify or enhance our protective measures or to investigate and remediate important information security vulnerabilities or exposures; however, our measures may be insufficient to prevent all physical and electronic break-ins, denial of service and other cyber-attacks or security breaches.
With the evolving nature of cyber threats, we may need to allocate significant additional resources to bolster our protective measures or investigate and address crucial information security vulnerabilities or exposures. Despite our efforts, they might not prevent all physical and electronic intrusions, denial of service, cyber-attacks, or security breaches.
In recent years, commercial real estate markets have been experiencing substantial growth, and increased competitive pressures have contributed significantly to historically low capitalization rates and rising property values. Furthermore, commercial real estate markets have been particularly impacted by the economic disruption resulting from the COVID-19 pandemic.
This elongated holding period results from a limited pool of potential purchasers for the collateral. Recent years have witnessed substantial growth in commercial real estate markets, compounded by intensified competitive pressures that have led to historically low capitalization rates and surging property valuations. The economic disruption spurred by the COVID-19 pandemic has particularly affected commercial real estate markets.
As a result, this type of lending often involves the disbursement of substantial funds with repayment 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 independently repay principal and interest.
Hence, such lending involves disbursing substantial funds, with repayment dependent on project success and the borrower's ability to sell or lease the property or obtain permanent financing, rather than independent repayment capability. • Commercial and Multifamily Real Estate Loans.
We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management. Our ability to manage and aggregate data may be limited by the effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected and processed.
We are subject to certain risks in connection with our data management or aggregation. We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management.
Loans on land under development or held for future construction 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 be significantly impacted by supply and demand.
Land loans for future development entail additional risks due to the lack of income generation from the property and potential illiquidity of collateral and are significantly affected by supply and demand dynamics.
As a bank, we are susceptible to fraudulent activity that may be committed against us or our customers, which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer’s information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes. 42 Table of Contents As a financial institution, we face the risk of fraudulent activities perpetrated against us or our customers, potentially resulting in financial losses, increased operational costs, disclosure or misuse of sensitive information, misappropriation of assets, breaches of customer privacy, legal actions, or damage to our reputation.
Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes.
Fraudulent activities come in various forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering, and other deceptive practices. There has been a notable national increase in reported incidents of fraud and other financial crimes. Our institution has encountered losses due to apparent fraudulent activities and other financial crimes.
A decline in interest rates results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities.
Conversely, declining interest rates can trigger increased loan prepayments and mortgage-backed security redemptions as borrowers seek lower borrowing costs through refinancing. This introduces reinvestment risk, where the challenge lies in reinvesting prepayments at rates comparable to those initially earned on the prepaid loans or securities.
Construction loans made by us include those with a sales contract or permanent loan in place for the finished homes and those for which purchasers for the finished homes may not be identified either during or following the construction period, known as speculative construction loans.
Our construction loans include those with finalized sales contracts or permanent loans for finished homes and speculative construction loans where purchasers may not be identified during or post-construction. Speculative construction loans to builders pose higher potential risks than loans for personal residences.
As a result, the continued development and enhancement of our information security controls, processes and practices designed to protect customer information, our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for our management.
However, the evolving nature of threats and our ongoing plans to advance our internet and mobile banking channels heighten our exposure to these risks. As a result, continuously developing and enhancing our information security controls, processes, and practices to safeguard customer information, systems, computers, software, data, and networks remains a management priority.
In addition, many of our commercial and multifamily real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such 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.
These balloon payments may require the borrower to either sell or refinance the property, potentially heightening the risk of default or non-payment. In the event of a foreclosure on a commercial or multifamily real estate loan, our holding period for the collateral tends to be more extended compared to one-to-four family residential loans.
Although we believe we have robust information security procedures and controls, we rely heavily on our third party vendors, technologies, systems, networks and our customers' devices all of which may become the target of cyber-attacks, computer viruses, malicious code, unauthorized access, hackers or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, theft or destruction of our confidential, proprietary and other information or that of our customers, or disrupt our operations or those of our customers or third parties.
Additionally, our customers use personal computers, smartphones, tablets, and other mobile devices to access our services, which are beyond our direct control. While we have robust information security procedures and controls in place, our reliance on third-party vendors, technologies, systems, networks, and customers’ devices makes them susceptible to cyber-attacks, viruses, unauthorized access, hackers, or security breaches.
As a result of our large portfolio of these loans, it may become necessary to increase the level of our provision for loan losses, which could decrease our profits.
As a result of our large portfolio of consumer loans, we may need to increase the level of our allowance for credit losses on loans, which could decrease our profits. Consumer loans, particularly those secured by assets that depreciate rapidly like manufactured homes, automobiles, and recreational vehicles, generally carry a higher risk.
In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our liabilities.
Shifts in interest rates can also impact the average lifespan of loans and mortgage-backed securities. In periods of rising interest rates, the growth rate of interest income from our interest-earning assets might lag behind the accelerating interest expenses on our interest-bearing liabilities.
Any such changes could have a material adverse effect on our business, financial condition and results of operations.
External economic factors, such as changes in monetary policy and inflation and deflation, may have an adverse effect on our business, financial condition and results of operations. Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve.
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Changes in agreements or relationships between the United States and other countries may also affect these businesses.
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Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance. Inflation has risen sharply since the end of 2021 and throughout 2022 at levels not seen for over 40 years. Inflationary pressures, while easing recently, remained elevated throughout the first half of 2023.
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Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition.
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Interest rates do not necessarily move in the same direction or by the same magnitude as the prices of goods and services. 37 Table of Contents Risks Related to Our Lending Our loan portfolio includes loans with a higher risk of loss.
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The COVID-19 pandemic has adversely impacted the global and national economy and certain industries and geographies in which our clients operate. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on the Company and its clients, employees and third-party service providers.

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Item 2. Properties

Properties — owned and leased real estate

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The aggregate net book value of our land, buildings, leasehold improvements, furniture and equipment was $5.5 million at December 31, 2022. See also "Note 7—Premises and Equipment" in the Notes to Consolidated Financial Statements contained in "Part II. Item 8. Financial Statements and Supplementary Data" of this report on Form 10-K.
The aggregate net book value of our land, buildings, leasehold improvements, furniture and equipment was $5.2 million at December 31, 2023. See also "Note 7—Premises and Equipment" in the Notes to Consolidated Financial Statements contained in "Part II. Item 8. Financial Statements and Supplementary Data" of this report on Form 10-K.
Item 2. Properties Six of our nine offices are leased. The operating leases contain renewal options and require us to pay property taxes and operating expenses for the properties. Our total rental expense for both of the years ended December 31, 2022 and 2021 was $1.1 million.
Six of our nine offices, including our headquarters, are leased, and each of the leases include renewal options, with the obligation to cover property taxes and operating expenses. Our total rental expense was $1.1 million for both the years ended December 31, 2023 and 2022.
In the opinion of management, the facilities are adequate and suitable for our current needs. We may open additional banking offices to better serve current clients and to attract new clients in subsequent years.
In the opinion of management, our existing facilities are adequate and suitable for our current needs. We may consider opening additional banking offices in subsequent years to enhance service to existing clients and attract new ones; however, we have no current plans to open any new branches.
We maintain depositor and borrower client data on in-house servers, in the cloud and within a service bureau environment, utilizing a telecommunications network, portions of which are leased. Management has a disaster recovery plan in place with respect to the data processing system, as well as our operations as a whole.
Any such decisions would be made based on ongoing strategic evaluations and the evolving needs of the business. We maintain depositor and borrower client data on in-house servers, in the cloud and within a service bureau environment, utilizing a telecommunications network, portions of which are leased.
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Item 2. Properties We operate in the Seattle 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.
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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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Management has a disaster recovery plan in place that encompasses both the data processing system and the broader operations of our organization. This plan is designed to ensure the resilience and continuity of our data management and operational capabilities in the event of unforeseen disruptions or emergencies. 48 Table of Contents

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Item 4. Mine Safety Disclosures 47 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 47 Item 6. [Reserved] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 49 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 63 Item 8. Financial Statements and Supplementary Data 65
Item 4. Mine Safety Disclosures 49 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 49 Item 6. [Reserved] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 51 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 66 Item 8. Financial Statements and Supplementary Data 68

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The common stock of Sound Financial Bancorp is listed on The NASDAQ Capital Market under the symbol "SFBC." There were approximately 262 stockholders of record of our common stock at March 10, 2023.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The common stock of Sound Financial Bancorp is listed on The NASDAQ Capital Market under the symbol "SFBC." There were approximately 255 stockholders of record of our common stock at March 15, 2024.
Under this program the Company was authorized to repurchase up to $2.0 million of its outstanding shares of common stock during the period ending October 29, 2022, from time to time in the open market, based on prevailing market prices, or in privately negotiated transactions.
Under this stock repurchase program, the Company is authorized to repurchase up to $4.0 million of its outstanding shares of common stock from time to time in the open market, based on prevailing market prices, or in privately negotiated transactions.
The actual timing, number and value of shares repurchased under the stock repurchase program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the SEC, price, general business and market conditions, and alternative investment opportunities.
The actual timing, number and value of shares repurchased under the Company’s stock repurchase programs will depend on a number of factors, including constraints specified in any trading plan that may be adopted in accordance with Rule 10b5-1 49 Table of Contents under the Securities Exchange Act of 1934 and limitations imposed on repurchases made pursuant to Rule 10b-18 under the Securities Exchange Act of 1934, price, general business and market conditions, and alternative investment opportunities.
Sound Financial Bancorp has historically paid cash dividends to its common stockholders. During 2022, the Company paid a regular quarterly cash dividend of $0.17 per share and one special dividend of $0.10 per share. Our cash dividend payout policy is reviewed regularly by management and the Board of Directors.
Sound Financial Bancorp has historically paid cash dividends to its common stockholders. In 2023, the Company paid quarterly cash dividends totaling $0.74 per share for the year, and currently pays a regular quarterly cash dividends of $0.19 per share. Our cash dividend policy is reviewed regularly by management and the Board of Directors.
The following table sets forth information with respect to our repurchases of our outstanding common shares during the three months ended December 31, 2022 : Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs October 1, 2022 - October 31, 2022 — $ — — $ 2,140,223 November 1, 2022 - November 30, 2022 — — — 2,140,223 December 1, 2022 - December 31, 2022 — — — 2,140,223 Total — $ — — $ 2,140,223
Issuer Purchases of Equity Securities The following table sets forth information with respect to our repurchases of our outstanding common shares during the three months ended December 31, 2023 : Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs October 1, 2023 - October 31, 2023 451 $ 36.66 451 $ 729,410 November 1, 2023 - November 30, 2023 21,783 36.59 19,734 7,158 December 1, 2023 - December 31, 2023 — — — 7,158 Total 22,234 $ 36.59 20,185 $ 7,158 (1) Includes the surrender of shares of Company common stock that the participants already own as payment of the exercise price for stock options.
Issuer Purchases of Equity Securities On April 25, 2022, the Company announced that its Board of Directors approved an extension of a previously announced stock repurchase program, which was set to expire on April 29, 2022, until October 29, 2022.
(2) On July 25, 2023, the Company announced that its Board of Directors approved an extension of the Company’s existing stock repurchase program, which was set to expire on July 31, 2023, until January 31, 2024.
On July 26, 2022, the Company announced that its Board of Directors amended the existing stock repurchase program to increase the authorized repurchase amount to $4.0 million and to extend the program maturity to January 31, 2023.
Subsequent to December 31, 2023, the Company announced that its Board of Directors approved a new stock repurchase program, authorizing the Company to purchase up to $1.5 million of the Company’s issued and outstanding common stock over a period of 12 months expiring on January 26, 2025.
Removed
Subsequent to December 47 Table of Contents 31, 2022, the Company announced that its Board of Directors further extended the existing stock repurchase program, scheduled to expire on January 31, 2023, to July 31, 2023.
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Shares surrendered by participants in the equity incentive plans are repurchased pursuant to the terms of the plan and applicable award agreement and not pursuant to publicly announced share repurchase programs.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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We also intend to selectively add products to further diversify revenue sources and to capture more of each client's banking relationship by offering additional services. We continue to refine our products and services for additional business and automate services, such as automating consumer loan originations this past year, in an effort to improve customer service.
We also intend to selectively add products to further diversify revenue sources and to capture more of each client's banking relationship by offering additional services. We continue to refine our products and services for additional business and to automate services, such as automating consumer loan originations this past year, in an effort to improve customer service.
The dividends, if any, we may pay may be limited as more fully discussed under “Business—How We Are Regulated—Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of this Form 10-K. Stock Repurchase Plans. From time to time, our board of directors has authorized stock repurchase plans.
The dividends, if any, we may pay in the future may be limited as more fully discussed under “Business—How We Are Regulated—Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of this Form 10-K. Stock Repurchase Plans. From time to time, our board of directors has authorized stock repurchase plans.
In addition, we incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets.
We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets.
Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises and equipment during the year ending December 31, 2023 that would materially impact liquidity. Sound Financial Bancorp is a separate legal entity from Sound Community Bank and must provide for its own liquidity.
Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises and equipment during the year ending December 31, 2024 that would materially impact liquidity. Sound Financial Bancorp is a separate legal entity from Sound Community Bank and must provide for its own liquidity.
The cost of total funding is calculated as annualized total interest expense divided by average total funding. 56 Table of Contents Rate/Volume Analysis The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.
The cost of total funding is calculated as annualized total interest expense divided by average total funding. 59 Table of Contents Rate/Volume Analysis The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.
As of December 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.
As of December 31, 2023, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.
In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.
In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to stockholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.
Capital adequacy requirements are quantitative measures established by regulation that require Sound Community Bank to maintain minimum amounts and ratios of capital. Based on its capital levels at December 31, 2022, Sound Community Bank exceeded these requirements at that date.
Capital adequacy requirements are quantitative measures established by regulation that require Sound Community Bank to maintain minimum amounts and ratios of capital. Based on its capital levels at December 31, 2023, Sound Community Bank exceeded these requirements at that date.
Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities, sales of fixed rate residential mortgage loans in the secondary market and federal funds sold.
Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flows from securities, sales of fixed rate residential mortgage loans in the secondary market and federal funds sold.
The actual timing, number and value of shares repurchased under the stock repurchase program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the SEC, price, general business and market conditions, and alternative investment opportunities.
The actual timing, number and value of shares repurchased under this stock repurchase program will depend on a number of factors, including constraints specified pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the SEC, prevailing stock prices, general business and market conditions, and alternative investment opportunities.
Our goal is to maintain or improve upon our level of nonperforming assets by managing all segments of our loan portfolio in order to proactively identify and mitigate risk. Improving Earnings by Expanding Product Offerings.
Our goal is to 53 Table of Contents maintain or improve upon our level of nonperforming assets by managing all segments of our loan portfolio in order to proactively identify and mitigate risk. Improving Earnings by Expanding Product Offerings.
Financial Statements and Supplementary Data" of this report on Form 10-K. Critical Accounting Estimates We prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates and assumptions.
Financial Statements and Supplementary Data" of this report on Form 10-K. Critical Accounting Estimates We prepare our consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions.
The Company contributed $5.5 million of the net proceeds from the sale of the subordinated notes to the Bank and retained the remaining net proceeds to be used for general corporate purposes. At December 31, 2022 Sound Financial Bancorp, on an unconsolidated basis, had $2.2 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.
The Company contributed $5.5 million of the net proceeds from the sale of the subordinated notes to the Bank and retained the remaining net proceeds to be used for general corporate purposes. At December 31, 2023, Sound Financial Bancorp, on an unconsolidated basis, had $156 thousand in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.
Consistent with our goals to operate a sound and profitable organization, our policy is for Sound Community Bank to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Beginning January 2020, the Bank elected to use the CBLR framework.
Consistent with our goals to operate a sound and profitable organization, our policy is for Sound Community Bank to maintain a "well-capitalized" status under the prompt corrective action capital categories of the FDIC. Beginning January 2020, the Bank elected to use the CBLR framework.
If Sound Financial Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2022, Sound Financial Bancorp would have exceeded all regulatory capital requirements. The estimated CBLR calculated for Sound Financial Bancorp at December 31, 2022 was 9.86%.
If Sound Financial Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2023, Sound Financial Bancorp would have exceeded all regulatory capital requirements. The estimated CBLR calculated for Sound Financial Bancorp at December 31, 2023 was 9.78%.
In addition to our retail branches, we maintain state of the art technology-based products, such as business cash management, business remote deposit products, business and consumer mobile banking applications and consumer remote deposit products. Total deposits increased to $808.8 million at December 31, 2022, from $798.3 million at December 31, 2021.
In addition to our retail branches, we maintain state of the art technology-based products, such as business cash management, business remote deposit products, business and consumer mobile banking applications and consumer remote deposit products. Total deposits increased to $826.5 million at December 31, 2023, from $808.8 million at December 31, 2022.
We believe that strong asset quality is a key to our long-term financial success. We are focused on monitoring existing performing loans, resolving nonperforming assets and selling foreclosed assets. Nonperforming assets were $3.6 million, or 0.37% of total assets, at December 31, 2022 compared to $6.2 million or 0.68% of total assets, at December 31, 2021.
We believe that strong asset quality is a key to our long-term financial success. We are focused on monitoring existing performing loans, resolving nonperforming assets and selling foreclosed assets. Nonperforming assets were $4.1 million, or 0.42% of total assets, at December 31, 2023 compared to $3.6 million or 0.37% of total assets, at December 31, 2022.
The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice.
The Company expects to continue its current practice of paying quarterly cash dividends on common stock, subject to the Board of Directors’ discretion to modify or terminate this practice at any time and for any reason.
We had $43.0 million in outstanding advances with the FHLB at December 31, 2022 and no outstanding borrowings with the Federal Reserve at December 31, 2022. In addition, we also had available $20.0 million of credit facilities with other financial institutions, with no balance outstanding at December 31, 2022.
We had $40.0 million in outstanding advances with the FHLB at December 31, 2023 and no outstanding borrowings with the Federal Reserve at December 31, 2023. We also had available $20.0 million of credit facilities with other financial institutions, with no balance outstanding at December 31, 2023.
During 2022, however, due to a generally illiquid jumbo loan market, we retained a higher proportion of jumbo loans than we have historically, resulting in commercial business and commercial and multifamily real estate loans making up a lower percentage of our overall portfolio.
During 2022 and continuing through 2023, however, due to a generally illiquid jumbo loan market for residential mortgage loans, we retained a higher proportion of these jumbo loans than we have historically, resulting in commercial business and commercial and multifamily real estate loans making up a lower percentage of our overall portfolio.
For additional details, see “Note 10—Borrowings, FHLB Stock and Subordinated Notes” in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K. In the ordinary course of business, we have entered into contractual obligations and have made other commitments to make future payments.
For additional details, see “Note 10—Borrowings, FHLB Stock and Subordinated Notes” in the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. In the ordinary course of business, we enter into contractual obligations and have additional commitments to make future payments.
The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities.
The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of favorable movements in market interest rates.
While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the future provisions will not exceed past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.
While we believe the estimates and assumptions used in our determination of the adequacy of the ACL are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not have a material adverse impact on our financial condition and results of operations.
We believe that opportunities currently exist within our market area to grow our franchise. We anticipate continued organic growth as the local economy and loan demand remains strong, through our marketing efforts and as a result of the opportunities created from the consolidation of financial institutions occurring in our market area.
We anticipate continued organic growth as the local economy and loan demand remains strong, through our marketing efforts and as a result of the opportunities created from the consolidation of financial institutions occurring in our market area.
In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination. 59 Table of Contents Noninterest Income.
In addition, the determination of the amount of our ACL is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment to the ACL based upon their judgment of information available to them at the time of their examination. Noninterest Income.
The loan portfolio remains well-diversified with commercial and multifamily real estate loans accounting for 36.1% of the portfolio, one-to-four family real estate loans, including home equity loans, accounting for approximately 33.9% of the portfolio and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounting for 13.8% of the total loan portfolio at December 31, 2022.
The loan portfolio remains well-diversified with commercial and multifamily real estate loans accounting for 35.2% of the portfolio, one-to-four family real estate loans, including home equity loans, accounting for approximately 33.8% of the portfolio and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounting for 14.6% of the total loan portfolio at December 31, 2023.
Total assets increased by $56.7 million, or 6.2%, to $976.4 million at December 31, 2022, from $919.7 million at December 31, 2021. The increase was primarily a result of an increase in loans held-for-portfolio and investment securities, partially offset by lower balances in cash and cash equivalents and decreases in loans held-for-sale. Cash and Securities.
Total assets increased by $18.9 million, or 1.9%, to $995.2 million at December 31, 2023, from $976.4 million at December 31, 2022. The increase was primarily a result of an increase in loans held-for-portfolio, partially offset by lower balances in cash and cash equivalents and decreases in investment securities. Cash and Securities.
Our consumer loan portfolio, which includes manufactured and floating homes and other consumer loans, increased to $119.3 million or 13.8% of our loan portfolio at December 31, 2022, from $97.7 million or 14.2% of our loan portfolio at December 31, 2021.
Our consumer loan portfolio, which includes manufactured and floating homes and other consumer loans, increased to $130.9 million or 14.6% of our loan portfolio at December 31, 2023, from $119.3 million or 13.8% of our loan portfolio at December 31, 2022.
See also the "Consolidated Statements of Cash Flows" included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K, for further information. Regulatory Capital. Sound Community Bank is subject to minimum capital requirements imposed by regulations of the FDIC.
See also the “Consolidated Statements of Cash Flows” included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K, for additional information regarding our sources and use of funds. Regulatory Capital. Sound Community Bank is subject to minimum capital requirements imposed by regulations of the FDIC.
The increasing interest rate environment is expected to continue to put downward pressure on our net gain on sale of loans, as well as increase borrowing costs which may adversely affect our net interest income and net interest margin in 2023.
The ongoing high interest rate environment is expected to continue to exert downward pressure on our net gain on sale of loans, as well as keep borrowing costs elevated, which may adversely affect our net interest income and net interest margin in 2024.
This increase primarily reflects $8.8 million in net income for the year ended December 31, 2022, partially offset by the payment of cash dividends of $2.0 million to common stockholders, the repurchase of $1.7 million of common stock and unrealized losses on our securities portfolio resulting in an other comprehensive loss, net of tax benefit, of $1.3 million during the year ended December 31, 2022.
This increase primarily reflects $7.4 million in net income for the year ended December 31, 2023 and unrealized gains on our securities portfolio resulting in other comprehensive income, net of tax, of $129 thousand, partially offset by the payment of cash dividends of $1.9 million to common stockholders and the repurchase of $2.1 million of common stock during the year ended December 31, 2023.
Interest income on the investment portfolio and cash and cash equivalents increased $1.1 million, or 233.6%, to $1.6 million for the year ended December 31, 2022, compared to $485 thousand for the year ended December 31, 2021. The increase was due to higher average yields, partially offset by lower average balances.
Interest income on cash and cash equivalents increased $2.4 million, or 193.2%, to $3.6 million for the year ended December 31, 2023, compared to $1.2 million for the year ended December 31, 2022. The increase was due to higher average yields, partially offset by lower average balances.
At December 31, 2022, core deposits, which we define as our non-time deposit accounts and time deposit accounts of less than $250 thousand, decreased $9.5 million to $745.7 million from $755.2 million at December 31, 2021.
However, core deposits, which we define as our non-time deposit accounts and time deposit accounts of less than $250 thousand, decreased $30.0 million to $715.7 million at December 31, 2023, from $745.7 million at December 31, 2022.
These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. 61 Table of Contents As of December 31, 2022, we had $68.0 million in cash and available-for-sale investment securities and no loans held-for-sale.
These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. 64 Table of Contents As of December 31, 2023, we had $58.0 million in cash, cash equivalents and AFS securities, and $603 thousand in loans held-for-sale.
Assuming continued payment during 2023 at this rate of $0.17 per share, our average total dividend paid each quarter would be approximately $442 thousand based on the number of our outstanding shares at December 31, 2022.
Assuming continued payment of cash dividends during 2024 at the current quarterly dividend rate of $0.19 per share, our total dividend paid each quarter would be approximately $486 thousand based on the number of our outstanding shares at December 31, 2023.
See "Note 1—Organization and Significant Accounting Policies" in the Notes to Consolidated Financial Statements contained in "Part II. Item 8. Financial Statements and Supplementary Data" of this report on Form 10-K for a summary of significant accounting policies. Allowance for Loan Loss.
See "Note 1—Organization and Significant Accounting Policies" in the Notes to Consolidated Financial Statements contained in "Part II. Item 8. Financial Statements and Supplementary Data" of this report on Form 10-K for a summary of significant accounting policies. Allowance for Credit Losses. Effective January 1, 2023, we maintain an ACL in accordance with ASC 326.
FHLB advances increased to $43.0 million at December 31, 2022, reaching as high as $114 million during 2022, as we utilized our FHLB line of credit to offset the decrease in deposits for funding needs. There were no FHLB advances at December 31, 2021.
FHLB advances decreased to $40.0 million at December 31, 2023, while reaching a high of $92.0 million during 2023, as we utilized our FHLB line of credit to offset fluctuations in deposits for funding needs. There were $43.0 million of FHLB advances at December 31, 2022.
For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank-only basis and the Federal Reserve expects the holding company's subsidiary banks to be "well-capitalized" under the prompt corrective action regulations.
Business—How We Are Regulated—Regulation of Sound Community Bank—Capital Rules" of this Form 10-K. 65 Table of Contents For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank-only basis and the Federal Reserve expects the holding company's subsidiary banks to be "well-capitalized" under the prompt corrective action regulations.
In managing the size of, and concentrations within, our loan portfolio we typically focus on including a significant amount of commercial business and commercial and multifamily real estate loans.
Our strategic plan targets consumers, small- and medium-size businesses, and professionals in our market area for loans and deposits. In managing the size of, and concentrations within, our loan portfolio we typically focus on including a significant amount of commercial business and commercial and multifamily real estate loans.
We originated $125.6 million and $243.9 million of one-to-four family residential mortgage loans during the years ended December 31, 2022 and 2021, respectively. We had no purchases of one-to-four family residential mortgage loans during the year ended December 31, 2022 and $24.1 million of purchases during the year ended December 31, 2021.
We originated $53.1 million and $125.6 million of one-to-four family residential mortgage loans during the years ended December 31, 2023 and 2022, respectively. We had no purchases of one-to-four family residential mortgage loans during the years ended December 31, 2023 and 2022. During those two years, we sold $17.1 million and $20.3 million, respectively, of one-to-four family residential mortgage loans.
The average cost of total deposits decreased four basis points to 0.37% for the year ended December 31, 2022, from 0.41% for the year ended December 31, 2021.
The average cost of total deposits increased 132 basis points to 1.69% for the year ended December 31, 2023, from 0.37% for the year ended December 31, 2022.
Net income decreased $352 thousand, or 3.8%, to $8.8 million, or $3.35 per diluted common share, for the year ended December 31, 2022, compared to $9.2 million, or $3.46 per diluted common share, for the year ended December 31, 2021.
Net income decreased $1.4 million, or 15.5%, to $7.4 million, or $2.86 per diluted common share, for the year ended December 31, 2023, compared to $8.8 million, or $3.35 per diluted common share, for the year ended December 31, 2022.
We believe that one of our strengths is that our employees are also significant stockholders through our ESOP and 401(k) plans.
We believe that one of our strengths is that our employees are also significant stockholders through our ESOP and 401(k) plans. We also offer incentives that are designed to reward employees for achieving high-quality client relationship growth.
We paid regular quarterly dividends of $0.17 per common share and a special dividend of $0.10 per common share during both 2022 and 2021. This equates to a dividend payout ratio of 23.1% in 2022 and 22.3% in 2021.
We paid regular quarterly dividends aggregating $0.74 per common share during the year ended December 31, 2023 and regular quarterly dividends aggregating $0.68 per common share and a special dividend of $0.10 per common share during the year ended December 31, 2022. This equates to a dividend payout ratio of 25.7% in 2023 and 23.1% in 2022.
The decrease was primarily a result of $2.7 million decrease in noninterest income, a $2.4 million increase in noninterest expense, a $546 thousand increase in interest expense and a $800 thousand increase in the provision for loan losses for the year ended December 31, 2022, partially offset by a $5.9 million increase in interest income. Interest Income.
The decrease was primarily a result of a $1.4 million decrease in net interest income and a $2.3 million increase in noninterest expense, partially offset by a $1.4 million decrease in provision for credit losses and a $424 thousand increase in noninterest income. Interest Income.
At December 31, 2022, the Bank’s CBLR was 10.83%, which exceeded the minimum requirements. For additional details, see “Note 16—Capital” in the Notes to Consolidated Financial Statements contained in "Item 8. Financial 62 Table of Contents Statements and Supplementary Data" and "Item 1. Business—How We Are Regulated—Regulation of Sound Community Bank—Capital Rules" of this Form 10-K.
At December 31, 2023, the Bank’s CBLR was 10.99%, which exceeded the minimum requirements. For additional details, see “Note 16—Capital” in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" and "Item 1.
A summary of deposit accounts with the corresponding weighted-average cost at December 31, 2022 and 2021 is presented below (dollars in thousands): December 31, 2022 December 31, 2021 Amount Wtd. Avg. Rate Amount Wtd. Avg.
Noninterest-bearing (including escrow accounts) deposits represented 15.3% of total deposits at December 31, 2023, compared to 21.4% at December 31, 2022. 57 Table of Contents A summary of deposit accounts with the corresponding weighted-average cost at December 31, 2023 and 2022 is presented below (dollars in thousands): December 31, 2023 December 31, 2022 Amount Wtd. Avg. Rate Amount Wtd. Avg.
Interest income on loans increased $4.8 million, or 14.3%, to $38.2 million for the year ended December 31, 2022, compared to $33.4 million for the year ended December 31, 2021, driven by the increase in the average balance of total loans outstanding.
Interest income on loans increased $8.3 million, or 21.7%, to $46.5 million for the year ended December 31, 2023, compared to $38.2 million for the year ended December 31, 2022, driven by higher average total loans and a 47 basis points increase in the average yield on loans.
We also saw increases in our floating homes and manufactured housing loan portfolios. The increase in loans held-for-portfolio primarily resulted from focused marketing campaigns, increased utilization of digital marketing tools and the addition of experienced lending staff.
The increase in loans held-for-portfolio primarily resulted from focused marketing campaigns, increased utilization of digital marketing tools and the addition of experienced lending staff, which resulted in continued strong loan demand, as well as slower prepayments.
CECL replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses.
Effective January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, also known as CECL. CECL replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses.
Interest expense on borrowings and subordinated notes increased $878 thousand, or 130.7%, to $1.6 million for the year ended December 31, 2022, which was comprised of interest expense on subordinated notes and FHLB advances, compared to $672 thousand for the year ended December 31, 2021, which was comprised solely of interest expense on our subordinated notes.
Interest expense on borrowings, comprised solely of FHLB advances, was $2.0 million for the year ended December 31, 2023, compared to $878 thousand for the year ended December 31, 2022, reflecting the increased use of FHLB advances to supplement our liquidity needs.
In addition to net income of $8.8 million, other sources of capital during 2022 included $223 thousand in proceeds from stock option exercises and $475 thousand related to stock-based compensation. Uses of capital during 2022 included $2.0 million of dividends paid on common stock, other comprehensive loss, net of tax, of $1.3 million and $1.7 million of stock repurchases.
In addition to net income of $7.4 million, other sources of capital during 2023 included $129 thousand of other comprehensive income, net of tax, $395 thousand in proceeds from stock option exercises and $450 thousand related to stock-based compensation.
At December 31, 2022, we had the ability to borrow an additional $199.0 million in FHLB advances and access to additional borrowings of $20.8 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.
At December 31, 2023, we had the ability to borrow up to $181.4 million in FHLB advances (in addition to FHLB advances outstanding at that date) and up to $18.3 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.
We also offer incentives that are designed to reward employees for achieving high-quality client relationship growth. 52 Table of Contents Expanding Our Presence, Including Through Digital Channels and Streamlining Operations, Within Our Existing and Contiguous Market Areas and by Capturing Business Opportunities Resulting from Changes in the Competitive Environment.
Expanding Our Presence, Including Through Digital Channels and Streamlining Operations, Within Our Existing and Contiguous Market Areas and by Capturing Business Opportunities Resulting from Changes in the Competitive Environment. We believe that opportunities currently exist within our market area to grow our franchise.
Average Balances, Net Interest Income, Yields Earned and Rates Paid The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.
In addition, stockholders’ equity at December 31, 2023 was negatively impacted by the adoption of CECL in the first quarter of 2023, which resulted in an after-tax decrease to opening retained earnings of $1.1 million. 58 Table of Contents Average Balances, Net Interest Income, Yields Earned and Rates Paid The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.
In addition, by delivering high-quality, client-focused products and services, we expect to attract additional borrowers and depositors and thus increase our market share and revenue generation. We continue to be disciplined as it pertains to future expansion, acquisitions and de novo branching focusing on the markets in Western Washington, which we know and understand.
In addition, by delivering high-quality, client-focused products and services, we expect to attract additional borrowers and depositors and thus increase our market share and revenue generation.
Rate Noninterest-bearing demand $ 170,549 — % $ 187,684 — % Interest-bearing demand 254,982 0.21 307,061 0.19 Savings 95,641 0.05 103,401 0.08 Money market 74,639 0.28 91,670 0.21 Certificates of deposit 210,305 0.97 105,722 1.57 Escrow (1) 2,647 — 2,782 — Total $ 808,763 0.37 % $ 798,320 0.41 % (1) Escrow balances shown in noninterest-bearing deposits on the Consolidated Balance Sheets. 55 Table of Contents Borrowings .
Rate Noninterest-bearing demand $ 124,135 — % $ 170,549 — % Interest-bearing demand 168,345 0.75 254,982 0.21 Savings 69,461 0.07 95,641 0.05 Money market 154,044 1.39 74,639 0.28 Certificates of deposit 307,962 3.45 210,305 0.97 Escrow (1) 2,592 — 2,647 — Total $ 826,539 1.64 % $ 808,763 0.37 % (1) Escrow balances shown in noninterest-bearing deposits on the Consolidated Balance Sheets.
Year Ended December 31, 2022 vs. 2021 Increase (Decrease) due to Total Increase (Decrease) Volume Rate Interest-earning assets: Loans $ 6,498 $ (1,710) $ 4,788 Investments and interest-bearing accounts (1,266) 2,399 1,133 Total interest-earning assets 5,232 689 5,921 Interest-bearing liabilities: Savings and Money Market accounts 19 12 $ 31 Demand and NOW accounts 16 63 79 Certificate accounts (471) 29 (442) Subordinated notes 2 (2) — Borrowings 878 — 878 Total interest-bearing liabilities $ 444 $ 102 $ 546 Change in net interest income $ 5,375 57 Table of Contents Comparison of Results of Operation for the Years Ended December 31, 2022 and 2021 Year Ended December 31, 2022 2021 Selected Operations Data: Total interest income $ 39,795 $ 33,874 Total interest expense 4,500 3,954 Net interest income 35,295 29,920 Provision for loan losses 1,225 425 Net interest income after provision for loan losses 34,070 29,495 Service charges and fee income 2,368 2,247 Earnings on cash surrender value of BOLI 219 416 Mortgage servicing income 1,242 1,284 Fair value adjustment on mortgage servicing rights ("MSRs") 207 (808) Net gain on sale of loans 546 4,190 Total noninterest income 4,582 7,329 Salaries and benefits 16,415 14,257 Operations expense 5,812 5,765 Occupancy expense 1,737 1,748 Net losses and expenses on OREO and repossessed assets — (16) Other noninterest expense 3,812 3,642 Total noninterest expense 27,776 25,396 Income before provision for income taxes 10,876 11,428 Provision for income taxes 2,072 2,272 Net income $ 8,804 $ 9,156 General.
Year Ended December 31, 2023 vs. 2022 Increase (Decrease) due to Total Increase (Decrease) Volume Rate Interest-earning assets: Loans $ 4,638 $ 3,655 $ 8,293 Investments (12) 147 135 Interest-bearing cash (1,727) 4,113 2,386 Total interest-earning assets 2,899 7,915 10,814 Interest-bearing liabilities: Savings and Money Market accounts 90 2,482 $ 2,572 Demand and NOW accounts (327) 373 46 Certificate accounts 5,729 2,839 8,568 Subordinated notes 3 (3) — Borrowings 741 332 1,073 Total interest-bearing liabilities $ 6,236 $ 6,023 $ 12,259 Change in net interest income $ (1,445) 60 Table of Contents Comparison of Results of Operation for the Years Ended December 31, 2023 and 2022 Year Ended December 31, 2023 2022 Selected Operations Data: Total interest income $ 50,609 $ 39,795 Total interest expense 16,759 4,500 Net interest income 33,850 35,295 (Release of) provision for credit losses (273) 1,156 Net interest income after provision for loan losses 34,123 34,139 Service charges and fee income 2,527 2,368 Earnings on cash surrender value of BOLI 1,179 219 Mortgage servicing income 1,179 1,242 Fair value adjustment on mortgage servicing rights ("MSRs") (219) 207 Net gain on sale of loans 340 546 Total noninterest income 5,006 4,582 Salaries and benefits 17,135 16,415 Operations expense 6,095 5,881 Occupancy expense 1,810 1,737 Net losses and expenses on OREO and repossessed assets 13 — Other noninterest expense 5,076 3,812 Total noninterest expense 30,129 27,845 Income before provision for income taxes 9,000 10,876 Provision for income taxes 1,561 2,072 Net income $ 7,439 $ 8,804 General.
Nonperforming loans were 0.34% of total loans at December 31, 2022, compared to 0.81% of total loans at December 31, 2021. We had no loans greater than 90 days delinquent and still accruing at December 31, 2022 and 2021. 54 Table of Contents Allowance for Loan Losses.
We had no loans delinquent 90 days or more and still accruing at December 31, 2023 and 2022. 56 Table of Contents Allowance for Credit Losses.
Our commercial loan portfolio (commercial and multifamily real estate and commercial business loans) increased to $337.2 million at December 31, 2022 from $306.2 million at December 31, 2021, but decreased as a percentage of our total loan portfolio to 38.9% from 44.5% at December 31, 2022 and 2021, respectively.
Our commercial loan portfolio (commercial and multifamily real estate and commercial business loans) totaled $336.0 million or 37.5% of our loan portfolio at December 31, 2023, down slightly from $337.2 million or 38.9% of our loan portfolio at December 31, 2022.
The provision for income taxes decreased $200 thousand, or 8.8% to $2.1 million for the year ended December 31, 2022, compared to $2.3 million for the year ended December 31, 2021, due to a lower effective tax rate and a decrease in taxable net income.
Income Tax Expense . The provision for income taxes decreased $511 thousand, or 24.7% to $1.6 million for the year ended December 31, 2023, compared to $2.1 million for the year ended December 31, 2022 due to lower pre-tax income. The effective tax rates for the years ended December 31, 2023 and 2022 were 17.3% and 19.1%, respectively.
The average yield on investments and cash and cash equivalents was 1.30% for the year ended December 31, 2022, compared to 0.22% for the year ended December 31, 2021, 58 Table of Contents primarily due to the deployment of a portion of cash and cash equivalents earning a nominal yield into higher yielding investment securities and the impact of rising rates.
The average yield on cash and cash equivalents was 4.85% for the year ended December 31, 2023, compared to 1.12% for the year ended December 31, 2022, primarily due to the impact of rising rates. 61 Table of Contents Interest Expense.
Noninterest expense increased $2.4 million, or 9.4%, to $27.8 million during the year ended December 31, 2022, compared to $25.4 million during the year ended December 31, 2021, as reflected below (dollars in thousands): Year Ended December 31, Amount Change Percent Change 2022 2021 Salaries and benefits $ 16,415 $ 14,257 $ 2,158 15.1 % Operations 5,812 5,765 47 0.8 Regulatory assessments 452 379 73 19.3 Occupancy 1,737 1,748 (11) (0.6) Data processing 3,360 3,263 97 3.0 Net gain on OREO and repossessed assets — (16) 16 (100.0) Total noninterest expense $ 27,776 $ 25,396 $ 2,380 9.4 % Salaries and benefits, the largest driver of noninterest expense, increased primarily due to higher wages, lower deferred compensation and higher medical expenses, partially offset by a decrease in incentive compensation as a result of a lower percentage earned on loans originated, changes to incentive compensation programs, such as the addition of non-production performance requirements, and lower commission expense related to a decline in mortgage originations.
Noninterest expense increased $2.3 million, or 8.2%, to $30.1 million during the year ended December 31, 2023, compared to $27.8 million during the year ended December 31, 2022, as reflected below (dollars in thousands): Year Ended December 31, Amount Change Percent Change 2023 2022 Salaries and benefits $ 17,135 $ 16,415 $ 720 4.4 % Operations 6,095 5,881 214 3.6 Regulatory assessments 688 452 236 52.2 Occupancy 1,810 1,737 73 4.2 Data processing 4,388 3,360 1,028 30.6 Net loss and expenses on OREO and repossessed assets 13 — 13 (100.0) Total noninterest expense $ 30,129 $ 27,845 $ 2,284 8.2 % Salaries and benefits increased primarily due to higher wages, hiring for strategic initiatives, higher medical expenses and lower deferred compensation, partially offset by a decrease in incentive compensation and commissions related to a decline in loan origination activity during the year ended December 31, 2023 as compared to 2022.
Year Ended December 31, 2022 2021 Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Interest-earning assets: Loans receivable $ 783,372 $ 38,177 4.87 % $ 650,045 $ 33,389 5.14 % Investments, cash and cash equivalents 124,331 1,618 1.30 221,577 485 0.22 Total interest-earning assets (1) 907,703 39,795 4.38 % 871,622 33,874 3.89 Interest-bearing liabilities: Savings and money market accounts 188,478 211 0.11 171,406 180 0.11 Demand and NOW accounts 295,919 690 0.23 289,096 611 0.21 Certificate accounts 129,011 2,049 1.59 158,649 2,491 1.57 Subordinated notes 11,653 672 5.77 11,611 672 5.79 Borrowings 27,273 878 3.22 1 — — Total interest-bearing liabilities 652,334 4,500 0.69 % 630,763 3,954 0.63 % Net interest income $ 35,295 $ 29,920 Net interest rate spread 3.69 % 3.26 % Net earning assets $ 255,369 $ 240,859 Net interest margin 3.89 % 3.43 % Average interest-earning assets to average interest-bearing liabilities 139.15 % 138.19 % Total deposits 803,521 2,950 0.37 % 797,686 3,282 0.41 % Total funding (2) 842,447 4,500 0.53 % 809,298 3,954 0.49 % (1) Calculated net of deferred loan fees, loan discounts and loans in process.
Year Ended December 31, 2023 2022 Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Average Outstanding Balance Interest Earned/ Paid Yield/ Rate Annualized Interest-earning assets: Loans receivable $ 870,227 $ 46,470 5.34 % $ 783,372 $ 38,177 4.87 % Investments 13,661 518 3.79 13,988 383 2.74 Cash and cash equivalents 74,708 3,621 4.85 110,344 1,235 1.12 Total interest-earning assets (1) 958,596 50,609 5.28 % 907,704 39,795 4.38 Interest-bearing liabilities: Savings and money market accounts 194,810 2,783 1.43 188,478 211 0.11 Demand and NOW accounts 204,922 736 0.36 295,919 690 0.23 Certificate accounts 280,238 10,617 3.79 129,011 2,049 1.59 Subordinated notes 11,698 672 5.74 11,653 672 5.77 Borrowings 43,977 1,951 4.44 27,273 878 3.22 Total interest-bearing liabilities 735,645 16,759 2.28 % 652,334 4,500 0.69 % Net interest income $ 33,850 $ 35,295 Net interest rate spread 3.00 % 3.69 % Net earning assets $ 222,951 $ 255,370 Net interest margin 3.53 % 3.89 % Average interest-earning assets to average interest-bearing liabilities 130.31 % 139.15 % Total deposits 834,418 14,136 1.69 % 803,521 2,950 0.37 % Total funding (2) 890,093 16,759 1.88 % 842,447 4,500 0.53 % (1) Calculated net of deferred loan fees, loan discounts and loans in process.
Noninterest income decreased $2.7 million, or 37.5%, to $4.6 million for the year ended December 31, 2022, as compared to $7.3 million for the year ended December 31, 2021, as reflected below (dollars in thousands): Year Ended December 31, Amount Change Percent Change 2022 2021 Service charges and fee income $ 2,368 $ 2,247 $ 121 5.4 % Earnings on cash surrender value of BOLI 219 416 (197) (47.4) Mortgage servicing income 1,242 1,284 (42) (3.3) Fair value adjustment on mortgage servicing rights 207 (808) 1,015 (125.6) Net gain on sale of loans 546 4,190 (3,644) (87.0) Total noninterest income $ 4,582 $ 7,329 $ (2,747) (37.5) % The decrease in noninterest income during the year ended December 31, 2022, compared to the same period in 2021 primarily was due to the decrease in net gain on sale of loans, and decreases in mortgage servicing income and earnings on cash surrender value of BOLI, partially offset by improvement in the fair value adjustment on mortgage servicing rights, and increases in service charges and fees.
Noninterest income increased $424 thousand, or 9.3%, to $5.0 million for the year ended December 31, 2023, as compared to $4.6 million for the year ended December 31, 2022, as reflected below (dollars in thousands): Year Ended December 31, Amount Change Percent Change 2023 2022 Service charges and fee income $ 2,527 $ 2,368 $ 159 6.7 % Earnings on cash surrender value of BOLI 1,179 219 960 438.4 Mortgage servicing income 1,179 1,242 (63) (5.1) Fair value adjustment on MSRs (219) 207 (426) (205.8) Net gain on sale of loans 340 546 (206) (37.7) Total noninterest income $ 5,006 $ 4,582 $ 424 9.3 % The increase in noninterest income during the year ended December 31, 2023, compared to 2022 primarily was due to a $960 thousand increase in earnings on BOLI reflecting $567 thousand in death benefits paid under our BOLI policies and an increase in the cash surrender value due to recent price increases in the securities markets.
Construction and land loans accounted for 13.5% of the portfolio and commercial business loans accounted for the remaining 2.7% of the portfolio at December 31, 2022. Nonperforming Assets. At December 31, 2022, our nonperforming assets totaled $3.6 million, or 0.37% of total assets, compared to $6.2 million, or 0.68% of total assets, at December 31, 2021.
Construction and land loans accounted for 14.1% of the portfolio and commercial business loans accounted for the remaining 2.3% of the portfolio at December 31, 2023. Nonperforming Assets.
Interest expense increased $546 thousand, or 13.8%, to $4.5 million for the year ended December 31, 2022, from $4.0 million for the year ended December 31, 2021, primarily as a result of an increase in the average balance of borrowings, partially offset by a decrease in the average balance of certificate accounts and, to a lesser extent, lower total deposit costs.
Interest expense increased $12.3 million, or 272.4%, to $16.8 million for the year ended December 31, 2023, from $4.5 million for the year ended December 31, 2022, primarily as a result of an increase in the average balances and costs of deposits and borrowings Interest expense on deposits increased $11.2 million, or 379.2%, to $14.1 million for the year ended December 31, 2023, compared to $3.0 million for the year ended December 31, 2022.
Comparison of Financial Condition at December 31, 2022 and December 31, 2021 As of December 31, 2022 2021 Selected Financial Condition Data: Total assets $ 976,351 $ 919,691 Cash and cash equivalents 57,836 183,590 Total loans held for portfolio, net 858,382 680,092 Loans held-for-sale — 3,094 Available-for-sale securities, at fair value 10,207 8,419 Held-to-maturity securities, at amortized cost 2,199 — Bank-owned life insurance ("BOLI"), net 21,314 21,095 OREO and repossessed assets, net 659 659 FHLB stock, at cost 2,832 1,046 Total deposits 808,763 798,320 Borrowings 43,000 — Subordinated notes, net 11,676 11,634 Stockholders' equity 97,705 93,358 General.
We continue to be disciplined as it pertains to future expansion, acquisitions and de novo branching focusing on the markets in Western Washington, which we know and understand. 54 Table of Contents Comparison of Financial Condition at December 31, 2023 and December 31, 2022 As of December 31, 2023 2022 Selected Financial Condition Data: Total assets $ 995,221 $ 976,351 Cash and cash equivalents 49,690 57,836 Total loans held for portfolio, net 885,718 858,382 Loans held-for-sale 603 — AFS securities, at fair value 8,287 10,207 HTM securities, at amortized cost 2,166 2,199 Bank-owned life insurance (“BOLI”), net 21,860 21,314 OREO and repossessed assets, net 575 659 FHLB stock, at cost 2,396 2,832 Total deposits 826,539 808,763 Borrowings 40,000 43,000 Subordinated notes, net 11,717 11,676 Stockholders' equity 100,654 97,705 General.
The average cost of the subordinated notes and FHLB advances was 3.98% for the year ended December 31, 2022, compared to 5.79% for the year ended December 31, 2021. Net Interest Income. Net interest income increased $5.4 million, or 18.0%, to $35.3 million for the year ended December 31, 2022, from $29.9 million for the year ended December 31, 2021.
Interest expense on subordinated notes was $672 thousand for both the year ended December 31, 2023 and the year ended December 31, 2022. Net Interest Income. Net interest income decreased $1.4 million, or 4.1%, to $33.9 million for the year ended December 31, 2023, from $35.3 million for the year ended December 31, 2022.
The increase in net interest margin was primarily due to an increase in yields earned on interest-earning assets exceeding the increase in rates paid on interest-bearing liabilities.
The decrease in net interest margin primarily was due to funding costs increasing at a faster pace than the average yields earned on interest-earning assets and an increase in the average balance of interest earning assets.
The following table reflects the adjustments in our allowance during 2022 and 2021 (dollars in thousands): Year Ended December 31, 2022 2021 Balance at beginning of period $ 6,306 $ 6,000 Charge-offs (124) (136) Recoveries 192 17 Net (charge-offs) recoveries 68 (119) Provision charged to operations 1,225 425 Balance at end of period $ 7,599 $ 6,306 Ratio of net recoveries (charge-offs) during the period to average loans outstanding during the period 0.01 % (0.02) % Allowance as a percentage of nonperforming loans 256.81 % 113.58 % Allowance as a percentage of total loans (end of period) 0.88 % 0.92 % Our allowance for loan losses increased $1.3 million, or 20.5%, to $7.6 million at December 31, 2022, from $6.3 million at December 31, 2021.
The following table reflects the adjustments in our ACL during the periods indicated (dollars in thousands): Year Ended December 31, 2023 2022 ACL — Loans: Balance at beginning of period $ 7,599 $ 6,306 Impact of adoption of ASU 2016-13 760 — Charge-offs (204) (124) Recoveries 41 192 Net (charge-offs) recoveries (163) 68 Provision for credit losses 564 1,225 Balance at end of period $ 8,760 $ 7,599 ACL - Unfunded Loan Commitments: Balance at beginning of period 335 404 Impact of adoption of ASU 2016-13 695 — Release of credit losses (837) (69) Balance at end of period 193 335 ACL $ 8,953 $ 7,934 Ratio of net charge-offs during the period to average loans outstanding during the period (0.02) % 0.01 % The ACL for loans increased $1.2 million, or 15.3%, to $8.8 million at December 31, 2023, from $7.6 million at December 31, 2022, while the ACL for unfunded loan commitments decreased $143 thousand, or 42.4% to $193 thousand at December 31, 2023, from $335 thousand at December 31, 2022.
Cash, cash equivalents, available-for-sale securities and held-to-maturity securities decreased by $121.8 million, or 63.4%, to $70.2 million at December 31, 2022 compared to the prior year. Cash and cash equivalents decreased $125.8 million, or 68.5%, to $57.8 million due to deploying cash earning a nominal yield into higher earning loans and investments.
Cash and cash equivalents decreased $8.1 million, or 14.1%, to $49.7 million at December 31, 2023 compared to the prior year-end due to the increase in loans held-for-portfolio exceeding increases in deposits and the deployment of excess cash earning a nominal yield into higher earning loans and investments.
Loans held-for-sale decreased to $0 at December 31, 2022 from $3.1 million at December 31, 2021 primarily due to a decline in mortgage originations, reflecting reduced refinance activity and the timing of originations. 53 Table of Contents The following table reflects the changes in the loan mix, excluding premiums and deferred fees, of our portfolio at December 31, 2022, as compared to December 31, 2021 (dollars in thousands): December 31, Amount Percent 2022 2021 Change Change One-to-four family $ 274,638 $ 207,660 $ 66,978 32.3 % Home equity 19,548 13,250 6,298 47.5 Commercial and multifamily 313,358 278,175 35,183 12.6 Construction and land 116,878 63,105 53,773 85.2 Manufactured homes 26,953 21,636 5,317 24.6 Floating homes 74,443 59,268 15,175 25.6 Other consumer 17,923 16,748 1,175 7.0 Commercial business 23,815 28,026 (4,211) (15.0) Total loans $ 867,556 $ 687,868 $ 179,688 26.1 The largest dollar increases in the loan portfolio were in one-to-four family loans, which increased $67.0 million, or 32.3%, to $274.6 million, driven equally by jumbo and conforming residential mortgages, construction and land loans, which increased $53.8 million, or 85.2%, to $116.9 million, and commercial and multifamily real estate loans, which increased $35.2 million or 12.6%, to $313.4 million.
Loans held-for-sale increased to $603 thousand at December 31, 2023 from zero at December 31, 2022 primarily due to timing of originations. 55 Table of Contents The following table reflects the changes in the loan mix, excluding premiums and deferred fees, of our portfolio at December 31, 2023, as compared to December 31, 2022 (dollars in thousands): December 31, Amount Percent 2023 2022 Change Change One-to-four family $ 279,448 $ 274,638 $ 4,810 1.8 % Home equity 23,073 19,548 3,525 18.0 Commercial and multifamily 315,280 313,358 1,922 0.6 Construction and land 126,758 116,878 9,880 8.5 Manufactured homes 36,193 26,953 9,240 34.3 Floating homes 75,108 74,443 665 0.9 Other consumer 19,612 17,923 1,689 9.4 Commercial business 20,688 23,815 (3,127) (13.1) Total loans $ 896,160 $ 867,556 $ 28,604 3.3 The increase in one-to-four family loans was partially driven by an increase in short-term bridge loans and related party loans, while the increase in home equity loans was primarily driven by homeowners utilizing the equity in their homes.
As a result, our noninterest-bearing demand balances (including escrow accounts) decreased $17.3 million, or 9.1%, to $173.2 million at December 31, 2022, compared to $190.5 million at December 31, 2021. Noninterest-bearing (including escrow accounts) deposits represented 21.4% of total deposits at December 31, 2022, compared to 23.9% at December 31, 2021.
Noninterest-bearing demand balances (including escrow accounts) decreased $46.5 million, or 26.8%, to $126.7 million at December 31, 2023, compared to $173.2 million at December 31, 2022.
The average balance of total loans was $783.4 million for the year ended December 31, 2022, compared to $650.0 million for the year ended December 31, 2021. The average yield on total loans was 4.87% for the year ended December 31, 2022, compared to 5.14% for the year ended December 31, 2021.
The average balance of total loans was $870.2 million for the year ended December 31, 2023, compared to $783.4 million for the year ended December 31, 2022, resulting from increased average balances related to all loan categories, except commercial business loans.
Held-to-maturity securities totaled $2.2 million at December 31, 2022, compared to none at December 31, 2021, due to the purchase of $2.2 million in municipal bonds and agency mortgage-backed securities. Loans. Loans held-for-portfolio, net, increased $178.3 million, or 26.2%, to $858.4 million at December 31, 2022 from $680.1 million at December 31, 2021.
HTM securities totaled $2.2 million at December 31, 2023 and 2022, and consisted of municipal bonds and agency mortgage-backed securities. Loans. Loans held-for-portfolio increased $28.6 million, or 3.3%, to $896.2 million at December 31, 2023 from $867.6 million at December 31, 2022, with increases across all loan categories, excluding commercial business loans.
As our loan portfolio increases, or due to an increase for probable incurred losses in our loan portfolio, our provision for loan losses may increase, resulting in a decrease to net income.
An increase in our loan portfolio or a rise in estimated lifetime credit losses may result in additional provisions for credit losses, thereby decreasing net income.
Our allowance for loan losses as of December 31, 2022, reflects probable and inherent credit losses based upon the economic conditions that existed as of December 31, 2022. Net recoveries for the year ended December 31, 2022 totaled $68 thousand, compared to net charge-offs of $119 thousand for the year ended December 31, 2021.
The release of credit losses on unfunded loan commitments resulted from a decrease in unfunded loan commitments at December 31, 2023, compared to the prior year-end. Net charge-offs for the year ended December 31, 2023 totaled $163 thousand, compared to net recoveries of $68 thousand for the year ended December 31, 2022.
Item 8. Financial Statements and Supplementary Data" of this report on Form 10-K. Stockholders' Equity. Total stockholders’ equity increased $4.3 million, or 4.7%, to $97.7 million at December 31, 2022, from $93.4 million at December 31, 2021.
Total stockholders’ equity increased $2.9 million, or 3.0%, to $100.7 million at December 31, 2023, from $97.7 million at December 31, 2022.
Loans sold during the year ended December 31, 2022, totaled $20.9 million, compared to $149.4 million during the year ended December 31, 2021. Earnings on cash surrender value of BOLI decreased as a result of declining market values.
Loans sold during the year ended December 31, 2023, totaled $19.2 million, compared to $20.9 million during the year ended December 31, 2022. Noninterest Expense .

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

8 edited+0 added−1 removed17 unchanged
EVE values only the current position of the balance sheet at December 31, 2022, and therefore does not incorporate any new business assumptions that might be inherent in a simulation of net interest income.
EVE values only the current position of the balance sheet at December 31, 2023, and therefore does not incorporate any new business assumptions that might be inherent in a simulation of net interest income.
Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk. 64 Table of Contents
Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk. 67 Table of Contents
The purpose of the asset/liability committee is to communicate, coordinate, and control asset/liability management consistent with our business plan and board-approved policies. The committee establishes and monitors the volume and mix of assets and funding sources, taking into account relative costs and spreads, interest-rate sensitivity and liquidity needs.
The purpose of the asset/liability committee is to communicate, coordinate, and control asset/liability management consistent with our business plan and board-approved policies. The committee establishes and monitors the volume and mix of assets and funding sources, considering the relative costs and spreads, interest-rate sensitivity and liquidity needs.
Management and the Board of Directors review these measurements on a quarterly basis to determine whether our interest-rate exposure is within the limits established by the Board of Directors. 63 Table of Contents Our asset/liability management strategy dictates acceptable limits on the amounts of change in given changes in interest rates.
Management and the Board of Directors review these measurements on a quarterly basis to determine whether our interest-rate exposure is within the limits established by the Board of Directors. 66 Table of Contents Our asset/liability management strategy dictates acceptable limits on the amounts of percentage change in EVE based on given changes in interest rates.
As indicated in the following table (dollars in thousands), our EVE shows a liability sensitive position at December 31, 2022. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon.
Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon.
A key element of our asset/liability management plan is to protect net earnings by managing the maturity or re-pricing mismatch between our interest-earning assets and our rate-sensitive liabilities.
A key element of our asset/liability management plan is to protect net earnings by managing the maturity or re-pricing mismatch between our interest-earning assets and our rate-sensitive liabilities. We seek to reduce exposure to earnings by extending funding maturities using FHLB advances, adjustable-rate loans and the sale of certain fixed-rate loans in the secondary market.
For interest rate increases and decreases of 100, 200, 300 and 400 basis points, our internal policy states that our EVE percentage change should not decrease greater than 10%, 20%, 25% and 30%, respectively and that our EVE ratio should not fall below 9%, 8%, 5% and 5%, respectively. .
For interest rate increases and decreases of 100, 200, 300 and 400 basis points, our internal policy states that our EVE percentage change should not decrease greater than 10%, 20%, 25% and 30%. As indicated in the following table (dollars in thousands), our EVE shows a liability sensitive position at December 31, 2023.
December 31, 2022 Change in Interest Rates in Basis Points (bps) Economic Value of Equity EVE Ratio % $ Amount $ Change % Change +400 $ 128,377 $ (47,361) (26.95) % 16.2 % +300 141,031 (34,707) (19.75) 17.2 +200 152,368 (23,370) (13.30) 18.1 +100 165,633 (10,105) (5.75) 19.0 0 175,738 — — 19.5 -100 181,422 5,684 3.23 19.5 -200 180,306 4,568 2.60 18.8 -300 173,108 (2,630) (1.50) 17.5 -400 $ 162,556 (13,182) (7.50) 16.0 % In addition to monitoring selected measures of EVE, management also monitors effects on net interest income resulting from increases or decrease in rates.
December 31, 2023 Change in Interest Rates in Basis Points (bps) Economic Value of Equity EVE Ratio % $ Amount $ Change % Change +400 $ 110,130 $ (30,325) (21.59) % 13.5 % +300 118,670 (21,785) (15.51) 14.1 +200 125,859 (14,596) (10.39) 14.6 +100 132,900 (7,555) (5.38) 14.9 0 140,455 — — 15.4 -100 142,578 2,123 1.51 15.1 -200 139,213 (1,242) (0.88) 14.4 -300 132,399 (8,056) (5.74) 13.3 -400 $ 122,658 (17,797) (12.67) 12.0 % In addition to monitoring selected measures of EVE, management also monitors effects on net interest income resulting from increases or decrease in rates.
Removed
We seek to reduce exposure to earnings by extending funding maturities through the use of FHLB advances, through the use of adjustable-rate loans and through the sale of certain fixed-rate loans in the secondary market.

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