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What changed in Sound Financial Bancorp, Inc.'s 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of Sound Financial Bancorp, Inc.'s 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+473 added−493 removedSource: 10-K (2025-03-18) vs 10-K (2024-03-22)

Top changes in Sound Financial Bancorp, Inc.'s 2024 10-K

473 paragraphs added · 493 removed · 405 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

201 edited+19 added−33 removed206 unchanged
Biggest changeGovernment 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.
Biggest changeGovernment and other governmental initiatives affecting the financial services industry; • bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; • fluctuations in the demand for loans, 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, including maintaining the confidence of depositors; • the possibility that unexpected outflows of uninsured deposits may require us to sell investment securities at a loss; • our ability to control operating costs and expenses; • secondary market conditions for loans and our ability to sell loans in the secondary market; • results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to increase our allowance for credit losses, write-down asset values or increase our capital levels, affect our ability to borrow funds or maintain or increase deposits; • the inability of key third-party providers to perform their obligations; • our ability to attract and retain deposits; • competitive pressures among financial services companies; • our ability to successfully integrate into our operations any assets, liabilities, clients, systems, and management personnel we may acquire and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all; • use of estimates in determining the fair values of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • our ability to keep pace with technological changes; • changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Financial Accounting Standards Board, the U.S.
We also sell insurance products and services to consumers through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank. Sound Community Bank's deposits are insured up to applicable limits by the FDIC.
We also sell insurance products and services to consumers through Sound Community Insurance Agency, Inc., a wholly owned subsidiary of the Bank. The Bank's deposits are insured up to applicable limits by the FDIC.
We believe that these loans satisfy the needs of borrowers in our market area. As a result, subject to market conditions, we intend to continue to originate these types of loans. We also retain jumbo loans, which exceed the conforming loan limits and therefore, are not eligible to be purchased by Fannie Mae.
We believe that these loans satisfy the needs of borrowers in our market area. As a result, subject to market conditions, we intend to continue to originate these types of loans. We also retain jumbo loans, which exceed the conforming loan limits and are therefore, not eligible to be purchased by Fannie Mae.
If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower's ability to repay the loan may be impaired.
If the cash flow from the project is reduced, or if leases are not obtained or not renewed, the borrower's ability to repay the loan may be impaired.
When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address specific impairments. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets.
When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address impairments. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets.
If we intend to sell, or it is likely we will be required to sell the security in an unrealized loss position, the total amount of the loss is recognized in current period earnings. For unrealized losses deemed non-credit related, we record the loss, net of tax, through accumulated other comprehensive income.
If we intend, or it is likely we will be required, to sell the security in an unrealized loss position, the total amount of the loss is recognized in current period earnings. For unrealized losses deemed non-credit related, we record the loss, net of tax, through accumulated other comprehensive income.
State laws and regulations govern Sound Community Bank’s ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make other loans, to invest in securities, to offer various banking services, and to establish branch offices.
State laws and regulations govern Sound Community Bank’s ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make other loans, to offer various other banking services, to invest in securities, and to establish branch offices.
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.
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 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.
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, Starbucks, University of Washington, Providence Health, Costco, Boeing, Nordstrom, Alaska Air Group, Weyerhaeuser and the U.S. Joint Base Lewis-McChord.
Due to uncertainties inherent in estimating construction costs, market values of completed projects, and the impact of governmental regulations on real property, accurately evaluating the total funds required to complete a project and the completed project loan-to-value ratio can be challenging. Actual results may significantly differ from estimates due to changes in demand, unexpected building costs, and other factors.
Due to uncertainties inherent in estimating construction costs, market values of completed projects, and the impact of governmental regulations on real property, accurately evaluating the total funds required to complete a project and the completed project loan-to-value ratio can be challenging. Actual results may significantly differ from estimates due to changes in demand, unexpected construction costs, and other factors.
The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated parties. The CRA requires the appropriate federal banking agency to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low- and moderate-income neighborhoods.
The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated parties. The CRA requires the appropriate federal banking agency to assess a bank’s record in meeting the credit needs of the communities served by the bank, including low- and moderate-income neighborhoods.
The federal banking regulators (the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC) have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital. Community Reinvestment and Consumer Protection Laws.
The federal banking regulators (the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC) have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital. Community Reinvestment Act and Consumer Protection Laws.
The USA PATRIOT Act and the Bank Secrecy Act requires financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network.
The USA PATRIOT Act and the Bank Secrecy Act requires financial institutions to develop programs to prevent themselves from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network.
The ACL consists of two elements: (1) identification of loans that do not share risk characteristics with collectively evaluated loan pools are individually analyzed for expected credit loss and (2) establishment of an ACL for collectively evaluated loan pools based upon loans that share similar risk characteristics.
The ACL consists of two elements: (1) identification of loans that do not share risk characteristics with collectively evaluated loan pools, which are individually analyzed for expected credit loss and (2) establishment of an ACL for collectively evaluated loan pools based upon loans that share similar risk characteristics.
Specifically, the new rule requires a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after, the banking organization determines that a “computer-security incident” rising to the level of a “notification incident” has occurred.
Specifically, the rule requires a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after, the banking organization determines that a “computer-security incident” rising to the level of a “notification incident” has occurred.
The FDIC has adopted regulatory guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and information systems, audit systems, interest-rate risk exposure and compensation and other benefits.
The FDIC has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and information systems, audit systems, interest-rate risk exposure and compensation and other benefits.
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.
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.
Information pertaining to us, including SEC filings, can be found by clicking the link on our site called "Investor Relations." For more information regarding access to these filings on our website, please contact our Corporate Secretary, Sound Financial Bancorp, Inc., 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121 or by calling (206) 448-0884. 36 Table of Contents
Information pertaining to us, including SEC filings, can be found by clicking the link on our site called "Investor Relations." For more information regarding access to these filings on our website, please contact our Corporate Secretary, Sound Financial Bancorp, Inc., 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121 or by calling (206) 448-0884. 34 Table of Contents
Among other things, these laws: • require lenders to disclose credit terms in meaningful and consistent ways; • prohibit discrimination against an applicant in a credit transaction; • prohibit discrimination in housing-related lending activities; • require certain lenders to collect and report applicant and borrower data regarding home loans; • require lenders to provide borrowers with information regarding the nature and cost of real estate settlements; • prohibit certain lending practices and limit escrow account amounts with respect to real estate loan transactions; • require financial institutions to implement identity theft prevention programs and measures to protect the confidentiality of consumer financial information; and • prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
Among other things, these laws: • require lenders to disclose credit terms in meaningful and consistent ways; 29 Table of Contents • prohibit discrimination against an applicant in a credit transaction; • prohibit discrimination in housing-related lending activities; • require certain lenders to collect and report applicant and borrower data regarding home loans; • require lenders to provide borrowers with information regarding the nature and cost of real estate settlements; • prohibit certain lending practices and limit escrow account amounts with respect to real estate loan transactions; • require financial institutions to implement identity theft prevention programs and measures to protect the confidentiality of consumer financial information; and • prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
Land loans pose risks due to the lack of income from the property and the potential illiquid nature of the collateral. These risks can be significantly influenced by supply and demand conditions. A downturn in housing or the real estate market may elevate loan delinquencies, defaults, and foreclosures, impairing collateral value and our ability to sell the collateral upon foreclosure.
Land loans pose risks due to the lack of income from the property and the potential illiquid nature of the collateral. These risks can be significantly affected by supply and demand conditions. A downturn in housing or the real estate market may elevate loan delinquencies, defaults, and foreclosures, impairing collateral value and our ability to sell the collateral upon foreclosure.
The Company participates in the Federal Reserve's Borrower-in-Custody program, which gives the Company access to the discount window. The Company pledges commercial and consumer loans as collateral for its Borrower-in-Custody line of credit. At December 31, 2023 and 2022, the Company had no outstanding borrowings and unused borrowing capacity of $18.3 million and $20.8 million, respectively, under the Borrower-in-Custody program.
The Company participates in the Federal Reserve's Borrower-in-Custody program, which gives the Company access to the discount window. The Company pledges commercial and consumer loans as collateral for its Borrower-in-Custody line of credit. At December 31, 2024 and 2023, the Company had no outstanding borrowings and unused borrowing capacity of $20.8 million and $18.3 million, respectively, under the Borrower-in-Custody program.
Land acquisition and development loans generally are originated with a loan term up to 24 months, have adjustable rates of interest based on the Wall Street Journal Prime Rate or the three- or five-year rate charged by the Federal Home Loan Bank ("FHLB") of Des Moines and require interest-only payment during the term of the loan.
Land acquisition and development loans generally are originated with a term of up to 24 months, have adjustable rates of interest based on the Wall Street Journal Prime Rate or the three- or five-year rate charged by the Federal Home Loan Bank ("FHLB") of Des Moines and require interest-only payments during the term of the loan.
Consequently, the success of these loans relies heavily on the project’s ultimate outcome and the borrower’s ability to sell or lease the property or secure permanent take-out financing. If our appraisal of the completed project’s value proves overstated, we may lack sufficient security for the loan repayment, leading to potential losses.
Consequently, the success of these loans relies heavily on the project’s ultimate outcome and the borrower’s ability to sell or lease the property or secure permanent take-out financing. If our appraisal of the completed project’s value proves overstated, we may lack sufficient security for the loan’s repayment, leading to potential losses.
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 earned mortgage servicing income of $1.1 million and $1.2 million for the years ended December 31, 2024 and 2023, 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 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.
We generally use the 30-day secured overnight financing rate (“SOFR”) to re-price our adjustable-rate loans; however, $10.3 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.
We repurchased one loan totaling $448 thousand in 2023 and no loans in 2022. Sales of whole real estate loans may generate income at the time of sale, produce future servicing income on loans where servicing is retained, provide funds for additional lending, and increase liquidity.
We repurchased no loans in 2024 and one loan totaling $448 thousand in 2023. Sales of whole real estate loans may generate income at the time of sale, produce future servicing income on loans where servicing is retained, provide funds for additional lending, and increase liquidity.
We 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.
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, 2024, approximately $1.5 million of our commercial business loans were unsecured.
The primary risk in floating home loans is the unique nature of the collateral and the challenges of relocating such collateral to a location other than where such housing is permitted. The process for securing the deed and/or the condominium or cooperative dock is also unique compared to other types of lending we participate in.
The primary risk in floating home loans is the unique nature of the collateral and the challenges of relocating such collateral to a location other than where such housing is permitted. The process for securing the deed and/or the condominium or cooperative dock is also unique compared to other types of lending.
However, the measurement of credit losses on (“AFS”) securities only occurs when, through our qualitative assessment, all or a portion of the unrealized loss is determined to be credit related. Our discounted cash flow approach incorporates assumptions about the collectability of future cash flows.
However, the measurement of credit losses on AFS securities only occurs when, through our qualitative assessment, all or a portion of the unrealized loss is determined to be credit related. Our discounted cash flow approach incorporates assumptions about the collectability of future cash flows.
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.
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 2024 or 2023.
At December 31, 2023, all these loans were performing in accordance with their repayment terms. Our construction and land development loans are structured based on estimates of costs relative to the anticipated values of completed projects.
At December 31, 2024, all these loans were performing in accordance with their repayment terms. Our construction and land development loans are structured based on estimates of costs relative to the anticipated values of completed projects.
We do not undertake and specifically decline any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
We do not undertake, and specifically decline, any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the dates of such statements or to reflect the occurrence of anticipated or unanticipated events.
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.
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.
The new rules require registrants to disclose on Form 8-K any cybersecurity incident they determine to be material and to describe the material aspects of the incident's nature, scope, and timing, as well as its material impact or reasonably likely material impact on the registrant.
The rules require registrants to disclose on Form 8-K any cybersecurity incident they determine to be material and to describe the material aspects of the incident's nature, scope, and timing, as well as the material impact or reasonably likely material impact on the registrant.
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.
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, 2024.
Financial Statements and Supplementary Data” of this report on Form 10-K. 21 Table of Contents The following table shows certain credit ratios at and for the periods indicated and each component of the ratio's calculations (dollars in thousands).
Financial Statements and Supplementary Data” of this report on Form 10-K. 20 Table of Contents The following table shows certain credit ratios at and for the periods indicated and each component of the ratio's calculations (dollars in thousands).
Selling properties under construction can be challenging, requiring completion for successful sales, complicating the resolution of problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. In the case of speculative construction loans, identifying an end purchaser for the finished project is an added risk.
Selling 14 Table of Contents properties under construction can be challenging, requiring completion for successful sales, complicating the resolution of problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. In the case of speculative construction loans, identifying an end purchaser for the finished project is an added risk.
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.
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. Capital . Consolidated regulatory capital requirements identical to those applicable to subsidiary banks generally apply to bank holding companies.
The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on borrowings targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of dividends paid by the FHLB of Des Moines and could continue to do so in the future.
The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on borrowings targeted for community investment and low- and moderate-income housing projects. These contributions have 31 Table of Contents adversely affected the level of dividends paid by the FHLB of Des Moines and could continue to do so in the future.
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.
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, 2024. 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, 2024.
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.
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 relocate the collateral. These loans tend to be made to retired individuals and first-time homebuyers.
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 .
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 .
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.
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 high interest rates and the limited housing supply have had on housing prices.
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.
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.
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.
Manufactured home loans are generally considered higher risk than loans secured by residential real property, though this risk may be reduced if the borrower also owns the land on which the manufactured home is located. A small portion of our manufactured home loans involve properties on which we have also financed the land for the owner.
First-time homebuyers of manufactured homes tend to be a higher credit risk than first-time homebuyers of single-family residences, due to more limited financial resources. As a result, these loans may have a higher probability of default and higher delinquency rates than single-family residential loans and other types of consumer loans.
First-time homebuyers of manufactured homes tend to be a higher credit risk than first-time homebuyers of single-family residences, due to more limited financial resources. As a result, these loans may have a higher probability of default and higher delinquency rates than single- 15 Table of Contents family residential loans and other types of consumer loans.
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.
The following table sets forth certain information at December 31, 2024, regarding the amount of 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 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 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 manner similar to one-to-four family 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.
We have entered into a loan agreement with the FHLB of Des Moines pursuant to which the Bank may borrow up to approximately 45% of total assets, secured by a blanket pledge on a portion of our residential mortgage loan portfolio, including one-to-four family loans, commercial and multifamily real estate 25 Table of Contents loans and home equity loans.
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.
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 $121 thousand.
Home equity lines of credit are typically originated for up to $250,000 with an adjustable rate of interest, based on the one-year Treasury Bill rate or the Wall Street Journal Prime rate, plus a margin .
Home equity lines of credit are typically originated for up to $250,000 with 11 Table of Contents an adjustable rate of interest, based on the one-year Treasury Bill rate or the Wall Street Journal Prime rate, plus a margin .
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.
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.
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, 2024, the Bank’s CBLR was 10.60%. 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, 2024, 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, 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%.
At December 31, 2024, our portfolio of fixed-rate loans also included $141 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%.
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.
This standard, referred to as Current Expected Credit Loss or CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets. CECL covers a broader range of assets than the previous method of recognizing credit losses and generally results in earlier recognition of credit losses.
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.
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.
The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety, and wellness of our employees. In support of our commitment, we expanded our gym reimbursement to include all physical and mental wellness activities.
The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety, and wellness of our employees. In support of our commitment, our gym reimbursement includes all physical and mental wellness activities.
Under Maryland corporate law, Sound Financial Bancorp generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total assets would be less than the sum of its total liabilities. Sound Community Bank.
Under Maryland corporate law, Sound Financial Bancorp generally may not pay dividends if after that payment it would not be able to pay its indebtedness as the indebtedness becomes due in the usual course of business, or its total assets would be less than the sum of its total liabilities. Sound Community Bank.
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.
Lending authority is also granted to certain other lending staff at lower amounts. Largest Borrowing Relationships . At December 31, 2024, the maximum amount under federal law that we could lend to any one borrower and the borrower's related entities was approximately $24.8 million.
The amount of credit loss is measured as the amount by which the security’s amortized cost exceeds the present value of expected future cash flows. Credit losses on AFS securities are measured on an individual basis, while credit losses on held-to-maturity (“HTM”) securities are measured on a collective basis according to shared risk characteristics.
The amount of credit loss is measured as the amount by which the security’s amortized cost exceeds the present value of expected future cash flows. Credit losses on AFS securities are measured on an individual basis, while credit losses on HTM securities are measured on a collective basis according to shared risk characteristics.
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.
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, 2024, totaled $10.7 million, or 7.3% of our consumer loan portfolio and 1.2% of our total loan portfolio.
A bank holding company subject to the Small Bank Holding Company Policy Statement, such as Sound Financial Bancorp, is expected not to pay dividends unless its debt-to-equity ratio is less than 1:1 and it meets certain additional criteria.
A bank holding company subject to the Small Bank 32 Table of Contents Holding Company Policy Statement, such as Sound Financial Bancorp, is expected not to pay dividends unless its debt-to-equity ratio is less than 1:1 and it meets certain additional criteria.
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.
These standards, which must be consistent with safe and sound banking practices, establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value ratio limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements.
During the year ended December 31, 2023, we did not recognize any credit losses on investment securities.
During the year ended December 31, 2024, we did not recognize any credit losses on investment securities.
At December 31, 2023, there was one security in an unrealized loss position for less than 12 months, and 16 securities in an unrealized loss position for more than 12 months, although management determined the decline in value was not related to specific credit deterioration.
At December 31, 2024, there was one security in an unrealized loss position for less than 12 months, and 15 securities in an unrealized loss position for more than 12 months, although management determined the decline in value was not related to specific credit deterioration.
The uninsured amounts are estimates based on the methodologies and assumptions used for Sound Community Bank’s regulatory reporting requirements.
The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.
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.
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, 2024, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 63.9% of CBLR Capital.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition at December 31, 2023 Compared to December 31, 2022—Delinquencies and Nonperforming Assets" contained in Item 7 of this report on Form 10-K for more information on troubled assets. Modified Loans to Borrowers Experiencing Financial Difficulty.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition at December 31, 2024 Compared to December 31, 2023—Delinquencies and Nonperforming Assets" contained in Item 7 of this report on Form 10-K for more information on troubled assets. 18 Table of Contents Modified Loans to Borrowers Experiencing Financial Difficulty.
Our President and Chief Executive Officer (“CEO”) may approve unsecured loans up to $1.0 million and all types of secured loans up to 30% of our legal lending limit, or approximately $7.3 million at December 31, 2023.
Our President and Chief Executive Officer (“CEO”) may approve unsecured loans up to $1.0 million and all types of secured loans up to 30% of our legal lending limit, or approximately $7.4 million at December 31, 2024.
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.
Our net gains on sales of residential loans for the years ended December 31, 2024 and 2023 were $258 thousand and $340 thousand, respectively. In addition to loans sold to Fannie Mae and others on a servicing retained basis, we sell nonconforming residential loans to correspondent banks on a servicing released basis.
Sound Community Bank is required to maintain minimum levels of regulatory capital and is subject to certain limitations on the payment of dividends to Sound Financial Bancorp. See “—Capital Rules” and “—Limitations on Dividends and Other Capital Distributions.” Regulation by the WDFI and the FDIC .
Sound Community Bank is required to maintain minimum levels of regulatory capital and is subject to certain limitations on the payment of dividends to Sound Financial Bancorp. See “—Capital Rules” and “—Limitations on Dividends and Stock Repurchase.” Regulation by the WDFI and the FDIC .
In September 2019, the regulatory agencies, including the FDIC and FRB adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio (“CBLR”) for institutions with total consolidated assets of less than $10 billion, and that meet other qualifying criteria related to off-balance sheet exposures and trading assets and liabilities.
In September 2019, the regulatory agencies, including the FDIC and FRB, adopted a final rule, effective January 1, 2020, creating a CBLR for institutions with total consolidated assets of less than $10 billion, and that meet other qualifying criteria related to off-balance sheet exposures and trading assets and liabilities.
We typically measure the ACL on modified loans to troubled borrowers on an individual basis when the loans are deemed to no longer share risk characteristics that are 19 Table of Contents similar with other loans in the portfolio.
We typically measure the ACL on modified loans to troubled borrowers on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio.
Financial Statements and Supplementary Data" and "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" for additional regulatory capital information. The FASB has adopted a new accounting standard for accounting principles generally accepted in the U.S. ("U.S. GAAP") that became effective for the Company and Bank on January 1, 2023.
Financial Statements and Supplementary Data" and "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" for additional regulatory capital information. The FASB has adopted a new accounting standard for GAAP that became effective for the Company and Bank on January 1, 2023.
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.
We had $2.0 million in purchases of commercial business loan participations from other financial institutions in 2024 and no such purchases in 2023. We originate loans that may meet one or more of the credit characteristics commonly associated with subprime lending.
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%.
Based on the most recent data provided by the FDIC, there are approximately 46 other commercial 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 0.28%.
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, 2024, land acquisition and development and lot loans totaled $15.5 million, or 21.3% 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, 2023, our ACL for loans was $8.8 million, or 0.98% of our total loan portfolio, compared to $7.6 million, or 0.88% of our total loan portfolio, at December 31, 2022. See “Note 1—Organization and Significant Accounting Policies” and “Note 5—Loans” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8.
At December 31, 2024, our ACL for loans was $8.5 million, or 0.94% of our total loan portfolio, compared to $8.8 million, or 0.98% of our total loan portfolio, at December 31, 2023. See “Note 1—Organization and Significant Accounting Policies” and “Note 5—Loans” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8.
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.
Our fixed-rate home equity loans generally have terms of up to 20 years and are fully amortizing. At December 31, 2024, fixed-rate home equity loans totaled $11.0 million, or 1.2% of our gross loan portfolio, compared to $9.9 million, or 1.1% of our total loan portfolio at December 31, 2023. Commercial and Multifamily Real Estate Lending.
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.
At December 31, 2024, Sound Community Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were $526 thousand 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.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeAdditionally, if insurance obtained by our borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to our borrowers, the collateral securing our loans may be negatively impacted by climate change, natural disasters and related events, which could impact our financial condition and results of operations.
Biggest changeIf our borrower’s insurance is insufficient to cover these losses or if insurance becomes unavailable, the value of collateral securing our loans could be negatively affected, potentially impacting our financial condition and results of operations. Moreover, climate change may adversely affect regional and local economic activity, harming our customers and the communities in which we operate.
We aim to mitigate these risks by actively monitoring unsold homes in our portfolio, local housing markets, and balancing home sales with new loan originations. We consider various factors, including builder financial capacity, market demand, and inventory ratios, while working with numerous small and mid-sized builders across geographic regions within our service area to diversify speculative construction lending risks.
We aim to mitigate these risks by actively monitoring local housing markets and unsold homes in our portfolio, and balancing home sales with new loan originations. We consider various factors, including builder financial capacity, market demand, and inventory ratios, while working with numerous small and mid-sized builders across geographic regions within our service area to diversify speculative construction lending risks.
These risks include interest-rate, credit, liquidity, operations, reputation, compliance and litigation. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures.
These risks include interest-rate, credit, liquidity, operations, reputation, compliance and litigation risks. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures.
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.
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 degree of risk.
Our first-lien one-to-four family real estate loans are primarily made based on the repayment ability of the borrower and the collateral securing these loans. Home equity lines of credit generally entail greater risk than do one-to-four family residential mortgage loans where we are in the first-lien position.
Our first-lien one-to-four family real estate loans are primarily made based on the repayment ability of the borrower and the collateral securing these loans. Home equity lines of credit generally entail greater risk than one-to-four family residential mortgage loans where we are in the first-lien position.
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.
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 regulatory authorities to maintain adequate levels of capital to support our operations.
The amount of this allowance is determined by management through periodic reviews and consideration of several factors, including, but not limited to: • our collective loss reserve, for loans evaluated on a pool basis with similar risk characteristics based on our life of loan historical default and loss experience, certain macroeconomic factors, reasonable and supportable forecasts, regulatory requirements, management’s expectations of future events and certain qualitative factors; and • our individual loss reserve, based on our evaluation of individual loans that do not share similar risk characteristics and the present value of the expected future cash flows or the fair value of the underlying collateral.
The amount of this allowance is determined by management through periodic reviews and consideration of several factors, including, but not limited to: 37 Table of Contents • our collective loss reserve, for loans evaluated on a pool basis with similar risk characteristics based on our life of loan historical default and loss experience, certain macroeconomic factors, reasonable and supportable forecasts, regulatory requirements, management’s expectations of future events and certain qualitative factors; and • our individual loss reserve, based on our evaluation of individual loans that do not share similar risk characteristics and the present value of the expected future cash flows or the fair value of the underlying collateral.
A financial institution may have a concentration in commercial real estate lending if, among other factors (i) 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, such as the Bank, that has elected to follow the CBLR framework, CBLR Capital (Tier 1 capital plus the entire allowance for loan and lease losses), or (ii) 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 financial institution may have a concentration in commercial real estate lending if, among other factors (i) 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, such as the Bank, that has elected to follow the CBLR framework, CBLR Capital (Tier 1 capital plus the entire allowance for loan and lease losses), or (ii) 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 41 Table of Contents balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
If the Bank is unable to pay dividends to the Company, the Company may not be able to pay dividends on its common stock or make payments on its outstanding debt.
If the Bank is unable to pay dividends to the Company, the Company may not be able to pay dividends on its common stock, repurchase its common stock or make payments on its outstanding debt.
If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected. The Company may not attract and retain skilled employees.
If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected. The Company might not be able to attract and retain skilled employees.
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.
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, problem assets, and foreclosures. • An increase in our allowance for credit losses on loans. • Reduced values in collateral securing 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.
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.
In addition, any additional capital we obtain may dilute the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our banking regulators, we may be subject to adverse regulatory action.
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.
The Company's ability to pay dividends, repurchase stock 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.
The long-term ability of the Company to pay dividends to its stockholders and debt payments is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level.
The long-term ability of the Company to pay dividends to its stockholders, repurchase its stock and make debt payments is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level.
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.
With the evolving nature of cyber threats, we may need to allocate significant additional resources to bolster our protective measures or investigate and 39 Table of Contents 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.
Such incidents could lead to unauthorized data releases, monitoring, misuse, theft, or destruction of confidential information, disrupting our operations or those of our customers and third parties. 41 Table of Contents To date, we have not incurred substantial losses from cyber-attacks or security breaches.
Such incidents could lead to unauthorized data releases, monitoring, misuse, theft, or destruction of confidential information, disrupting our operations or those of our customers and third parties. To date, we have not incurred substantial losses from cyber-attacks or security breaches.
A majority of our residential loans are “non-conforming” because they are adjustable-rate mortgages which contain interest rate floors or do not satisfy credit or other requirements due to personal and financial reasons (i.e., divorce, bankruptcy, length of time employed, etc.), conforming loan limits (i.e., jumbo mortgages), and other requirements imposed by secondary market purchasers.
A majority of our residential loans are “non-conforming” because they are adjustable-rate mortgages which contain interest rate floors or do not satisfy credit or other requirements due to the borrower’s personal and financial circumstances (i.e., divorce, bankruptcy, length of time employed, etc.), conforming loan limits (i.e., jumbo mortgages), and other requirements imposed by secondary market purchasers.
Several factors influence our liquidity, including (i) interest rate trends and competition affecting deposit flows and loan prepayments and (ii) potential limitations arising from changes in FHLB of Des Moines’ 44 Table of Contents underwriting guidelines, which could restrict our borrowing capacity.
Several factors influence our liquidity, including (i) interest rate trends and competition affecting deposit flows and loan prepayments and (ii) potential limitations arising from changes in FHLB of Des Moines’ underwriting guidelines, which could restrict our borrowing capacity.
Inaccuracies in our estimations could lead to an insufficient allowance for credit losses, necessitating increases through provisions for credit losses, adversely impacting our recorded income.
Inaccuracies in our estimations could lead to an insufficient allowance for credit losses, necessitating increases through provisions for credit losses, adversely impacting our net income.
Many national vendors provide turn-key services to community banks, such as internet banking and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to invest in technological improvements.
Many national vendors provide turn-key services to community banks, such as internet 40 Table of Contents banking and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to invest in technological improvements.
Business—How We Are Regulated—Regulation of Sound Community Bank—Capital Rules” and “—Regulation of Sound Financial Bancorp—Limitations on Dividends and Stock Repurchases" for additional information.
Business—How We Are Regulated—Regulation of Sound Community Bank—Capital Rules” and “—Regulation of Sound Financial Bancorp—Limitations on Dividends and Stock Repurchases" for additional information. 44 Table of Contents
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.
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, 2024, approximately 5.1% of our total deposits and a portion of our service charges from deposits are from legal cannabis-related businesses.
This occurrence poses financial risks, particularly for institutions that originate longer-term, fixed-rate mortgage loans. As of December 31, 2023 , approximately 52.2% of our loan portfolio consisted of fixed-rate loans, potentially exposing us to these risks.
This occurrence poses financial risks, particularly for institutions that originate longer-term, fixed-rate mortgage loans. As of December 31, 2024 , approximately 52.4% of our loan portfolio consisted of fixed-rate loans, potentially exposing us to these risks.
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. 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.
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. At December 31, 2024, Sound Community Bank’s aggregate recorded loan balances for construction, land development and land loans were 63.9% of CBLR Capital.
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.
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.
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.
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, 2024 , Sound Financial Bancorp had $1.3 million in unrestricted cash to support dividend and debt payments. See "Part I. Item 1.
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.
Declines in market value could result in credit losses on these assets, which would lead to accounting charges that could 38 Table of Contents have a material adverse effect on our net income and capital levels. At December 31, 2024, we had no allowance for credit losses on securities.
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.
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.
This allowance represents management’s best estimate of the lifetime expected credit losses in 39 Table of Contents our loan portfolio.
This allowance represents management’s best estimate of the lifetime expected credit losses in our loan portfolio.
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.
In addition, at December 31, 2024, 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 348.5% of CBLR Capital.
Moreover, a significant decline in local, regional or national economic conditions caused by inflation, recession, severe weather, natural disasters, widespread disease or pandemics, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could negatively affect the financial results of our banking operations.
Moreover, a significant decline in local, regional or national economic conditions caused by inflation, recession, severe weather, natural disasters, widespread disease or pandemics, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, trade-related pressures that may affect construction costs or materials availability, unemployment or other factors beyond our control could negatively affect the financial results of our banking operations.
An increase in interest rates, change in the programs offered by Fannie Mae or our ability to qualify for its programs may reduce our mortgage revenues, which would negatively impact our noninterest income. The sale of residential mortgage loans to Fannie Mae provides a significant portion of our non-interest income.
An increase in interest rates, changes in the programs offered by Fannie Mae or our ability to qualify for its programs may reduce our mortgage revenues, which would negatively impact our noninterest income. The sale of residential mortgage loans to Fannie Mae contributes significantly to our non-interest income.
Additionally, as we acknowledge the potential impact of significant portfolio growth, new loan products, and refinancing activities, these actions may result in portfolios consisting of unseasoned loans that may not perform as anticipated, elevating the risk of an inadequate allowance to absorb losses without additional provisions.
Additionally, as we acknowledge the potential impact of significant portfolio growth, new loan products, and refinancing activities, these actions may result in portfolios consisting of unseasoned loans that may not perform as anticipated, elevating the risk of an inadequate allowance to absorb losses without additional provisions. Bank regulatory agencies also periodically review our allowance for credit losses on loans.
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.
Based on their assessment, they may require increased provisions or loan charge-offs.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.
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.
However, interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services, creating additional uncertainty in the economic environment. Risks Related to Our Lending 35 Table of Contents Our loan portfolio includes loans with a higher risk of loss.
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.
The purpose of the guidance is to assist banks in developing risk management practices and capital levels commensurate with the level and nature of their real estate concentrations.
Our operations rely on certain external vendors. We rely on certain external vendors to provide products and services necessary to maintain our day-to-day operations. These third-party vendors are sources of operational and informational security risks to us, including risks associated with operational errors, information system failures, interruptions or breaches and unauthorized disclosures of sensitive or confidential client or customer information.
Our operations rely on certain external vendors. We rely on certain external vendors to provide products and services essential to our day-to-day operations. These third-party vendors expose us to operational and information security risks, including operational errors, system failures, interruptions or breaches, and unauthorized disclosures of sensitive or confidential information.
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.
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 raise significant concerns about the state of the environment.
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.
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.
Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. A borrower’s cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral includes accounts receivable, inventory, equipment or real estate.
A borrower’s cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral includes accounts receivable, inventory, equipment or real estate.
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.
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.
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.
Virtually all of our assets and liabilities are monetary in nature and, as a result, market interest rates tend to have a more significant impact on our performance than general levels of inflation or deflation.
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.
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.
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.
Monetary policy, inflation, deflation, and other external economic factors could adversely impact our financial performance and operations. Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve.
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.
Investments in cybersecurity, data privacy protections, and employee training are critical to managing these risks. 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.
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.
This elongated holding period results from a limited pool of potential purchasers for the collateral. In recent years, the commercial real estate market has experienced substantial growth, with increased competition contributing to historically low capitalization rates and rising property values. However, the economic disruption caused by the COVID-19 pandemic significantly impacted this market.
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.
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.
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.
This may particularly affect small to medium-sized businesses, as they are less able to leverage economies of scale to mitigate cost pressures compared to larger businesses. Consequently, our business clients may experience increased financial strain, reducing their ability to repay loans and adversely impacting our results of operations and financial condition.
In addition, although we sell loans to Fannie Mae or into the secondary market without recourse, we are required to give customary representations and warranties about the loans we sell. If we breach those representations and warranties, we may be required to repurchase the loans and we may incur a loss on the repurchase.
Although we sell loans into the secondary market without recourse, we provide customary representations and warranties to buyers. If these representations and warranties are breached, we may be required to repurchase the loans, potentially incurring a loss. We may incur losses in the fair value of our mortgage servicing rights due to changes in prepayment rates.
Conversely, periods with stable or declining loan levels might seem relatively more profitable as income accrues gradually for loans where losses had been previously recognized.
Conversely, periods with stable or declining loan levels might seem relatively more profitable as income accrues gradually for loans where losses had been previously recognized. Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
In addition, our results of operations are affected by the amount of noninterest expense associated with our loan sale activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs.
Our results of operations are also affected by noninterest expenses associated with mortgage banking activities, including salaries and employee benefits, occupancy, equipment, data processing, and other operating costs. During periods of reduced loan demand, we may face challenges in reducing these expenses proportionately, which could adversely impact our results of operations.
As of December 31, 2023 , our deposit composition included $249.5 million in certificates of deposit maturing within one year and $518.6 million in noninterest-bearing, NOW checking, savings, and money market accounts. In an increasing interest rate environment, retaining these deposits could lead to a higher cost of funds, which has been the case over the last couple of years.
As of December 31, 2024 , our deposit composition included $274.3 million in certificates of deposit maturing within one year and $542.0 million in noninterest-bearing, NOW checking, savings, and money market accounts. In a rising rate environment, retaining deposits can become costlier.
Risks Related to our Business and Industry Generally Ineffective liquidity management could adversely affect our financial results and condition. Our business hinges on effective liquidity management.
As a result, navigating this evolving regulatory and public opinion landscape may require us to balance compliance with regulatory requirements against maintaining investor, customer, and stakeholder trust. Risks Related to our Business and Industry Generally Ineffective liquidity management could adversely affect our financial results and condition. Our business hinges on effective liquidity management.
The lack of empirical data surrounding the credit and other financial risks posed by climate change render it difficult, or even impossible, to predict how climate change may impact our financial condition and results of operations; however, the physical effects of climate change may also directly impact us.
Legislative and regulatory proposals aimed at combating climate change may face greater scrutiny or diminished priority. The lack of empirical data regarding the financial and credit risks posed by climate change makes it difficult to predict its specific impact on our financial condition and results of operations.
Mortgage banking is generally considered a volatile source of income because it depends largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates.
Future changes in Fannie Mae’s program, our eligibility to participate, the criteria for loan acceptance, or related laws that significantly affect the activity of Fannie Mae could materially adversely affect our results of operations. Mortgage banking is generally considered a volatile source of income because it depends largely on loan volume, which is influenced by prevailing market interest rates.
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.
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. Higher U.S. tariffs on imported goods could exacerbate inflationary pressures by increasing the cost of goods and materials for businesses and consumers.
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.
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.
Further, the effects of climate change may negatively impact regional and local economic activity, which could adversely affect our customers and the communities in which we operate. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on our financial condition and results of operations.
Regardless of changes in federal policy, the effects of climate change and their unknown long-term impacts could still have a material adverse effect on our financial condition and results of operations.
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.
However, the physical effects of climate change, such as more frequent and severe weather disasters, could directly affect us. For instance, such events may damage real property securing loans in our portfolio or reduce the value of that collateral.
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A return of recessionary conditions or adverse economic conditions in our market areas may reduce our rate of growth, affect our customers' ability to repay loans and adversely impact our business, financial condition, and results of operations.
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Broader economic factors such as inflation, unemployment and money supply fluctuations also may adversely affect our profitability. Trade wars, tariffs, or shifts in trade policies between the United States and other nations could disrupt supply chains, increase costs for businesses, and reduce export opportunities for our customers.
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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.
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These developments may, in turn, negatively impact these businesses and, by extension, our operations and financial performance.
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Additionally, the pandemic has accelerated the adoption of remote work options, potentially influencing the long-term performance of certain office properties within our commercial real estate portfolio.
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Furthermore, a prolonged period of inflation could cause wages and other costs to us to increase, which could adversely affect our results of operations and financial condition.
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Moreover, the federal banking regulatory agencies have raised concerns about vulnerabilities within the current commercial real estate market, recognizing the risks associated with these assets. 38 Table of Contents Failures in our risk management policies, procedures, and controls could impede our ability to effectively manage this portfolio, potentially leading to increased delinquencies and higher losses, thereby materially impacting our business, financial condition, and operational performance. • Commercial Business Loans .
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The pandemic also accelerated the adoption of remote work, which has led many companies to re-evaluate their long-term real estate needs. While some businesses are returning to traditional office environments, others are downsizing or shifting to hybrid models, creating uncertainty in demand for office space and other commercial properties.
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As is the case with many banks, we attempt to increase our proportion of deposits comprising either no or relatively low-interest-bearing accounts, which has been challenging over the last couple years.
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This trend could result in prolonged vacancies, declining rental income, and reduced property values, adversely affecting the performance of our commercial real estate loan portfolio. Federal banking regulators also have raised concerns about weaknesses in the commercial real estate market.
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Should interest rates associated with our deposits and borrowings increase at a faster pace than the rates received from loans and other investments, our net interest income and overall earnings might be adversely affected.
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Failures in our risk management policies and controls could lead to higher delinquencies and losses, adversely affecting our business, financial condition, and results of operations. 36 Table of Contents • Commercial Business Loans . Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.
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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 .
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If deposit and borrowing rates rise faster than loan and investment yields, our net interest income and overall earnings could decline. Additionally, adjustable-rate residential mortgage loans and home equity lines of credit may face increased default risks in a rising rate environment.
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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.
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Past incidents involving third-party vendors have demonstrated the potential for such risks to disrupt our operations, impair customer service, damage our reputation, or expose us to litigation. While we work closely with our vendors to implement appropriate security measures and monitoring processes to mitigate these risks, no system is entirely immune to breaches or other security events.
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During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations.
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Such incidents could materially and adversely affect our business, financial condition, and results of operations. Our current and future uses of Artificial Intelligence (AI) and other emerging technologies may create additional risks. The increasing adoption of AI in financial services presents significant opportunities but also introduces a range of risks that could impact our operations, regulatory compliance, and customer trust.
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We may incur losses in the fair value of our mortgage servicing rights due to changes in prepayment rates.
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AI introduces model risk, where flawed algorithms or biased data could result in inaccurate credit decisions, compliance violations, or discriminatory outcomes in lending or customer service. Cybersecurity threats, such as data breaches, adversarial attacks, and data poisoning, pose significant challenges, particularly as these systems handle large volumes of sensitive customer information.
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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.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeSee “Risks Related to Cybersecurity, Data and Fraud” under “Item 1A. Risk Factors” in this Form 10-K for a further discussion of risks related to cybersecurity. Governance The Board of Directors is responsible for the development, implementation, and maintenance of the ISP.
Biggest changeRisk Factors” in this Form 10-K for a further discussion of risks related to cybersecurity. Governance The Board of Directors oversees cybersecurity risk management as part of its broader risk oversight responsibilities. The Board receives at least annual reports from the ISSC on cybersecurity risks, emerging threats, regulatory developments, and the effectiveness of our information security program.
This means the bank is effectively handling the inherent risks it faces in five critical areas: cyber risk management and oversight, collaboration on threat intelligence, implementation of cybersecurity controls, management of external dependencies, and resilience in handling cyber incidents. To stay ahead of potential cybersecurity challenges, the Company has established a formal process.
This means the Company is effectively handling the inherent risks it faces in five critical areas: cyber risk management and oversight, collaboration on threat intelligence, implementation of cybersecurity controls, management of external dependencies, and resilience in handling cyber incidents. To stay ahead of potential cybersecurity challenges, the Company has established a formal process.
The cybersecurity risk management program contains eleven key elements: Information Security Policies, Strategic Planning, Risk Assessment, Audit and Examination, Business Continuity Planning, Incident Response Planning, Third-Party Due Diligence, Cyber Insurance Coverage, Employee Training and Testing, Patch and Vulnerability Management, and the Federal Financial Institutions Examination Council (“FFIEC”) Cyber Assessment Tool (“CAT”).
Our cybersecurity risk management program contains eleven key elements: Information Security Policies, Strategic Planning, Risk Assessment, Audit and Examination, Business Continuity Planning, Incident Response Planning, Third-Party Due Diligence, Cyber Insurance Coverage, Employee Training and Testing, Patch and Vulnerability Management, and the Federal Financial Institutions Examination Council (“FFIEC”) Cyber Assessment Tool (“CAT”).
This process is activated whenever the FFIEC CAT or the ISGC identifies changes in inherent risks. In response, the Company proactively updates its cybersecurity objectives, policies, and tactical goals. This ensures that the Company’s cybersecurity strategy remains responsive, continuously adapting to emerging threats and evolving industry standards.
This process is activated whenever the FFIEC CAT or the ISSC identifies changes in inherent risks. In response, the Company proactively updates its cybersecurity objectives, policies, and tactical goals. This ensures that the Company’s cybersecurity strategy remains responsive, continuously adapting to emerging threats and evolving industry standards.
The ISGC's responsibilities encompass: • Review and approval of the ISP-related documents, including policies, strategies, plans and risk assessments; • Monitoring of control statuses and program gaps, including findings from audit reports and assessments; • Participation in program assessments, such as risk and business impact assessments; • Providing input on mitigation of current issues and threats; • Reporting, at least quarterly, to the Enterprise Risk Management Committee on ISGC activities and risk impacts on the Risk Appetite Statement. • Reporting, at least annually, to the Board on the status of the ISP, covering compliance, risk management, vendor management, audit and testing results, breaches and incidents, and recommended updates to the ISP.
The ISSC's responsibilities encompass: • Review and approval of the ISP-related documents, including policies, strategies, plans and risk assessments; • Monitoring of control statuses and program gaps, including findings from audit reports and assessments; • Participation in program assessments, such as risk and business impact assessments; • Providing input on mitigation of current issues and threats; • Reporting, at least quarterly, to the Enterprise Risk Management Committee on ISSC activities and risk impacts on the Risk Appetite Statement. • Reporting, at least annually, to the Board on the status of the ISP, covering compliance, risk management, vendor management, audit and testing results, breaches and incidents, and recommended updates to the ISP.
Attackers adapt quickly to changes in defense measures. While we have not identified significant compromises, substantial data losses, or major financial setbacks from cybersecurity attacks so far, our systems, along with those of our clients and service providers, face constant threats.
Attackers adapt quickly to changes in defense measures. While we have not 46 Table of Contents identified significant compromises, substantial data losses, or major financial setbacks from cybersecurity attacks so far, our systems, along with those of our clients and service providers, face constant threats.
The Virtual Chief Information Security Officer (“vCISO”), who is also appointed by the Board, oversees the ISP and coordinates the ISGC.
The Virtual Chief Information Security Officer (“vCISO”), who is also appointed by the Board, oversees the ISP and coordinates the ISSC.
The Information Security Governance Committee (“ISGC”), appointed by the Board, bears the responsibility for cybersecurity risk management and strategy. It aids the Board in fulfilling its oversight duties related to IT security, aligning with the Bank’s business strategy, and adhering to regulatory requirements.
The Information Security Steering Committee (“ISSC”), appointed by the Board, bears the responsibility for cybersecurity risk management and strategy. It aids the Board in fulfilling its oversight duties related to IT security, aligning with the Bank’s business strategy, and adhering to regulatory requirements.
There is no guarantee that our 47 Table of Contents cybersecurity risk management program will completely safeguard the confidentiality, integrity, and availability of our information systems and solutions. Cybersecurity risks are anticipated to stay elevated due to the evolving nature of threats and the increased use of online and mobile banking services.
There is no guarantee that our cybersecurity risk management program will completely safeguard the confidentiality, integrity, and availability of our information systems and solutions. Cybersecurity risks are anticipated to stay elevated due to the evolving nature of threats and the increased use of online and mobile banking services. See “Risks Related to Cybersecurity, Data and Fraud” under “Item 1A.
This collective expertise ensures a comprehensive and well-rounded approach to our information security initiatives. Our vCISO has substantial relevant expertise and formal training in the areas of information security and cybersecurity risk management and is accountable for managing our enterprise information security department and developing and implementing our information security program.
Our vCISO has substantial relevant expertise and formal training in the areas of information security and cybersecurity risk management and is accountable for managing our enterprise information security department and developing and implementing our information security program.
The responsibilities include cybersecurity risk assessment, defense operations, incident response, vulnerability assessment, threat intelligence, identity access governance, third-party risk management, client, vendor and employee education and awareness, and business continuity and disaster recovery. The ISGC, as a whole, consists of information security professionals with varying degrees of professional education, certifications and experience.
The responsibilities include cybersecurity risk assessment, defense operations, incident response, vulnerability assessment, threat intelligence, identity access governance, third-party risk management, client, vendor and employee education and awareness, and business continuity and disaster recovery.
The vCISO oversees the ISP and coordinate with the ISGC. The ISGC includes key personnel including the vCISO, Chief Operating Officer, Technology Services Director, Information Technology Manager, Internal Audit Manager, Compliance Manager, and Information Security Specialists.The ISGC members bring diverse qualifications, certifications, and extensive experience to the table.
The ISSC includes key personnel including the vCISO, Chief Operating Officer, Technology Services Director, Information Technology Manager, Internal Audit Manager, Compliance Manager, and Information Security Specialists.The ISSC members bring diverse qualifications, certifications, and extensive experience to the table. This collective expertise ensures a comprehensive and well-rounded approach to our information security initiatives.
Adherence to the ISP is of utmost importance, and any exceptions to policy must be recommended by the ISGC, approved by the Enterprise Risk Management Committee, and reported to the Board at least annually. As previously stated, the ISGC, appointed by the Board, bears the responsibility for cybersecurity risk management and strategy.
The ISSC also includes senior executives from risk, compliance, IT, and internal audit functions, ensuring a multidisciplinary approach to managing cybersecurity threats. Adherence to the ISP is of utmost importance, and any exceptions to policy must be recommended by the ISSC, approved by the Enterprise Risk Management Committee, and reported to the Board at least annually.
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Specifically, the Board is oversees: • Continuous administration of the ISP; • Perform an annual review and approval of the ISP policies; • Assignment of critical roles, including the vCISO; and • Review of reports provided by the ISGC at least annually.
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The Board also reviews and approves the ISP annually to ensure alignment with business strategy and regulatory requirements. The ISSC, chaired by the vCISO, is responsible for implementing cybersecurity risk management policies and strategies. The vCISO, appointed by the Board, has extensive experience in information security, holding various professional certifications, including a Certified Information Systems Security Professional (“CISSP”).
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This blend of diverse qualifications, certifications, and experience within the ISGC ensures a comprehensive and flexible approach to information security, positioning the Company to address emerging threats and maintain a robust defense against potential risks.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeSix 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.
Biggest changeSix 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 year ended December 31, 2024 and the year ended December 31, 2023.
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
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. 47 Table of Contents
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.
The aggregate net book value of our land, buildings, leasehold improvements, furniture and equipment was $4.7 million at December 31, 2024. 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 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 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
Biggest changeItem 4. Mine Safety Disclosures 48 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 48 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 64 Item 8. Financial Statements and Supplementary Data 66

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeIssuer 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.
Biggest changeIssuer 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, 2024 : 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 (1) October 1, 2024 - October 31, 2024 — $ — — $ 1,435,350 November 1, 2024 - November 30, 2024 — — — 1,435,350 December 1, 2024 - December 31, 2024 — — — 1,435,350 Total — — $ 1,435,350 (1) On January 26, 2024, the Company announced that its Board of Directors approved an extension of the Company’s then-existing stock repurchase program, which was set to expire on January 31, 2024, until January 26, 2025.
Any dividends declared and paid in the future would depend upon a number of factors, including capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. We currently expect our regular quarterly cash dividends will continue for the foreseeable future.
Any dividends declared and paid in the future would depend upon a number of factors, including capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. We currently expect our quarterly cash dividends will continue for the foreseeable future.
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.
Sound Financial Bancorp has historically paid cash dividends to its common stockholders. In 2024, the Company paid quarterly cash dividends totaling $0.76 per share for the year, and currently pays a quarterly cash dividend of $0.19 per share. Our cash dividend policy is reviewed regularly by management and the Board of Directors.
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.
Under this stock repurchase program, the Company was authorized to repurchase up to $1.5 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.
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.
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 243 holders of record of our common stock at March 13, 2025.
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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.
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The Company’s Board of Directors did not extend this repurchase program or adopt a new repurchase program after this program expired on January 26, 2025.
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(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.
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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
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.

Item 7. Management's Discussion & Analysis

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

115 edited+26 added−31 removed51 unchanged
Biggest changeThis 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.
Biggest changeThis increase primarily reflects $4.6 million in net income for the year ended December 31, 2024, $390 thousand in share-based compensation, and $269 thousand in common stock options exercised, partially offset by the payment of cash dividends of $1.9 million to common stockholders, as well as unrealized gains on our securities portfolio resulting in other comprehensive income, net of tax, of $56 thousand, the repurchase of $65 thousand of common stock, and stock surrendered of $218 thousand to satisfy tax withholding obligations upon the vesting of restricted stock during the year ended December 31, 2024. 56 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.
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.
The Company expects to continue its current practice of paying quarterly cash dividends on its common stock, subject to the Board of Directors’ discretion to modify or terminate this practice at any time and for any reason.
Sound Financial Bancorp is a holding company and does not conduct operations; its sources of liquidity are generally dividends up-streamed from Sound Community Bank, interest on investment securities, if any, and borrowings from outside sources. Banking regulations may limit the dividends that may be paid to us by Sound Community Bank.
Sound Financial Bancorp is a holding company and does not conduct operations; its sources of liquidity are generally dividends up-streamed from Sound Community Bank, interest on investment securities, if any, and borrowings from outside sources. Banking regulations may limit the dividends that may be paid to Sound Financial Bancorp by Sound Community Bank.
The ACL consists of two elements: (1) identification of loans that do not share risk characteristics with collectively evaluated loan pools are individually analyzed for expected credit loss and (2) establishment of an ACL for collectively evaluated loan pools based upon loans that share similar risk characteristics.
The ACL consists of two elements: (1) identification of loans that do not share risk characteristics with collectively evaluated loan pools, which are individually analyzed for expected credit loss and (2) establishment of an ACL for collectively evaluated loan pools based upon loans that share similar risk characteristics.
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.
Our strategic plan targets consumers, small- and medium-sized businesses, and professionals within our market area for loans and deposits. In managing the size and concentrations of our loan portfolio, we focus on including a significant amount of commercial business and commercial and multifamily real estate loans.
While our policies and procedures used to estimate the ACL, as well as the resulting provision for credit losses reported in the Consolidated Statements of Income, are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise.
While our policies and procedures used to estimate the ACL, as well as the resulting provision for credit losses reported on the Consolidated Statements of Income, are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise.
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.
As of December 31, 2024, 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.
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.
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, 2024, Sound Community Bank exceeded these requirements at that date.
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 remain strong, through our marketing efforts and as a result of the opportunities created from the consolidation of financial institutions occurring in our market area.
The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost.
The objective of our liquidity management is to manage cash flows and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost.
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.
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. 63 Table of Contents Regulatory Capital. Sound Community Bank is subject to minimum capital requirements imposed by regulations of the FDIC.
A deterioration in national and local economic conditions due to such factors as inflation, a recession or slowed economic growth, among others, may lead to a 62 Table of Contents material increase in the provision for credit losses, which could have a material adverse impact on our financial condition and results of operations.
A deterioration in national and local economic conditions due to such factors as inflation, a recession or slowed economic growth, among others, may lead to a material increase in the provision for credit losses, which could have a material adverse impact on our financial condition and results of operations.
The provision for credit losses, or the release of such provision, is essential for establishing the ACL at a level sufficient to cover estimated lifetime credit losses in our loan portfolio, including unfunded loan commitments.
The provision for credit losses, or the release of such provision, is essential for maintaining the ACL at a level sufficient to cover estimated lifetime credit losses in our loan portfolio, including unfunded loan commitments.
The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect, the value of our MSRs could be negatively impacted.
The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, weighted average life and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect, the value of our MSRs could be negatively impacted.
The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto that appear in "Part II. Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
The information in this section has been derived from the Consolidated Financial Statements and notes thereto that appear in "Part II. Item 8. Financial Statements and Supplementary Data" of this Form 10-K.
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.
The cost of total funding is calculated as annualized total interest expense divided by average total funding. 57 Table of Contents Rate/Volume Analysis The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.
The information contained in this section should be read in conjunction with these Consolidated Financial Statements and footnotes and the business and financial information provided in this Form 10-K.
The information contained in this section should be read in conjunction with these Consolidated Financial Statements and notes and the business and financial information provided in this Form 10-K.
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.
Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flows 62 Table of Contents from securities, sales of fixed rate residential mortgage loans in the secondary market and federal funds sold.
Net interest margin was 3.53% and 3.89% for the year ended December 31, 2023 and 2022, respectively. The decrease in net interest income primarily resulted from an increase in the average balances of and rates paid on deposits and borrowings, partially offset by higher average balances and yields earned on interest-earning assets.
Net interest margin was 3.00% and 3.53% for the year ended December 31, 2024 and 2023, respectively. The decrease in net interest income primarily resulted from an increase in the average balances of and rates paid on deposits and borrowings, partially offset by higher average balances and yields earned on interest-earning assets.
See, “Business — How We Are Regulated — Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of this Form 10-K. During the year ended December 31, 2020, the Company completed a private placement of $12.0 million in aggregate principal of subordinated notes resulting in net proceeds, after placement fees and offering expenses, of approximately $11.6 million.
See “Business — How We Are Regulated — Limitations on Dividends and Stock Repurchases” contained in Item 1, Part I of this Form 10-K. In 2020, the Company completed a private placement of $12.0 million in aggregate principal of subordinated notes resulting in net proceeds, after placement fees and offering expenses, of approximately $11.6 million.
In addition, expected loss estimates consider various factors, including customer-specific information, changes in risk ratings, projected delinquencies, and the impact of economic conditions on borrowers' ability to repay.
In addition, expected loss estimates 60 Table of Contents consider various factors, including customer-specific information, changes in risk ratings, projected delinquencies, and the impact of economic conditions on borrowers' ability to repay.
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%.
If Sound Financial Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2024, Sound Financial Bancorp would have exceeded all regulatory capital requirements. The estimated CBLR calculated for Sound Financial Bancorp at December 31, 2024 was 9.56%.
In addition to its own operating expenses (many of which are paid to Sound Community Bank), Sound Financial Bancorp is responsible for paying for any stock repurchases, dividends declared to its stockholders, interest and principal on outstanding debt, and other general corporate expenses.
In addition to its own operating expenses (many of which are paid to Sound Community Bank), Sound Financial Bancorp is responsible for paying for any stock repurchases, dividends declared to its stockholders, interest and principal on outstanding holding company indebtedness, and other general corporate expenses.
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.
Assuming continued payment of cash dividends during 2025 at the current quarterly dividend rate of $0.19 per share, our total dividend paid each quarter would be approximately $488 thousand based on the number of our outstanding shares at December 31, 2024.
In January 2024, the 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.
In January 2024, the Board of Directors approved a 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 which expired on January 26, 2025.
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.
In 2022 and continuing into 2023, due to a generally illiquid jumbo loan market for residential mortgage loans, we retained a higher proportion of these jumbo loans than historically, resulting in commercial business and commercial and multifamily real estate loans making up a lower percentage of our overall portfolio.
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.
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, 2024, Sound Financial Bancorp, on an unconsolidated basis, had $1.3 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.
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.
We had $25.0 million in outstanding advances with the FHLB at December 31, 2024 and no outstanding borrowings with the Federal Reserve at December 31, 2024. We also had available $20.0 million of credit facilities with other financial institutions, with no balance outstanding at December 31, 2024.
The average yield on total loans was 5.34% for the year ended December 31, 2023, compared to 4.87% for the year ended December 31, 2022. The average yield on total loans increased primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates.
The average yield on total loans was 5.63% for the year ended December 31, 2024, compared to 5.34% for the year ended December 31, 2023. The average yield on total loans increased primarily due to variable rate loans adjusting to higher market interest rates and new loan originations at higher interest rates.
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.
We had no loans delinquent 90 days or more and still accruing at December 31, 2024 and 2023. 54 Table of Contents Allowance for Credit Losses.
The aggregate amount of time deposits in denominations of more than $250,000 at December 31, 2023 and December 31, 2022, totaled $88.3 million and $56.1 million, respectively. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.
The aggregate amount of time deposits in denominations of more than $250,000 at December 31, 2024 and December 31, 2023, totaled $90.9 million and $88.3 million, respectively. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements. Borrowings .
Deposit amounts in excess of $250,000 are not federally insured. As of December 31, 2023, uninsured deposits totaled $140.1 million, which represented 17.0% of total deposits, as compared to uninsured deposits of $161.9 million, or 20.0% of total deposits as of December 31, 2022.
Deposit amounts in excess of $250,000 are not federally insured. As of December 31, 2024, uninsured deposits totaled $167.3 million, which represented 20.0% of total deposits, as compared to uninsured deposits of $140.1 million, or 17.0% of total deposits as of December 31, 2023.
We intend to prudently maintain the percentage of our assets consisting of higher-yielding commercial and multifamily real estate and commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest-rate fluctuations than one-to-four family mortgage loans, while maintaining our focus on residential lending.
Improving Earnings by Expanding Product Offerings. We intend to prudently maintain the percentage of our assets consisting of higher-yielding commercial and multifamily real estate and commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest-rate fluctuations than one-to-four family mortgage loans, while 51 Table of Contents maintaining our focus on residential lending.
To meet our funding requirements, we rely on various sources, including deposits (both retail and brokered), advances from the Federal Home Loan Bank (“FHLB”), borrowings through the Federal Reserve, and payments received on loans and securities.
To meet our funding requirements, we rely on various sources, including deposits (both retail and brokered), FHLB advances, borrowings through the Federal Reserve, and payments received on loans and securities.
The following table reflects the components of the provision for (release of) credit losses during the periods indicated (dollars in thousands): Year Ended December 31, 2023 2022 Provision for credit losses on loans $ 564 $ 1,225 (Release of) provision for credit losses on unfunded loan commitments (837) (69) (Release of) provision for credit losses $ (273) $ 1,156 The change in the provision for (release of) credit losses for 2023 from 2022 resulted primarily from changes in methodology used to reserve for credit losses.
The following table reflects the components of the provision for (release of) credit losses during the periods indicated (dollars in thousands): Year Ended December 31, 2024 2023 (Release of) provision for credit losses on loans $ (161) $ 564 Provision for (release of) credit losses on unfunded loan commitments 41 (837) Release of provision for credit losses $ (120) $ (273) The change in the (release of) provision for credit losses for 2024 from 2023 resulted primarily from changes in methodology used to reserve for credit losses.
This analysis is prepared utilizing a qualitative scorecard framework, which establishes bounds for the estimation of loss between zero (“Low Watermark”) and a maximum loss rate (“High Watermark”) for each segment. The Low Watermark is indicative of zero credit losses.
Our ACL analysis is prepared utilizing a qualitative scorecard framework, which establishes bounds for the estimation of loss between a minimum (“Low Watermark”) and a maximum (“High Watermark”) for each segment. The Low Watermark indicates zero credit losses.
The High Watermark is established by utilizing the same historical loss rate model used to establish modified loss rates, which included assuming a worse-case economic environment into the existing model. Risk levels categorized as minor, moderate, major, no change, and improvement, segment the gap between the Low Watermark and High Watermark.
The High Watermark is established by utilizing the same historical loss rate model used to establish modified loss rates, assuming a worse-case economic scenario. Risk levels are categorized as minor, moderate, major, no change, and improvement, segmenting the gap between the Low Watermark and High Watermark.
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.
At December 31, 2024, we had the ability to borrow up to $172.3 million in FHLB advances (in addition to FHLB advances outstanding at that date) and up to $20.8 million through the Federal Reserve's discount window, in each case subject to certain collateral requirements.
The average yield on investments was 3.79% for the year ended December 31, 2023, compared to 2.74% for the year ended December 31, 2022, primarily due to the impact of rising rates.
The average yield on investments was 4.07% for the year ended December 31, 2024, compared to 3.79% for the year ended December 31, 2023, primarily due to the impact of rising rates.
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.
Interest expense on borrowings, comprised solely of FHLB advances, was $1.6 million for the year ended December 31, 2024, compared to $2.0 million for the year ended December 31, 2023, reflecting the decreased use of FHLB advances to supplement our liquidity needs.
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.
Our consumer loan portfolio, which includes manufactured and floating homes and other consumer loans, increased to $145.3 million or 16.2% of our loan portfolio at December 31, 2024, from $130.9 million or 14.6% of our loan portfolio at December 31, 2023.
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.
Interest expense on subordinated notes was $672 thousand for both the year ended December 31, 2024 and the year ended December 31, 2023. Net Interest Income. Net interest income decreased $2.8 million, or 8.4%, to $31.0 million for the year ended December 31, 2024, from $33.9 million for the year ended December 31, 2023.
In evaluating the results from the sensitivity analysis, the sensitivity by qualitative factor adjustment provided the largest change in the ACL. If all qualitative factors were adjusted from the base model to the High Watermark, the estimated ACL on loans would increase to $32.8 million (3.28%).
In evaluating the results of the sensitivity analysis, the qualitative factor adjustment provided the largest change in the ACL. If all qualitative factors were adjusted from the base model to the High Watermark, the estimated ACL on loans would increase to $25.2 million (2.82%).
Under CECL, the provision for credit losses for the year ended December 31, 2023 reflects assumptions related to our forecast concerning the economic environment as a result of local, national and global events.
Net charge-offs for the year ended December 31, 2024 totaled $100 thousand, compared to net charge-offs of $163 thousand for the year ended December 31, 2023. Under CECL, the provision for credit losses for the year ended December 31, 2024 reflects assumptions related to our forecast concerning the economic environment as a result of local, national and global events.
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.
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.
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.
The loan portfolio remains well-diversified with commercial and multifamily real estate loans accounting for 41.2% of the portfolio, one-to-four family real estate loans, including home equity loans, accounting for approximately 32.9% of the portfolio and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans, accounting for 16.2% of the total loan portfolio at December 31, 2024.
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.
These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of December 31, 2024, we had $51.4 million in cash, cash equivalents and AFS securities, and $487 thousand in loans held-for-sale.
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.
We paid quarterly dividends aggregating $0.76 per common share during the year ended December 31, 2024 and quarterly dividends aggregating $0.74 per common share during the year ended December 31, 2023. This equates to a dividend payout ratio of 42.0% in 2024 and 25.7% in 2023.
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.
The following table reflects the adjustments in our ACL during the periods indicated (dollars in thousands): Year Ended December 31, 2024 2023 ACL — Loans: Balance at beginning of period $ 8,760 $ 7,599 Impact of adoption of ASU 2016-13 — 760 Charge-offs (122) (204) Recoveries 22 41 Net charge-offs (100) (163) (Release of) provision for credit losses (161) 564 Balance at end of period $ 8,499 $ 8,760 ACL - Unfunded Loan Commitments: Balance at beginning of period 193 335 Impact of adoption of ASU 2016-13 — 695 Provision for (release of) credit losses 41 (837) Balance at end of period 234 193 ACL $ 8,733 $ 8,953 Ratio of net charge-offs during the period to average loans outstanding during the period (0.01) % (0.02) % The ACL for loans decreased $261 thousand, or 3.0%, to $8.5 million at December 31, 2024, from $8.8 million at December 31, 2023, while the ACL for unfunded loan commitments increased $41 thousand, or 21.2% to $234 thousand at December 31, 2024, from $193 thousand at December 31, 2023.
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.
Net income decreased $2.8 million, or 37.6%, to $4.6 million, or $1.80 per diluted common share, for the year ended December 31, 2024, compared to $7.4 million, or $2.86 per diluted common share, for the year ended December 31, 2023.
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.
Interest income on cash and cash equivalents increased $2.7 million, or 75.8%, to $6.4 million for the year ended December 31, 2024, compared to $3.6 million for the year ended December 31, 2023. The increase was due to higher average yields and higher average balances.
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.
Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of favorable movements in market interest rates.
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.
Construction and land loans accounted for 8.1% of the portfolio and commercial business loans accounted for the remaining 1.7% of the portfolio at December 31, 2024. Nonperforming Assets.
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.
Our commercial loan portfolio (commercial and multifamily real estate and commercial business loans) totaled $387.1 million or 42.9% of our loan portfolio at December 31, 2024, up slightly from $336.0 million or 37.5% of our loan portfolio at December 31, 2023.
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.
Interest income on loans increased $4.0 million, or 8.7%, to $50.5 million for the year ended December 31, 2024, compared to $46.5 million for the year ended December 31, 2023, driven by a higher average balance of total loans and a 29 basis points increase in the average yield on loans.
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.
The average yield on cash and cash equivalents was 5.12% for the year ended December 31, 2024, compared to 4.85% for the year ended December 31, 2023, primarily due to the impact of higher market interest rates during 59 Table of Contents the year.
AFS securities decreased $1.9 million, or 18.8%, to $8.3 million at December 31, 2023 from the year end 2022, primarily due to the maturity of $1.6 million in treasury securities in the first quarter of 2023, regularly scheduled payments and maturities, and net unrealized losses resulting from the increases in market interest rates during the past 12 months.
AFS securities decreased $497 thousand, or 6.0%, to $7.8 million at December 31, 2024 from the 2023 year end, primarily due to regularly scheduled payments and maturities, and net unrealized losses resulting from the increases in market interest rates during the past 12 months.
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.
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. 52 Table of Contents Comparison of Financial Condition at December 31, 2024 and December 31, 2023 As of December 31, 2024 2023 Selected Financial Condition Data: Total assets $ 993,633 $ 995,221 Cash and cash equivalents 43,641 49,690 Total loans held for portfolio, net 891,672 885,718 Loans held-for-sale 487 603 AFS securities, at fair value 7,790 8,287 HTM securities, at amortized cost 2,130 2,166 Bank-owned life insurance (“BOLI”), net 22,490 21,860 OREO and repossessed assets, net — 575 FHLB stock, at cost 1,730 2,396 Total deposits 837,799 826,539 Borrowings 25,000 40,000 Subordinated notes, net 11,759 11,717 Stockholders' equity 103,666 100,654 General.
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.
We originated $39.9 million and $53.1 million of one-to-four family loans during the years ended December 31, 2024 and 2023, respectively. We had no purchases of one-to-four family loans during the years ended December 31, 2024 and 2023. During those two years, we sold $14.2 million and $17.1 million, respectively, of one-to-four family loans.
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 compete with other financial service providers by relying on the strength of our customer service and relationship banking approach. 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.
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.
Total assets decreased by $1.6 million, or 0.2%, to $993.6 million at December 31, 2024, from $995.2 million at December 31, 2023. This decrease was primarily a result of lower balances of cash and cash equivalents and investment securities, offset by an increase in loans held-for-portfolio. Cash and Securities.
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.
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.
The ACL is measured using the CECL approach for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts.
The level of the ACL is established using the CECL approach for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset.
Nonperforming assets, which are comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans to troubled borrowers) and OREO and repossessed assets, increased $514 thousand, or 14.2%, to $4.1 million, or 0.42% of total assets, at December 31, 2023 from $3.6 million, or 0.37% of total assets, at December 31, 2022.
Nonperforming assets, comprised of nonperforming loans (nonaccrual loans and nonperforming modified loans to troubled borrowers) and OREO and repossessed assets, increased $3.4 million, or 81.3%, to $7.5 million, or 0.75% of total assets, at December 31, 2024 from $4.1 million, or 0.42% of total assets, at December 31, 2023.
Interest income on the investment portfolio increased $135 thousand, or 35.25%, to $518 thousand for the year ended December 31, 2023, compared to $383 thousand for the year ended December 31, 2022. The increase was due to higher average yields, partially offset by lower average balances.
Interest income on the investment portfolio decreased $10 thousand, or 1.93%, to $508 thousand for the year ended December 31, 2024, compared to $518 thousand for the year ended December 31, 2023. The decrease was due to lower average balances, partially offset by higher average yields.
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.
The decrease was primarily a result of a $2.8 million decrease in net interest income, a $351 thousand decrease in noninterest income and a $153 thousand decrease in the release of credit losses, partially offset by a $555 thousand decrease in provision for income taxes. Interest Income.
Cash, cash equivalents, AFS securities and HTM securities decreased by $10.1 million, or 14.4%, to $60.1 million at December 31, 2023 compared to the prior year.
Cash, cash equivalents, AFS securities and HTM securities decreased by $6.6 million, or 10.9%, to $53.6 million at December 31, 2024 compared to the prior year-end.
The cost of FHLB advances increased 122 basis points to 4.44% for the year ended December 31, 2023, compared to 3.22% for the year ended December 31, 2022. The average balance of FHLB advances was $44.0 million for the year ended December 31, 2023, compared to $27.3 million for the year ended December 31, 2022.
The cost of FHLB advances decreased 12 basis points to 4.32% for the year ended December 31, 2024, compared to 4.44% for the year ended December 31, 2023. The average balance of FHLB advances was $37.6 million for the year ended December 31, 2024, compared to $44.0 million for the year ended December 31, 2023.
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.
In addition to our retail branches, we believe 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.
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.
Noninterest-bearing demand accounts (excluding escrow accounts) increased $6.0 million, or 4.8%, in 2024, compared to 2023. 55 Table of Contents A summary of deposit accounts with the corresponding weighted-average cost at December 31, 2024 and 2023 is presented below (dollars in thousands): December 31, 2024 December 31, 2023 Amount Wtd. Avg. Rate Amount Wtd. Avg.
Scheduled maturities of time deposits at December 31, 2023, are as follows (in thousands): Year Ending December 31, Amount 2024 $ 249,457 2025 51,065 2026 4,996 2027 1,472 2028 972 Thereafter — $ 307,962 Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of five years or less.
Scheduled maturities of time deposits at December 31, 2024, are as follows (in thousands): Year Ending December 31, Amount 2025 $ 274,317 2026 18,496 2027 1,379 2028 1,109 2029 521 Thereafter — $ 295,822 Savings, demand, and money market accounts have no contractual maturity. Certificates of deposit have maturities of five or less.
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.
The average cost of total deposits, including noninterest bearing deposits, increased 95 basis points to 2.64% for the year ended December 31, 2024, from 1.69% for the year ended December 31, 2023.
However, improvements in loan risk ratings, increased property values, or recoveries of previously charged-off amounts may partially or fully offset the required increase in the ACL due to factors such as loan growth or an increase in estimated lifetime losses on loans and unfunded loan commitments. 51 Table of Contents We recorded a release of provision for credit losses of $273 thousand for the year ended December 31, 2023, consisting of a provision for credit losses on loans of $564 thousand and a release of credit losses on unfunded commitments of $837 thousand, compared to a provision of $1.2 million for the year ended December 31, 2022.
However, improvements in loan risk ratings, increased property values, or recoveries of previously charged-off amounts may partially or fully offset the required increase in the ACL due to factors such as loan growth or an increase in 49 Table of Contents estimated lifetime losses on loans and unfunded loan commitments.
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.
At December 31, 2024, the Bank’s CBLR was 10.60%, 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. Business—How We Are Regulated—Regulation of Sound Community Bank—Capital Rules" of this Form 10-K.
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.
Interest Expense. Interest expense increased $9.6 million, or 57.4%, to $26.4 million for the year ended December 31, 2024, from $16.8 million for the year ended December 31, 2023, as a result of an increase in the overall average balances and costs of deposits and borrowings.
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.
Stockholders’ equity totaled $103.7 million at December 31, 2024 and $100.7 million at December 31, 2023. In addition to net income of $4.6 million, other sources of capital during 2024 included $390 thousand related to stock-based compensation and $269 thousand in proceeds from stock option exercises.
Business and Operating Strategies and Goals Our goal is to deliver returns to stockholders by increasing higher-yielding assets (including consumer, commercial and multifamily real estate and commercial business loans), increasing lower-cost core deposit balances, managing expenses, managing problem assets and exploring expansion opportunities. We seek to achieve these results by focusing on the following objectives: Focusing on Asset Quality.
No historical or recent experience has indicated notable deviations from management’s assessments. Business and Operating Strategies and Goals Our goal is to deliver returns to stockholders by increasing higher-yielding assets (including consumer, commercial and multifamily real estate and commercial business loans), increasing lower-cost core deposit balances, managing expenses, managing problem assets and exploring expansion opportunities.
Operations expense increased primarily due to increases in various accounts including legal fees, audit fees, state and local taxes, charitable contributions, office expenses and costs related to our deposit products, specifically debit card processing expenses, partially offset by lower marketing costs, professional fees (tax and consulting) and loan origination fees.
Operations expenses decreased by $201 thousand mainly due to reductions in office expenses, loan origination fees, travel expenses, state and local taxes, and charitable contributions, partially offset by higher professional fees (tax and consulting) and increased costs related to deposit products, especially debit card processing expenses.
In addition, there were five manufactured home loans, two home equity loans, two other consumer loans, and nine additional one-to-four family loans classified as nonperforming at December 31, 2023. Nonperforming loans were 0.40% of total loans at December 31, 2023, compared to 0.34% of total loans at December 31, 2022.
In addition, there were eight manufactured home loans, one floating home loan, one business term, one commercial real estate, one home equity loan, one land loan, and five other consumer loans classified as nonperforming at December 31, 2024. Nonperforming loans were 0.83% of total loans at December 31, 2024, compared to 0.40% of total loans at December 31, 2023.
Since March 2022, in response to inflation, the Federal Open Market Committee of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points, including 100 basis points during 2023, to a range of 5.25% to 5.50% as of December 31, 2023. Provision for Credit Losses.
During 2023, in response to inflation, the Federal Open Market Committee of the Federal Reserve (“FOMC”) increased the target range for the federal funds rate by 100 basis points to a range of 5.25% to 5.50%, where it remained until September 2024.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeAs part of our efforts to monitor and manage interest-rate risk, we maintain an interest-rate risk model and utilize software and resources provided by a third party. The model contains several assumptions that are based upon a combination of proprietary and market data that reflect historical results and current market conditions.
Biggest changeThe model contains several assumptions that are based upon a combination of proprietary and market data that reflect historical results and current market conditions. These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of certain assets under the various interest-rate scenarios.
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.
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, 2024.
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.
EVE values only the current position of the balance sheet at December 31, 2024, 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. 67 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. 65 Table of Contents
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.
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. Our asset/liability management strategy dictates acceptable limits on the amounts of percentage change in EVE based on given changes in interest rates.
These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of certain assets under the various interest-rate scenarios. The model's capital at risk measure, also known as the Economic Value of Equity ("EVE"), evaluates the change in the projected EVE over a two-year period given an immediate increase or decrease in interest rates.
The model's capital at risk measure, also known as the Economic Value of Equity ("EVE"), evaluates the change in the projected EVE over a two-year period given an immediate increase or decrease in interest rates.
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.
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.
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.
December 31, 2024 Change in Interest Rates in Basis Points (bps) Economic Value of Equity EVE Ratio % $ Amount $ Change % Change +400 $ 145,607 $ (21,243) (12.73) % 17.1 % +300 152,505 (14,345) (8.60) 17.4 +200 157,656 (9,194) (5.51) 17.6 +100 161,851 (4,999) (3.00) 17.6 0 166,850 — — 17.7 -100 165,624 (1,226) (0.73) 17.2 -200 158,786 (8,064) (4.83) 16.1 -300 146,417 (20,433) (12.25) 14.5 -400 $ 130,031 (36,819) (22.07) 12.6 % In addition to monitoring selected measures of EVE, management also monitors effects on net interest income resulting from increases or decrease in rates.
Added
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. 64 Table of Contents As part of our efforts to monitor and manage interest-rate risk, we maintain an interest-rate risk model and utilize software and resources provided by a third party.

Other SFBC 10-K year-over-year comparisons